Solve Part 2: Problem 1

exam/part2_problem1/Overview_File_Problem_1.csv

@@ -0,0 +1,61 @@
+index;filename;ticker;company_name_transcript
+1;2013-Jan-29-AMZN.OQ-139057386295-Transcript.txt;AMZN;Amazon.com Inc
+2;2013-Apr-25-AMZN.OQ-139339186971-Transcript.txt;AMZN;Amazon.com Inc
+3;2013-Jul-25-AMZN.OQ-137712068210-Transcript.txt;AMZN;Amazon.com Inc
+4;2013-Oct-24-AMZN.OQ-139066299673-Transcript.txt;AMZN;Amazon.com Inc
+5;2014-Jan-30-AMZN.OQ-141027717464-Transcript.txt;AMZN;Amazon.com Inc
+6;2014-Apr-24-AMZN.OQ-140443160996-Transcript.txt;AMZN;Amazon.com Inc
+7;2014-Jul-24-AMZN.OQ-138703384359-Transcript.txt;AMZN;Amazon.com Inc
+8;2014-Oct-23-AMZN.OQ-140669099674-Transcript.txt;AMZN;Amazon.com Inc
+9;2015-Jan-29-AMZN.OQ-136951423128-Transcript.txt;AMZN;Amazon.com Inc
+10;2015-Apr-23-AMZN.OQ-139804865882-Transcript.txt;AMZN;Amazon.com Inc
+11;2015-Jul-23-AMZN.OQ-140462931809-Transcript.txt;AMZN;Amazon.com Inc
+12;2015-Oct-22-AMZN.OQ-137384537916-Transcript.txt;AMZN;Amazon.com Inc
+13;2016-Jan-28-AMZN.OQ-139696494446-Transcript.txt;AMZN;Amazon.com Inc
+14;2016-Apr-28-AMZN.OQ-137577237096-Transcript.txt;AMZN;Amazon.com Inc
+15;2016-Jul-28-AMZN.OQ-138879486315-Transcript.txt;AMZN;Amazon.com Inc
+16;2016-Oct-27-AMZN.OQ-139909051245-Transcript.txt;AMZN;Amazon.com Inc
+17;2017-Feb-02-AMZN.OQ-139452463844-Transcript.txt;AMZN;Amazon.com Inc
+18;2017-Apr-27-AMZN.OQ-139668306179-Transcript.txt;AMZN;Amazon.com Inc
+19;2017-Jul-27-AMZN.OQ-137040257613-Transcript.txt;AMZN;Amazon.com Inc
+20;2017-Oct-26-AMZN.OQ-140695336667-Transcript.txt;AMZN;Amazon.com Inc
+21;2013-Jan-17-BAC.N-137118030967-Transcript.txt;BAC;Bank of America Corporation
+22;2013-Apr-17-BAC.N-140727993387-Transcript.txt;BAC;Bank of America Corporation
+23;2013-Jul-17-BAC.N-138558829694-Transcript.txt;BAC;Bank of America Corporation
+24;2013-Oct-16-BAC.N-137085760338-Transcript.txt;BAC;Bank of America Corporation
+25;2014-Jan-15-BAC.N-138523498996-Transcript.txt;BAC;Bank of America Corporation
+26;2014-Apr-16-BAC.N-139135830280-Transcript.txt;BAC;Bank of America Corporation
+27;2014-Jul-16-BAC.N-137162730136-Transcript.txt;BAC;Bank of America Corp
+28;2014-Oct-15-BAC.N-137877397872-Transcript.txt;BAC;Bank of America Corp
+29;2015-Jan-15-BAC.N-138737516690-Transcript.txt;BAC;Bank of America Corp
+30;2015-Apr-15-BAC.N-138140128784-Transcript.txt;BAC;Bank of America Corp
+31;2015-Jul-15-BAC.N-137368163905-Transcript.txt;BAC;Bank of America Corp
+32;2015-Oct-14-BAC.N-139658820022-Transcript.txt;BAC;Bank of America Corp
+33;2016-Jan-19-BAC.N-137516735613-Transcript.txt;BAC;Bank of America Corp
+34;2016-Apr-14-BAC.N-138757977086-Transcript.txt;BAC;Bank of America Corp
+35;2016-Jul-18-BAC.N-138282004512-Transcript.txt;BAC;Bank of America Corp
+36;2016-Oct-17-BAC.N-139667176127-Transcript.txt;BAC;Bank of America Corp
+37;2017-Jan-13-BAC.N-137706007374-Transcript.txt;BAC;Bank of America Corp
+38;2017-Apr-18-BAC.N-141158160180-Transcript.txt;BAC;Bank of America Corp
+39;2017-Jul-18-BAC.N-138882471971-Transcript.txt;BAC;Bank of America Corp
+40;2017-Oct-13-BAC.N-136999269367-Transcript.txt;BAC;Bank of America Corp
+41;2013-Jan-30-FB.OQ-140751793850-Transcript.txt;FB;Facebook
+42;2013-May-01-FB.OQ-140634585149-Transcript.txt;FB;Facebook
+43;2013-Jul-24-FB.OQ-140049061003-Transcript.txt;FB;Facebook
+44;2013-Oct-30-FB.OQ-138249704477-Transcript.txt;FB;Facebook
+45;2014-Jan-29-FB.OQ-139655634314-Transcript.txt;FB;Facebook
+46;2014-Apr-23-FB.OQ-137448671471-Transcript.txt;FB;Facebook
+47;2014-Jul-23-FB.OQ-137343825744-Transcript.txt;FB;Facebook Inc
+48;2014-Oct-28-FB.OQ-140415619254-Transcript.txt;FB;Facebook Inc
+49;2015-Jan-28-FB.OQ-139431073452-Transcript.txt;FB;Facebook Inc
+50;2015-Apr-22-FB.OQ-141043150939-Transcript.txt;FB;Facebook Inc
+51;2015-Jul-29-FB.OQ-141107486910-Transcript.txt;FB;Facebook Inc
+52;2015-Nov-04-FB.OQ-139744337761-Transcript.txt;FB;Facebook Inc
+53;2016-Jan-27-FB.OQ-137249190020-Transcript.txt;FB;Facebook Inc
+54;2016-Apr-27-FB.OQ-137612530009-Transcript.txt;FB;Facebook Inc
+55;2016-Jul-27-FB.OQ-139115186913-Transcript.txt;FB;Facebook Inc
+56;2016-Nov-02-FB.OQ-137048274923-Transcript.txt;FB;Facebook Inc
+57;2017-Feb-01-FB.OQ-140831484304-Transcript.txt;FB;Facebook Inc
+58;2017-May-03-FB.OQ-137850824087-Transcript.txt;FB;Facebook Inc
+59;2017-Jul-26-FB.OQ-136950829491-Transcript.txt;FB;Facebook Inc
+60;2017-Nov-01-FB.OQ-137641444844-Transcript.txt;FB;Facebook Inc

exam/part2_problem1/Problem_1_Conference_Call_Segments/call_10_answers.txt

@@ -0,0 +1,157 @@
+Answer_1:
+
+    Sure. On Prime Now, we're -- don't have specific metrics we want to share today. But, we have expanded to seven cities, with more on the way. Customers are really enjoying the one hour and two hour delivery of tens of thousands of daily essential products. So, the response has been great.
+We'll point out that our operations network that we've been building for the last 20 years, helps make Prime Now a viable proposition for us. The scale makes a possible. So, really, so far customer response has been great.
+
+Answer_2:
+
+    And, Brian, on the FCs, as we've done in prior years, it's early in the year, and as we progress through the year, we'll give you some updates on how many. But, as a reminder, we ended the year with 109 fulfillment centers around the world and we'll update you as we go.
+
+Answer_3:
+
+    Yes, sure. So, North America operating margin up 120 basis points year over year to 3.9%. A lot of good cost efficiency. But, again, we're continuing to invest selectively as we build the Prime platform and invent on behalf of customers.
+So, you'll see a lot of invention. Definitely to feed the Prime platform, which, things like video content, Prime music as we talk about Prime Now devices. And, we continue to build fulfillment centers for selection and expansion and FBA. So, that's -- it's generally what's driving the operating margin in North America.
+
+Answer_4:
+
+    And, just to add onto that, we're -- we gave the metrics last quarter about Prime. It's growing very fast. As Brian said, we're feeding the platform and certainly, the common thing with category expansion, new FCs, original content, Prime Instant Video devices, Prime Now; the common theme is they're all really intertwined with Prime.
+And, they're inextricably linked to our consumer business in Prime. So, it's just -- we're happy to do it. And, the last quarter, we gave an indication of the growth rates after being added for 10 years. So, we're super excited to have the platform and to continue to invest in it.
+
+Answer_5:
+
+    Yes, let me start with China. So, I think you see a lot of invention. You're seeing a lot of invention from us in China right now. Amazon is a trusted source of authentic international products.
+And, that's really what we're doubling down on now, with the Amazon global store on our own site, which gives Chinese customers access to over a million Amazon products globally. And then, the team all flagship store for international brands, which you've heard about. Giving thousands of direct imported products access, or, customers, access to these products. And those happened to be stocked and ready to ship from our fulfillment centers in China. So, that's an added benefit.
+25% of those are exclus -- or, over 25% of those are exclusives to Amazon. So, we continue to be selective in our investments there. But, we're taking the long-term view and we have hopes for the new initiatives along with the global store and the team all flagship store.
+
+Answer_6:
+
+    In terms of the growth for total international, just maybe, some comments first about the current quarter. And, then elaborate a little bit further. But, the growth was down 2% on a dollar basis. Up 14% on a local currency basis.
+So, we did see a little bit of improvement in terms of growth rate acceleration versus the last couple quarters. And, in addition to the things that Brian mentioned earlier, about the Prime platform. That's something that we're doing globally. And so, we're certainly, all of those things we're working on globally. So, those are things that, at least in most geographies, we have today.
+One thing to keep in mind also, as you look at the growth rate for Q1, is last year Q1 we talked about in April 1, there was a consumption tax increase in Japan. We had some, what we think some pre-buys in Q1 and we're overlapping that. And, in Q1 of this year. So, it's a headwind if you think about it for Q1. But, we're looking at -- we think there's still a big opportunity.
+As we mentioned last call, a big opportunity with Prime. Prime's growing at a faster rate. We think there's still a great opportunity to add unique selection to -- for category expansion. And, again, so we're going to continue to feed the Prime platform as we talked about. Continue to add selection in a lot of categories.
+We're also very excited about India. If you take a look at our results for -- from an operating profit standpoint, you see that it was approximately negative $76 million on a dollar basis. If you back out exchange, that's approximately breakeven. Included in there, we certainly have a sizable step up in investment in India. And, we're super excited from what we see there right now.
+We think it's very big opportunity. And, we're investing appropriately for that big opportunity. So, those are some of the things that we're working on. And, we think they're -- we still have a lot of opportunity there moving forward.
+
+Answer_7:
+
+    To answer your first question, yes, they are. The associated infrastructure costs to run our North America and International consumer business, those costs, those infrastructure costs are being allocated to those segments.
+The second question, in terms of China, it's early. We're liking, certainly, some of the things that we're seeing there. But, there's not a lot I can add to that at this stage.
+
+Answer_8:
+
+    Yes, I think the best way to think about it is, we certainly have an advertising part of our North American consumer segments. But, the way you should think about it is we are making some great investments for the long term. And, that's really what's reflected in the operating results that you're seeing in terms of -- so, it is certainly impacting the operating margins both for North America and International.
+So, it's the things that we're -- both Brian and I talked about, that we're doing globally to support the Prime platform. All of those things that we mentioned. Video content, original content, Prime Now, category expansion, investing on behalf of FBA, which also helps Prime devices. Those are all intertwined and certainly part of that.
+And, then some of the things outside of -- that are more specifically related to International in addition to those, are some of the geographic stuff that we talked about. So, I think you should think about it that way. That, certainly we think it's a big opportunity.
+And, again, one of the reasons I wanted to give you an update last quarter on Prime growth and you can see that that's going very well, and so we're feeding that. And, that's what we have been doing and that's what you see also, in certainly, the results that you're seeing today.
+
+Answer_9:
+
+    Sure.
+
+Answer_10:
+
+    Yes, in terms of International, we're not breaking out individual country results. The one thing that I did mention around from a country perspective, was India. In terms of, we've certainly stepped up our investment. And, if you look at it year over year. So, that's certainly reflected in the numbers that you're seeing.
+In terms of AWS, we've had 48 price decreases since inception. The team is doing a terrific job in terms of working on behalf of customers to pass on savings as they see it. But, in terms of any comment on what to expect going forward, there's really not much to add there.
+
+Answer_11:
+
+    It probably is worth adding, that although price is a factor, the primary factor for customers choosing to move to AWS is really around their ability to move quickly and to be nimble and agile.
+And so, we're very pleased with the kind of continued adoption and usage growth we've seen and obviously the benefits of AWS around their ability, customers' ability to be nimble, as a primary factor there.
+
+Answer_12:
+
+    In terms of your first question specifically related to North America. One of the comments we made last quarter, that we disclosed, was we disclosed the growth rate globally. As well as the growth rate in the US. And, the growth rate in the US after 10 years is up 50%. It was up 50% year over year.
+And so, 2014 versus 2013, in terms of Prime membership. And, that's after a price increase on Prime from 79 to 99. So, it gives you a feel for the work that we've put into Prime to make that experience great for customers and the value that we're giving them. So again, given that growth.
+So, that's what, that's certainly one of the things that gives us comfort. But, when we look at the individual pieces we like what we see. So, in other words, some of the investments we're making, I think as we've talked about the past. I'll give one example, would be, video content, both original and licensed content.
+We mentioned last call that we spent approximately $1.3 billion on content globally for Prime customers. And, what we've seen to date, is it's certainly still an investment for us. It's certainly impacting our operating results, but we like what we see. We see customers who come in through our free trial pipeline, if you will, for video content. They convert at a higher rate.
+We see -- we have a great retention of Prime members. But, those who stream, actually, we retain those at a higher rate. And, we bring in new customers through our video pipeline. The purchasing pattern that we have for those customers is very similar to those who come in from other pipelines. So, in other words, they're buying very good from a physical product standpoint, as well as digital. So, they're buying a diverse set of products.
+So, in other words, the video content that we're spending is helping us. Customers will buy consumables from us. They'll buy clothing from us. They'll buy shoes from us. They'll buy electronics. They'll buy media items.
+So, that's what we're seeing and so again, it's some of these things are very early. We'll have to see over time how efficient they are. But, each period we go, we keep the data that we see, we're encouraged. And so, that's just one example.
+But, that's why we are investing a lot in Prime and we think it's a great -- the Prime platform, if you will. And, we think it's a great opportunity and as I mentioned earlier, all these things we're investing in are very intertwined.
+
+Answer_13:
+
+    And, Carlos, I think you had a question about AWS. From our perspective, it's a business that's still really in day one. A lot of potential innovation in front of us, we believe. And so, you can see we're putting a lot of CapEx, obviously there, including capital leases. And, we think over time, we will be able to generate significant free cash flow at strong ROICs.
+
+Answer_14:
+
+    The -- thanks for the question, Mark. Just in terms of going forward, we're not giving any specific guidance beyond the current quarter. So, I can't predict for you what could happen.
+But, what you mentioned is, in some of the periods that you were describing, as you mentioned, what our business look like. Several years ago, when Prime was nascent or, and we were a bit earlier in the business. We go through different cycles. We're certainly still investing very heavily.
+That being said, we, as I mentioned last quarter, we're spending time on making sure that we get productivity. So, we're working on both investing heavily in the business, while working on fixed and variable productivity in other areas. Putting a lot more energy into it. That's what's helping us with the improvement that Brian mentioned in terms of operating margins year over year. It's a number of different aspects, but certainly, a mix of business and some productivity is certainly impacting that.
+But, again, we think this opportunity is to improve margins over time. You'll have to stay tuned on that to see what it looks like. But, we certainly, as you can see from, not only the results, but some of the data points that we've given over the last several quarters. We are investing heavily in the business again.
+Because, we like what we see and the -- and Prime growing so dramatically globally after being in it for a long time. And, we think that that's a great platform to feed.
+
+Answer_15:
+
+    Justin, I will take the AWS portion on the question first. So, our model over the long term really has been to innovate and to use our scale and position to be able to pass savings along to customers. And so, we've had 48 price decreases since we launched.
+As I talked about earlier, that's one factor. Customers save a lot of money, but the primary motivator is really around the innovation that AWS enables and the ability for developers to move really quickly.
+
+Answer_16:
+
+    In terms of the International. Again, as you mentioned, Justin, we are investing a lot right now. At which, impacts the margins there. Again, X exchange.
+Think of it as approximately breakeven for the quarter. And so, again we're continuing to invest. We're investing in all the things that we talked about related to the platform. We continue to invest in some emerging geographies. Most notably certainly, India, with the step up given the experience we have.
+So, we are optimistic over time. We have a lot to do there. We think it's a great opportunity for us and so that's what we're doing. But, we're excited about the opportunity and that's why you see the results that you're seeing there.
+
+Answer_17:
+
+    Yes, in terms of the CapEx question. You know there's certainly two pieces of that. There's the consumer, the North America and International piece.
+There's a number of pieces, but certainly the two largest pieces would certainly be the CapEx associated with fulfillment and the second would be infrastructure. And, again, that's for AWS versus North America and International.
+I'll take the North America and International first. We're seeing good growth and year over year, in terms of overall unit growth, in terms of revenue growth, certainly, X exchange. As I a mentioned earlier, it's early in the year. So, as we do every year, we'll continue to monitor the growth there.
+We're making plans for the rest of the year. And we'll get back to you as we progress throughout the year in terms of what fulfillment capacity we'll need to support that growth this year.
+In terms of web services, it's obviously growing extremely fast. We saw some acceleration of growth from a revenue perspective over the last few quarters here. Usage is growing faster than that, so we will be deploying more capital as we go there. In terms of the amounts, specific amounts, we're not giving guidance on that today.
+And, one of the reasons is, it's just growing so fast, that we want to make sure we've put the right amount of capital in place and the team's doing a great job doing a lot of planning and the execution around that. So, that's what we're doing there. In terms of media, I'm not fully sure I understood the question. But, as it relates to, I think it's video, could you repeat the -- part of that, part of the question?
+
+Answer_18:
+
+    Heath, we do allocate some Prime to account for the video.
+
+Answer_19:
+
+    Thanks for the question.
+
+Answer_20:
+
+    Yes, I'll take that one. We certainly, as I said earlier, we see this as a natural extension of our existing infrastructure investment. We've -- we have 109 fulfillment centers, again, very close to customers. It allows us and unlocks for us, same day and next day deliveries.
+And, to its, extreme one hour and two hour deliveries, as you've seen with Prime Now. So, we're not forecasting or giving much more on that. But, we definitely see it as a valuable customer proposition and customers embraced it.
+Again, a smaller number of ASINs, tens of thousands of ASINs, but available for one or two hour delivery. And, generally, in the category of essential products that you would need in a short time period.
+
+Answer_21:
+
+    And, the only thing I would add to that, as Brian mentioned earlier as well, we're in seven cities today and they'll be more to come. We haven't said how many, but, you should be definitely expecting more to come, and we're very excited to do that.
+
+Answer_22:
+
+    Yes, in terms of our consumer business, we love the business that we have today. We love -- we think there's a great opportunity to do that. To continue to expand the existing business that we have.
+In terms of other things, we have a longstanding practice of not talking about what we might or might not do there. In terms of the second part, India and China, could you repeat that part? Sorry.
+
+Answer_23:
+
+    Yes, thank you for the question. Yes, they are very different. You'll see the growth rate in India's very rapid. We talked about last year and it's increasing our investment.
+I think the biggest difference is the focus on sellers and the connection of sellers. A big part of the challenge there is helping sellers all across India to succeed and grow their online businesses. You'll see from our press release, that we've launched some new apps for that. So, that helps them manage their inventory better and also respond to customer inquiries.
+So, that's probably the biggest difference that we see between India and China. But, it's still very very early on in India.
+
+Answer_24:
+
+    We've spent a tremendous amount of time on our seller business over the years. And, trying to improve both the experience for sellers as well as customers. And, we've done a lot of interesting things to help sellers and that's why you see the results that we're seeing today. 44% of our units today, as of this quarter, are third-party units. That's up about 400 basis points from last year.
+Certainly, one of the things that we've talked about that's most -- that's notable, is fulfillment by Amazon. And so, the benefit for sellers is they get to take advantage of our multi-node fulfillment network globally. We have 109 fulfillment centers globally. As well as our customers get to take advantage of that as Prime members where we offer it in those geographies. So, it's really a great benefit for sellers.
+It's good for sellers. It's good for customers. And, we believe good for shareowners too. Again, we're very excited. A number of different things we're working on. But certainly, one of the drivers, along with all the things that I mentioned is certainly FBA is very helpful.
+
+Answer_25:
+
+    So, Mark, I can't comment on the derived number. But, I can say that FBA continues to grow really well. It's become a bigger and bigger part of our third-party mix over the years.
+I think we gave you an update in Q4 that it was more than 40% of our third-party units. Obviously, in the fulfillment line there is cost associated with that. As well as our other third-party units as well, with things like payment processing and other costs that we incur. So, I don't know if there's much more that we can say about that.
+
+Answer_26:
+
+    Well, if you take a look at the guidance that we gave. Again, we gave as we have in previous quarters, we give a wide range. And, from a consolidated segment operating income standpoint, we gave $100 to $650.
+The implied margin at the lower end, the higher end, is approximately 50 basis points upwards to 2.9%. This quarter, in Q1, we were up 60 basis points year over year in total. At the upper end of the forecast, we implied we'd be up 80 basis points. So, again, you know that's the range that we think it's appropriate; range for Q2.
+
+Answer_27:
+
+    So, let's start with the increase sequentially in margin from Q2, or Q3 to Q4 of 2014. So, revenue grew by about 21.5% sequentially and expense grew by around 10%. And, so obviously, we were growing faster on the top line than our expenses.
+And, over the long term improvements in efficiency and innovation allow us to drive that kind of cost out of the business. I mean, there certainly was an impact with pricing changes and you probably saw some of that in Q2 as well. But, over the long term, that's the model we follow. Great, thank you.
+
+Answer_28:
+
+    And, with that, thank you for joining us on the call today and for your questions. A replay will be available on our investor relations website at least through the end of the quarter. We appreciate your interest in Amazon.com and look forward to talking with you again next quarter.
+

exam/part2_problem1/Problem_1_Conference_Call_Segments/call_10_presentation.txt

@@ -0,0 +1,28 @@
+
+Hello and welcome to our Q1 2015 financial results conference call. Joining us today is Tom Szkutak, our CFO; and Brian Olsavsky, Vice President and CFO of our Global Consumer Business. We will be available for questions after our prepared remarks.
+The following discussion and responses to your questions reflect management's views as of today, April 23, 2015, only, and will include forward-looking statements. Actual results may differ materially. Additional information about factors that could be potentially impact our financial results is included in today's press release and our filings with the SEC, including the most recent annual report on Form 10-K.
+As you listen to today's conference call, we encourage you to have our press release in front of you, which includes our financial results, as well as metrics and commentary on the quarter. In addition, the release includes historical financial results of our North America, International, and Amazon Web Services reportable segments for 2014 and 2013.
+During this call, we will discuss certain non-GAAP financial measures. In our press release, slides accompanying this webcast, and our filings with the SEC, each of which is posted on our IR website, you will find additional disclosures regarding these non-GAAP measures, including reconciliations of these measures with comparable GAAP measures.
+Finally, unless otherwise stated, all comparisons in this call will be against our results for the comparable period of 2014. Now, I'll turn the call over to Brian.
+
+Thanks, Phil. I'll begin with comments on our first-quarter financial results. Trailing 12-month operating cash flow increased 47%, to $7.84 billion. Trailing 12-month free cash flow increased to $3.16 billion.
+In the supplemental financial information and business metrics portion of our earnings release, we include a few additional free cash flow measures. We believe these measures provide additional perspective on the impact of acquiring property and equipment with cash, and through capital and finance leases. Trailing 12-month capital expenditures were $4.68 billion. Capital expenditures do not include the impact of property and equipment acquired under capital and finance lease obligations.
+Return on invested capital was 14%, up from 9%. ROIC is trailing 12-month free cash flow divided by averaged total assets, minus current liabilities, excluding the current portion of long-term debt over five quarter ends. The combination of common stock and stock-based awards outstanding was 483 million shares, compared with 476 million one year ago.
+Worldwide revenue grew 15% to $22.72 billion, or 22%, excluding the $1.3 billion unfavorable impact from year-over-year changes in foreign exchange. Worldwide paid unit growth was 20%.
+Active customer accounts was approximately $278 million. Excluding customers who only had free orders in the preceding 12-month period, worldwide active customers were approximately 260 million, up from approximately 230 million in the comparable prior-year period. Worldwide active seller accounts were more than 2 million. Seller units represented 44% of paid units.
+Now, I'll discuss operating expenses, excluding stock-based compensation. Cost of sales was $15.4 billion, or 67.8% of revenue, compared with 71.2%. Fulfillment, marketing, technology and content, and G&A, combined was $6.62 billion, or 29.1% of sales, up approximately 290 basis points year over year. Fulfillment was $2.67 billion, or 11.7% of revenue, compared with 11.3%. Tech and content was $2.52 billion, or 11.1% of revenue, compared with 9.2%. Marketing was $1.05 billion, or 4.6% of revenue, compared with 4.3%.
+Now, I'll talk about our segment results. Beginning in the first quarter, we changed our reportable segments to report North America, International, and Amazon Web Services. In addition, we have provided historical results for these segments, for 2014 and 2013, with our earnings release filing today. Consistent with prior periods, we do not allocate to segments, our stock-based compensation or the other operating expense line item.
+In the North America segment, revenue grew 24% to $13.41 billion. Media revenue grew 5% to $2.97 billion. EGM revenue grew 31% to $10.25 billion, representing 76% of North America revenues. North America segment operating income increased 79% to $517 million, a 3.9% operating margin. Excluding the favorable impact from foreign exchange, North America segment operating income increased 77%.
+In the International segment, revenue decreased 2% to $7.74 billion. Excluding the $1.3 billion year-over-year unfavorable foreign exchange impact, revenue growth was 14%. Media revenue decreased 12% to $2.32 billion, or increased 2%, excluding foreign exchange.
+EGM revenue grew 4% to $5.38 billion, or 21%, excluding foreign exchange. EGM now represents 69% of international revenues. International segment operating loss was $76 million, compared to a loss of $33 million in the prior-year period. The unfavorable impact from foreign exchange to International segment operating loss was $78 million.
+In the Amazon Web Services segment revenue grew 49% to $1.57 billion. Amazon Web Services segment operating income increased 8% to $265 million, a 16.9% operating margin. Excluding the favorable impact from foreign exchange, AWS segment operating income decreased 13%.
+Consolidated segment operating income increased 41% to $706 million, or 3.1% of revenue, up approximately 60 basis points year over year. Excluding the unfavorable impact from foreign exchange, CSOI increased 45%. Unlike CSOI, our GAAP operating income includes stock-based compensation expense and other operating expense. GAAP operating income was $255 million compared to $146 million in the prior-year period.
+Our income tax expense was $71 million. GAAP net loss was $57 million, or negative $0.12 per diluted share, compared with a net income of $108 million and $0.23 per diluted share.
+Turning to the balance sheet, cash and marketable securities increased $5.12 billion year over year to $13.78 billion. Inventory increased 10% to $7.37 billion and inventory turns were 8.8. Down from 9.1 turns a year ago, as we expanded selection, improved in stock levels, and introduced new product categories. Accounts payable increased 13% to $11.92 billion and accounts payable days increased to 70 from 68 in the prior year.
+I'll conclude my portion of today's call with guidance. Incorporated into our guidance are the order trends that we've seen to date, and what we believe, today, to be appropriately conservative assumptions. Our results are inherently unpredictable and may be materially affected by many factors, including a high level of uncertainty surrounding exchange rate fluctuations, as well as the global economy and consumer spending. It's not possible to accurately predict demand, and therefore, our actual results could differ materially from our guidance.
+As we describe in more detail in our public filings, issues such as settling intercompany balances in foreign currencies among our subsidiaries, unfavorable resolution of legal matters, and changes to our effective tax rates, can all have a material effect on guidance. Our guidance further assumes that we don't conclude any additional business acquisitions, investments, restructurings, or legal settlements, record any further revisions to stock-based compensation estimates, and that foreign exchange rates remain approximately where they've been recently.
+For Q2 2015, we expect net sales of between $20.6 billion and $22.8 billion for growth of between 7% and 18%. This guidance anticipates approximately 750 basis points of unfavorable impact from foreign exchange rates. GAAP operating income or loss to be between a $500 million loss and a positive $50 million of income, compared to a $15 million loss in second quarter 2014. This includes approximately $600 million for stock-based compensation and amortization of intangible assets.
+We anticipate consolidated segment operating income, which excludes stock-based compensation and other operating expense, to be between $100 million and $650 million, compared to $404 million in the second quarter of 2014. We remain heads down, focused on driving a better customer experience through price, selection, and convenience. We believe putting customers first is the only reliable way to create lasting value for shareholders.
+Thanks, and with that, Phil, let's move on to questions.
+
+Great. Thanks, Brian. Let's move on to the Q&A portion of the call. Operator, will you please remind our listeners how to initiate a question?

exam/part2_problem1/Problem_1_Conference_Call_Segments/call_10_questions.txt

@@ -0,0 +1,115 @@
+Question_1:
+
+    Thank you. Can you share with us any updated metrics for Prime Now? How sticky is it in terms of repeat customers, average order value, or other details?
+And, also any update on your fulfillment center plans for the year? If you can't disclose specific numbers, maybe you could just qualitatively tell us your focus, either domestic versus international? Or, sortation versus traditional FC build out? Thanks.
+
+Question_2:
+
+    Great. Thanks for the new disclosure, guys. Really really helpful. I guess just digging in on that a little bit, we all understand the investments you guys are making on international retail. And, maybe why that margin's been declining.
+But, can you give us some color on what's driving up the North America retail segment margin. And, I guess in the context of that, just talk about the impact that Prime is having on the retail margin for both North America and International. Thanks.
+
+Question_3:
+
+    Great. Thanks, guys.
+
+Question_4:
+
+    Thanks for taking the question. Could you guys talk a little bit more, just about the international business and, kind of, the key initiatives here in terms of getting the growth to reaccelerate from these levels?
+And, then also perhaps, a little bit more on your strategy in China? How you're thinking about the cost structure there, relative to previous years? And, some of the key ways you might be able to rationalize things there? Thanks.
+
+Question_5:
+
+    Great. Thanks for taking my questions. I have two. The first one is on the new AWS disclosure.
+Can you just help us on accounting question. The AWS data center costs related to the core e-commerce business. Are those being allocated to North America and International? Or, are those being fully embedded into the AWS segment?
+And then, the second question goes back to China, I guess. Any early learnings from the team all partnership and whether you have new thoughts of, potentially, a lower capital intensive growth strategy in China?
+
+Question_6:
+
+    Thank you.
+
+Question_7:
+
+    Great thanks. Maybe, just another follow up on the new segment disclosure. Thanks for breaking that out.
+If we assume that the advertising other segment is reasonably profitable, than the implication is then that the core retail business is very modestly profitable, close to breakeven. And, just wondering what the thought process is and strategy is behind that? If in a sense, there's some subsidy to the retail side being used as you build market share in the core business? Thanks.
+
+Question_8:
+
+    All right, helpful. Thanks very much.
+
+Question_9:
+
+    Thanks for taking my questions. On the International revenue, I believe there's probably a -- there's a real distinction here between some of your more established countries and some of your more emerging countries.
+I wonder if you could talk a little bit about, for Germany and the UK and Japan and some of the more established markets. What the profit profile of those markets look like? And, just how much of the International segment results are being -- losses being held back by a handful of the more emerging markets?
+And, then a question on AWS pricing. That seemed like the pricing environment was pretty competitive last year. What are you seeing in the market this year and what your expectations going forward? Are you expecting a bit more of a stable pricing environment? Thanks.
+
+Question_10:
+
+    Hi. Thanks for taking my question. I have two. My first is, my first question is about the profitability of the North America segment. You mentioned a few moments ago, that investments in Prime were part of the, or, may -- most of the explanation for what is a relatively low 3.9% margin in North America. Which, are much lower than the 5 to 6% margin EBIT margin that the brick-and-mortar retailer books. Despite, a large benefit of booking 3P net.
+Here's the question. Prime is not new in North America. You probably have tens of millions of Prime users in the US, now 30, 40, 50 million. Yet, margins are still low. What gives you confidence that the investments that you are making will pay off?
+Second question on AWS. As you look at expenses like R&D, and perhaps, even the fixed component of marketing and sales, which presumably, one day will be really fixed. Are they still growing significantly?
+In other words, is there room for significant margin expansion at some point in the future when AWS is, I don't know, three, five, or ten times its current size? Or, do you expect R&D to scale up at the same rate as revenues? Thank you.
+
+Question_11:
+
+    Thanks. I want to go back at this North America retail margins. And, I guess I want to try to figure out. I know you're not going to go out where they could go.
+But, if we look in the past. I assume that if the base in 2014 and in full year 2013 was probably depressed for North American retail margins, North American segment margins. And, if we look back, five, six years, it's probable that that was running at, kind of, mid to high single digits, CSOI margins. Kind of similar to the incremental margins you just reported for that segment, 8.7%.
+So, I guess the big question I want to ask is, is there a structural change in the North American retail business over the next -- this year and the next couple years? Versus what you had, call it in 2004 to 2009, when the margins were pretty clearly higher? And now, you're going to be recovering to the levels?
+That's what I'm trying to get at. Any color would be great. Thanks.
+
+Question_12:
+
+    Okay. Thanks, Tom.
+
+Question_13:
+
+    Hello, a couple questions on margins. First on AWS, I think those are higher than most of us were thinking. Appreciate the disclosure.
+What is driving your margin versus your pricing decision? How do you think about passing through cost efficiencies or potential margin growth through to customers?
+And then, secondly, on international margins. Clearly, below history, below the US, what kind of things need to happen to get those at least to where the US is today? Much less, back to where they were six or seven years ago? Thank you.
+
+Question_14:
+
+    Great. Thanks. I was wondering if you could give us a sense of how we should think about the run rate of CapEx and capital lease obligations in the quarter as any sort of indication for full year? And, the trajectory of investment in fulfillment and data centers?
+And then, just on the question of Prime and Prime video. As we think about the way that media growth is trending now, is there a point where you start to think of allocating Prime, some of those Prime revenues to media to account for the -- as Prime video usage increases?
+
+Question_15:
+
+    Right, was just getting a sense of, as video becomes such a, becomes a bigger part of the Prime value proposition. Do you start to allocate some of the annual revenues from Prime more directly into that media segment? Because of the level of usage associated with Prime video versus the shipping benefits of Prime?
+
+Question_16:
+
+    Okay. Great. Thank you.
+
+Question_17:
+
+    Good afternoon, could you talk a little bit about the focus on same day and same hour? And specifically, about the incremental investments? And, just some context to how big of those investments are?
+And, separately is what the strategic advantage is? Is this something, ultimately, obviously, it's to improve the experience, but do you see in any of your data that this opens you up to be more competitive with traditional retailers? Thanks.
+
+Question_18:
+
+    Yes, thank you. I was wondering, Tom, could you give us an update on your retail store strategy? Should we expect stores to open up across the US or is that something you're just limited to trying out New York. And then number two, India's come up a couple of times on the call today.
+China had several structural challenges based on the market there. I was curious if you could differentiate what you're seeing that's different in India versus the China challenges? Thank you.
+
+Question_19:
+
+    Sure, so you've talked about India a couple of times today on the call. Obviously it's big area of investment and focus for the Company. China had some structural challenges based on how the marketplace is.
+I was wondering if you could differentiate what you're seeing in India that makes you optimistic there versus some of the challenges you faced in China?
+
+Question_20:
+
+    Thanks. So, can you talk about how the impact on available third-party SKUs impacts the business particular to in Europe?
+And, ultimately what you could do to drive more SKUs through the platform? Whether it's lowering third-party rates or is it -- are there are other factors to try to get more SKUs on there for third-party? Thanks.
+
+Question_21:
+
+    Hi, good afternoon. Looking at the service sales, less the AWS revenues, you've got about $4 billion in fees mostly coming from the marketplace off a strong mid-30%.
+Can you help us think about the costs that go against those marketplace fees? And, specifically within fulfillment, if you could help us understand how much of the cost is going against 3P, or basically, FBA fulfillment? Perhaps, percent of units out of the FCs that are going to 3P?
+
+Question_22:
+
+    If I can insert a second question. Given the upside and profitability in the first quarter, the guidance for the second quarter quite a bit lower. What are the factors you see that are negatives? Or, I guess otherwise, people are going to think you are sand bagging. Thanks.
+
+Question_23:
+
+    Great. Thanks for taking the question. Just going back to margins, and a little bit more on AWS. As I look at the seasonality. I wonder if there's any seasonality in margins?
+Given, it looks like margins in 2Q and 3Q came in sub 10% versus maybe mid-teens in the -- in 4Q and 1Q. And then, sort of, looking at a different way, maybe given the dip in profitability in 2Q of last year. Did that have any impact from the pricing cuts in April? Thanks very much.
+

exam/part2_problem1/Problem_1_Conference_Call_Segments/call_11_answers.txt

@@ -0,0 +1,129 @@
+Answer_1:
+
+    Yes, Mark. Thanks for your question.
+So we will not be providing the granular customer detail, unfortunately, but I will say the growth of 81% was up from 49% in Q1. You'll remember that we're lapping a number of large price decreases in Q2 of last year, so it was somewhat expected, but a very strong quarter in AWS. We did open a region in India
+
+Answer_2:
+
+    We've announced a region in India.
+The other thing to mention is just we continue to see really strong usage growth. It's outpacing the revenue growth of 81%, obviously. And so we're really excited about it.
+From a distribution of customers, it is a global business. We have regions spread throughout the world. We've got 11 regions at this point and have announced plans to launch a region in India in the future.
+
+Answer_3:
+
+    Certainly, Eric. What I could say about India is that when we say a positive surprise, we double down on it. That's kind of our policy. India is that kind of surprise.
+We're very happy, very encouraged early on with what we've seen, the ramping of the business, the level of invention going on for both customers and sellers. We're over 25 million ASINs, which is the largest online store in India, and continue to improve pricing and fast delivery.
+So we're super excited about India. I will not get into specific investment levels right now, but we continue to ramp up our investment there.
+
+Answer_4:
+
+    Sure. Let me start with that second question. So as Phil mentioned, we're seeing continued increases in usage, both sequentially and year-over-year. We're also seeing great efficiency in the business on a cost basis. Innovation is accelerating, not decelerating. We had over 350 significant new features and services and we believe that's what's resonates with customers.
+Pricing is certainly a factor. We don't believe it's always the primary factor. In fact, what we hear from our customers is that the ability to move faster and more agilely is what they value.
+I'm sorry, the first part of your question was?
+
+Answer_5:
+
+    Sure. Well, here's how I think about it. We have two things, at least two things going on. We're continuing to drive operational improvement in every business that we're in. But we're also investing in large opportunities that are in front of us, particularly in Marketplace, Prime and AWS.
+If you saw our shareholder letter this year, I think Jeff Bezos put it really well. He said we're going to look for things that are important to customers, customers love them, businesses that can grow to be a large size, that can generate a high return on invested capital and are durable and can last for decades. We will continue to invest in the businesses that we think fit that profile, and we're always looking for a fourth or fifth business that fits that profile.
+As far as lumpiness, admittedly it is lumpy and we will continue to work on both those tracks going forward.
+
+Answer_6:
+
+    Certainly. We saw good acceleration in both North America and international this quarter. North America was up 200 basis points sequentially and international was up 800 basis points. And half of that you'll remember we've spoken about the impact of the Japanese consumption tax that was instituted last April 1 of 2014.
+It had a measurable impact on our run rate, our growth rate, last year, particularly in Q2. And so we're lapping that, which sequentially makes up half of the 800 basis point sequential gain. But independent of that, yes, you're right, Prime membership continues to grow.
+Faster outside -- data we gave you at the end of the year, it's growing faster outside the US than it is in the US. We're happy with both growth rates, quite frankly. I would say the Prime membership to Prime Flywheel, the additional benefits we're adding to Prime, not only in North America but also internationally, and additional selection, both retail and FBA which feeds the Prime Flywheel.
+
+Answer_7:
+
+    Sure. So let me start with North America. 5.1% operating margin was up from 3.9% in Q1 and 3% last Q2. You hit a nail on the head. A lot of it is the top line growth, but it's also a lot of the efficiency we're seeing, particularly on the fulfillment and marketing lines, which for the whole Company were flat year-over-year on a percent of revenue basis.
+So we are getting very good top line growth, a lot of that is fueled by Prime, Prime adoption, and we are dropping a lot of it to the bottom line with many of the efficiency projects. In international we had not split countries out. What I can say is that if you adjust for foreign exchange, the operating margin is up slightly both sequentially and year-over-year. What you're seeing there is obviously colored by our investment, our increased investment in India based on the momentum and success we've been seeing there so far.
+
+Answer_8:
+
+    Let me start with that second question first. Yes, headcount was up 38% year-over-year. The vast majority of that is in operations where we're adding people for our new FCs and call centers. We continue to look for smart, innovative people who want to build on behalf of customers and so we are -- but this particular quarter is colored a bit by the operations growth.
+If you look at Prime Day, we're thrilled with the results of Prime Day. Surpassed all of our expectations. Any metric we look at, we think it was a huge success. Customers saved millions. New Prime members signed up at higher rates than we've ever seen. People bought more devices than on any other day. So it's a great success.
+My hat's off to the operations team and all the people who worked on that because it was a Christmas in July, quite frankly. Bigger day than Black Friday as we've said and orders increased 266% year-over-year. I'll also point out that worldwide FBA unit order growth approached 300%. Not only was it a great day for Amazon, it was also a great day for our sellers, which was great. So while not breaking out the impact of Prime Day specifically, it's incorporated into our guidance.
+
+Answer_9:
+
+    Let me start with that second one. Prime Now you said and Amazon Fresh. We are moving very quickly on Prime Now. We've now expanded to nine cities, three more in the quarter, including our first international city in London. So we're moving quick. But we would always like to move quicker, obviously.
+On AWS, I think your question's more around the ability to fund AWS. No comments specifically on that. We do realize it's a capital intensive business and we have modeling that shows that it's going to be a very -- it is a very good business for us and that's what we aim for is long-term return on invested capital and free cash flow.
+So we're certainly cognizant of the capital part of that calculation. So not much more I can add on that, Carlos.
+
+Answer_10:
+
+    Sure. Thanks for your question, Heath. Yes, I'll point out that we have continued to lower prices. We've had multiple price cuts this year. We're now up to 49 since launch in 2006. So it is a fundamental part of our business model. So is innovation. And as I said, we have over 350 new features and services that have also significant features and services that have launched this year.
+As we were just talking with Carlos, the capital investment is very large as well. So we continue to fund it and we're super excited with customer reception that we're getting and the feedback we get from large customers and so we're thrilled with the business and price reductions are part of that model. And again, as I said earlier, we're in the long haul, in this for the long haul. We are looking for return on invested capital, free cash flow and happy customers in this space.
+
+Answer_11:
+
+    Yes, what I can tell you is we have seen great efficiency on the cost side. The cost to generate the capacity for AWS. I'll also say that Amazon is one of the primary large customers of AWS, so we see it on the consumer side of the business as well, although that's not included in AWS revenue. It's in intercompany relationship. So we get a double whammy there. We're getting great efficiency from our external AWS business, but also from our own use of AWS services.
+
+Answer_12:
+
+    I'll comment on the units first. We're really following the model of giving our customers as many choices as possible and letting them choose whether they want to buy first party or third party. I think we're working really hard to make sellers succeed on the platform. Brian touched on the success that our FBA sellers had with Prime Day. We see FBA as a tailwind for the third party business in general.
+When we surveyed those sellers in the past, in 2014 about 71% of sellers saw a 20% or greater increase in sales when they entered the FBA program. So we're really happy with what that's doing for third party business. We're working really hard to give customers as many option as possible and allowing them to choose. We don't really have a specific target there. It all comes down to customer choice.
+On the price reduction question, we've got a long track record of driving cost out of the business. And you can certainly see where we've even done that over the last several quarters if you look at the margins in AWS. We've also lowered prices for customers 49 times since launch and so it can be lumpy but over the long haul that's the model we followed.
+
+Answer_13:
+
+    Sure. On the engagement of Prime customers, excuse me, PIV customers, we've seen buying habits that look like normal Prime customers or other Prime customers from the group that comes in through the digital pipelines. We also see a higher pick-up in retention rates and free trial conversions. So we're very happy with the linkage between our digital offerings and the Prime customer base.
+On the content side, I will say that one of the factors in the sequential guidance, Q2 to Q3 being lower is two things. What we're talking about is the fulfillment center, additional fulfillment center cost we see this time every year as we get ready for Q4, but also additional step-up in content spend where we spend a lot of our content in Q3. You'll see extensions of a lot of the successful shows that we've had so far this year, a new pilot season including Man in the High Castle and Hand of God, so stay tuned for that.
+
+Answer_14:
+
+    Or seasons of Man in the High Castle and Hand of God.
+
+Answer_15:
+
+    Sure. Thanks for your questions, Gene. On robotics first, we don't have any new numbers to share with you, but we're super excited with the progress of that business. We had very high expectations for Amazon robotics and its impact on our warehouse cost structure and we've been very pleasantly surprised by the job being done by that team. That's looking great.
+Efficiency, yes, as we talked about in the last few calls we have more emphasis on variable and fixed productivity. I think that's evident in the Q2 results that you've just seen. To give you a little more color on that, I would say what does that look like. Defect reduction and process improvements are probably something we've always done and worked on, both to lower our cost but also improve the customer experience and also the seller and vendor experience.
+We're using software and algorithms to make decisions rather than people which we think is more efficient and scales better and will be more accurate, especially as we insert machine learning into those decisions. As I said earlier, we benefit from the efficiency gains of the AWS business as on the Amazon side as well. We look to increase the leverage of our fixed assets, particularly our fulfillment centers and throughput of the fulfillment centers and just generally getting inventory closer to customers as we add and expand warehouses and the sort centers that we added primarily last year. All have helped our cost structure.
+So just a little more color on maybe some specifics on the efficiency area.
+
+Answer_16:
+
+    Sure. So we ended the year last year with 109 fulfillment centers around the world and 19 US sort centers. Typically, we're looking at what the demand would be for peak as we figure out what we need. Still a little early in the year to comment on that.
+In the past we've given an update sometime around Q3 on that. Continuing to build as we have demand and like, Brian said, we like to be close to customers and benefit from having inventory close to customers as well. So like I said, a little early for the update at this point, but something that we're looking at and something the team's working really hard on.
+
+Answer_17:
+
+    So I'll start with the Fire phone question. We have a policy of not commenting on our roadmap, so can't give you anything there. We obviously do learn from everything we do and value the feedback we get from customers. But nothing to share at this point.
+In terms of growth, we continue to see selection as a strong driver of growth. Prime is obviously very important as well. We really haven't teased those apart. FBA becomes very important as well. We've talked about some of the tailwinds we see there and sort of the linkage between Marketplace and Prime that FBA provides.
+All those things are going on. As you see in EGM, strength across a lot of the categories there. There was no single category we're really calling out, but continue to see good selection growth and good Prime growth as well.
+
+Answer_18:
+
+    Thanks for your question. I can't forecast into the future on that, but I will reiterate the investments we have going on right now, which, again, we're looking to invest to strengthen the Prime platform. That includes video content, including Amazon Originals, Prime Music, Prime Now, we have a robust device business, including a launch of a new Paperwhite Fire TV Echo with general availability and numerous other products that we're very excited about. That roadmap, we know those devices drive customer engagement and sales. We build fulfillment centers so we can add selection and we can add FBA partners and then we add things like same day delivery which we talked about.
+On the AWS side, we continue to invest in that infrastructure. We talked about opening -- announcing the region in India, so there's expansion there's as well. Feature expansion, services expansion, internationally, very similar to the US on a number of the Prime fronts, but also the investment in India.
+And then a few other things you may have seen in our press release today. The launch of Mexico, which we're very excited about, and Amazon Business, so lots of -- as I said, lots of investment in front of us but we operate in two paths. We're definitely working for operational efficiencies in the business that we're in. We're investing wisely in things that we think are big and important. And it's not a static activity.
+We continue to evaluate those investments, take into account what customer response is and make changes. So I think you can look forward to continuation of that into the future.
+
+Answer_19:
+
+    Sure. So I'll start with the first part of that question. We definitely are delivering a lot of packages with the post office. I think most notably they did a lot of the Sunday delivery that you saw when we started launching Sunday delivery.
+We try lots of things for fulfillment. We're constantly working to provide the best experience to customers and be as efficient as possible. And so we're happy with all the partners we have and continue to work with them to provide the best experience possible.
+For advertising, I would remind you that certain parts of the advertising roll up into other. Some actually roll up to EGM and media as well. So it's a business we're really excited about. We're taking a customer-centric approach as we build that to make sure we're providing engaging business, engaging ads to customers and making sure we keep the customer front of mind.
+It's a business that the team is excited about and working hard on.
+
+Answer_20:
+
+    Your first question was about the infrastructure and how we're managing the customer experience in India. So FBA, Easy Ship and some of those programs are important to us. They're very valuable for sellers to make it easy for the seller to get their goods to the customer. They're great from a customer experience standpoint because we can do what we do best with the logistics. And so there is a lot of investment, a lot of efforts going on in that front.
+I would say that India and China are totally different and I think, as Brian mentioned, India is a country that we're doubling down on based on the success we've seen there so far. And so very happy with the trajectory we're on there and excited to be investing and have the opportunities we do at that point.
+
+Answer_21:
+
+    Yes, thanks for your question. We have not broken out specifically apparel, but we're super excited about that business. It's growing very well. We like our position in it. We think our website is very, very atune to selling online. So we're very happy with that.
+It is a big business for us, not only in North America but also Internationally. So you mentioned a couple other consumables categories. I will say we are very happy in our consumables and hard line categories as well. We drive a lot of repeat business with things like Prime Pantry and subscribe and Save and others. So very happy with the EGM business as a whole.
+
+Answer_22:
+
+    Sure. Let me start with the first question on international media and EGM. I think we're seeing similar trends in both geographies, both segments that EGM growth is much -- is very strong. Media growth has been consistent for the last four quarters. We do like the work being done by the media teams.
+There's a lot of pipeline of invention, things like Prime Instant Video, Prime Music, all feed the Prime pipeline and Prime ecosystem, if you will. They work great with our devices, by the way. And they drive other non-media sales. So they're very tied together, although certainly the EGM is outpacing the media segment or excuse me, media businesses right now.
+On transportation costs, not a lot to add there. Again, we are -- we have a combination of doing our own shipping and using third party carriers. So the rate increases are staged and we see those quite frequently, nothing to add there.
+On the FCs and whether we would expand or build new, I think we're looking to always to get the most out of the fulfillment centers that we have. And as we need new facilities, we place them closer and closer to customers. So that can have its benefits as well. Not much more to add on that one.
+
+Answer_23:
+
+    Thank you for joining us on the call today and for your questions. A replay will be available on our Investor Relations website at least through the end of the quarter. We appreciate your interest in Amazon.com and look forward to talking with you again next quarter.
+

exam/part2_problem1/Problem_1_Conference_Call_Segments/call_11_presentation.txt

@@ -0,0 +1,28 @@
+
+Hello. And welcome to our Q2 2015 financial results conference call. Joining us today is Brian Olsavsky, our CFO. We will be available for questions after our prepared remarks.
+The following discussion and responses to your questions reflect management's view as of today, July 23, 2015 only, and will include forward-looking statements. Actual results may differ materially. Additional information about factors that could potentially impact our financial results is included in today's press release and our filings with the SEC including our most recent annual report on Form 10-K.
+As you listen to today's conference call, we encourage you to have our press release in front of you, which includes our financial results as well as metrics and commentary on the quarter. During this call we will discuss certain non-GAAP financial measures. In our press release, slides accompanying this webcast and our filings with the SEC, each of which is posted on our IR website, you will find additional disclosures regarding these non-GAAP measures including reconciliations of these measures with comparable GAAP measures. Finally, unless otherwise stated, all comparisons in this call will be against our results for the comparable period of 2014.
+Now I'll turn the call over to Brian.
+
+Thanks, Phil. I'll begin with comments on our second quarter financial results.
+Trailing 12 month operating cash flow increased 69% to $8.98 billion. Trailing 12 month free cash flow increased to $4.37 billion, up from $1.04 billion. In the supplemental financial information and business metrics portion of our earnings release, we include a few additional free cash flow measures. We believe these measures provide additional perspective on the impact of acquiring property and equipment with cash and through capital and finance leases.
+Trailing 12 month capital expenditures were $4.61 billion. Capital expenditures do not include the impact of property and equipment acquired under capital and finance lease obligations. The increase in capital expenditures and capital leases reflects additional investments in support of continued business growth due to investments in technology infrastructure, the majority of which is to support AWS, and additional capacity to support our fulfillment operations.
+Return on invested capital was 17%, up from 6%. ROIC is trailing 12 month free cash flow divided by average total assets, minus current liabilities, excluding the current portion of long-term debt over five quarter ends.
+Combination of common stock and stock based awards outstanding was 488 million shares, compared with 480 million one year ago. Worldwide revenue grew 20% to $23.18 billion, or 27% excluding the $1.39 billion unfavorable impact from year-over-year changes in foreign exchange. Worldwide paid unit growth was 22%.
+Worldwide active customer counts was approximately 285 million, excluding customers who only had free orders in the preceding 12 month period, worldwide active customers were approximately 265 million, up from approximately 237 million in the comparable prior year period. Worldwide seller units represented 45% of paid units, up from 41% in the comparable prior year period.
+Now I'll discuss operating expenses excluding stock-based compensation. Cost of sales was $15.16 billion or 65.4% of revenue, compared with 69.3%. Fulfillment, marketing, technology and content and G&A combined was $6.95 billion or 29.9% of sales, up approximately 130 basis points year-over-year. Fulfillment was $2.74 billion or 11.8% of revenue compared with 11.8%. Tech and content was $2.70 billion or 11.7% of revenue compared with 10.4%. Marketing was $1.1 billion or 4.7% of revenue compared with 4.7%.
+Now I'll talk about our segment results. As a reminder, in the first quarter we changed our reportable segments to report North America, International and Amazon Web Services. Consistent with prior periods, we do not allocate to segments our stock-based compensation or the other operating expense line item.
+In the North America segment, revenue grew 26% to $13.8 billion. Media revenue grew 6% to $2.62 billion or 7% excluding foreign exchange. EGM revenue grew 31% to $10.99 billion or 32% excluding foreign exchange. EGM now represents 80% of North America revenues. North America segment operating income increased 113% to $703 million, a 5.1% operating margin. Excluding the $9 million favorable impact from foreign exchange, North America segment operating income increased 111%.
+In the International segment, revenue increased 3% to $7.56 billion. Excluding the $1.37 billion year-over-year unfavorable impact from foreign exchange, revenue growth was 22%. Media revenue decreased 12% to $2.09 billion or increased 3% excluding foreign exchange. EGM revenue grew 10% to $5.43 billion or 31% excluding foreign exchange. EGM now represents 72% of International revenues.
+International segment operating loss was $19 million compared to a loss of $2 million in the prior year period. International segment operating loss includes $89 million of unfavorable impact from foreign exchange.
+In the Amazon Web Services segment, revenue increased 81% to $1.82 billion. Amazon Web Services segment operating income increased 407% to $391 million, a 21.4% operating margin. Excluding the $71 million favorable impact from foreign exchange, AWS segment operating income increased 314%. Consolidated segment operating income increased 166% to $1.07 billion or 4.6% of revenue, up approximately 250 basis points year-over-year.
+Excluding the $9 million unfavorable impact from foreign exchange, CSOI increased 168%. Unlike CSOI, our GAAP operating income includes stock-based compensation expense and other operating expense. GAAP operating income was $464 million compared to a loss of $15 million in the prior year period.
+Our income tax expense was $266 million. GAAP net income was $92 million or $0.19 per diluted share, compared with a net loss of $126 million or a loss of $0.27 per diluted share.
+Turning to the balance sheet. Cash and marketable securities increased $6.02 billion year-over-year to $14 billion. Inventory increased 12% to $7.47 billion, and inventory turns were 8.9, down from 9.1 turns a year ago, as we expanded selection, improved in-stock levels and introduced new product categories. Accounts payable increased 18% to $12.39 billion, and accounts payable days increased to 74 from 71 in the prior year.
+I'll conclude my portion of today's call with guidance. Incorporated into our guidance are the order trends that we've seen to date and what we believe today to be appropriately conservative assumptions. Our results are inherently unpredictable and may be materially affected by many factors including a high level of uncertainty surrounding exchange rate fluctuations as well as the global economy and customer spending. It's not possible to accurately predict demand and therefore our actual results could differ materially from our guidance.
+As we describe in more detail in our public filings, issues such a settling intercompany balances and foreign currencies among our subsidiaries, unfavorable resolution of legal matters and changes to our effective tax rate can all have a material effect on guidance. Our guidance further assumes that we don't conclude any additional business acquisitions, investments, restructurings or legal settlements, record any further revisions to stock-based compensation estimates and if foreign exchange rates remain approximately where they've been recently.
+For Q3 2015, we expect net sales of between $23.3 billion and $25.5 billion, or growth of between 13% and 24%. This guidance anticipates approximately 620 basis points of unfavorable impact from foreign exchange rates. GAAP operating income or loss to be between a $480 million loss and $70 million of income, compared to a $544 million loss in the third quarter of 2014. This includes approximately $580 million for stock-based compensation and amortization of intangible assets.
+We anticipate consolidated segment operating income, which excludes stock-based compensation and other operating expense, to be between $100 million and $650 million, compared to a $136 million loss in the third quarter of 2014. We remain heads down focused on driving a better customer experience through price, selection and convenience. We believe putting customers first is the only reliable way to create lasting value for shareholders.
+Thanks, and with that, Phil, let's move on to questions.
+
+Great. Thanks, Brian. Let's move on to the Q&A portion of the call. Operator, will you please remind our listeners how to initiate a question?

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@@ -0,0 +1,154 @@
+Question_1:
+
+    Thanks for taking my questions. Clearly a lot of things that were working well in the quarter, but maybe just focusing in on AWS which is -- seems to be quickly emerging as your largest contributor to operating income. Can you maybe provide a little more color on what drove the acceleration and just the overall growth in the business, if you could talk a little bit about the addition of new customers versus average spend per customer and I think in the past you've talked about what unit growth was for AWS?
+And then in the press release you talked about expanding AWS into some new International markets. Can you give us a feel for how much of AWS's business today is domestic and what kind of opportunity you have there to expand AWS outside the US.
+
+Question_2:
+
+    Great. Thank you for taking the question. There's been some recent press reports talking about investments in India. Wanted to know, you've talked a little bit about that market in the past, whether there was any update there in terms of how you're thinking about approaching that market and the level of investments that might be needed to compete in the market. Thank you.
+
+Question_3:
+
+    Thanks so much.
+
+Question_4:
+
+    Thank you. A couple questions. We follow this coming for a long time and profits seem to move around quite a bit year-over-year and year against year. Just wondering how you think about that? Is that just the nature of your big bets and that's just going to continue or is there a way to smooth that out?
+And secondly, in AWS, it does seem like pricing competition has come down and we've been to a lot of your events and it seems like you're emphasizing pricing a little less to your customers. Can you talk at all about the pricing environment in cloud? Thank you.
+
+Question_5:
+
+    I was asking about just how the profitability really moves, pretty big swings year-over-year. Is that the nature of your just big bets and that can continue or is there a way to smooth that out going forward? How do you think about that?
+
+Question_6:
+
+    Thank you.
+
+Question_7:
+
+    Okay. Thanks. I don't know if Tom's listening in. That's a great exit on his part.
+On International retail, you had nice acceleration there. Could you give us a little bit more of the why behind that? Why would international revenue growth, particularly in EGM, accelerate pretty materially? Is that the impact of the buildup of Prime in international markets, and also in the US, too, but more spend per Prime customer as they go through this evolution that's just layering on? Is that what it is? What is causing that acceleration? Thank you.
+
+Question_8:
+
+    Okay. Thanks a lot.
+
+Question_9:
+
+    Great. Thanks for taking my questions. I have two.
+The first one on the North America retail profitability was up nicely. Can you just talk to some of the drivers of that? Is it more top line and more Prime subs coming on, or is it more on the logistics side and what's driving the North America improving profitability?
+And then the international profitability, is there any way you can help us understand the profitability of the more mature international markets like UK and Germany relative to the US at this point?
+
+Question_10:
+
+    Okay. Great. Thanks.
+
+Question_11:
+
+    Great. Thanks for taking the question. Just two things I wanted to ask. First on Prime Day, Brian, if you could give a little more color there on the early take-aways that you have, and also more importantly how you think that sets Amazon up for the back-to-school season and also the holidays later in the year?
+And then also can you just comment on the headcount, which I believe is up 18,000 or so sequentially, which I believe is the biggest number that you've ever added in a quarter? Is there anything in particular that stands out there or just more fulfillment centers, more geography expansion as well? Thanks.
+
+Question_12:
+
+    Hi. Thanks for taking my questions. I have two. I may be delusional, but if I add your capital leases and CapEx that suggests that AWS capital  is at least 80% if not much higher. What gives you confidence that if AWS continues to grow so fast and consuming so much capital, two years out you'll be able to fund its growth from the retail business? And secondly, can you help me understand why you are not rolling out Prime Now and Fresh faster? What specifically are the bottlenecks there? Thank you.
+
+Question_13:
+
+    Thank you.
+
+Question_14:
+
+    Great. Thanks, guys. Wondering if you can touch a little bit more on AWS margins? Is there a level, particularly when you've been able to maintain pricing strength the way that you have been, where you feel like margins start to become and the leverage that you have there starts to become a catalyst for lowering prices or is that purely a competitive decision? And as you think about AWS longer term, is there a framework or structure that you use to think about where margins in that business should be?
+
+Question_15:
+
+    Great. Thanks. Really appreciate it.
+
+Question_16:
+
+    Thank you. I guess another question on AWS, if I may? So want to go back to something that you said, Brian. You said that you've seen greater efficiency in that business from a cost standpoint. I was wondering if you could maybe parse that out a little more for us? Were you referring to OpEx or CapEx?
+And if you're referring to CapEx as well, have you -- do you feel that you've reached that escape velocity that should allow CapEx as a percentage of revenues, pricing aside, to now allow you for constant decline in that metric? CapEx as a percentage of revenue for that particular business? Thanks.
+
+Question_17:
+
+    Okay. Thanks.
+
+Question_18:
+
+    Thanks for taking the questions. Just a quick follow-up on Heath's question on the price reductions, Brian, you said earlier in the year. Can you just compare maybe the reductions earlier this year, versus the ones across the board from last year and 2Q 2014?
+And a follow-up just on the third party units. I think you mentioned third party units are now 45% or maybe 47% of total units. Is there a natural limit there or does it matter as long as the customer experience through FBA is seamless. Thank you.
+
+Question_19:
+
+    Thank you.
+
+Question_20:
+
+    Great. Thank you. Just a question on the content side. Any update on how engaged folks are, the video side of Prime, and their shopping behavior number one? Number two, any update on your plans for growth on the content cost side? Thank you.
+
+Question_21:
+
+    Thank you.
+
+Question_22:
+
+    Good afternoon and congratulations. Just want to follow up on a previous question. In past calls you talked about an increased focus on productivity. Is that still a focus of yours? And separately, any thoughts in terms of how robotics are impacting, any updates in terms of number of robots in fulfillment centers? Thanks.
+
+Question_23:
+
+    Great. Thank you.
+
+Question_24:
+
+    Great. Thanks. You now halfway through 2015, any update or insights on your fulfillment center buildout plans for the year? If you can't disclose that, can you maybe just give us a general sense of focus and strategy, how should we be thinking about domestic versus international, as well as sortation versus traditional? What's kind of the path to build out over the next 6, 12, 18 months? Thanks.
+
+Question_25:
+
+    Great. Thanks.
+
+Question_26:
+
+    Thanks. Congrats on the great quarter. In the retail business obviously a lot of variables driving growth there. You're seeing higher Prime membership levels for one, but I wonder how much of that growth you can also break down by some other factors, for example, we're seeing a notable increase in selection across longer-tail categories?
+And then secondly, in the press release no mention of Fire phone. I think almost every other product was mentioned. Can we just chalk that one up now to a learning experience and an example of where Amazon is showing some discipline around investments, or how should we think about that? Thanks.
+
+Question_27:
+
+    Thank you.
+
+Question_28:
+
+    Thanks, guys. So Brian, I know you guys don't like to provide guidance beyond the next quarter, but philosophically if we go back a few quarters, you've characterized 2015 as a year where you believe that some of the heavier investments made in prior years should start to benefit and pay off and we're clearly seeing that in AWS and in North America retail. And it looks like you're still investing heavily on international retail.
+If we look out 2016, 2017, is there any high level philosophical commentary about whether you see next year as another year of these types of trends that you're seeing now, or are there any bigger investment areas, particularly in the retail business that you might be looking to take advantage of?
+
+Question_29:
+
+    Thanks a lot. You've talked a lot about operational efficiencies. I know you guys have partnered with the post office and deliveries.
+Can you talk a little bit about how that is potentially benefiting and maybe the longer term strategy with the post office? And then you guys haven't necessarily broken this out, but I think you do generate a fair amount of revenue from advertising. I think that's in the other category. Is there anything that you can provide on advertising revenue? Thank you.
+
+Question_30:
+
+    Thank you.
+
+Question_31:
+
+    Thanks. Brian, just a follow up on the India question earlier. To my knowledge, foreign e-commerce operators such as yourself are not allowed to have first party retail operations. But given the fulfillment enhanced customer service has always been a high focus item for you guys, what steps have you taken in the country to make sure that the consumer experience there is as good if not better for the inventory on which you have no direct control?
+And secondarily, similar to China you have a pretty large population base and internet penetration currently that's probably comparable to what was the case when you acquired Joyo. Can you provide any color on how the general operating environments are the same or different, and do you expect your growth trajectory there to be similar to what you saw in China? Thank you.
+
+Question_32:
+
+    Thank you.
+
+Question_33:
+
+    Great. Thank you. So it appears that Amazon is growing its share of household budget driven by many factors, Prime growth and strong growth in large verticals like apparel among others. Specifically on apparel, just wondering how you view the breadth of Amazon's apparel offering? Any color on that segment's performance in the second quarter and how do you view Amazon's apparel opportunity going forward? Thank you.
+
+Question_34:
+
+    Thanks.
+
+Question_35:
+
+    Thanks. Wanted to just follow up on a couple things. Three quick questions.
+First off on international, I was wondering if you could compare and contrast relative performance of media and EGM, moving in different directions? Second, there have been a couple questions about shipping, but most notable is that we had a couple price increases from the majors hit at the beginning of the year and it seems like your costs are coming down. I was wondering if you could comment on that?
+And then third just following up on Brian's question around the FCs. I was wondering how many of the facilities lend themselves to expansion rather than having to put up a new facility. Thanks.
+

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@@ -0,0 +1,127 @@
+Answer_1:
+
+    On International yes, you are right, first of all, the FX neutral growth of 24% year-over-year is up 200 basis points versus Q2 and up 1,100 basis points year-over-year. Some of that is due to the comping of the JP consumption tax increase in April of last year which we said last year, impacted Q2 and Q3 and not really impact in Q4. We are seeing the last of that on the comp.
+But the impact of Prime Day globally we estimated about 200 basis points and we saw a pickup in both. I'll remind you that Prime Day was a global event, so we saw that as International as well. That was great event for -- a great day for customers, Amazon and sellers alike. The base International growth is really being driven by Prime adoption, greater selection, greater Prime selection including FBA. So it is essentially the same playbook as the US. The additional Prime features, we launched a Prime Now location in the UK this quarter. Not materially going to impact the entire continent but it is a good start. So we like the trends in International and they mirror many of the same things we see in North America.
+On AWS, the business model there, let me talk about margin which was up sequentially from Q2 from 21.4% to 25%. We're continuing to see great acceleration in the pace of innovation. We've launched 530 new significant features this year which is more than last year already. We continue to lower prices. We've lowered prices eight times since a rather large price cut in April of 2014 -- excuse me, April of 2014. And we like the customers are really responding. They like the speed and agility that AWS provides them. They like the new features that we launched, many of which are also enable them to lower their cost of infrastructure.
+Amazon Aurora, one-tenth the price of other high-end commercial databases, a new storage class of Amazon S3 QuickSight also very effective and cost-effective products for our customers. So like AWS, the model remains in early days and we enjoy leading this business and customers have responded well and we believe we are adding new services and features at a rate faster than many others. But the growth rates and margins will certainly remain lumpy and bumpy as we go forward. But we are very encouraged by the business and so are customers.
+
+Answer_2:
+
+    Yes.
+
+Answer_3:
+
+    So this is Phil. I will take the AWS portion. I'll echo what Brian said earlier. This is a young and rapidly growing business and as you've seen looking backwards, certainly growth rates and margins and capital expenditure timing can be bumpy. We are taking a very long-term view on this business. We are excited about the potential there and really the team's focused on just keeping their heads down and continue to accelerate the pace of innovation to try to continue to grow the functionality gap we think we offer. A lot of hard work going on there. But again, we're take a long-term view on the business and interested in helping customers as much as possible in that space.
+On the CapEx, again, we are focused on the ability to drive efficiencies across all of Amazon but we are also certainly investing in growth. On the AWS side, we've got investment going on around the world. Certainly additional servers to support the strong growth we have and some of the expense for things like data centers or new regions can be a little lumpy and we've mentioned a couple of new regions we are working on throughout the world. So that's going on as well.
+
+Answer_4:
+
+    Mark, on your headcount question, you are right, the headcount was up 49% year-over-year which is higher than Q2 -- we saw in Q2. This is going to be primarily our Ops area. If you exclude Ops related employees, our headcount's growing actually slower than our FX neutral growth rate of 30%. So what's going on in Ops is we've added 14 net fulfillment centers this year bringing the total to 123 globally. We've added four sort centers in the US bringing the US footprint to 23. We're staffing earlier in those locations. We are in good shape for the holidays and ready to go. The other issue -- is there any other reason is that we are also doing a live conversion of temp workers to full-time workers purposefully. This a metric of employment of full-time hires so it is a little bit higher due to that program.
+
+Answer_5:
+
+    Sure. On a EGM growth, I won't call out any particular categories but it is a direct reflection of our efforts to grow selection both our retail selection and also our third-party, particularly FBA which is also Prime eligible. And then just the responsiveness of our customers, especially our Prime customers to the EGM product line. We are very encouraged with the EGM growth.
+And on India, I will not -- excuse me. I won't give specific dollar numbers on investment but I can give you an update on India. We are really encouraged with what we are seeing both on the customer side and the seller side. On the customer side, active customer accounts were up 230% year-over-year. We're in the middle of the Dewali season. That is going really well. Sales are 4X what they were last year. So customers are responding greatly this year. We continue to invest. We've been adding products at the rate of 40,000 products per day so far this year.
+And just as big is the number of sellers, the sellers -- the number of sellers has grown more than 250% year-over-year. 90% of those sellers are using our logistics and warehouse services. As a result, we have tripled our fulfillment capacity year-over-year. We are very encouraged, as I said last quarter, in India, and continue to invest there very heavily.
+
+Answer_6:
+
+    Mark, I think you asked about China as well. This is Phil. We're continuing to work on some of the items we've been talking about for a couple quarters now. So the team has some interesting ideas. Really focused on making Amazon a trusted conduit for Chinese customers to access authentic International branded products and things that customers cannot get.
+I think Amazon Global Store continues to expand the selection there. We added about another 400,000 items to that store this quarter and continue to focus on using our global network of vendors to be able to get those products to customers. We continue to test the store on TMall as well. And the team has some other ideas but that's what we are talking about so far.
+
+Answer_7:
+
+    Sure, Eric. What I can tell you is the 3P percent of revenue continues to grow for now up to 46% of paid units, which is up 400 basis points year-over-year and 100 basis points sequentially off Q2. We feel that Prime and FBA are reinforce each other, they are inextricably linked. FBA adds Prime selection and Prime growth attracts more FBA sellers. So we have seen growth in FBA. It increases our Prime fast-track eligible selection, which we like and customers like, so we like what we see in the third-party side.
+
+Answer_8:
+
+    This is Phil. It still pretty early for a lot of the really expedited delivery options. We've been working on our network for about 20 years to be able to enable some of the really fast delivery with things like Prime Now. But at this point, we are in a relatively small list of cities but it is expanding pretty fast. I think we launched it a couple more Prime Now cities just today. So that brings us up to about 17 across the globe.
+On the same day, here in the US, we continue to expand that as well. But we think that those fast options add us to the consideration set of a customer's purchase on some purchases that we might not otherwise be included in. But at this point, we are still working on that and getting it up to speed. So nothing specific to call out on that. On the other part of your question, we continue to work on the network around the world but cannot respond to any of the rumors and speculation.
+
+Answer_9:
+
+    This is Phil. I don't know that we have anything to comment on all of that.
+
+Answer_10:
+
+    Yes, thanks, Doug. I will point out that this quarter showed a lot of innovation, a lot of new products and features and a lot of investment. We've already talked about India, but domestically, we're -- excuse me, globally we are investing very heavily in our Prime platform both in North America and International. And that includes video content and original content, Prime Music, as Phil just said, the Prime Now has been expanded to 14 Metro areas, we have had same day delivery in now in 16 metro areas, we've built 14 new fulfillment centers, we've launched multiple devices including e-readers, tablets that are priced under $50, Echo, Dash Button.
+So there's a lot of investment going on and there will be continue especially related to Prime. And on the AWS side, as I said, we have 530 new features so far this year. So innovation and investment will continue and can be lumpy. I hate to use that word again, but could be lumpy over time. The other dynamic in our Company though is definitely working on cost reductions and efficiency. I think you see a lot of that in this quarter's P&L and in our capital efficiency, both in the warehouse world and also in infrastructure.
+So we will continue to work on costs. The good thing about 30% revenue growth is it gives you a lot more cost to work on as well. So we will -- I would say it is not as much as a pendulum as maybe it's been portrayed, it is more of a constant. The investment will, it sometimes ebbs and flows but the cost reductions will be a constant presence and the increase in customer experience and shortening the time to delivery in making the customer experience better.
+
+Answer_11:
+
+    On the Brazil side, this is Phil, we've had the Kindle store in Brazil for a while. I think we look at all of our investments within an eye towards trying to maximize long-term free cash flow at strong returns on invested capital. That's across the Board. That's the criteria we are using, making sure we're building things that customers love that can have attractive financial returns over time and can persist for a long time and if they work, can be big. That's the metrics we are using. There's nothing specific to call out to Brazil though.
+
+Answer_12:
+
+    This is Brian. We are not going to update our Prime subscription growth beyond what we said last year or the end of last year, which last year in the year when we raised prices early in 2014, the global growth rate was 53% and North America growth rate was 50%. So by default, the International growth rate was higher. We like the adoption of Prime internationally, it is helped by additional selection that's available for fast-track shipment including FBA. So that fly wheel is working.
+We've also launched video benefits, most recently in Japan, but we have them in UK and Germany. We continue to launch other Prime benefits, Amazon Pantry in Japan and Germany this quarter. We launched Prime Now in the UK. So it is very similar to the US story potentially time lagged a bit but we are seeing the same customer adoption and impact on growth rates.
+
+Answer_13:
+
+    Sure, thank you, Carlos. First, what I will classify as Prime demographics. So yes, we still think there's a lot of people in the country who are not Prime members and we are anxious to have them try it and sign up and join. The other thing that we see is that with our vast offering of selection and faster and faster shipping programs, we have a more competitive offering for many things that they buy. So there's a share of wallet element to it as well over time that we are looking to be more useful to customers all the time.
+On your comment about the economic drivers of Prime Now. You know what I will say is, customers really value it. It is not our entire selection, it is tens of thousands of items that they may need on a daily basis. We think it is an interesting part of the selection offer for Prime and it's in many ways something that we can do that others cannot because it is a natural evolution of our 20-year effort to grow our fulfillment center network and our scale, quite frankly, makes it possible to even offer this to customers.
+
+Answer_14:
+
+    I will take the India question. So again, India is a different market and does not have a lot of the same ready fulfillment options that some other countries did. We see that as an opportunity, an opportunity that we can build and we can bring to sellers. And as I believe I already mentioned, we like what we see, we are very encouraged, customer accounts, active customer counts are up 230% year-over-year and sellers, number of sellers is up 250% year-over-year. 90% of those sellers use our logistics and warehouse services, as you mentioned, which has caused us to triple our fulfilment capacity. We are happy to do so. We like what we see in India. We think we have, we're attractive both to customers and to sellers and we like our position.
+
+Answer_15:
+
+    This is Phil. On the grocery side, for Fresh we are in a handful of metropolitan areas here in the US. It is been a relatively measured rollout by Amazon standards. We continue to work on the customer experience and making sure we are really delivering a quality experience for shoppers. We are also working on the economics. And so, we've continued to work on that, but not much new to add right now.
+
+Answer_16:
+
+    No comment on the pricing. I would say that we have 23 sort centers which allows us to control a lot more of our shipments for longer but we certainly value our relationships with USPS, FedEx, UPS and other global carriers. And we are looking forward to a great holiday season.
+
+Answer_17:
+
+    On destinations, we're constantly trying new things and testing and measuring and iterating here at Amazon and we learned a lot but we've discontinued that. On the restaurant delivery, we've had it for a couple months here in Seattle and recently announced it in Portland, and it fits very well with Prime Now. At this point, it is pretty small but something we are excited to do for customers. We think it will be helpful for them and we are happy to take advantage of some of the competencies we've built with Prime Now with our fulfillment network so far.
+
+Answer_18:
+
+    Yes, I will take that one, this is Brian. No specific call outs in Japan. I would say that we are still very bullish on our Prime Instant Video, especially our new original content we've created. We think it is been critically acclaimed and also a big hit with customers. Man in the High Castle is coming out shortly as is the second season of Transparent which won Emmys this year. So we are really excited about the creative team we've assembled and the products that they have been able to bring to Prime customers. And we still like the customer reaction. Free trial conversion rates are higher when Prime members stream and they also renew at a higher rate their annual subscription. So again, that's very important to us as well and are very happy with the results.
+
+Answer_19:
+
+    Sure. So this is Phil. On the Prime pricing, we do have a few different programs for different demographics today with programs like Prime Student or Prime Family, which we're very excited about. I can't speculate as to what we'd do in the future but Prime is a program that is really important for us and we are working hard everyday to continue to build selection there and to continue to make Prime better.
+Hopefully you see that in the list of things we've launched recently and the continued cadence of making the services we have better. We just added a lot of new music in our Prime Music program. And as Brian mentioned, some of the upcoming programming should be pretty good in the fall. The Man in the High Castle is actually our most watched pilot, so we are excited about that one as well. So, continue to work on Prime.
+
+Answer_20:
+
+    On the shipping side --
+
+Answer_21:
+
+    I would say it is difficult equation. Yes, order size can go up but we ship a lot of toys and bigger items so it is hard to predict what that looks like. But having the density, having the sort centers has certainly helped our cost structure in that area and having inventory closer to our customers.
+
+Answer_22:
+
+    Yes, sure. On Prime Now, it is our intent to rollout benefits and functionality globally as quickly as possible. I think we were able to do that with Prime Now and get to the UK faster. We are happy with that, it is not necessarily a comment on Amazon Fresh, it's just they are different businesses. So we're happy with the launch in the UK and the team did a great job to get that launch in a timely manner.
+On Kiva, we are up to 30,000 bots at the end of Q3, which is -- and then they're in 13 for fulfillment centers. At the end of 2014, we had 15,000 bots. So we've doubled that amount and they were in 10 warehouses. Our intent is to use that more widely. And stay tuned.
+
+Answer_23:
+
+    So this is Phil. On the unit side, you did see units move in a rate that's highly correlated with revenue there. Keep in mind AWS and some of the other rental type offerings don't generate units so we don't count those. But we did see, certainly saw some additional units as result of Prime Day. And on a longer-term, bigger basis, the continued growth of Prime, the continued selection expansion is helping with the units growth there. Was there a second part of your question?
+
+Answer_24:
+
+    We continue to see really strong usage growth across the board and it's coming from customers of all sizes. We also have recently announced that Aurora, which is our new database software, is our fastest growing service ever. For a long time we talked about red shift and Aurora has now outpaced that. So we're very excited about what we are seeing there.
+
+Answer_25:
+
+    This is Phil, I will take the Safe Harbor question with AWS. With our EU approved, AWS data protection agreement and model clauses we have in place, AWS customers can keep running their global operations using AWS and be in compliance with E-law. I think your second question was about the capital intensity? .
+
+Answer_26:
+
+    I'm going to be vague on the scale of it but their capital intensity is offset by their density and throughput. So it is a bit of an investment that has implications for a lot of elements to your cost structure but we are very happy with Kiva. We think it is a great pairing our associates with Kiva robots to do some of the hauling of products within the warehouse has been a great innovation for us. And we think it makes the warehouse jobs better and I think it makes our warehouses more productive.
+
+Answer_27:
+
+    Yes, I cannot get into too much detail on the components of EGM profitability. I would say that we are seeing strong growth across all of our EGM categories. We have great teams that are chasing a lot of different product lines and working with vendors to get more selection on the site, both retail and also third-party. So still a lot of room there.
+On the Prime sub growth, we are not updating the statistics. We are very happy with the growth not only in participation but also purchases and retention and we had a very successful Prime Day in July that we are really happy. It was a great event for customers and sellers. That's about all I have on that.
+
+Answer_28:
+
+    Thank you for joining us on the call today and for your questions. A replay will be available on our Investor Relations website at least through the end of the quarter. We appreciate your interest in Amazon.com and look forward to talking with you again next quarter.
+

exam/part2_problem1/Problem_1_Conference_Call_Segments/call_12_presentation.txt

@@ -0,0 +1,20 @@
+
+Hello, and welcome to our Q3 2015 financial results conference call. Joining us today is Brian Olsavsky, our CFO. We will be available for questions after our prepared remarks.
+The following discussion and responses to your questions reflect Management's views as of today, October 22, 2015 only and will include forward-looking statements. Actual results may differ materially. Additional information about factors that could potentially impact our financial results is included in today's press release and our filings with the SEC, including our most recent annual report on Form 10-K. As you listen to today's conference call, we encourage you to have our press release in front of you which includes our financial results as well as metrics and commentary on the quarter.
+During this call, we will discuss certain non-GAAP financial measures. In our press release, slides accompanying this webcast and our filings with the SEC, each of which is posted on our IR website. You will find additional disclosures regarding these non-GAAP measures including reconciliations of these measures with comparable GAAP measures. Finally, unless otherwise stated, all comparisons in this call will be against our results for the comparable period of 2014. Now, I'll turn the call over to Brian.
+
+Thanks, Phil. I'll begin with comments on our third quarter financial results. Trailing 12-month operating cash flow increased 72% to $9.8 billion. Trailing 12-month free cash flow increased to $5.4 billion, up from $1.1 billion. Trailing 12-months free cash flow less lease principal repayments was $3.1 billion, up from an outflow of $99 million. Trailing 12-months free cash flow less finance lease principal repayments and capital acquired under capital leases was $637 million, up from an outflow of $2.3 billion. Trailing 12-month capital expenditures were $4.4 billion. Capital expenditures does not include the impact of property and equipment acquired under capital and finance lease obligations. These capital expenditures and capital leases reflect additional investments in support of continued business growth due to investments in technology infrastructure, the majority of which is to support AWS, and additional capacity to support our fulfillment operations.
+Combination of common stock and stock-based awards outstanding was 489 million shares compared with 481 million one year ago. Worldwide revenue grew 23% to $25.4 billion or 30% excluding the $1.3 billion unfavorable impact from year-over-year changes in foreign exchange. Worldwide paid unit growth was 26%. Worldwide active customer counts was approximately 294 million, excluding customers who only had free orders in the preceding 12-month period, worldwide active customers were approximately 272 million, up from approximately 244 million in the comparable prior-year period. Worldwide seller units represented 46% of paid units, up from 42% in the comparable prior-year period.
+Now, I will discuss operating expenses excluding stock-based compensation. Cost of sales was $16.8 billion or 66.1% of revenue compared with 71.1%. Fulfillment, marketing, technology and content and G&A combined was $7.6 billion or 30.1% of sales, up approximately 50 basis points year-over-year. Fulfillment was $3.1 billion or 12.3% of revenue, compared with 12.4%. Tech and content was $2.9 billion or 11.4% of revenue compared with 10.8%. Marketing was $1.2 billion or 4.8% of revenue compared with 4.7%.
+Now, I will talk about our segment results. As a reminder, in the first quarter we changed our reportable segments to report North America, International and Amazon Web Services. Consistent with prior periods, we do not allocate to segments our stock-based compensation or the other operating expense line item.
+In the North America segment, revenue grew 28% to $15 billion or 29% excluding foreign exchange. Media revenue grew 8% to $3 billion or 9% excluding foreign exchange. EGM revenue grew 35% to $11.8 billion. EGM now represents 79% of North America revenues. North America segment operating income was $528 million, a 3.5% operating margin compared to a loss of $60 million in the prior-year period. North America segment operating income includes $11 million of favorable impact from foreign exchange.
+In the International segment, revenue increased 7% to $8.3 billion. Excluding the $1.3 billion year-over-year unfavorable foreign exchange impact, revenue growth was 24%. Media revenue decreased 8% to $2.3 billion or increased 6% excluding foreign exchange. EGM revenue grew 14% to $5.9 billion or 32% excluding foreign exchange. EGM now represents 71% of International revenues. International segment operating loss was $56 million compared to a loss of $174 million in the prior-year period. International segment operating loss includes $64 million of unfavorable impact from foreign exchange.
+In the Amazon Web Services segment, revenue grew 78% to $2.1 billion. Amazon Web Services segment operating income was $521 million, a 25% operating margin compared to $98 million in the prior-year period. AWS segment operating income includes $78 million of favorable impact from foreign exchange.
+Consolidated segment operating income was $993 million or 3.9% of revenue, up approximately 460 basis points year-over-year. CSOI includes $25 million of favorable impact from foreign exchange. Unlike CSOI, our GAAP operating income includes stock-based compensation expense and other operating expense. GAAP operating income was $406 million compared to a loss of $544 million in the prior-year period. Our income tax expense was $161 million. GAAP net income was $79 million or $0.17 per diluted share, compared with a net loss of $437 million or a loss of $0.95 per diluted share.
+Turning to the balance sheet. Cash and marketable securities increased $7.5 billion year-over-year to $14.4 billion. Inventory increased 23% to $9 billion and inventory turns were 8.6, down from 8.9 turns a year ago as we expanded selection, improved in stock levels and introduced new product categories. Accounts payable increased 22% to $14.4 billion and accounts payable days increased to 79 from 74 in the prior year.
+I'll conclude my portion of today's call with guidance. Incorporated into our guidance are the order trends that we've seen to date and what we believe today to be appropriately conservative assumptions. Our results are inherently unpredictable and may be materially affected by many factors including a high level of uncertainty surrounding exchange rate fluctuations as well as the global economy and customer spending. It is not possible to accurately predict demand and therefore, our actual results could differ materially from our guidance.
+As we describe in more detail in our public filings, issues such a settling intercompany balances in foreign currencies among our subsidiaries, unfavorable resolution of legal matters and changes to our effective tax rate can all have material effects on guidance. Our guidance further assumes that we don't conclude any additional business acquisitions, investments, restructurings or legal settlements, record any further revisions to stock-based compensation estimates and that foreign exchange rates remain approximately where the have been recently.
+For Q4 2015, we expect net sales of between $33.5 billion and $36.75 billion, or growth of between 14% and 25%. This guidance anticipates approximately 340 basis points of unfavorable impact from foreign exchange rates. GAAP operating income to be between $80 million and $1.28 billion, compared to $591 million in the fourth quarter of 2014. This includes approximately $620 million for stock-based compensation and amortization of intangible assets. We anticipate consolidated segment operating income, which excludes stock-based compensation and other operating expense, to be between $700 million and $1.9 billion, compared to $1.04 billion in the fourth quarter of 2014.
+We remain heads down focused on driving a better customer experience through price, selection and convenience. We believe putting customers first is the only reliable way to create lasting value for shareholders. Thanks and with that, Phil, let's move on to questions.
+
+Great. Thanks, Brian. Let's move onto the Q&A portion of the call. Operator, will you please remind our listeners how to initiate a question?

exam/part2_problem1/Problem_1_Conference_Call_Segments/call_12_questions.txt

@@ -0,0 +1,91 @@
+Question_1:
+
+    Hi, thanks for taking my questions. The first question Brian, International retail growth continues to improve and I was wondering if you can just talk through some of the dynamics there understand the consumption tax in Japan comp? You have some real markets where you have physical infrastructure now in Europe and then also the dynamics in India and China as contributors. And then secondly, maybe if you could just given how profitable AWS has become, if you could framework for thinking about the long-term profitability of that business? Thank you.
+
+Question_2:
+
+    Hello? Can you hear me?
+
+Question_3:
+
+    Okay. Thanks. Question hopefully it hasn't been asked already is around AWS margins were obviously quite strong in the quarter. Can you speak to the sustainability of the margin improvement that we've seen there and what is your long-term expectations for profit margins for this business? And if you give us a sense of what CapEx for this segment of the business look like in the quarter and the rate of growth that would be helpful. And then secondly, your employee adds were fairly strong in the quarter as well. Wonder if you could call out any particular areas within the business where you are strengthening your hiring efforts? Thanks.
+
+Question_4:
+
+    I'm tempted to ask about the long-term margins for AWS but I won't. Can you talk about two areas? One, the EGM growth in North America, it is accelerated really strongly. Any color behind what's in particular categories that are driving that? And secondly, there's been -- you've made some public comments in the last eight months about some on the retail side about investments internationally. Particularly in India. Could you refresh us on what kind of levels suspend you're interested in targeting in that market? And then, maybe as part of that, any comments on China and how well you think you're doing there now? Thanks a lot.
+
+Question_5:
+
+    Thanks for taking the question. Can you call out in terms of the 3P business what you are seeing in terms of third-party sellers maybe needing to make more and more of their goods Prime eligible? What the economics of that might be in terms of creating a tailwind for the business and how we should think about that evolving over the next couple of years? Thanks.
+
+Question_6:
+
+    Thank you. We did see the acceleration in EGM. I was just wondering if some of the local delivery and Prime Now is driving that acceleration? Is that having a big impact on your business? And down the road, do you think the delivery infrastructure will be valuable in maybe delivering third-party and other units? Thank you.
+
+Question_7:
+
+    Thanks for letting me ask a question. This is Kunal for Bob. Quick question on India, is there any change or any indication that there might be a change in the regulatory framework that would allow you to go direct?
+
+Question_8:
+
+    Thanks.
+
+Question_9:
+
+    Thanks for taking the question. I just wanted to ask the most frequent investor question and concern that we get is when will Amazon flip back to its heavier spending and investment ways from 2014 and earlier? So I wanted to ask, is that a legitimate question do you think or are you now at a point of scale and market share and maturity that you could sustainably manage the heavy invest and while still delivering material profit? Thanks.
+
+Question_10:
+
+    Thanks for taking my questions. You guys had the Kindle store in Brazil since December of 2012. Just curious about the learnings around that and what benchmarks are you analyzing as you try to determine whether or not to invest further in a larger Brazil store?
+The second one, just curious for comments on International Prime sub growth. It sounds like Prime subs are growing really well. I think a couple quarters ago, you mentioned how they are growing over 50%. Is that still the case and if so, what is driving that faster International Prime sub growth?
+
+Question_11:
+
+    Thank you. I have two questions. You have told us that you have tens of millions of Prime users, that you are investing heavily in Prime. Now at this scale and the 50% plus growth rates that you just mentioned, if you roll the clock two or three years, one can see Prime penetration in markets like the US starting to saturate as judges so many homes in the country. How should we think about the level of investment in Prime once you reached full penetration? Are there components that are given primarily to customer acquisition and what's the right way to think about that?
+And secondly, what are the economic drivers that justify the business case for Prime Now? I don't expect you to give us any numbers, I've learned that lesson in the last few years, but what are the components of the customer lifecycle value calculation or what type of calculation that you make to justify someone dropping a box with that $15 order to a customer? Thank you.
+
+Question_12:
+
+    Great. Thanks, guys. Can you talk a little bit more about India and what is the opportunity there that you see? There's a tremendous amount of -- tremendous middle-class there but the distribution can be very challenging. So is that an area where we could see Amazon really building out the last mile? And then there's been some reports of an Amazon potentially trying to close the GAAP in terms of delivery and deliver sooner. On the grocery side, what is the impetus there and can we see how is the recent market's been trending on the grocery side that you've launched recently? Thank you.
+
+Question_13:
+
+    Great. Thanks. I'm just wondering if you could give us a sense how some of the recent announcements from FedEx and UPS about pricing during the holidays and the structure of some of the third-party relationships might impact you? And given the investments that you've made in your own fulfillment infrastructure, how much of a competitive advantage you feel like you've got during the holiday season as other retailers have -- that are more directly exposed to these changes have to deal with it?
+
+Question_14:
+
+    Yes, hi guys. Can you quickly, if you can talk about some of the more experimental projects you work on? I guess the travel business, you're in again for a few months and then got out of. Also, maybe with just restaurant, providing restaurant delivery. How do you view these services? They're not necessarily core to what you do, obviously you can provide those services. But how should we think about these types of investments longer-term? Thanks.
+
+Question_15:
+
+    Thanks, some questions on video. Any color such as engagement on the recent launch of video products in Japan including the Fire TV, the Fire TV stick and Prime Video? And also, any general updates on your video content strategy or view on standalone streaming separate from Prime? Thanks.
+
+Question_16:
+
+    So Prime has done remarkably well with folks willing to pay $99 up front. But do you expect to have different offerings for different cohorts? In other words, right now, Prime is a one-size-fits-all model. Could we see different pricing models for different demographics in the future? And then separately, can you also talk about how shipping leverage changes during the holiday season when shoppers tend to want more items per transaction? Thanks.
+
+Question_17:
+
+    Thanks. Brian, it seems like you guys are rolling out Prime Now as well as product verticals internationally, fairly quickly especially if you measure it versus the pace of the rollout for Fresh or your other International older territories. Am I reading too much into this or have you guys put in place different processes to iterate more quickly?
+And second, I think you've disclosed that as of the end of 2014, a little less than 10% of your fulfillment centers are outfitted with Kiva. So I guess, are all of your other fulfillment centers on a go forward basis going to have Kiva? If not, why not? And given the pickup in presumably the volume through-put there, does this mean you can slow down the pacing of your buildout there? Thanks.
+
+Question_18:
+
+    Great. Thanks for taking the question. Just real quickly on pay unit growth accelerated 26% this year. I realize that these are comps but anything significantly higher or anything that happened this quarter? I know Prime Day could be it, but wondering if that was the reason? And then on AWS usage, just wondering if you could update on usage? I believe last quarter you mentioned usage was growing faster than revenue. I wonder if that's the same case this quarter? Thank you.
+
+Question_19:
+
+    It was just on AWS unit growth. I think last quarter you said it was growing faster than revenue. I'm wondering if that's still the case here?
+
+Question_20:
+
+    Thank you very much. Two questions. First, with the courts striking down the Safe Harbor Provision between the US and the EU, how do you see the changes to European data storage requirement affecting AWS potentially? And on the Kiva, a question asked earlier, can you maybe help us understand the capital intensity of ace and actually using Kiva versus one that is not? Thank you.
+
+Question_21:
+
+    Yes, right.
+
+Question_22:
+
+    Great. Thanks. Two questions. So first, our data suggests that the US Prime sub growth is growing very rapidly at scale. Just wondering where you think the US Prime sub base is right now on the adoption curve? The second question is North American EGM growth accelerating again this quarter, we're assuming growth is being driven in part by categories like apparel and consumables versus perhaps a more mature category like electronics. So the questions are, with the vertical mix changing, how should we think about the impact to margins or are some of the newer and faster growing categories structurally higher margin for Amazon than the more mature categories? Thank you.
+

exam/part2_problem1/Problem_1_Conference_Call_Segments/call_13_answers.txt

@@ -0,0 +1,140 @@
+Answer_1:
+
+    Yes, thanks, Stephen. No, I don't have a usage growth number for you. We'll say we're -- it's been very strong. AWS revenue is on a -- just short of a $10 billion run rate at the end of Q4.
+As far as pricing is concerned, we had a price reduction in January for our EC2 services. It was our 51st price reduction since we launched AWS years ago. And generally, what we find is that price is important, but so is speed and agility for customers, and the ability to deliver services and features that are beneficial to them. I will point out that we added 722 new features and services in 2015, and that was up 40% year-over-year. So we feel we have a lead in this space. And we don't take it for granted, and we want to serve customers better each year.
+
+Answer_2:
+
+    Sure. Well, what I can say is our approach to pricing has not changed. And through Q4, we did everything we could to have the best prices available for customers, and in-stock in time for the holiday. Another dynamic of Q4 was that, it was a huge FBA quarter. Nearly 50% of our third-party units were FBA, and our third-party units were also up to 47% of our paid units, so up 400 basis points year-over-year.
+So a really strong quarter for our FBA sellers, using our FBA services. It did put a lot of demands on our warehouses, and we were full. It was a very busy quarter, and it did increase some of our variable costs as a result, primarily in the US. But a very strong quarter for FBA. It exceeded our -- even our expectations.
+
+Answer_3:
+
+    I'm sorry. You cut off there. Could you repeat your question?
+
+Answer_4:
+
+    Nothing specific. I will say, one interesting enhancement this year was our Prime Now service, which allowed people to order in selected markets up until 11:59 on New Year -- or excuse me, Christmas Eve. So that was a valuable service to many late shoppers, last-minute shoppers.
+
+Answer_5:
+
+    Sure, Aram. Thanks for your question. I would say that -- what we've found, is in order to properly serve our customers at peak, we've needed to add more of our own logistics to supplement our existing partners. That's not meant to replace them, and those carriers are just not -- no longer able to handle all of our capacity that we need at peak. They have been, and continue to be great partners, and we look forward to working with them in the future.
+It's just we've had to add some resources on our own. You mentioned trucks. The Amazon trucks, we did invest in those this past year. We use those primarily for movement between our warehouses and our sort centers.
+
+Answer_6:
+
+    No. And again, keep in mind, that the fulfillment as a percent of revenue is impacted by the calculation of FBA revenue being a net number, as opposed to a full revenue number. But our fulfillment costs per unit actually decreased year-over-year. It's just that we are now shipping more and more of our -- other than demand, out of our warehouses because of the strength in retail and FBA.
+On gross margin, I -- first, I'll caution you and say, we would encourage you to look at free cash flow which was -- it grew at a minimum $4 billion on each of the metrics that we point out. And Op profit, which was up 88% year-over-year. If you look sequentially, also keep in mind that in Q3, when it was up about 500 basis points year-over-year, that was lapping the write-down of our Amazon phone inventory the prior year. So there was a little bit of noise in the Q3 number. But generally, again, we're happy with the ability to service customers, the reaction of customers in Q4, and the bottom line results that we had.
+
+Answer_7:
+
+    Sure. Let me work backwards -- don't give guidance by segment, so cannot really comment on AWS specifically in Q1. The -- and the operational improvements -- excuse me, the gross margin -- the operating margin year-over-year that we've seen in the AWS business has been heavily driven by operating efficiencies, both purchase reductions and purchase prices, and also efficiency in driving greater utilization of the assets that we have. So we're very happy with that.
+Keep in mind that we did have -- although the year-over-year increase in capital expenditures and capital leases was not as great as we saw in 2013 to 2014, we did spend over $9 billion on those -- on capital, and expenditures and capital lease obligations, up from prior year was -- excuse me -- 
+
+Answer_8:
+
+    Sorry, let me finish my answer to him, please? We grew up, we grew from in the $5 billion range in 2013, to $8.9 billion in 2014, and now over $9 billion in 2015.
+
+Answer_9:
+
+    Sure. We're very thrilled with the customer response to Prime Video. Again, when Prime Video is used by our Prime members, it drives adoption and retention, higher free trial conversion rates, and higher renewal rates for subscribers. So what we were encouraged by in Q4 was that globally, we doubled the number of -- our Prime members doubled the number of viewing hours of the Prime Video year-over-year. And internationally, we had twice as member Prime members streaming year-over-year. So very encouraged by the pick up, and the response of customers.
+The other comment I would say about video is, we're very happy with the Amazon studios content, in particular. We've had some great success in 2014 and 2015. As you probably know, Transparent has won multiple Golden Globes and Emmys, both for actors and for the show itself. Mozart in the Jungle just won two Golden Globe Awards.
+So very pleased with the critical acclaim to the Amazon Studios content, and we've got a lot of new content coming out this year. Catastrophe Season 2, Bosch Season 2, we're all looking forward to. And in February, we will have Chi-Raq, our first original movie that we got to work with Spike Lee on, which won many critical -- made many critics' Best Films list in 2015. That will be coming to Prime Video in February.
+
+Answer_10:
+
+    Just to add to that, this is Phil. On your question about the streaming partners program, so that's our new over-the-top streaming subscription program for Prime members. We think it's a really convenient way for them to access additional content, content from sources like ShowTime and Starz. And it's really early, so it's just out of the gate, but we've been very pleased with what we've seen so far.
+
+Answer_11:
+
+    Sure, Mark. Thanks for your questions. No macroeconomic comments. Again, we feel we're very encouraged by the customer response to our offerings in Q4.
+Amazon business, yes, in April, you may remember we launched it as a marketplace, with specific features and benefits for businesses. That -- Amazon business now serves more than 200,000 businesses, from small organizations to Fortune 500 companies. So it's still early, but we're encouraged, and we think we're creating some value, a lot of value for our business customers.
+
+Answer_12:
+
+    Yes. Sure, Mark. Thanks for your question. We are very pleased by the international growth, 22% FX neutral, was up 1,000 basis points year-over-year. We saw that the -- we told you that the Prime growth, Prime membership growth, 50% in -- excuse me, 51% globally. 47% in the US means that the international Prime programs grew at a faster clip than that. So very, very pleased with the uptick.
+We rolled out a lot of additional Prime features internationally as well this year, from free same-day, to Prime Now, to Prime Music, and Prime Video in Japan, to name a few. So very happy with that. But in general, if I step back, our investments in national are twofold.
+First, there's the Prime platform and all the features I just mentioned, including the fulfillment, adding more fulfillment resources to handle higher and higher retail volumes, and a very strong FBA program as well. And then, the remainder -- the biggest other investment area is obviously India. And we like -- we continue to see, like what we see in India. In Q4, Amazon India was the top e-commerce site in India, throughout the very busy -- Diwali shopping season, including the shopping season, according to comScore.
+And sales by sellers in Q4 were greater than all of 2014 combined, in Q4. So seeing great progress with downloads, innovations for sellers and customers alike. And we like the ramp there, and we're continuing to invest in India.
+
+Answer_13:
+
+    Sure. Let me start with EGM. So EGM growth, North America EGM growth of 28% was actually also the highest in the last four years. So we're happy with that.
+The deceleration you're seeing of 700 basis points is more a function of the Prime Day that we had in Q3, if you remember. We didn't break it out by segment, but we said that Prime Day contributed 200 basis points to our Q3 run rate, revenue growth rate. So sequentially last year, in North America EGM, we dropped from 31% to 27%.
+This year, it's 35% to 28%. So there is always a -- generally, a sequential drop in Q4. But certainly very happy with that business and its role in Prime as well, in total customer satisfaction.
+Your other question, investments. Yes, we continue to have healthy investments as we've stated across the globe. To step back again on that, our general philosophy is, we want to find things, businesses that customers love, that can grow to be large, will provide strong financial returns, and are durable. They can last for decades. We think Prime is that, we think Marketplace is that, we think AWS is that, and we are constantly looking for a fourth or fifth business that fits that criteria.
+But as we continue to invest primarily in, as I said in Prime, the Prime platform, Prime features for customers, expansion for fulfillment capacity, as we build out to support 26% unit growth in Q4, for instance, and much greater FBA share, and not to mention all the investments in AWS, we are constantly looking for cost efficiencies, in fixing variable productivity. I think a thing to think about is, the investments will ebb and flow over time, but our focus on cost reductions and improvement on customer experience will be constant.
+
+Answer_14:
+
+    Sure. Let me work backwards from your footprint question or comment. We have -- we just announced Korea as a region. And we'll be adding five more regions in the next, in the future, in the near future as we mentioned. CapEx, let me start with that first. CapEx, we've seen great efficiencies in capital expenditures, in particularly in AWS. And we continue to work on better purchase efficiencies and driving utilization rates in our data centers.
+CapEx, as I mentioned, grew quite a bit in 2014. It grew even more to over $9 billion, across all of our capital expenditures and capital leases in 2015. From the new regions, they are not the major driver in any way. Most of our capacity, and capital and capital leases in AWS is to service existing regions, and existing customers' demand growth. But there's certainly expenditures when we open up new regions. Some of that is not always in the year that we open the region, so we spent a good bit on those new regions already in 2015.
+But as far as pricing, there's no capacity constraint. And I would a little bit dispute the deceleration comment on the -- yes, on a percentage basis, 69% is lower than Q3. But as I've said before, we're approaching a $10 billion run rate in this business. On a dollar basis, we continue to grow. We saw the greatest growth year-over-year and quarter-over-quarter. And again, we continue to invent, it's not all about price-- we continue to innovate on behalf of customers, and see great customer response.
+
+Answer_15:
+
+    So in terms of -- this is Phil. In terms of expectations, I think we were pleased with what we saw this Q4. And if you look at what we gave for guidance, we were in the upper half of the range there for revenue. So no real call outs there. I think, what was your second part of your question?
+Oh, and mobile, we said for a long time continues to be a tail wind for the business. We're working very hard to make sure that it's very easy for customers to buy the things they want to buy, and access a lot of the features they have grown accustomed to on the website. And so, we're very focused on the convenience factor. And if you look at some of our new offerings like Prime Now that's available through a mobile app, and very, very convenient for customers. And as Brian has mentioned, allowed them to shop even up to Christmas Eve, and then have their items delivered in two hours.
+
+Answer_16:
+
+    Carlos, this is Phil. So your question about the AWS margins, that business as they continued to learn, and as we continue to invent and get better at designing and operating the infrastructure and assets, we have been able to drive costs out of that business. And so, that's one of the primary drivers of the improvements that you've seen in margin year-over-year.
+There is also an FX tail wind in there as well, which I think was about $60 million this quarter, which would contribute on a year-over-year basis, which really arises, because we're largely priced in dollars, but have assets with local currency costs throughout the world. As for the streaming content, we haven't given another update this year, and haven't given any commentary on the profile quarter to quarter.
+
+Answer_17:
+
+    This is Phil. So on the Dash buttons, we're really excited about what we're delivering there. I think, as you saw in the release, there are some new devices that take advantage of the underlying service, that we think will be really convenient for sellers, and interesting for device makers. We're excited about what we're building there. I don't have any stats for you today.
+On the Twitch side, we continue to let Twitch do what Twitch does best. And so, don't have any updates on numbers there, but they continue to really engage customers, and offer a really unique experience, which was one of the reasons we were attracted to them to start with.
+
+Answer_18:
+
+    Yes, I'll take that. So we ended the year at 123 fulfillment centers, up a net 14, and we have 20 -- excuse me, 23 sortation centers in the US, up 4 year-over-year.
+
+Answer_19:
+
+    Yes, my comment on ebb and flow was more about the investment, and also including capital expenditures and capital leases. So not around gross margins. And merely, I was pointing out that again, we've laid out all the invested areas, where we're seeing heavy investment. We continue -- we see the continuation of that certainly, into 2016 and beyond.
+There are quarter-to-quarter and even year-to-year fluctuations in some accounts, and some investment areas. But generally, we're pretty transparent on where we're investing our dollars. And against that backdrop, we are always looking for efficiency. And the nice thing about growing the top line at such a high clip, is we have a lot more areas for opportunity to save money year-over-year. And we always look to do that.
+
+Answer_20:
+
+    And this is Phil. On the Kiva question, the last update we've given is more than 30,000 robots. We continue to be really pleased with the program, and like what it does in the warehouse, both from a density of storage, as well as from making the jobs easier for the associates who are picking packages, by bringing the packages actually to the associates. But no new numbers on that.
+
+Answer_21:
+
+    Sure. First, on guidance, we keep it pretty, a consistent process on how we look at guidance, and how we estimate the near-term view of the business. I will point out that Q4 is obviously, a very large quarter, the largest revenue quarter by far of the year. There's a lot of demand that comes in the last six weeks of the year as well.
+So very, very little visibility at the time of guidance when we do the call. So we are using are best projections on a lot of fronts. We think it's a similar -- we know it's a consistent process. And there are times, when we under-run and sometimes we over run it.
+
+Answer_22:
+
+    On the -- this is Phil. On the category mix question, obviously, category mix does play a role in gross margin. I would say though, that we're much more focused on operating profit dollars, and free cash flow dollars, as we've probably talked about before.
+The gross margins are impacted by first-party versus third-party mix, as well as AWS mix, if you're looking at the total for the Company. So we're much more focused on the dollars. And no specific categories we're calling out, as a driver for gross margin, because, again, we're much more focused on the profit dollars.
+
+Answer_23:
+
+    So we deliver, really quickly, a couple of ways. One is the free same-day, that you've seen us roll out in a number of markets in the US. The other is Prime Now. And we're now in more than 25 metropolitan areas for Prime Now. Delivering for free in two hours is difficult and expensive, but customers love it.
+So we feel like this is the natural evolution of our delivery, and we're happy to invest in that service. We like what it does for Prime members. We like the convenience factor. And so, we're taking a long-term approach, and doing what we normally do, which is really focus on continuing to drive greater and greater efficiency.
+
+Answer_24:
+
+    Sure. Yes, again, I'll point out that the demand for FBA services was very high, nearly 50% of our third-party units, again were FBA. And the demand for space and services was very large by our seller base, which was great from a lot of standpoints, and it did exceed our expectations. But did make our warehouses rather full, and did cause us to incur some additional variable costs in the US. And there is also the dynamic that we were fulfilling more of these units ourselves, at our warehouses because of the FBA growth, and the retail growth.
+
+Answer_25:
+
+    On the speed of delivery, this is Phil. All I can say is, the customers love the service. It's very convenient, and it gives them flexibility, and the ability to get products really quickly. I don't know that there's any big trends we are ready to call out at this point, but they seem to really, really like it. So we're encouraged by that. We're excited to invest in it, and excited what we can do for our Prime members.
+
+Answer_26:
+
+    So on the Echo, we like what -- how Echo has done. We're really excited about the ecosystem, and some of the skills that are being added to Echo, as well as some of the other devices that are taking advantage of Alexa, which is the brains behind Echo. So we like our device business in general.
+As you probably saw from the press release, we had a good Q4, where we did almost double the, or double what we did last year, so very excited about the devices. We like that they pump more energy into Prime, and really the whole ecosystem. Not sure on the Internet of Things, but it's very exciting for devices standpoint. And the brains of Echo are in the AWS cloud. And so, Echo gets new capabilities all the time, as Alexa gets better and better.
+On the restaurant delivery, it's just another great service we can offer for our Prime members. This is tied in with the Prime Now offering in a handful of cities at this point. And so, we have the delivery people going out and making the deliveries in the neighborhoods. And so, this is one more really valuable convenient service we can offer for our Prime customers.
+
+Answer_27:
+
+    Sure. Yes, as you say, the net shipping margin was up 70 basis points year-over-year. Again, this is all tied in with the increase in FBA growth, and the demand from Prime members. We're shipping more units -- more of our units, so this ripples through our ship cost per unit. And, again, the calculation of ship costs, as margin is a percent of revenue, and that is impacted by the denominator effect on the FBA sales, being booked at a net revenue.
+
+Answer_28:
+
+    Related to your Prime Now question, this is Phil. We're in more than 25 metropolitan locations. It's -- if you've been watching, this roll out has really happened in the last year, so it's been a pretty rapid rollout. We're excited to bring it to more places.
+We don't have a target for you today, but we are working hard to bring it to more and more places. We're outside the US now in a handful of countries, in the UK and Japan and Italy, and working to expand. So it's a program we're really excited about, and we're happy to bring it to more customers.
+Thank you for joining us on the call today, and for your questions. A replay will be available on our Investor Relations website, at least through the end of the quarter. We appreciate your interest in Amazon.com, and look forward to talking with you again next quarter.
+

exam/part2_problem1/Problem_1_Conference_Call_Segments/call_13_presentation.txt

@@ -0,0 +1,28 @@
+
+Hello, and welcome to our Q4 2015 financial results conference call. Joining us today is Brian Olsavsky, our CFO. We will be available for questions after our prepared remarks.
+The following discussion and responses to your questions reflect management's views as of today, January 28, 2016 only, and will include forward-looking statements. Actual results may differ materially. Additional information about factors that could potentially impact our financial results is included in today's press release and our filings with the SEC, including our most recent annual report on Form 10-K. As you listen to today's conference call, we encourage you to have our press release in front of you, which includes our financial results, as well as metrics and commentary on the quarter.
+During this call, we will discuss certain non-GAAP financial measures. In our press release, slides accompanying this webcast, and our filings with the SEC, each of which is posted on our IR website, you will find additional disclosures regarding these non-GAAP measures, including reconciliations of these measures with comparable GAAP measures. Finally, unless otherwise stated, all comparisons in this call will be against our results for the comparable period of 2014. Now I will turn the call over to Brian.
+
+Thanks, Phil. I'll begin with comments on our fourth quarter financial results. Trailing 12-month operating cash flow increased 74% to $11.9 billion. Trailing 12-month free cash flow increased to $7.3 billion, up from $1.9 billion.
+Trailing 12-month free cash flow less lease principle repayments increased to $4.7 billion, up from $529 million. Trailing 12-month free cash flow less finance lease principle repayments and assets acquired under capital leases increased to $2.5 billion, up from an outflow of $2.2 billion. Trailing 12-month capital expenditures were $4.6 billion.
+Capital expenditures does not include the impact of property and equipment acquired under capital and finance lease obligations. These capital expenditures and capital leases reflect additional investments in support of continued business growth, due to investments in technology infrastructure, the majority of which is to support AWS, and additional capacity to support our fulfillment operations. The combination of common stock and stock-based awards outstanding was 490 million shares, compared with 483 million one year ago.
+Worldwide revenue increased 22% to $35.7 billion, or 26% excluding the $1.2 billion unfavorable impact from year-over-year changes in foreign exchange. Worldwide paid unit growth was 26%. Worldwide active customer accounts were approximately 304 million. Excluding customers who only had free orders in the preceding 12-month period, worldwide active customers accounts were approximately 280 million, up from approximately 254 million in the comparable prior year period.
+Worldwide paid Prime members increased 51% year-over-year. Worldwide seller units represented 47% of paid units. Fulfillment by Amazon or FBA units represented nearly 50% of seller units. Worldwide active Amazon web services customers exceeded 1 million.
+Now I'll discuss operating expenses, excluding stock-based compensation. Cost of sales was $24.3 billion or 68.1% of revenue, compared with 70.5%. Fulfillment, marketing, technology and content and G&A combined was $9.7 billion or 27.1% of sales, up approximately 100 basis points year-over-year. Fulfillment was $4.4 billion or 12.3% of revenue, compared with 11.3%. Tech and content was $3.2 billion or 9% of revenue, compared with 8.2%. Marketing was $1.7 billion or 4.8% of revenue, compared with 5.1%.
+Now I'll talk about our segment results. As a reminder, in the first quarter we changed our reportable segments to report North America, international, and Amazon web services. Consistent with prior periods, we do not allocate segments, our stock-based compensation, or the other operating expense line item.
+In the North America segment, revenue grew 24% to $21.5 billion. Media revenue grew 11% to $3.9 billion, or 12% excluding foreign exchange. EGM revenue grew 28% to $17.3 billion. North America segment operating income was $1 billion, a 4.7% operating margin, compared with $733 million in the prior year period. North America segment operating income includes $6 million of favorable impact from foreign exchange.
+In the international segment, revenue grew 12% to $11.8 billion. Excluding the $1.1 billion year-over-year unfavorable foreign exchange impact, revenue growth was 22%. Media revenue decreased 3% to $3.3 billion, or increased 5% excluding foreign exchange.
+EGM revenue grew 19% to $8.5 billion, or 31% excluding foreign exchange. International segment operating income was $60 million, compared with $65 million in the prior year. International segment operating income includes $47 million of unfavorable impact from foreign exchange.
+In the Amazon web services segment, revenue grew 69% to $2.4 billion. Amazon web services segment operating income was $687 million, a 28.5% operating margin, compared with $240 million in the prior year period. AWS segment operating income includes $60 million of favorable impact from foreign exchange. Consolidated segment operating income was $1.8 billion or 4.9% of revenue, up approximately 140 basis points year-over-year. CSOI includes $20 million of favorable impact from foreign exchange.
+Unlike CSOI, our GAAP operating income includes stock-based compensation expense and other operating expense. GAAP operating income grew 88% to $1.1 billion. Our income tax expense was $453 million. GAAP net income was $482 million or $1 per diluted share, compared with a net income of $214 million and $0.45 per diluted share.
+Now I'll discuss the full year results. Revenue increased 20% to $107 billion, or 26% excluding year-over-year changes in foreign exchange. North America revenue grew 25% to $63.7 billion, or 26% excluding year-over-year changes in foreign exchange. International revenue grew 6% to $35.4 billion, or 21% excluding year-over-year changes in foreign exchange.
+Excluding year-over-year changes in foreign exchange, Germany revenue grew 18%. Japan revenue grew 19%, and UK revenue grew 16%. AWS revenue grew 70% to $7.9 billion.
+Consolidated segment operating income was $4.5 billion or 4.2% of revenue, up approximately 220 basis points year-over-year. CSOI includes $16 million of favorable impact from foreign exchange. GAAP operating income was $2.2 billion, compared with $178 million in the prior year.
+Turning to the balance sheet, cash and marketable securities increased $2.4 billion year-over-year to $19.8 billion. Inventory increased 23% to $10.2 billion. And inventory turns were 8.5, down from 8.6 turns a year ago, as we expanded selection, improved in-stock levels, and introduced new product categories. Accounts payable increased 24% to $20.4 billion, and accounts payable days increased to 77 from 73 in the prior year.
+I'll conclude my portion of today's call with guidance. Incorporated into our guidance are the order trends that we've seen to date, and what we believe today to be appropriately conservative assumptions. Our results are inherently unpredictable, and may be materially affected by many factors, including a high level of uncertainty surrounding exchange rate fluctuations, as well as the global economy, and customer spending. It's not possible to accurately predict demand, and therefore our actual results could differ materially from our guidance.
+As we describe in more detail in our public filings, issues such as settling intercompany balances in foreign currencies among our subsidiaries, unfavorable resolution of legal matters, and changes to our effective tax rate can all have a material effect on guidance. Our guidance further assumes that we don't conclude any additional business acquisitions, investments, restructurings, or legal settlements, recording further revisions to stock-based compensation estimates, and that foreign exchange rates remain approximately where they have been recently.
+For Q1 2016, we expect net sales of between $26.5 billion and $29 billion, or growth of between 17% and 28%. This guidance anticipates approximately 130 basis points of unfavorable impact from foreign exchange rates. GAAP operating income to be between $100 million and $700 million, compared with $255 million in first quarter of 2015.
+This includes approximately $600 million for stock-based compensation and other operating expenses net. We anticipate consolidated segment operating income, which excludes stock-based compensation and other operating expense net, to be between $700 million and $1.3 billion, compared with $706 million in the first quarter of 2015.
+We are grateful to our customers, and remain heads-down focused on driving a better customer experience. We believe putting customers first, is the only reliable way to create lasting value for shareholders. Thanks. And with that, Phil, let's move on to questions.
+
+Great. Thanks, Brian. Let's move onto the Q&A portion of the call. Operator, will you please remind our listeners how to initiate a question?

exam/part2_problem1/Problem_1_Conference_Call_Segments/call_13_questions.txt

@@ -0,0 +1,108 @@
+Question_1:
+
+    Okay, thanks. So Brian, I think in the past, you've given some indication as to what usage growth may be at AWS. I was wondering if you have an update for that in the fourth quarter? And secondarily, is there any way to characterize what the pricing environment is right now for AWS as well? Thank you.
+
+Question_2:
+
+    Thank you.
+
+Question_3:
+
+    Thank you. Can you talk a little bit about the dynamics in fourth quarter, eCommerce, particularly in the US? Did we see more aggressive promotional activity? And maybe talk about how you tried to work that to continue to drive the Prime number of members going forward? Thanks.
+
+Question_4:
+
+    Perhaps how are you able to integrate that into holiday promotions?
+
+Question_5:
+
+    Sure. Just any additional color around Prime, and how you were able to integrate that into holiday promotions?
+
+Question_6:
+
+    Hey, thanks very much. Two questions, both on the logistics side. It seems pretty clear that you guys are trafficking in some old world assets, like truck trailers, and ship lanes, and air fields. Can you help, give us a sense as to maybe what we're trying to accomplish with that? If it's defensive to protect your service to your existing customers, or if you're looking to maybe start new businesses with those assets?
+
+Question_7:
+
+    Thanks for taking my questions. I've got two. The first one is just on gross margins. I think they were down about 200 basis points sequentially. It's the biggest fall in the fourth quarter in quite sometime. Anything you would call out there? Is it devices, or more sortation centers? Is there anything pressuring gross margins we should think about in the fourth quarter?
+And then on the fulfillment line, you mentioned FBA being a big driver of the growth in the fulfillment costs. Anything else you would call out, leading to incremental fulfillment costs? Maybe India or something else? Thanks.
+
+Question_8:
+
+    Great, thanks. One follow-up, and then another question. On the logistics and transportation side, I was curious if that's to date, just to supplement some of the other carriers? But more broadly or longer term, is there an ambition from the services side, to perhaps provide capacity to other companies?
+And then on AWS margins, was just wondering if we should expect more leverage there going forward? And whether Q1, whether that should demonstrate some seasonality, versus what we've seen in terms of sequential growth in prior years? Thank you.
+
+Question_9:
+
+    Hi. So a lot of headlines around Amazon's activity at SunDance. I was hoping maybe you could expand once more on the video strategy, and specifically are you seeing an inflection in Prime Video usage? And maybe, just also on your streaming partners program, what the general reception is like? Thank you.
+
+Question_10:
+
+    Two things, please. Any call outs on the macro side? Occasionally, you called anything -- you've called things out, anything this time? And then, could you talk a little bit about Amazon business?
+I know that there is a little bit of a line in the press release on it. I know you've had this for a couple of years. But any indications to the materiality of that, the kind of momentum it's gaining, the kind of traction it's gaining? Thank you.
+
+Question_11:
+
+    Thanks. Brian, question on the international retail business. I think you added well over $1 billion in revenue year-on-year in the quarter, but from a CSOI perspective, you really didn't see any improvement there. I'm sure there is -- there are a lot of different things going on.
+I just wonder if you could unpack that a little bit, and give us a sense of what profitability looks like maybe in some of your more mature, established countries and regions, relative to the investments you're making in other countries? So that we can kind of get a better picture of what's actually going on under the hood there? Thanks.
+
+Question_12:
+
+    Thanks for taking the question. Two things. Just first, on the North America EGM growth, if you could just talk about the 28% there? And the decel on an easier comp, and whether there's any particular factors within that we should be thinking about? And perhaps, if there was any weather and apparel impact there?
+And then second, last quarter, and I don't want to misquote you, but you said something along the lines of, being able to invest as you would like, and also deliver good profit, and that the pendulum wouldn't swing as far perhaps as it has in the past. Is that statement and thought still hold, as you head into 2016? Thanks.
+
+Question_13:
+
+    Great, thanks. I was wondering if you could give us a sense, as we look at the slowing growth in AWS, obviously, still from an incredibly high level, and still very strong growth there. But try and take that into context, with the growth in margins that you keep seeing in that business, to levels that certainly seem a lot higher than you would anticipate for an Amazon business. Is there any capacity constraint or management that, that's driving pricing strategy in AWS?
+We've heard the comments about the number of availability zones that are being launched this year, which is obviously about a big part of driving incremental capacity in that business. I'm just trying to balance those, think about how we should balance those three things?
+
+Question_14:
+
+    Sure, sure. Got it. Thank you.
+
+Question_15:
+
+    Thanks a lot. First question is, if you can provide maybe some context around linearity within Q4, more as a -- compared to your expectations? Obviously, you have a ramp-up into the holiday season, but was -- did December tail off faster than you expected, or did the ramp-up, did it spike higher than you expected? And then, just on the follow-up, maybe can you add some context about how the mobile played a role in the holiday season for Amazon? Thanks.
+
+Question_16:
+
+    Thank you. I have two. I want to go back to AWS margins. You talked briefly about purchasing an asset utilization. But do this explain the 800 bps or so, on your year-on-year margin expansion?
+And are you seeing anything else? Like is there any impact of scale driving leverage over fixed costs? Is there some benefit from revenue mix shift, like services, like Aurora and RedShift growing faster than EC2, or is all the margin expansion due to purchasing and asset utilization? So that's the first question.
+And the second, I have a question about your streaming content expenses or cost of revenues to be more precise. Last year, you told us they were $1.3 billion, but if you didn't give us a figure for 2015. In lieu of that, can you comment on whether 4Q saw higher than usual costs for streaming content, compared to other quarters in the year? Thank you.
+
+Question_17:
+
+    Thank you. You mentioned Amazon Dash in the press release. Can you give us some color around how you're viewing the traction there, both with customers, and with brands and devices? And then, maybe any update on Twitch? How is traffic and user engagement been trending on that site? Thanks.
+
+Question_18:
+
+    And maybe just quickly, end of year fulfillment and sortation centers?
+
+Question_19:
+
+    Hey, good afternoon. I want to just quickly revisit the margin pendulum question in some of your comments, as you mentioned that to kind of expect it to ebb and flow. Could you tell us if you expect it to ebb and flow, but moving higher? Or is ebb and flow just mean that, that it's kind of undetermined in 2016? And then, a second follow-up, is the robotics. Any update in terms of number of robots, or how you see that expansion going forward? Thank you.
+
+Question_20:
+
+    Thank you. Two questions. Was there any category mix impacts in the quarter on gross margins? That's just a quick one.
+And then secondly, as you look back at last year, you had some quarters where you really exceeded your guidance on the CSOI line. Maybe looking back, or just looking forward, what are the types of things that causes you to come in at the high end, versus maybe the low end, when you look back, or when you look forward? Thank you.
+
+Question_21:
+
+    Great. Thanks. Just wonder if you could give an update on the strategy around same-day shipping? How we should think about kind of further expansion of that? And kind of what parameters do you guys use to determine what markets to go in? Is it density of the market? Is it proximity of your distribution facilities? Just some color on that would be great.
+
+Question_22:
+
+    Great. Thanks for taking the questions. I wanted to ask more about North American operating margins, because I think they expanded just under 50 bps this quarter to 4.7%. And that compares to an average of 200 basis points thereabouts, expansion in the prior three quarters.
+So I'm just wondering, if in 4Q maybe higher FPA costs or something else in there that led to, maybe an expansion not as great as we saw in prior quarters. And then, following up on the Prime Now question just now, I'm wondering how an hour delivery or two-hour delivery has changed a consumer's perception of just delivery overall? Thank you.
+
+Question_23:
+
+    Great. Two questions, please. One, it seems like the Echo did perform well. Can you talk more broadly about your Internet of Things ambitions, and kind of how Echo plays into that strategy?
+And then, secondly, just wanted to know a little bit more about restaurant delivery? It seems a little bit outside of the wheelhouse. What's the impetus behind doing more in terms of food delivery, and what are your ambitions there? Thanks.
+
+Question_24:
+
+    Great, thanks. Two questions. First one, shipping costs were higher than we expected. I think it was 12.5% of net revenue, versus 11% last year.
+Just any color on the higher shipping costs? And is that percentage of net revenue a new normal, as we are in 2016 now, and as we look out? And then the second question on Prime Now, in 25 markets globally, how should we think about the total number of markets that, additional markets you can enter with the Prime Now offering in 2016? Thanks.
+

exam/part2_problem1/Problem_1_Conference_Call_Segments/call_14_answers.txt

@@ -0,0 +1,133 @@
+Answer_1:
+
+    Sure. Your first question on international. Yes, all three segments had very strong growth in the quarter. International's 26% for FX-neutral growth rate was actually the strongest we've seen in 3.5 years. I would attribute it to the Prime Fly Wheel. As we may have mentioned in the past -- feel that Europe and the large countries in Europe and Japan are a few years behind the US on a lot of the key Prime metrics, but we also said last year that Prime subscriptions were up 51% year-over-year in 2015. 47% of that was in the US and a higher rate than that internationally.
+So, certainly a lot going on in the international. A lot that's really good adding Prime subscribers at a high clip. Continuing to add selection at FBA sellers. So, you'll see devices, you see video content. It's the whole array of Prime offering. Prime Now, Same-day, everything is in Europe. Maybe getting there a little slower than starting point at the US. We see it really showing up in customer engagement and customer purchases.
+On the AWS side, I think the 2016 to 2015 comparison probably stands on its own and 2014 falls by the wayside so I would encourage you to look at recent trends. We don't forecast, obviously, by segment.
+
+Answer_2:
+
+    This is Phil Hardin. I'll take the units question. Really the units are driven by very similar trends to what Brian described. When we look at the bridges for revenue, and obviously, units is our key driver of revenue. Things like Prime are key in that bridge. I would also call out selection growth. That has been a big area of focus for us.
+One important way we drive selection is through FBA. We continue to be very pleased with the progress we're making in FBA. What that means for our Prime customers is there's more for them to choose from. Obviously, that gives them more they can purchase. It makes Prime more valuable. For sellers, it means they sell more. I would say that FBA is helping drive some of the selection growth we're seeing here. Selection growth and Prime though are two very key drivers of our growth. On the second part, I think Brian -- .
+
+Answer_3:
+
+    One other comment I didn't say earlier, I do want to point out that because of the leap year there was an extra day in Q1. Every Company would have seen this obviously. But, we estimate it was worth about 150 basis points to our growth rate in revenue. That would be consistent North America and international.
+Your other comment -- question was on AWS and a bit about margins and margin outlook. We're very pleased with the quarter. We came in at 23.5% operating margin on the new basis including stock-based compensation and other. We're very pleased. But, stepping back with the 64% growth in AWS which is now a $10 billion business. On the margin side, I would caution you that we're pleased, but it is very early to start drawing too many conclusions on the long-term margins in this business. They'll be bumpy over time. At any point in time, they are going to reflect the balance of investing including global expansion that he's talked about. Price reductions we may offer and also driving cost efficiency which for us is a very important driver in not only this business but also the North American and international segments.
+
+Answer_4:
+
+    I'll take the first part of your question about active customers. As we look at our metrics and what information we provide each year, we often make some changes. So, this quarter we only gave the active customers with a paid purchase in the trailing 12 months. So, that number was more than 285 million. I think that's pretty similar to the trend that we've seen in that metric.
+In the past, sometimes we had also given a total active customers count. That number for this quarter was over 310 million so that may be where you're making the statement about the slowdown in growth. The trajectory was very similar from prior quarters for both of those numbers. But, we opted just to give the other one, but you now have the number for the total number of customers as well.
+
+Answer_5:
+
+    And, on your AWS footprint question so we ended the quarter with 33 availability zones and 12 geographic regions, and we have 11 more availability zones opening in the next year. The impact on capital, yes, there will be additional capital investment as we build out those zones. Some of it has already taken place. But, I'll also say that by and large, the largest increases in capital leases is to support the growth of incremental usage of customers we have now and agreements we have now. You should expect to see us continue to invest to support this business. We have a leadership position. We intend to maintain it, and we're very excited about where we are.
+
+Answer_6:
+
+    Let me start with the Prime. Yes, we have had very strong growth the last two years and earlier obviously on Prime growth of members. I would say it's a culmination of a lot of separate investments that we're making. If you look at the success of our devices, we are seeing tablets sell twice the volume in Q1 year-over-year. Fire TV stick, you may have read in our press release that it has greater than 100,000 customer reviews, the most reviewed product ever. Over 62,000 of those reviews are 5-star reviews. We've not only had the Echo, but we have the Echo Dot and Tap. We're branching off that product line and having trouble keeping those in stock. And, of course, we launched the new Kindle Oasis, our e-reader.
+That is an important part of the series as is the digital content. You may have seen the recent announcements that we're working on a great amount of new content for Prime members. Customers love the content, and we like the results we see particularly around Prime free trial conversion and renewal rates for subscribers who use and take advantage of Prime. So, beyond the awards that the content is winning and the success we're having with Amazon particularly Amazon Originals, we feel that program is working. We're going to significantly increase our spend in that area. Some of that is in Q2. You'll see that more in the next few quarters. But, we think that's working and look forward to bringing a lot of new content to our Prime subscriber base. Both to our normal Prime subscription and also the monthly plan that you alluded to.
+
+Answer_7:
+
+    This is Phil Hardin. I'll jump in on the second part of your question. For the trucks, really it's trailers. The typical use case is running a lag between a fulfillment center and a sort center. So, we're running enough volume there that we were using trucks already. We thought it made sense to go ahead and buy some trailers. We're actually still contracting out for the truck part, and it gives us flexibility. We think the economics will make sense over time. Similarly, we've announced an agreement to lease some airplanes with air transport services group, agreement to lease up to 20 Boeing 767s there. And, similar use case, it's products that are already boxed, and we think again this is activities we've been doing already which means we grow at a very rapid rate. This gives us extra capacity, and we think it's good to be able to deliver to customers. We think it makes sense over the long-term.
+
+Answer_8:
+
+    Sure. This is Brian. Let me start with the second question first. It wasn't necessarily the Prime Fly Wheel that was the issue. It was more the FBA demand that we had from FBA sellers for space in our warehouses. We were very full. It was a high-class problem to have.
+But, as I mentioned last quarter, it did result in higher fulfillment costs in the fourth quarter as a result. I think you'll see some of that dissipated now in Q1. You can tell it was a Q4 issue.
+We learn from every Q4. This one was no exception. We are already making plans for a smoother Q4 next year. We will continue to add fulfillment capacity. We'll work with FBA sellers on inventory stocking and timing, and we think that there's things that we can do better as we do every year, come out of the fourth quarter with immense learnings.
+
+Answer_9:
+
+    This is Phil. On the Prime question, we launched Prime in the US in 2005. Followed that in 2007 with UK, Germany, and Japan. And then, other countries after. We have Prime in all the countries where we have marketplaces with the exception of Mexico, China, and India.
+And, Prime is really in varying stages in those countries. We have some kind of an expedited shipping offer in all of them. Here in the US, we've been talking quite a bit about Prime Now. That's also in Italy and Japan and the UK at this point and not others. Also, varying levels of digital benefits as well.
+Generally, the international countries are not as far along with selection or the fullness of the digital offers. We've got Prime Video in the UK, in Germany, and Japan. Music is not fully rolled out yet all together. That's where we are with Prime.
+
+Answer_10:
+
+    Sure. Let me start with that second one. We think there's a lot of room to grow not only in our international countries but also in the US. We plan on continuing to build the benefits of the Prime program from music to video to two-day shipping to same-day shipping to Prime Now. I don't see that dissipating, and it remains the best deal in retail so hopefully everyone signs up for that.
+On the tech and content question, I don't have a lot to call out in the quarter. I would say there's no letup in the pace of invention here particularly on the AWS side. We used quote the number of new features and services to you each quarter. We had 214 in Q1 up from the 170 this first quarter of last year. Over 26% growth in this quarter alone coming off a year where I believe the number was 722 significant new features and services delivered for AWS customers last year.
+
+Answer_11:
+
+    Thanks. I actually just returned from India where I spent a week with our teams in Bangalore and Hyderabad. We're breaking ground on a new 10-acre campus there. So, we are solidifying and increasing our investment in India on all fronts.
+I had a chance to see firsthand the level of invention going on with both customers and sellers making deliveries to customers, seeing the I have space program we have with merchants. It's a very exciting time in India, and again, the invention is off the charts. We're inventing things in India that do not exist in other parts of the world. And, the team there is one of our best. You can see it in some of the external commentary as well. For the second year in a row, customers selected Amazon India as Amazon's most trusted online shopping brand.
+During the quarter we rolled out a feature called Tatkal which is a studio on wheels that we go to the sellers to help them sign up. We let them do registration, imaging, catalog, uploads, and basic seller training. We're taking it to the sellers -- taking the business to the sellers. We've already reached sellers in 25 cities, and we're really helping them expand their business. Not only within their home region, throughout the whole country.
+
+Answer_12:
+
+    Sure. On the op margin side, although there was improvement year-over-year, you're right, it is still on an FX-neutral basis negative. We have, as I said earlier, fulfillment network and digital content. We continue to build the underpinnings of the Prime program in our international countries. You also have to keep in mind that we're making large investments in India. We're very excited about what we see. And, we will continue to invest heavily in India.
+
+Answer_13:
+
+    I'll take your second question first. So, again, we had margin expansion year-over-year that was quite significant from 12.4% to 23.5%. But, again, it's very early in this business. We're very pleased with the results we're seeing on the top and bottom line. But, margins are going to be bumpy and affected by levels of investing, price reductions, and also cost efficiency that we're driving. So, quarter to quarter, it will very. We are concerned at this point about capital efficiency, returning price to customers periodically with price reductions, and adding feature sets for them to make the business more valuable.
+
+Answer_14:
+
+    This is Phil. For your other part of the question, we're not providing an update on the $1 billion stat. What I would say is that the AWS team has strong revenue growth across their suite of products. The fastest growing product in their history is actually Aurora, the new database. We're very excited by what we're seeing in that space, but we're not breaking out the revenue for those various components today.
+
+Answer_15:
+
+    Sure. I don't have a forecast for you on content cost in isolation or really forward looks on anything besides the guidance I've given you. Yes, it hits in the gross margin. Content costs do show up there. I think the bigger issues that you should look at in gross margin, and again, starting with the comment that we expanded by 300 basis points year-over-year. That is really driven by, first of all, the AWS growth. And again, $10 billion business growing 64%. We're very pleased with that, and that affects gross margin as well.
+The other bigger element though is the third-party contribution. Third-party units are now up to 48% of paid units, and that's up 400 basis points year-over-year. That continues to be a factor in gross margin. We book that on a net basis. The third-party revenue. It's a positive factor in gross margin. It can be a negative factor in fulfillment costs and some of the other metrics.
+
+Answer_16:
+
+    This is Phil. Also, just to jump in, gross margin is not the primary metric we use to measure the business. We're much more focused on free cash flow dollars and operating profit dollars. So, there are a whole lot of moving parts in gross margin, and Brian mentioned a lot of them. But, it's not a primary metric for us.
+
+Answer_17:
+
+    We're very excited about the advertising business, and we think it's still very early days for this opportunity. So, it's an offering we've been working on. We're trying to take a very customer-centric approach. You've probably noticed some changes in the treatment on the website, and we did move away from text ads and product ads in favor of some of the other, newer products. We're really excited about the opportunity there is for third-party sellers and for other vendors on the site. But, we're not breaking out numbers today.
+
+Answer_18:
+
+    On Prime Now, we're now in 30 metro areas. Really from a standing start 16 months ago when we opened our first Prime Now location, and it's now a worldwide business in the US, UK, Italy, and Japan. The five cities we added in the first quarter were Raleigh, North Carolina, Cincinnati, Tampa, Liverpool, England, and Osaka, Japan.
+How do we feel about that business? Again, it offers tens of thousands of daily essential products. We think it's a service that customers like. Certainly is hard for companies to do. We think the natural evolution of our operations network and our scale gives us a chance to do this, and we are happy to invest in it as a service for our customers. We're taking a long-term approach on this one though.
+
+Answer_19:
+
+    Let me start with your CapEx question. We like to look at both capital expenditures and capital leases because they're both essentially our level of investment. Those totaled $9.5 billion in the trailing 12 months, and it was up 7% from the 12-month period ending this quarter last year. I will point out that the prior year was $6.1 billion. We have stepped up investment. Although it did not go up as much year-over-year this quarter, we are still spending almost $10 billion on what essentially is fulfillment capacity in support of really strong growth -- unit growth in FBA and global expansion and then also on AWS. Additional capacity for existing customers as they grow their business and also in new regions. We've been working and continue to work very hard on capital productivity. It's very important to us and I attribute a good piece of the ability to keep that at a modest growth rate year-over-year to our capital efficiency and better purchasing across all capital and capital leases quite frankly. But, again, we are spending almost $10 billion.
+
+Answer_20:
+
+    Stephen, this is Phil. Just to jump on the usage growth comment, we continue to see really strong usage growth. We're not in the business of raising prices. We lower prices for AWS. There can be mix for products, but by and large, if you see our revenue growth, we're also lowering prices which means that by math we're typically going to be growing usage at a very strong rate. Just wanted to jump on that.
+
+Answer_21:
+
+    This is Phil. I'll take the EGM question first. So, just to put numbers on that, the year-over-year in the US, or North in America, was 32% growth which was up from 28% in Q4. There's not any single categories we're calling out there. To grow on a base that big, that kind of rate, you need pretty strong performance across the board. A lot of categories are selling a lot. It's a lot of the drivers we talked about. As Brian mentioned on the revenue growth side -- Prime, selection growth. We also benefited from the extra day in quarter due to the leap year. Strong performance from many of the categories.
+
+Answer_22:
+
+    On Amazon Fresh, we continue to have a strong Fresh business in a number of cities in the US. We know customers love it. We're making good progress on the economics. You'll also notice we have other ways for people to buy consumable products. We have Prime Pantry. We have Prime Now. We're playing with a lot of different models to see what resonates with consumers, and it will guide our investment decisions going forward.
+
+Answer_23:
+
+    I'll take the first question on content. Yes, my comment on Prime benefits was essentially one about video content and our investment there. Not saying other investments may not go up as well, but that is the one we're focusing on that I called out.
+On the comment about Prime -- I guess what I'll call availability or saturation. I think that's one of the thoughts behind our monthly plan. We want to create flexibility for consumers to try Prime in a low cost way if that's how they choose. We've always had our free trial program, but it is a hurdle for many people, or there's a hesitancy to put up a full year's payment for a year of Prime. Annual is still going to be a better deal. But, we know customers may try it more frequently if it's a monthly plan. And, that's what we're looking for. We know that once customers try it, generally they'll really like it. So, we think that will purge some other demographic groups as well.
+
+Answer_24:
+
+    This is Phil. Another comment on the Prime. Your saturation question. Keep in mind, even in the US, which is our most mature by years of launch, we still grew last year at 47% year-over-year membership growth, and we continue to make the program better and better. I think the monthly offers are great for flexibility. Give people a chance to try new ways, and we continue to add content. We continue to add selection. Prime Now is a huge benefit that didn't even exist two years ago. We're still out trying to meet as many customers as possible. We're very committed to driving Prime and it's part of the Company.
+Your question on China, probably the biggest thing to point to is more progress and selection on the Amazon global store. This is our website -- this is the offer that allows Chinese customers to shop from the US website, Amazon.com with prices in RMB and with Chinese language pages. It's focused on items that may be hard to get. And, Amazon is really trying to become the trusted source for many of these goods. So, really that's a big part of the focus. If you've been tracking that number over time, we're now up over $10 million which is good progress on that front.
+
+Answer_25:
+
+    I'll start. You see the growth rate of the segment at 27%. It's showing the success we're having with customers. When we grow at that clip, we can do a lot of good things with it. We can on the cost side run our facilities more efficiently. We can buy better. We can look to in-source some things that we may have paid externally for. There's a number of things that we can do that I think will show up on the bottom line. But, principally, what we're trying to do now is make the Prime experience as strong as possible for consumers.
+
+Answer_26:
+
+    This is Phil. The other thing I would add to that is that the margin you see in any quarter is the output of our rate of investment in some places and drive for efficiencies in others. We're not really trying to optimize for any particular number in a given quarter. We're just trying to make the best decisions we can to grow long-term free cash flow per share. We're juggling the investment in the places where we feel like we have long-term opportunities where we need to invest with making sure we're getting continuously better in all our other processes at the same time.
+
+Answer_27:
+
+    This is Phil. I'll take the India question. We're happy to see the recent clarifications. Then, we're happy to operate in any regime. Frankly, the more clarity the better.
+
+Answer_28:
+
+    Then, on the logistics question. Stepping back, the reason we add logistics capability and transportation capability is so we can serve our customers faster and faster delivery speeds, and we've needed to add more of our own capacity to supplement our carriers and partners. They're still, again, great partners, have been, and will continue to be for the future. But, we see opportunities where we need to add additional capacity, and we're filling those voids.
+
+Answer_29:
+
+    Thank you for joining us on the call today and for your questions. A replay will be available on our Investor Relations website at least through the end of the quarter. We appreciate your interest in Amazon.com and look forward to talking with you again next quarter.
+

exam/part2_problem1/Problem_1_Conference_Call_Segments/call_14_presentation.txt

@@ -0,0 +1,19 @@
+
+Hello and welcome to our Q1 2016 financial results conference call. Joining us today is Brian Olsavsky, our CFO. We will be available for questions after our prepared remarks. The following discussion and responses to your questions reflect management's view as of today, April 28, 2016 only, and will include forward-looking statements. Actual results may differ materially. Additional information about factors that could potentially impact our financial results is included in today's press release and our filings with the SEC, including our most recent annual report on Form 10-K and subsequent filings.
+As you listen to today's conference call, we encourage you to have our press release in front of you, which includes our financial results, as well as metrics and commentary on the quarter. During this call, we will discuss certain non-GAAP financial measures. In our press release, slides accompanying this webcast, and our filings with the SEC, each of which is posted on our IR website, you will find additional disclosures regarding these non-GAAP measures including reconciliations of these measures with comparable GAAP measures. Finally, unless otherwise stated, all comparisons in this call will be against our results for the comparable period of 2015. Now, I'll turn the call over to Brian.
+
+Thanks, Phil. I'll begin with comments on our first-quarter financial results. Trailing 12-month operating cash flow increased 44% to $11.3 billion. Trailing 12-month free cash flow increased to $6.4 billion, up from $3.2 billion. Trailing 12-month free cash flow less lease principal repayments increased to $3.5 billion up from $1.5 billion. Trailing 12-month free cash flow less financed lease principal repayments and assets required under capital leases increased to $1.6 billion, up from an outflow of $1.2 billion.
+Trailing 12-month capital expenditures were $4.9 billion. Capital expenditures do not include the impact of property and equipment acquired under capital and finance and lease obligations. These capital expenditures and capital leases reflect additional investments in support of continued business growth due to investments in technology infrastructure, the majority of which is to support AWS and additional capacity to support our fulfillment operations.
+The combination of common stock and stock-based awards outstanding was 490 million shares compared with 483 million one year ago. Worldwide revenue increased 28% to $29.1 billion, or 29% excluding the $210 million unfavorable impact from year-over-year changes in foreign exchange. Worldwide active customer accounts, excluding customers who only had pre-orders in the preceding 12-month period, exceeded 285 million. Worldwide paid unit growth was 27%. Worldwide seller units represented 48% of paid units.
+Now, I'll talk about our segment results. In the first quarter of 2016, we began to allocate stock-based compensation and other operating expense net to our segment results. These amounts are combined and titled stock-based compensation and other in our segment results and reflect the way we now evaluate our business performance and manage our operations. For reference this quarter, I'll also mention segment operating income excluding stock-based compensation and other.
+In the North America segment, revenue grew 27% to $17 billion. Media revenue grew 8% to $3.2 billion. EGM revenue grew 32% to $13.5 billion. North America segment operating income including stock-based compensation and other was $588 million, a 3.5% operating margin compared with $254 million in the prior year. This includes $5 million of favorable impact from foreign exchange. North America's segment operating income before stock-based compensation and other was $924 million, a 5.4% operating margin compared with $517 million in the prior year.
+In the international segment, revenue grew 24% to $9.6 billion. Excluding the $177 million year-over-year unfavorable foreign exchange impact, revenue growth was 26%. Media revenue increased 7% to $2.5 billion, or 9% excluding foreign exchange. EGM revenue grew 31% to $7 billion, or 33% excluding foreign exchange. International segment operating loss including stock-based compensation and other was $121 million compared with a loss of $194 million in the prior year. This includes $21 million of favorable impact from foreign exchange. International segment operating income before stock-based compensation and other was $20 million compared with a loss of $76 million in the prior year.
+In the Amazon Web Services segment, revenue grew 64% to $2.6 billion. Amazon Web Services segment operating income including stock-based compensation and other was $604 million, a 23.5% operating margin compared with $195 million in the prior year. This includes $24 million of favorable impact from foreign exchange. Amazon Web Services segment operating income before stock-based compensation and other was $716 million, a 27.9% operating margin compared with $265 million in the prior year.
+Our operating income includes stock-based compensation expense and other operating expense. Operating income was $1.1 billion, or 3.7% of revenue, up approximately 260 basis points year-over-year. This includes $50 million of favorable impact from foreign exchange. Consolidated segment operating income before stock-based compensation and other was $1.7 billion, or 5.7% of revenue compared to $706 million in the prior year. Our income tax expense was $475 million. Net income was $513 million, or $1.07 per diluted share compared with a net loss of $57 million, or loss of $0.12 per diluted share.
+Turning to the balance sheet, cash and marketable securities increased $2.1 billion year-over-year to $15.9 billion. Inventory increased 30% to $9.6 billion, and inventory turns were 8.6 down from 8.8 turns a year ago as we expand selection, improved in-stock levels, and introduced new product categories. Accounts payable increased 26% to $15 billion, and accounts payable days increased to 72 from 70 in the prior year.
+I'll conclude my portion of today's call with guidance. Incorporated into our guidance are the order trends that we've seen to date and what we believe today to be appropriately conservative assumptions. Our results are inherently unpredictable, and may be materially affected by many factors, including a high level of uncertainty surrounding exchange rate fluctuations, as well as changes in global economic conditions and customer spending, world events, the rate of growth of the internet, online commerce and cloud services, and the various factors detailed in our filings with the SEC. It is not possible to accurately predict demand, and therefore, our actual results could differ materially from our guidance.
+As we describe in more detail on our public filings, issues such as settling inter-Company balances in foreign currencies among our subsidiaries, unfavorable resolution of legal matters, and changes to our effective tax rate can all have a material effect on our results. Our guidance further assumes that we don't conclude any additional business acquisitions, investments, restructurings, or legal settlements, record any further revisions to stock-based compensation estimates, and that foreign exchange rates remain approximately where they've been recently.
+For Q2 2016, we expect net sales of between $28 billion and $30.5 billion, or growth of between 21% and 32%. This guidance anticipates approximately 70 basis points of favorable impact from foreign exchange rates. Operating income to be between $375 million and $975 million compared with $464 million in second-quarter 2015. This includes approximately $825 million for stock-based compensation and other operating expense net.
+We are grateful to our customers and remain heads-down focused on driving a better customer experience. We believe putting customers first is the only reliable way to create lasting value for shareholders. Thanks. And, with that, Phil, let's move on to questions.
+
+Great. Thanks, Brian. Let's move on to the Q&A portion of the call. Operator, will you please remind our listeners how to initiate a question?

exam/part2_problem1/Problem_1_Conference_Call_Segments/call_14_questions.txt

@@ -0,0 +1,69 @@
+Question_1:
+
+    Thanks a lot. Lots here, but international retail revenue -- the international retail segment really stood out. Revenue accelerated. Seemed like a bit of a milestone also that the CSOI turned positive in a non-Q4 quarter. Can you shed any more light in what the key driver there was? And, how sustainable it is? And, AWS just mathematically, the comps get tougher starting in Q2, just given what happened in 2014. Is that something that we should be taking into account in terms of thinking about how the rest of the year may progress? Thanks.
+
+Question_2:
+
+    Thanks for taking the question. Just wanted to ask you about unit growth overall and if we look back over the last three quarters, you've accelerated it now to a materially higher level than what we saw in 2014 and the first half of 2015, and I realize in 3Q last year you had Prime Day. I was hoping you could comment on the overall acceleration we've seen here and key drivers behind that? And, if there's something different perhaps than what you talked about on international?
+Also, on AWS, can you talk about the underlying drivers here of margins and thinking about that a little bit going forward primary sources of leverage? As you open up six new regions in coming months, should we expect this to be constant build-out? Or, something that's more lumpy over time and more in waves? Thanks.
+
+Question_3:
+
+    Great. Thanks. Looking at the active customer account number, it looks like growth slowed pretty significantly, about 10 percentage points. Just curious if you can give us a sense of anything that might be throwing that number off, assuming we're reading it the right way? And then, as you roll out on AWS -- as you roll out the fixed new availability zones over the course of the year, is there a way to quantify what kind of an impact that's going to have on the capacity at AWS?
+
+Question_4:
+
+    The first one is on Prime. You've had two straight years of around 50% Prime subscriber growth. Curious about how you think about keys to driving Prime sub-growth going forward? And, the thought process behind the reported monthly Prime subscription? And, the second one on the logistics investments, there's been a lot about truck investments and logistics investments. Any comments at all about learnings, and what you're seeing from some of the investments in your truck fleet and your own delivery network? Thanks.
+
+Question_5:
+
+    Great. Two questions related to Prime overseas. Could you talk about the status of Prime in international markets? How far rolled out it is in most of your major markets? Then, you talk about Prime Fly Wheels, and you did last year. But, it seems likes those Fly Wheels spun faster than you expected in the fourth quarter of last year that caused some near-term expense issues for you? Can you talk about how you're thinking about planning against that as the Prime Fly Wheels are getting broader for you, how do you try to get ahead of that into the peak season later this year? Thank you.
+
+Question_6:
+
+    Thank you. I have two. I think it's the first time 1Q 2011 that we see tech and content counted as a percentage of revenue declining or flat. Is it just a sign of your inability to increase investment in line with revenue growth? Or, is there something going on, if yes, what?
+Secondly, Brian, you said that the growth of Prime has been driven by investments you have made or are making. You gave the examples of devices that you are selling. I think it's a mathematical certainty that Prime subscribers would accelerate in North America at some point from 50% growth. As penetration increases and growth slows, will we see a deceleration in the investment levels? In other words, how do we think about the effect of deceleration in Prime on the North American margin structure in the future? Thank you.
+
+Question_7:
+
+    Thanks for the question. Any comments on your business in India? How is that market ramping up? On the competitive front there, any sense of where the local incumbents may actually have some advantage in the region? Thanks.
+
+Question_8:
+
+    Thanks. My question is on the international margins. They're quite a bit below where they were many years ago and trailing the US. Maybe talk about the dynamics there and what is it going to take to catch up over time? Thanks.
+
+Question_9:
+
+    Great. I just had two questions on AWS. First, last fall at re:Invent, you disclosed that data management revenue was at a $1 billion run rate. Can you provide an update on that figure? And, maybe talk about how much of AWS revenue today is outside of the storage and compute layers.
+And then, the second question is on the AWS margin. I think everybody is trying to learn more about the structural long-term margin, and it was down a tad quarter-on-quarter. Is that solely from FX impact? Or, was there some seasonality of expenses? Any color on what's driving the AWS margin, and how we should think about that over the longer term? Thank you.
+
+Question_10:
+
+    Thanks for taking the question. Looking at the gross margin, impressive performance in Q1. There were a few headwinds it looked like in gross margin in Q4. Wanted to understand how we should think about the puts and takes in gross margin. It has evolved to be a much higher number in the last few years. What some of the puts and takes are going forward especially with respect to content costs? Thanks.
+
+Question_11:
+
+    Thanks. Couple of questions. First, if you can update us on your new advertising initiatives in terms of how the sponsored links are performing? Additionally, if you can give us an update on Prime Now. Seems like you've rolled out a number of cities for that. How that's involving and the traction with Prime Now? Thank you.
+
+Question_12:
+
+    Thanks. Your capital lease-driven property and equipment acquisitions is down again year-over-year. So, will you help tie this to perhaps the overall usage growth at AWS? Or, maybe the changing nature of how your enterprise customers may be using the platform to be more compute versus storage or database-heavy? I think historically on the e-commerce side, you have been price followers as opposed to price leaders. AWS, you have been price leaders for the most part for actively taking down price. Now, given your leadership position, do you think you'll continue to be price leaders? Or, do you think it's now time for you to follow instead? Thanks.
+
+Question_13:
+
+    Great. Thanks. The North American EGM segment outperformed our expectations of growth accelerating on a year-over-year basis. Given you don't break out GMV by vertical within the EGM segment and given the strong growth at massive scale, can you cite any key verticals that were particularly strong?
+Second question is just an update on Fresh. Rollout has obviously been much slower than Prime Now. How should we think about the Fresh rollout and the impact over the long-term? Thank you.
+
+Question_14:
+
+    First, congratulations on the great quarter. Couple on Prime and one on China. First, a point of clarification. You answered a previous question by saying that you will significantly increase investment in Prime. Was that specifically in reference to video? Or, should we expect new types of offerings beyond video and music?
+And, secondly on Prime, membership is likely hitting some saturation levels for certain demographics in the US? Do you intend to focus on more lower income households for growth there? Then finally, on China, anything notable to call out there that's been different over the recent past driving results? The free trade zone, et cetera?
+
+Question_15:
+
+    Thanks for taking the question. I want to go back to North America but focus on margins. 5.5%, 5.4% margins, I think that's the highest level since maybe Q2 2010 and resumes the margin expansion we saw for most of last year. Just hoping we can understand -- help us understand a little more what's driving that? I'm sure the more mature Prime Fly Wheel you mentioned that's happening in Europe. Is there anything else that's going on besides Prime Fly Wheel, maybe more efficient shipping or things along those lines? Thanks.
+
+Question_16:
+
+    Thank you. Two quick ones. Back to India for a second, I was wondering if you could talk about the regulatory environment there, particularly how it pertains to Amazon cloud tail? Two, on logistics, could you talk about excess capacity in logistics as you build out air, freight, sea, et cetera. Would you ever entertain delivering other Companies' items, i.e., like a FedEx or UPS?
+

exam/part2_problem1/Problem_1_Conference_Call_Segments/call_15_answers.txt

@@ -0,0 +1,118 @@
+Answer_1:
+
+    At this time, we will now open the call up for questions. In the interest of time, we ask that you limit yourself to one question.
+
+Thank you. Our first question is from Mark May of Citi. Please proceed.
+
+Answer_2:
+
+    Okay. Thanks, Mark. Yes, let me talk a little bit about guidance, and I'll incorporate the answer to the fulfillment question. So, you'll notice on the top line guidance of $31 billion to $33.5 billion or 22% to 32% growth incorporates the Prime Day results and I can talk more about that later. But Prime Day was very successful for us. It was up 60% on a worldwide basis over the prior year, and it was also a record day for our Amazon devices, as well as sellers and customers alike.
+In the bottom line, you'll need to remember that Q3 is a typically a lower operating income quarter as we prepare for Q4, the holiday peak. It's a little bit more exaggerated this year in that we're opening 18 fulfillment centers this quarter. To put that in perspective, we launched six in Q3 of last year. This will bring us up to 21 net FCs for the year by the end of Q3, and that compares with 10 fulfillment centers for the first three quarters of last year on a net basis. So, why are we expanding so much? If you remember back to Q4 and the capacity constraints we had in Q4, primarily due to really strong FBA growth, we talked a lot in the Q4 call about the operational cost of that in Q4. Customers are well taken care of, but we had additional fulfillment costs from being so tight on capacity.
+This year, with that in mind and then knowing that our growth rate is actually accelerating on a unit basis, we are - Q2 was 28% unit growth for paid units, but fulfilled by - units fulfilled by Amazon is much higher than that due to the growth of Prime and FBA. That compares with last year in Q2 when we saw 22% unit growth. So we're 600 basis points faster growth in Q2 this year than last year and that 22% last year turned into 26% in Q4. So it ramped up in the back end of the year.
+So a lot of data points there, but the bottom line is that there's a large step up in the amount of fulfillment capacity in Q2 - excuse me, Q3 versus Q2. There's a couple of other factors while I'm at it for guidance. We are also nearly doubling our content spend in the second half of this year versus the second half of 2015. We have a great slate of new Amazon Originals coming out later this year, both in the US and internationally, and we're nearly tripling our number of new Amazon Original shows - TV shows and movies compared with the second half of last year. There are other investments, certainly, that are increasing sequentially. I'd point to India and AWS, but primarily the two biggest issues in Q3 guidance I would say are the operational ramp and also the increase in digital content spend.
+
+Answer_3:
+
+    And, Mark, to follow up on the other question, our net sales guidance anticipates approximately 30 basis points of favorable impact from foreign exchange rates.
+
+Answer_4:
+
+    We're not disclosing that at this time.
+
+Answer_5:
+
+    Sure. Let me circle back on Prime Day. So again, it was the biggest global day ever for Amazon and was up 60% on a order product sales basis versus Prime Day 2015. It was a record day for Amazon devices. It was a great day for small businesses and sellers who saw great year-over improvement in their sales. And more importantly, it was a great day for customers. Globally they saved over double what they had saved in Prime Day 2015.
+So we're very pleased with the results of Prime Day, and the impact of Prime Day is factored into this guidance. As far as new customers and new Prime members, we're not disclosing that, but suffice to say that it was a great day for both existing Prime members and also new customers who were trying us out for the first time.
+
+Answer_6:
+
+    And on the stock-based compensation, you'll recall beginning in Q1 this year, we began allocating stock-based compensation and other operating expense to our North America, international and AWS segments. So we're including that in our guidance on operating income and have not separately guided to stock-based comp and other income expense this quarter.
+
+Answer_7:
+
+    Hi, Gene. This is Darin. I'll start with the customer accounts. As we noted again in our Q1 release, our active customer accounts exceeded 300 million. However, today we're not going to update that number.
+
+Answer_8:
+
+    To your question on Prime Now, so I will point out Prime Now is now in more than 40 metro areas worldwide. In the past quarter we expanded further internationally to Germany, Spain and France, so it's a global program, again, offering free two-hour delivery on tens of thousands of items. We also have in the same vein of, I think what you called maybe automated consumption, the same day has expanded. Now we've added 11 metro areas, bringing the total to 27 metro areas that are qualified for same day.
+So, yes, we think this is an important part of our Prime offering. We know customers love it. We're very happy with their order patterns from Prime Now, and very happy with it. Of course, we do always talk about - we always usually get asked about profitability, and it is a very hard service to deliver and make money on. But we know customers love it and we're in a great position to do this because of our long-term approach, our drive of greater efficiencies and our proximity to the customer with our vast global FC network.
+
+Answer_9:
+
+    Sure. We don't give - obviously we don't give segment-based guidance. But to your question about AWS, we actually see nine availability zones in four regions coming out in the next - in the coming year. The impact on short-term is pretty much indistinguishable from the growth that we're seeing in our expansion of our base customers in our existing regions, so we don't see a large step-up from the addition of new regions relative to the large and rapid growth in the business itself.
+We do think that it does pay benefits both for ourselves and for our customers because of the expansion, and we're happy to have added the region in Mumbai this past quarter. We think when we expand geographically, existing customers will run more of their workloads on AWS. Sometimes they have local latency concerns or security issues that require them to run things in their country, so that helps. And we also open up to new customers when we add these regions. So not a large impact on Q3 guidance, but certainly an exciting investment for our customer base.
+
+Answer_10:
+
+    Sure. On tech and content, that's going to be a combination of our people cost related to many areas of the website and also the infrastructure cost to run it, at both the Amazon Web Services and also the Amazon site. We've been seeing some great efficiencies in our infrastructure, both internally as Amazon and also as part of AWS. We have great people working on not only better efficiency, but also driving cost out of our acquisition prices. So, there's a lot of great work going on there and I think that's what you're seeing reflected in the tech and content line. Again, this can fluctuate quarter-to-quarter, but we're happy with the current trend and you see it in the AWS margins.
+On Prime Now versus Fresh, they are separate - sorry. The - we'll point out in Q2 that we added London and Boston as two new sites in London for AmazonFresh, and that was the first international location. But we've been running AmazonFresh for seven years, or excuse me, since 2007 in Seattle. And what you've seen as we've been testing the model, we've been expanding in North America and more so we've been expanding within the cities that we're in, adding zip codes, adding additional customers. So, the move into Boston and also now into London give us some really good data points and as - it's a great customer feature for the Prime offering.
+Prime Now is a little bit easier to build up from scratch, I would say. The - it has a different purpose, although some of the products overlap. Again, this is more about immediacy of one-hour and two-hour delivery of a curated list of important products that people need in a short period of time. So, they have different roles. Some of the products overlap, of course, but we're happy with both, and we think that customers like both of them.
+
+Answer_11:
+
+    Sure. Well, in Echo, again, we continue to build out the list of devices, launching the Dot and Tap and Fire TV skills this past year. And now we have 1,900 third-party skills for the Alexa, including new skills from Kayak, Lyft, NBC, Honeywell and more. So there's a lot of uses that we're seeing for Echo. A lot ties into our Prime Music offering. It's just a great way to access Prime Music and more and more the Amazon site. We don't have anything to disclose on physical orders from - through - excuse me, orders through Echo.
+On Amazon Web Services margin, again, this is primarily due to efficiencies gained on our infrastructure, better utilization, better cost out. There is a - certainly a mix of products and services. I don't have a bridge for you on whether that's helpful or hurtful, but the - these margins in AWS will fluctuate from quarter to quarter, and that's what you're seeing. But we're very happy with the year-over-year improvement.
+
+Answer_12:
+
+    Sure. Yes, I have the same buzzwords for you, Mark. It's really -- the flywheel of Prime is definitely working. It's as simple as that. The low prices, vast selection and convenience continue to resonate with customers. Prime membership increases and selection through FBA makes Prime more valuable. So it's a bit as simple as that in the consumer business in North America and international, we are seeing great acceptance of Prime and usage of Prime benefits. We continue to expand the list of Prime benefits for customers to make it more valuable, and none is more valuable than FBA, which we've talked a lot about the value of Prime to FBA and vice-versa.
+FBA is bringing more Prime-eligible selection to Prime and then the growth of Prime and the type of customers that utilize Prime and their buying behavior is a great traction for other FBA sellers. So that is essentially what we're seeing, and we're certainly pleased with the customer response to those offers globally.
+
+Answer_13:
+
+    Sure. Let me start with the second question first. So on Prime Video, again, we're very happy with the customer adoption of Prime Video, and we know the customers love it. We like the results that we see, particularly with the free trial conversion, the renewal rates for subscriptions. So it's clearly working. I mentioned earlier how we're doubling the investment rate in the second half of the year versus last year's second half, and we're tripling the Amazon Originals content.
+That Originals content for TV and movies, that content can be used globally. We've talked a bit about our Prime launch in India, and alluded to the fact that we'll be having video soon in India, but local content and also Amazon Originals. So, stay tuned for that. I don't have any more to announce on that today. On the variance to guidance, what I'll say is, we came in the very high end of our revenue guidance. I would say that our business model usually reacts well to high volume as we get a really good leverage on our fixed expenses. So that's part of what we saw, very strong operating efficiencies as we hit essentially the highest end of our revenue guidance.
+But we do have a lot of diverse profit streams here at Amazon and a lot of investments going on at any point in time. I think I heard a question there about level of investment. We continue to invest heavily. In fact, I just called out a few things that are going to be stepping up in investment levels in Q3, mostly ops and digital content. So we continue to invest on behalf of customers. But we also work very hard at efficiencies and scaling the businesses that we have. So we take both roles very seriously around here, investing on the right - in the right things, seeing results on behalf of customers, and also driving efficiencies. And there can be timing, quarter-to-quarter, the operating margin and levels of investment can fluctuate, but certainly continue to expand.
+
+Answer_14:
+
+    Sure. Well, first of all, we believe customers will choose AWS primarily for three factors, the functionality and pace of innovation that we bring to the table, our partner and customer ecosystem and our experience. We've been in this business longer than anyone. Having said that, there's plenty of room for multiple winners in this business. What we focus on is innovating on behalf of customers and expanding the geographic footprint to make our services more widely available.
+You can see us continue to invest in things like new application services, higher up the stack, additional technologies that will make integrating with AWS seamless for those companies that have a hybrid IT environment and then continuing to add functionality for data analytics, mobile, Internet of things, machine learning offerings, things like that, that will add greater and greater value for AWS customers. And I would say the rapid pace of innovation continues to stretch our lead in that dimension. We have had 422 new significant services and features added in the first half of this year. That's a faster pace than last year when we added 722 services and features. So we feel good about the business position we're in and our position with customers.
+
+Answer_15:
+
+    Yes, sure. First, on EGM, I'll just say the growth is across a lot of different products, none to exactly call out here, and we think that a lot of it is, of course, driven by the growth of Prime itself. EGM in North America grew 32%, which was higher than the revenue growth rate, and also grew 36% internationally. So when people join Prime, they are certainly buying EGM in strong quantity. So that continues to grow with the growth of the Prime program.
+On transportation, I think your question was about whether that's impacting our short-term results. No, the answer is no. We are certainly expanding our service offerings in the transportation side and we have been for many years, things like sortation centers and delivery methods. The plane deal that we were talking about is essentially planes that we're going to be leasing from other companies, and you'll hear more about that as we go forward, but that is to essentially take on the demand for internal flights as we move product around. It certainly will be well utilized.
+
+Answer_16:
+
+    I will start with the second question. So I would just say Prime Day had enormous impact on the device business and devices were well featured and also well adopted by customers. So it was the largest device sales day that we've ever had and essentially pretty much across all of our device types, E-readers, tablets, Fire TV and Echo.
+And I'm sorry, your first question was around - the cost of fulfillment centers. Not disclosing that we do continue to change our fulfillment centers. We've changed, again, the automation, the size, the scale many times and we continue to learn and grow there. So no general trends I can point to on cost per fulfillment center to start up, but because they do vary in size and mission and some have fully outfitted in using Amazon Robotics, others - some don't for economic reasons. Maybe the volume is not perfect for robot volume. But, yes, so I can't give you any real distinct trends there.
+
+Answer_17:
+
+    Hi, Justin. This is Darin. I'll comment on the customer accounts again. We may consider updating that in the future, but really we encourage you and our investors to look at our free cash flow measures, our revenue and our GAAP operating profit since our customer purchasing behavior can vary.
+
+Answer_18:
+
+    And on Prime penetration, of course, we haven't released Prime subscription levels. We have talked about growth certainly globally and in North America. What I can tell you there is we still think there's a lot of room in Prime. We've tailored programs to students, we've tailored video programs, we've rolled out monthly plans, we have plans with grocery delivery.
+So there's a lot of different flavors of Prime and we are aggressively looking for a perfect Prime for everybody. We know that, again, when customers try Prime, they like it. So it's really just about getting them to try Prime and continuing to deliver great Prime benefits and great low prices and selection.
+
+Answer_19:
+
+    So thank you, Ross. This is Darin. Let me take that first question. On Prime Air in the UK, we've been working with and developing Prime Air for some time to develop a rapid delivery system that is safe, environmentally sound and it really enhances the services that we provide for millions of customers. And we're extremely happy to partner with the UK government to advance the safe use of drones for small parcel delivery. This is providing us with permission to trial new methods in the space, including beyond line-of-sight operation, sense-and-avoid technologies and flights where one person operates multiple drones.
+So we definitely appreciate the pragmatic and forward-looking approach on this topic with the UK, and we're going to continue to work with regulators and policymakers in many countries, including the US, so we're excited about there. As for the ocean-going licenses, we have no comment on that today.
+
+Answer_20:
+
+    As far as AWS, essentially penetration question you asked. We think still very early. Again, we like our position, our industry leading position in the cloud space, and we're working on things that would incent more and more customers to accelerate their cloud conversion. The lower prices and services that we offer, and as I said, we'll work on things that will make it easier and easier for customers to work with us with their hybrid data centers or transfer their volume to us.
+
+Answer_21:
+
+    So, hi, Eric. This is Darin. I'll take the second question on China. So we continue to operate well in China. We see China as a - and the way we're approaching China as a way to - a trusted avenue for our Chinese customers to access authentic international brands and we'll focus on those global brands and bringing those to Chinese customers. Offerings like the Amazon Global Store where Chinese customers can access those international brands on the China website and have them shipped directly to their houses is something we're focused on. So, yes, it's still early days and some of those experiments that we're doing, but we're seeing good traction on those things and we like that.
+
+Answer_22:
+
+    Yes, and on the content spend, I think the only other data point I can give you is probably a dated one at this point, but we spent $1.3 billion in 2014, that's the last number that we disclosed and we continue to add content. The best I can give you at this point is that it will be double, nearly double what we spent in the second half of 2015.
+
+Answer_23:
+
+    Sure. So India, we're very encouraged by what we've seen so far in India, both with customers and also sellers; that's a third-party seller market. You heard that we launched the Prime program this week, which will be a whole new experience for Indian customers. In hundreds of cities we'll now have unlimited free one-day and two-day delivery, and we also mentioned that Prime Video is coming there, both Indian and global content.
+We're also starting to see exclusive online sales partnerships. Recently, we've had partnerships with Motorola, Samsung, Lenovo on select phones. But more importantly, again, we really like the opportunity in India. We like the initial results that we see from customers and also sellers. We really like our team there. We have a great team of Amazonians who've been very inventive in India.
+Every time there's an obstacle or something that's different from the US or another major business, they'll invent around it, whether it's a shipping method or a payment method or whatever. So, very creative and the customer response has been really strong. So we are very excited about the Prime program. We think it'll enter into a new chapter in India, and we've seen great success in every country in the world that we've launched Prime, and we feel India is going to be no different. So we're looking forward to seeing what we can do on behalf of the Indian customer.
+
+Answer_24:
+
+    And hi, Victor, this is Darin. On Italy, yes, we continue to invest in Italy and really throughout Europe to keep pace with the strong customer demand we see. Since opening Italy in 2010, we've invested over EUR450 million and created 1,700 jobs in Italy, and this increased investment will be to add future FC near Rome and other infrastructure assets. So, yes, this is really to support both the customers that we have there in Italy and throughout Europe, and we'll continue to invest in the coming years.
+So thank you for joining the call today and for your questions. A replay will be available on our investor website at least through the end of the quarter. We appreciate your interest in Amazon.com and look forward to talking with you again next quarter. Thank you.
+

exam/part2_problem1/Problem_1_Conference_Call_Segments/call_15_presentation.txt

@@ -0,0 +1,18 @@
+
+Hello and welcome to our Q2 2016 financial results conference call. Joining us today is Brian Olsavsky, our CFO. We will be available for questions after our prepared remarks.
+The following discussion and the responses to your questions reflect management's views as of today July 28, 2016, only, and will include forward-looking statements. Actual results may differ materially. Additional information about factors that could potentially impact our financial results is included in today's press release and our filings with the SEC, including our most recent annual report on form 10K and subsequent filings.
+As you listen to today's conference call, we encourage you to have our press release in front of you, which includes our financial results as well as metrics and commentary on the quarter. During this call we will discuss certain non-GAAP financial measures. In our press release, slides accompanying this webcast and our filings with the SEC, each of which is posted on our IR website, you will find additional disclosures regarding these non-GAAP measures including reconciliations of these measures with comparable GAAP measures.
+Please note, unless otherwise stated, all comparisons in this call will be against our results for the comparable period of 2015. Now I will turn the call over to Brian.
+
+Thanks, Darin. I'll begin with comments on our second-quarter financial results.
+Trailing 12-month operating cash flow increased 42% to $12.7 billion. Trailing 12-month free cash flow increased to $7.3 billion, up from $4.4 billion. Trailing 12-month free cash flow, less lease principal repayments, increased to $3.9 billion, up from $2.4 billion. Trailing 12-month free cash flow, less financed lease principal repayments and assets acquired under capital leases, increased to $2.5 billion, up from an outflow of $492 million.
+Worldwide revenue increased 31% to $30.4 billion or 30% excluding the $166 million favorable impact from year-over-year changes in foreign exchange. Worldwide paid unit growth was 28%. Worldwide seller units represented 49% of paid units.
+Now I will talk about our segment results. North America revenue grew 28% to $17.7 billion. North America operating income was $702 million, a 4% operating margin, compared with $348 million in the prior year. This includes $5 million of favorable impact from foreign exchange.
+International revenue grew 30% to $9.8 billion. Excluding the $184 million year-over-year favorable foreign exchange impact, revenue growth was 28%. International operating loss was $135 million, compared with a loss of $189 million in the prior year. This includes $40 million of favorable impact from foreign exchange.
+Amazon Web Services revenue grew 58% to $2.9 billion. Amazon Web Services operating income was $718 million, a 24.9% operating margin, compared with $305 million in the prior year. Our operating income was $1.3 billion, or 4.2% of revenue, up approximately 220 basis points year over year. This includes $45 million of favorable impact from foreign exchange. Net income was $857 million, or $1.78 per diluted share, compared with the net income of $92 million, or $0.19 per diluted share.
+I'll conclude my portion of today's call with guidance. For Q3 2016, we expect net sales of between $31 billion and $33.5 billion, or growth of between 22% and 32%. This guidance anticipates approximately 30 basis points of favorable impact from foreign exchange rates. Operating income to be between $50 million and $650 million, compared with $406 million in third quarter 2015.
+We are grateful to our customers and remain heads-down focused on driving a better customer experience. We believe putting customers first is the only reliable way to create lasting value for shareholders. Thanks, and with that I will hand it back to Darin.
+Thank you, Brian. Before we move to questions I need to remind you that our guidance incorporates the order trend that we've seen to date, and what we believe to be appropriate assumptions.
+Our results are inherently unpredictable and may be materially affected by many factors including fluctuations in foreign exchange rates, changes in global economic conditions and customer spending, world events, the rate of growth of the Internet, online commerce and cloud services and the various factors detailed in our filings with the SEC.
+Our guidance also assumes that we do not conclude any additional business acquisitions, investments, restructurings or legal settlements and that foreign exchange rates remain approximately where they have been recently. It is not possible to accurately predict demand for our goods and services, and therefore, our actual results could differ materially from our guidance.
+With that let's move to the Q&A portion of the call. Operator, please remind our listeners how to initiate a question.

exam/part2_problem1/Problem_1_Conference_Call_Segments/call_15_questions.txt

@@ -0,0 +1,71 @@
+Question_1:
+
+    Thanks for taking my question. We've noticed some data points out there that suggest that you're accelerating your build-out of fulfillment capacity in North America and obviously also in India. Can you give us a sense of what sort of impact that, that might have in the near to mid-term on your CapEx, depreciation and ultimately CSOI? Especially as it relates to your Q3 guidance? And then just a maintenance question, how much is FX impacting your Q3 guidance? Thanks.
+
+Question_2:
+
+    And, Brian, where does that bring your video content spend to with the doubling in the second half if we look at it on an annualized basis?
+
+Question_3:
+
+    Thanks.
+
+Question_4:
+
+    Thanks for taking the questions. I just want to go back to Prime Day for a minute. I didn't hear any commentary around new Prime members in particular. Obviously a lot of other metrics that you gave but hoping you could provide a little bit more color around that.
+And then also, is there anything else that stood out in terms of what you learned around operations and systems ahead of the holiday season? And then just going back to the 3Q guide, what's the right way for us to think about stock-based comp in the third quarter and if we looked at your 2Q numbers, is that a fair assumption for what you're thinking about? Thanks.
+
+Question_5:
+
+    Hello, good afternoon. First, love the conference call format here. Get right to it. In terms of questions, the customer count, can you give us a little bit of guidance on that? And then also talk about the theme of automated consumption and separately, the importance of Prime Now and how you can grow those SKUs. Thanks.
+
+Question_6:
+
+    Great, thanks. I was wondering as it relates to the Q3 guidance, can you give us a bit of a sense of just how we should think about margins in the AWS business, especially as the next eight availability zones roll out? Presumably that kind of increase in capacity likely has an impact on margins, but would appreciate any direction you can share on how to think about that.
+
+Question_7:
+
+    Thank you. Two questions if I may. As I look at your tech and content expense as a percentage of revenues, we see year-on-year decline for the last two quarters, which is something we hadn't seen since mid-2010, and of course it's reflected in the AWS margins. Can you help us understand what has driven this significant change in relative trajectory in tech and content expenses? And the second question is, why is it that the rate at which you are deploying Prime Now is so much greater or faster than the rate at which you are deploying Fresh? What's different between them and how is it that you are deploying Fresh in new markets but not as fast as Prime Now, and what drives the difference? Thank you.
+
+Question_8:
+
+    Thanks for taking my questions. I have two. The first one is on the Echo. Anything you could share at all on some of the most commonly used searches? How are consumers using the Echo as of now most commonly, and then anything on uplift in purchase behavior from Echo households? And the second one on Prime, on AWS margins, can you just walk us through some of the puts and takes that have been driving the AWS margin expansion we've seen in the first half of this year? Is it utilization, product mixes? What's been driving the margin expansion? Thanks.
+
+Question_9:
+
+    Okay. Brian, could you give us some whys as to the revenue growth acceleration that you're seeing, a little more color about the revenue growth acceleration in North American retail and in international retail? I remember last quarter you called out really starting to see, I don't know, critical mass, tipping point, whatever the buzzword is, from Prime and from FBA in international markets. Is that what's continuing, I assume, to drive that re-acceleration in any geographic country comments behind that? Thanks a lot.
+
+Question_10:
+
+    Thank you. Two questions, please. Brian, your operating income has been come in stronger than expectations, but more importantly, stronger than your own guidance, at least in the last couple of quarters. I was just wondering as you look back at where you guided relative to actual, where do you think that delta was most pronounced? Why wouldn't we assume that maybe, at least on the margin, the investment intensity in the business has maybe decelerated a bit?
+And second, on Prime Video, just was wondering, considering what the main competitor there is doing, i.e., expanding aggressively around the world, you guys have been growing in a more measured manner, is that still the plan or are you guys interested in maybe instead of moving into a few countries, expand globally in one fell swoop? That's it. Thanks.
+
+Question_11:
+
+    Hi. Sorry about that. This is Ray McDonough on for Jason Helfstein. Just on the AWS side, we've been hearing a lot of talk and especially a lot of media reports that larger customers tend to use AWS, they might use Google and Microsoft Azure in tandem in a multi-cloud kind of architecture. Just wondering your thoughts on how you see AWS fitting in the overall ecosystem and kind of your place longer term in the ecosystem.
+
+Question_12:
+
+    Okay. Thanks, guys. As another follow up on the margins, I was hoping you could comment on any impact from the investments and build out of enhanced transportation capabilities including the air cargo leases. And then secondly, was hoping you could identify any categories within EGM that are becoming more meaningful drivers of growth or at least are an increasing focus on the retail side? Thank you.
+
+Question_13:
+
+    Thanks for the questions. First, on FC build out, is the cost of building centers scaling over time given the use of Kiva, other technologies or general learnings, or are those costs still relatively consistent? And also, we noticed some device sellout in the next four to five weeks, post-Prime Day. Was this a bit of a planned inventory reduction for some of the devices or did volumes take you by surprise here?
+
+Question_14:
+
+    Great. Thank you. First on the customers, I'm guessing - I'm wondering why you aren't giving the number, a lot of people use it for their models. And then second thing, when you look at the US Prime penetration versus total US customers, how do you feel about that and do you think there's still a lot of room for Prime growth in the US? Thank you.
+
+Question_15:
+
+    Thanks, guys. I just had two. First as a follow up on the logistics topic. So, in addition to the cargo planes you just mentioned for in-network moving products around, you guys have registered and received a US maritime license to operate as a freight forwarder and you recently announced this partnership with the UK for drone delivery that you've been working for a couple years. At a high level, can you just talk about how the overall logistics strategy is evolving from trucks and fulfillment centers to incorporate some of these new methods and how that might impact your unit costs going forward?
+And then the second question's on AWS. So you continue to put up really strong results, and you guys obviously talk to a lot of customers across lots of different verticals. Just a high level, what percent of enterprise workloads do you think have shifted to the public cloud at this stage? Is it low-single digit to mid-single-digit? And any color there on where we are in terms of penetration in the space. Thank you.
+
+Question_16:
+
+    Thanks for taking the questions. Maybe one clarification and one big picture topic. On the clarification, appreciate the disclosure on content and how that'll double year-on-year in the second half. For purposes of just making sure we can understand the trajectory, is there any way to frame it within second half of this year versus first half of this year, just so we can try to triangulate on a gross margin basis from the content spend? And the bigger picture topic would be China, hasn't come up yet on the call. I wanted to understand your latest thoughts there on either the competitive landscape, relative positioning in China and how you think about investments in China. Thank you.
+
+Question_17:
+
+    Thanks for putting me on. Maybe I'll just ask a question about India. You called out India was - you had the most visited e-commerce site as well as the most downloaded mobile app, and you also launched Prime. So maybe you could just talk about the opportunities and the challenges that you see in that market. And second, there was some press reports that you invested about $500 million of incremental capital in Italy. I was wondering, what are you seeing in that market that justifies that level of investment?
+

exam/part2_problem1/Problem_1_Conference_Call_Segments/call_16_answers.txt

@@ -0,0 +1,100 @@
+Answer_1:
+
+    Sure. Thanks, Doug. Specifically to international, we are seeing expansion to support selection expansion fulfillment network increases. We're also investing in digital content and additional prime benefits, Fresh location and Prime Now. By far the biggest individual thing is the investment in India that we continue to make. Very excited about the initial reaction in India from both customers and also sellers. That is essentially the international margin guidance in Q4.
+
+Answer_2:
+
+    Yes. Thanks, Gene. We will continue to invest in the business where we are seeing significant customer traction. The things that I'm about to mention fall into that category. The largest individual reasons for the ramp-up in investment between the first half and second half of this year and also second half of this year versus second half of last year are the things that I mentioned on the call last quarter.
+First, video content and marketing associated with that is nearly doubling year over year in the second half of the year. It continues to be a large increase for both Q3 and Q4. In the quarter in Q3, we added 18 fulfillment centers and we have added 5 more in October. For the year, we will add 26. Most of those are in North America.
+That compares to 14 last year and I would -- looking back, there is -- the last time we had double-digit increase in fulfillment centers was 2012 when we added 11 in the third quarter. There was a rare aggregation of startups in Q3 and into Q4. It is helping us position better for Q4 volumes, because paid unit growth continues to be strong and Amazon fulfilled unit growth, which includes what we ship, includes FBA is significantly higher than even that. We are continuing to build for high AFN, or Amazon fulfilled network demand, including both retail and FBA.
+The number of warehouses that we added represent the 30% increase in square footage year over year. Last year we increased square footage by just under 20%. The definition of square footage in this case is all of our warehouses, plus our sortation and delivery centers, so it's pretty much our end-customer service centers. It's pretty much our square footage that support operations.
+Those will dissipate as we -- as they burn in. We've talked about fulfillment centers initial startup costs include increase in fixed cost but also variable cost as we train workers and also bring in inventory. There's a number of transportation costs also related to the startup of a new fulfillment center, both inbound and outbound. They are inherently less efficient than more established, mature buildings. There will be a cycle where those will be more productive next year than they are this year and more productive in 2018 than they are in 2017.
+What you are seeing, essentially, in the second half of this year is a step-up investment, primarily around digital content and also the fulfillment center investment, but also things like Echo and Alexa which we're adding a lot of resources to, India and AWS as we add people there to support additional service rapid growth in that business.
+
+Answer_3:
+
+    Sure. In the fulfillment network, as we build it yes, they will be more productive next year than this holiday peak and probably even more productive in 2018. I can't forecast it for you into next year quite yet, but we certainly had productivity and additional costs in Q3 and even into Q4 of this year as we built the additional capacity. Again, the underlying reason for that capacity build is the strength in paid units and even more so in the units that we're fulfilling, driven by our FBA program.
+The FBA program is the key pillar of our Prime offering. It adds selection. It makes Prime stronger. That's a self-reinforcing loop where Prime -- the Prime success attracts more sellers. We're glad to have that problem. We are just working very hard to get capacity in place and productive use for Q4 and beyond.
+
+Answer_4:
+
+    Hi, Brian. This is Darin. On the AWS question, we continue to invest in AWS on behalf of our customers. In addition to the technologies that make integrations easier and it helps companies move from an on-prem or a hybrid IT environment into AWS if we're going to continue to do that. Specifically, the database migration tool that are helpful for customers when they move production databases from on premises to the cloud with virtually no downtime.
+Also, many of our AWS customers are beginning to choose and continue to choose the AWS schema conversion tool which really switches database engines to get out of old-guard proprietary databases and on to AWS. We will continue to react to customer needs and that will include opening up new regions. We have opened up Ohio this past quarter. We've highlighted that we will have a number of regions coming online in a few months. Yes, we're doing a lot of things to help make it easier for all customers to migrate to AWS.
+
+Answer_5:
+
+    Sure. Thanks, Mark. I will start with Fresh and groceries in general. Yes, this quarter we launched in Northern Virginia, Maryland, Dallas and Chicago. We also launched a new pricing plan, which is a monthly $14.99 add-on to Prime in the US. We have expanded, as you know, previously into London.
+We're very happy with the progression both in the geographies that we have been in for a long time where we are at, continuing to add zip codes and additional neighborhoods and also in these new cities. Certainly a business where we continue to work on costs and profitability. We are finding at the very attractive service to our customers, which is what we're after.
+Similarly, but not exactly the same, is the Prime Now business which has similar overlap on things besides groceries. It is a slightly different model, obviously, where we're more about immediacy and smaller list items available in one to two hours. There's certainly a lot of people who are using that for groceries and consumable items. That is now up to 40 cities across 7 countries versus 17 this time last year. We're also adding Amazon Restaurant Delivery to the Prime Now offer in 19 metropolitan cities in the US. That is up from two last year.
+We continue to believe consumables, groceries are a key part of the offer to customers. We are playing with very different models to see which works and for what needs. We're very happy with the Amazon Fresh and we have now expanded quite a bit as you see in this year. Prime Now we're also very happy with, although obviously the economics in that business are even tougher, but we do feel that our scale makes that possible because of our geographic footprint and how close we already are to customers.
+
+Answer_6:
+
+    Hi, Mark, this is Darin. On fashion, fashion and apparel continue to be a large part of our EGM business and one that we're very excited about. We continue to make it easier for brands and manufacturers to come on board in that category. We continue to work with brands to come on board. We're happy with the traction that we're seeing with those brands. As we get more and more selection, we're really pleased with the customer engagement that we have there, both from the discoverability, the technology that goes behind making it easier to shop fashion on our site, as well as the  selection by adding the brand.
+
+Answer_7:
+
+    Sorry. To answer your question about whether that is part of investment. Yes, it certainly is part of our investment. The larger ramp, if you will, in investment that we're seeing from the back end of last year and also the first half of this year is more related to digital content and the building our fulfillment network, which I already discussed.
+
+Answer_8:
+
+    Let me start with your second question on FBA. Yes, we did make some changes to the pricing formula for this holiday season. They're essentially meant to incent the right behavior among sellers around holiday. The biggest issue you're trying to get at is having the most valuable products for holiday in the warehouse, in the Prime space and not having the warehouse filled with things that may not sell until after the New Year. We are trying to incentivize that behavior. We're also trying to incentivize getting inventory into the warehouse quicker. Yes, the formulas were -- the changes to the pricing formulas were really with that in mind, to help the flow and the space utilization in Q4.
+
+Answer_9:
+
+    Yes. Hi, Mark. This is Darin. On the capitalization point, I'd say the things that get capitalized are the core buildings and the leasehold improvements in the buildings. The things that we're seeing hit the P&L are the fixed and variable expenses that it takes to run the building. I think that is what Brian is pointing out most pointedly in terms of what is impacting our profitability of second half. Yes, the capitalization is relatively small in terms of -- other than the building itself.
+
+Answer_10:
+
+    Sure. First on your video comment, we're in four countries right now, the US, UK, Germany and Japan and we have stated that we will be in India soon. The content that we are creating, through Amazon studios, we are generally holding the worldwide rights to and can use that in other countries as well. The cost of that then get amortized to the country and becomes part of the international segment results. Yes, we consider that to be very valuable as opposed to versus licensing many times, by country the third-party rights to content that we don't create ourselves.
+Your question on fulfillment expenses, I can't extend the guidance into next year. We will do that, obviously, at the end of next quarter. I would say we are -- this was in extraordinary step-up as I mentioned in Q3 that is tied to very rapid growth in not only paid units but Amazon fulfilled units. Really our forecast for additional capacity additions and the rate of addition will be tied to those growth factors as well.
+We will have to see. We right now are working on getting the capacity in. It was very lumpy this time, with 18 warehouses in one quarter and another 5 in the first three weeks of the next quarter. Obviously we will be working on the efficiencies of all of the warehouse we have, including the ones that we just started up this year.
+
+Answer_11:
+
+    Sure. Let me start with transportation. Yes, we are looking forward to a great holiday. That includes working with our shipping partners, both in the US and globally. We have worked very closely with them to line up capacity, share capacity plans. We certainly have additional delivery capability of our own, but with all of our partners, we work well in advance of the holiday to get our plans in place. We feel very confident we're looking forward to a great holiday not only for customers but also for sellers.
+On your question on AWS, I didn't listen to the Google call. You will have to fill me in on that later. The thing that I can tell you about pricing is that our pricing is -- price reductions are a core part of our philosophy, of course. We had a price decrease in Q3. That was our 52nd since we started this business. It's -- we are comfortable with price decreases. Not only did we lower the prices of our products but we also create new services that are cheaper that customers can switch to. They can also benefit from that as well.
+If you step back and say, why do people choose AWS? I'll give you the points I said last quarter. Basically what we hear are the functionality and pace of innovation. It is greater than our competition. We have added new -- more new significant features and services this year already than we had all of last year when we added 722. We have a partner and customer ecosystem. You've read about the VMware deal that we signed this quarter. We continue to extend with partners and build ecosystems that better can support customers.
+Finally, experience. We have been in this business a long time, longer than anyone else. We've used that time to make our product and services better. There's going to be a lot of winners in the space, as we said, but we are very happy with our position and the customer reception to our products.
+
+Answer_12:
+
+    Sure. Yes. As far as the continuation of the investment and into next year, I cannot give you as much color on that today. What I can tell you again is that we have ramped up considerably. We have been investing quite openly in a lot of areas and continue to do so. We are experiencing a ramp-up, if you will, in the second half of this year, particularly tied again to the fulfillment center and expanded also the video content spend.
+We will continue to invest in video content. We will continue to invest in fulfillment space to handle higher and higher paid unit volumes than shipped unit volumes. We will continue to invest in things that we believe enhance the customer experience, particularly the Prime experience. Devices we will invest in, particularly Alexa and the Echo products. We will continue to invest in getting faster and faster shipping methods for our consumers. We believe that is working. We are very happy with the results. We're very happy with all of the customers we have but particularly the Prime customers that we have.
+As far as long-term operating margins, I can't forecast that right now. I can't forecast that for our AWS business, either. We are, again, working on two fronts. We are honing the businesses that we're in and making them as efficient, as profitable as possible while also investing very pointedly and very wisely, we believe in things that will enhance customer experience and create lasting businesses for us down the line.
+We have said we want things that customers will love, can grow to be large, will have strong financial returns and durable and can last for decades. That is still our mission. We have pillars of the business right now with Marketplace, AWS and Prime and we're actively looking for a fourth and fifth pillar.
+
+Answer_13:
+
+    Sure. Yes. The word cycle, if I mentioned that, was an omission. It was a misspeak. The investment that we are seeing is a step-up versus what we have experienced in particularly the first half of this year and the last half, the second half of last year, which I mentioned.
+We have said investments are going to be lumpy. They are going to be high sometimes and they will be moderate at other times. We are right now, the second half of this year looks like a big step-up compared to the first half, and it is. But, again, it is all areas that we will continue to investment in, some of which I just actually went through the laundry list.
+I would not characterize it as the cycle. I would characterize it as continued investments. We make investments with the idea that they are going to pay off and they pay off in either directly in the business they're in or in their contribution to the total business, many times as a part of the Prime program.
+
+Answer_14:
+
+    Hi, John. This is Darin. On vehicle, Amazon Vehicles is really a car research destination and built the automotive community for customers. Gets information that they need when shopping for vehicles offsite or shopping for parts and accessories on-site. The features include research tools, community engagement, where you can talk to other customers. Certainly we try to build a one-stop shop for vehicles as an extension to the automotive store, which engages customers to add information about their cars in the garage which makes it actually easier to shop for parts and accessories for your particular vehicle.
+We think there's a lot of opportunity there to add convenience for customers. On the b2b side, certainly we do have an Amazon business offering. Businesses of all shapes and sizes can sign up to be a b2b customer. The selection that we have in our parts and automotive categories are certainly open to that channel. I wouldn't speculate on anything that we might do in a particular vertical for those business customers.
+
+Answer_15:
+
+    Sure. Your comment on -- your question on grocery and physical stores, I can't comment on any rumors or speculations there might be regarding that. What I will tell you is that we have experimented with physical stores. As you may know, we have three physical bookstores, one in Seattle, one in San Diego and one in Portland and two more coming, one in Boston and one in Chicago.
+What we're finding is they're great places for customers to browse what ends up being a curated selection of books and they also get to try out our devices, which is very beneficial. They get to touch and try our e-readers, tablets, Fire TV and Echo. We like what we see with that connection. We also have pop-up stores that you may see and also college pick-up points. We will try different delivery methods or pick-up points or ways of getting product to customers, but nothing specific to point out on the grocery side right now.
+
+Answer_16:
+
+    Yes. On wages, nothing to point out for this holiday. Our challenge generally is the volume of head count that we're looking to hire. We work well in advance with agencies to help to get seasonal employees and many of them turn into full-time employees after the holiday. Nothing specific on the wage pressure front. As you probably saw, head count is up 38% year over year in Q3 and that is continuation of a lot of ops roles that are supporting this high demand, the opening the fulfillment centers we talked about, new Fresh locations, Prime Now, but also and a lot of hiring in our tech areas, strictly around AWS and also the Echo/Alexa areas.
+
+Answer_17:
+
+    I'm sorry. The second question?
+
+Answer_18:
+
+    Yes, sure. We are very encouraged by what we're seeing in India, but it is certainly very early on still. Most recent highlights would be the launch of the Prime program in India this past quarter. It's now one of the top-selling units on Amazon.India. It has been well received by customers.
+It is hard to compare India to any other country. It is very different in its stage and structure. Being a third-party market has caused a lot of invention on our side. We're being creative. The team there in India has been very creative on whenever they find a roadblock or something that has not existed in another country, they create it themselves, whether that's from delivery stations to working with small merchants to you name it. We're very happy with both the customer engagement that we're seeing and also the seller engagement, which is very important in India. Very pleased with the team that brought that over there and the way they work with teams throughout the world.
+
+Answer_19:
+
+    Brian, to step back to Ben's other question on units. Ben, this is Darin. Paid units grew at 28% again this year, as it did in the prior quarter. As Brian pointed out earlier, our AFN units, our Amazon Fulfilled Units, which includes our first-party units as well as FBA unit that's that go through our warehouses, are continuing -- are certainly higher than that 28%. That is a result of the traction we're getting with our FBA sellers.
+Thank you for joining us on the call today and for your questions. A replay will be available on our investor relations website at least through the end of the quarter. We appreciate your interest in Amazon.com and look forward to talking with you again next quarter.
+

exam/part2_problem1/Problem_1_Conference_Call_Segments/call_16_presentation.txt

@@ -0,0 +1,6 @@
+
+Hello and welcome to our Q3 2016 financial results conference call. Joining us today to answer your questions is Brian Olsavsky, our CFO. As you listen to today's conference call, we encourage you to have our press release in front of you which includes our financial result as well as metric and commentary on the quarter. Please note, unless otherwise stated, all comparisons in this call will be against our results for the comparable period of 2015.
+Our comments and responses to your questions reflect Management's view as of today, October 27th, 2016, only and will include forward-looking statements. Actual results may differ materially. Additional information about factors that could potentially impact our financial result is included in today's press release and our filings with the SEC, including our most recent annual report on Form 10-K and subsequent filing.
+During this call, we may discuss certain non-GAAP financial measures. In the press release, slides accompanying this webcast and our filings with the SEC, each of which are posted on our IR website, you will find additional disclosures regarding these non-GAAP measures, including reconciliations of these measures with comparable GAAP measures.
+Our guidance incorporates the order trends that we have seen to date and what we believe today to be appropriate assumptions. Our results are inherently unpredictable and may be materially affected by many factors, including fluctuations in foreign exchange rates, changes in global economic conditions and customer spending, world event, the rate of growth of the Internet, online commerce and cloud services and the various factors detailed in our filings with the SEC. Our guidance also assumes, among other things, that we don't conclude any additional business acquisitions, investment restructurings or legal settlements. It is not possible to accurately predict demand for our goods and services and therefore our actual results could differ materially from our guidance.
+With that, we will move to Q&A. Operator, please remind our listeners how to initiate a question.

exam/part2_problem1/Problem_1_Conference_Call_Segments/call_16_questions.txt

@@ -0,0 +1,55 @@
+Question_1:
+
+    Thanks for taking the question. The international retail segment margin was the lowest we have seen in quite a while. I was hoping that you could provide some of the key drivers there in terms of the drag and any color on how to think about the incremental international investment that might be impacting the 4Q guide. Thanks.
+
+Question_2:
+
+    Thank you.
+
+Question_3:
+
+    Great. Thanks. I guess when we think about the progression in margins in the second half versus the second half of 2015 and kind of the flat lining of overall margin at this point, excluding AWS, should we think about this as a temporary plateau that will at some point will resume once you start leveraging your fulfillment build-out or is there something structural that is philosophically changing with the way that you operate your business. Thanks.
+
+Question_4:
+
+    Thanks for taking my question. I have two. The first one, just to go back, Brian, to the fulfillment build. In the past you talked about how it takes time to kind of get the fulfillment centers to peak efficiencies. With these new FCs opening, can you talk about if you become more efficient, so if you get into a lower volume quarter next year, there's less risk of deleverage or should we still think about it's going to take time to get up to peak efficiency?
+The second one at AWS, Amazon the Company is good in removing friction in the purchase process. Can you talk about some of the main hurdles you have to overcome for large enterprises to start using AWS more? Thanks.
+
+Question_5:
+
+    Okay. Hey, Brian, would you give us any commentary on two categories in particular, groceries and fashion and apparel? Particularly on groceries, I know in the release there was a couple of data points about Fresh rolling out into newer areas like Maryland. Great to see that. Can you just talk about that in the investment horizon? Is that moving the needle for you and how big that -- any way to help us quantify how big that already is to your -- to the revenue growth that you're seeing, particularly on groceries and any particular comment on fashion and apparel. Same line of thinking. Thanks.
+
+Question_6:
+
+    Thanks a lot. In some of these incremental investment areas like warehouses, logistics and also content, I know in some cases you expense up front. In some cases you amortized over time. Wondering if you can give us a sense of how much of the recent step-up is being expensed. I'm particularly looking at your COGS as a percent of retail revenues that was up year over year for the first time in quite a while. How much of that was because of content that expensed in the period? Just trying to better understand that.
+I think also you have been changing around, and this is happening here shortly, FBA pricing, including increasing your storage fees but also reducing your handling fees. I guess the question is, are these changes designed to just pass through kind of increasing shipping costs or is this more of a net neutral change where really the goal is to try to free up capacity in some of your facilities? Thanks.
+
+Question_7:
+
+    Yes. Two quick questions. With the step-up in investments and content from Prime Video as you mentioned before, you would also be stepping up the international expansion? Maybe you can just remind us how many countries you're in with Prime Video and whether there is a potential chance of stripping Prime Video from Prime to allow it to be extended to other countries. Do you -- I know you're not guiding to 2017, but just looking at the capacity increase that you had for FCs for 2016, should we expect that kind of as an ongoing expense going forward or is the current build-up enough to give you spare capacity to cool that down for 2017? Thanks.
+
+Question_8:
+
+    Thanks. A follow-up on the FC question. I guess more specifically, it sounds like you have enough capacity in terms of fulfillment centers for the holidays. Also wondering what your comfort level is in terms of your shipping partners to manage those deliveries. Secondly, was wondering how you would characterize the pricing environment for AWS, in particular with more deep pocketed competitors in the space now. Google in fact highlighted this on their conference call today. Thank you.
+
+Question_9:
+
+    Great. Thank you. I guess when you look at fourth-quarter guidance and you back out AWS, it suggests that margins are -- on the core business are going to be pretty down versus last year. Do you view this as an abnormal investment cycle or just part of the overall kind of ebbs and flows of the business? Long term, I know several years ago you talked about maybe high-single-digit, low-double-digit margins long term. I wonder if you could refresh us on that and also let us know if you think international has structural marginal differences than the US, the core retail business.
+
+Question_10:
+
+    Great. I'm wondering, there obviously have been some headlines since the call that you did earlier with the press on the scale of this investment cycle relative to other investment cycles that you have been through. With the 2014 cycle sort of being the most recent, could you quantify a little bit more how you would compare this investment cycle to that most recent one? To the extent that we're in the midst of this investment cycle, would you say we're in sort of the earlier or later stages? Any sort of clarity around that would be useful. Thank you.
+
+Question_11:
+
+    Great. Thanks. Two questions. It seems that you're increasing your efforts in the auto vertical with the recent launch of Amazon Vehicles. Just wondering if you can discuss some of the dynamics of the auto industry that make it attractive and maybe how it aligns with the Prime value prop. Also wondering if you had any plans to work directly with auto shops, just given your ability to service most areas in one to two days.
+The second question, on grocery, would you consider physical locations in an effort to kind of expand and/or accelerate growth in that vertical? Thank you.
+
+Question_12:
+
+    Given the low unemployment rates that you are seeing in the US, do you expect any unusual impact on wages for seasonal workers this year? Are you seeing overall wage pressure in the fulfillment centers? Separately, if you could talk about trend lines you are seeing in paid units versus shipping units. Are they diverging meaningfully versus the past? Thanks.
+
+Question_13:
+
+    Thanks. Can you provide a little more color into the investments that you're making in India? What is driving that growth and what stage is India in today relative to some of the other large international markets that you have launched in the past?
+

exam/part2_problem1/Problem_1_Conference_Call_Segments/call_17_answers.txt

@@ -0,0 +1,126 @@
+Answer_1:
+
+    Thank you, John. First, let me talk about revenue just to get that out there as well.
+We are guiding to 17% to 25% growth on an FX-neutral basis. That includes approximately -- on top of that is approximately 250 basis points or $730 million of FX negative impact, which brings the non-FX adjusted range down to 14% to 23%.
+I will also point out we that had the Leap Year comp from last year. Last year, the extra day of Leap Year was worth 150 basis points to us in our Q1 revenue. This year that reverses, so we have 150 basis point headwind to growth and it's been factored into our guidance range.
+But your question was on bottom line. So yes, what you are seeing, John, is the continuation of the step-up investment that we saw in the second half of last year. I talked about in prior calls about the fulfillment center step up.
+We had 26 warehouses we added last year, 23 of them were in the second half of the year. Digital content, digital video content, end marketing stepped up quite a bit in the second half of the year.
+We continue to invest heavily in those two areas. We also have investments in other Prime benefits from Prime Now to Amazon Fresh, and of course we're continuing to invest in Alexa in our Echo devices. And finally I'd point out India which continues to be a rather large investment for us.
+
+Answer_2:
+
+    Well ultimately, I will step back and say one of the main things we look at on Prime Video is customer usage patterns. And in 2016, we had a doubling of Prime hours for video, music and reading. So we are happy with the engagement that customers have.
+We're also happy with the -- especially on the studio side, the people we have been able to work with. Some of the most talented people in the entertainment industry. And our customers have responded really well to the shows that we have created. We have garnered awards of course, but mainly what we were focused on is good content that is attractive to customers.
+I will also point out that we rolled out the global Prime Video offer in the second half of last -- in Q4, and what we see there is again original content is a fixed cost expense. The more we can amortize it over a large base, the better off we will be. But more importantly, we have great content that we want to share with people outside of our primary retail countries and this takes us to over 200 more countries.
+So we are very happy with the results in video. Yes, the investment did step up in the second half of last year, including marketing and that will continue in 2017 and likely beyond.
+
+Answer_3:
+
+    Hello, Ben. This is Darin. We are very pleased with our FBA offering, and that's really helpful to sellers around the world. Certainly, our international sellers have access to more and more customers through that offering, and that doesn't exclude sellers in China as well.
+The offering in China that we have for consumers is also a great trusted customer engagement. We have a very strong and trusted venue for Chinese customers to access international brands there, as we continue to focus on great offerings through the Amazon global store which offers great brands from outside of China to customers. And so there is a mix of things going on in China, and we're happy with what we are seeing in both of those.
+
+Answer_4:
+
+    Let me start with India. So it's still very early. We continue to say that, but we're very encouraged with what we have created with customers and sellers alike in India over the last few years.
+We continue to develop new functionality for that country, whether it's delivery, whether it's seller features. We rolled out Prime last summer, if you'll remember, and we recently launched Prime Video there.
+So we've had success with Prime in every country we've been in, we don't expect India to be any different. We will continue to build our business there, and continue to do a great job for both customers and sellers. We are bullish on India longer term, and it's early but we like the initial engagement we are seeing and the response again from both customers and sellers.
+
+Answer_5:
+
+    And this is Darin. On China, like I said, we are very pleased with our offering in China. Our strategy there has been one of bringing a trusted and authentic product to customers in China, both domestically and from international offers.
+So we will continue to focus on the global store there. As you may know, we've launched the Prime program that's focused around the availability of international goods in China, and we are pleased with what we are seeing there.
+
+Answer_6:
+
+    Let me start with that second question first. So more basically on AWS, very happy with the response from customers. We feel we've got a very broad base of customers from startups, to small medium businesses, to large enterprises, to the public sector, and we are continuing to see strong growth across all those sectors.
+The business is now a $14 billion annualized -- running at a $14 billion run rate. You are right that we had seven price cuts in Q4 essentially timed for December 1, so about a third of the impact was seen in Q4. But that's going to be constant in this business.
+We have been pretty clear that this business is all about creating new functionality for customers, giving price cuts, and then working on the operating efficiency. So very pleased with Q4 and the pace of the business.
+The new services and features last year were over 1,000 versus 700 or so in 2015. So we continue to innovate on behalf of customers. We are working with some very large customers in each industry.
+You have seen probably press releases on companies like Capital One, Workday, salesforce and others. So again, widespread usage and new customer adoption which is great.
+Your second question on FBA, I can't break out the year-over-year difference there. What I will say the impact of FBA on our business is, and first that's -- one of the things that we look at is how well are we attracting new FBA sellers. Because again, FBA reinforces Prime, Prime reinforces FBA. It's a good flywheel.
+We added active sellers in FBA grew 70% year over year in 2016. So we are very happy with the continued adoption of FBA and what that does to Prime eligible selection for Prime members.
+The other data point I will give you that affects our cost structure is our Amazon fulfilled units, which is the combination of retail plus FBA, grew nearly 40% last year. That compares to our paid unit growth of 24% in Q4. I'm giving you Q4 and a full-year number, but they are similar in relative proportion.
+The fulfillment center expenses and a lot of our shipping costs are tied to the increase in that FBA percentage, and that growth of Amazon fulfilled units. So that is certainly a factor that we consider a positive from a customer standpoint, and it's one from a cost standpoint that we certainly continue to work on every day. But I think that's the most I can give you on FBA at this point.
+
+Answer_7:
+
+    Sure, Colin. On your first question, holidays are always a very promotional period, so we don't see -- I can't really comment on the year-over-year differential in promotional activity to us. We are always looking to not be beat on price. We want to offer the best options to customers, and we saw a lot of great response from customers this holiday season. I think we'd be a very trusted holiday partner, particularly as you get closer to the holiday.
+So on the promotion side, we don't consider it a huge factor either way. It's pretty much a cost of doing business 12 months a year for us.
+Sorry, the second question was on the hub in Cincinnati or Kentucky. Yes, that is -- I saw the announcement on that, that is a partnership we have to build out a facility at the Hebron, Kentucky airport. We think it will create thousands of jobs over time.
+What it does for us is it this gives us a base for future growth. It's all about supplementing our existing capacity, both our Partners and ourselves, and essentially building capacity that can handle this top line growth and also the growth in AFN, or Amazon fulfilled network units which as I just mentioned is even higher than our paid unit growth.
+So same as some of the investments you saw in airplanes last year or partnerships with companies that do air cargo, this is about supplying our need for our customers and our sellers. We value the partnership with the external providers as well, and I think we're all dealing with the problem of having lots of incremental volume year over year.
+
+Answer_8:
+
+    Let me start with the second one. We factored it in, and obviously into the numbers I gave through guidance the timing of it was again closer to December 1. So there will be a incremental differential in Q1 on those price cuts, but this is something that we again have quite frequently and I don't think it's a large factor in Q1.
+The bigger one is more mechanical that Leap Day comp I would say. And if you are looking on a non-FX adjusted basis, the foreign exchange exposure which I mentioned was $730 million or 250 basis points expected in this guidance.
+
+Answer_9:
+
+    Hello, Mark. This is Darin. On that unit growth, we're very happy with the 24% unit growth that we saw in Q4, like you mentioned. Our unit growth has been strong, it's primarily attributable to our Prime program and the customers and members that enjoy that program.
+As Brian mentioned, that 28% is only part of the story. Our Amazon fulfilled units, the amount going through our fulfillment centers which essentially includes our first-party retail and our FBA sales, grew nearly 40% over 2016. So we are very pleased with those results, and happy with the fundamentals of the business from that perspective.
+Customers continue to respond very well to the low prices, the vast selection, which is helped by the FBA sellers, and the strong convenience that we can offer through free two-day shipping and the multitude of other faster shipping options. Such as same day, next day, and in some cases with Prime Now the 1 to 2 hour delivery. Prime membership and selection continues to drive growth, and you'll see that in our unit growth numbers.
+
+Answer_10:
+
+    On the first one, we have a long-standing practice of not commenting on regulatory or tax matters. So I am not going to comment on any proposed issues out there. We certainly keep an eye on external issues and weigh in when we think it's going to impact our business.
+But the -- sorry, your second question was on FCs. We will continue to invest in FCs. The comparable I will give you is that I won't forecast 2017, but the 20% growth in square footage that we saw in 2015 was followed by 30% square footage increase in 2016 that generally went to service that 40% growth in units in AFN units.
+It also included some of the additional logistics delivery stations and all too, so it's not all FC capacity that's square footage. But I would say that we're going to continue to invest in fulfillment centers as long as our AFN growth rate maintains high, and we certainly want to keep that high and growing.
+
+Answer_11:
+
+    Let me start with the Echo. I don't think I'm going to answer your exact question there on quantifying the retail sales through Echo devices. It's still very early days on that, so that's not material.
+But the engagement is just like any other Prime benefit or investment that we have. We do look at engagement, and we like the engagement of customers who have Echos. But let me step back and give some highlights on that, Alexa and Echo together.
+As we mentioned in our press release, the unit sales of Echos grew nine times 9x year over year during the holiday period. So great customer adoption. We are really glad to see that, and that creates a great base of Echo and Alexa fans out there.
+We've added 4,000 skills to Alexa since I last spoke to you in October, and we are working with a lot of major companies as they add abilities for our customer base to use the Alexa or the Echo to reach them. Tens of thousands of developers are building new skills for Alexa, so the skills addition should continue. And just as importantly, tens of thousands of developers are also using the Alexa voice service to help integrate Alexa into their products which then creates a great network effect.
+We're doing that ourselves. If you've seen in the quarter, we added Alexa capabilities to our tablets and Fire TV devices, making them better. So it's a great part of the flywheel in that Echo and Alexa make the devices better, and it builds the engagement, not only with Echo and Alexa but also with Amazon.
+
+Answer_12:
+
+    Hello, Mark. This is Darin. On the customer account, no absolute number to give this quarter. As you know, back in Q1 we gave an active customer account that exceeded $300 million. I can see it's still growing, and we're pleased with the number there.
+What we do like is the engagement with Prime. We continue to add Prime members, and similar to the flywheel that Brian was just mentioning the FBA selection helps us with engaging customers, and in particular the Prime program. So we are very pleased with our customer engagement this year.
+
+Answer_13:
+
+    Let me start with your first question. So as you point out, we have had Amazon Logistics deliveries in the UK for more years than some of our other countries, and what we see is it gives us control of the shipment for a lot longer. We can shift order cutoff times out, and time is valuable to us because again we can avoid split shipments, we can avoid other costs of acceleration.
+So having control later in the process is very valuable to us, especially as we're working across multiple nodes in a network. But I have driven with drivers in downtown London, and it's a very interesting experience. I think it's a great value to our customers.
+It's interesting to see the route density that we see in high cities or in some cities, and the challenges and the upside of that. But I would say essentially in a nutshell, our logistics deliveries allow us to have better control of the end delivery in markets where we use it. The challenge is always going to be cost, and as we get better at this and get economies of scale we lower those costs over time. So that's essentially my overview of Amazon Logistics.
+Sorry, your second question was on the stores. You probably noticed we opened the Amazon Go store in Seattle in the fourth quarter. We think that is very interesting.
+It's only one store at this time, but it's using some of the same technologies you would see in self-driving cars, computer vision, sensor, fusion, deep learning. So it's a great accomplishment by that team. It's in beta right now and we like the promise of that.
+Probably more advanced and further along are the Amazon Bookstores. We have three physical stores Seattle, San Diego and Portland right now. We see adding five more this year. So we are still in that phase where we are testing and learning and getting better, even on the bookstore.
+I would say there's other things that are physical in nature, the pop-up stores and college pickup points that we learn from as well, and think creates a great value particularly at the college pickup points. So not much projection beyond where we are today, except for the fact that we will be adding more bookstores.
+But we test, we innovate. We think the bookstores, for instance, are a really great way for customers to engage with our devices and see them, touch them and play with them and become fans. So we see a lot of value in that as well.
+
+Answer_14:
+
+    I can't give an exact split of the investments by geography, but I would say most of the fulfillment expansion was in North America last year, most of those 26 warehouses we talked about. We see that being more balanced over time, and being more global as we move forward.
+Video content is with the new global program. Global Prime Video is becoming more global with the launch in India as well, and of course we had Prime Video in some of our existing countries prior to that. So that is going more global, and will be more balanced as you see devices rollout to other countries same thing.
+So I would say over time, it will become more balanced and probably what you have seen in the short run tended to be more North America focused. But I can't give you a great split of -- I'm not giving you absolutes anyway, so I can't give you a great split of the two.
+And I will also say that not all of our investments are on the consumer side. AWS continues to expand their global footprint. Last year, we added regions in the UK and Canada, we now have 42 availability zones in 16 geographic regions and will continue to grow that business globally. And India again, we've mentioned, but that is obviously an international investment.
+
+Answer_15:
+
+    On the customer split, we serve, in AWS, we serve millions of active customers along the spectrum of large enterprise companies, as well as small startups and the public company or public environment as well. The multitude of launches that we had in re:Invent was great for all sizes of customers really, both large and small.
+Both companies just getting there start with AWS, but also companies that have been engaged with AWS for many years. So we're really happy about the engagement of re:Invent and the participation in that conference, as well as the engagement of the new services that we have launched in Q4 and all of 2016 really.
+
+Answer_16:
+
+    Yes, I will take the advertising question. Yes, it's very early in the advertising space, but what our goals there are to be helpful to customers and enhance their shopping and viewing experiences. Mostly with targeted recommendations. We think that is a good strategy rather than invasive things that take away from the shopping experience.
+I would sponsored products is off to a great start. They're finding a very effective way for advertisers to reach interested customers.
+We also on Video have not added much in the way of advertising yet. There is some pre-roll as we call it, but for the most part we like to the progression. We are balancing customer experience with advertising at all times, and we like the team that's working on it.
+
+Answer_17:
+
+    And on other revenue, I just want to call out. There's a number of things going into that particular line. These things include revenue from our co-branded credit card arrangements and certain advertising, particularly display advertising.
+We have other types of advertising that spread out throughout the P&L, whether that's a shared marketing investment from our vendors which goes into contra COGS and lowers the cost of sales or its related to other seller advertising which is generally within the EGM and media categories. I would say other revenue incorporates a number of things, not just advertising. And on India demonetization, nothing particular to call out today on that.
+
+Answer_18:
+
+    I can't add too much or won't add too much on the last two questions, but I will say on -- you're talking about the levels of engagement now that we are seeing versus what would be the long-term model over time. We're certainly spending ahead of the value of the engagement right now. But it's a good sign that it's building, an important step was that global Prime program that we launched in the fall, excuse me, in Q4.
+As I said, it's very much a fixed expense game, especially with original content. The fixed amount can go up or down, but the ability to amortize it over large population is what we are looking for. So we see a double benefit of the global Prime Video program, again, both to amortize the investment in original content but also to show that original content to more and more people.
+Because we think it's done really well. We think it's won a lot of awards, and we have worked with some great talented people. It's our ability to scale that and to amortize it over a much larger customer base, which will help us in the future.
+
+Answer_19:
+
+    Thank you for joining us on the call today and for your questions. A replay will be available on our Investor Relations website at least through the end of the quarter. We appreciate your interest in Amazon.com, and look forward to talking to you again next quarter.
+

exam/part2_problem1/Problem_1_Conference_Call_Segments/call_17_presentation.txt

@@ -0,0 +1,10 @@
+
+Hello and welcome to our Q4 2016 financial results conference call. Joining us today to answer your questions is Brian Olsavsky, our CFO.
+As you listen to today's conference call, we encourage you to have our press release in front of you, which includes our financial results as well as metrics and commentary on the quarter. Please note, unless otherwise stated, all comparisons in this call will be against our results for the comparable period of 2015.
+Our comments and responses to your questions reflect management's views as of today, February 2, 2017 only, and will include forward-looking statements. Actual results may differ materially. Additional information about factors that could potentially impact our financial results is included in today's press release and our filings with the SEC, including our most recent annual report on Form 10-K and subsequent filings.
+During this call, we may discuss certain non-GAAP financial measures. In our press release, slides accompanying this webcast and our filings with the SEC, each of which is posted on our IR website. You will find additional disclosures regarding these non-GAAP measures, including reconciliations of these measures with comparable GAAP measures.
+Our guidance incorporates the order trends that we have seen to date, and what we believe today to be appropriate assumptions. Our results are inherently unpredictable, and may be materially affected by many factors. Including fluctuations in foreign exchange rates, changes in global economic conditions and customer spending, world events, the rate of growth of the internet, online commerce and cloud services, and the various factors detailed in our filings with the SEC.
+Our guidance also assumes, among other things, that we don't conclude additional business acquisitions, investments, restructurings or legal settlements. It is not possible to accurately predict demand for our goods and services, and therefore, our actual results could differ materially from our guidance.
+And just briefly before we move to questions, I would like to address our Form 10-K that we will be filing with the SEC. We received a comment letter from the SEC's Division of Corporate Finance regarding our 2015 Form 10-K, and have subsequently been engaged with the SEC staff regarding our disclosures.
+We will be revising the disclosures of net, product and service sales in our Form 10-K. As a result, we expect to file our 2016 Form 10-K later than we typically have, but before the SEC's due date of March 1. These changes relate to our entity-wide disclosures and do not impact the financial results that we report for the Company or our segments.
+With that, we will move to Q&A. Operator, please remind our listeners how to initiate a question.

exam/part2_problem1/Problem_1_Conference_Call_Segments/call_17_questions.txt

@@ -0,0 +1,64 @@
+Question_1:
+
+    Great, thanks for the question. So the first quarter GAAP operating income guide essentially implies negative incremental margins at the low, mid and high end of guidance. So just wondering if you can frame in order of possible the investment areas that are driving the negative incremental margins, and then just generally how should we think about the margin profile in 2017? Thank you.
+
+Question_2:
+
+    Hello, thank you. The question is on video. I was wondering if you could just give any quantification in terms of the magnitude of video spend in 2017, as well as the lumpiness from an expensing standpoint quarterly?
+And then separately as it relates to just the video service. From a positioning standpoint in the market, how do you think about the unique aspects of the product that Amazon has relative to others in the market in terms of is the aggregation tools that are being provided now where some of the value is being perceived longer term?
+Is it the uniqueness of the content or is it other things? If you could provide a little bit of color on that, that would be helpful. Thank you.
+
+Question_3:
+
+    Can you discuss what you're doing to help merchants in China sell and ship directly to consumers in the US and other developed economies, and how the business has been evolving over time? Thanks.
+
+Question_4:
+
+    Thank you. A follow up on India and China. I know you are investing a lot, I'd love to hear how much but you probably won't tell us.
+But can you tell us why you think the market is worth investment, and what really attracts you to the market as you think out longer term? And then China, can you give us any updates there on how financial performance is doing, and if you have changed your strategy and if anything has gotten better there this year? Thank you
+
+Question_5:
+
+    Great. Two primary questions. Can you give us a sense of what the best way to think about the impact that the shift to third-party? And within that the growth in FBA is having on these sequential growth rates?
+To the extent that there is 150 basis point impact from Leap Year on a year-over-year basis, is there a way to quantify the impact that that shift to third party is having on the growth rate for the first quarter or for what you have reported in the fourth? And then on the AWS side of the business, with the price cut in November can you give us some sense of what impact the price cut had on the deceleration in growth compared to the impact that presumably it had in driving incremental volume to the platform?
+
+Question_6:
+
+    Thanks very much. Maybe as a quick follow up on the quarter, we have heard from other e-commerce companies and retailers about a higher degree of promotional activity during Q4. So I wonder if there was any conscious decision on your part to pull back from some of the more aggressive discounting?
+And then my other question is whether you can shed any more light on the motivation to build out the air cargo hub in Cincinnati, understanding the need to support the growth of the core retail business? But also if this gives you more of an opportunity to build out direct connections to suppliers, for example, or longer-term offer excess capacity or logistics as a service? Thank you very much.
+
+Question_7:
+
+    Thank you. Just a question on paid unit growth. For the last several quarters here it's been accelerating on a year-on-year basis, and I think this quarter 24% was below the 26% that you reported in Q4 of 2015. Just curious what had been driving the acceleration over the past few quarters, and what may be changed this quarter?
+And then in terms of the Q1 revenue guidance, wondering if you could provide a little bit of color in terms of the impact that maybe the recent AWS price adjustments are having on your Q1 guidance? Thanks.
+
+Question_8:
+
+    Thanks for taking the question. A lot of talk obviously about border tax. I was hoping that you could give us some of your initial thoughts there and how you might think about some of the key considerations around a potential border tax.
+And then secondly, can you talk a little bit about fulfillment centers? You mentioned the 26 fulfillment center build out in 2016. Any color that you can give us in terms of how you're thinking about that for 2017? Thanks.
+
+Question_9:
+
+    Thanks, two questions please. First, any comment on customer growth qualitatively how that trended throughout the year, accelerated, consistent, decelerated? And then would you be willing to give any commentary on the engagement impact you're seeing from all of these Echo devices that are getting into households?
+Are you seeing people shop more? Are they engaging more with other parts of Amazon? Just any impact on what people with these Echo devices do that's different than Amazon customers that don't have them? Thank you.
+
+Question_10:
+
+    Thanks for taking my questions, I have two. The first one is on the last mile on the Logistics build. Can you help us at all on what you are seeing in some of these markets, like the UK where you have more of the last mile build out done on your own? Is there anything you're seeing about Prime behavior?
+What are the advantages and even the challenges you are facing as you're building out a last mile? And secondly, on the brick-and-mortar stores, any learnings and strategically just talk to the strategic advantage of having a bigger Amazon storefront? Thanks.
+
+Question_11:
+
+    Thanks, two questions. As we think about investment in the first quarter in 2017, any color how to think about domestic versus international? You did give some comments about India, but any other color or how to think about it.
+And then on AWS, you announced both new products at re:Invent at the low end and at the high end. Any commentary on if that impacted the types of customers who you have been adding on AWS with those new products? Thank you.
+
+Question_12:
+
+    Thanks for taking the question, maybe two if I can ask. One, the other North America revenue line in our view has a lot of advertising revenue in it, and that line continues to show a lot of momentum, come in better than expected. Can you talk holistically short, medium, long term about how you think you are approaching an advertising business across your broad properties?
+What that might become longer term, and how that might impact the P&L? And then one housekeeping item, anything to call out as an impact from demonetization efforts India in either Q4 or Q1? Thanks so much.
+
+Question_13:
+
+    Thanks for taking my questions. It's about Prime Video, you said you were pleased with the hours of engagement. My question is do you think that the hours of video stream need to accelerate from here to get to an adequate return on the invested capital in video, or are you happy with those returns with the current levels of engagement?
+And then relatedly on Prime Video, could you just talk about your ambitions to potentially extend the video offering beyond on demand and into possibly a virtual cable bundle? And then finally, just a question of do you need to aggressively partner with distributors, whether they be cable distributors or hardware device companies, in order to get better distribution of the Amazon Prime Instant Video app and content to your customers? Thanks.
+

exam/part2_problem1/Problem_1_Conference_Call_Segments/call_18_answers.txt

@@ -0,0 +1,72 @@
+Answer_1:
+
+    Sure, Justin. Thank you. Yes, I think Jeff's comments were pretty dead on. The launch of Prime last year was a big turning point. We've increased Prime selection by 75% since launching that 9 months ago in India, also increased the fulfillment capacity for sellers by 26% this year. On the content side, we've announced 18 Indian Original TV series, and we're customizing the content. So it's a really vast selection of local and global movies and TV shows that are available to the Indian public. You'll also notice that the Fire TV Stick was -- the new version of it was launched in India with some important features there, such as the ability to search in Hindi and in English, free data usage for 3 months and also data monitoring, which is important there. So we're -- again, we continue to be encouraged by both the response from customers and sellers. As far as level of investment is concerned, it is certainly one of our important investment areas. We see a lot of potential for the country and our business there.
+
+Answer_2:
+
+    Sure. I can't quantify it, but -- or break out specifically, but I will say it's a large factor as well as a couple other things in the international segment. So keep in mind that we launched Prime Video in the fourth quarter, and now we have that in over 200 countries and territories. We're spreading a lot of the Prime benefits that we've seen in North America to other countries. We just opened up AmazonFresh in Tokyo last weekend, but also Prime Now. You saw other things like our business -- B2B business just opened up in the U.K. We have Amazon devices. So there's a lot of moving parts here. The other big influence is the same trends are happening in international with respect to FBA growth and the fact that our Amazon fulfilled network or the units we shipped are growing at much faster clip than our paid unit growth. Last year, we said that was a 40% -- nearly 40% growth worldwide, so we're making the investments in warehouses, fulfillment capacity and delivery capacity to handle that. So there's a lot going on in international. We are very encouraged with the growth of the Prime program, and we're hopeful for the Prime Video that we launched in the fall.
+
+Answer_3:
+
+    Sure, Mark. Let me start with the Echo question first. So yes, we're very encouraged by the customer response to the Echo products. Not only the Echo products, but the ability to use tablets -- our tablets now as Echo devices since we've spread the Alexa technology to many of those devices. And we're also happy with the success we've had with developers. There's over now over 12,000 Alexa skills. So we think that's all foundational. The monetization, as you might call it, is -- the theme of your questions, that's not our primary issue right now. It's about building great products and delighting customers. We think as engagement -- as we pick up engagement with the devices, it helps the engagement with Amazon as a whole. So whether someone is ordering off their Alexa device or whether they're going to their phone or going to their computer, it all has the same effect for us. So very, very pleased with the initial progress. We see a lot of momentum there, and we continue to invest. And that's one of the answers to your second question on North America operating margin. So if I step back, let me just talk generally about investment. So right now we're just seeing a lot of great opportunities before us, and we're continuing to ramp up the investments in pursuit of those opportunities. And the big picture is, again, as we've said, customers -- we want the things that customers love, can grow to be large, will have strong financial returns and they're durable and can last for decades. So in that category and some of the things that we are investing the most in are, as you say, the Echo and Alexa devices. We're doubling down on that investment, video content and marketing, not only in the U.S. but globally with the launch of our Prime Video in the fall. So we're building global scale in that business in both content and marketing. As I said earlier, we're expanding Prime benefits in the U.S. and also globally, things like Prime Music, Prime Now, AmazonFresh, all expanding globally. And we've launched Prime in India, China and Mexico. I know I'm drifting a bit from North America, but it's all part of the same theme. We also have this trend going on in our fulfillment networks where strong FBA growth and high growth in Amazon fulfilled units is resulting in a large increase in fulfillment capacity. We're also investing in new technologies, such as artificial intelligence, machine learning. You're starting to see some of that show up in things like Amazon Go, our beta store that we've developed in Seattle; drones. We use those technologies a lot in our internal businesses, and we're also developing services for AWS customers. So -- and that's -- of course, another area as AWS continues to grow and add services and features and doing so at an accelerating rate. So there's a long list and I can keep going, but I think the general theme is we're -- there's a lot of investment in front of us that we're optimistic about and we continue to ramp those investments. In North America, that manifests itself mostly in the device area, the content area and also the expansion of the fulfillment networks.
+
+Answer_4:
+
+    Sure thing. So particularly as it pertains to our fulfillment center networks, I think the biggest areas of efficiency right now are in our Amazon robotics areas. That technology continues to improve, and we've -- we're now multiple generations down. We just launched a Amazon robotics fulfillment center in the Tokyo area recently. And so toward that last month, and it's just amazing to see the strides that the Amazon robotics has taken and the efficiency we're getting in our warehouse as a result. The other efficiencies we're seeing are network efficiencies, especially as we had things like sort centers. It's a collaboration and a movement between warehouses and sort centers and then to the end customer. The ability to have control through our sort centers has allowed us over the last few years to cut off our -- to extend our cut off times from 3 p.m., in most cases, till midnight. So greater control of our processes. If we do it cost-effectively, it can also have favorable benefits both for our warehouse flow and also for our customers and their ordering pattern. So there's a lot of efficiencies that are going on day-to-day around here. One of the benefits of rapid growth and -- is the ability to create leverage on purchases and a lot of the processes that we run. So your second question was on stores. Yes, yes, I think you're seeing the expansion of our bookstores. We have 6 bookstores right now, and we've announced another 6. The Amazon Go is in beta in Seattle. And while that's not large and it's only one site, we're excited about the potential there and the use of the technologies of computer vision, sensor fusion and deep learning. We think that has a lot of potential. Again, it's only one location. That's still in beta. But along with the bookstores, we also have -- you'll see us in pop-up stores and college pickup points. So for us, it's another way to reach the customer and test what resonates with them, and we're pleased with the results.
+
+Answer_5:
+
+    Sure. Yes, we haven't updated that number, but suffice to say, the innovation pace continues to accelerate. We are very proud of the launches in Q4: the Amazon Connect, which we think will provide customer service-like capability to customers; and Amazon Chime, which we also believe will resonate with customers. We've had a lot of adoption of our new services. We've got customers migrated more than 23,000 databases using the AWS data -- database migration service since that launched last year. And just generally, we continue to expand geographically. We've announced additional Availability Zones and regions worldwide. So again, we signed a number of big customers. I guess I would point out in the quarter Liberty Mutual, Snap and Live Nation, all starting relationships with us or expanding their current relationship. We're now over $14 billion run rate, but we're happy with the business and the team. And again, for us innovation is going to be key as we move forward.
+
+Answer_6:
+
+    Sure. Yes, we're -- it's pretty early in the days with advertising, but we're very pleased with the team we have and the results. Our goal is to help -- is to be helpful to consumers and enhance their shopping or their viewing experience with targeted recommendations, and we think a lot of the information we have and preferences of customers and recommendations help us do that for customers. We have -- Sponsored Products is off to a great start, and it's a very effective way for advertisers to reach those especially interested customers. While you're on the topic of advertising, I thought I'd point out that in other revenue -- advertising is in other revenue, as is co-branded credit card agreements and also some other advertising services. That decelerated from 99% to -- in Q4 to 58% in Q1, but the fluctuation and the volatility was essentially in the co-branded credit card agreements and the other services, which can fluctuate quarter-to-quarter based on contract terms and that's what happened. Advertising was -- remains strong and was consistent growth with Q4.
+
+Answer_7:
+
+    Yes, sorry, I don't have a usage number to share with you today. If it'll help, I will tell you that, again, we're now over $14 billion run rate. You clearly see our -- we break out very clearly our AWS segment revenue and operating income. And you'll also keep in mind that there's price decreases that are part of the business, and we're pretty public when we do those. And if you remember last call, I mentioned that we had 7 price increase -- or excuse me, price decreases that were timed for December 1. So about 1/3 of the impact of those was seen in Q4 and then, again, that's one element of the sequential operating margin. But in general, we're very happy with that team and the progress they're making. And we're deploying more capital, as you can see, to support the usage growth.
+
+Answer_8:
+
+    Sure. Yes, CapEx, which is principally the fulfillment centers, was -- grew 51% year-over-year. As you'll remember, we added 26 warehouses last -- fulfillment centers last year, 23 in the second half of the year. Some of that cost of startup is before the startup. Some comes in a quarter afterwards. So there was some carryover from that. But generally, the biggest trend here is that the difference -- differential between Amazon fulfilled network unit growth and paid unit growth. So that nearly 40% growth in Amazon fulfilled units last year and the continuation of the strong growth higher than the paid unit growth that we see in 2017 is resulting in a lot of fulfillment center capacity. And the fulfillment centers, I will also say, with the robotics technology tend to be more capital intensive than prior versions of warehouses and then they're -- generally have much better operating efficiencies and variable costs following their start up. On the capital leases, as grew 45%. A good deal of that is tied to the AWS business. As I just mentioned, a lot of that's tied to unit -- excuse me -- usage growth. But I'll caution, CapEx can fluctuate quarter-to-quarter. And if you look back to last year, the trailing 12 months was only 7% growth from the quarters through Q1 of last year. So certainly, there was a bigger step up in 2016, now carrying into 2017.
+
+Answer_9:
+
+    Sure. Let me start with advertising. So yes, I think scale is helping. We have great teams working on advertising for a while now. Our scale in number of customers, number of clicks, number of eyeballs and new content -- or excuse me, video content and other opportunities for advertising has really helped create some scale in that business. So we're very happy. I can't project it forward, but we're happy with the growth there. I think the Sponsored Products was a very inventive move for us, and I think that is having some really good impact on advertising growth. On your second point about fulfillment capacity, here's how I'd generally -- I'd generalize it. We -- in Q4 of 2015, we were pretty vocal, or pretty transparent anyway, that we ran out of space in Q4, especially due to some very strong demand for FBA space and services. Last year, we changed some of our incentives to -- and worked with FBA merchants to try and have their throughput to our FCs, particularly in Q4. That, combined with the step up in fulfillment centers that I mentioned, the 26 new ones, left us in a really good position. We had a very clean holiday, and we think it worked well for both customers, Amazon and also for sellers, especially for FBA sellers. So yes, that leaves us now continuing to grow internationally as well because we continue to see strong FBA adoption, and it's a big part of our business, and it's a big part of our value with the additional Prime eligible ASINs that FBA provides. So again, it's -- they're self-reinforcing, the FBA program and also our Prime program. Prime program attracts more people to Amazon, and they buy more, including FBA products. And conversely, more FBA products in our warehouses helps our in stock of things that people want to buy, Prime eligible in stock, and that helps reinforce the Prime program.
+
+Answer_10:
+
+    Heath, this is Darin. Yes, on the deferred revenue balances, as we've said in the past, the primary drivers of that increase are both the activity that we're seeing with our AWS customers and the purchase of Reserved Instances and prepaid credits for their account as well as Prime member purchases. We're not breaking out the specific growth rates for Prime. But certainly, we like what we see in terms of the growth, and it's been consistent with what we've seen over the last quarter or so. Certainly, part of that increase in deferred balances is related to Reserved Instances as customers get more comfortable and begin to put more sustained workloads into the AWS services. Through buying RIs, they're able to get fairly significant discounts on their usage. And so we like that model, customers certainly like that model and collecting that through deferred revenue and then letting customers use that over time is very helpful.
+
+Answer_11:
+
+    Sure, Colin. As you pointed out, we're -- we've expanded our own fleet. We now have 18 planes in service for Amazon, and we've announced rights to lease up to 40 planes. So it's gone very well. The ability to control shipments within our network has gone up, and we think the cost is very good. So on that front, it's better control -- better capacity control and especially search capacity and also good costs. So we have great relationships with third-party carriers. We will continue to, and we value all of our partner relationships as we develop our own capability, particularly in intra-network. We're putting it to good use, as I mentioned before, with the sortation center example.
+
+Answer_12:
+
+    Let me start with your middle question. I think it was about Latin America growth. Let me step back and talk about international growth in general. So it -- our approach varies by country. If you look historically, we've taken multiple approaches. So in China, we bought an existing business, Joyo.com, and built off that base. In India, we started from scratch and have built a lot of things ourselves. And it's always going to depend on the country, the dynamics in that country both for retail, for online and for foreign investment. But a real key factor in all of this generally is management bandwidth as well. So we pick our spots carefully. You'll see -- you heard in the quarter that we've announced the intention to buy Souq in the Middle East. Where does that fit into the strategy? Well, Souq is a pioneered e-commerce in the Middle East, and they're creating great shipping experience for the customers and their multiple countries and they're doing a great job. So we see this as an example where we can learn from them and also support their efforts with our Amazon technology and global resources. So we -- we are in Mexico, but we're not in other parts of Latin America. We're -- we have a business in Brazil, but other countries will take on a case-by-case basis, again, bounded by what our management bandwidth can support and prioritization versus other things. You obviously heard my long list of investments. All of those are pretty much gated by the need for people and software engineers and strong teams to approach them. So international expansion gets played off in the same prioritization that other efforts do.
+
+Answer_13:
+
+    Jason, this is Darin. We, a number of quarters back, started breaking out stock-based compensation by segment, and now we've collapsed that in our op income by segment. So it's definitely in there. We do provide some disclosure by P&L line item on a consolidated basis that helps you identify that stock-based compensation expense in total, and you'll see the trend analysis in the metrics at the back of the press release.
+
+Answer_14:
+
+    Sure. Let me start with the retail subscription services revenue. So there's multiple things in that category, the largest is Prime membership fees, but also other subscription services like audiobooks, e-books, digital video, digital music and other subscription services. So you're right, there was an acceleration. Much like the comment I had on advertising and the other revenue category, the Prime membership growth rates for Q1 and Q4 last year are relatively consistent. So the volatility is in those other items. So I'm not quantifying the Prime membership or commenting on the growth rates other than to say it's been very strong and Q4 strength has continued into Q1. Your comment on shipping costs, yes, that is going to -- that was a lower unit volume as well. But generally, costs are going to be a combination of the tailwind -- the headwinds obviously are going to be FBA growth and shipping more products ourselves and this expansion of our Prime program and the demand for products from our Prime customers. And demand's been great. Again, there's over 50 million items that people can get delivered to their doorstep within 2 days or, in some cases, next day or same day. So it's going to be a big part of our cost structure, but it's an investment we work hard to reduce as far as rates and we're glad to spend it to support our Prime program.
+
+Answer_15:
+
+    Sure. I'm sorry, you said Prime Now. And what was the other thing?
+
+Answer_16:
+
+    Sort centers, right. Well, I don't have updated numbers for you, but the Prime Now is available in more than 45 cities across 8 countries. The same day is available in 30 cities in the U.S. So that's a bit on the quantification of those. I can't tell you much more on sort centers.
+
+Answer_17:
+
+    Yes, I can't project that. We're still growing that, and we're happy with the progress in Prime Now and the service that -- the value it creates for Prime customers. And as I said, we've expanded internationally, which is a big goal of ours as well. So we will continue to grow that. I can't quantify it for you right now. The other similar-like facility metric you might want is AmazonFresh is now in 21 metro areas in the U.S. as well as London and Tokyo.
+
+Answer_18:
+
+    Thank you for joining us on our call today and for your questions. A replay will be available on our Investor Relations website at least through the end of the quarter. We appreciate your interest in Amazon.com and look forward to talking with you again next quarter.
+

exam/part2_problem1/Problem_1_Conference_Call_Segments/call_18_presentation.txt

@@ -0,0 +1,9 @@
+
+Hello, and welcome to our Q1 2017 financial results conference call. Joining us today to answer your questions is Brian Olsavsky, our CFO.
+As you listen to today's conference call, we encourage you to have our press release in front of you, which includes our financial results as well as metrics and commentary on the quarter. Please note, unless otherwise stated, all comparisons in this call will be against our results for the comparable period of 2016.
+Our comments and responses to your questions reflect management's views as of today, April 27, 2017, only and will include forward-looking statements. Actual results may differ materially. Additional information about factors that could potentially impact our financial results is included in today's press release and our filings with the SEC, including in our most recent annual report on Form 10-K and subsequent filings.
+During this call, we may discuss certain non-GAAP financial measures. In our press release, slides accompanying this webcast and our filings with the SEC, each of which is posted on our IR website, you will find additional disclosures regarding these non-GAAP measures, including reconciliations of these measures with comparable GAAP measures.
+Our guidance incorporates the order trends that we've seen to date and what we believe today to be appropriate assumptions. Our results are inherently unpredictable and may be materially affected by many factors, including fluctuations in foreign exchange rates; changes in global economic conditions and customer spending; world event; the rate of growth of the Internet, online commerce and cloud services; and the various factors detailed in our filings with the SEC. Our guidance also assumes, among other things, that we don't conclude any additional business acquisitions, investments, restructurings or legal settlements. It's not possible to accurately predict demand for our goods and services, and therefore our actual results could differ materially from our guidance.
+Before moving to Q&A, I would like to draw attention to a new accounting rule that we implemented in Q1. The new rule requires excess tax benefits from stock-based compensation to be presented as an operating activity in the consolidated statements of cash flows. We retrospectively adjusted our consolidated statements of cash flows to reclassify excess tax benefits from financing activities to operating activities. And as a result, you will see an increase in our free cash flow measures for prior periods.
+Additionally, beginning January 1, 2017, the excess tax benefit or deficiency for stock-based compensation is recognized as a component of tax expense rather than equity. This change resulted in a decrease to our tax expense for the quarter and a corresponding increase to our net income and earnings per share. Specific changes are presented in the footnotes to the consolidated statement of cash flows and related metrics provided in our press release. Further disclosure of the impact of the adoption of this accounting change can be found in our Form 10-Q.
+With that, we'll move to Q&A. Operator, please remind our listeners how to initiate a question.

exam/part2_problem1/Problem_1_Conference_Call_Segments/call_18_questions.txt

@@ -0,0 +1,68 @@
+Question_1:
+
+    Got it. Saw on the front pages of release you're really focused on India. Can you give us a progress update on how you're doing? Any thoughts on how far you're willing to take the investment levels there? And what are your thoughts on maybe when international margins can start to make progress?
+
+Question_2:
+
+    Any thoughts on how much this is impacting your international profitability?
+
+Question_3:
+
+    Okay. 2 questions. The North American operating margins seem to come down like 70 bps year-over-year, and I know it's not a big focus of you, the margins. I get that, but it's sort of a change. You've had margins be flat or up year-over-year for quite some time and now they dip down. Just could you explain that? And then secondly, on these -- on the Echo devices, the Echo family, Alexa devices that are coming out, could you comment at all about what kind of impact you're seeing in terms of increased wallet or per share within household? Are you seeing that have an impact in terms of Amazon customers more likely to spend more once they have these devices in particular categories like groceries or household products, Pantry, products that they're more likely to spend because they have these devices in their houses, in their kitchens, in their living rooms?
+
+Question_4:
+
+    I have 2. Just the first one, Amazon always has a pretty big focus on efficiency. So I'd be curious to talk -- if you could talk about examples or areas where you've been able to iron out inefficiencies in the fulfillment process. And there's -- any still existing examples where you see low-hanging fruit to really improve fulfillment efficiency? And then just back to the point on investment, you didn't mention brick-and-mortar at all, yet there's been a lot of mention in the press about Amazon brick-and-mortar. I guess I'd be curious to hear how you think about the importance of an Amazon brick-and-mortar presence and how that fits into the long-term strategy.
+
+Question_5:
+
+    Brian, I think you mentioned accelerating growth within AWS on new products, and last year you added about 1,000. Can you just talk about maybe the plans for AWS and product growth going forward here in 2017 and the focus on innovation?
+
+Question_6:
+
+    Brian, a couple questions about your growing advertising business. We see more and more of it appearing on the site, and I was interested to hear a little bit more about how you expect that business to roll out internationally. I think it's largely U.S.-based today, but be curious to hear about that. And then second, I think it's fairly obvious what someone selling within the Amazon ecosystem would be interested in promoting on the platform. But maybe tell us a little bit about maybe over the long term, there are opportunities for sort of non-endemic advertisers within your platform.
+
+Question_7:
+
+    So you periodically disclosed usage growth for AWS, but it has been some time since we saw one. So we're wondering if you can update us in terms of where you are now. If not, I mean, should we think about the growth in your cash deployment as an indicator of the ongoing growth?
+
+Question_8:
+
+    I just want to ask you about CapEx. It looks like CapEx, including leases, more than doubled year-over-year. So I know you listed kind of a long list of the many investment opportunities here, but can you just point out anything else in particular that drove the pretty substantial increase there?
+
+Question_9:
+
+    I know that we talked about over the last couple quarters that part of the step up in CapEx was to catch up from the underinvestment in '15. Just curious if you'd say -- have you made a lot of progress in terms of catching up with some of the fulfillment needs that you saw necessary in the business at the beginning of last year? And then I know you just said that you're -- it still is early days in terms of advertising. But there's a perception out there that over the last year or so, that the company has sort of really begun to focus more on this business opportunity. Has something really changed at the business in the last year? And do you see advertising becoming a more meaningful part of the business over the near to midterm, I guess?
+
+Question_10:
+
+    Wondering if you could give us a sense of how we should think about the increase in unearned revenue. Obviously this quarter, the biggest increase that you've seen from at least from a dollar perspective. What does that say about the way customers are changing in the behavior in the AWS business? How should we think about the way that, that might be impacting pricing mix, near-term growth?
+
+Question_11:
+
+    Question on the transportation and logistics initiatives and, in particular, if you could share any of the facts or learnings thus far with air cargo. In particular, what kind of performance or cost efficiencies that you may be realizing or expect to realize from this effort.
+
+Question_12:
+
+    I was wondering if you could talk a little bit about where you are in terms of investment and capabilities in India at this point and how you think about that market longer term. And then secondly, also if you could just comment on the limitations and your willingness to invest more throughout LatAm, the way you have more recently in markets like China and India. And if I could, just finally, you've previously discussed satisfaction with the measurements of success for the video product in terms of consumer engagement and the effects on Prime. I was just wondering if you could comment on whether these metrics are continuing to improve as spending continues to rise on video and consumer awareness is seemingly growing as well.
+
+Question_13:
+
+    So is there -- just an accounting housekeeping, a way to think about stock-based comp. You guys aren't providing that by segment anymore, but the rates of growth kind of differed by the businesses. And so is there just a way to think about, a, will that be in the Q, or are you not disclosing anymore? And is there a way to think about would, I guess, the patterns be consistent with historical patterns by segment?
+
+Question_14:
+
+    Maybe I could take 2 away from the press release just to understand a little bit of the quarter-over-quarter cadence. The retail subscription services, that's a pretty big jump up in the growth rate year-on-year in Q1 versus Q4. I think that might be Prime memberships had come on to paid from trial, but just want to understand what maybe what some of the driver was of that quarter-over-quarter in terms of the growth rate. And net shipping costs actually grew at the slowest rate by our count in a couple years. It looks like you're starting to get some improvements there in terms of revenue over costs on the shipping line. I just wanted to know what that was in terms of what's driving that, and can we expect that to possibly continue.
+
+Question_15:
+
+    I have a follow-up and then a new question. The follow-up is would love an update. You talked about the fulfillment centers, but could you update us on where we are in terms of rolling out Prime Now facilities and sorting centers -- just a count? And if you feel that's an area to really ramp-up investment this year, or what you got last year is sort of what you need.
+
+Question_16:
+
+    And the sorting centers.
+
+Question_17:
+
+    But when you think about building out the capacity, it sounds like last year you had that big surge in fulfillment centers. There isn't a similar surge about to happen this year on some of those other areas?
+

exam/part2_problem1/Problem_1_Conference_Call_Segments/call_19_answers.txt

@@ -0,0 +1,52 @@
+Answer_1:
+
+    Sure. Let me see what I can tell you on that. First of all, I want to remind you that Q3 is typically a lower operating income quarter as we're preparing for the Q4 holiday peak. The other dynamic is that similar to last year, a large percentage of our new fulfillment centers are coming online in the second half of the year, a lot of them in Q3. So to give that some perspective, the Amazon-Fulfilled Network or the combination of retail and FBA shipments coming out of our warehouses has been nearly 40%. It was that last year and it's continued through this year. Last year, we added 30% additional square footage to handle that additional shipping volume, and about 80% of that went in to service in the back end of last year. That's what I mentioned about this time last year. The -- similar dynamic this year. We're going to have about 80% of our increase in square footage for fulfillment and shipping coming online in the back end of the year. So that's a major increase. The other comment I would make is on the content -- video content. Video content, last year I highlighted the fact that it was going to be a significant step up between first half -- second half of 2016 and the second half of 2015. We are still -- we lapped that most of the first half of this year, and we'll also be increasing video spend on a sequential and year-over-year basis in Q3 and that's included in this guidance. Other than that, I can't give much more specifics except to say that the large investment areas remain increasing fulfillment capacity to service the strong growth of the FBA business. I'll also point out that the strong usage growth at AWS has led us to a step up in infrastructure in the form of capital leases. We've built capital leases in the trailing 12 months. They've increased 71% through the end of Q2 versus last year. That is servicing -- accelerating usage in our largest AWS services as well as geographic expansion. So that's additional factor sequentially in the quarter year-over-year.
+
+Answer_2:
+
+    Sure, Colin. First, as far as Whole Foods is concerned, as Darin mentioned, it's not included in this guidance since it hasn't closed yet, but we are excited about that acquisition and looking forward to working with the team at Whole Foods. We think they're very customer-centric just like us. They've built a great business focused around quality and customers. So we're really glad to join up with them. On your larger question about with the place of AmazonFresh, that include Prime Now and some of our other efforts, I would say we believe there will be no one solution. So we're experimenting with a number of the formats, from physical pickup points in Amazon Go to online ordering and delivery to your door through Prime Now and AmazonFresh. And we'll see how customers respond. We like the response that we've seen so far. We think they're valuable. All those are valuable services. Amazon Go is not out of beta, but the other ones are. On top of that, we're looking forward to adding the Whole Foods team and their great reputation for quality and customer service to this offering.
+
+Answer_3:
+
+    Sure. As far as Q2 is concerned, we were very encouraged by the revenue and unit growth acceleration, particularly in North America. We see that as tied to the Prime growth and the adoption of Prime and success of that program. Also point out that AWS stepped up its run rate from a $14 billion run rate last quarter to $16 billion. So we saw the largest quarter-over-quarter and year-over-year increase in revenue in that businesses as well, and gross margin expanded 130 basis points. So as you point out, the year-over-year difference is primarily driven by investments. The -- we're within the guidance range, and we continue to invest in, as I said, fulfillment capacity and logistic services, digital video, our Echo and Alexa -- Echo devices and Alexa platform, India, the buildup at AWS infrastructure, all the things I mentioned, not to mention Prime Now and AmazonFresh and Prime benefits. We did see a big jump in headcount in year-over-year. You'll see it's 42%, and in the past I've said most of that is driven by operations hiring. And I've even said that headquarters office hiring many times in the past was below the level of revenue growth. Right now what we're seeing is an accelerated growth rate in software engineers and also sales teams to support primarily AWS and advertising. So yes, those -- the growth rate of those 2 job categories actually exceeded the company growth rates. So we are adding -- having success hiring a lot of people and pointing them at some very important programs and customer-facing efforts. On the place of physical, again, as I mentioned in the earlier question, we are experimenting with a number of formats. You've seen the physical bookstores, and I would say that the benefit there is -- again, we have a curated selection of titles and it's also a great opportunity for people to touch and feel our devices and see them, especially the new Echo devices. I went into the store in Seattle last week and I saw about 1/3 of the people were standing around the device table, learning how they work, how they interact with the devices. So I saw firsthand the customer experience. I think that's where we're seeing the benefit to the physical stores right now.
+
+Answer_4:
+
+    Yes, let me start with the second one. So yes, we've had numerous price increase -- or decrease, excuse me, and we continue to have that in the AWS business, both absolute decreases in service costs and also rolling out new services that may be cannibalizing more expensive, other services that we provide. So nothing really to note on Q2 or Q3 from that standpoint. The fulfillment investments, I can't split it out for you between Amazon Logistics support sort centers and fulfillment centers. What I can say, the biggest dynamic going on, again, is that Amazon-Fulfilled unit growth of nearly 40%, which was last year and carrying it to this year. It's a global number, and we are very glad of the success of the FBA program. We're matching that with just over 30% increase in square footage. And yes, you're right, that does include some shipping sort centers and things that are incremental and new functions for us, if you will. But that's about all I can say on that right now. I think we're very happy -- we're very happy with the FBA program, its impact on Prime and we think Prime and FBA are self-reinforcing. We know customers really like it, the additional selection that FBA provides. So we like those combined, and we are working very hard to match that with capacity in an efficient manner.
+
+Answer_5:
+
+    Sure. On the price of Prime, I have nothing to add at this time. We think that the -- we're increasing the value of the Prime program every day. So it becomes more and more valuable and again, as we've said, it's the best deal in retail. On AWS, yes, the -- we are seeing great customer adoption. The -- again, as I've said earlier, the run rate's gone up from $14 billion to $16 billion in Q2. And also, we had the largest sequential and year-over-year dollar rise in revenues. Our usage in all of our large services are actually accelerating, so -- and they're growing at a rate higher than our revenue growth. So we're seeing great adoption. We are seeing AWS customers migrate more than 30,000 databases over the last 1.5 years. We've signed some very big customer wins like Ancestry, Hightail, California Polytechnic State University and others that we're very proud to have. So yes, the momentum in the businesses is very strong. We continue to open new regions. We'll be opening 5 regions in the near future in France, China, Sweden, Hong Kong and a second government cloud region in the east. So yes, we like the momentum in that business. Stepping back, I would say that where pricing is important, again, we're generally being selected because of our functionality and pace of innovation. The innovation keeps accelerating. It did in the first half of this year, the pace of new services and features. We also know that customers value our partner and customer ecosystem, and really the experience we've had. We've been at this longer than anybody else.
+
+Answer_6:
+
+    Sure. Those margins, as we say frequently, are going to fluctuate quarter-to-quarter and always going to be a net of investments, price reductions and cost efficiencies that we drive. So I would say the biggest impact in the margin that you're seeing in Q2 is really around the 71% increase in assets acquired under capital leases. Most of that is for the AWS business. So we've really stepped up the infrastructure to match the large usage growth and also the geographic expansion, and that is showing up in tech and content. On the marketing, if you look under the marketing expenses, they are also up and that is driven by the increases we're seeing in the sales team, both in AWS and advertising. So I would point to those 2 as probably larger-than-normal impacts on Q2 operating margin.
+
+Answer_7:
+
+    Sure. Let me start with your second question. On the subscription revenue, grew 53% year-over-year versus 52% in Q1. So yes, we continue to see strong Prime membership growth. That is the main thing. There's also, in that line item, are also other monthly fees associated with some of our other subscription services like audiobooks, eBooks, digital video and digital music. But again, I would say that we're very happy with the Prime membership growth, and it remained pretty consistent both in Q4 and then through Q1 and Q2 of this year. On your second question on Prime Now, so Prime Now is now available in 50 cities across 8 countries. We do learn something new in every city and have different -- slightly different shapes and sizes of those buildings and different density profiles. And so we are learning as we go. We learn as we grow internationally as well. That is a service that customers love. That's not an inexpensive service though, and we also have -- so we're constantly working on our cost of delivery and our route densities. And again, we like what we see, and we'll continue to expand that and we'll be working very hard on making that not only a valuable Prime offering, Prime benefit, but also lower-cost operation as well.
+
+Answer_8:
+
+    Sure. Yes, it's early on the Echo Show. As you know, we just started shipping those in late June, but we're very excited about the potential and the additional -- the addition of the video screen and the messaging capability and video capability. So it's -- I've used mine and it's awesome. It's a big step up, in my mind, but we'll get more customer feedback as we go along. On advertising, technically, what I said is the sales force has grown higher than the rate of growth in the business itself, which was 42% regular headcount, and that sales force is primarily AWS and advertising. So we build self-service tools and obviously that we want to make those as efficient as possible for customers and advertisers, but we realize it will need actual sales contact with accounts as well. So it's a mix. I can't get into the split really, but I would see both growing.
+
+Answer_9:
+
+    Sure. I'll start with the second one. Yes, as you noted in the press release or the 8-K, we had an absolute step up from Q1 of $792 million to Q2 of $1.2 billion. So it increased 51% year-over-year in Q2 versus a headcount increase of 42%. I'll also say that we generally see a step up from Q1 to Q2 because we do our employee RSU grants in Q2 of each year. So that's a normal trend. But the 51% year-over-year is also -- is a combination of the hiring we've done, but also an adjustment we've made to our estimated forfeiture rate. We're seeing less forfeitures, which is a great sign for our employee retention, but you have to make adjustments to your reserves as you see that. So that was another influence in Q2. On operating margins internationally, I'd step back and say, we -- a lot of the investments we're making in North America, we're also making in international: Prime benefits, including Prime Video and remember, we launched global video in Q4 of last year to 200 countries; Prime Now; AmazonFresh; the general rise of FBA and added selection, both retail and FBA, to make Prime more attractive and the fulfillment and logistics costs that go with that, any additional constant effort to reduce prices and accelerate shipping. So that all impacts both North America segment and international. The North America segment is a little further along in the Prime -- or excuse me, yes, the Prime membership growth curve. And so in some respects, we are giving benefits earlier in the life cycle to international Prime customers than we did in North America just because it launched later. And then there's also India. As I mentioned, we continue to invest in India. We're very hopeful with the progress we've made with sellers and customers alike in India, and we see great momentum and success there. So we'll continue to invest, and we have some of our best people in that business.
+
+Answer_10:
+
+    Brian, this is Darin. Yes, we're getting more efficient every time we put new capacity into the network, whether that's through automation or just through the experience that we've gained over the years. We still say it takes up to 3 years or 3 peaks to get to kind of network efficiency for a new particular facility. And that's about staying the same, although the whole network gets efficient over time. So there's a big mix going on, and we like the new innovation that we're bringing to the capabilities, but that ramp stills stays about consistent as it was.
+
+Answer_11:
+
+    I'm sorry, what was the first part of your question?
+
+Answer_12:
+
+    No, nothing. In that other line item is advertising and also other things like co-branded credit card agreements. I would say that the main -- excuse me, advertising revenue growth has been strong and fairly consistent over the past 3 quarters. So that number will move around, but there's other things that more the variance in the volatility as in the other line items. Your question on stores. We are -- again, I personally think that new devices -- the ability to see new devices is a great asset, but I don't want to shortchange our -- the rest of the bookstore and the ability to have curated selection and the creativity we've had in taking a new look at the bookstore. So we are experimenting with different formats, and we look at different sizes and we look at revenue and cost per square foot just like any other physical retailer. So we haven't essentially nailed the model yet, and we continue to experiment and see what works and how it differs by city or more suburban locations.
+
+Answer_13:
+
+    So thank you, Brian, and thank you all for joining us on the call today and for your questions. A replay will be available on our Investor Relations website through at least the end of the quarter. We appreciate your interest in Amazon.com and look forward to talking to you again next quarter.
+

exam/part2_problem1/Problem_1_Conference_Call_Segments/call_19_presentation.txt

@@ -0,0 +1,6 @@
+
+Hello, and welcome to our Q2 2017 financial results conference call. Joining us today to answer your questions is Brian Olsavsky, our CFO.
+As you listen to today's conference call, we encourage you to have our press release in front of you, which includes our financial results as well as metrics and commentary on the quarter. Please note, unless otherwise stated, all comparisons in this call will be against our results for the comparable period of 2016.
+Our comments and responses to your questions reflect management's views as of today, July 27, 2017, only and will include forward-looking statements. Actual results may differ materially. Additional information about factors that could potentially impact our financial results is included in today's press release and our filings with the SEC, including our most recent annual report on Form 10-K and subsequent filings. During this call, we may discuss certain non-GAAP financial measures. In our press release, slides accompanying this webcast and our filings with the SEC, each of which is posted on our IR website, you will find additional disclosures regarding these non-GAAP measures, including reconciliations of these measures with comparable GAAP measures.
+Our guidance incorporates the order trends that we've seen to date and what we believe today to be appropriate assumptions. Our results are inherently unpredictable and may be materially affected by many factors, including fluctuations in foreign exchange rates, changes in global economic conditions and customer spending, world events, the rate of growth of the Internet, online commerce and cloud services and the various factors detailed in our filings with the SEC. Our guidance also assumes, among other things, that we don't conclude any additional business acquisitions, investments, restructurings or legal settlements and excludes the impact of our proposed acquisition of Whole Foods Market. It is not possible to accurately predict demand for our goods and services, and therefore our actual results could differ materially from our guidance.
+With that, we will move to Q&A. Operator, please remind our listeners how to initiate a question.

exam/part2_problem1/Problem_1_Conference_Call_Segments/call_19_questions.txt

@@ -0,0 +1,48 @@
+Question_1:
+
+    I was just wondering if you could give us a sense on the investments that are planned in Q3. Previously, you've been willing to provide sort of some qualitative guidance around how you're rank ordering those in terms of the ones that are -- the largest areas of investment in the quarter. Just wondering if you could update us on that just given the guidance for Q3 and what we saw in investment in Q2.
+
+Question_2:
+
+    A question on the grocery category and the announcement that we have -- that we heard recently. Specifically, does that imply that the strategy has changed around Fresh, which was presumably replacing the trip to the grocery store? Or should we think about adding different modes, such as pickup points and bricks-and-mortar, as serving a distinct customer base or geared to reduce the cost bottleneck around home delivery? Any comments would be helpful.
+
+Question_3:
+
+    A couple of questions. It definitely seems relative to your guidance, you may have stepped up spending in the second quarter. Anything in particular to call out, India or anything like that? And then just thinking bigger picture, I'm wondering why physical locations might make sense for Amazon. Why is that a positive use of capital going forward?
+
+Question_4:
+
+    Question on the comments around the fulfillment investments. Could you characterize or maybe even quantify how much of the fulfillment infrastructure investment that you're making is going to incrementally gear towards handling growth in sort of the existing business and infrastructure versus expanding your capabilities in fulfillment, like adding more inbound or last mile and/or from entering new international markets where you need to invest ahead of growth versus just sort of keeping up and maintaining growth within sort of your existing footprint? And then AWS, you had some price adjustments in May, yet the Q2 growth was quite good. Can you just comment about the impact that those cuts may have had in Q2? And if you're modeling those also in your Q3 guidance, maybe the impact there.
+
+Question_5:
+
+    I just wanted to follow up on AWS and just on the back of the price cut, obviously 1Q being the first full quarter, but it looks like 2Q, as Mark said, things did stabilize some. Can you just talk about whether you're seeing more of a volume pickup response here and companies kind of more actively moving volume into the cloud at these lower prices? And then just secondly on Prime, the value of the Prime subscription for the consumer seems to continue to increase as you add more features in there. Can you just talk about your view around the flexibility of the price of an annual Prime subscription?
+
+Question_6:
+
+    I want to stick with AWS, please. So the AWS revenue growth showed almost no change, but the AWS operating margin was lower, I guess, than we've seen in, I don't know, 6 quarters or something like that. I find that a little surprising, but then I also saw that the tech and content came in materially heavy, I think, versus our and, I assume, other expectations. So could you just talk about that a little bit, the profitability, if there's anything that's changed in the profitability of AWS?
+
+Question_7:
+
+    I have 2. The first one, as you continue to add more Prime Now markets with 1- to 2-hour shipping, can you just talk to some of the logistical challenges you've already encountered and worked through? And talk to kind of -- if you really do see 1- to 2-hour shipping become a larger piece of the business over the next year, what's the biggest challenge to make sure that you manage? And the second one on the subscription revenue. Looks like subscription revenue growth was strong again, over 50%. Can you just talk to what drove that acceleration? Was it Prime, or was there something else in there?
+
+Question_8:
+
+    Brian, I think I heard you earlier say that your headcount for advertising salespeople is growing faster than the company as a whole -- or company's headcount growth rate as a whole. I'd just like to use that maybe as a springboard to talk a little bit about what you think the right mix is for how you sell in terms of the self-service versus salespeople. And then a second one would just be a quick one. I know it's early, but I'd be curious to see what you're seeing with users of the Echo Show with the screen on it and if you're seeing any particularly different type of user behavior there versus the original devices without one.
+
+Question_9:
+
+    Maybe 2. One, with respect to international margins, is there anything there you can give us in terms of rank order or color, whether it'd be geographies or category expansion that we should be thinking about that are driving some of the cost curve in the international side of the business? That would be number one. Number two, stock-based comp stepped up a lot both quarter-over-quarter and year-on-year. Wanted to know if there was anything either organic or inorganic that was driving that step up in stock-based compensation.
+
+Question_10:
+
+    You mentioned before as you stand up new fulfillment centers, it takes a bit of time for them to ramp up optimization. How should we think about that path optimization over a year or so as you continue to scale operations and you bring data to bear in robotics, in Kivas and AI machine learning? Are you finding that kind of new fulfillment center optimization curve is accelerating?
+
+Question_11:
+
+    Just one. Other slowed from 58% in the first quarter to 53% year-over-year. Anything to call out? And then you made a comment about the physical stores in reaction to one of the other questions that was really about showcasing new devices. Is it fair to say that probably means locations would have small footprints versus the large footprints if you were thinking about that?
+
+Question_12:
+
+    Other revenue slowed from 58% in the first quarter to 53%. Is there anything to call out around that?
+

exam/part2_problem1/Problem_1_Conference_Call_Segments/call_1_answers.txt

@@ -0,0 +1,77 @@
+Answer_1:
+
+    In terms of fulfillment question, you're right in terms of,  over the past few years, we have expanded our fulfillment network pretty extensively  to the point where we are closer to customers; and  you're seeing that reflected in our transportation costs. 
+You can obviously see the fulfillment expense is certainly not fixed in terms of in absolute terms. But  you can see that we had the 20 fulfillment centers last year and that's reflected in the operating expense that you're seeing. But that is a benefit of adding  to our fulfillment center network. We are closer and closer to customers, with a lot of great selection. You're seeing that reflected in the individual business gross margins, which shows up as benefits of transportation costs. 
+In terms of other opportunities, certainly there are a number of opportunities, as we invest in individual customer experience areas across the business; many of those would be on our website. We have a relatively fixed expense, as we launch those and we're able to amortize those costs over our full customer base. As they grow, they become more effective on a per-unit or per-customer basis. There is a number of opportunities that we have had and will have going forward to do that.
+
+Answer_2:
+
+    We did see  a good expansion,  as you've mentioned,  in 3P. Our third-party units as a percentage of total units  increased some 36% last year, Q4 to 39%, some expansion of approximately 300 basis points. Our overall unit growth rate for the quarter in total was 32% and our third-party growth rate was  in excess of 40%. So, again, nice growth. 
+It is -- you're certainly seeing it in a number of areas. You see it certainly in our EGM business. If you look at our North America growth rates, you can see that our revenue was up 23%, but our third-party -- our total unit growth rate was substantially faster than that and our third-party units were growing very fast there as well. So there's a number of different areas that you're seeing that, but certainly you're seeing it there.
+
+Answer_3:
+
+    There's not a lot I can comment on in terms of  our plans. Similar to last year, as we progress through the year, we can give you further updates on what we plan to do there. Last year, we  opened up 20 new fulfillment centers and so we saw  very rapid growth and fulfillment capacity last year. Stay tuned and we'll let you know more as the year progresses there.
+
+Answer_4:
+
+    In terms of unit growth, there's not a lot more I can add to it. We did see very strong -- we saw a substantially high unit growth and revenue growth in terms of paid unit growth in Q4  which we're seeing very strong third-party growth as well; it was up over 40%. In terms of investment cycle, yes, I wouldn't read into anything related to that.   We will still be adding capacity during 2013. In terms of the levels of how much we'll add,   as I mentioned earlier on the call, I'd just stay tuned and we'll let you know as the year progresses.
+
+Answer_5:
+
+    I'm not really sure how best to answer your question. We  certainly have expanded pretty dramatically over the past, coming out of 2009,  so between 2010, '11 and '12, we've rapidly increased our footprint  globally. Your comment was more directed towards the US, but we've also rapidly  increased our footprint in the US. 
+As a result of that,  we're able to carry selection, a much broader selection, closer to customers, just with the,  as you would expect, with  this rapid increase. We've also expanded selection during that time period. So  we continue to be in the  locations we would like to be in and we'll continue to expand our footprint over time and become even closer and closer to customers. Beyond that, there's not a lot I can add.
+
+Answer_6:
+
+    There is some variation by business, but certainly that's  -- what we attempt to do is,  from  a pricing standpoint, is to try to be agnostic. That's certainly how we run the business. Again, this is on a third-party versus retail  and then we've always -- also added certainly a lot of other services over the past year in terms of fulfillment. So it really depends upon where we are in the investment cycle, what our utilization is. 
+As you know, certainly as you look at the last few years, we've been  very heavily expanding in terms of fulfillment capacity because of the growth that  we've been experiencing. That certainly would put pressure on our overall cost structure,   certainly as a -- on a per unit basis because we're not getting the productivity. We don't get the full productivity for a number of years after expanding. 
+So depending on what type of customer is,   whether it's a -- excuse me, whether it's a retail unit, a straight third-party unit,  or an FBA unit. But again, we're certainly attempting, at least on a product basis, to be roughly agnostic.
+
+Answer_7:
+
+    In terms of attach rates, it's not -- we haven't given a lot of detail. But  I think one thing certainly to look at, it doesn't give an attach rate, but  it gives you at least a sense of the health of the business, is the number that was in the release today.   We surely have a multi-billion dollar eBook business, growing approximately 70% year-over-year. That's total year, last year.  That's growing at that rate after a -- really just launching the business approximately five years ago. So  it's a pretty good, healthy growth rate,  five years in. 
+ We're seeing good -- I can't give you specific numbers, but we're seeing very good progress on a number of our other digital media categories. Video, I talked about a little bit earlier. We're seeing Prime customers,   certainly the percentage of Prime customers who were watching free content through Prime Instant Video has gone up dramatically year-over-year. We've also increased Prime membership dramatically year-over-year. They are also purchasing paid content. 
+  Those customers that are using the service, they watch free, but they are also paying for new content, which is great. We've launched a number of new services on the music side, most recently, certainly, our CD with free MP3, which we have on many titles. It's still very early, but we certainly like that service and pleased to offer it to customers. So I can't give you specific for attach rates, but  the business is making good progress on the video content side and again, it's still very early.
+
+Answer_8:
+
+    Sure. Just in terms of overall selection, as we added to  Prime, what I was talking about earlier in terms of having  a -- just a more expanded footprint is,  there's no question that's helping us add additional selection more economically to Prime.  So  that's both in terms of third-party selection as well as our retail selection.  So that's something that we  continue to have the benefit of as we get  more and more members of Prime and have a bigger and bigger concentration of  two-day shipping in the US for that. 
+So we did add  the shipping portion of the FBA fees in Q1 of 2012 and we see some benefit year-over-year. But we're still seeing leverage in terms of our,   ex the FBA fees,   quite a bit of leverage there. So we don't have the specific number for you there, but  we're still seeing quite a bit of leverage there, ex that reclass that you're referring to.
+
+Answer_9:
+
+    If you take a look at our growth rate, we're -- we  think the growth rate for Q4 was solid. It was up 23% on a revenue basis, quite a bit higher than that on a unit growth basis, up 32% year-over-year. In terms of  some of the things that we saw,   we,  again, there's -- we saw solid growth across many different categories and geographies  year-over-year. 
+Certainly, some things to call out in terms of things that may have been a little bit softer.   A few examples would be we did see some of the higher average selling price items,   particularly the items that are greater than $1,000, a little bit softer. A few of the  consumer electronics  sub-categories like  TVs, MP3 players, digital cameras,  to some extent,  were softer. But, again,   with the base that we have in Q4, still very solid growth. 
+Another one,   we certainly were thrilled to have Paperwhite in our lineup.  It's certainly the best eReader that's out there and we're very pleased with it. But we couldn't keep up with demand. We would have had more sales in Q4 if we were able to keep up with the demand.  So the team is  working very hard to make sure we have good in-stock going forward on that product. But  we certainly could have sold more in Q4.
+
+Answer_10:
+
+    We'll continue to look at  -- continue to expand our selection, both in terms of Amazon  Instant Video as well as Prime Instant Video. We'll do that in a number of different ways.  We think we have a very interesting selection right now.  You should expect that we'll be spending more on content as it relates to Prime over time and we'll continue to add selection on Amazon Instant Video. Beyond that, you'll have to stay tuned.
+
+Answer_11:
+
+    In terms of the AWS business, we've --  the business is growing very fast. We've increased a number of services pretty dramatically over the past several years. The team's doing a fantastic job there and  we'll  continue to innovate on behalf of customers in that space. There's a number of other things that go into that line item, other. Some of the credit card, as well as other marketing  revenue goes in there,  so -- but again, AWS is in that line item.
+
+Answer_12:
+
+    Yes, there's not a particular callout that I can make on that. The only thing that I would,   in terms of the change I'm referring to, but in terms of the difference between the two,   keep in mind that a   couple factors, one, mix of business is a little bit different. Our AWS business is in the North America segment. 
+You also have some newer geographies. Our geographies --  I shouldn't say that  are necessarily newer, but geographies  that we're investing in heavily that  have a longer-term horizon for returns, some of the ones I mentioned earlier. So those are  factors as you look at the two different segments.
+
+Answer_13:
+
+    Yes, I apologize. We're not -- we  haven't broken out the  first-party versus third-party.   It's not something we've done  for -- not something I'm doing today or we've done in previous calls, so there's not a lot I can help you with there.
+
+Answer_14:
+
+    That's correct.
+
+Answer_15:
+
+    There's not a lot I can specifically talk about as it relates to LivingSocial beyond what's in our results today and what we'll have in our 10-K, which will be filed  soon.  So I would encourage you to take a look at our full disclosures related to that. But in terms of Local, there certainly is still a very interesting opportunity there. We do have a couple -- we have an investment in LivingSocial. 
+We also have a local business ourselves.  So  those are -- it's an interesting opportunity. It's a long-term opportunity and we'll continue to work on that -- for customers to make that experience even better.  You should think about it not unlike a lot of the other businesses that we invest in, with it [budding] over  long-term horizon and it's very early there.
+
+Answer_16:
+
+    Okay. Thank you for joining us on the call today and for your questions. A replay will be available on our Investor Relations website at least through the end of the quarter. We appreciate your interest in Amazon.com and look forward to talking with you again next quarter.
+

exam/part2_problem1/Problem_1_Conference_Call_Segments/call_1_presentation.txt

@@ -0,0 +1,23 @@
+
+Hello, and welcome to our Q4 2012 financial results conference call. Joining us today is Tom Szkutak, our CFO. We will be available for questions after our prepared remarks. The following discussion and responses to your questions reflect management's views as of today, January 29, 2013, only, and will include forward-looking statements. Actual results may differ materially. Additional information about factors that could potentially impact our financial results is included in today's press release and our filings with the SEC, including our most recent Annual Report on Form 10-K. 
+As you listen to today's conference call, we encourage you to have our press release in front of you, which includes our financial results, as well as metrics and commentary on the quarter. During this call, we will discuss certain non-GAAP financial measures. In our press release, slides accompanying this webcast  and our filings with the SEC, each of which is posted on our IR website. 
+You will find additional disclosures regarding these non-GAAP measures, including reconciliations to these measures, with comparable GAAP measures. Finally, unless otherwise stated, all comparisons in this call will be against our results for the comparable period of 2011. Now, I'll turn the call over to Tom. 
+
+Thanks, Sean. I'll begin with comments on our fourth quarter financial results. Trailing 12-month operating cash flow increased 7% to $4.18 billion. Trailing 12-month free cash flow decreased 81% to $395 million. Trailing 12-month capital expenditures were $3.79 billion. This amount includes $1.4 billion in purchases of our previously leased corporate office space, as well as property for development of additional corporate office space located in Seattle, Washington, which we purchased in the fourth quarter. 
+The increase in capital expenditures reflects additional investments in support of continued business growth, consisting of investing in technology infrastructure, including Amazon Web Services and additional capacity to support our fulfillment operations. Return on invested capital was 4%, down from 22%. ROIC is TTM free cash flow divided by average of total assets minus current liabilities, excluding the current portion of long-term debt over five quarter-ends. The combination of common stock and stock-based awards outstanding was 470 million shares compared with 468 million shares one year ago. 
+Worldwide revenue grew 22% to $21.27 billion, or 23% excluding the $178 million unfavorable impact from year-over-year changes in foreign exchange. We're grateful to our customers, who continue to take advantage of our low prices, vast selection, and shipping offers. 
+Media revenue increased to $6.51 billion, up 8%, or 10%, excluding foreign exchange. EGM revenue increased to $13.93 billion, up 28%, or 29%, excluding foreign exchange. Worldwide EGM increased to 65% of worldwide sales, up from 63%. Worldwide paid unit growth was 32%. Active customer accounts exceeded 200 million. Worldwide active seller accounts were more than 2 million. Seller units represented 39% of paid units. 
+Now I'll discuss operating expenses, excluding stock-based compensation. Cost of sales was $16.14 billion, or 75.9% of revenue, compared with 79.3%. Fulfillment, marketing, technology and content,  and G&A combined was $4.45 billion, or 20.9% of sales, up approximately 293 basis points year-over-year. Fulfillment was $2.2 billion, or 10.3% of revenue, compared with 9.3%. Tech and content was $1.22 billion, or 5.7% of revenue, compared with 4.5%. Marketing was $833 million, or 3.9% of revenue, compared with 3.3%. 
+Now I'll talk about our segment results and consistent with prior periods, we do not allocate the segments, our stock-based compensation, or other operating expense line item. In the North America segment, revenue grew 23% to $12.17 billion. Media revenue grew 13% to $2.9 billion. EGM revenue grew 24% to $8.5 billion,  representing 70% of North America revenues, up from 69%. North America segment operating income increased 114% to $608 million, a 5% operating margin. 
+In the International segment, revenue grew 21% to $9.09 billion. Adjusting for the $183 million year-over-year unfavorable impact from foreign exchange, revenue growth was 23%. Media revenue grew 5% to $3.61 billion, or 7% excluding foreign exchange. And EGM revenue grew 35% to $5.43 billion, or 37% excluding foreign exchange. EGM now represents 60% of international revenues,  up from 54%. 
+International segment operating income decreased 61% to $70 million, at 0.8% operating margin. Excluding the unfavorable impact from foreign exchange, international segment operating income decreased 56%. CSOI increased 47% to $678 million, or 3.2% of revenue, up approximately 54 basis points year-over-year. Unlike CSOI, our GAAP operating income includes stock-based compensation expense and other operating expense. 
+GAAP operating income increased 56% to $405 million, or 1.9% of net sales. Our income tax expense was $194 million in Q4, resulting in a 58% rate for the quarter, and a 79% rate for the full year 2012. GAAP net income was $97 million, or $0.21 per diluted share, compared with $177 million and $0.38 per diluted share. 
+Now, I'll discuss the full-year results. Revenue grew 27% to $61.09 billion. North America revenue grew 30% to $34.81 billion and international revenue grew 23% to $26.28 billion,  or 27% growth excluding year-over-year changes in foreign exchange. Consolidated  segment operating  income, or CSOI, increased 6% to $1.67 billion, or 7%, excluding the unfavorable year-over-year impact from foreign exchange. Operating margin decreased 54 basis points, 2.7%.  GAAP operating income decreased 22% to  $676 million, or 1.1% of net sales. 
+Turning to the balance sheet, cash and marketable securities increased $1.87 billion year-over-year to $11.45 billion. Inventory increased 21% to $6.03 billion and inventory turns were 9.3, down from 10.3 turns a year ago, as we expanded selection and improved in-stock levels and introduced new product categories. 
+Accounts payable increased 20% to $13.32 billion and  accounts payable  days increased to 76 from 74 in the prior year. In Q4 2012, we issued $3 billion of senior non-convertible unsecured debt and three-, five- and seven-year tranches with proceeds to be used for general corporate purposes. 
+  I'll conclude my portion of today's call with guidance. Incorporated into the guidance are the order trends we've seen to date and what we believe to date  to be appropriately conservative assumptions. Our results are inherently unpredictable and may be materially affected by many factors, including a high level of uncertainty surrounding exchange rate fluctuations, as well as the global economy, and consumer spending. It's not possible to accurately predict demand and therefore, our actual results could differ materially from our guidance. 
+As we describe in more detail on our public filings, issues such as settling intercompany balances and foreign currencies amongst our subsidiaries; unfavorable resolution of legal matters; and changes to our effective tax rates can all have a material impact on guidance. Our guidance further assumes that we don't conclude any additional business acquisitions, investments, or settlements, record any further revisions to stock-based compensation estimates, and that foreign exchange rates remain approximately where they have been recently. 
+For Q1 2013, we expect net sales of between $15.0 billion and $16.6 billion, or growth between 14% and 26%. This guidance anticipates approximately 122 basis points of unfavorable impact of foreign exchange rates. GAAP operating income or loss to be between  $285 million loss and $65 million positive income compared to $192 million in income in the prior period year. This includes approximately $285 million for stock-based compensation and amortization of intangible assets. 
+We anticipate consolidated segment operating income, which excludes stock-based  compensation and other expense, to be between $0 and $350 million, compared to $398 million income in the prior period. We remain heads-down focused on driving a better customer experience through price, selection and convenience. We believe putting customers first is the only reliable way to create lasting value for shareholders. Thanks. With that, Sean, let's move to questions. 
+
+Great. Thanks, Tom. Let's move on to the Q&A portion of the call. Operator, will you please remind our listeners how to initiate a question?

exam/part2_problem1/Problem_1_Conference_Call_Segments/call_1_questions.txt

@@ -0,0 +1,72 @@
+Question_1:
+
+    Tom, it looks to us that you have successfully begun the transition of your logistics cost in the direction of being more of a fixed fulfillment cost, with lower unit base shipping costs, given that the growth rate of up on shipping is now meaningfully below the fulfillment growth rate. So the  question is, is that something that we should expect to continue now on the back of this meaningful fulfillment center expansion ramp? 
+Then separately, but on the same topic, we're also wondering, are there other parts of the business in which you can make this transition to more of a fixed cost in the future? Thanks.
+
+Question_2:
+
+    Just wanted to ask about the shift to third-party and in particular, I think last 4Q, you talked about shifting more of the business in the video game space in particular to third-party. Are there certain categories that you would specifically point to in this last 4Q where you made   a similar shift? Thanks.
+
+Question_3:
+
+    Looks like you're moving more in the direction of same-day shipping. Would you provide any thoughts or insights here? Should we anticipate a significant ramp-up of fulfillment center build-outs, particularly in Q2, Q3?  Maybe you could just comment more generally on your FC build-out plans, US versus international. Thanks.
+
+Question_4:
+
+    The paid unit growth deceleration to  32%; there seems a bit of a disconnect versus an active customer growth that didn't decelerate as much on a per-customer basis. Are you seeing some change in overall activity? Is that the impact of newer international markets?  Then just on the investment cycle, the last couple of calls,   you've consistently called out future investments, whether the $1.4 billion for Seattle or distribution center expansion. You didn't do it this quarter. I don't want to over-read into it, but does that mean that we're at the end of a major investment cycle? Thanks.
+
+Question_5:
+
+    I was wondering if you could give us just a bit of a sense of what you're seeing as you roll out fulfillment centers into new states. Obviously, the sales tax issue has been one that's come up a good bit. But  you've touched on the impact of being closer with faster delivery in those same states. Net-net, what do you see as being the impact on -- I'm not asking you to give us a state-by-state breakdown, but the impact of rolling out the fulfillment center footprint, taking both of those things into account?
+
+Question_6:
+
+    From a high level, can you remind us the margin difference between 1P and 3P? I know in the past you've talked about you  being agnostic between the two. But the growth in 3P and what your CSOI margin as  would imply that 3P has a little bit  higher margin. Is that the correct read-through? Thanks.
+
+Question_7:
+
+    On the device strategy, with Kindles and Kindle HDs, can you help us at all with what you're seeing with attach rate trends on digital goods, after people buy the Kindles? Then  generally, do you see a higher overall GMV per customer on Kindle devices than users on Amazon apps through other devices?
+
+Question_8:
+
+    As you guys build out the Prime membership and the SKUs available through FBA, you run into this challenge of increasing your unit volume of tail items.  At the same time, you need to get products to customers in much shorter shipping cycles. So can you talk about how the new fulfillment footprint helps on that front -- is your reliance on air going down as a percent of total items shipped? 
+Then if I remember correctly, you guys reclassified some FBA revenue early in 2012. Can you just remind us how that flows through the shipping revenue line and what would happen as you comp that in the beginning of '13? Thanks.
+
+Question_9:
+
+    Last year, you reported 4Q in the lower half of revenue range and you were able to call out Taiwan and video games category. Any reasons why revenues were   in the lower half this quarter and then if you look at gross profit growth, it clearly has accelerated to 40% growth, but unit growth decelerated to 32%. Can you describe what's driving that   accelerating gross profit in the face of lower unit growth?  Is it possible maybe you're letting the third-parties handle some of the maybe less profitable categories for Amazon? Could you talk about that at all? Thank you.
+
+Question_10:
+
+    I wanted to ask you on Amazon Instant Video, how you felt about your current offering and your ability to add exclusive content in a cost-effective manner through Amazon Studios? And  what the relationship is between adding more titles and uses on your hardware such as your Amazon Kindle devices? Thanks.
+
+Question_11:
+
+    Can you talk a little bit about the non-AWS drivers within that line, such as advertising?  As you look out, are there advantages to you in terms of having AWS, as far as offering things like buying, serving analytics through the AWS platform to advertisers? Where are you   in that roll-out phase now? Thank you.
+
+Question_12:
+
+    I wondered if you could comment on the pace of business throughout the fourth quarter. Did you see a particular deceleration in the month of December?  Second question, on international, I'm wondering are there any callouts in terms of specific countries that may have been weighing on profitability, countries where there's outsized dollars of investment going on, or accelerated investment at the current time? Thanks.
+
+Question_13:
+
+    In terms of -- there's not a lot of specifics. We have a long-standing practice of not talking about  trends within the quarter, and -- but  in terms of year-over-year growth or anything like that. Obviously, the  Q4 is very seasonal.   December is, by far,  the largest month  followed by November, but in terms of individual growth rates,   don't have a lot of comments there. 
+In terms of international, yes, there certainly are geographies that we're investing in heavily.   Certainly China would be one. Some of the newer --   some of the European countries, including some of the newer launches we're investing in.  So those are certainly -- you're seeing those represented in those segment results.
+
+Question_14:
+
+    In terms of your  recent margin profile, that's truly comparing US and International, over the past four quarters, the vast majority improvement of other have been less worse margin continuing of -- seeing have  been  due to US margins improving, whether International was, planning in the range of  300, 350 basis points. 
+In Q4, international declined just 160 basis points, so my question is, should we read this as a big enough of a trend that we saw,  how international -- how domestic margins increased over the last four quarters, whether international should follow the same route over the next foreseeable future?
+
+Question_15:
+
+    It looks like the first-party gross margin is actually  up fairly meaningfully year-over-year. I wonder if you can  talk about that within the context of how  Amazon Kindle hardware is impacting the  gross margin. Then separately, just any view on how video game sales  impacted  the year-over-year growth rates for the quarter? Thanks.
+
+Question_16:
+
+    The content cost for Prime Instant Video flow into the cost of goods line, even though there's no direct revenue associated with it, not into the tech and content line, right?  Is that right?
+
+Question_17:
+
+    Okay. So gross margins would have been even higher if  those costs were included elsewhere or broken out separately. Do you have any   common or -- to reduce the carrying value in your investment in LivingSocial, do you have a feel  on a broad strategic level as to whether the local deals business through Amazon Local or through LivingSocial is something that you care to keep investing in? Thanks.
+

exam/part2_problem1/Problem_1_Conference_Call_Segments/call_20_answers.txt

@@ -0,0 +1,82 @@
+Answer_1:
+
+    Yes, thanks, Justin. This is Dave. I'd also point you to beyond the balance sheet. There's some disclosure around additions to unearned revenue as part of the cash flow statement. So when you look at that, for the 3 months ended, you'll see that up around 34%, 35% versus the same time last year.
+And historically, what we've seen with unearned revenue is big and leading contributor to that is Prime memberships. The example is a customer signing up, paying $99 upfront and having that amortize over the 12 month period. That continues to be the biggest absolute contributor to what you see there. The other one area that's been growing over the past few years is Amazon Web Services, features like reserved instances where those customers can pay for services upfront, in some cases and receive discounts over a multiyear period. What we're seeing and more recently, I think, is on the Prime piece, we launched month-to-month Prime last year, and if you think about how that works, customers are paying $10.99 per month as they go. So there's less that's deferred. So, that's I think one of a number of factors. There's obviously other mix factors going in there besides the pieces that I just mentioned. But we've seen monthly Prime has been a good driver of getting more members into the program. So that's part of what you're seeing.
+
+Answer_2:
+
+    And your question about Whole Foods, yes, we're really excited to have them as part of the team now after the acquisition in late August. What you see in the financial results for this quarter is a -- it's shown actually in the new physical stores, revenue component $1.3 billion of revenue, $21 million of operating income. And that's where you'll be seeing Whole Foods revenue showing up. In addition, that is -- that class of revenue, physical store's revenue is going to be where we are going to book any sales that where a customer physically select an item in a store. So it also -- it does include our Amazon Books. If you step back on Whole Foods, again, I think we've had busy months since we've joined forces, offering lower prices on a range of key grocery items in the stores. Launching the private-label -- Whole Foods private-label products on Amazon, we've got technical work to make Prime the Whole Foods customer rewards program, and we'll have that coming out in the future. We've added Amazon Lockers to select Whole Foods stores. So lots of activity, lots of energy and we're real excited to show customers what's possible when we join forces here.
+
+Answer_3:
+
+    Sure. In Q3, yes, I would say we had a very strong Prime Day. As you know, we talked about that on the last call, but it really carried into the quarter. We had a record day for sign-ups for free trials for Prime and Prime Day globally. Had a very strong Prime Day in particular internationally. So it really got a lot more traction in this, the third year that we've had it. So I would point mostly to those factors. There's also very strong quarter for AWS, revenue growth was the same as Q2 and now we're at an $18 billion run rate. Whereas last quarter, when I had this call, we were at $16 billion. So very pleased with the customer response in the AWS business as well. And usage growth is actually growing a lot higher than revenue growth. So particularly pleased with the new customers that we've added and the additional workloads that we've picked up from existing customers.
+
+Answer_4:
+
+    Yes, it was pretty strong across the board. We had the impact of Souq, obviously this quarter internationally and the Diwali holiday in India was a few days earlier, which maybe pushed some sales into Q3 versus Q4. But generally, it was the strength of Prime Day internationally and it carried through the quarter. So it's -- but generally, I would point to the increase selection, a lot of the building blocks we've been working on. All the Prime benefits, advancement and free shipping offers or faster shipping offers, the Prime benefits that drive engagement, of course, adding selection, adding Fulfilled by Amazon partners and the selection that they bring. So again, I wouldn't point to anything other than the Prime Day pickup, but stronger than -- it was stronger than probably I anticipated.
+
+Answer_5:
+
+    Sure. On Whole Foods, I would say it is early. August 28 was the close date and -- what I could tell you is, I've been in meetings with John Mackey and his team and they're very like-minded with us, customer-obsessed, ready to work together to continue their mission then expand on their offerings that we can offer customers. The other things I mentioned, price reductions early on, selling products on -- their products on Amazon.com and also installing Amazon Lockers. I think over time, you'll see more cooperation and working together between AmazonFresh, Prime Now and Whole Foods, as we can explore different ways to serve the customer. So that's kind of the earlier report on Whole Foods. So far so good, and we're thrilled to finally be working together after the summer of closing the deal. On subscription revenue, let me just remember your question there. We had essentially 59% growth, you said, 600 basis points higher than Q2. In this line item is certainly the fees associated with Amazon Prime and also it's where a lot of our subscription services from digital music, digital video, audio books, eBooks. So there's some moving parts in there. The growth in Prime has been fairly consistent over the last recent quarters in Prime memberships. And as I said, we had a great -- the largest new Prime -- new sign-ups on Prime Day for the Prime program. The monthly program is gaining traction. It's an attractive option for a lot of people. And again, on this -- on the other subscription services, music especially, it works just so well with our Echo device that we're seeing a lot of growth in that area as we increase the number of Echo devices and customers using the Echo devices.
+
+Answer_6:
+
+    Yes, Eric. This is Dave. I think we put out a release saying earlier this quarter talking about 120,000 operations folks to bring into our fulfillment centers this year. So we're continuing to hire and hire across a number of locations. We talked earlier this year about expecting to see a greater than -- roughly greater than 30% square footage growth in an operations, so we're certainly hiring to support that. More of these facilities do have Amazon Robotics and certainly that helps with the efficiencies there, but it requires tremendous effort from a number of our folks as well. And so we'll continue to hire there.
+
+Answer_7:
+
+    While we're on this subject of headcount. Headcount grew 77% year-over-year in the quarter. That includes the impact of the Whole Foods and Souq acquisitions. Without those -- without that headcount, the base Amazon grew 47%, which is still up from 42% in Q2. So a lot of the additional pickup in Q3 was tied to our ramp for the holidays. We continue to hire a lot of software engineers. We continue to hire a lot of sales reps, and it's tied directly to our major investment areas of AWS, Prime Video and devices.
+
+Answer_8:
+
+    Yes, I can't confirm or deny any of the rumors related to pharmacy or anything else. I will say we do see a lot of opportunity with Whole Foods. As I said, there will be a lot of work together between Prime Now, AmazonFresh, Whole Foods, Whole Foods products on the Amazon site, Lockers at the Amazon -- excuse me, Amazon Lockers at the Whole Foods stores. So there'll be a lot of integration, a lot of touch points and a lot of working together as we go forward. And we think we'll also be developing new store formats and everything else just as we've talked about in the past with before Whole Foods, amazon Bookstores, Amazon Go and the opportunity that technology presents. We have campus -- on-campus bookstores. So we're experimenting with a lot of formats. I think that Whole Foods really gives us a vast head start on that and a great base and a great team to work with who has a lot of history, and a lot of -- they probably have 10 to 20 years of learnings that we don't have and wouldn't have. So we're really excited about that. And I think working together will bring our different strengths to the table and really be able to build on behalf of customers.
+
+Answer_9:
+
+    Sure. Let me start with the revenue. So you're right. Other revenue grew 58% in the quarter, and that includes advertising services and other things such as our cobranded credit card agreements. Advertising revenue continues to grow very quickly, and its year-over-year growth rate is actually faster than the other revenue line item that you see there. But I would say generally, we're very pleased with the advertising business. Our goal here is to be helpful to consumers and help them make better shopping and selection choices. We'll also provide in giving them targeted recommendations. So making it helpful for customers rather than intrusive. And then we believe that by creating that  and engaging advertising experience with the customers, it will also maximize success for our advertisers. So it's an important part of the flywheel and the -- so it's -- the traffic and the customers, especially the Prime customers that come to the site, are really the ones that we can use to help them select items and use advertising to help make their decisions more informed when they're picking products.
+On the international, yes, I can't split it, the effects. But I'll tell you again, it is international expansion in -- primarily in India where we're continuing to add benefits, and we launched Prime there a year ago, if you remember, and we've had more Prime members joined in India than in any other country in the first 12 months. We have free shipping on 10 million items there, and we're continuing to add benefits: Prime Video, Amazon Family, we've had a first Prime Day there this year, Prime Music. Amazon business is also expanding in India. So a lot of positive momentum and investment going on in India. Very pleased with that. We also recently announced Echo and Alexa are available in India. So that -- that should be well received by the Indian consumer base. But excluding India and Souq, the rest is the Prime benefits and the continued growth in the other countries that we've been in for a while, continue to roll out Prime Now and AmazonFresh. In Video, we launched -if you remember in Q4 of last year, we launched Prime Video in 200 -- over 200 countries globally, continue to build up not only the offerings but also the engagement that we see from those Prime customers. So becoming more engaged, and we're also doing the basic blocking, tackling of adding selection, especially FBA selection, increasing free shipping offers and also speed of shipping offers. So there's a lot of -- a lot of different influences there. You saw the growth rate. It's, we believe, it's resonating with customers. So we will continue to invest and think that we have a good path forward.
+
+Answer_10:
+
+    Yes, Ross. Thanks for the question. This is Dave. On Brazil, just briefly, yes, we did recently expand and add an electronics category there in Brazil. It's a third-party marketplace offering. You may recall we've been in Brazil for a number of years now, initially launched with really a Kindle and eBooks offering without the sort of physical categories and more recently added physical books again, a third-party marketplace offering. So I think we're excited about the electronics that are getting out there. There's a wide variety of products included in that category: Smartphones, tablets, cameras, TVs, what have you. So I think, really excited to get that technology out there for Brazilians. And I think beyond that, really just focus on those categories and growing selection there, but I can't speculate on what we might do in the future there.
+
+Answer_11:
+
+    And on Whole Foods, yes, I believe the total is 465 stores or thereabouts. And we have 12 bookstores now. We are adding a few more in the near future in California, Washington D.C. and Austin. So yes, you will see more expansion from us. We're not ready to announce any, what that will look like, and we're working with the Whole Foods team on what maybe what they will -- how many more stores we might have in that area. But still early. So, those plans will develop over time.
+
+Answer_12:
+
+    Yes, Heath, this is Dave. I'll take that first question in relation to health care. I think where you're seeing us do some work on that, I think is in the areas of Amazon Business, and that's really just from the standpoint of there are many different types of businesses that we can serve with that offering, and we're in our third year now. And so there's a lot of different sectors, whether they're hospitals, educational institutions, labs, government agencies. I mean there's a lot of different shapes and sizes across industries that we can serve with that. And so I think what you're seeing us do is really focus on services that meet those businesses, multiuser accounts, improving approval workflow tools, and just more recently, we introduced Amazon Business for Business Prime shipping, which we think will be a great way for our businesses use multiuser -- Business customers that have multiuser accounts, and that's in the U.S. and in Germany. So I think it's part of that offering, and we really have to see how that evolves. And the other side, too, is certainly health care is one of many sectors as part of Amazon Web Services that are important customers that we're focusing on and building tools for. So probably nothing specific to call out on that one, but that's a lot of what you're seeing from us today.
+
+Answer_13:
+
+    Yes, on AWS, we don't provide segment level estimates, but we did consider in our guidance the impact of the price cuts last year. You're right, we had a number of price cuts on  time to -- about around December 1 of last year that certainly had an impact on Q4 of last year. But again, price cuts and not only price cuts, but new products that have lower average costs and can cannibalize more expensive products is pretty much a part of our business all the time in AWS. So we're looking forward to a strong Q4 and re:Invent is in December, so that's -- the end of November, early December, so that is also an exciting time of year for the AWS business.
+
+Answer_14:
+
+    Sure, let me start with Video, and I just want to be clear, we are going to continue to invest in video and increase that investment in 2018. And why are we going to do that? It's because the Video business is having great results with our most important customer base, which is our Prime customers. They continue to -- it continues to drive better conversion of free trials, higher membership renewal rates for existing subscribers and higher overall engagement. We're seeing engagement go up year after year in video and also music and a lot of the other Prime benefits. We also know Prime members who watch video also spend more on Amazon. And we have a lot of data. We're -- that's the advantage we have is that we see the viewing patterns and we also see the sales patterns, so we can tie the 2 together and understand which video resonates with Prime members, which video doesn't, and make midcourse corrections. So we always do that, the -- we're always changing the emphasis and looking for those more impactful shows, more shows that resonate better with our customer base and things they want to see. And -- so that will always be an important part of our Prime offer, and we'll continue to use the data that we have to make better and better decisions about where to invest our dollars in Prime Video. So we're very -- we remain very bullish on the Video business, and we're looking forward to a lot of interesting new projects back end of this year and also lined up into next year. On the -- sorry, the second comment was, the overlap. Yes, so Whole Foods, I think I mentioned this earlier, but we definitely see commonality and overlap with the Whole Foods business as well as Amazon in total, but specifically, Prime Now, and also, AmazonFresh. And we're going to work to see how we expand those offerings, and in some cases, combine them. We're not sure how it will play out, but we're going to cooperate across those different customer touch points and trying to make them better for customers. We know customers are going to buy just like in the physical world, sometimes you go to a convenience store, sometimes you go to a supermarket, sometimes you go to a superstore. Sometimes you need things within an hour, sometimes you can wait days for shipment. So there's no one paradigm for all customer engagement, and we're looking for the ones that resonate best with customers, and we're going to continue to work on those.
+
+Answer_15:
+
+    I think I'll start on traffic. So we're not disclosing traffic figures. Whole Foods will be issuing a final 10-K at the end of the -- early next month, so you'll see a better perspective on the entire quarter. The quarter -- the 4-week period that you see running through the Amazon P&L this quarter is pretty hard to draw conclusions on other than revenue at this point. But Dave, do you have more on the...
+
+Answer_16:
+
+    Yes, Jason, this is Dave. On the ad-supported question, I think what you've seen to date is really particularly as you're looking as a customer as a Prime Video member and watching content, we view that as you paid into that service and able to watch those shows ad-free. There may be instances where you're viewing a first episode and there's an ad leading into that if it's the first free episode, but generally like to have that as customers have paid into that program and they'll be able to enjoy that without interruption.
+
+Answer_17:
+
+    Probably a little of both. We think that, especially as we get into more and more Amazon Logistics deliveries, we're going to experiment with different ways to deliver things that make it easier on consumers, things that cut down on potential theft on doorsteps, but really it's mostly about increasing convenience for them.
+
+Answer_18:
+
+    Yes, I think that's right, in terms of overall investments there.
+
+Answer_19:
+
+    And the other investments, obviously, are maybe the bigger-ish things are like planes and transportation capacity in general. And there our philosophy is, again, we're going to watch out for our customers, we're going to build capacity that gives them great service 12 months a year but particularly at holidays, by investing in those transportation options, we do so at same costs or cost parity, I would say, at the very minimum, but it also allows us to do interesting things like extend cutoff times for customers, enable Sunday delivery, enable better weekend delivery. So we're seeing a lot of benefits, just the ability to stretch the order cut off from what once was 3 p.m. in the afternoon to midnight, has huge benefits both for the customer and also for Amazon. It results in incremental sales, it also builds that trust that when you need something, Amazon's going to be there for you. And I need to remind you that the Thursday Night Football game will start in 2 hours and 20 minutes so.
+
+Answer_20:
+
+    On that, thanks for joining us on the call today and for your questions. A replay will be available on our Investor Relations website at least through the end of the quarter. We appreciate your interest in Amazon and look forward to talking with you again next quarter.
+

exam/part2_problem1/Problem_1_Conference_Call_Segments/call_20_presentation.txt

@@ -0,0 +1,7 @@
+
+Hello, and welcome to our Q3 2017 financial results conference call. Joining us today to answer your questions is Brian Olsavsky, our CFO.
+As you listen to today's conference call, we encourage you to have our press release in front of you, which includes our financial results as well as metrics and commentary on the quarter. Please note, unless otherwise stated, all comparisons in this call will be against our results for the comparable period of 2016.
+Our comments and responses to your questions reflect management's views as of today, October 26, 2017, only and will include forward-looking statements. Actual results may differ materially. Additional information about factors that could potentially impact our financial results is included in today's press release and our filings with the SEC, including our most recent annual report on Form 10-K and subsequent filings. During this call, we may discuss certain non-GAAP financial measures. In our press release, slides accompanying this webcast and our filings with the SEC, each of which is posted on our IR website, you will find additional disclosures regarding these non-GAAP measures, including reconciliations of these measures with comparable GAAP measures.
+Our guidance incorporates the order trends that we've seen to date and what we believe today to be appropriate assumptions. Our results are inherently unpredictable and may be materially affected by many factors, including fluctuations in foreign exchange rates, changes in global economic conditions and customer spending, world events, the rate of growth of the Internet, online commerce and cloud services and the various factors detailed in our filings with the SEC.
+Our guidance also assumes, among other things, that we don't conclude any additional business acquisitions, investments, restructurings or legal settlements. It's not possible to accurately predict the demand for our goods and services, and therefore, our actual results could differ materially from our guidance.
+With that, we will move to Q&A. Operator, please remind our listeners how to initiate a question.

exam/part2_problem1/Problem_1_Conference_Call_Segments/call_20_questions.txt

@@ -0,0 +1,48 @@
+Question_1:
+
+    Great. I guess I'll just start with, can you give us your thoughts on the Whole Foods integration? How you see that contributing to the bottom line over time? And then on a quick balance sheet note, we obviously saw the strong AWS results, but unearned revenue doesn't seem to be growing at the rate it was in the past. Maybe comment a little bit on the unearned revenue growth on the balance sheet, why it might be slower than the past?
+
+Question_2:
+
+    Guess I'll ask 2 as well. The first one is, that was a bit of a usual upside to your guidance, even stripping out Whole Foods. Is there -- what would you -- what's most surprised you in the quarter? You've been pretty consistent to how you reported versus your guide. So something unusual happened or somewhat unusual happen? What would you attribute that to?
+
+Question_3:
+
+    And then briefly on the international retail, that growth also by itself was intrinsically stronger than you've seen in a while. Any particular markets geographic markets, you would call out there?
+
+Question_4:
+
+    I have 2. Just on Whole Foods again, I was wondering, could you talk about 1 or 2 of the biggest surprises you've seen so far? And then maybe just a strategic opportunity, as you see, of having a brick-and-mortar presence as you look to continue to grow your overall business? And the second one on the subscriptions revenue, you accelerated to 59%, could you just talk about which countries or which regions are driving that? And maybe talk a little bit about the growth or the cadence of what's happening in the U.S., your oldest market?
+
+Question_5:
+
+    In the comment in the release on seasonal workers, that looks roughly flat year-on-year. I wanted to know if you could understand a little bit more about the trajectory around the workers needed to fulfill seasonal holiday demand and what that might also mean for automation or efficiency benefits you're getting inside your fulfillment centers.
+
+Question_6:
+
+    Brian, I was hoping you could help us understand how at this point you're prioritizing expansion into new product categories. In particular, there's a lot of talk now about potentially using Whole Foods stores for physical pharmacy presence and also that you've perhaps got an approvals across multiple states in that category. Can you just help us understand the approach in general to new categories and pharmacy, in particular?
+
+Question_7:
+
+    The other category which includes advertising accelerated 58% in the quarter. I think the common view there is that's a fairly high-margin business, certainly higher than corporate average. Is there any reason why that isn't the right assumption to make? Essentially what impact is the growth in the ad business having on the company's overall profitability? And in terms of the increased losses in the international retail segment of the business, can you provide some color around how much of that's being driven by Amazon launching into new markets, which I know you continue to do, versus investing more heavily in existing markets?
+
+Question_8:
+
+    Two questions. There's been some news flow recently about Brazil expansion. Can you just talk about how Brazil compares to maybe some of the other international markets that you're investing in? What level of investment should we expect in Brazil maybe relative to like in Australia or in India? And then the follow-up on the Whole Foods. So do you feel like the store footprint at 460-odd stores is adequate? Or any color on plans to expand either the Whole Foods store footprint or the Amazon bookstores or those other ones you mentioned?
+
+Question_9:
+
+    I understand you can't comment on rumors one way or the other, but curious as you think about categories like health care and obviously you guys are already in health care to some degree through Amazon Business, can you give us a bit of a status update on what you do have out there now? And particularly how the company and management thinks about entering more regulated businesses over time? How you would approach that versus a standard category that you might go into? Or maybe again, I know you can't comment on rumors, how you have approached to that in the past or in other market? And then to the extent that we are thinking about AWS growth in the fourth quarter, you guys are lapping the price cuts from last year and obviously have about an 800 basis point easier comp Q3 to Q4, taking those 2 things into consideration, how should we think about AWS growth through the end of the year?
+
+Question_10:
+
+    I had 2, please. The first, Prime Now, Fresh Prime Pantry and Whole Foods, they're all distinct offerings, but it does seem like there's natural overlap with the potential to be further connected. And I was just wondering if you could just speak to how we should think about those 4 as distinct product offerings in the future versus being more integrated and possibly even, in some cases, eliminated to remove overlap from a customer experience standpoint? And then secondly, given the recent management changes in video, Brian, I was just wondering if you could speak to any strategic shifts in Video or changes in the pace of content portfolio build in coming years?
+
+Question_11:
+
+    I'll actually ask 2 if I can. Just any way you can comment on the increase in Whole Foods traffic after the close? And then second, talk about your desire to have an ad-supported business on Fire TV or through Prime Video?
+
+Question_12:
+
+    Just wanted to ask about delivery, in just over the last several months, we've seen a lot of announcements in products around delivery options between Lockers, testing the Kohl's partnership, Whole Foods, obviously, Amazon Key came out recently. I just wanted to better understand this investment. Is this a result of -- or the thesis that more options could drive, obviously, more sales on the flip side? Do you think you're losing some sales by not having those options?
+

exam/part2_problem1/Problem_1_Conference_Call_Segments/call_21_answers.txt

@@ -0,0 +1,202 @@
+Answer_1:
+
+    You're saying expenses, not including LAS and the litigation?
+
+Answer_2:
+
+    I think as you look at that number, and if we keep LAS out of this, obviously, the big new savings bucket that we have is New BAC. We have indicated that we are, on a quarterly basis, at $900 million a quarter as we leave 2012. We expect that our New BAC cost savings when we get to the fourth quarter of '13 will be at $1.5 billion per quarter. So you can expect to see, on a core basis with New BAC, about a $600 million increase from where we leave 2012 to where we leave 2013.
+
+Answer_3:
+
+    The seasonal stuff, if you are going Q4 to Q4, you would expect the seasonal stuff to be there, but, as we indicated, we looked at and for this quarter relative to the third quarter, there was $300 million to $400 million of stuff that we would characterize as seasonal.
+
+Answer_4:
+
+    We would expect -- and the one thing that we are being very cognizant of is that while we are investing in the business, we are not going to let inflation outrun the progress that we are working on New BAC. So I think on a net basis thinking about that $600 million number from New BAC is a good assumption.
+
+Answer_5:
+
+    Sure. I think it is important when you look at the FICC business to go back and look at the progress that we have made during 2012. If you look at FICC revenues 2012 compared to 2011 pre-DVA, they were up 36% year-over-year. If you go back and look at each of our quarterly releases in 2012, in each quarter in 2012 pre-DVA, revenues were higher than 2011 at the same time that we were taking cost out.
+The third thing I would say is that you have to realize that we run the FICC and overall debt underwriting business and look at that as one consolidated business and from a debt underwriting perspective at over $1 billion of revenue, we believe that was, as I indicated earlier, more than anyone else did this quarter on a global basis. And so we feel very good about that. Your point on the VAR is a fair one and we did see VAR increase during the fourth quarter and we would expect to see the benefits of that VAR flow through during the first quarter this year.
+
+Answer_6:
+
+    That is correct.
+
+Answer_7:
+
+    It does not, John, because I think the one thing when we announced these sales that you have to realize is that it is very important that the transition of the loans that are being sold work through a process and go in a way that is as consumer-friendly as we can do it. So there is a lot of work that goes through that. So as we look at the servicing business, that does not include in any meaningful way incremental sales. There may be some small ones over and above that and at the same time, somebody could come and look to do something as well, but, at this point, I would consider that 150,000 to be more organic reduction.
+
+Answer_8:
+
+    I would assume that you should generally expect it to come out throughout the year. It is not something you're going to have to wait for the fourth quarter to see.
+
+Answer_9:
+
+    Yes, I am hesitant, John, to give you specific numbers in the quarter. What I would say is that we gave you guidance as to how much of the fourth quarter was seasonal that we obviously wouldn't expect in the first quarter. You have got the $900 million of stock compensation expense that will come through. Expect to see a little bit of benefit in the first quarter as we continue to implement New BAC and probably the biggest variable that you can see in the first quarter that I didn't mention is really compensation expense that varies based on actual business performance. But I think if you think and look at those different metrics, you will get pretty close.
+
+Answer_10:
+
+    If you look back over the course of 2012, absent any settlements or any unusual activity, you had a run rate throughout the quarter of around $300 million per quarter in 2012. And with the Fannie settlements, as well as obviously the fact that Freddie was settled at Countrywide, you would expect that number to be $150 million or so going forward.
+
+Answer_11:
+
+    There was a less than $100 million to the negative.
+
+Answer_12:
+
+    Excluding any of that and realize that we have got a couple less days in the first quarter of this year.
+
+Answer_13:
+
+    Well, I think the average earning asset levels are probably at a level that you are not going to see an enormous amount of growth. What we do hope that happens though is that the composition of those earning assets change so that we can look at, and particularly in the institutional business as I mentioned, as well as in GWIM, there was very strong loan growth during the fourth quarter. We are focused on continuing to drive that forward and that obviously reduces the need to invest in securities and other things, and we think ultimately has a positive impact on NII and is also quite frankly consistent with managing OCI risk going forward.
+
+Answer_14:
+
+    Well, Paul, focusing on the customers and our customer base is not real restrictive since you are one and two households, so there is plenty of marketshare to go. Our penetration of the product in our Preferred segment and our Wealth Management segment is still relatively low, so there is tremendous growth.
+But as you think about shaping the mortgage business, we are kind of -- this quarter kind of moves us -- starts moving [announcements] as we close these servicing sales to where we end up with maybe 5 million serviced loans going forward producing $20 billion and growing a quarter direct to retail. And that is kind of what we want with a marketshare that steadily grows and that is kind of the equilibrium and the team has to go.
+So the next challenge ahead is obviously replacing the HARP volumes over the next year. This year, we had to replace the correspondent volumes. Next year, we have to replace the HARP volumes and the team is working diligently on that, but it is really focused on the core customers. And if you think about the cost of servicing mortgages and stuff, we need to really focus on people that we are very comfortable with the credit and keep the delinquencies down and stay away from the stray products and just chase some volume.
+
+Answer_15:
+
+    It's a good question, Glenn. When you look at -- and let's just first spend a minute on Basel 1. As I think you know that the majority of regular way loans in Basel 1 are 100% risk-weighted so that as you look at our $10 million increase in risk-weighted assets under Basel 1, it is generally speaking the net increase in our loan book.
+If you go to Basel 3, and I think you are referring to slide 9 where we talk about the different reductions, why don't I spend a moment on each of the buckets? The first is that we referenced that we had about $23 billion less through consumer real estate exposures and the way that Basel 3 works is that, as opposed to these general risk-weighted buckets, they look at loan-to-value, delinquency and other type metrics. So during the quarter, the $23 billion benefit we saw, we saw declines in the loan-to-value within our residential mortgage book. The percentage of loans that were 90 plus day delinquencies, each of those went down, which I think in large part is reflective of the changes in the underwriting standards that we have talked about before that we implemented in the fourth quarter of '08 and the first quarter of '09.
+The second thing is if you look at our home equity book, the delinquencies, as well as the loan-to-value continue to improve there, as well as the notional amount outstanding has also gone down. So we benefit there as well.
+And then the third bucket within consumer real estate are our other retail exposures, which generally represent the runoff portfolio that we have talked about, that decreased during the quarter as well. So those three different buckets within the consumer exposure are what drove the $23 billion decline there.
+If you move to the $64 billion number that we referenced largely in market risk, really go through a couple different areas where we have benefits. The first is we did have a pretty significant decline on a net basis of CVA, stressed VAR, as well as our CRM risk-weighted assets during the quarter. Over and above that, you know that some of the securitization products have very high risk-weighted asset content. We were able to fairly significantly decrease some of those securitization exposures. And during the quarter, the industry also got some guidance from a regulatory perspective on risk-weighted assets with certain securitization products that was favorable, so that helped.
+And then the last piece that we had is that there were some indexed tranches and other things within the markets business, which came down pretty significantly as well. So those were really the big items in the $64 billion bucket.
+And then with respect to the $23 billion bucket, I want to spend just a moment on that because the $23 billion reduction is not a function of going in and changing models. The $23 billion is that, each year when you update your models for actual loss experience, it drives changes in risk-weighted assets and given the strength and improvement across the credit portfolios in 2012, we have benefited from that when the models were updated.
+As you look forward, I would just say, looking forward, I think we are generally in a place now where we told you a couple quarters ago the optimization on Basel 1 was largely done and the risk-weighted assets would vary pretty proportionally with the amount of loans. From a pure risk-weighted asset perspective, I think we are largely through those reductions. But keep in mind, from a numerator or common perspective going forward, we will benefit given our deferred tax position in that the pretax number will generally grow capital on a pretax basis and we still do have some threshold deductions we can work down there.
+
+Answer_16:
+
+    There is not a permission aspect to it; it is required that we update these on an annual basis, so that is correct.
+
+Answer_17:
+
+    Hey, Glenn, the balances move every quarter. I think it is the models -- the factors that change on risk.
+
+Answer_18:
+
+    No, it is not extending duration. If you look at our securities portfolio, we continue to run that duration in and around two years. What you have to keep in mind is that we had -- during the third quarter, you had some of the FAS 91 amortization expense. That flows through and hits the yield on the securities portfolio, so we did not see a significant change in the actual yields during the quarter; it was really more FAS 91.
+And I think, as you look at our Company going forward, I think we are a little bit different in that between the fact that the duration of what we have continues to be short, as we look forward, we clearly think the worst of the recouponing of the securities portfolio is behind us based on where rates are today.
+
+Answer_19:
+
+    I think I'd say, Ed, that we completed our results; we are in a better position this year than last year and we will let you know once we get through the test. I think it is -- the Fed is doing its work, but I think we have been clear with people that the issue for us is not necessarily capital levels, balance sheet cleanup and stuff. The issue is the recurring earnings levels that have been consistent on that and we will let you know once we get there. But Bruce and the team have done a great job on submitting it and we will see what happens.
+
+Answer_20:
+
+    If you look at what we did in 2012, we took capital and redeemed preferred instruments and subordinated debt and other things and continuing to do that during the year. We were getting approvals to do so as we went along. So all the -- we have been clear that all the capital we have, now that we are above the levels, we will be in a position when we get the approvals to return to the shareholders. And you know the viewpoints of the relative preferences of the CCAR process in terms of dividends versus stock buybacks and things like that. So we would be no different than anybody else.
+But it is clear; it is either on the balance sheet, tangible book value. It is not needed for the risk of the balance sheet because you can see that with all the risk-weighting and everything, the capital is there and it will all get returned as part of the business proposition. If we retain any to grow, that is actually a good problem, but, so far, we still have optimization left on the balance sheet, as Bruce described, that will allow us to continue to return capital. So our intention is to return it. The question is we have got to get through the processes and then we will do it.
+
+Answer_21:
+
+    Yes, the reason it dropped by that amount is that, and you saw it in the third, as well as the fourth quarter, that with some of the DOJ/AG settlement modification and other things, that as you dispose, get repaid or write off the purchased credit-impaired portfolio, it reduces your loan-loss reserve.
+
+Answer_22:
+
+    That is correct.
+
+Answer_23:
+
+    I would make a couple observations on that. The first is that, at 9.25% today, regardless of required SIFI buffers, we have more on the Basel 3 basis than anyone else.
+The second thing I would say is given the position that we are in and the fact that we do have DTAs going forward, the rate at which we increase capital given it is on a pretax basis, we would expect to be more significant than our peers.
+So I think going forward, we still think we have the opportunity as core earnings rebound to grow capital more quickly than our peers. As it relates to the exact level, we have always looked at it and thought that you want to run at least an extra 50 basis point cushion. Given that these ratios are more sensitive to changes in the market, depending on what the market looks like at the time your ratio is, you may vary that a little bit based on the market.
+But I would say generally if we look at what we saw in the third quarter and what we saw today that we are generally in the range of where you would expect us to run and as we look out at and see how our counterparties from a credit perspective view the Company now and look at our credit spreads, we feel like we are doing the right things right now.
+
+Answer_24:
+
+    So if you go back and look what we did in the beginning of '11 when we split, we split our portfolio into two thought processes, our mortgage servicing portfolio. We split a chunk into what we called the Home Loans at that point and a chunk into what we called LAS and it was about, round numbers, $11 million, $12 million in loans at that time. Half went to LAS and half went to Home Loans. And the criteria which we looked at that was customers, products and loans and stuff that were going to be a go-forward business we think of in the Home Loans business. And the other half was products that were never going to be done again and the way we are going to run the business because frankly you lose a lot of money on them due to the delinquency levels and customer strife, etc.
+So since that time, we have, and if you go back and look, we showed that exact break. Since that time, we have been busily trying to work the $6 million non-core loan book portfolio down. And we got it down around $2.5 million-ish now and with the sales, $2 million, not all of it comes out of that because of combined pools and stuff, but a significant amount, we are really accelerating the ability to get to the end state on the bad mortgage servicing book for lack of a better term. And that is what we are up to.
+We had gotten it to a level from a capital level and all that stuff we were comfortable with and so once we get this out, these are products that we just aren't going to continue with and we have been focusing on rebuilding the business into the core business as I spoke about earlier.
+So if you think about it in that context, think about something that might have taken us all the way into '15 to finish up and think about through the sales of a significant part of the $2.5 million how much -- the question is we are bringing that into '13 and early '14 as we finish up, which then accelerates our reposition of our Company away from products and services, which we didn't plan to continue two years ago.
+
+Answer_25:
+
+    Yes, the number was slightly less than $300 million, rounded to that number, but, in any one quarter in that business, you have some pluses and some minuses that are flowing through. So you are right. The $1 billion though is starting from a $3.1 billion base.
+
+Answer_26:
+
+    Let's be clear here. We are still working through -- we have signed the sales transaction January 7, working through with the buyers the timing of the movement of the assets and finalizing that, then how fast you can move. There is transition issues that you have got to deal with in terms of people who are in the middle of the modification process and stuff.
+But let me flip to the other thing. This quarter, the total resources you saw on the one slide dedicated to LAS went down by 9,000 between FTEs and contractors dedicated to this team. We will continue to drive that down. There is nothing more important to our Company to get this done as quickly as possible.
+So Bruce has given you the outline and whether it is from this call item or that item, the idea is that we need to get the work out of here and that is what actually is taking the cost and the sales closing, the continued progress on the remaining piece that we have left, but think about, in a single quarter, 9,000 change in headcount and think about -- we are going as fast as we can.
+
+Answer_27:
+
+    Our marketshare overall, when you put the whole thing together, I think has gone up about 2/10 of 1% per quarter as best I have. And remember, we are only competing in the direct-to-consumer part of the market. So I think it has moved from 4.2% to 4.4% to 4.6% type of numbers. And so expect us to keep driving our marketshare up. Now, again, we got the HARP volumes, which is in the $21 billion this quarter, $7 billion to $8 billion type of number, think of that, that we have got to replace. And so that is the team's challenge.
+And on the other hand, we are not closing loans as quickly as we should honestly. And we have been adding significant resources as we have downsized LAS into the home loans business to increase our fulfillment capacity. So you put all that together, our marketshare continues to grow every quarter for the last three or four. We will continue to drive it.
+Where it will settle in at, I am not exactly sure, but as I talked about earlier, if you think about us having about a -- think of an 8% share of servicing, we have got to get our origination share moving towards that direction over the next couple years in order to have sort of equilibrium for lack of a better term.
+
+Answer_28:
+
+    Look, the issue isn't liquidity in the market, but the kinds of loans going through. The issue was -- they happen to correspond to each other, but it really had nothing to do with each other. The issue is we stopped the correspondent business.
+
+Answer_29:
+
+    If you thought about our marketshare when it was at its strongest in the high teens, two-thirds of it or more were correspondents. And that is what dropped our share down. The retail marketshare is actually -- from this year, direct-to-retail, excluding even HARP, it is flat year-over-year in terms of production and fell a little bit and has grown every quarter.
+So we are selling to Freddie and we will work it out with Fannie over time, but the point I am really saying is it is not the secondary market liquidity that caused our markets to drop; it was getting out of the correspondent business. And if you just look in this quarter, remember that there was $6.5 billion last year fourth quarter versus this year fourth quarter that was in the correspondent that is a carryover from when we quit it in the third quarter at the same time we announced that we were going to stop with Fannie.
+
+Answer_30:
+
+    If the volumes are there, we will continue to invest in the servicing fulfillment teams. We've moved -- Tony Meola has done a great job and Ron Sturzenegger in that business working through LAS has now taken over sort of the good side of production, along with a fellow named Steve Boland, Dean Athanasia in the Retail and the Preferred group under David Darnell drives the production side. We have added mortgage loan officers every single quarter, focused them on the branches and what we are seeing is tremendous uptake when we get them working with our teammates. We are better when we are connected as a company across things and so we have seen it.
+So we are investing both on the front end and on the service and fulfillment, the middle office so to speak and we have moved I think 4,000 people increase this year so far in fulfillment and we will move some -- we will continue to move them because ultimately the retail production side is a good business right now.
+
+Answer_31:
+
+    Well, so if we think about it starting in 2009, we started to reposition that business because it had gotten too far into the broader credit. And after the crisis, just remember, we charged off $60 billion, $70 billion of charge-offs in that business. So we started repositioning it. We have got it about now where we want it. In other words, we have an affinity group of businesses that is very core and we like it a lot and we have the core business. So this quarter, I think we did 840,000 new cards, about 350,000 or more or less through the franchise, another 100,000 some I think online. So we are producing what we need to do.
+Balances grew, point to point, you've got to be careful of the fourth quarter. You get a little kick around Christmas obviously, but if you look at it, as we look across the last few quarters and we will have to wait until everybody gets out this quarter, we are holding around 14%-ish marketshare, which is fine. So now the question is we push a little bit harder on the -- and I use the broad context marketing, not direct mail market, but marketing and driving to the franchise.
+So what we have done is position the credit quality well. It is a much more of a payment business now, 19% plus pay rate, which basically up from 14% probably six, eight quarters ago and so it is a higher quality business. It has drilled the core customer base, the 1-2-3 card and the rewards cards we have that drill off the core platform are working well in our Retail segments and then obviously in the Wealth Management segments, we have a great array of products.
+So I would say that we have got this where we want it now; it is stabilized. The run-off book that we are fighting on a growth basis is down to $3 billion, $3.5 billion, down from $15 billion at the top. So I think they should start to see some growth. But it will take -- it is going to bump around where it is right now for a few quarters, but I would say that there is nothing wrong in the business and we are making a fair amount of money in it right now. The risk-adjusted margin is the highest it has ever been.
+
+Answer_32:
+
+    Yes, I mean I think generally we are in that 40% area from a compensation perspective and obviously, given the performance and where we are, we need to be competitive with where the peers are. But I don't think you have really seen that change materially during the course of 2012.
+
+Answer_33:
+
+    We will have to get back to you with that exact number. I think I have a gut, but I want to make sure I am right. So why don't we get back to you with that number.
+
+Answer_34:
+
+    I want to think, Mike, it was somewhere between 9 and 11 basis points. I just don't have the exact number.
+
+Answer_35:
+
+    I think a couple things on that, Mike. First, I think from our perspective, the $8.5 billion Gibbs & Brun settlement is going through the court process. Would likely get wrapped up sometime in the second quarter or early in the third quarter. And that is completely independent from what is going on at MBIA.
+With respect to MBIA in the broader monolines, as we have said before, generally, if you look at geography within the financial statements, the majority of the work that we do and where the monolines are accrued for at this point is within the litigation line item as opposed to within our provision for reps and warranties.
+And the third thing I would say is that, as it relates to kind of the general rep and warrant question, I think the most important thing to go back to is that the large majority of everything that was done with the GSEs at this point between our global settlement with Freddie and Countrywide and our global settlement with both Countrywide and Bank of America with the GSEs just takes away a significant amount of risk relative to where we have been before.
+
+Answer_36:
+
+    As I referenced, you have got the several monolines that we are working through on a litigation perspective and then you are right, you have got the private-label piece. And I think if you go back to the comments that we made about the geography of the representations and warranties, you can see we have a pretty sizable amount set aside to work through the private-label exposures.
+
+Answer_37:
+
+    Mike, we could -- I think as we think about it, this litigation goes back and forth and the judge has a lot of decisions to make in a lot of cases and we will play it out here. But we are comfortable with our legal positions across the board.
+
+Answer_38:
+
+    I am not sure the exact timing.
+
+Answer_39:
+
+    I think what I would suggest you do, and I am not going to quote somebody else's financial statements, but I think you can go look on MBIA's financial statements and see how much that they believe that we're owed or that they are owed from us. That is disclosed in their financial statements, so you can look at that. And then the corollary is I think you have to keep in mind that there is a significant amount of money that they owe us within our Global Markets business that is very significant that we have marked at cents on the dollar.
+
+Answer_40:
+
+    I think the biggest thing that you have to go back to is that, and you have seen the different reports, that it is that people are looking at these amounts based on not only the amount of debt, but also the amount of equity that you have on the balance sheet. So if you go and look at our ratios, we obviously, as far as the amount of pure common equity and other equity-related instruments on the balance sheet now are more than virtually all of our peers and because of the way -- through the series of mergers that happened, our debt footprint on an absolute basis, as well on a relative basis is higher than our peers.
+So as we look at this and as we talk about going forward, I think we still have a lot of work to do and opportunity to get our interest expense down through shrinking the size of the debt footprint and just bringing it down to where the rest of the industry is. So we can't predict with certainty where this goes, but we know as we look at the different ratios and the different metrics, we still have some opportunity to continue to benefit the interest expense line just to get to where our peers are from an overall debt and equity perspective.
+
+Answer_41:
+
+    On the LAS, I don't think you would see it. In the New BAC is net of the cost of achieving the results, which is largely technology implementation costs and if you look at our technology development costs over the last few years, we have gone from about $2 billion and change to $3.6 billion per year. And the investments we are making in New BAC are investments in the franchise. In other words, to get the efficiencies, we are -- embedded in there is the rework of our entire trading platform systems and things like that. But we are investing to get the savings, but investing to also strengthen the franchise at the same time. So it is all netted in there.
+
+Answer_42:
+
+    Yes.
+
+Answer_43:
+
+    Thank you for your time and attention. Look forward to next quarter.
+

exam/part2_problem1/Problem_1_Conference_Call_Segments/call_21_presentation.txt

@@ -0,0 +1,54 @@
+
+Good morning. Before Brian Moynihan and Bruce Thompson begin their comments, let me remind you that this presentation does contain some forward-looking statements regarding both our financial condition and financial results and that these statements involve certain risks that may cause actual results in the future to be different from our current expectations. For additional factors, please see our press release and SEC documents. And with that, let me turn it over to Brian.
+
+Thank you, Kevin and thank all of you for joining us on a busy day. In 2012, we laid out our four focus areas for the year -- capital, managing our risk, reducing costs and driving our core business growth. In each area, we achieved strong results this year and we are carrying that momentum forward as we look to 2013. So let's start on page 4 of our presentation. We positioned our Company with a strong balance sheet this year. The estimated capital ratios now are above current Basel 3 requirements and we have seen improving credit quality. And as you know, we have addressed many legacy issues that Bruce will talk about later. As a result, the [coring] power of the Company, the coring power that our team has been driving all year can now shine through more clearly as we look forward.
+We've positioned our Company to driving our core customer relationship strategy. That strategy continues to accelerate our growth by simply helping those people we serve with their financial lives. We've positioned our Company by reducing costs, making our operations leaner and more efficient and investing in our growth initiatives at the same time. We continue to streamline all our businesses. We focus it on those three customer groups that we talk about on each call -- people, companies, institutional investors. And on page 5, we highlight some of the progress we have made in the last quarter and last year.
+On the consumer side, our deposits continue to grow. Our retail mortgage production has increased by an average of 10% per quarter over the past three quarters. The pipeline today remains as strong as it was at the end of the third quarter. As you know, we continue to optimize our service network, our branch network as online and mobile banking numbers continue to increase. We are now averaging about 10,000 new mobile subscribers a day.
+In our Preferred client area, the growth this year has been strong. The evidence of that is our brokerage assets in Merrill Edge are up 14% from a year ago. Moving to our wealth management businesses, US Trust and Merrill Lynch, those businesses had strong loan, strong deposit, strong revenue growth this year and earnings and pretax margin were also at record levels.
+As we think about the companies, the corporations and middle market companies we serve across the country and around the world, our loan growth continues to expand, particularly in the second half of 2012. Global Banking ended with loans of $288 billion, up from $265 billion at the end of June. Investment banking fees for these clients are strong and we maintained our number two market position. In the fourth quarter, we had a leadership position in debt underwriting.
+As we move to our Global Markets business, and it serves the institutional investors, our research capabilities continue to be recognized as the best in the world for the second straight year. As we look at 2012, sales and trading revenue did well in a relatively difficult environment. In 2012, our trading revenues were up 20% from 2011, excluding the impacts of DVA and we did that while we reduced cost in this business by over 10%.
+So thinking about it, looking across every customer group we serve, you can see our strategy we put in place continues to drive results. We continue to fine-tune this strong core franchise focusing on those industry-leading capabilities we have to serve our clients and customers in every area.
+But while we are doing that, we continue to work on our expenses. Bruce is going to take you through the highlights in a few pages. But if you think about it from the top, we reduced our delinquent mortgage count, which allowed us to reduce our LAS expenses. We have reduced our employee count in each quarter in the last five and we have done that while we continue to invest in our targeted growth areas.
+Our strategy continues to work. We are seeing growth across all the core businesses. We are seeing that momentum continue to accelerate, so as we look forward to 2013, we are going to continue to drive this strategy and drive the earnings power of our Company. Thank you and I will turn it over to Bruce to take you through the results in detail.
+
+Great. Thanks, Brian and good morning, everyone. I'm going to start on slide 6. As you all saw this morning, we reported net income for the quarter of $732 million, or $0.03 a share for the quarter. I am going to spend a moment on the previously announced items in the geography on the income statement so that you can better understand the quarter.
+Reported revenues net of interest expense were $18.9 billion during the quarter. If you look in the bottom left-hand corner of this slide, you can see our revenues were negatively impacted by five items totaling approximately $3.7 billion. Those items included a $2.5 billion charge for reps and warranties with respect to the Fannie Mae settlement; approximately $0.5 billion related to the clarification of our obligations under mortgage rescissions; negative DVA and FVO of approximately $700 million relating to the significant tightening of our credit spreads that we saw during the quarter and then a positive $700 million between the change in the MSR valuation related to the servicing sales, as well as our sale in our Japan joint venture.
+If we move to the right on the expense side, our expenses were negatively impacted by approximately $2.3 billion due to our previously announced independent foreclosure review acceleration agreement, as well as approximately $900 million of litigation expense and $300 million of compensatory fees. In addition, during the quarter, we did have a positive net tax adjustment primarily related to tax credits that are associated with certain non-US subsidiaries.
+If we turn to slide 7, a lot of numbers. I would like to draw your attention to three line items. The first, deposits were up $42 billion, or 4%, from the end of the third quarter to the end of the fourth quarter. During the fourth quarter, we reduced our long-term debt footprint by approximately $11 billion, but more significantly, during all of 2012, our debt footprint came down by almost $100 billion, or 26%. We accomplished that reduction in our debt footprint while our overall liquidity sources remained in the range of $370 billion to $380 billion.
+Turning to slide 8, and looking at Basel 1 capital, Basel 1 capital declined during the quarter to a still very strong 11.06%. The decline was the result of our pretax loss, as well as approximately $500 million of common and preferred stock dividends. In addition, during the quarter, our risk-weighted assets grew by approximately $10 billion as the strong growth that we saw in the investment and corporate bank more than offset the reductions in the consumer business.
+If we turn to slide 9, I'd like to spend a few minutes on Basel 3 capital. We estimate that our Tier 1 common capital under Basel 3 on a fully phased-in basis would have been 9.25% at the end of the year. Our estimate once again assumes approval of all models with the exception of the change in the comprehensive risk measure for CRM after one year under the US Basel 3 NPRs. This 9.25% is a 28 basis point improvement over our estimate of 8.97% at the end of the third quarter of this year.
+While our Tier 1 common capital declined as a result of the pretax loss, lower OCI and higher threshold deductions, this was more than offset by a reduction in our risk-weighted assets. Driving the RW decline during the quarter were lower exposures, particularly in consumer real estate and market risk, improved credit quality and updates of our recent loss experience in our models. We estimate that our Tier 1 common capital at the end of the quarter was $128.6 billion while our risk-weighted assets were approximately $1.4 trillion under Basel 3. And as you all know, Basel 3 ratios are more sensitive to changes in credit quality, portfolio composition, interest rates, as well as earnings performance.
+If we turn to slide 10 and look at funding and liquidity, our global excess liquidity sources were at $372 billion at the end of the fourth quarter, down $8 billion from the prior quarter driven by a reduction of our long-term debt footprint of approximately $11 billion during the quarter. During the fourth quarter, we redeemed $5.3 billion of TruPS and other long-term debt.
+You may have seen last week, we raised approximately $6 billion in the aggregate for 3, 5 and 10-year notes to take advantage of strong investor demand. As we look forward though, we do expect to continue to see long-term debt decline, primarily through maturities consistent with our overall goal of optimizing the cost associated with both our debt and capital. As we do so, we expect that our time to required funding will consistently remain above two years coverage and that metric at the end of 2012 was at 33 months.
+On slide 11, net interest income, we reported an increase in net interest income from $10.2 billion in the third quarter to $10.6 billion in the fourth and an improvement in our net interest margin of about 3 basis points to 2.35%. As we consider that number, we benefited during the quarter from less negative impact of market-related premium amortization expense. We continued to benefit from the shrinkage in our long-term debt footprint, as well as improved trading-related net interest income. Partially offsetting those benefits were lower asset yields, as well as lower consumer loan balances.
+If you adjust for the market-related items that I just referred to, we are in line with the estimated range of net interest income of $10.5 billion before market-related impacts we have discussed during our past earnings announcements. Given [long end] rate levels at the end of December, we estimate that quarterly net interest income may come in around a base of $10.5 billion plus or minus for FAS 91 and day count for the next several quarters. The impact of our liability management actions and long-term debt maturities are expected to help offset headwinds from continued pressure on consumer loan balances, as well as the overall low rate environment.
+On slide 12, we highlight the results of our Consumer & Business Banking. Earnings were $1.4 billion for the quarter, an increase of $143 million, or 11% from the third quarter, driven by higher revenue more than offsetting higher non-interest expense. Service charges were lower due in part to our actions that we took around Hurricane Sandy to further support our customers in the region. Average deposits increased more than $6 billion, or 1.3% from the third quarter.
+On the slide 13, we list some of the key indicators for our Consumer & Business Banking for the quarter. In our deposits business, the average rate paid on deposits declined 3 basis points -- 3 basis points during the quarter to 17 basis points. Our mobile banking customer base reached 12 million, which is an 8% increase from the prior quarter and up 31% from a year ago. We reduced banking centers as we continue to optimize the delivery network around customer behaviors. Credit card purchase volumes per active account increased 7% from the fourth quarter of 2011. The US credit card loss rate is at its lowest level since 2006 while the 30 plus day delinquency rate is at a historic low.
+On slide 14, and before we get into Legacy Assets & Servicing, we summarize the specific mortgage items that we announced on January 7, including our settlements with Fannie Mae, sales of mortgage servicing rights and the acceleration agreement on the IFR. During the quarter, these items had a negative pretax income on fourth-quarter LAS revenue of $2.6 billion and in the expense category of $2 million resulting in an aggregate net income impact of $2.9 billion in LAS within our Consumer Real Estate Services segment.
+If we turn to slide 15 now, we break out the two businesses within CRES -- Home Loans and LAS. Home Loans reported an increase in net income to $281 million while LAS reported a net loss of $4 billion, including the approximately $2.9 billion of items I just highlighted. As you all are aware, the Home Loans business is responsible for first lien and home equity originations within CRES.
+First mortgage retail originations of $21.5 billion were up 6% from the third quarter driven by refinancings and up 42% compared with retail originations of approximately $15 billion in the prior year-ago quarter. You can see this same type of trend in our core production income, which is up from the third quarter and almost double results from a year ago. As you know, we exited the correspondent business in late 2011, so correspondent originations are non-existent versus volumes of approximately $6.5 billion a year ago.
+The MSR asset within LAS ended the quarter at $5.7 billion, up $629 million from the end of the third quarter, due in part to the valuation adjustments previously discussed related to the sale of MSRs. MSR hedge results during the quarter were positive and we ended the period with the MSR rate at 55 basis points versus 45 basis points in the third quarter and 54 basis points one year ago.
+If we turn to slide 16, we show some comparisons of certain metrics in Legacy Assets & Servicing on a linked quarter basis, as well as compared to fourth quarter a year ago to reflect the work done to reduce delinquent loans and find homeowner solutions. As you recall, Legacy Assets & Servicing reflects all of our servicing operations and the results of our MSR activities.
+Total staffing in the quarter, including contractors and offshore, decreased approximately 9,000 from the third quarter. The number of first lien loans serviced dropped 7% in the quarter while the number of 60 plus day delinquent loans dropped 17% to 773,000 units. We expect this drop in 60-day plus delinquencies should have a positive impact on our staffing levels and servicing costs going forward as we were fully staffed in the second half of last year to handle the various new programs and regulations.
+We have referenced our January 7 announcement of agreements to sell MSRs totaling $306 billion aggregate unpaid principal balance. This represents 2 million loans of which 232,000 are 60 plus day delinquent. The transfers of these servicing rights are scheduled to occur in stages over the course of 2013 with the delinquent loans scheduled to be transferred after the current loans. Currently, we recognize approximately $200 million in servicing fees per quarter associated with these loans, which is expected to decrease throughout the year as we actually transfer the servicing. However, the impact on earnings from lower revenue is expected to be negligible for the year as we expect expenses to also decrease as we transfer the servicing, especially the 60 plus day delinquent loans.
+We believe our serviced 60 plus day delinquent loans at the end of 2013 may be around 400,000 units versus 773,000 units at the end of 2012, a decrease of approximately 50%. That implies an additional decrease of 150,000 units beyond the 232,000 units that are expected to go with the scheduled transfers.
+Given the projected declines in 60 plus day delinquent loans and notwithstanding their being a one to two-quarter lag between delinquent loan transfers and expense decrease, we believe we can get expenses in the fourth quarter of 2013 down by more than $1 billion from the $3.1 billion in the fourth quarter of 2012, excluding the impact of IFR and litigation.
+On slide 17, we show outstanding claims at the end of December, but, as you know, a significant portion of GSE claims has been addressed in our settlement with Fannie Mae. If we exclude the rep and warrant amounts addressed in the settlement of $12.2 billion from GSE outstanding claims of $13.5 billion, pro forma outstanding GSE claims would have been $1.3 billion at the end of the year. Total outstanding claims on a pro forma basis would then be $16.1 million. Remember that the table reflects unpaid principal amounts versus the actual losses projected on the loans.
+Outstanding claims in the quarter from private-label counterparties increased approximately $1.7 billion from the end of September. And an anticipated increase in our aggregate non-GSE claims was taken into consideration when we developed our reserves at the time of the BNY settlement and we continue to review our assumptions on a quarterly basis. Unresolved claims with monolines remains static as much of our activity with the monolines revolves around litigation issues.
+Reserves for representation warranties at the end of the quarter increased to $19 billion of which $8.5 billion is associated with the BNY settlement and approximately $6 billion is associated with the GSEs. We currently estimate that the range of possible loss for both GSE and non-GSE representations and warranties exposures could be up to $4 billion over accruals at December 31 compared to up to $6 billion over accruals at September 30. This decrease is the result of our settlement with Fannie Mae in the range of possible loss now principally covers non-GSE exposures.
+On slide 18, in Global Wealth & Investment Management, earnings for the quarter of $578 billion -- excuse me -- $578 million were up slightly from record results in the third quarter. The pretax margin was 21%. This quarter, we did move two businesses that we agreed to sell, International Wealth Management and our brokerage joint venture in Japan, to the All Other segment, including the results in past quarters for comparability.
+Overall, client activity in the Wealth Management business in the quarter across all categories was quite robust and was aided by client actions due to the fiscal cliff. Period-end deposit growth of approximately $23 billion and period-end loan growth of $3.5 billion helped offset the impact of the continued low rate environment. Ending loan balances were at record levels and long-term AUM flows of $9.1 billion were the second-highest quarterly amount since the Merrill merger and the 14th consecutive positive quarter.
+Net income of $1.4 billion in Global Banking on slide 19 is an increase of more than 10% from the third quarter and reflects higher revenue and lower expenses. Average loans and leases increased $10.8 billion, or 4% from the third quarter, with growth across C&I, as well as commercial real estate. Average deposit balances increased $15.8 billion, or 6% from the third quarter, to $268 billion as our customer base continued to be very liquid. Asset quality continued to improve from prior quarters as we have seen over the last year. NPAs dropped 20% to $2.1 billion and reservable utilized criticized exposure declined 11%.
+On slide 20, we outline our investment banking fees for the quarter. You can see that our debt underwriting area was up $213 million from the third quarter to $1.078 billion in revenues and our advisory business was up approximately $80 million to $301 million for the quarter. Corporation-wide investment banking fees were up 20% from the third quarter and 58% from the year-ago period. Debt underwriting fees were a record for the quarter and we believe number one on a global basis during the quarter. From an overall investment banking fee perspective, we maintained our number two global ranking in net investment banking fees during 2012 based on Dealogic data.
+Switching to Global Markets on slide 21, earnings, excluding DVA, were $326 million. Excluding DVA and the UK corporate tax charge in the third quarter, net income decreased compared to the third quarter driven by lower sales and trading revenue reflecting a seasonally slower fourth quarter. Sales and trading revenue, excluding DVA, was down 23% from the third quarter, but improved substantially from levels a year ago. Within our FICC area, excluding DVA, revenues of $1.8 billion decreased from $2.5 billion in the third quarter primarily as a result of lower volumes and reduced client activity, but were up $1.3 billion, or 37% from a year ago.
+In equities, excluding DVA, results were flat with the third quarter as lower volatility and continuing lack of investor appetite for equity products kept volume suppressed. Expenses declined from both the third quarter and the prior year primarily driven by lower personnel expense.
+On slide 22, we show you the results of All Other, which includes our Global Principal Investments business, the non-US consumer card business, our discretionary portfolio associated with interest rate risk management, the international wealth management business we agreed to sell, insurance, as well as our discontinued real estate portfolio. The revenue improvement in All Other from the third quarter was mainly due to a lower negative valuation adjustment on structured liabilities under fair value option of $442 million compared to a negative $1.3 billion in the third quarter and higher equity investment income as a result of the sale of our brokerage joint venture in Japan.
+Non-interest expense declined compared to the third quarter due to lower litigation costs as the third quarter included the Merrill Lynch class-action settlement. Also contributing to net income in the quarter was the foreign tax credit benefit that I mentioned at the beginning of the presentation.
+As you can see on slide 23, total expenses increased compared to the third quarter, but were down from a year ago. Excluding LAS expenses, the independent foreclosure review and litigation, expenses in the quarter were $13.3 billion versus $12.9 billion in the third quarter and $14.7 billion a year ago. The $400 million increase from the third quarter reflects the normal seasonal trend and represented non-personnel costs. FTE at the end of the quarter was down approximately 5,000 from the third quarter and 15,000 from a year ago.
+An important driver behind the reduction of $1.4 billion in expenses from fourth quarter a year ago is New BAC, which we have discussed with you several times. If you remember, total annual cost savings targeted with New BAC are $8 billion per year, or $2 billion on a quarterly basis, which we said we would hit sometime in mid-2015. In the fourth quarter, we achieved approximately $900 million of the $2 billion, which is 45% of our target. As a reminder, the first quarter every year includes the annual retirement eligible stock compensation, which was $900 million in the first quarter of 2012 and this year, we expect will be a similar amount plus or minus.
+While we are talking about expenses, let me comment on taxes. Tax expense for the quarter was a benefit of $2.6 billion consisting of the expected tax benefit of the pretax loss, our recurring tax preference items and the $1.3 billion primarily related to the non-US restructurings. For 2013, we estimate the effective tax rate to be somewhere around 30%, including $800 million or so for another expected 2% UK tax rate reduction, which we would expect in the third quarter.
+If we switch to overall credit quality on slide 24, provision was $2.2 billion versus $1.8 billion in the third quarter as lower charge-offs were more than offset by lower release. Overall credit quality trends continue to be positive even when we normalize for the events in the third quarter. If you'll recall, regulators provided new guidance to the industry in the third quarter of this year around loans discharged as part of a Chapter 7 bankruptcy, which resulted in increased net charge-offs of $478 million in the third quarter.
+In addition, we incurred charge-offs of $435 million in the third quarter in connection with the National Mortgage settlement. We did not have impacts to net charge-offs of a similar magnitude in the fourth quarter, but did have $73 million related to the completion of the implementation of the regulatory guidance. Excluding these items, net charge-offs were down $178 million, or 6%.
+We believe most portfolios are close to stabilization and overall reserve reductions are expected to continue but at reduced levels. Given our outlook for a slow growth but healthy economy, we believe provision expense in 2013 will range between $1.8 billion and $2.2 billion per quarter, the levels experienced between the second and fourth quarters of 2012. Excluding the fully insured portfolio, 30 plus day performing delinquencies continue to drop. NPAs were down $1.4 billion from the third quarter and $4.2 billion from a year ago. On the commercial side, reservable criticized levels showed a decline of 8% from the third quarter and 42% from a year ago.
+Before we open up for questions, let me say and reiterate Brian's comments that we feel very good about our accomplishments in 2012. We improved the balance sheet, we managed risk and we addressed significant legacy issues and were successful in reducing certain of our exposures. We have stepped up our focus on growing the business and some of that focus is evident this quarter when you look at deposit growth across the franchise, loan growth in the Global Bank, solid Investment Banking results and in GWIM, strong deposit AUM and loan flows.
+We enter 2013 all about moving the ball forward and winning in the marketplace with what we think is the best banking franchise in the world. And with that, let me go ahead and open it up for questions.

exam/part2_problem1/Problem_1_Conference_Call_Segments/call_21_questions.txt

@@ -0,0 +1,201 @@
+Question_1:
+
+    Good morning. A couple of follow-ups. I guess starting on the expenses, I appreciate the outlook on the legacy costs. As we think about kind of the All Other expenses that you pointed to of $13.3 billion, with some seasonal stuff this quarter, maybe you could just frame what we can expect for that level or for that bucket for 2013.
+
+Question_2:
+
+    Exactly. The $13.3 billion that you pointed to in the fourth quarter.
+
+Question_3:
+
+    Okay. So as we think about that $13.3 billion, I guess we could take out $600 million for New BAC, but was there other bulk or how much I guess of the seasonal stuff is there that maybe we should adjust for?
+
+Question_4:
+
+    Okay. And then just in terms of like underlying, call it, inflation or just normal investments, if we take that $13.3 billion 4Q to 4Q, would you expect that to be down, so you have kind of minus $600 million from additional BAC savings and there is always some offsets from inflation or investments? Do you think that net number will be down?
+
+Question_5:
+
+    Okay. And then just separately, if we look at the FICC revenue, a little bit weaker than maybe we have seen so far; although it is still early in the earnings process here. And I guess I noticed that the asset level in the trading book went up, the VAR doubles quarter-to-quarter and just wondering if there was anything unusual in terms of positioning that you would point to.
+
+Question_6:
+
+    Sorry, benefits meaning higher revenue?
+
+Question_7:
+
+    Okay, all right. Thank you.
+
+Question_8:
+
+    Hi, Bruce, does the goal of reducing the delinquents in LAS, the 150,000, does that include additional planned MSR sales that you might have in mind?
+
+Question_9:
+
+    Okay. And what kind of pace throughout the year would you expect for reducing that $3.1 billion LAS expense by your goal of $1 billion by the fourth quarter? Kind of steady throughout the year or is it lumpy?
+
+Question_10:
+
+    Okay. And then getting to Matt's question earlier, if we -- just a lot of moving parts on your expenses. If we look top of the house, trying to think about a jumping-off point for total BAC expenses that you start in the first quarter, it seems like you might be in the $17 billion ballpark with the stock option expense. Does that feel like the right area?
+
+Question_11:
+
+    Okay. And with the Fannie settlement this quarter, how should we think about the rep and warrant provisioning going forward here? Will you need to add on a quarterly basis to the rep and warrant provision?
+
+Question_12:
+
+    Okay. And then one last thing on NII. Was that a pretty clean number? Was there any impact from hedging or premium amortization in the NII number this quarter?
+
+Question_13:
+
+    Okay. And your guidance of the kind of $10.5 billion is the run rate you think for the next couple quarters and that is excluding any of that, right?
+
+Question_14:
+
+    Okay. Thanks.
+
+Question_15:
+
+    Thank you very much. Hey, guys, on your guidance for NII, which was really good, you talked about a steady -- I mean you can maintain that net interest margin at current levels. What about average earning assets? Do you think you can maintain your average earning assets at these levels or grow them?
+
+Question_16:
+
+    Okay. And then I have to ask one mortgage question. I asked the same question in the third quarter, but I think, Brian, you have been out in a lot of interviews talking about how much you like mortgage banking. But you still really are just going to be focused on retail. Am I correct? And on retail, are you focusing just on your own customers or will you be focusing on customers outside of your deposit mix or your customer base?
+
+Question_17:
+
+    Guys, thank you very much.
+
+Question_18:
+
+    Good morning. First one is a question on risk-weighted assets. On one of your slides, you show Basel 1 assets going actually up a little in the quarter, Basel 3 coming down. It is all in the net change in credit and other risk-weighted assets. And I am just curious what do you see on the credit side that drives that model enhancement? And the reason why I ask is it makes sense. Intuitively, it is just different to the tune of half, the Basel 1 to Basel 3 jump. It is different versus all the other big banks.
+
+Question_19:
+
+    That is super helpful. I think you just said it, but I just want to confirm. This happens on an annual basis. In other words, whether the balances come down on paydown, run-off, charge-off, whatever or credit improves, the models get updated on an annual basis and there is no permission process. In other words, this just happens in real-time?
+
+Question_20:
+
+    Okay, really appreciate it.
+
+Question_21:
+
+    Yes, that is super helpful. I appreciate all of that. Inside the average balance sheet, the securities yields went up 11 basis points in the quarter. Most banks are trending lower as things run off. This is part of your defending the NIM, so I get it. Just curious, is it just expanding a little bit on the duration curve? Just curious what you are doing on the asset side to help support those yields.
+
+Question_22:
+
+    Okay, thanks, Bruce. I appreciate it.
+
+Question_23:
+
+    Good morning, guys. With the capital ratios up significantly and credit quality getting better, the mortgage repurchase risk getting resolved over time, could you give us any thoughts in terms of how you are thinking about capital return for 2013? We have had a number of the other big banks -- JPMorgan, Wells, USB -- at least give us some insight in terms of how they are thinking about capital return for this year going into the CCAR and wondered if you would be willing to do the same? Thanks.
+
+Question_24:
+
+    Well, I mean you are already above the capital ratios that you need to be at, at least according to FSB guidelines. Now that you are generating -- continue to generate excess capital, is that something that you think you would like to return to shareholders over time or is that something that needs to be retained in the near term for safety and soundness reasons or till you get more litigation resolved? Or any thoughts in terms of the excess, above and beyond where you have indicated you sort of intend to run the Company?
+
+Question_25:
+
+    Okay, thanks. And then I guess my second question is just fairly technical. But when I look at what you have outlined in terms of reserve recapture, it looks like about $900 million in terms of loan-loss reserve, a $2.2 billion provision and $3.1 billion of charge-offs. But it looks like the loan-loss reserve itself dropped by about $2 billion from the third quarter. Can you reconcile that for me?
+
+Question_26:
+
+    Okay. And then that is not coming through the charge-off line?
+
+Question_27:
+
+    Okay. All right, thank you.
+
+Question_28:
+
+    Good morning. Thanks for taking the question. So a quick one following up actually on one of Ed's questions. And it is related to your capital levels and the SIFI buffer. Is there any view from your guys' perspective that you will intend to run with a buffer above the required 8.5% because many of your money center competitors are going to be running at the 9.5% level. So maybe either for funding market reasons or potentially competitive reasons, is it in your mindset or strategic vision that you might run a bit above that 8.5% level or is that the wrong way to think about it?
+
+Question_29:
+
+    Okay, that's fair. And then thinking about maybe the fact that you guys might be in the market to sell another chunk of MSRs or at least you hear about that through speculation from various sources. Is the idea behind that, we are at a point where that is not really a capital issue for you all anymore, right, because you are below the threshold from that perspective. So is it more about getting an opportunity to further eliminate and push down these legacy costs or is it that you just strategically don't view the business as very attractive and you just want to be out of it altogether? Can you help maybe give some color around that thought process?
+
+Question_30:
+
+    Cool. Thanks for that. And then last one, the $1 billion decline in mortgage costs, the legacy costs you guys provided from the $3.1 billion to the $2.1 billion by 4Q, just kind of curious about the starting point there. The $3.1 billion, I thought that included $0.3 billion of compensatory fees from this Fannie deal. So why is that the starting point rather than like $2.7 billion? Is there something in that $0.3 billion that is recurring or what is the deal there?
+
+Question_31:
+
+    Yes, well, clearly, it has been really tough to try to forecast how this would run down and you guys are clearly not alone in having challenges. Everybody in the industry I think has been struggling with that. So just was kind of curious whether or not there was something in there. Better to understand it. Thanks for giving the color.
+
+Question_32:
+
+    Good morning. A couple of other questions on mortgage. One is around the Fannie settlement. So now you will be originating through Fannie as you used to, regular way mortgages for the Home Loan section. I am wondering how fast you think you can get your marketshare back up as a result of that.
+
+Question_33:
+
+    Right. It is just that when you stopped originating through Fannie, the share came down rather sharply in a short period of time. So I was just wondering if, with higher throughput, you might be able to do more there.
+
+Question_34:
+
+    Right.
+
+Question_35:
+
+    Right. Okay. And then lastly on Home Loans, should we expect -- are you anticipating more reinvestment in the Home Loans group to drive that faster throughput or do you think you are at the investment spend that you want to make in that business?
+
+Question_36:
+
+    Good morning, guys. First question, on the credit card business, Brian, could you just give us some color about what is going on right there? I mean your numbers are not robust and I am wondering -- I know you have lost share there. What is being invested into that business?
+
+Question_37:
+
+    Okay. Secondly, Bruce, if you could just speak to the comp ratios in the Investment Bank and how you guys are trying to position yourself relative to your competition?
+
+Question_38:
+
+    Great, thank you.
+
+Question_39:
+
+    Hi, first just a follow-up. The FAS 91 amortization expense, what would have been the change in the securities yield and the margin if not for that looking third quarter to fourth quarter?
+
+Question_40:
+
+    Okay. Do you just know generally I mean because you margin was up; that is good, and the securities yield is up 11 basis points, but do you think it would have been down if not for that?
+
+Question_41:
+
+    Okay, that's fine. And then going to the mortgage putbacks, so the Fannie settlement, you got that done. It sounds like you are feeling better about the rep and warranty expense. I think I heard you say it might go from $300 million to $150 million per quarter. So I sense you are feeling better.
+I'm trying to reconcile that with what is taking place with the MBIA versus Countrywide court moves and correct my thinking if anything is wrong here, but I think it is an issue of Bank America success or liability or is Bank America responsible for Countrywide? And as of January 9 and 10, the oral arguments were completed, so I understand it is in the hands of Judge Bransten, the New York State Supreme Court and the motion says that Bank America is responsible for Countrywide and if so, I guess that could put the $8.5 billion private-label settlement at risk. So my question is could that $8.5 billion settlement be at risk? Do I understand what is happening in the court correctly? And what happens if the $8.5 billion private-label settlement does not go through?
+
+Question_42:
+
+    So we are really just talking private label at this point?
+
+Question_43:
+
+    So what is the significance of the decision by Judge Bransten and the New York State Supreme Court? There was a Wall Street Journal article on January 11, some other chatter saying that if this motion goes against you and you are deemed responsible for the legal liabilities of Countrywide then that could be a negative event for you. Do you agree with that?
+
+Question_44:
+
+    Okay, but for that, we should, you think we will hear next month as opposed to midyear?
+
+Question_45:
+
+    Okay. Just last question on that because I am just trying to -- how do we get our arms around that risk? That is really my question and so if you wanted to just give advice to somebody -- okay, here is the potential hit if things go wrong, what would be your answer to that or just is there no answer?
+
+Question_46:
+
+    Great. All right, thank you.
+
+Question_47:
+
+    Good morning. You guys have done a great job countering the net interest margin pressure obviously with managing your long-term debt down. And maybe it is too early to think about this, but obviously under orderly liquidation authority in Dodd-Frank, there is some provision for bail-in debt and I was wondering how you guys are thinking about that and how you might implement it over time.
+
+Question_48:
+
+    Okay, that's fair. Just one last question regarding expenses. Obviously, you have stuck with your guidance on the New BAC and you told us where you are along the path of getting to those goals and you have updated us on the LAS expense reduction initiatives as well, but you are also talking about reinvesting and specifically around mortgage origination, but I think more broadly as well because obviously you don't want to ignore revenue growth opportunities. How do we reconcile those things and how much reinvestment at this point should we expect to see of the New BAC $8 billion and of the LAS $10 billion?
+
+Question_49:
+
+    Okay, so you would encourage analysts to continue to bring those entire amounts to the bottom line by 2015?
+
+Question_50:
+
+    Okay, that's great. Thank you.
+

exam/part2_problem1/Problem_1_Conference_Call_Segments/call_22_answers.txt

@@ -0,0 +1,288 @@
+Answer_1:
+
+    Good morning, Glenn. It is interesting, if we look at the commercial loan balances across the platform, the spread on the new originations was actually up slightly relative to both the fourth quarter of last year, as well as relative to the first quarter of last year. And it is interesting in that the loans that came on, not only were the spreads wider, but based on our internal risk ratings, the credit quality of what was being brought on was also stronger.
+So we feel like we are doing -- the loans that we are bringing on, we are doing in a prudent way and you can see that, as you look at the -- in the supplements -- that a decent chunk of the loans that are being brought on are international, not any real concentrations, but both international, domestic and really across all products.
+
+Answer_2:
+
+    Yes, I think, Glenn, that's exactly right, that that $18.2 billion included the 900 from the retirement-eligible employees that only happens once a year. So you're right. As you go to the second quarter, the starting point should be $17.3 million.
+The two other things that I would point out once again is that if you look at the compensation expense in the first quarter relative to the last couple quarters of last year, it was elevated by about $800 million based on the revenues that we saw within the sales and trading, the Global Banking and to a lesser extent the wealth management business. So we hope those repeat, but I would just highlight that that is a delta relative to the last several quarters of last year.
+And then obviously, from that starting point, we would look to continue to drive down expenses based on the work that we have spoken about with New BAC that we would expect to achieve throughout the year.
+
+Answer_3:
+
+    I think we obviously are paying close attention to the different OLA proposals. I think if you look at the mix between the Merrill debt, as well as the BAC debt and you compare those dollar amounts relative to risk-weighted assets and you compare us relative to our peers, at least all the work that we have done suggests that we are at the very high end of the amount of debt and related instruments that we have relative to risk-weighted assets. So the rules obviously are not clear at this point. We feel like we are positioned very well based on what we understand the different proposals are that are out there realizing it still is moving around. So as we go throughout the year, we would expect, as I said, to continue to drive that footprint down not only in 2013, but throughout 2014 and we continue to be very focused on that, Glenn.
+
+Answer_4:
+
+    Glenn, I would add that there is also a rationalization of the footprint. Remember this was put on by various companies, not by one company that we have been restructuring. So even if there is an amount outstanding, the cost can come down because you can string it out. The rates paid are fairly high because they are different environments than we [bid] in and expect to be in the next couple years. So there is even value even if you said the notional wouldn't move as far based on some interpretation of the rules that gets the debt footprint more rational, more spread across time than it is today.
+
+Answer_5:
+
+    No, as I said, we referenced three things. The first was there was a gain that, as you look at that decline that was in the area of $250 million that I would categorize more quite frankly as a recovery than a gain that we had highlighted during the quarter last year. So a decent chunk of that was a gain that did not recur.
+Then I think it is important, if you go and look at during the quarter what we saw, the financial spreads, which tend to be a fairly significant part of any FICC trading business, tightened significantly in the first quarter of last year and during the first quarter this year, start to finish, actually widened. So that was the second piece of it.
+And then the third piece, as we referenced, is that commodities had a particularly strong quarter last year and did not have as strong a quarter this year. So those three general things. I would say flows generally continued to be very strong and as you look at where we were relative to the fourth quarter of last year, I actually think we continue to make good progress, but it was a little lumpy in the first quarter of last year.
+
+Answer_6:
+
+    And Matt, I would add that, as you think about how we are running the Global Markets business, if you look at our VAR and our risk-taking, we are keeping a balance relative to the rest of the Company. And so there will be times when people do better than we are and times when we will do better than them, but we are keeping a balance.
+The second thing that Tom Montag and the team have worked on is the expense side. So you can see the operating leverage when you look across the first quarter last year and this year and importantly the fourth quarter of last year to this year. You can see that, with a little bit of revenue, you generate a lot more profit. And so the idea is we are keeping this business so that we can make good money at a $3 billion -- some money at a $3 billion trading revenue level in the aggregate in the business, a lot of money at the $5 billion level and you are seeing that play out.
+So if you think about it, we made money I think every trading day in the quarter. The VAR was down and so I think we should be careful to think that we may not roar as much as some people might, other people might because this is one of the many businesses we have and we drive it for the benefit of the investing customers and also the issuing customer.
+
+Answer_7:
+
+    Yes, two things on that. The first is you probably saw -- I believe on April 1, we actually went ahead and issued the redemption notices for the $5.5 billion of preferreds that are outstanding. It is just under $500 million of preferred dividend savings that we will have on that and there was no requirement to issue to replace that. So as you look at that redemption, that is a good redemption where you can look at those savings.
+As it relates to the common, we would expect to be balanced and work through the share repurchase throughout the year and really don't have much more to comment on than that.
+
+Answer_8:
+
+    Sure. So what we have said, it's a good question, we have said that, at the end of 2012 on a quarterly basis, we would achieve $900 million per quarter of New BAC cost saves at the end of in the fourth quarter of 2012. So as you look to adjust your models, we will take that $900 million a quarter that we would have had in the fourth quarter and that will grow to $1.5 billion by the fourth quarter of 2013. Some of that we achieved during the first quarter and we would expect to continue to achieve that throughout the year.
+And then the second piece, outside of the more one-timers that we've talked about in the first quarter, were the LAS expenses where we have said we will get that number below $2.1 billion by the end of 2013 and we obviously got that from$ 3.1 billion in the fourth quarter down to $2.6 billion. So in addition to those compensation-related items, we have got those two levers to continue to drive expenses down during the balance of the year.
+
+Answer_9:
+
+    We have not given an exact number. I think what you should do is, if you go back to slide 9 and look at the red bar, we have said that there was $800 million of increased incentives in that $13.8 billion. That gets the number down to $13 billion. You should assume that part of the benefit between $13.3 billion and $13 billion related to New BAC, but we have not given an exact number.
+
+Answer_10:
+
+    Sure. It's a good question. One of the things, and I am going to walk through the different pieces and as it relates to overall litigation, as well as the rep and warrant, and I would ask you to flip back to slide 23 where we lay this out. And I think one of the things, Meredith, that we feel very good about the progress during the quarter is, if you walk through what we have laid out at the bottom of page 23, if we start with the reps and warrants, between the settlements at the beginning of 2011, as well as the Fannie settlement that we had at year-end, you can see that, as we lay out here, we are generally through the GSE exposure as it relates to rep and warrant.
+You then go down to the monolines. There are three significant monolines that we did business with, five in total. We obviously have had previous settlements with two of those three monolines. The one that obviously gets a lot of press is MBIA that continues to be out there.
+You then go down to the private-label rep and warrant and obviously the most significant piece of that is the Gibbs & Bruns settlement that will work through -- continues to work through the court process and we would expect the outcome of that to be during the third quarter of this year.
+So as you look at reps and warrants, we are through a significant portion of that. We then -- if you then flip to the securities litigation, which is the other significant piece of the litigation expense, one of the reasons that we think the settlement that we announced today was significant is as I referenced. If we look at the original unpaid balance companywide of all of the securities that were underwritten, this settlement today relates to companywide about 70% of that.
+So I don't think anyone is going to ever, at this point, declare complete victory. We do think that between the Fannie and related settlements and the lookback in the fourth quarter, as well as the settlement that we have announced today, that we are moving through in a pretty meaningful way this pipeline of items.
+
+Answer_11:
+
+    Sure. Thank you.
+
+Answer_12:
+
+    Sure. Once again, the RPL that we have within the rep and warrant will continue to be up to $4 billion. As we have said before, we cover -- at this point given we don't have repurchase history with the monolines, the monolines are covered within our litigation reserves and we have both litigation reserves, as well as range of possible loss for litigation and you should assume that there was some additional monies during the quarter in litigation expense that was set aside for the monolines.
+
+Answer_13:
+
+    That is correct. Not only -- claims or threatened claims, John.
+
+Answer_14:
+
+    Yes, the two most significant that are out there on the securities litigation that have been more public would be FHFA, as well as AIG.
+
+Answer_15:
+
+    That is our best sense. Far be it from us to forecast that process, but our best estimate, to your point, would be the third quarter.
+
+Answer_16:
+
+    Yes, I think, at this point, where we have guided is we have said that with the work that we have done that, ex any market-related impacts, that $10.5 billion is a good starting point. That number can bounce around, but I would continue to look at that $10.5 billion in the near term as the right starting point.
+
+Answer_17:
+
+    Yes, it's a good question, John. I think as we look at the charge-off and the move in charge-off -- to have almost a 20% decline in charge-offs I think speaks to the quality of the portfolio and the work that we had said had been done back in late '08 and early '09 as it relates to consumer underwriting. We have previously said that, as we look at provision, charge-offs will come down about the time that the releases also come down to get you to a level between 1.8 and 2.2. If you look at what we experienced this quarter and with what we are seeing as a trend, it clearly feels like we will be at the low end of that going forward.
+
+Answer_18:
+
+    Yes.
+
+Answer_19:
+
+    I would think about it at the bottom of the range at this point.
+
+Answer_20:
+
+    And John, as it is clear, it is all about the home finance side now. You see the credit card businesses continue to make some incremental improvement, but it has made a dramatic improvement from the high points going back several quarters. But it is really about mortgages and everything you hear about in the market that we are witnessing in our portfolios in terms of house price improvement. Activity level continues to -- will bear well on that as we look forward.
+
+Answer_21:
+
+    Yes, I think what we said is that roughly -- I think it was roughly $90 million to $100 million of the decline in servicing revenue was the result of the sales. We've said that we think, as we get to the end of the year, the sales will ultimately lead to a reduction in revenues of about $200 million related to the MSR sales. We obviously had a fair bit of that given that a decent chunk of the performing sales had an effective closed date on January 31. So we have clearly taken a piece of that and there's probably another $100 million a quarter to come relating to those sales by the end of this year.
+Obviously, as you look at, and we tend not to just look at the revenue number, but we look at the contribution from a pretax perspective and obviously, as you see the work that we are doing within Legacy Assets & Servicing, we continue to think that the opportunities there are significant.
+
+Answer_22:
+
+    Yes, I think as we look at, at this point, the MSR balance was roughly $5.8 billion at the end of the first quarter. If we were to pro forma those sales throughout the year, assuming rates stay where they are, it gets you down to about a $5 billion number from an overall capital perspective. Plus or minus that feels about right. Obviously any change from that is going to be a function of the opportunities to originate things that make sense versus any type of accelerated prepayments that may or may not happen. But I think $5 billion from an MSR balance perspective is not a bad number to be looking at.
+
+Answer_23:
+
+    John, from the origination side, the first order of business was to, after we got out of the correspondent business, was to kind of get the business on an upward trajectory and if you go back and look starting in the fourth quarter '11, we've basically grown retail originations quarter after quarter after quarter. In this quarter again, we had another 15% odd off the fourth quarter last year.
+But if you actually look at the headcount that you see on the pages, remember that we have got 1000 plus loan officers working this quarter that we didn't -- that weren't here last year that are trained and getting up to speed in the closing [rate]. So the next order of business is how to overcome the HARP refinancing levels, which we have in the portfolio and sort of get to a core run rate.
+But there is no cap on us in terms of retail origination. We will do as much as we can do for our clients and you have seen us drive it forward every quarter and now we have more people, more trained, more up to speed, 4000 more people in the fulfillment area and we don't see the pipeline slowing down.
+
+Answer_24:
+
+    Yes, a couple things. If you look at the -- we talked about credit costs. Credit costs, I think within the business there was roughly a $30 million reserve release during the quarter that we wouldn't assume is necessarily going to continue. But I think if you look at overall pretax margin, we have been at kind of in the 20%, 21% area. This quarter was 26%. I think the assumption going forward is that we will clearly be north of the 21%, but I wouldn't expect that in the near term we run at 26% either.
+
+Answer_25:
+
+    Yes, I think the easiest way to look at it is, if you look at deltas, we had some of the market-based benefits that we quoted that were roughly $300 million during the quarter. A portion of that gets allocated to GWIM and if you look at the GWIM business, you can see that the net interest income was up about $100 million. So I will give you those pieces of data, but we are not going to quote exact numbers as to how we allocate that out, but it is a piece of that.
+
+Answer_26:
+
+    You are exactly right that once a borrower goes through the trial MOD period and gets to a permanent MOD, they need to be current for six months before we would look to bring those back in. And when you consider that number, realize that coming out of the National Mortgage Settlement, there was heightened modification activity during the third and fourth quarters in particular of last year. So we clearly would expect some of those to cross the six-month period during the second quarter, but realizing, if you go back to, I believe it was the third quarter when we adopted the regulatory guidance, the biggest of that $6 billion plus, north of $4 billion of that is the regulatory guidance that was given. So that is going to be the bigger piece of the two things.
+
+Answer_27:
+
+    As you can see, Betsy, on the page, you can see that the mortgage loan officers are up about 1000 year-over-year. We are still adding as we speak. The success of putting them in into the branch environments where you have the mortgage loan officer and FSA, personal bankers is multiples of the success in other branch environments and so we are just driving at that.
+So I don't have -- the pipeline is still as strong as it has ever been. We are still -- we had thousands of people to get them closed on time and we are still working our tail off to get mortgage loans closed in time. I don't think there is any -- honestly there is any cap on where this could go. We still have tremendous opportunity within our client base that are unserved. The people, our clients go elsewhere to get their mortgages.
+So we have seen it drive up 50% plus year-over-year, another $3 billion increase in  production fourth quarter to first quarter. So I challenge the team, they have got to outrun the HARP at some point because that will die off, although it has been extended. But I just -- I wouldn't tell you there is any sort of cap. I think we should be able to drive it up to more of our natural share in things like deposits and stuff, which is more than the 10% level over time.
+
+Answer_28:
+
+    Yes, but it's going to take time. I mean we are talking about -- we have been about 0.2% increase in marketshare each quarter. So this is a lot of activity, but at $24 billion of retail production, we are in the top couple there, top two or three and our view is we ought to be able to push that forward.
+
+Answer_29:
+
+    If we look at both combined MHA and HARP, that is just under 50% of the total for the quarter.
+
+Answer_30:
+
+    Yes, I think, I would say generally there was more of it this quarter than we probably would've thought coming into the year and we are headed, not to give an exact number, but as Brian referenced, I would say overall pipeline in activity, as we went through the first quarter, continued to be very strong.
+
+Answer_31:
+
+    I would expect that component though is probably at a strong point right now and will come down over the next three or four quarters just because frankly as we sell some of the servicing, some of that opportunity goes away. That was part of the transaction value that we got. But the key is, if you look at the non-HARP/HAMP type production, the non-HARP type production on making homes affordable production, you are seeing that grow at as fast a rate.
+
+Answer_32:
+
+    We have got enough to do with our own portfolio.
+
+Answer_33:
+
+    Sure. I would say generally throughout the quarter with some of the growth that we have seen, and I assume you are referring to Basel III, Betsy?
+
+Answer_34:
+
+    I think we continue, as we go through over the next couple quarters, we would just say what we've continued to say, which is that with where we are from a DTA perspective as we go forward pretax should be the way that generally we are creating capital and I think as it relates to different mitigation opportunities, the biggest thing that we see out there is that as home prices continue to move up and we continue to see the home equity portfolio amortize, which has been about $3.5 billion a quarter, that there is a fairly significant tailwind as it relates to reductions in risk-weighted assets there.
+As we go forward, the runoff of the structured credit portfolio that we have, we would expect to accelerate as we go into '14, '15 and '16. And that will obviously be gone by the end of '17. So that is an opportunity and then the third thing I would say is that we continue to work through, and you can see we made progress on the private equity portfolio this quarter and we will continue to wrap that up.
+So I think -- but the biggest item as we go forward is just going to be the pretax income line. But I do think that there will continue to be other opportunities to drive that as well.
+
+Answer_35:
+
+    We have not given an exact number that we would expect that to run off, but you should assume it is north of $20 billion of risk-weighted assets.
+
+Answer_36:
+
+    That's correct.
+
+Answer_37:
+
+    Sure. Well, I think, and Betsy, as we have spoken, I think there are three different metrics and ways that you get to looking at capital allocation and capital return. The first is obviously where your ratios are after stress through the CCAR process. And as you look at the results that we had, we ended up just above 6% after our ask, which, relative to our peers, we think positioned us well.
+The second item, which, as you referenced, you moved to Basel III and we feel like we have done a very good job on Basel III and to your point are above the minimums, above buffers and feel like we have done a good job there.
+And then the third, which is what you have heard us talking a lot about, is just driving the core earnings as the third component. And so we balanced all of those three. And I guess the other thing I would say, as you look at the ask, obviously we have got $5 billion that will get returned to the shareholders based on our plan, but I think -- I don't think you should also minimize though the other $5.5 billion that will go to redeem preferred stock because that preferred stock had coupons between 8% and 8 5/8%. It is not tax-deductible and we are not replacing it with other preferred stock.
+
+Answer_38:
+
+    So I think, Betsy, we were clear that we, a few quarters ago, we said we would do the 750, and I would say -- excuse me, Nancy -- you were at 750 and I think we're -- and you can see that that number is close to 5000. So think about that as 5400 odd, getting down to 5000. The point was, at the time, we did an optimization thought process, looked at it, looked at customer behavior and got that number and we are busily doing that in a very thoughtful way so that we retain a lot of customers, especially on the consolidation side. And then also obviously, as you know, Nancy, we have exited some of the markets and sold community banks where they can get the leverage and the operations that we can't get in some of those markets.
+So the question of what happens next I think is probably a question that we take up as we get into '14 and think about what the customer behavior change has been because we are seeing a fairly strong change in the behavior of the customers evidenced by the mobile volumes. And so not only do we have a number mobile customers -- mobile customers goes up to about 10,000 a day to 12,600. It is also what they do. So 100,000 checks a day get deposited by people taking pictures of them and type the numbers.
+So that behavioral change we have got to keep monitoring. At the same time, we are building the centers to be these more destination with the [FFAs], which are brokers in branches, mortgage loan officers and so that configuration I think we are still testing. So I don't know the exact answer, but because the near term is to get the other 400 changed that we are talking about through.
+If you step back from it, look year-over-year, the branches are down, the customer satisfaction is up and the deposits are up strongly, which is a nice combination.
+
+Answer_39:
+
+    Think of us as a retailer looking at what the best way to get the most out of the market and serve our customers best. And that will always be a subject we will talk about and we are making massive investments in other ATM architecture, virtual ATMs in the mobile space to make sure that we are right with our customers.
+
+Answer_40:
+
+    Absolutely. And part of it is continuing to upgrade the system. So if you look at our Company between 2009 and 2015, we will have rewritten all the systems and we will bring systems, which are more standalone product systems, into systems which are consistent with a customer approach, Nancy.
+So the kinds of inquiries you get where we can see it first in one system, not in another system. Those are going away, frankly getting out of multiple deposit systems helps and so our complaints are down a lot, our attrition is way down and so we are seeing the benefits of this as we go through it. But absolutely, this is all geared at maintaining a customer posture, customer satisfaction posture, which is up year-over-year and driving it to places we haven't driven before honestly based on all the tools we have.
+
+Answer_41:
+
+    I think that there are probably two things. I think that the $900 million built into the estimates, which we have every period as we look out there, I think it was in some, not in others. So I don't think there was uniformity on that across. And then I think the other item that was out there is, as we look at a lot of the analysts, as they look at core, they don't include any litigation number and obviously there was a $900 million litigation number. We obviously need that to come down, but when I mentioned to Meredith's question, I think getting this class-action and shrinking the tale risk with respect to our mortgage-backed security litigation, tale risk was a significant item for us and we were able to get through that this quarter being generally in line with what you all had expected.
+
+Answer_42:
+
+    It's hard for us to predict what is going to happen on the 30th. But I think, as we have spoken to, that the process, and we are obviously not a part of this. This is Bank of New York Mellon in their capacity as trustee and obviously, the standard and what needs to be worked through is did they go through and were they prudent and did they follow a process to getting to the point to say that this settlement made sense for investors. And so that will be the general topic. We are not going to predict what exactly happens on the 30th besides that we obviously wouldn't have entered into the settlement if we didn't think that there was a basis for it.
+
+Answer_43:
+
+    That's correct.
+
+Answer_44:
+
+    There is clearly a significant overlap. I think as you look at the people that were part of the settlement today tended to be people that would have been original purchasers of the securities. With respect to Gibbs & Bruns, they could have either been original purchasers or subsequent purchasers, but there is overlap and as we have said in the release that the people that were part of the settlement today, to the extent that Gibbs & Bruns gets approved, they will receive whatever they would have otherwise received as part of Gibbs & Bruns.
+
+Answer_45:
+
+    Yes, because, as we said in the release, this covers 80% of the Countrywide securities, of which Gibbs & Bruns was obviously a more than -- a very significant piece. So you're absolutely correct in that.
+
+Answer_46:
+
+    No, there is really nothing that we would say there. I think I would just reiterate though that, as you look at the component of what we settle today from a securities litigation perspective, as it relates to current outstanding amount, as well as what was originally underwritten, it is obviously a significant piece of that. We continue to want to resolve and get these legacy issues put behind us. At the same time, between the capital that we have built and the number of them that we have put behind us, it has to make sense for the shareholders.
+
+Answer_47:
+
+    I am not sure what you are talking about.
+
+Answer_48:
+
+    They are all in the litigation reserves, which are not on that page. Those are just the rep and warranty reserves. The monolines, the FHFA and those are in litigation reserves because FHFA and AIG are RMBS cases.
+
+Answer_49:
+
+    Well, the -- I want to make sure I understand the question. So within the -- as you go through the litigation reserves, we have reserves for those litigation items that we have the basis to reserve. To the extent that we don't have the basis to reserve, we have a range of possible loss. So as it relates to these items, those are the two ways that we work through the reserves.
+In the litigation reserves, as we have said before, are where we house reserves for litigation matters, as well as, as I said, the monolines reside within that litigation bucket as well because we are in litigation with them. And then obviously as you move to the rep and warrant reserves, we have got the actual reserves and then we have also disclosed the range of possible loss for those items that we don't have the basis to reserve.
+
+Answer_50:
+
+    Well, I think that there is -- as we look, I would say that if we look at where we ended the quarter relative to where we started, I would say that it feels at this point that the spreads at this point have somewhat settled out. But obviously those spreads are going to be a function of activity versus capacity and we will have to see how that unfolds over the quarter.
+We have obviously built up, and as Brian referenced, have built up the capacity to do what we need to do for our customers and we will just need to see where those margins go throughout the quarter. But, at this point, there was obviously a stepdown in margins during the first quarter. It feels to some extent as if that has leveled out, but we will have to see how it plays out over the second quarter.
+
+Answer_51:
+
+    You are right. The international component is obviously a very small component. Those are large -- they are almost exclusively either wholesale deposits that are out there. I am not sure you're going to see much movement in that. I think to your earlier question, where the majority of the deposits are and where the majority of the cost of the deposits are those housed in the US. And you can see that as we build up the core deposits, the amount of time deposits that we have here in the US, we would expect those to continue to come down. And as those come down, all other things being equal, you would expect deposits here domestically, the cost of those to continue to move down.
+
+Answer_52:
+
+    I think as I have said before, I think the OLA rules continue to evolve. If you look out at our annual filings that we have put out there, we have said that we are looking at does it make sense to have a Mellon Co. merged into BAC. That is ongoing work that continues. We believe ultimately, as the Merrill debt runs off and to the extent there is reissuance, it's at the Bank of America level, so we pick up that benefit. Like I said, as we look at any ratio, and as we consider the different rules, it feels like we will have more than enough in total parent company debt relative to risk-weighted assets.
+
+Answer_53:
+
+    Two things. The first is -- the one thing, when you mentioned it came down in the quarter, realize that one of the reasons why it came down is that we have included the $5.5 billion of preferred redemptions in the time to required funding, so that largely drove that.
+But to your question, it is a good one. We would expect over time that the amount of parent company liquidity that we have would tend to come down over time. As we get through the '13 and '14 maturities, we still believe we can bring the parent company liquidity down, bring the cost of it down and you are right, we will keep time to required funding at at least two years. Initially given we work through maturities, that will stay elevated in the high 20s, 30, but the goal is to obviously flatten out the maturities and have that become more in the two-year area, which is consistent with what we have been saying for some time.
+
+Answer_54:
+
+    We have been driving the Company and so there has been two basic pieces of strategy. One is to continue to push the legacy issues and costs  out of the Company. At the same time, take the Company and drive the underlying business metric. So that has been going on and as we clean up more of the former, then the focus of the Company is on the latter. And involved in the latter -- in other words, driving the core Company was that we had say credit card, a big book of business that we were running off that, we are getting towards the end of that or less impact quarter-to-quarter and now we have got to grow the credit card business. So this quarter, I think we did 900,000 plus credit cards, which is the highest amount we have done in a quarter since 2008 or something like. 70% of those are through the branch structure and through the preferred business and things like that.
+So the goal is to continue to drive this Company and get the value of the combination of all the pieces of businesses through it. It is not a new push. It is just as the other issues go away, this is what the team has to be focused on. So we are seeing great progress in some of the businesses and look at the GWIM business and look at the connectivity to the GWIM business. We literally have millions of referrals that go between businesses a year. We goal those at 30%, 50% increases every year and we see that number is being hit and it's tracked in every single market, 100 plus markets, with about 20 different pieces of business flows between businesses that we track and monitor on a monthly basis.
+It is all geared to just driving the value of the franchise and frankly delivering the customers' entire franchise. And it appears in all the businesses, whether it is in the commercial business bringing our 401 platform, which is new to the Bank of America structure since Merrill came in and we just see that -- wins in that happening every day. It is bringing the capital markets expertise deep in our middle-market business. It is bringing the personal side of the wealth management business to our business entrepreneurs. It is all those things.
+And so there is -- new is probably a word that overstresses it. It is what we have to do to drive the revenue and continue to work the expenses to produce the bottom line we need.
+
+Answer_55:
+
+    Yes, and I always -- Mike, one of the tough things is we have 260,000 people in this Company and a lot of them have been focused on this and it is just their time to shine and the rest of what Bruce and I have been working on and others, restructuring the balance sheet and getting the capital up, getting liquidity, legacy issues are starting to fade away.
+
+Answer_56:
+
+    I think that the -- the couple things that I would say is that the first is, and I am not going to drill into the Flagstar case, but I want to be clear, Flagstar gave a borrower fraud reference and that was part of that case, which is not something we have done. But at a high level, Mike, I would go back to -- that is correct. It is in the disclosure and as I said in my earlier comments, within the litigation reserve during the quarter, we reassess those every quarter and we did provide, within the litigation expense, some element of cost with respect to monolines during the quarter.
+
+Answer_57:
+
+    I think that the first thing is that the court is not opining on a number. They are either opining on approving or not approving and obviously, if they don't approve, we have set up reserves within the Countrywide securities, assuming that every trust gets to the 25% threshold. And so, obviously, if it doesn't get approved, this will revert back to going individual trust by trust and working through it. But I don't think it is appropriate to comment on reserves on something that we don't even -- don't know what -- the extent it's not going to happen.
+
+Answer_58:
+
+    That's correct. And I think the other important thing is when we set up the $8.5 billion to the Countrywide, we also used that same methodology with respect to bank-issued securitization rep and warrant to set up reserves based on the same methodology across the Company.
+
+Answer_59:
+
+    To be clear, the 50% was both MHA as well as HARP.
+
+Answer_60:
+
+    And it was slightly -- and in fact, if you think about it year-over-year, the growth rate of the non -- those activities -- has actually been as strong as the growth rate. And that is the challenge going forward is just how do we keep an originated broader product set. But right now, that is an opportunity, which is here and near and it goes away over time, but the rest of the production continues to grow at a fast pace also.
+
+Answer_61:
+
+    Within the consumer mortgage business?
+
+Answer_62:
+
+    Largely nonconforming. And obviously we are not looking to go out -- what we want to do is to provide the mortgage product and balance sheet for that, which there isn't another alternative and we are pressing hard within the different businesses. The mortgage activity within the wealth management business this quarter was very strong, as well as within the mass affluent client space. So that is largely the focus.
+
+Answer_63:
+
+    Just on the underwriting of those though, you should be rest assured that the underwriting is consistent with very strong underwriting that is going on in the industry totally right now.
+
+Answer_64:
+
+    Okay, I think we are through the questions. So once again thanks for joining us this morning and we will be talking with you next quarter.
+

exam/part2_problem1/Problem_1_Conference_Call_Segments/call_22_presentation.txt

@@ -0,0 +1,49 @@
+
+Good morning. Before Bruce Thompson and Brian Moynihan begin their comments, let me remind you that this presentation does contain some forward-looking statements regarding both our financial condition and financial results and that these statements involve certain risks that may cause actual results in the future to be different from our current expectations. And please see our press release and SEC documents for more reference and with that, let me turn it over to Bruce.
+
+Great. Thanks, Kevin and good morning, everyone. I am going to start on slide 4 as we work through the presentation. We earned $0.20 per fully diluted share during the first quarter, or $2.6 billion, up significantly from both the first and fourth quarters of last year. The one item we want to highlight upfront, since it only happens once a year, is approximately $900 million of expense related to retirement-eligible stock-based compensation awards that we have had in the first quarter for the past several years.
+We believe first-quarter results demonstrate significant progress towards the goals we have discussed over the past several quarters. Global Markets client activity drove improved sales and trading results versus the fourth quarter of 2012 while investment banking performance remained strong.
+Global Wealth & Investment Management reported record earnings post the Merrill Lynch merger. Expenses in most of our businesses continue to decline, although they are partially offset by higher revenue-related incentive compensation and the impact of expense related to annual retirement-eligible stock-based compensation awards.
+Capital and liquidity both continue to strengthen and are at record levels by most metrics. The interest rate environment continues to be challenging, but moderate loan growth and reduced average long-term debt helped stabilize net interest income versus the fourth quarter.
+Credit quality improved in almost all products and both consumer and commercial loss rates were the lowest in several years. And we continue to make strides in resolving legacy issues as we just recently reached an agreement to settle three class-action lawsuits involving Countrywide-issued RMBS.
+On slide 5, if we look at the balance sheet, you can see the total balance sheet was down from both the fourth quarter of last year, as well as the year-ago period, although total loans are up slightly. If we look at commercial loans and leases, they are up 3% relative to the fourth quarter of 2012 and up 17% compared to the year-ago period.
+If we move down to deposits, deposits were down slightly from the fourth quarter of '12 to the first quarter of '13, although up approximately $54 billion, or 5%, from the first quarter of 2012. Tangible common equity ratio was up 20 basis points from the fourth quarter to 6.94% and tangible book value was up about $0.10 to $13.46 at the end of the first quarter.
+As you know, we started reporting under Basel I incorporating the Market Risk Final Rule this quarter. The change added approximately $87 billion to risk-weighted assets. As you can see on slide 6, at the end of March, our Tier 1 common capital ratio under Basel I, incorporating this change was approximately 10.6%, up from what we would have reported had we incorporated the change at the end of last year.
+Under Basel III, on a fully phased-in basis, Tier 1 common capital was estimated to be $131 billion, or 9.4%, versus the fourth-quarter estimated calculation of $129 billion and 9.25% respectively.
+I do want to bring to your attention that effective January 1 of this year on a prospective basis, we adjusted the amount of capital being allocated to the business segments. The adjustment reflects an enhancement to prior-year methodology and now considers the effect of regulatory capital requirements in addition to our internal risk-based economic capital models. On slide 22 in the appendix, we summarize the adjusted allocations for you.
+If we turn to slide 7, our global excess liquidity sources remain very strong at $372 billion. Ending long-term debt did increase $4.1 billion from the fourth quarter of '12 as we funded the January payment for the Fannie Mae settlement and opportunistically accelerated our 2013 issuance plans.
+While we issued $11.5 billion of vanilla parent company debt during the quarter, we still expect our long-term debt to decline over the remainder of 2013, as well as during 2014. Our parent company liquidity remains strong at $100 billion and time to required funding was 30 months. We would expect to continue to remain over two years of coverage.
+If you turn to slide 8, net interest income, our net interest income increased from $10.6 billion, or a net interest yield of 2.35% in the fourth quarter, to $10.9 billion or 2.43% in the first quarter of 2013. If we adjust these numbers for FAS 91 in hedge ineffectiveness, on the upper right-hand chart, you can see that net interest income was effectively flat at $10.6 billion, or 2.37% during the first quarter of 2013.
+As we look at these results, we benefited obviously from the market-related premium amortization expense. In addition, we also benefited from higher commercial loan balances, as well as the reduction in the average long-term debt, as well as the deposit rates paid. Those benefits were partially offset by lower consumer loan balances and yields, as well as two fewer days during the period.
+Let's move to slide 9 and look at expenses. Total expenses were down from both the first quarter a year ago and the fourth quarter as we delivered on expense reductions in LAS, as well as ongoing cost savings in our other businesses from New BAC. LAS expenses, excluding litigation in the IFR acceleration agreement, were down approximately $500 million from the fourth quarter to $2.6 billion during the first quarter. This decrease marks the first quarter where the correlation between expenses and lower delinquent loan levels is visible. Delinquent loan levels started to drop during the middle of last year, but as we have previously said, there is a lag of one to two quarters before you see the associated expenses decrease. LAS headcount for March was down approximately 3000 from December while headcount, excluding LAS, was down approximately 1000.
+As we have said previously, we believe that LAS expenses ex-litigation will be at $2.1 billion or lower in the fourth quarter of this year and we feel like the progress that we made during the first quarter in getting to that goal was quite strong. Excluding LAS expenses, litigation and annual retirement-eligible cost, expenses in the quarter in the red box on the slide were $13.8 billion, an increase of $558 million from the fourth quarter of '12 and down $920 million, or 6%, from the first quarter a year ago.
+The increase from the fourth quarter was due to higher revenue-related incentive compensation, approximately $800 million, which more than offset the impact of cost savings. We continue to believe that we will achieve 75% of Project New BAC cost saves, or $1.5 billion per quarter by the fourth quarter of this year.
+The effective tax rate for the quarter was 28% with nothing noteworthy to point out. We would expect a slightly higher effective tax rate for the rest of the year, plus or minus any unusual items like another UK tax rate reduction. This year's expected UK rate reduction of 3%, up from the previous assumption of 2%, should be enacted in the third quarter and will result in a charge of approximately $1.2 billion to write down our UK DTA in that quarter.
+If we turn to slide 10, you can see that credit quality continues to improve. Net charge-offs declined 19% to $2.5 billion during the first quarter, which is the lowest level in several years. The consumer loss rate dropped 34 basis points to 1.7%, the lowest since the beginning of 2008 while the commercial loss rate declined 5 basis points to 25 basis points, the lowest since 2006.
+Provision expense of $1.7 billion includes a reserve reduction of approximately $800 million, reflecting the improved trends. NPLs and reservable criticized balances also continue to decrease. In addition, 28%, or $6.4 billion, of our NPAs are current consumer loans that were modified and are now current after successful trial periods or our loans classified as NPAs due to regulatory guidance that was issued in the second half of 2012. Our allowance coverage to annualized charge-offs increased from 1.96 times in the fourth quarter of 2012 to 2.2 times in the first quarter of 2013.
+If we turn to slide 11, we highlight the results of Consumer & Business Banking. Starting this quarter, we have combined business banking and deposits for reporting purposes. Pretax earnings for Consumer & Business Banking increased 4% versus the fourth quarter driven by improved credit costs, as well as lower expenses. However, net income was relatively flat due to a higher tax rate. Average deposit balances increased 4%, or $18 billion compared to the fourth quarter driven by $11 billion of organic growth and $7 billion related to transfers from Global Wealth & Investment Management. As you know, we periodically move customers across business segments after an evaluation of how they can be best served by us.
+Rates paid on deposits during the quarter declined 3 basis points due to pricing discipline and a mix shift in our deposits. Brokerage assets increased $6.7 billion from the fourth quarter, or 9% due to market appreciation and increased customer flows. We reduced banking centers during the first quarter as we continue to optimize the delivery network.
+Our mobile banking customer base reached $12.6 million, which is up 5% from the fourth quarter and 30% from a year ago. Combined credit and debit card purchase volumes had a seasonal decline of 6% from the fourth quarter, but increased 3% from a year ago. US consumer credit card retail spend per average active account increased 7% from first quarter a year ago. Average loans did decline $1.6 billion from the fourth quarter due to seasonality and continued noncore portfolio runoff. And as I mentioned earlier, credit quality continued to improve with some of our credit quality indicators at historic lows.
+If we turn to slide 12, we address one of the two businesses within our Consumer Real Estate Services area, home loans. As you know, the home loans business is responsible for first lien and home equity originations within Consumer Real Estate Services. First mortgage retail originations of approximately $24 billion were up 11% from the fourth quarter and were up 57% compared with retail originations from a year ago. We believe these increases are reflective of improvements in our retail marketshare.
+Consequently, we are adding employees to improve our sales and fulfillment capacity, which is the driver behind higher expenses in home loans during the quarter. However, given lower margins realized during the first quarter, core production income decreased from the fourth quarter.
+If we turn to slide 13, Legacy Assets & Servicing had a loss of $1.4 billion in the quarter, a significant improvement from the fourth quarter that was impacted by our settlements with Fannie Mae. The provision for reps and warranties in CRES was $250 million during the quarter. The MSR asset ended the quarter at $5.8 billion, up slightly from the end of the fourth quarter.
+Although we announced the sale of mortgage servicing rights in January, the accounting sale will be recorded throughout the year as the servicing asset is transferred. MSR results, including hedges, were positive for the quarter. The capitalized MSR rate ended the period at 61 basis points versus 55 basis points at the end of the year and 58 basis points a year ago. Results did include approximately $700 million of litigation during the first quarter of '13, as well as a similar amount during the fourth quarter of 2012.
+As you can see from our press release this morning, as well as on slide 24 in the slide presentation, we did reach an agreement in principal to settle for $500 million three class-action lawsuits involving Countrywide-issued RMBS. We feel very good about resolving these exposures, which addressed original principal balance RMBS that exceeded $350 billion, or what we believed represents approximately 70% of the unpaid principal balance of all MBS as to which securities disclosure claims have been filed or threatened as to all Bank of America-related entities.
+Servicing income decreased 17%, or $182 million, compared to the fourth quarter. 47% of this decrease was related to the legal sale of MSRs in connection with the sales that we announced in January, together with other smaller MSR sales. The balance reflected payoffs that exceeded originations in the portfolio due mainly to our exit from the correspondent channel in late 2011 combined with the seasonality and the timing of mortgage payments.
+The number of loans in our servicing portfolio totaled approximately $6.5 million at the end of March, down 866,000 from the end of the year due to actual transfers of approximately 570,000 and the rest due to payoffs. 60-plus day delinquent loans dropped from 773,000 units at the end of December to 667,000 units at the end of March, of which a third of the decrease is associated with transferred servicing. We continue to believe that our 60-plus day delinquent loans at the end of this year will be at 400,000 units or below.
+If we turn to slide 14, Global Wealth & Investment Management had a very strong quarter. Earnings increased 25% to $720 million from the fourth quarter and continued to set post-merger records in several metrics. The pretax margin of approximately 26% was impacted by low credit cost and a higher contribution from corporate ALM activities, some of which we would not expect to continue.
+Overall client activity in the wealth management business in the quarter was strong across all categories. Client balances were up $82 billion, or 3.8% from the fourth quarter, due to higher market levels and net positive flows offset somewhat by the net migration of deposits to consumer and business banking. Period-end deposits dropped $26 billion driven by $19 billion of net migration once again to Consumer & Business Banking. The rest of the decrease reflected year-end seasonality heightened by the fiscal cliff in client investment activity, including long-term assets under management activity. Ending loan balances were at record levels and long-term AUM flows were a record $20 billion, the highest quarterly amount since the Merrill merger and the 15th consecutive positive quarter.
+Net income in Global Banking, slide 15, was $1.3 billion versus $1.4 billion in the fourth quarter and down from the first quarter of last year primarily due to higher provision expense due to loan growth and asset quality stabilization. Revenue increased 2% from the fourth quarter reflecting increased business lending revenue. Asset quality continues to improve. Net charge-offs declined $117 million, or 51%. Reservable utilized criticized exposure declined 6% and NPAs dropped 20% to $1.7 billion.
+On slide 16, you can see corporatewide investment banking fees increased 26% from a year ago, but were down slightly from a record-setting fourth quarter in debt issuance. Per Dealogic, Bank of America-Merrill Lynch gained marketshare compared to the fourth quarter of 2012 and based on our reported peer results, we believe at $1.5 billion in investment banking fees during the first quarter of 2013, we were a very strong number two.
+Average loans increased almost $12 billion from the fourth quarter, driven by growth in C&I, as well as within commercial real estate. Ending loan balances continue to be higher than average balances reflecting the momentum that we saw throughout the quarter. Average deposit balances at $221 billion for the first quarter declined approximately $21 billion compared to the fourth quarter, partially impacted by the expiration of TAG.
+If we switch to Global Markets and flip to slide 17, net income of $1.4 billion increased approximately $1 billion, excluding DVA from the fourth quarter reflecting increased sales and trading activity. We did record DVA losses of $55 million in the first quarter of this year versus losses of $276 million in the fourth quarter and losses of $1.4 billion a year ago. Total revenue ex-DVA was up $1.9 billion, or 58% from the fourth quarter and was down 11% from the first quarter a year ago.
+Sales and trading revenue ex-DVA increased $1.9 billion from the fourth quarter driven by our FICC business due to improved market sentiment. FICC revenue ex-DVA was up 85% from the fourth quarter due to improved customer activity across all product categories. Versus a year ago, FICC revenue was down 20% ex-DVA as market-making opportunities and credit products were reduced due to spread tightening being much more significant a year ago than what we experienced in the first quarter of this year.
+Also contributing to the decline was a gain in credit products in the first quarter of last year that did not repeat and a decline in commodities revenue. In equities, excluding DVA, results increased 61% from the fourth quarter due primarily to improved trading performance and increased volumes in cash markets driving higher commissions. Versus a year ago, equity results were up 8% due to increased client financing balances. Average VAR of $81 million in the quarter is down from $100 million in the fourth quarter and effectively flat with the year-ago period.
+On slide 18, we show you the results of all other, which to remind you includes our global principal investments business, the non-US consumer card business, our discretionary portfolio associated with interest rate risk management insurance and the discontinued real estate portfolio, as well as the international wealth management business.
+The loss of $867 million was driven mainly by first-quarter annual retirement-eligible costs. The $1.7 billion decline in net income versus the prior quarter was driven by the annual retirement-eligible costs in the absence of tax benefits that were recognized in the fourth quarter of last year. With that, let me turn it over to Brian.
+
+Thanks, Bruce. Before we take questions, I thought I would leave you with a few thoughts about the quarter. As you can see on slide 19, we continue to work to stabilize the revenue streams and begin to build the strength to drive in the future. At the same time, we continue to work on the cost structure, both reducing costs, at the same time investing in business, as Bruce talked to you earlier about the 4000 people we put to help drive our mortgage production or the 1000 more loan officers are examples. That in turn will help increase our profitability now and in the future.
+We continue to see continued momentum in driving balance growth across all our customer groups. When you look in the consumer side this quarter, we were pleased with the growth in deposits, the continued stabilization and profitability of the credit card business and the ability to continue to drive the mortgage activity, the production activity the way we want to, up 50% plus year-over-year.
+As you can see in our Global Wealth Management businesses, we have had a record level of assets under management come in from our industry-leading business and they had strong performance, including operating margins. As we think about the commercial lending business, you can see both year-over-year and linked quarter, we have had strong commercial loan growth as those businesses continue to produce strong profits for our Company. We remain strong in our investment banking revenue, as Bruce said, a number two positioning and we continue to drive our positioning in that business.
+When you look at our capital markets business, as you can see, we continue to show good profitability and a strong increase from the fourth quarter, but we continue to maintain the low risk that's, in the methodology which you run that business, driven towards the customers we serve and making sure that we balance risk and reward at any turn.
+We still have a lot of work ahead of us as a company. We feel good about where we are and the progress we made this quarter. We will continue to drive the earnings forward to deliver the results that you expect of us and we expect of ourselves. So let's open it up for Q&A.

exam/part2_problem1/Problem_1_Conference_Call_Segments/call_22_questions.txt

@@ -0,0 +1,289 @@
+Question_1:
+
+    Hi, thank you. So good loan growth on the commercial -- C&I and commercial real estate side. Just curious what kind of yield is that bringing -- being brought on and from what I understand there's pretty reasonable competition for those new loans. So just curious on how you balance the growth and [marginal] pressure in the markets.
+
+Question_2:
+
+    That's great. I appreciate that. I wanted to get -- your thoughts on the expenses from slide 9. I wanted to make sure that I understood. Should the starting point -- being that the retirement-eligible is a first-quarter phenomenon, is the starting point, the 18.12 less the 900 or so, as we think about second quarter and then folding in the New BAC incremental efficiencies?
+
+Question_3:
+
+    Perfect. I appreciate that. And you also mentioned your long-term debt is down $75 billion year-on-year and you expect more maturities in '13 and '14 in the 20s. I guess that is perfectly straightforward. Does that include any adjustments for what is coming down the pike with OLA or do you just have to take a wait-and-see attitude on what those rules are?
+
+Question_4:
+
+    All right, thank you both. I appreciate it.
+
+Question_5:
+
+    Good morning. Just to follow up a little bit on the fixed income trading results, obviously, it can be lumpy quarter-to-quarter, but it was down a little bit more than we saw elsewhere. You talked about some of the mortgage areas. Was there a particular gain last year that was unusual or is it just activity?
+
+Question_6:
+
+    Okay, thanks. That's helpful. And then just separately, in terms of your capital actions, I think many were positively surprised by the CCAR Fed approval for buybacks of both common and preferred. Just any commentary in terms of the pace of the common share repurchase and on the preferred side, the timing of that and do you have to issue any to replace what you are calling?
+
+Question_7:
+
+    Okay, thank you very much.
+
+Question_8:
+
+    Thank you, Bruce and Brian, for taking my call. Bruce, I have a question. In the release you talk about -- I mean we have gone through expenses in terms of the stock compensation, if you will, in the quarter and also higher first-quarter compensation related to revenues. And you can kind of back that out and see what the run rate is for second quarter.
+But you also mentioned that you expect to achieve $1.5 billion in cost saves per quarter by fourth quarter of 2013 related to Project New BAC. How do I account for that third piece of the pie? I know the stock compensation in the quarter, I know the overall compensation being high because of revenues. How do I account for New BAC and getting to a run rate of second quarter?
+
+Question_9:
+
+    And just to be clear, the $1.5 billion in New BAC by fourth quarter 2013, what are the cost saves running in this quarter on New BAC? So with the delta I can kind of gauge.
+
+Question_10:
+
+    That's great. Thanks so much for the color.
+
+Question_11:
+
+    Hi, good morning. I just wanted some commentary on sequencing of litigation reserves and what has been -- what has already been factored in in terms of the bulk of litigation settlements and then what is on the horizon. Thanks.
+
+Question_12:
+
+    Got it. Thanks. That seems to be the big question for investors. Thanks so much.
+
+Question_13:
+
+    Hi, thanks. Bruce, just following up on that, you have, on that same page, the range of possible loss above additional accruals of up to $4 billion. There was some concerns that some of the recent legal decisions in the monoline cases, particularly around the causation issue, might have impacted your estimates there and it doesn't look like it did. Could you tell us why that hasn't changed any of your outlook on that RPL number?
+
+Question_14:
+
+    Okay. And then you noted that the settlement that you announced today covers 70% of issuance on which claims have been made. Is that what you said?
+
+Question_15:
+
+    Got it. So what does that leave some of the higher profile government  like FHFA and some of the things that we know about?
+
+Question_16:
+
+    Okay. And on the Gibbs & Bruns, the final hearing is in late May. I guess the deliberations could extend for a few months after that. Do you have any idea -- I guess you said third quarter. You hope to get the final resolution in the third quarter?
+
+Question_17:
+
+    Okay. And then switching gears on the net interest income, Bruce, do you expect maybe to do better than the core $10.6 billion now that you have a little bit of loan growth in the day count or do you expect to kind of stay around that level?
+
+Question_18:
+
+    Okay. And how about on credit cost? You had a nice move down this quarter. Do you still have capacity to take the reserves down further and do you expect the provision to make further progress below the $1.7 billion that you did this quarter?
+
+Question_19:
+
+    Yes, I mean this quarter you were below the range, right?
+
+Question_20:
+
+    So are we setting a new range or you still think we should think about that range of 1.8 to 2.2?
+
+Question_21:
+
+    Okay. And then --.
+
+Question_22:
+
+    Okay. One more thing on, Bruce, on the revenue side. The servicing, mortgage servicing revenues seem to take a step down from the MSR sale. What should the cadence of that be going forward? Is part of the decline kind of built in from the phased-in sale?
+
+Question_23:
+
+    And one more follow-up. How do you guys think about the ultimate target of MSR size and maintaining a balance between origination and servicing in the mortgage business for when rates eventually rise?
+
+Question_24:
+
+    Okay, thank you.
+
+Question_25:
+
+    Good morning, guys. So in wealth management, just hoping to dig in. You guys highlighted a couple things that helped the margins move a bit higher, which it seems you don't think they are going to repeat. About how much of a tailwind were those items? And if we are looking ex -- how much of -- it seems as though maybe we might have enough draft anyway because we are looking at like a 500 basis point increase year-over-year and quarter-over-quarter.
+
+Question_26:
+
+    Sure, sure. I think you also highlighted the ALM as a tailwind too. Is there any way to quantify that and can you, forgive the potentially ignorant question, but can you help me understand the mechanics of how ALM will run through GWIM?
+
+Question_27:
+
+    Okay, that helps. Thanks, guys. And then last one, and sorry, it's a little bit technical, but on the NPAs, I guess you guys had said that 20% were from MODs or regulatory requirements. And we have run through the regulatory requirements before. Just hoping to understand on the MODs, it was my understanding that, after about six months of payments, the TDRs are reclassified as current. Do you guys account for TDRs differently than that or can you help me maybe understand how that works?
+
+Question_28:
+
+    Okay, thanks. That helps.
+
+Question_29:
+
+    Hey, good morning. A couple questions, one on mortgage. You indicated in the past that you were interested in increasing the mortgage origination share and you have done that. I am just wondering how close you are to where you want to be or are you still in the process of building out what capacity you want to have there?
+
+Question_30:
+
+    Great, okay. So go from 4% a couple quarters ago up to 10% to 12%?
+
+Question_31:
+
+    And so two follow-ups on that. One is, on HARP you mentioned, how much of the production right now is HARP and how much HARP is in your footprint, your client base that you haven't done yet?
+
+Question_32:
+
+    Okay. And what is left in your client base to do that you haven't done yet? I mean how many more quarters of this do you think you have?
+
+Question_33:
+
+    Okay. And you are just HARPing your current portfolio set? You are not going after other peoples? You have enough to do with your own portfolio.
+
+Question_34:
+
+    Right, okay. And then just separately, on page 6, you go through the regulatory capital. Could you just remind us what your expectation is for RWAs going forward, passive mitigation, active mitigation?
+
+Question_35:
+
+    Correct.
+
+Question_36:
+
+    And the runoff of the structured credit, how much is that right now?
+
+Question_37:
+
+    Today in 1Q?
+
+Question_38:
+
+    Okay. And then the last question is on how you get to the $5 billion ask that you had for CCAR that got approved. Because with the 9.4% common Tier 1 ratio in [1Q3] and these RWA mitigation opportunities coming going forward, clearly you must know going into it that you were going to be well above the 8.5% FFC minimum that is out there and that you would be approaching the 10%, that kind of high end of the range scenario that people in business  like yourself have targeted. So just wondering how you got to $5 billion and how we think about capital ask going forward.
+
+Question_39:
+
+    Okay, thanks.
+
+Question_40:
+
+    Good morning, guys. How are you? A couple of questions for you on retail. You have closed I think 262 branches if I am looking at the numbers correctly over the past year. Can you tell me how that number looks for the coming year and if there is some, quote, optimal number of branches that you want to maintain?
+
+Question_41:
+
+    So what I hear you saying is that this, as you go into 2014, this 5000 branch number is not written in stone, is that correct?
+
+Question_42:
+
+    And my second part to the question would be, Brian, in addressing all these changes in consumer behavior, etc., I mean has part of this program also been to address some of the service issues that you guys had encountered over the past few years as other stuff took more attention?
+
+Question_43:
+
+    And one question, one final question for Bruce. Bruce, the stock is down roughly about 3% in the market right now and there was some disappointment with the headline number. But all the ingredients for the quarter look pretty good. Was it your sense that the $900 million in seasonal costs was built into most estimates or was this a point of variance do you think?
+
+Question_44:
+
+    Okay, thank you.
+
+Question_45:
+
+    Thanks. I just want to circle back to the litigation issues for a moment. And could you just help me understand what precisely at the upcoming hearing on the 30th is being debated? Is it simply the amount of the settlement or is it more the actual legitimacy of the process by which the settlement was derived?
+
+Question_46:
+
+    Correct. I am certainly not asking you to anticipate an outcome. I just wanted to make sure it's not as narrow as the monetary settlement. It is the broader issue of whether BONY followed the appropriate procedures in terms of determining a settlement, is that correct?
+
+Question_47:
+
+    Okay, great. Thanks very much.
+
+Question_48:
+
+    Thanks very much. Just another litigation question. Is it fair to assume that the Countrywide RMBS that were included in the settlement that you announced this morning are all included in the securities that were the subject of the settlement of the Gibbs & Bruns and Bank of New York as trustee process?
+
+Question_49:
+
+    Okay. But looked at from the perspective of the Countrywide securities issues, again, would all of the ones in today's settlement be included in the other -- in the Bank of New York as trustee settlement?
+
+Question_50:
+
+    Okay. And then I don't know if there is anything you can say on this, but any prospective statement about the settlement or possible timing of resolution for the various alphabet soup of remaining litigation, MBIA, FHFA and AIG?
+
+Question_51:
+
+    Great. Thanks very much.
+
+Question_52:
+
+    Great, just like on the trusts that were outside of the Bank of New York, you did provide, on a similar basis. Is there anything you can say about the other lawsuits as to whether there is a provision that has been in there for them based upon some of the experience in the other cases?
+
+Question_53:
+
+    Well, I mean you just . Right, well you have had experience with some of the monolines. I don't know if it is like a facts and circumstances when you think about MBIA or -- so how do you think about whether there has been a provision there or -- and the same thing for the FHFA lawsuits? Are there elements of some of the others that cause you to have had some degree of provisioning for them or would that only happen once those get advanced?
+
+Question_54:
+
+    Right. But I mean the question is is there -- should we think about there having been a component of them or is that all going to be pending?
+
+Question_55:
+
+    Okay, thanks. I'll take that off-line. Just a second question with respect to the mortgage business and the gain on sale. The primary/secondary spread did end the quarter lower than where it was on average. Talk a little bit about how you see that gain on sale trending into Q2 and as we go forward.
+
+Question_56:
+
+    Okay, thank you.
+
+Question_57:
+
+    Thanks for taking my question. Most of my questions have been asked and answered already. But just a quick question in terms of the deposit cost. You have got your domestic deposit costs down to sub 20 basis points. You have got somewhat higher costs outside the US, although obviously much smaller balances. Is there any -- how are you thinking about being able to reduce though the non-US deposit cost, particularly in the time deposit categories over the next 6 to 12 months?
+
+Question_58:
+
+    Okay. And now a bigger picture question on OLA. You have got about $134 billion of long-term debt at Bank of America Corporation as of the end of the year, an additional $90 billion of Merrill Lynch debt. When you are thinking about OLA, does any -- do you think about potentially explicitly agreeing to support the Merrill Lynch debt? Does that help you at all under OLA or are you planning on just maintaining the status quo on that basis?
+
+Question_59:
+
+    Okay. And then just one final question. You had mentioned the time to required funding has come down a little bit from the end of last year and you intend on maintaining that at above two years. Should we think about that coming down closer to 24 months over the next 6 to 12 months or is it too early to tell?
+
+Question_60:
+
+    Right. Okay, thanks for taking my questions.
+
+Question_61:
+
+    Hi, I had a question on litigation, but before we go there, just there was an article saying that, Brian, you were leading a revenue push at the Company and I was wondering if this is a tweak, a strategic change. And as far as a revenue push starting from the top, is that because of what Bank of America is not doing or is it because of the weaker-than-expected environment or both?
+
+Question_62:
+
+    All right. So as you finish or move further along with the cleanup, just more external focus?
+
+Question_63:
+
+    And then a separate question, back to the litigation. The 10-K and some 10-Qs say that if the courts disagree with the argument of loss causation then the reserves may need to go up and that has not taken place, your range of possible loss is about the same. So I'm trying to reconcile those two thoughts because it seems as though, with Assured versus Flagstar, loss causation was shot down and some other comments in the courts. So how do I reconcile what happened with Flagstar, some other court comments that shoot down loss causation with the comment in your 10-K?
+
+Question_64:
+
+    And the big question here is what happens if the $8.5 billion settlement doesn't go through? And I asked Bank of New York that question this morning and the answer from Bank of New York is well it is up to the courts to decide. But what if the courts decide the $8.5 billion agreement does not go through, what would be the impact on your reserves?
+
+Question_65:
+
+    So you have $8.5 billion in reserves for the $8.5 billion settlement and that may change, but you will wait and see what happens May 30th?
+
+Question_66:
+
+    All right. Thank you.
+
+Question_67:
+
+    Good morning. This is actually [Thomas Laturneau] on behalf of Paul. I have a quick follow-up and I just want to make sure I heard you guys right. Did you say that 50% of your total originations were HARP and if so, would that imply that -- I guess what I am asking is do you think you can replace that with sort of normal retail volume if HARP starts to dissipate in the back half of the year?
+
+Question_68:
+
+    Okay.
+
+Question_69:
+
+    Okay, great. That's helpful. And one additional question real quick. Can you tell me what type of products you are actually portfolioing right now?
+
+Question_70:
+
+    Yes.
+
+Question_71:
+
+    Okay, great. Thanks for taking my question.
+
+Question_72:
+
+    Okay, great. Thanks, guys.
+

exam/part2_problem1/Problem_1_Conference_Call_Segments/call_23_answers.txt

@@ -0,0 +1,288 @@
+Answer_1:
+
+    Sure. When we referenced, Betsy, the improving credit quality you can look at it in three different buckets. The first which you already pointed out, clearly HPI under Basel 3, as home prices go up there is benefit to that. And that improvement accounted for roughly a third of the improvement we saw during the quarter.
+The other two things that we benefited from was at the end of the quarter we had less risk on the books so that obviously the reduction in risk provided some benefit. And then third, the overall credit quality of the wholesale book that we had seen also improved. So within that credit quality characterization it was those three things. As we look forward any improvement, any further improvement that we have with respect to risk-weighted assets is going to be a function of home prices.
+Obviously the prints that we have seen during this quarter continue to be strong. And to the extent that the improvement continues we would expect to benefit from that. The other thing that is noteworthy and you see this is that we do continue to run off a fair bit of legacy positions within the consumer mortgage portfolio and you saw that the home equity lines of credit reduced by about another $3.5 billion during the quarter and that obviously provides some benefit as well.
+
+Answer_2:
+
+    Sure. Well, in the queue we put out two different numbers, the first that we put out is the parallel -- the 100 basis points parallel shift which at the end of this quarter I believe we said was either $3.6 billion or $3.7 billion. And then we had the steepening where just long rates went up and we had the $1.6 billion that. Obviously at we look at -- and look at net interest income in the future, we've not seen a parallel shift at this point. We've just seen a steepening. And that's why, in my comments, I referenced the $1.6 billion.
+But as we look forward and look at -- and look forward from a net interest income perspective, to the extent that long end rates are higher and we are investing excess liquidity at the Company we will benefit from being able to invest at higher rates.
+The other two items that we have that will benefit net interest income going forward is we do continue to take down the debt footprint. And you can see that commercial loan balances are moving up as well. And we would expect the combination of those things to more than offset some of the declines in both balances and yields we have seen on the consumer side.
+
+Answer_3:
+
+    Bruce, I just would add, if you think about over the last several quarters we have been fighting the run off portfolios and the impact of those going forward continues to mitigate. So if you look at some of the information was -- and the card balances actually growing quarter to quarter, whether -- even the home equities, the size of the run-off portfolio in mortgages is lower. You assume those that had higher yields as a general case, so the stuff coming on replacement now helps replace those yields and is better in securities. So that gives us confidence that we are starting to see the growth that helps drive the core NIM up.
+
+Answer_4:
+
+    As we have always said, the first places we continue to build liquidity that we are looking to place it is within the lines of business to fund loan growth from those customers. And if you look at this quarter and you look at the balance sheet you saw some of that in that our overall securities balances I believe were down about $18 billion, whereas our average overall loans were up.
+So clearly the lines of business, to the extent of that we continue to originate well structured well priced loans that return the way that we'd like, that is where the liquidity is going to go first. The excess liquidity is invested and in this environment we continue to be very mindful of the OCI risk and will manage with the mindset of mitigating that risk.
+
+Answer_5:
+
+    Yes. The only one timer that I think jumps out is if you look at it you can say that we actually had a negative provision of about $15 million for the quarter, a more normalized provision number within that business is probably $25 million to $50 million, but not unlike the balance of our consumer real estate portfolio. The consumer lending with respect to mortgages and that segment benefits from the increasing home prices that we have seen. That is probably the one anomaly that merits mentioning.
+
+Answer_6:
+
+    Betsy, we have been -- John Thiel and David Darnell -- John runs the business, and along with Keith Banks -- U.S. Trust, has done a good job. If you look at the revenue year-over-year, I think it is a 10% increase in expenses went up 3% in the business which, as you know, has high sensitivity to compensation increases. They just have been doing all the hard work and the New BAC work like everybody else. And so as the markets rose they benefited dramatically from it.
+
+Answer_7:
+
+    Over time as we look at where we are, and I want to highlight over time, we think that can get to a margin of 30%. But at the same time I think of accurately called out we were at 28% this quarter and we did have some benefit from the provision line.
+
+Answer_8:
+
+    Yes.
+
+Answer_9:
+
+    Remember, they've got a lot of loans, deposits, lending in there too that benefits as rates rise.
+
+Answer_10:
+
+    Sure. A couple things on the fixed income business. If we look at the -- and let's look at it year over year because this business probably has the most seasonality with respect to the first quarter. If you look at year-over-year and if you looked within the businesses, within both the rates and currencies area as well as the different credit trading areas which we look at investment grade, high yield as well as our loan sales and trading, the performance year over year was actually pretty good.
+Where we had weakness in the second quarter this year was in three areas. The first is that we continue to run off the structured credit trading book and you had a pretty significant decline during the second quarter of 2013 relative to the prior year from the continued run off of that book. From a P&L perspective it is largely run off at this point so we are not going to have to discuss that much going forward.
+The other two areas on a relative basis that were weaker, we have a very significant business that has got number one market shares in the municipal finance space. And if you look at the prices and the spread widening, it was very dramatic during the month of June in the muni space, that negatively affected us. And then in the mortgage space, obviously the market widened out significantly there and we had some lumpy items in the second quarter of 2012 as well.
+So I think as you look at the quarter and you look at the fixed income business, once again we run it as a holistic business between new issue and sales and trading. The new issue business had a great quarter. Those areas where the markets were good, rates and currencies, fixed income -- or fixed -- excuse me, credit trading across the board actually performed pretty well in the three areas that I mentioned, one because it is running off; and two, given the market dynamics didn't perform as well as we would have expected.
+
+Answer_11:
+
+    I think that's fair. Just to give you a sense, Matt, the structured credit trading book this quarter was less than $100 million. So as you look at the go-forward basis, there is just not much left.
+
+Answer_12:
+
+    Matt, just on that -- just as you look at slide 17, what Tom Montag and team have been able to do is to continue to take advantage of opportunities. The equities business last year, we were still in a work in progress, but they have rebuilt that business; it's doing well. The fixed income, Bruce just ran you through that, but look at the ability to drive the profit by getting the expenses lined up well. So, on the year-over-year basis, the profit increased by $450 million, $460 million because we are able to maintain the expense discipline at the same time as the revenue went up.
+And so I think the key there is that we're trying to manage that business in the context of who we are as entire company in the markets business, and Tom and his team continue to drive where the opportunities are. And FICC aside I think had a very good quarter, but when you step back and look at it holistically, their ability quarter after quarter to drive the profit growth or a good return on capital even in more volatile spaces where we got -- obviously hit a little bit in FICC in the latter part of the quarter is pretty solid.
+
+Answer_13:
+
+    Yes, I think it is a good question. What I would point to is that credit quality across the board, and particularly as you look at early stage delinquencies, as well as what we are seeing as we move some of the consumer real estate out, is quite strong. As we have said, we think the charge-off number will come below $2 billion in the third quarter.
+And as you look at the reserve release, the reserve release this quarter, roughly [$650 million] of it was from core reserves and roughly [$250 million] of it was from PCI. We can't project PCI, but I think if you look at the core $650 million and take the charge-off guidance that we have given, absent any change in home prices, you get a sense as to where we are trending.
+
+Answer_14:
+
+    Yes, I think, John, as we look at legal expense, it is always a little bit difficult to predict. But the just under $500 million that we saw this quarter is clearly at an elevated level from what we would expect long term. At the same time, within the $500 million there was nothing lumpy from the quarter. So it's -- I always hesitate to say too much on that because it is lumpy. But the $500 million number as it relates to a base level, at least what we can tell in the near term, is probably not a bad level to keep.
+
+Answer_15:
+
+    That's correct.
+
+Answer_16:
+
+    Yes. I would -- as we make progress we previously said we would get $1 billion at this year and $1 billion in 2014. We will be at a lower level at the end of 2013, as we said today. And I don't think it is unreasonable to think we will get another $1 billion out in 2014 relative to that lower level.
+
+Answer_17:
+
+    Right now on a disallowed basis under Basel 1.5 it is in the ZIP Code of $15 billion to $16 billion. I think the important thing to keep in mind is during the quarter we didn't get the benefit that you would think from DTA because the impact of OCI offset that.
+
+Answer_18:
+
+    Absolutely.
+
+Answer_19:
+
+    No, the $300 million was in the $10.8 billion. The $10.4 billion backs out the $300 million.
+
+Answer_20:
+
+    Yes, the $700 million would be the benefit, all other things being equal, off of that $10.4 billion number. And that is just the benefit from the move in rates, not anything else to do with the balance sheet.
+
+Answer_21:
+
+    That's correct. The $700 million that is left is all core. The $300 million was in the adjusted -- or in the pre-adjustment number that we reported of $10.8 billion this quarter.
+
+Answer_22:
+
+    Correct.
+
+Answer_23:
+
+    That is correct and that is the important point. As you look at -- and I'm just going to speak to what we had in the first-quarter Q -- the difference between a 100 basis point parallel shaft and a 100 basis point on the long end is an incremental $2.1 billion which is to your short end question.
+
+Answer_24:
+
+    John, the power of the deposit franchise and the short rate rise because the mix is so transactional and core oriented is just, that is where there is a lot of lift left. It's not showing up yet obviously because of the steepness of the curve.
+
+Answer_25:
+
+    Yes, there is always a lag of three to six months from when the work goes away to when the actual employees that are working on that, as well as the expenses associated with it, leave the income statement.
+
+Answer_26:
+
+    Sure. I want to make sure we clear up one question that we get a lot on this. We worked hard to enter into the MSR sale that we entered into at the end of 2012. A lot of the goal associated with that was to be able to reduce the work so we could take the expenses out of our Legacy Assets and Servicing area.
+We entered into a number of transactions in the fourth quarter of 2012 and those will close throughout 2013. The most significant sales have already closed and there will be some smaller sales that close during the balance of this year.
+Outside of the closing of those sales any activity that you see from an MSR perspective will only be because it makes so much sense and it results in getting out loans that are very difficult to work out. But going forward you should not expect to see any incremental MSR sales. And all the guidance we've given you with respect to expense as well as 60-plus day delinquencies is solely based on us doing the work that we control.
+
+Answer_27:
+
+    Yes, as you look at that, one of the conferences that we spoke at, the comment that we had made at that point was that as you look at the impact of OCI relative to net interest income that it took between two and a half to three years to be able to earn back the OCI that is lost through net interest income. And you are absolutely right that durations do widen in mortgage-backed securities. So as we leave 2012 it is more in the context of three years to earn it back as opposed to the two and a half to three years that we had spoken about previously.
+
+Answer_28:
+
+    Well, I think a year or so, I mean -- I think if you went back a little shorter than that in the first quarter as the markets moved people started putting money back in the market on a retail level -- on a high net worth retail level. And I think that trend has continued. But there is still a lot of cash out there. So if you look at some of the deposit dynamics you can see that repositioning.
+And so, we feel people are constructive. I'm not -- we've got our research experts that can give you their view of the S&P levels and things like that. But from a general trend from both our private banking clients and the willingness to borrow money, put it to work for Private Banking and Wealth Management clients and their investment patterns we've seen they are willing to take risk go up.
+And so, you've seen growth in our lending across the board and that has been -- that indicates that people are willing to take risk. I think if you look back a year ago people were not using lines and weren't asking for a lot of lines. And that has changed in the last couple quarters.
+
+Answer_29:
+
+    Bruce, why don't you hit on some of that and then I will give you some broader color.
+
+Answer_30:
+
+    So I think as you step back this quarter our purchase percentage of our overall total went up to 17% from what I believe was right around 7% during the first quarter. So we have started to see the purchase share go up. As we look forward we have roughly 12% deposit market share throughout the country. And if we are doing this business as well as we believe that we can we clearly would expect over time that that mortgage market share can grow from the 4% that we started at a year ago to the 5% that we are at today up to a high single-digit market share.
+And as we look at where we are today relative to going forward and as we look at what some of our peers have said, the 5% decline in pipeline end of second quarter this year -- or end of second quarter currently versus the first quarter is reflective of the fact that we are picking up share because the pipelines aren't down as much as some others.
+
+Answer_31:
+
+    Paul, the other thing is about 70% odd -- 72% to 74% I think it is of the activity that we do in mortgage is really off the customer base. And so, we now have more than half the mortgage loan officers that we have working through the branch -- the retail stores, on teams of people along with the financial advisors, what we call FSA's, in a branch and personal bankers and small business bankers.
+And so, that business system is really taking hold and the amount they are producing continues to grow. And that is where we have placed a lot of the growth year over year. I think we are up 700 or 800 or so mortgage loan officers and mostly in that platform. That platform performs well from both realtor referral basis plus direct to consumer basis. And so, we think that serves us well as the market ebbs and flows between refi purchases.
+And then when you look at our purchase statistics you also have to remember that we still have, probably more than other of our peers, a lot of the government-related refinancing business going through, which we identified for you. So if you sort of back that out you see a more represented picture of how we are doing in the purchase market. But we've got to make that transition happen and the team will work hard at it.
+
+Answer_32:
+
+    For this quarter -- for the third quarter?
+
+Answer_33:
+
+    I think it's too early to tell because we have only had a couple of week's activity obviously. But they came down in the quarter. Bruce, why don't you --?
+
+Answer_34:
+
+    Yes, they were down roughly, Paul, 50 basis points during the second quarter relative to the first. And as Brian indicated, it is too early to tell this quarter.
+
+Answer_35:
+
+    Generally in this business, remember, we are -- this business is a business which ebbs and flows and you know it as well as anybody. Our goal in this business is to serve our customers well. And I think we have rebuilt the platform to do that and that is why we are having success. And so, as the margins have come in they're still strong, we still make money in the business, but we've got to monitor as we go forward. It doesn't mean that -- we will have to take expenses down like everybody else will if the volume is not there.
+
+Answer_36:
+
+    The -- we can get you on that -- we will get you that. I don't know it off the top of my head. Do you happen to know, Bruce?
+
+Answer_37:
+
+    It's in the 40%s.
+
+Answer_38:
+
+    Yes, the 40% I thought.
+
+Answer_39:
+
+    Yes, I think at this point, Guy, we have worked hard, given that these rules came out at the end of last week, to be able to get to both the parent as well as to be very specific about our two primary banking subsidiaries. From best that we can tell in the different releases that is what the US regulatory framework has focused on. There are obviously some different views that were put out in BIS, but we don't have a number for you on that.
+
+Answer_40:
+
+    It's one of the questions and as we have different discussions that you raise, that as policy gets set on this there is a concern of do some of the policies out there possibly have an impact on the availability of undrawn credit. And so, directly to your point, to the extent that over time you are required to hold capital in this case in the form of a leverage ratio for committed undrawn facilities, by definition the cost of those facilities to have truly committed facilities will need to migrate up over time so there is a fair return that is generated on the capital that needs to get help for those.
+To the extent that they are not committed, obviously the percentage that you need to hold is much less. But across the industry to the extent that you need to hold capital for those in greater amounts, the cost will need to change over time. Keep in mind, that doesn't kick in until 2018.
+
+Answer_41:
+
+    Guy, I would ask you to take a look -- and if you flip back to the balance sheet data that we present on page 6, you can see that the actual number of outstanding shares for the quarter came down by 80 million which is the 80 million shares that we told you we repurchased. The only variation in the share count on a fully diluted basis is the treatment of the 700 million shares that were associated with the Berkshire investment. And depending on the price of the stock, as well as where the preferred shares are, that fully diluted share count can bounce around a little bit. But on a pure shares outstanding we came down by the 80 million that we show on slide 6.
+
+Answer_42:
+
+    As you go back through -- and the guidance and what we have spoken about is that we wrapped up and did the New BAC for the consumer businesses at the beginning of 2011 and we had a plan to work through and to rationalize that branch network down to in the ZIP Code of 5,000 branches by the end of 2014. And beyond 2014 at this point we will continue to evaluate and optimize the branch network going forward.
+What we have been very pleased with as we look at that optimization of the network is two things. The first as we have rationalized the network in the markets that we operate, we have been very pleased with our retention of both consumer deposits as well as overall relationships in that as we have rationalized that network our customers have continued to do business with us and just use a different branch.
+And the second thing that I would mention is that you have seen some announcements that in some of the more rural markets we've actually been able to sell those branches and generate decent premiums as we have sold those. But in the near-term we have got the plans through 5,000 and we will continue to look to optimize based on the environment that we are operating in.
+
+Answer_43:
+
+    No, I think -- if you look at page 12 you can sort of -- you have to sort of look at all of the dynamics in there. So deposits up $50 billion from last year's second quarter. The branch countdown about 270, and the rate paid on deposits from 19 basis points down to 12 basis points. But importantly look at the mobile banking customer and look at the -- and the uses behind that.
+So this is a matter of continuing to optimize, as you said, Guy, the distribution system. But it is going to be led by the customer behavior change. In other words we are seeing, because of our customer base and because of our capabilities, like our online banking system was rated best in the business ninth year in a row and things like that. The mobile banking system gets great feedback from our customers seeing constant improvement. That our ability to do this is still in front of us because we got to watch the customer behavior and how we change.
+There will be some point where the core store level will probably settle in, but you are seeing it work through that if you sit there and say -- have 10% more deposits and 5% less branches and 30% more mobile customers, that is a pretty good dynamic towards the expense basis of the platform. And so, we will continue to optimize it, but it is going to be led by our customers.
+
+Answer_44:
+
+    Yes, the big thing there, Chris, is remember in the home loan space that the only activity that is reflected within that is the front end or the origination side as well as a small amount of the home equity book that is held there. Keep in mind, relative to our peers the service -- all of the servicing asset and the profitability that comes out of the servicing asset for what I would characterize as the quote, good or current servicing, is all based within the legacy assets and servicing segment. So it's a little bit of apples to oranges relative to our peers as to how we report it.
+
+Answer_45:
+
+    That is correct.
+
+Answer_46:
+
+    Correct.
+
+Answer_47:
+
+    I wouldn't say loss leader. You've got to do it to make some money, but the value tends to be extracted through the servicing over time. But I think the reality is we have been building this up and investing in it. And as we sort of reach a level of where the investment is paying us back we still have a lot of efficiency to get in this business to in the front end.
+
+Answer_48:
+
+    Well, the liquidity, I think -- let me go back and you have to be careful with -- are you referring to on the liquidity side? Keep in mind, a big chunk, $18 billion of what you saw was a result of what we saw in running down the debt footprint. And, as we said, we've got $13 billion of maturities left in the balance of 2013 and just under $40 billion during 2014. So we will continue to be a net reducer of our debt balances and we would expect that to continue to benefit the net interest income line.
+
+Answer_49:
+
+    I'm sorry, I'm not sure I understand your first question.
+
+Answer_50:
+
+    Sure, okay. So, we would expect and, if you look at during the quarter and you look at the composition, keep in mind, Moshe, that you do have loans repaid. But during the quarter, as it relates to the origination activity that we had with our core clients that there were about $13 billion of residential mortgage loans that were originated through the core platform, roughly a third of which were through our Wealth Management area and the balance through our CBB segment. So there is an origination of activity.
+And as I said, the investment portfolio is there to invest the residual of what is used. There will be some incremental investments during the year, but I don't think in the aggregate you should expect to see the overall level of securities balances change dramatically between now and the end of the year.
+
+Answer_51:
+
+    What we are focused on, and you have seen two different levels of activities amongst our peers. You have seen some looking to deploy and to invest in those areas where there are things that are being sold. What you are going to see us -- and I think you see some of it as you look at our commercial loan activities. We are very much focused given the capital and liquidity that we have built and using that capital and liquidity within our core customer segments.
+And so, when you look at that liquidity if you look at our Wealth Management business you will see that the loan balances were up $5 billion Q1 to Q2 because of what we are doing from a securities lending perspective and a mortgage lending perspective, you look at the commercial loan balances. And so, they were up $10 billion, that is not from buying loans or doing anything else.
+I do think though to your point some of that comes from being able to lend where other people are pulling back. So you are not going to see anything inorganic that we are doing. What you will see and what you should expect of us is to continue to driving those growth in those customer areas where because of the dynamics that you have mentioned other people may be doing less.
+
+Answer_52:
+
+    So if you link this question to the last question about sort of the efficiency of the mortgage business, year over year we deployed about 5,000 people, about a 25% increase, to make sure we can close mortgages on time and meet the demands of the customers. So at the same time the headcount of the overall Company is down significantly, we've had that kind of investment go on. We have more commercial bankers today than we had a year ago, we have more small business bankers, financial service advisor branches, so we continue to make the investment.
+It's not really about capital I think because we still have so many loan portfolios that are running off that if we replace them it would be good core growth to replace them. It is more about expense dollars and redeploying and that is where we make the judgments right now. And so, the business of returning our cost of capital on allocated capital which is regulatory minimums or above, but it is really the question of where we put the expense dollars and that is where we are focused on sort of the core business that we have the best opportunity.
+
+Answer_53:
+
+    It's a net number, so we don't give you a number that doesn't take account. But for this year, just to give you an example, we will spend $1.1 billion in connection with the New BAC ideas, which are expense revenue and improving our Company basis that is on top of the $2.5 billion we spend otherwise and systems development work. That is pure systems development initiatives to help drive this Company.
+So there is investment going in, but all of the numbers we give you are net of all the investments we are making. So we just -- we are giving you a net number, but we are investing significantly at the same time. And that was what Bruce and the team -- management team set out a few years ago was we had to make sure we progressed the core franchise at the same time we brought the expense base and headcount down.
+
+Answer_54:
+
+    I think we are in a position, Nancy, for the first time in a long while to -- we've been saying stabilizing credit card for a couple of quarters because we have seen it sort of settle in. We divested some portfolios, as you know. We sized out of some of the business that we didn't find attractive. In this quarter we saw it increase for the first time I think in almost five years. And so, the team produced about 975,000 cards through the -- new cards this quarter up from 950,000-ish last quarter. That is a multitier high in production, I think it goes back to 2008. So, we should see this go on.
+Now, you have activity levels you've got to be careful of in the summer and things like that. But overall the baseline is set now. That restructured portfolio which we have shown you guys I think started $15 billion to $20 billion several years ago and is now down to a few billion. To set the underlying dynamics are there that we should be able to grow the business and hold our share. And if you look over the last couple quarters we are basically flattish share wise in card balances, a little bit down but in line with the peers. And so, we feel good that we finally have reached this point after five years of hard work of restructuring that business.
+
+Answer_55:
+
+    We will continue to drive share among our customers. We have low penetration in certain segments and low usage of our cards in other segments. And so, we are driving through the three or four core products, the Cash 123 product for people that feel that's what they want in a card through the travel awards and other awards products. And we are seeing the cards come in through those core products and we are driving. And, yes, we want to grow share in the context of our customers in the select affinity teams that we work with across the country.
+
+Answer_56:
+
+    Well, the first thing to your point, if we look at and if you go to the supplement that during the second quarter the deposit segment within CBB did make $500 million during the quarter.
+As we look forward though, more directly to your point, to the extent that the overall yield curve shifts up -- and this is once again in our first-quarter Q -- that the benefit from a net interest income perspective on a 100 basis point parallel shift as of the end of the first quarter was over $3.5 billion, the lion's share of which is going to flow through the consumer segment.
+So, as it relates to where we are now it is profitable, we made almost $500 million, we continue to optimize and to reduce the expenses to make it more profitable. And you are correct, once rates go up it will become much more so.
+
+Answer_57:
+
+    I think -- Nancy, I think about a lot of the adjustments we made on the fee side for the general consumer customer have already been made. And I think they had -- the customers have benefited dramatically from our position and how we overdrafts and other types of fees. So I think that that will be -- that is the -- following off of your point, that payback to the customers. As deposit -- as rates rise we will meet the market and grow with the market as we have been doing.
+But interestingly enough, remember the constitution of our deposits across the last three years, we have run off a lot of CDs and other things which are not advantage products and it has really become more and more core every single quarter. And that will play to our benefit because transactional deposits -- a checking account is non-interest at this point. So as rates rise there is no extra cost.
+
+Answer_58:
+
+    At this point -- as we have said, 30% is a reasonable effective tax rate for the last two quarters of the year realizing that you need to add about $1.1 billion to that for the UK tax. And as we go into 2014 and 2015 that 30% migrates into more of a 32% to 33% effective tax rate based on what we think we will be earning as we go into 2014 and 2015.
+
+Answer_59:
+
+    Where would it be? I'm not sure, Mike, what --?
+
+Answer_60:
+
+    We don't disclose the difference between -- I think what you are asking is, is the margin in US Trust materially different than it is in the traditional Merrill Lynch Wealth Management model. And you should not assume that the margin improvement and the 28% is driven by a mix, virtually all of that margin is driven by overall what we are seeing within which you characterized as the traditional wealth management business of Merrill Lynch.
+
+Answer_61:
+
+    Well, keep in mind, Mike, and if you flip to slide 9 we show both the reported as well as the actual number. And the reason why that increase in interest rates led to the improvement in NII is because you need to adjust the way you look at premium securities went rates go up to reflect the slowdown in the rate at which you would expect to be paid back. So that is more of a life of loan type adjustment and that is why it is $300 million, it's the reason why we show you the number both ways.
+
+Answer_62:
+
+    The first is that we are not going to comment on the ins and the outs on the $8.5 billion because, as you know, technically we are not a part of that. The second thing as it relates to that that I would say is, and I think if you go back and look at one of the comments that was made, we accrued the $8.5 billion assuming that all 424 trusts were at the point where they got to the 25% two where there was a negotiation.
+So at this point to comment whether or not we think the reserves would be higher or they could be lower is really not appropriate because right now there is an $8.5 billion settlement that is going through the process. We've accrued based on what 22 of the largest investors said was a fair deal, and as you know, when we set up the reserves we applied that same methodology to a variety of our other exposures. And to speculate or to comment before then given where we are in this, I just don't think is appropriate, Mike.
+
+Answer_63:
+
+    I'm not sure that we ever said that we thought it would be wrapped up in the second quarter. What we do know is what you know now given how you have followed the case that I believe that there is a court schedule set up through 26 July, it's not clear whether or not it will be wrapped up by the 26 or will go beyond that. We will just have to see how the process unfolds.
+
+Answer_64:
+
+    Thank you. And I believe at this point that we are through all the questions. So thank you very much for joining us this morning and we will look forward to talking to you next quarter.
+

exam/part2_problem1/Problem_1_Conference_Call_Segments/call_23_presentation.txt

@@ -0,0 +1,63 @@
+
+Good morning to those on the phone joining us by webcast. Before Brian Moynihan and Bruce Thompson began their comments let me remind you that this presentation, available at BankofAmerica.com, does contain some forward-looking statements regarding both our financial condition and financial results and that these statements involve certain risks that may cause actual results in the future to be different from our current expectations. Please see our press release and SEC documents for further information. With that, let me turn it over to our CEO, Brian Moynihan.
+
+Thank you, Lee. Good morning, everyone. And just to start off, let me remind you where our focus is and has been for some time -- on capital generation, on managing our risk, on continuing to reduce our costs, and on addressing the legacy issues so that we can drive our growth strategy by simply doing more with our customers and clients.
+This quarter shows very clearly how the focus is paying off as we earned $4 billion. We built our Company over the last several quarters to maintain stability while continuing to make progress; to withstand the volatility that we saw in part at the end of this quarter while delivering for our customers and shareholders, and that came true. Even as mortgage demand has decreased we still had a 40% increase in resale production over last year and an increase over last quarter. Even as interest rates rose we were able to add to our capital ratios. And keep in mind, with our $1 trillion deposit book, rising rates will continue to increase the value of those over time.
+We have leading capabilities in the areas where our customers want us to be. We do more business with them; we're gaining momentum across every customer group we serve. And while we are doing that our balance sheet continues to strengthen, our capital ratios again move higher and, just as importantly, we have begun the process of returning capital to our shareholders.
+Our credit quality continues to improve; expenses are down by $1 billion from a year ago. LAS expenses, or legacy asset servicing expenses, excluding our litigation, are down by nearly $800 million on a quarterly basis from the peak only a couple quarters ago and are ahead of our projections.
+Our loans and our deposits continue to grow. All the businesses produced solid, stable revenues and in the focused areas where we are growing they grew their revenues. And we are seeing growing activity levels across all our customer and client groups.
+So as we look forward we are closely following recent regulatory proposals around capital and leverage, just as you are. Obviously we have already taken significant steps in our Company to build her current strong levels of capital and liquidity and we maintain a comfort level here that Bruce will take you through the numbers later.
+The good news in all this is that we are seeing in our business is reflected in an improving economy. The economy continues to improve across all areas, that benefits our Company across multiple fronts. But most importantly, with an improving economy it strengthens and creates opportunity for the people, companies and investors that we serve. And that opportunity will continue to provide opportunity for us to capture as we connect all our capabilities to help those that we serve realize their financial goals. With that let me turn it over to Bruce.
+
+Great. Thanks, Brian, and good morning, everyone. I'm going to start on slide 5 of our presentation materials. Total revenues for the quarter were very solid at $22.9 billion. And we earned $4 billion or $0.32 per diluted share, which is up significantly both from the first quarter of this year as well as the comparable period in 2012.
+We made significant progress in all of our primary businesses this quarter and on a linked quarter basis we had growth in four out of the five businesses. Consumer activity levels were solid as mortgage production increased, credit card loan balances stabilized and both deposits and brokerage flows increased from the previous quarter.
+Global Wealth and Investment Management reported on another quarter of record revenues as well as earnings. Global banking revenue showed continued strength driven by increased lending in both our commercial as well as our corporate bank and investment banking performance remained strong and close to record levels.
+Total noninterest expense of $16 billion represented a significant improvement in expenses both relative to the first quarter of this year as well as the comparable quarter in 2012. And asset quality improved significantly as our provision expense declined to $1.2 billion this quarter.
+On slide 6 we give some balance sheet highlights. First, the overall size of the balance sheet came down this quarter to about $2.125 trillion. Importantly, customer activity remained strong with loans led by our commercial loans up $10 billion. Period end deposits were down driven by seasonality associated with tax payments. However, our average deposits did experience modest growth.
+I'd also call out on the page the tangible book value per share remained relatively flat from the first quarter of this year. That is significant in the context of our $4 billion of earnings largely offset the negative after-tax impact from accumulated other comprehensive income driven by the increase in rates that we saw during the quarter.
+Also helping our tangible book value per share in the quarter was the return of roughly $1 billion of capital through the repurchase of 80 million common shares at a price below tangible book value. And as we look forward we have an additional $4 billion available for common share repurchases.
+The combination of the earnings that I discussed on slide 5, as well as the work that we did on our balance sheet, led to a return on tangible common equity of just under 10% for the quarter and a return on average assets of 74 basis points.
+On slide 7 we walk through some of the different regulatory capital ratios as far as where we ended up at the end of the second quarter. If we start with Basel I Tier 1 common ratio, we ended the quarter at 10.83%, up 34 basis points from the first quarter of this year and 45 basis points on a pro forma basis at the end of 2012.
+Moving to Basel 3, on a fully phased-in basis under the advanced approach and based on final rules, our Tier 1 common ratio was 9.6% showing progress from the first quarter of 2013 despite a 32 basis point negative impact from the change in OCI during the quarter. Risk-weighted assets under Basel 3 were $1.31 trillion or $43 billion lower than the first quarter of 2013 due to an improvement in both the composition as well as the overall credit quality on the books.
+If we move to the proposed supplementary US leverage ratio requirement, which will kick in at the beginning of 2018, our preliminary analyses indicate that at the holding company our leverage ratio for the second quarter of 2013 was in the range of 4.9% to 5%, which positions us very well relative to the 5% minimum.
+If we look at our primary bank subsidiaries, which we have two, BANA, our primary banking subsidiary, and FIA, our card subsidiary, during the second quarter of 2013 both of those were in excess of the 6% proposed minimum. So net-net from a regulatory capital perspective, we feel like we've made very good progress across all of the different measures that we'll be required to operate within.
+On page 8, funding and liquidity, you can see long-term debt during the quarter declined $18 billion as maturities outpaced issuances during the quarter. Our global excess liquidity sources did decline during the quarter; it was expected as a result of our reductions in the long-term debt footprint, our preferred stock redemptions, as well as of the seasonal deposit outflows that I referenced earlier from tax payments.
+At the parent company liquidity remains very strong at $95 billion due to capital returns from our subsidiaries during the quarter. Time to required funding increased to 32 months, up from 29 months in the first quarter of 2013 and well above our target of approximately 24 months. And as we've indicated before, over the next four to six quarters we will look to move that time to funding towards the 24 months as we repay the upcoming debt maturities in 2013 and 2014.
+On noninterest income, if you look at slide 9, net interest income on an FTE basis was $10.8 billion, down just about 1% from the first quarter of 2013. If you adjust our net interest income for market-related items, it was $10.4 billion which was less than $100 million below our guidance as our trading-related net interest income declined as a result of reduced balance sheet utilization in our global markets business during the last month of the quarter.
+On the positive side, we benefited during the quarter from lower long-term debt, higher levels of commercial land balances, as well as one additional day of interest in the second quarter relative to the first. On the flipside, in addition to the negative impact of lower asset balances on the trading books, we also had slightly lower consumer loan balances and yields driven by our runoff portfolios.
+As we came into the second quarter of 2013 our interest-rate sensitivity, as we disclosed in the first quarter 10-Q, estimated a $1.6 billion annual benefit to net interest income from a 100 basis point instantaneous long end steepening if rates remained at that level.
+During the second quarter the 10-year rate did increase by more than 60 basis points and we realized $300 million of that benefit immediately through the impact on FAS 91. We expect to realize the balance of the benefit, approximately $700 million, over the course of the next 12 months. As a result of those different factors we do expect net interest income, excluding any market-related impacts, to build off of the second quarter of 2013's $10.4 billion adjusted level as we move forward during the balance of 2013 and into 2014.
+If you look at the work that we did on expenses on slide 10, total expenses were down significantly on both a linked quarter as well as a year-over-year basis as we continued to deliver on the expense reductions that we have discussed within our Legacy Assets and Servicing area, as well as the ongoing cost savings from our New BAC initiatives that we're implementing in the other businesses that we operate.
+Our number of full-time equivalent employees in the quarter ended at just over 257,000, which was down 2% from the first quarter of 2013 and almost 7% from the comparable period a year ago. Total expenses did declined $3.5 billion from the first quarter of 2013 as we benefited from a $1.7 billion decline in litigation; our LAS expenses X litigation were down roughly another $250 million; our retirement eligible costs, which we only incur during the first quarter of each year, were down $900 million, and all other expenses were down approximately $600 million.
+As we look at the progress that we make on our LAS, expenses from the fourth quarter of 2012 when they peaked at $3.1 billion, we are now down approximately $800 million from that peak and we did all of that within the last two quarters. As a result we previously had said that our LAS expenses X litigation would be approximately $2.1 billion by the end of 2013, meaning in the fourth quarter of 2013. And with the progress that we've made, we now believe our fourth-quarter LAS expenses will be below $2 billion in the fourth quarter of 2013. And keep in mind that as we work through these the realization of these savings can be somewhat lumpy.
+In addition to our LAS expenses, the $600 million improvement in all other costs was driven primarily by lower incentive compensation costs during the quarter, as well as our New BAC efforts. We remain on track to achieve $1.5 billion of New BAC quarterly savings by the fourth quarter of 2013.
+On slide 11 we give some information on the trends from an asset quality perspective. And as you can see, credit quality once again improved significantly during the quarter. Net charge-offs declined to $2.1 billion, an improvement of 16% on a linked quarter basis and 42% relative to the second quarter of 2012.
+Our second-quarter of 2013 net loss rate of 94 basis points is the first time that we have been below 100 basis points since 2006. Given the improving trend in delinquencies and other metrics, we now expect our net charge-offs will come in below $2 billion in the third quarter of 2013.
+Provision expense of $1.2 billion this quarter does reflect a reserve reduction of approximately $900 million reflecting improving credit trends. The allowance coverage remains strong and, given the pace of improvement in credit quality, we do anticipate continued reserve releases particularly in our consumer real estate portfolios.
+Let's now move to a discussion of the performance within our lines of business on slide 12. Consumer and business banking -- before we go through the results I do want to highlight a technical change that this quarter we did move our direct and indirect auto and other specialty lending into the CBB business from global banking given that it more closely connects with consumer lending activity. This book does include $37 billion of loans and we have adjusted prior periods to have this data be comparable.
+Earnings in the business were relatively stable compared to the first quarter of 2013 and up 15% from the prior year driven by both expense improvements as well as lower credit cost. We do continue to do more business with our core customers. Our average deposits were up almost $9 billion from the first quarter of 2013 excluding the transfers that we had from the Wealth Management business. Loans declined a modest 1% as a decline in our credit cards was mitigated by a balance growth in both small business as well as auto lending.
+There's been a lot of discussion on use credit card balances. Those balances appear to have stabilized and at the end of the second quarter were at $90.5 billion, up from $90 billion at the end of the first quarter of this year. Our card issuance remained strong in the second quarter and is at its highest level since 2008. US consumer credit card retail spend per average active account was up 9% from the second quarter a year ago. We continue to optimize our delivery network and usage within the mobile channel continues to increase.
+And lastly, expense levels reflect both the benefits of the network optimization as well as the investments to build out our specialty sales force.
+If we move to consumer real estate services, on slide 13, we address home loans, one of the two businesses within our CRES segment. First mortgage retail originations were $25 billion and were up 6% from the first quarter and 41% compared with retail originations in the year ago period. Our market share in the retail mortgage space improved. We broke through 5% versus below 4% just over a year ago.
+We do anticipate some slowdown in mortgage production resulting from recent increases in interest rates and that is seen by the 5% reduction in our mortgage origination pipeline at the end of June relative to what we had seen at the end of March this year.
+While production has experienced a nice trajectory over the last year, we, not unlike the industry, have experienced compression on margins that affect revenue. While the margins do remain high relative to historical periods, the compression is most notable when you look at our year-over-year production revenue.
+We continued to add mortgage loan officers during the second quarter primarily in the banking centers, as well as other employees in our sales and fulfillment area, in order to deliver a first-class mortgage experience for our customers. These actions did contribute to higher expenses in the quarter.
+On slide 14 we move to Legacy Assets and Servicing, which still did report a loss in the quarter, but showed significant improvement from the first quarter which included the MBIA and RMBS litigation settlements as the reduction in expenses more than offset a decline in the revenues. Revenues were negatively impacted by a servicing revenue decline of $175 million as the servicing portfolio declined 17% and we had less favorable MSR hedge performance. That was partially offset by higher sales volume of loans that returned to performing status.
+As you look at LAS, several key takeaways from this slide. The first is our level of 60-plus day delinquent loans, which is one of the primary drivers of the elevated cost, dropped below 500,000 units at the end of June, a 27% decline from the results at the end of the first quarter of 2013. Recall our number of 60-plus day delinquent loans peaked at almost 1.4 million units at the end of 2010.
+Looking ahead, we now expect our amount of 60-plus day delinquent loans to come down further than we originally expected to below 375,000 units by the end of 2013. As we continue to reduce these loans the number of employees and contractors will come down and you can see that by the decrease of 5,000 people during this quarter.
+Expenses ex-litigation once again were down roughly $250 million from the first quarter to $2.3 billion.
+Global Wealth and Investment Management on slide 15 had a great quarter with our results once again reflecting records in revenues, earnings as well as pretax margin. Year-over-year revenue increased 10% and net income grew by 38%. Our second-quarter pretax margin of about 28% benefited from strong revenue performance as well as improved credit cost during the quarter.
+Long-term AUM flows were solid at nearly $8 billion in the quarter, more than double the flows that we saw in the prior year ago period. Ending loan balances grew $5 billion in the quarter to record levels while ending deposits declined $5 billion due to the seasonality of tax payments.
+Global banking, on slide 16, experienced strong loan growth and slightly higher investment banking fees compared to the first quarter of 2013, both of which helped drive $1.3 billion in net income and a 22% return on allocated equity. The Investment Banking strength kept fees near record levels and we retained our second-place ranking in net investment banking fees.
+Within the Investment Bank, underwriting fees continued the momentum from near record levels during the first quarter of 2013 and were up 53% from the second quarter of 2012. Equity underwriting fees grew 10% relative to the first quarter of 2013 and up 86% from the comparable year-ago period due to the strong global IPO market as well as our focus on continuing to grow capabilities within this space.
+On the balance sheet average loans increased by almost $12 billion from the first quarter driven by growth in both corporate C&I as well as commercial real estate. As you look at that loan growth I think it's important to note the strong diversity in lending to our global customer base as the US represented approximately 40% of the growth with the balance outside of the US.
+If we switch to global markets on slide 17, we earned roughly $1 billion during the quarter on revenue of $4.2 billion, which is up significantly from the second quarter of 2012 results, but down from the first quarter of 2013. The business during the second quarter generated a 13% return on allocated equity.
+Sales and trading revenue, if we back out DVA, was $3.5 billion, solidly above our 2012 results. FICC sales and trading was down versus the second quarter of 2012 as well as the first quarter of 2013 given the rate volatility and spread widening that we saw during the last month of the quarter. Equity sales and trading had a very strong quarter, actually the best that we've seen since the first quarter of 2011. Results ex-DVA were up 53% from the second quarter of 2012 and 4% over the first quarter of 2013 as we continued to gain market share in cash equities, improved our performance and equity derivatives and had higher client balancing -- balances in our financing area.
+If you look at the balance sheet, trading asset levels did decline as we reduced risk during the end of the second quarter. Average VAR at a 99% confidence level was $69 million in the quarter, down from $80 million in the first quarter of last year.
+On slide 18 we walk you through the results of our all other segment which includes global principal investment, our non-US consumer card business, our discretionary portfolio associated with interest-rate risk management, insurance as well as our international Wealth Management area.
+Gains on the sale of debt securities were $452 million in the second quarter of 2013 compared to $67 million in the first quarter and $354 million in the second quarter of 2012. That coupled with the prior quarter cost for retirement eligible compensation, lower litigation expense, higher equity investment income and lower provision for credit losses due primarily to the improvement in the residential mortgage portfolio drove the significant improvement in earnings in this segment compared to both the first quarter of this year and the prior year ago period.
+Before we leave this slide, two things I would note for modeling purposes as it relates to preferred dividends and taxes. The first, preferred dividends -- we expect our preferred dividends to drop from $441 million this quarter to about $280 million in the third quarter and then settle in around $260 million per quarter as we move forward. These declines are the result of the redemption of the $5.5 billion of preferred stock this quarter.
+If we move to taxes, the effective tax rate for the quarter was 27%. As we look out during the balance of the year we would expect the rate to be approximately 30% plus or minus any unusual items like the UK tax rate reduction. As we have disclosed previously, this year's expected UK corporate income tax rate is likely to be reduced by 3% and will be enacted in the third quarter of this year.
+As a result, for modeling purposes, you should include a charge of approximately $1.1 billion associated with the write-down of our UK deferred tax asset in the third quarter of this year. But keep in mind, given where we are from a DTA disallowance position, this will not impact our Basel 1 or Basel 3 capital ratios.
+And before we wrap up and take questions I would like to leave you with a couple of thoughts about the second-quarter performance. We achieved many of the objectives that we laid out for the quarter, revenue was solid, costs came down significantly, credit continued to improve and our capital ratios remain strong and improved despite the change in both OCI as well as the initiation of our share repurchase program during the quarter.
+The higher rate environment, to the extent it stays with us allows us to improve our net interest income going forward and we plan to continue to drive forward, execute on our strategy and deliver on the earnings capability of our Company. And with that, operator, we will go ahead and open it up for questions.

exam/part2_problem1/Problem_1_Conference_Call_Segments/call_23_questions.txt

@@ -0,0 +1,249 @@
+Question_1:
+
+    A couple of questions on improving RWA's. You mentioned that credit helped drive the RWA's down a little bit. Could you give a little bit more color on how much of the HPI improvement has already come through the RWA? Is there any more to come from what is happened so far in your 2Q -- in your 3Q and 4Q outlook?
+
+Question_2:
+
+    Okay, thanks. And then a follow-up on your comment regarding the outlook for NII, where you indicated that NII excluding market-related items could build from the $10.4 billion at 2Q 2013. Could you describe how you are thinking about that? I've had a lot of conversations over the last quarter of about what you put in your Q, which is 100 basis point  rates, a meaningful increase in EPS that has got to come more from reinvesting the cash flow of the securities portfolio. So could you give us a sense of how you drive higher NII?
+
+Question_3:
+
+    And would you be looking to shift some of the liquidity pool into securities? Obviously it would be longer duration in a liquidity pool.
+
+Question_4:
+
+    Okay, great. And then just lastly on the GWIM gross -- pretax margin, pretty strong number this quarter. And I know last quarter you called out some one timers. Were there any one timers in that this quarter?
+
+Question_5:
+
+    So what is the targeted pretax margin there?
+
+Question_6:
+
+    Okay. Over time includes a higher interest rate environment?
+
+Question_7:
+
+    Absolutely. All right, thanks a lot.
+
+Question_8:
+
+    Just within fixed income trading businesses, I mean obviously June proved to be a tough month I think for a lot of folks. And it seemed like the trends were maybe a little bit weaker than we are seeing elsewhere when we factor in some of the charges that you had in the first quarter.
+
+Question_9:
+
+    Okay, that is very helpful color. So just as we think about FICC going forward, maybe a little bit of a lower run rate as you are running down the -- or ran down the structured trading, but also hopefully less volatility given that?
+
+Question_10:
+
+    Okay. And then separately -- I'm sorry.
+
+Question_11:
+
+    Okay. That is helpful color. I mean we do see good core trends in the iBanking fees and of course the equities business, as you mentioned. And then just separately, if we look at loan was provision expense going forward; you give us some components of charge-offs and then, just kind of big picture, some more reserve release. But any thoughts on just the specific level of provision expense going forward? I think you had been targeting $1.8 billion to $2.2 billion, which obviously you broke through that now for a couple quarters.
+
+Question_12:
+
+    Okay, that's helpful. Thank you.
+
+Question_13:
+
+    Bruce, I was wondering if you had any sense of where we might think of legal expense going forward. It came down a lot this quarter; you got some things behind you. How should we think of that number going forward?
+
+Question_14:
+
+    Okay. And putting expenses altogether, the $16 billion is probably a pretty good jumping off point for us to think going forward starting in the third quarter?
+
+Question_15:
+
+    Okay. And then on the quarterly LAS trend you mentioned getting below $2 billion by the end of this year. Any thoughts on what your destination for that might be by the end of 2014? Ultimately you want to get that number down to $500 million, right?
+
+Question_16:
+
+    Okay. Just separately, you mentioned the DTA. I assume the DTA consumption is still helping drive up your capital ratios. Could you remind us how much DTA you have right now and how much is disallowed?
+
+Question_17:
+
+    Okay. But normally you would probably be building at close to the pretax rate you said before?
+
+Question_18:
+
+    Okay. Last thing for me. On the NII, can you just review that again? The benefit you have talked about, that is a benefit from the 10 year moving up. And did you say that you received $300 million of that benefit that is already in the $10.4 billion that we see this quarter?
+
+Question_19:
+
+    Okay. So the benefit -- the $700 million, that is to come over the next 12 months?
+
+Question_20:
+
+    Okay. But you are thinking of that as helping the core number grow, right, not the --?
+
+Question_21:
+
+    Okay, right, that $300 million wasn't core, but the next one to come is. Okay, got it.
+
+Question_22:
+
+    Okay, thank you. Bruce, so do you have -- and you have additional benefits beyond that if short rates rise, was that the point you were making earlier?
+
+Question_23:
+
+    Okay, thanks.
+
+Question_24:
+
+    A quick question I just want to confirm. I believe you guys said in the past that there is -- when we look at the revenue decline from the sales and the MSR and the LAS business versus the corresponding reduction in expenses we should kind of count on a lag on that front, is that right?
+
+Question_25:
+
+    Okay, great. Thanks for confirming that. And in your experience generally how sensitive -- what is the MSR market -- the MSR purchase market like at this point? Are you guys still out there shopping MSRs and how sensitive are those buyers to home prices?
+
+Question_26:
+
+    Okay, that's clear. Thank you. And then on your AFS portfolio, I think you guys have indicated in the past it was a roughly two year duration. Given your allocation to RMBS in that portfolio, did we see an extension of that duration? Can you kind of help us -- give an idea about what the impact might have been during the quarter?
+
+Question_27:
+
+    Terrific. Thanks for that. And then last one from me -- the results in GWIM have definitely been impressive. Can you guys speak to any change we've seen in high net worth risk appetite or behavior over the last roughly year or so and how sustainable you view that?
+
+Question_28:
+
+    Cool. That's helpful, thanks.
+
+Question_29:
+
+    Switching to the mortgage banking side, you've got 5% market share which you have really built back -- you built back your market share over the last year, year and a half. But most of them are refi's. With the refi -- with rates going up where do you think that market share goes to or do you think you've done a pretty good job building up your purchase -- your purchase salesforce to maintain that?
+
+Question_30:
+
+    And then can you add some color -- I mean we have been first -- rates have really moved up, gain on sale margins you know are coming down. But can you give some color where you are seeing gain on sale margin so far into the quarter or is it too early to tell?
+
+Question_31:
+
+    Yes.
+
+Question_32:
+
+    And did you disclose what your HARP percentage is? If you did I missed it.
+
+Question_33:
+
+    Okay. Hey, guys, thank you very much.
+
+Question_34:
+
+    Thanks for the disclosure on the supplemental leverage ratio. I was wondering if you had any assessment of what the impact might be of the BIS proposal for add-ons on disallowed repo and CDS protection sold and disallowed derivatives collateral.
+
+Question_35:
+
+    Okay, that's fair. I know that is early days. How will you -- and stipulating to the fact that clearly based on what you have told us and some stuff that we have done you are pretty much where you would need to be on the supplemental leverage ratio per the US take. How would you think about managing your off balance sheet lending commitments to the extent that they do drive the denominator there?
+
+Question_36:
+
+    Yes, fair enough. And to the numbers you gave, you obviously don't have a lot of pressure to do anything there. But you are right, it would seem like pricing of those facilities probably has to get rationalized. On the shares, you did an initiate the share repurchase, you talked about that. But there was still a fairly meaningful amount of share creep in the quarter. Was that just employee grants? Although I would've expected to see those more in the first quarter. And should we expect that we are at this point kind of at a high for the year in terms of the share count; should it head back down to where it was say in the first quarter?
+
+Question_37:
+
+    Fair enough. Okay, I just have one more question -- thanks for the clarity on that. When do you expect at this point to have completed the rationalization of the branch system?
+
+Question_38:
+
+    But it almost sounds like, based on the success that you've had that you outlined, that might encourage you to take it a little bit further or would that be reading too much into it?
+
+Question_39:
+
+    Great. Thanks so much for that.
+
+Question_40:
+
+    I am looking at the supplement on page 23 where you go through the consumer real estate services. And looking down the column that says home lending and year to date you have nearly $2 billion of revenues and only $94 million drops to the bottom line. And I am wondering is that lack of profitability some vagary of segment accounting or is it that the business is just -- or is the business just kind of so marginally profitable? And if so then why be in it?
+
+Question_41:
+
+    Wait, so I'm sorry, the servicing revenues are in the LAS?
+
+Question_42:
+
+    And this is just origination?
+
+Question_43:
+
+    Okay. And is that kind of historically the norm that origination is sort of a loss leader almost?
+
+Question_44:
+
+    Okay. And then overall in terms of liquidity, I mean it looked like your non-loan earning assets were down by almost $40 billion this quarter. How much further do you suppose you can run those down as you reduce your debt footprint?
+
+Question_45:
+
+    Okay, great, thank you.
+
+Question_46:
+
+    Could you talk a little bit about whether you either have -- it doesn't look like it, but whether you have or are planning to kind of retain mortgage loans in the second half of the year? And I have got a follow-up question, too.
+
+Question_47:
+
+    Well, I mean, when you think about -- you said in terms of the investment portfolio you would kind of be cognizant of the AOCI impact. You could achieve a similar objective without that by retaining residential mortgages.
+
+Question_48:
+
+    Got it. And maybe -- given that you have been kind of ahead of or meeting at least or regulatory capital levels kind of faster than some of your large peers. What are the areas that you think could benefit from incremental kind of capital investment or where they might be divesting? Are there any opportunities there?
+
+Question_49:
+
+    And so, maybe just to follow up on that, Brian, I mean do you have a number in mind as to how much you would look to kind of reinvest of the expense savings that you are generating?
+
+Question_50:
+
+    Great, thanks.
+
+Question_51:
+
+    Two questions for you. You have made gains in market share and mortgage and you said that you have stabilized the credit card. Are you going to be able to gain share in credit card and how do you look to do that?
+
+Question_52:
+
+    So though do you feel that -- I mean is it a business where you want to gain share? Or if you could just sort of give your overall philosophy on the credit card business right now.
+
+Question_53:
+
+    The second question I have is somewhat imprecise and I apologize in advance. But I think what everybody is waiting for with your stock and with the earnings outlook is for this massive deposit gathering network to get profitable. And we understand that that is a function of short rates going up. Is there an ideal -- can you kind of walk us through this? Is there an ideal yield curve? Is there an absolute level of short rates? I mean whatever -- what do we have to see to begin to see the branches get massively profitable?
+
+Question_54:
+
+    If I could just finally ask a corollary to that question. Because of all the issues that you have had in the past few years with closing branches, changing the branch model, several different sort of programs to change the retail footprint of the Company, is there going to be a need as rates go up to give more of that benefit to your customers? In other words, are you going to have to act differently in deposit pricing this time around than you have in previous rate cycles?
+
+Question_55:
+
+    Okay, thank you.
+
+Question_56:
+
+    I have three real small questions and then one bigger question. What tax rate should we assume to be normal?
+
+Question_57:
+
+    All right. And then secondly, the GWIM margin of 28%, I'm just trying to compare that to the old Merrill Lynch Wealth Management margin and you have the Asset Management and US Trust in there. Can you just give us some estimate where that 28% margin would be? Would it be 26% or 25% or --?
+
+Question_58:
+
+    Excluding US Trust and excluding asset management. In other words, just the pure brokerage business, what kind of margin did that have? I'm just -- I'm trying to see if this is the highest brokerage margin ever perhaps if you can go back to the old Merrill Lynch?
+
+Question_59:
+
+    Okay, thank you. And then, as far as net interest income, you said you had a $300 million benefit this quarter from the increase in the 10 year. So am I just drink the math right? You had $10.5 billion of net interest income, so it added 3% just this last quarter or really in the last month? It just seems like a lot. I mean that is a nice benefit.
+
+Question_60:
+
+    Okay. And then lastly, the legal expense came we down, you expect to stay around $500 million. But I'm still focused on the $8.5 billion settlement. And I go down to the courthouse in lower Manhattan and what I think I hear, and again correct my thinking, what I think I hear some lawyers say that Bank of New York rubberstamped the $8.5 billion agreement therefore throw the $8.5 billion deal out. What I think I hear the Kathy Patrick side say is accept the $8.5 billion deal is the best economic alternative out there.
+So my question is, you have $8.5 billion of reserves, the $8.5 billion settlement, your disclosures say if the judge does not approve the deal your reserves would go higher. So my question is, how much higher would your reserves go if the judge does not approve the deal and what part of my logic would you like to perhaps correct?
+
+Question_61:
+
+    Sure. I think last quarter you thought it would all be wrapped up by now. Any sense of when this might be wrapped up, when you might have this behind you?
+
+Question_62:
+
+    All right, thank you.
+

exam/part2_problem1/Problem_1_Conference_Call_Segments/call_24_answers.txt

@@ -0,0 +1,256 @@
+Answer_1:
+
+    Yes, I think, Moshe, what I would say is that if you look, as we referenced, it was roughly $1.6 billion a year ago. It was $500 million in the second quarter, and it was roughly $1 billion this quarter.
+I'd go back to -- and I think we've been pretty consistent. If you go back to 2010 and look at the build over the course of four years from both a litigation and a rep and warrant perspective, I think you can see that we have had more of that over the course of a three-and-a-half year period than anyone else out there.
+And as we look at the remaining pipeline we put it in really four different buckets. The first is the GSE bucket for rep and warrant, which with one exception we have got global settlements from the end of 2008 back with Freddie and Fannie. So as we look at that bucket we feel very good about that.
+We then go to the second bucket which is mono-lines. You've got global settlements with three of the five mono-lines, and we have established the reserves for the remaining two based on that history of the three.
+We then go to the rep and warrant. With respect to the private label securities, the $8.5 billion Gibbs & Bruns case, which represents half the exposure, continues to go through the court process and we'll be back in court on that I believe in November. And obviously we set up reserves at that point based on the Gibbs & Bruns history; and as we have said before, for that which we didn't have the basis to establish a reserve, we put out a range of possible loss for rep and warrant that continues to be up to $4 billion.
+And then you move into the other piece that we have, that's the RMBS securities litigation. During the quarter, the Luther, Maine settlement received preliminary approval during the quarter, and we will look to get final approval by that sometime during the fourth quarter. And we obviously set up a reserve; and that settlement was for $500 million which represents in the ZIP Code of 65% to 70% of the Companywide exposure that we have for RMBS litigation.
+And then the other two pieces that we continue to work through in that bucket are the HAFA litigation on behalf of Freddie and Fannie as well as AIG. And there is really nothing to report new on either of those fronts.
+And what you saw during the quarter, as we said, was really an adjustment to the reserves based on as we get more information and to the extent that there are additional discussions with some of the people that we're in a party with those discussions, too.
+
+Answer_2:
+
+    Yes, I think -- let me be a little bit more specific when we go back to it, because I think the one thing that has been overlooked a little bit -- and this is not a number we are particularly pleased with. But if you go back to the beginning of 2010 and look at the combined litigation and rep and warrant expense that we have had in this Company, it has been over $40 billion, which I think is quite a bit higher than the number that they quoted.
+Obviously, those numbers are particular to each institution. But I think as you look at what we have tried to do, that those numbers have been significant and I think at this point relative to our peers we have tried to be out front and get through some of the larger settlements that we have. And we think that $40-billion-plus number reflects that.
+
+Answer_3:
+
+    I think let's talk about the production first. You remember that we had a lot of HAMP going on, and that has been dropping each quarter as we get through the volumes of that. And that had a pretty good impact; I think it was down roughly $3.5 billion or so linked quarter.
+The rest of the production continues to move forward. But if you look at what is really going on as we speak, because during the third quarter you had significant changes July/August as we ran through pipeline, etc. The current pipeline stands at a level of 30,000-odd. The current application volumes today are 1,000 plus, around 1,000.
+The purchased piece of that has maintained relatively constant, 300-ish a day. So if you think about that, we have sort of a month-and-a-half pipeline, and that has been pretty consistent as we got into September and to October. So if you extrapolate that out you should see production levels that will be down again in the fourth quarter, but will start to mitigate.
+The issue on the revenue is the spreads come in and the refinancing volume is at a higher profit margin because the work is not as much. So we expect to see a lot like we are seeing now, spreads that have come in a couple hundred basis points or so, and we expect that to hold and the volumes will come down, and so I think the number will continue to work in that direction.
+What you do mention is the other side, which is the rep and warrant exposure, and stuff that goes through there, and stuff that changes it. Bruce can touch on that.
+But in terms of overall volumes, we have started taking the people down to match the volumes. You remember we had a lot of work to do here. If you look at our non-HAMP production it has continued to grow each quarter.
+Our home equity loan production has doubled in the last few quarters and we'll continue to drive that forward. As we have told you many times it will never be a huge business for this Company, because it is a business which is very competitive out there and the profit margins will always be thin. But we need to do it for our customers and clients.
+
+Answer_4:
+
+    And on the rep and warrant front, you are right, the rep and warrant expense was just over $300 million a quarter. And we clearly would expect that the run rate of that expense is going to be much more in the $150 million a quarter type run rate as opposed to the $300 million-plus.
+
+Answer_5:
+
+    Yes, I think once again our comments will be assuming that we don't see any slippage in the economy. During the quarter, if you look at the reserve release, roughly $250 million of it was from purchased credit-impaired, and roughly $1.150 billion from the core.
+As we go forward I would think about the provision -- or excuse me, think about the reserve release much more consistent with what you saw in the first and second quarters of this year over the next couple quarters. And then ultimately as we get into the latter part of 2014 and beyond, you'd expect most of that to go away.
+But I do think there are probably another couple quarters where it could be in line with what we saw in the first and second quarter. Clearly not at the third quarter of this year given the sharp improvement in credit we saw.
+
+Answer_6:
+
+    No, it is not.
+
+Answer_7:
+
+    I think as we have said, that number tends to be lumpy. And I wouldn't say that there was any one specific item during the quarter that you could point to. It was really just a continued evaluation of the reserves as well as reflective of any current discussions that we are having with the different parties that we are trying to work through this with.
+
+Answer_8:
+
+    That's correct.
+
+Answer_9:
+
+    Yes, I think I would say a couple things on that, Betsy. That once again we told you at the end of the second quarter that we would get the number of 60-plus-day units down below 375,000 units by the end of the year. And you can see during the third quarter alone we got them down below 400,000, so we feel particularly good with that guidance.
+There is a lot of work that goes on in a quarter to move out and to get these servicing transfers done as it relates to both our own teammates as well as people that we use to help us with that. So that is why you saw some of the numbers Q2 to Q3 a little bit sticky.
+But the point that you raise I think is the right one, which is -- now that you've got the loans out you have the ability to take the expense out. And that is why we would expect the expense reduction in the fourth quarter to be greater than what we had seen in the third quarter.
+I think as you look out at and as you look through 2014, the guidance that we have given is very -- really remains the same. And we feel more comfortable with, given the delinquencies, that as you go through 2014 you should see that expense number go from below $2 billion in the fourth quarter of 2013 to below $1 billion by the end of 2014.
+And it always can be a little bit lumpy, but you should see that occur generally consistently throughout the year.
+
+Answer_10:
+
+    Our SLR numbers are fully loaded at both the Bank Holding Company as well as at the subs. And as we look at CCAR what I would say is I think we have been consistent on this, that we have done it and done everything we can both in the way -- intrinsically the way we run the Company, which in many respects is not inconsistent with what you get tested in CCAR, in that we have built our Basel 1.5 ratio up significantly from last year. The Basel 3 ratios across the board are up.
+As you look at both credit risk and market risk, those have obviously gotten better. And we have continued to put the legacy issues behind us.
+So as we look at -- we obviously were able to return $5 billion to the common shareholders during this year as part of the CCAR process, and we will look to move forward from that, realizing that until we see the exact case that we are running and what the test is, I think it is probably premature to say anything more than that.
+
+Answer_11:
+
+    I think that is fair, John. You are always a little bit subject to mix, loan pricing, as well as rate environment. But that is clearly the trajectory that we are on; so the answer would be yes.
+
+Answer_12:
+
+    Yes, think it is important -- and the one thing that doesn't come out when you look at this slide is, it is not that we saw much variability in either FAS 91 or hedging effectiveness during the third quarter. It was that we had some benefit in the second quarter when you had the sharp increase in rate.
+So as long as you are within a reasonable range where rates aren't bouncing around, you shouldn't see much of that. But keep in mind that what you saw in the first and second quarters was because of the largely unprecedented movement up in rates that we saw, that gave us the FAS 91 benefit.
+
+Answer_13:
+
+    Well, it gets reset so that you don't have any aberration from quarter to quarter. The only time you have an aberration on a run rate basis is when the underlying rates move.
+
+Answer_14:
+
+    Yes, I want to think we are in the same ZIP Code both on a 100 basis point steepening as well as a 100 basis point parallel shift. The guidance that we have given was it takes us about three years to earn back any impact in OCI.
+We are a touch better than that this quarter. If you look at the supplemental you will see that the level of debt securities is down modestly, as we are very sensitive to managing that OCI risk.
+
+Answer_15:
+
+    John, that is really difficult to say. I think that the punchline is that it can be lumpy. And we obviously do and work hard each quarter -- to the extent that we can get things put behind us at reasonable levels for the shareholders, we do that.
+It is an evolving process and it is something that we are working hard on. At the same time there is no question that the expense was elevated this quarter.
+
+Answer_16:
+
+    Sure. I am not sure I understand your question on the mortgage expense --
+
+Answer_17:
+
+    No, as we referenced on the front -- on the legacy piece we talked about the 2.3 going to 2.2 and how we will have that below 2. As we talked about, we needed to get through the pipeline on the front end during the third quarter, which we did. The 1,000 people that we referenced on the front end happened late in the quarter.
+As I mentioned we are 1going to continue to reduce t1hat, to size that for the volumes that we are seeing now. But we have not put out a specific number on that.
+
+Answer_18:
+
+    Yes, we typically -- if you look at combined Investment Banking and sales and trading you tend to be in the mid to high 30s, and I don't think you are going to see any significant variations in that Q3 to Q4.
+
+Answer_19:
+
+    John, one thing on the -- both in the mortgage and otherwise, as Bruce talked about, the actions we've taken during the quarter to reduce headcount overall in the Company, a lot of it is in the second half of the quarter. So you always get a continuing-on effect of that.
+And by the way, next quarter as we reduce further LAS and mortgage you will see it go into the first quarter. So it does lag; and it is just the nature of the severance accruals you take at the time plus as we move the headcounts out, paying them on, as you go on the severance also in certain cases.
+So you should expect that those volume-related reductions will continue to move forward. And the economics of what we did in the third quarter is probably more in the fourth quarter than it is in the third quarter.
+
+Answer_20:
+
+    Yes, I wouldn't really note any specific change there, Glenn. It is something that we continue to look at. The one thing I would say that we are working hard on -- and this really flips more to some of the capital and central clearing type things -- that as we continue to have more and more of that migrated, that is going to benefit certain capital ratios as we look at counterparty.
+So I think that the ongoing -- to the extent that there is an economic negative going forward, we are obviously continuing to spend a lot of time with that. The one piece that is a little bit more tangible that we worked through is that there will be some decent benefits over the course of 12 to 18 months as more and more of that gets migrated.
+
+Answer_21:
+
+    I think as you think about the markets business, one of the things that Tom and team have done is got the -- as we talked about in various quarters -- has kept the breakeven point relatively low. So in a quarter which the equities business was very good for us, comparatively -- but the fixed income business, which is a lot bigger than the equity business, was obviously down -- we still made $0.5 billion.
+So the goal there is to be able to serve our clients and customers well and keep the balance sheet in good shape, but also keep the expense base. So that when we get $2.5 billion to $3 billion we start making some decent money. And then in the good quarters we will make a good amount of money, and Tom and team have done a good job to keep that expense base in line.
+And most of the expense increase here is with litigation and things that were not fundamental, just show up in line of business related to broader question.
+
+Answer_22:
+
+    Yes, if you just look across the last four quarters you see it. But the key was going from 11 to 12 we move the fundamental level, so there is good operating leverage. You get another $1 billion in revenues, a lot of it comes through net of -- with incremental compensation here.
+
+Answer_23:
+
+    Yes, I think a couple things and I'd just kind of reiterate a little bit, we touched on, is that we have made over the course of the last 12 to 18 months the investment of having more bankers in the branches and trying to do more things with our customers. And the two things that we feel best about as you look at that growth in cards to over 1 million cards in the quarter is that -- the first is that 63% of those people, once again, we already have an existing relationship with and obviously know something about and are trying to do more with.
+And the second thing I would say is that as you look at the overall FICO and credit quality of those borrowers, they tend to be in the mid-700s on average. So it is the right customer; it is sold the right way; and it is part of an overall deepening strategy.
+And now that we are starting to see some of the balances creep up, it is reflective of that activity, which I think, quite frankly, was overshadowed a little bit as we cleaned out some of the affinity and other programs, that the new stuff that you saw got overshadowed by things that were leaving the books. But now that we are largely through that, what we are doing on the front end is starting to come out.
+
+Answer_24:
+
+    Sure. What happens is that typically you mark your pension OCI once a year as you update the asset values and assumptions at year end. You typically do that on an annual basis.
+Because we merged several pension plans at the end of August, we were required to remeasure those assets as of the end of August. And that $1.4 billion reflects the change in value from Jan. 1 to August 31; and then obviously we will remeasure those again at year end.
+
+Answer_25:
+
+    Yes, I think if you look at our client base, which ranges from small businesses through the largest companies in the world, I would say all of them feel very good about their operating position. They are making money, have done a tremendous job of keeping a cost structure in line.
+I had an example of a company that had 200 employees; their sales were going to grow by 25%; and they said we are only going to add five employees. So American business has gotten very efficient.
+But when you put on top of them the uncertainties, because they are all engaged in global commerce, the macro uncertainties at the world level, the US level, I think there has been an uncertainty hold-back here that will come through as more and more clarity both in the economy -- i.e., final demand for their products -- and the macro situation comes clear.
+So is it a sprint out of the blocks? No. They are running forward; it will probably be a speedup of the process. And you saw some of that this summer with some of the M&A activity and stuff in the larger companies has strengthened and you are seeing it go on.
+So I think there is demand in the system, so to speak. There is money on the sidelines from the investor side. And the more clarity, you will see better activity.
+Meanwhile, underneath it, you see the core economy continue to push forward even with all the things going on around the world.
+
+Answer_26:
+
+    Sure. You have a couple things going on. The first thing I would say is that the expense number during the third quarter of last year -- and I'm going to speak to -- if you flip to slide 10 for a moment. That if you look at that All Other bucket, which is I think what you are referring to, that $13 billion in the third quarter last year was particularly low. If you look at where was in the fourth quarter it was at $13.4 billion; so that can bounce around by a couple hundred million dollars. So realize it was off a low base.
+You did see a couple things, though, in the third quarter of this year that you wouldn't have had. The first is that the Wealth Management revenues, which there is a fair bit of formulaic compensation, are running at, as I mentioned, at higher levels in 2013 than 2012; so you have some compensation there.
+The second thing that you had this quarter, as Brian referenced, is we took down headcount. We had roughly $100 million of severance that came through the P&L during the quarter.
+The third thing that you had during the quarter that I referenced is you had some elevated marketing expense that will go down in the fourth quarter, that you also didn't have in the third quarter. So a combination of a variety of items.
+But I think what we would say is as you look to go forward you should see that red bar come down based on our overall expense initiatives as well as New BAC.
+
+Answer_27:
+
+    And remember also that when we give you these reduction numbers we are not giving you a reduction and saying that then we are growing elsewhere. This is a net number that you pointed out. So all the investments we're making and from the third quarter last year to the third quarter of this year, you are seeing the mortgage production costs go up, which will come back down. But all the investment we made in salespeople to do the cards that we talked about earlier, small business lending, investment services that you can see at the branch level, we can see the numbers growing there -- all those are in those numbers.
+So all those investments are more commercial bankers that are helping our commercial loan growth. And yet we are overcoming them.
+And then you have the natural salary increases and stuff like that are all absorbed in that. Then you have -- the nominal numbers are flat; and, frankly, if you back out a couple of the things that Bruce just mentioned are down.
+So we are comfortable on course for New BAC. But remember these numbers are absorbing all the usual costs that we do plus the investments in the business, which we are making strong investments in the areas that we have growth opportunity.
+
+Answer_28:
+
+    That's correct.
+
+Answer_29:
+
+    As far as just notional size of the balance sheet?
+
+Answer_30:
+
+    Yes, I think at this point what I would expect is that generally speaking the securities book should remain relatively consistent with where it is. And then if you look at the loan book I would say that you are going to see that the loan book as well as the shrinkage of the debt footprint will be absorbed through deposit growth, as well as a reduction to some extent in our parent Company liquidity as we are carrying an elevated level of parent Company liquidity to address the significant debt maturities in 2014.
+The net of those, which I thought you were getting to initially, is that you should continue to see this balance sheet in the $2.125 billion to $2.15 billion type area. But as we go forward we should continue to get it to be more and more efficient.
+
+Answer_31:
+
+    Yes, I think one of the things that we haven't talked about in a while is we still have significant runoff portfolios that we are replacing. We still have -- which gives us the ability to grow the core business without growing the balance sheet footings.
+And I think that is something that will help us in our capital levels, that are already very strong today, going forward. Because effectively we don't need incremental capital to grow the balance sheet, even to have commercial loan growth and other types of growth that you are talking about.
+
+Answer_32:
+
+    Yes, and you know, by the way everything is on the NIM is still -- the short rate move drives a lot of profit because the deposit franchise is an advantaged funding source, as you well know.
+
+Answer_33:
+
+    I think the best guidance that we'd give at this point is we have got roughly $600 million a quarter in New BAC to get done over the next five to six quarters.
+
+Answer_34:
+
+    Yes. But then you've got to remember, you've got to add back some of the LAS costs -- the subtract in there. But there is always -- LAS is a servicing business; it is always going to have some costs  to.
+
+Answer_35:
+
+    Sometimes people take that lower number and multiply it times 4, but you've got to remember parts of those other costs will also be in there.
+
+Answer_36:
+
+    Roughly $1.4 billion a quarter, Mike, relative to $2 billion a quarter that we had previously announced.
+
+Answer_37:
+
+    That's correct.
+
+Answer_38:
+
+    I think what we said was at the current run rate level you should be expecting that to hit the bottom line.
+
+Answer_39:
+
+    We do not put out a litigation reserve on a standalone basis. The number that we do put out is where we are in rep and warrant, and that was just over $14 billion at the end of the third quarter.
+
+Answer_40:
+
+    That's correct. $14.1 billion.
+
+Answer_41:
+
+    That includes another $5.5 billion for a variety of matters.
+
+Answer_42:
+
+    As we have said before we would need to look at that based on the circumstances that come out at the time. I don't think it is a foregone conclusion it goes one way or the other.
+
+Answer_43:
+
+    I would say that the -- we really haven't -- and one of the things that we have tried to do and we will continue to optimize, particularly the way that the Basel 3 standardized ratio works, that we are focused more and more and for those places where we make credit commitments to have the loans be funded as opposed to unfunded, given the capital treatment that is out there.
+So I would say generally as you look at line utilizations that there hasn't been much that has changed at all. Where you are seeing the loan growth has been more funded-type loan growth, in many cases for large, high-quality companies that are making acquisitions. A couple that we would have seen this quarter would have been Verizon Wireless as well as Amgen.
+
+Answer_44:
+
+    Overall, Mike, the loan utilization rates, they haven't moved around a lot but they are at low levels historically across the board, whether it is our business banking segment, the middle-market segment. And the large corporates don't really use their lines other than as Bruce described, when they are doing something inorganic.
+But they are very low, which gives you two things. One, it indicates that they have got lots of cash and have lots of room for investments. But secondly, as the economy picks up, moving back the 1,000 basis points or so we are from more normal levels, for lack of a better term, there is a lot of loan growth within the -- without new customer relationships or any more work.
+
+Answer_45:
+
+    I think demand has picked up over the last couple years. I think that if a company had a line of credit in their dynamics, they are using it at a lower level than they did, not necessarily two years ago but during the normal economic times.
+And that is the second point. The demand has been picking up across consumer demand and things like that; but it is still not as strong as it would be because it's a 2% growth rate economy out there.
+
+Answer_46:
+
+    It won't all just go, but I think it is safe to assume that less than half of it will be refinanced.
+
+Answer_47:
+
+    Yes, I believe, Guy, that at the end of the second quarter, I believe that we had said that the range of possible loss with respect to litigation was in the high $2 billions; and we will obviously need to freshen that up as we get the third quarter Q out. But I wouldn't expect to see anything significant one way or the other.
+
+Answer_48:
+
+    Yes, if you look at by business unit, I referenced that as you float through that you had -- you can see it in the Commercial Real Estate Service area, there was over $300 million of it there. There was roughly $300 million of it between banking and markets. And then the majority of the rest of it was in All Other.
+
+Answer_49:
+
+    Yes, I think the only two things is that you have obviously seen a little bit more brand that is out there. And then with CCB there was the acceleration of what we do from a charitable perspective from the fourth to the third. Those were the two items.
+
+Answer_50:
+
+    Well, no, is a great question. Really two things going on. Keep in mind, as we have said, because we have a decent chunk of disallowed DTA from a Basel perspective, that ballpark we will accrete capital on a pretax basis generally speaking as opposed to a post-tax basis for a decent number of quarters going forward. So, when you look at that, think pretax not so much post-tax.
+And then the second benefit that you had, which was an earlier question, was the benefit of OCI during the quarter of roughly $1 billion after-tax or $1.5 billion pretax. And that was the combination of pension to the positive; and then to the negative CCB coming out, as well as some of the debt securities gains.
+
+Answer_51:
+
+    Okay. I think that's all the questions that we have, so thanks for joining us this morning.
+

exam/part2_problem1/Problem_1_Conference_Call_Segments/call_24_presentation.txt

@@ -0,0 +1,80 @@
+
+Good morning to those on the phone and joining us by webcast. Before Brian Moynihan and Bruce Thompson begin their comments, let me remind you that this presentation, which is available at BankofAmerica.com, does contain some forward-looking statements regarding both our financial condition and financial results, and that these statements involve certain risks that may cause actual results in the future to be different from our current expectations. Please see our press release and SEC documents for further information.
+So with that, let me turn it over to our CEO, Brian Moynihan.
+
+Thanks, Lee. Good morning, everyone. I will cover a few points, and then I will turn it over to Bruce to go through the details of the quarter, as we have done in other quarters.
+Consistent with prior quarters, our Company continued to show progress on the areas we have been focused upon -- capital generation, managing risk, achieving cost savings, addressing legacy issues, and driving our core growth strategies in our core lines of business.
+On the capital front this quarter, we generated $3 billion-plus of Basel 1 Tier 1 common capital. Our Basel 3 ratios now approach 10% on a fully phased-in basis. That capital and liquidity and the balance sheet optimization that has been going on for the last several quarters holds us in good shape with regards to the regulatory suggested or proposed requirements that we see on the horizon.
+The strength and capital is allowing us to return capital to shareholders. In the past six months we have repurchased 140 million shares, equalling about $2 billion of our $5 billion authorization.
+Turning to the revenue side, we have experienced relative stability this quarter. But of course we felt the impacts of the industrywide headwinds on a slower refi business in mortgage and a slowdown in the capital markets from a typical summer slowdown as well as the investor concerns of a political and monetary uncertainty.
+On expenses, this quarter we incurred additional litigation costs. Outside of that we continue to make progress on our expense initiatives, remaining on track to deliver the cost savings that we told you about two years ago in New BAC, and also reducing the costs in our Legacy Assets and Servicing area.
+In the credit area we continue to see asset quality improve, and our net loss rates are at levels not seen since 2005. As the macro environment slowly improved we experienced a 20% drop in net charge-offs and a decline in delinquencies from the second quarter.
+Our 248,000 teammates have been fully engaged with our customer clients to drive activity. We are pleased to see another quarter of solid loan growth in our commercial businesses, while we continue to see the consumer lending activity stabilize in our card balances and modest growth elsewhere, which has offset the runoff in our non-core portfolios.
+As a Company, we reached record deposit levels this quarter, more than $1.1 trillion in deposits. Our client balance flows in our Wealth Management clients helped us maintain our industry-leading positions. And you have seen that Bank of America Merrill Lynch has assumed prominent roles in the marquee investment banking deals that have gone on this quarter.
+We have also seen a nice trend of progress, absent some seasonality, of results in our equity trading business. It has been gaining market share and continuing to improve.
+So to sum it up, it is another solid quarter of progress in our core businesses; and I'm going to turn it over to Bruce to cover in detail the presentation. Bruce?
+
+Thanks, Brian, and good morning, everyone. I am going to start my presentation on slide 5. During the quarter, we earned $2.5 billion or $0.20 per diluted share.
+Before I address the core business trends let me mention a few noteworthy items from our results that we have disclosed to you previously. First, we sold our remaining stake in CCB, recording a pretax gain of $753 million, which was partially offset by a $443 million negative impact of FVO and DVA, as our as our credit spreads continued to tighten during the quarter. The net of these items benefited EPS by $0.02 in the quarter.
+We also recorded a $1.1 billion charge to remeasure our UK deferred tax asset, given the 3% decline in the tax rate, which reduced EPS by $0.10 a share. The net of these is obviously a reduction of $0.08.
+Moving to the core business, total revenues in the quarter on an FTE basis were solid at $21.7 billion, or $22.2 billion if we exclude the FVO and DVA charges. If we compare this to the second quarter, revenues declined on lower mortgage banking revenue as well as mostly seasonal declines within our sales and trading area.
+Total non-interest expense of $16.4 billion included $1.1 billion in litigation costs, a $600 million increase in litigation cost from second-quarter levels. The increase in these costs was partially offset by the improvement in both our Legacy Assets and Servicing costs as well as the benefits of our New BAC initiatives.
+Asset quality improved significantly, with net charge-offs improving 20% from the second quarter of 2013 to $1.7 billion. And with the reserve reductions we took in the quarter, we recorded provision expense of just under $300 million in the quarter.
+On slide 6 you can see that our period-end balance sheet remained relatively stable versus the prior quarter at about $2.13 billion. Customer activity remained solid with loans, largely led by commercial loans, up $12.8 billion.
+Consumer lending activity in the quarter improved as we saw increased loan generation in our Dealer Financial Services area and our continued stabilization of card balances, which was partially offset by the runoff within our home equity portfolio. Period-end deposits were up over $29 billion or 2.7%, led by commercial client activity and solid flows from our Wealth Management clients.
+If we move down the page, tangible book value per share improved to $13.62, and our tangible common equity ratio increased above 7%.
+A couple other things that I would like to mention during the quarter. We repurchased 60 million shares for roughly $900 million during the quarter. OCI increased by about $900 million during the quarter. And our preferred stock includes the completion of our previously announced preferred stock redemption for just under $1 billion.
+On slide 7 you can see our Basel 1 Tier 1 common ratio of 11.08% increased 25 basis points from the second quarter of 2013. Under Basel 3 on a fully phased-in basis under the Advanced Approach, Tier 1 common capital increased by approximately $6 billion to an estimated $131.8 billion. Our Tier 1 common ratio is 9.94%, showing a 34 basis point improvement from the second quarter of 2013.
+And our estimate of the Basel 3 Tier 1 common ratio on a fully phased-in basis under the Standardized Approach would be just over 9% above our proposed 8.5% 2019 minimum requirement.
+If we move to the supplemental leverage ratio, based on the proposed US requirements that don't take effect until 2018, at the end of the third quarter our bank holding company leverage ratio improved to above the proposed minimum of 5%; and our two primary banking subsidiaries, BANA and FIA, continue to be in excess of the 6% proposed minimum.
+So to reiterate what Brian mentioned, there are a lot of new capital regulations proposed or finalized, and we already exceed the requirements for the various known rules on Basel 3 capital and the supplementary leverage ratio.
+On slide 8, funding and liquidity, you can see our long-term debt ended the quarter $7 billion lower as maturities and the completion of our $5 billion tender offer outpaced issuances. We have $40 billion of parent Company maturities through 2014; and as we look forward, we expect issuances to be materially below that number as we continue to reduce and smooth the maturity profile of our debt footprint.
+Global excess liquidity sources of $359 billion increased from $342 billion at the end of the second quarter of 2013, and parent Company liquidity remained strong at $95 billion. That translates into a Time to Required Funding of 35 months, well above our two-year coverage that we target.
+I would also like to highlight that on October 1 of this year we have completed the legal entity merger of the Merrill Lynch Holding Company into Bank of America Corporation as part of our continued efforts to both simplify the Company and reduce cost.
+We turn to slide 9, net interest income. Net interest income on a reported basis was $10.5 billion, down from the second quarter of 2013, as the improvement in our core net interest income was more than offset by a negative impact from market-related impacts. If we exclude those market-related impacts, net interest income built off of Q2 2013's $10.4 billion to be just north of $10.5 billion.
+During the quarter, we benefited from higher rates in our discretionary book, lower long-term debt levels, higher commercial loans, and lower rates paid on deposits. These positives were partially mitigated by lower loan yields and lower trading-related NII.
+As you will note on the slide, the net interest yield excluding market-related impacts improved from 2.36% to 2.44%, driven by the lower balance sheet levels as well as our lower funding cost. And consistent with what we mentioned last quarter, we expect to realize the benefit of higher long-term rates as we reinvest, but note that some of those benefits will occur through time.
+On slide 10, we will spend a few minutes on expenses. Total expenses for the quarter were $16.4 billion, a $1.1 billion improvement from the year-ago quarter, but up $371 million from the second quarter of this year.
+I want to be clear. As you look at expenses and see the uptick in the linked-quarter expense, we continue to deliver on our non-litigation expense reductions in our Legacy Assets and Servicing area as well as the ongoing benefits from our New BAC initiatives in the balance of the Company.
+Compared to the second quarter of 2013, progress on LAS and New BAC, in addition to lower revenue-related incentive compensation, was more than offset by increased cost of litigation as well as some marketing initiatives that were accelerated from the fourth quarter of 2013. Our litigation expenses did increase as the continued evaluation of legacy exposures led to an addition to reserves.
+Our LAS expenses ex-litigation, which are shown on the gray bar on slide 10, of $2.2 billion declined $110 million from the second quarter of 2013. And we continue to expect our fourth-quarter LAS expenses ex-litigation to be below $2 billion as we continue to make very good progress on reducing the number of 60-plus-day delinquents that we have in that business.
+Our New BAC savings in the third quarter were approximately $100 million and are included in All Other, the red bar. We also remain on track to achieve the expected $1.5 billion of New BAC quarterly cost benefits by the end of 2013 and ultimately the $2 billion quarterly benefit upon completion of the project.
+From an employee staffing perspective, our number of FTEs ended the quarter at 248,000, a decline of more than 9,000 or 3.6% from the second quarter of 2013. That was driven by staff reductions within our Legacy Assets and Servicing area, declines in home loans given the slowdown in mortgage production, as well as the continued optimization of our branch network.
+While we were down by 3.6% from the end of the second quarter to the end of the third quarter, the average FTEs only declined 2.3%. So we will get some additional benefits during the fourth quarter relative to the third from those reductions.
+We touched on asset quality, slide 11. You can see that credit quality once again improved significantly. Net charge-offs declined to $1.7 billion, a 20% improvement on a linked-quarter basis.
+As Brian referenced, our third quarter of 2013 loss rate of 73 basis points declined 21 basis points from the second quarter and is now at 2005 levels. Delinquencies, a leading indicator of charge-offs, again declined nicely.
+During the quarter, we did reduce reserves by $1.4 billion on the back of steadily improving consumer data, which resulted in a provision expense of just under $300 million. Given what we see from the improving delinquencies as well as the current HPI trends, absent any unexpected changes in the economy, we expect net charge-offs to decline again in the fourth quarter and stabilize sometime in 2014 at approximately $1.5 billion per quarter.
+Let's move into the individual lines of business on slide 12. Our Consumer and Business Banking segment, we were very pleased with the results during the third quarter as we delivered improved earnings, with revenues growing modestly and expenses declining from both the previous quarter as well as the year-ago quarter. This, coupled with lower credit costs within the segment resulted in net income of approximately $1.8 billion during the quarter, a 28% improvement over the previous quarter and a 32% improvement over last year.
+That was achieved as we continued to do more business with our core customers. Our average deposits were stable as our organic customer growth was offset by small branch divestitures as well as migrations to our Global Wealth and Investment Management area.
+Our brokerage assets are at record levels within this business, up 6% from the second quarter and up 18% over the prior year's quarter. Average loans, as I mentioned, reflect stability in card balances as well as growth within our Dealer Financial Services area.
+Card issuance during the quarter remained strong. We issued more than 1 million new cards in the third quarter, which is at the highest level going back to 2008. Consistent with our relationship strategy, 63% of this issuance was to people that we have existing relationships with.
+And credit quality continues to be strong as delinquencies and net losses continued to improve during the quarter. Reduced expense levels in the segment reflect the benefits of our network optimization, partially offset by investments we continue to make as we build out our specialist salesforce in this area.
+On slide 13, Commercial Real Estate Services, where we operate the production, origination, and servicing of consumer real estate loans. In our supplemental information we report the two separate components of this segment, one focused on loan origination and the other focused on servicing and legacy issues.
+On originations this quarter, first mortgage retail originations were $22.6 billion, which was down 11% from the prior quarter and up 11% compared with originations in the year-ago period. We believe that the current-period decline in production is less than our industry peers, as we have been working through our existing pipeline.
+Our current pipeline at the end of the third quarter is, however, down approximately 60% compared to the end of the second quarter of 2013, which reflects the significant reduction in market demand, particularly in the refinancing space. Since our production revenue is booked at the point in which you lock a loan, as opposed to funding, I should point out that our lock volume was down 23% from the second quarter of 2013.
+In addition to those lower lock volumes, we saw a gain on sale margins decline compared to the second quarter of 2013. Our reduction was about 60 basis points during the quarter.
+As a result of all these factors, core production revenue was down 46% to $465 million from the second quarter of 2013.
+From a staffing point of view, just on the origination side, as we saw demand slow we reduced headcount by more than 1,000 employees toward the end of the quarter. We will continue to reduce these staffing levels, to be consistent with the lower volumes that we have seen.
+The other primary component in this segment, servicing revenue, declined approximately $100 million versus the second quarter as our servicing portfolio declined as we continued to complete certain servicing transfers.
+The other item that I want to highlight on this slide that is particularly important is the servicing costs that we see within the Legacy Assets and Servicing area. We have spoken a lot about reducing the number of 60-plus-day delinquencies in this portfolio, and we had a lot of success during the quarter as the number of 60-plus-day delinquent loans dropped below 400,000 units at the end of September, nearly 100,000 lower than what we had at the end of June.
+Roughly half of the decline was driven by the transfers of servicing that I referenced in conjunction with the MSR sales agreements that we announced in the first quarter of 2013. Once again, as a result of this work we continue to believe that our LAS expenses, ex-litigation, will be below $2 billion during the fourth quarter of 2013.
+On slide 14, our Global Wealth and Investment Management area had another strong quarter, generating solid earnings and solid returns. Within this segment, both Merrill Lynch and U.S. Trust maintained their leadership positions with a total of $2.3 trillion of client balances.
+Revenue remains near record highs at $4.4 billion, up 8% over the third quarter of 2012. Relative to the third quarter of 2012, net income improved 26% and was the third consecutive quarter in which our pretax margin was above 25%.
+Asset management fees achieved a new record during the quarter, while our brokerage income did decline from the second quarter due to reduced market activity.
+Client engagement remains quite strong. Long-term AUM flows were $10.3 billion, near doubling last year's production. Ending deposits were up $6.5 billion or roughly 3% from the prior quarter; and our ending client loan balances of $117.2 billion reached record levels and are up 2% from the second quarter of 2013 and 11% over the third quarter of a year ago as we continue to provide more banking products to both our Merrill Lynch and U.S. Trust clients.
+On slide 15, you can see Global Banking earnings were stable relative to the year-ago period. Revenue compared to a year ago includes the benefit of strong loan growth and stable investment banking fees.
+Expenses this quarter include very good cost controls offset slightly by elevated litigation expense. Global fee pools did decline, but we maintained our strong second-place ranking of global net investment banking fees, recording $1.3 billion of fees and improving our market share to 7.7%.
+In addition, if you look at it fees within the Americas, we ranked number 1 with an 11% market share. During 2013, we have advised on 7 of the top 15 announced M&A deals.
+As we head into the last quarter of the year, the pipeline looks quite strong. But I do want to highlight that during the fourth quarter of last year we did see record levels of debt issuance during that period.
+If we look at the balance sheet, average loans increased $4.4 billion from the second quarter, with more than half of that growth driven by commercial real estate lending, with the balance by C&I lending, particularly with our large corporate clients. Average deposits increased $12.2 billion from the second quarter of 2013, above our expectations, given certain timing considerations as well as customer liquidity that has been built around fiscal cliff concerns.
+If we move to slide 16, Global Markets, we earned $531 million during the quarter after excluding the $1.1 billion UK tax charge as well as DVA losses of $291 million. On a comparable basis, this is a decrease of $341 million compared to the third quarter of 2012 and down $403 million from the second quarter of 2013 due to lower sales and trading revenue as well as higher expense from litigation.
+Sales and trading revenue, ex-DVA, was $3 billion during the quarter, an 8% declined from the comparable year-ago period. FICC sales and trading revenue was down 20% versus the year-ago period, once again impacted by concerns regarding the Fed's position on its stimulus program as well as political uncertainty both domestically and abroad.
+Our equity sales and trading area had another very strong quarter with revenues, ex-DVA, up 36% over the year-ago period as we experienced higher market volumes and continued to benefit from the repositioning of this business that has happened over the last 18 months. We are gaining market share and we are improving our performance in each of the product lines.
+Expenses in the quarter compared to the third quarter of 2012 included higher litigation costs that were partially offset by a reduction in operating expenses. Average trading-related assets were down 4% from the year-ago period while our VaR was effectively flat.
+On slide 17, we show you the results of All Other. Gains on the sale of debt securities were $347 million in the third quarter, down $105 million from the second quarter of 2013. You can also see the breakout of $1.1 billion of equity investment income, which reflects the CCB gains I mentioned earlier as well as an additional $368 million of gains.
+The FVO that I mentioned earlier is also recorded in this segment. Expenses include roughly $350 million during this quarter for litigation. That compares to $100 million in the second quarter of 2013 and $950 million in the third quarter of 2012.
+As we close on All Other, I would note that the effective tax rate for the quarter, ex-the impact of the UK tax reduction charge, was 25%. And as we look forward to the fourth quarter of 2013, we expect the effective rate to be in the high 20%s.
+Before we take questions I would like to leave you with several thoughts about our results. Capital and liquidity both strengthened during the quarter. We had encouraging business results as we saw improvement in both activity and profitability within Consumer and Business Banking.
+We saw continued strength in Global Wealth Management. We maintained our top position in Investment Banking and had another quarter of strong growth in our equity sales and trading business.
+Credit continued to improve. Our cost initiative work remains on track. And to the extent that the steepened yield curve environment stays with us, it should allow us to move NII upward as we move forward.
+We will continue to execute on our strategy and continue to deliver on the earnings power of the Company. With that we will go ahead and open it up for questions.

exam/part2_problem1/Problem_1_Conference_Call_Segments/call_24_questions.txt

@@ -0,0 +1,232 @@
+Question_1:
+
+    Great, thanks. In addition, the slides have got a good breakdown of the rep and warrant reserving. Could you talk a little bit about the litigation and how to think about the litigation costs as we go forward? Because that is obviously still volatile. Maybe discuss what is still remaining that could get roped into that as we go forward.
+
+Question_2:
+
+    I guess just to follow up on that, because JPMorgan had indicated that they had expenses in this quarter that were substantially higher than what they would have anticipated as possible even three months ago because of a change of the regulatory environment. Do you feel like you have taken that fully into account?
+
+Question_3:
+
+    Just shifting gears on the mortgage business, you had a decline in rate locks that you identified; but the pipeline actually is down substantially more. Could you talk a little bit about how you see the fourth quarter and into 2014?
+Because you have got both the potential for obviously a further decline as the pipeline moves through. But then again you also had a fairly high rep and warrant in the quarter. Like how should we think about that from a revenue perspective?
+
+Question_4:
+
+    Got it. The very last one for me is you had mentioned expected improvement in charge-offs. The provision obviously was substantially lower. How should we think about the provision relative to those charge-offs in Q4 and into 2014?
+
+Question_5:
+
+    Great. Thanks very much.
+
+Question_6:
+
+    Hi, good morning. Just one follow-up on the conversation that we just had regarding the reps and warranties and litigation. I heard you that the mono-line, three out of five are done; you established reserves for the other two based on the three out of five.
+Is that part of the rep and warranty this quarter, the establishing reserves for the other two based on the three out of five done?
+
+Question_7:
+
+    Okay. Then on the litigation reserve, there's obviously a long list of stuff in your Q; so is it fair to say that litigation reserve was just all of the above of that long list? Or was there something specific that you saw in the quarter that drove the higher number?
+I am just wondering; do we do the $1 billion quarterly in our model going forward? Or is it going to be more episodic than that?
+
+Question_8:
+
+    Okay. Then on the LAS expenses, you indicated that next quarter is sub $2 billion.
+
+Question_9:
+
+    Okay. So you highlighted that your delinquents are down half from the asset sales and half from your own actions. So is it fair to say that the reduction, roughly $300 million or so -- well, $200 million to $300 million or so, that you are calling out for next quarter is also equally half and half?
+And part of the question is trying to understand. You know the run rate of how those expenses are coming out associated with the asset sale. And I am wondering; is that front-end loaded in 4Q? Is that going to be 4Q through 2Q next year?
+And are the organic actions you are taking likely to be equal in size in terms of the decline in the LAS expenses?
+
+Question_10:
+
+    Okay, thanks. Then lastly, on page 7 you highlight the regulatory capital. Obviously it seems like you have set yourself up well for a bigger ask in CCAR from a buyback perspective. Is that a fair assumption to make?
+Could you highlight how SLR factors into that? And are your SLR numbers that you present fully loaded in 3Q, or is it on a phased-in approach?
+
+Question_11:
+
+    Okay. Thanks a lot.
+
+Question_12:
+
+    Yes. Hi, good morning. Bruce, was wondering on the net interest income side; do you think that the core NII should grind higher at a similar pace that we saw this quarter? Looks like it was up $100 million, assuming no big change in rates.
+
+Question_13:
+
+    How should we think about the market-sensitive component? Do you still have the NII hedges on? Or is it really the FAS 91 that adds volatility from here?
+
+Question_14:
+
+    Okay. Over time does that FAS 91 affect dissipate, over time? Or is that always going to be with you?
+
+Question_15:
+
+    Okay. Then just any update on your rate sensitivity relative to where you stood at the end of last quarter for a 100 basis point move in long rates?
+
+Question_16:
+
+    Okay. Then just a follow-up on litigation expense. Back in July you were thinking perhaps $500 million per quarter and clearly came in much higher than that this quarter. Recognize things are fluid here, but should we be thinking of litigation expense more like this quarter or more like last? Are you able to say?
+
+Question_17:
+
+    Okay. Then one more clarification on the core expenses. How much did the expenses come down for mortgage so far and what do you see left on that? And then just any comment on the IB comp ratio, how we should think about that going forward.
+
+Question_18:
+
+    Yes, any capacity reduction that you are doing as originations come down, have you gotten the benefit from that? And how much might we expect for you to do that going forward?
+
+Question_19:
+
+    Okay. In terms of IB comp, what we saw this quarter and how we should think about that?
+
+Question_20:
+
+    Okay, thanks.
+
+Question_21:
+
+    Got it. Okay, thank you.
+
+Question_22:
+
+    Hi, thank you. Question on FICC. I think the explanation on the down 20% was fair enough, and a lot of macro and political reasons, which I get. Just curious on if you had any early comments on swaps execution and clearing impact in the quarter and what you see going forward as clients migrate.
+
+Question_23:
+
+    Okay.
+
+Question_24:
+
+    I appreciate that. Might be putting words in your mouth but it sounds like that there is a pretty good operating leverage built-in on the upside, then. In other words, it doesn't necessarily scale up and down with revenues to the same degree.
+
+Question_25:
+
+    Okay. One other question just on cards. Looks like issuance and balances have been growing good. I am just curious how much of that is you turning up the heat on marketing, selling through the branches, and how you feel about the outlook. Because it has been a while since we saw the industry in general have decent balance growth.
+
+Question_26:
+
+    Okay, perfect. Thank you.
+
+Question_27:
+
+    I just have a detailed question on the OCI. There was a $1.4 billion gain, I think from changes in pension. Could you just explain what that was about?
+
+Question_28:
+
+    That's clear. Thanks. Then just on -- talking more generally, you obviously have a lot of corporate relationships, and I guess there is some unease about what is going on in Washington. But assuming we can get through that, do you get the sense that the corporates are looking to move from margin preservation to investment? Or are they just really worried about the macro environment?
+I am trying to get a sense of where loan growth could go, going forward.
+
+Question_29:
+
+    That's very helpful. Thanks.
+
+Question_30:
+
+    hey, good morning. Could you talk -- run me through the expense line a little bit on the compensation side? I guess I am just struggling a little bit with, on a year-over-year basis you guys were down around $100 million on the comp line but headcount is down 25,000 employees. Capital markets revenues are down.
+Why are we seeing that stay elevated? How do we see that go down more significantly going forward?
+
+Question_31:
+
+    Okay. No, that's helpful on the severance. I guess I would assume that we would see some less of that going forward given the significant reductions in mortgage this quarter, right?
+
+Question_32:
+
+    Okay, great. Thank you.
+
+Question_33:
+
+    Hi, guys. Just as we think about the overall size of the balance sheet, you mentioned managing the securities book with OCI risk in mind; and obviously the securities did come down as you mentioned this quarter, while the loans are growing. How do we think about the net impact of those two, I guess looking out next several quarters?
+
+Question_34:
+
+    Yes, I am really focused on the loans plus the securities; because obviously liquidity levels can vary quarter to quarter and the trading book can vary quarter to quarter. So just -- I mean, loans are growing nicely, but it is being offset by securities coming down. So I am really just focused on those two components.
+
+Question_35:
+
+    Great. So flattish balance sheet, but optimizing the capital usage; and then obviously the NIM probably benefiting from the remix there.
+
+Question_36:
+
+    Then just separately, circling back on the core expenses of $13.1 billion. I guess it is $13 billion ex- the severance and there is some of the mortgage staff reductions, still some New BAC coming in, and then maybe some investments. Where does that -- on the revenue base that you have right now, where does that $13.1 billion go to, if you just fully loaded all the stuff that you can see?
+
+Question_37:
+
+    Okay, that is a net number; so think about it $12.4 billion, $12.5 billion?
+
+Question_38:
+
+    Yes. I guess I was just breaking the -- you've got the litigation, which is a moving target; you've got the LAS which you have been pretty explicit; and then everything else is the $13.1 billion that --
+
+Question_39:
+
+    Okay. Thank you very much.
+
+Question_40:
+
+    My questions have been answered. Thanks.
+
+Question_41:
+
+    Hi, I just wanted to clarify the New BAC benefits. How much of New BAC have you achieved?
+
+Question_42:
+
+    Originally I thought you were looking for mid-2015. So when you say $600 million more, that is what you mean, when you say over six or so quarters?
+
+Question_43:
+
+    Just to clarify the last answer, so you expect all that to hit the bottom line? Or some of that will be offset by investments and salespeople and other investments?
+
+Question_44:
+
+    Okay. Switching back to the legal questions, you said you had taken over $40 billion of charges. What is your legal reserve as of the end of the third quarter?
+
+Question_45:
+
+    $14 billion rep and warranty?
+
+Question_46:
+
+    Okay. Would that include anything other than the $8.5 billion settlement?
+
+Question_47:
+
+    So for the Gibbs & Bruns settlement you have an $8.5 billion reserve for that settlement. I think I asked this on some other earnings calls; but if that agreement was not approved by the judge, what is the potential range for that $8.5 billion reserve?
+
+Question_48:
+
+    Okay. Switching gears, in terms of loan growth, what is the loan utilization level? And what are you seeing as far as acceleration or deceleration in loan growth?
+
+Question_49:
+
+    I understand you are picking and choosing your spots more. So would you say that demand really hasn't changed a whole lot over the past year or two? Or is it picking up in certain areas?
+
+Question_50:
+
+    All right, thank you.
+
+Question_51:
+
+    Good morning. I just have a few cleanup questions. With respect to the long-term debt footprint then, have you talked about how much of the $40 billion that is coming due that you would expect to refi? Or are you going to let it all just go?
+
+Question_52:
+
+    Okay, thanks. That's helpful. On the last question you were asked about the litigation reserve, which understandably you don't want to go there. But do you have an estimate of what your reasonable and possible beyond the litigation reserve will be this quarter?
+
+Question_53:
+
+    Got it. The $1.1 billion litigation expense and I guess reserve build this quarter, can you give us a sense of how it breaks down by business unit? Because it didn't seem like it all goes to All Other.
+
+Question_54:
+
+    Great. That's helpful. You mentioned that you had accelerated some marketing initiatives from the fourth quarter to the third. I was just wondering if you could give us a little color on specifically what they were, since everybody is looking for growth.
+
+Question_55:
+
+    Got it. Then the very final question is, you had a meaningful improvement in your Basel 3 capital above and beyond the earnings, and it looks like it is a pretty meaningful reduction in the threshold and other deductions. I was wondering if you could just give us a little more granularity on what was going on there.
+
+Question_56:
+
+    Got it. Okay, that's great. Thanks so much for taking my questions.
+

exam/part2_problem1/Problem_1_Conference_Call_Segments/call_25_answers.txt

@@ -0,0 +1,401 @@
+Answer_1:
+
+    I think, John, if you look at what we saw during the quarter, we had a series of benefits for the quarter. You can see that the -- if you look back at our tables, the margin that we saw within some of the repo and other global markets lending activity was up nicely. As you mentioned, we benefited from the continued reduction in the long-term debt footprint, which was clearly a positive. And we had a little bit of benefit, even if you back out FAS 91, on the debt securities line.
+So I think that those three things were clearly favorable. We will have to see with respect to the markets margins, as well as just overall rates, where we go in the first quarter of 2014 relative to 2013.
+I would be careful to assume that you are going to see $300 million type improvements in the NII as we go forward on a quarter-to-quarter basis. But over time, with the work that we are doing, we would expect that number to continue to grind upwards all other things being equal.
+
+Answer_2:
+
+    I would say that whenever rates move up you tend to widen out a little bit as maturities extend in the mortgage space as rates move up. So you always have a little bit of that in a rising rate environment, although given where rates are, we think we are largely through that.
+The only other thing from an asset liability management perspective I would note is that, as it relates to both managing OCI risk as well as managing to LCR, you saw it a little bit in the fourth quarter and you will see it a little bit more going forward, that we are purchasing on the margin some additional treasuries given the treatment that they have under LCR.
+
+Answer_3:
+
+    We are not going to comment, John, on specific items with respect to the CCAR request. We have been pretty consistent as we came into 2013 that we would focus on increasing the core profitability of the Company. And as you look at the last couple of quarters from an EPS perspective, we think we have done a good job of that.
+You can see the capital build that we have had and you can see the reduction in the legacy exposures that we have made. So we feel like we did a good job of preparing ourselves for CCAR this year and we are obviously working hard as we go through the rest of the process between now and mid-March.
+
+Answer_4:
+
+    I think as we look out at, as we look out over the three years I would say it is more of the same for us that you can see a tangible common equity ratio that is just over 7%. The three metrics that we assume we stay at around that 7% level. We were about it in the fourth quarter, but if we stay at that level we are looking to get to the point where we are returning 1% on assets, which translates into a 14% return on tangible common equity. Those are the types of levels that we see ourselves looking to achieve over the course of the next three years.
+
+Answer_5:
+
+    I'm not sure exactly which piece you are looking at, Betsy, but if you go back to our earnings supplement, which is back on page 10, I think it is interesting that you can see from the third quarter of 2013 to the fourth quarter of 2013 that our yields on residential mortgages did increase about 6 basis points to 3.74%. The other interesting thing is that we have started to see and be able to do more home-equity type business with our core customers.
+I think it is interesting; if you look at the yields on that portfolio, they were up 20 basis points to just under 4% for the quarter. So as we look at the yields and the rates that we are able to get, I think we are competitive in the market and we have been able to see some slight increases within the rates that we are able to earn.
+
+Answer_6:
+
+    The things is you have got the volume going through and then either the [receive] or the pay is on both sides of the rate question. And we continue to see deposit pricing. Liability pricing came down. The contribution from non-interest-bearing size in the balance sheet continues to go up.
+But just focusing on the production, what has really been happening across the last several quarters that we are seeing stabilization in some of the balances and the runoff portfolio impact gets smaller and smaller from some of the non-core portfolios that we are getting rid of. But in the fourth quarter, for example, our direct auto, which is -- in 2013 our direct auto business, not our indirect but our direct-to-consumer auto, was up 55%. The home equities in the fourth quarter were up almost 100% over the prior year's fourth quarter. Year over year they are up 60%.
+The card we had about 19% more production in the fourth quarter of 2013 versus 2012. So we are building -- in the business banking, small business area we are seeing production up, so we are building the basics that are producing the balanced growth.
+The pricing spreads are holding. It's competitive as heck in the middle market and things like that. So I think it all serves us well largely having runoff stuff that may have yielded high but had a high credit cost content you got to remember. And we are replacing with stuff that is good and core and great credit quality and so we are seeing a shift a little bit from the commercial loan growth which was really more positive to where the consumer loan growth is starting to stabilize and come along.
+
+Answer_7:
+
+    If you look at the various portfolios, I think in card we have kind of seen it. As Bruce talked about, we have got a sale. I think it's home equity you still got a ways to go, Betsy, because remember we have got about 40% or so of our home equity is still in the non-core portfolio. And then I think in the commercial side you have seen the straight growth, whether it is large corporate or commercial middle market.
+I think that would be the overall summary. So I think that sort of came through from the corporate activity. It moved faster to the smaller business activity and then consumer activity, but we are stabilizing both portfolios and growing.
+
+Answer_8:
+
+    Yes, we quoted roughly $1.1 billion, Betsy.
+
+Answer_9:
+
+    Yes, that is correct. It is about $100 million higher than what we had said before. And I think the work that we are starting is -- take a step back that we got through roughly $400 million during this quarter, which was a little bit better than we would have expected to do, so we felt very good about that.
+And if you look at the number of 60-plus day delinquent loans, it came all the way down to 325,000 loans. So what we are going to be working on over the course of the next 90 days is a little bit of a reset of that expense base so that we can continue to drive that number down. That $1.1 billion doesn't reflect that, but given the work and the activity levels we need to go back and do some more work on that.
+
+Answer_10:
+
+    We still think and we have been consistent that we would expect and look to end 2015 at roughly $500 million a quarter.
+
+Answer_11:
+
+    That is always a tough question. I think what I would say, Betsy, is that there was obviously a lot of new learning that we saw during the fourth quarter of this year and as a result of that we adjusted the reserves for the legacy exposures to reflect that which we learned. And as we have said, it was largely with respect to RMBS litigation and beyond that it is just a number that is difficult to predict.
+
+Answer_12:
+
+    I will let Bruce talk you through it, but we got to remember how we got here which is with a legacy set of companies put together. They had debt structures that were built for their company and their industry without the core funding we had, so we are coming down to a level most of our peers were below and they may be coming up a little bit.
+You got have to remember that whether it was Countrywide or Merrill Lynch the funding structure was so different. We had like $400 billion of long-term debt we have been bringing down and the size of the balance sheet shrank. We started off at about $2.5 trillion and we are down to $2.1 trillion, so I would be careful about comparing where they are going versus where we are going based on this just because what we had is different than what they started.
+Then Bruce can talk about what we think from where we are now going forward.
+
+Answer_13:
+
+    As we look out, Matt, I think at the parent company as we look at and with our understanding of the LCR ratio we are in the 100% area as it relates to LCR. So at the parent you can look at us being where we need to be based on 2017 levels.
+The one area that we will look to do more in and I highlighted is to further build and take out more term financing within the bank levels to look to build that. So I think we are in great shape at the parent, we are in great shape at the banks, but you will see us doing a little bit more bank financing activity to be able to meet those requirements. If you look at where we finance it at the banks, there is no incremental cost for that that is different than what we have communicated before.
+The other thing that I would just point out on the overall debt footprint and the cost of it is with the work that we have done on the balance sheet and with where our credit spreads are now in the market, we will be refinancing our debt at lower rates than the debt that is coming off of the books as it matures.
+
+Answer_14:
+
+    I think to project a cushion three years out I think we clearly are going to run at a cushion. We are going to run the Company so this is not an issue. But until we get out to 2016 and 2017 and understand the exact composition, as well as to any puts and takes that we are seeing, it is probably a little bit premature to talk about a cushion.
+The focus has been to get to the 100% at the parent immediately, so it is not an issue to discuss.
+
+Answer_15:
+
+    It is obviously applicable to anyone that has an uncollateralized derivative book, so it is applicable to us. I think that clearly the industry view and how you account for FBA is still very much evolving. JPMorgan, obviously, came out today with their adoption and as a company it is something that we continue to evaluate.
+I think the important thing to remember when you look at this, and I'm sure you know this, is just that this is a question of do you take a reserve for something that you earn back over the average life of your uncollateralized balances. So it is not something that changes the core economics of the activities that we are doing.
+
+Answer_16:
+
+    I would say that as we look at and what we have said is that from an LCR and an SLR basis, given that we are at the levels at the parent and then with respect to the supplementary leverage ratio at the bank, given we are at the levels that we need to be that phase in between 2015 and 2019, there is not anything directly related to those given that we are in great shape with respect to those.
+What I would say is that as we move forward and as we look at the bank level and some of the rules, you will see us, on average, carrying a little bit more cash at those levels. And you saw that as you look at the year-end numbers.
+As it relates to the different repo activity and the like within the global markets business, you continue to look to manage and balance what is the size of that book, how it affects the overall size of the Company, and the yield that you are able to achieve. I think that was one of the things as some of these different regs come out that we feel good that if you look at the repo book we were up 7 basis points from an average yield perspective Q3 to Q4. Those are numbers that are going to ebb and flow, but I would say directionally we feel very good about where the balances.
+
+Answer_17:
+
+    Our approach has been as these rules come out to put ourselves in compliance, or whatever the right word would be, immediately and not wait so that we didn't have hanging over us could you get to the LCR, could you get to be supplemental leverage. So we just said position our balance sheet.
+But I would say as you look at the company's sort of constitution in terms of business mix and balance sheet mix at the year-end 2013. We are very comfortable with that and so there will be ebbs and flows. Loans will grow here or maybe market will use a little more balance sheet on a given quarter.
+But Tom and the team have done a good job to sort of be able to face against the customers and maintain our strong market position in all our businesses -- investment banking, sales trading, fixed income and equities both -- while at the same time bringing the balance sheet in year over year down. But we are completely comfortable with it being in the size range it is now and expect it to stay roughly in there. I don't think we see massive changes in how the Company looks to comply with rules because we are already complying.
+
+Answer_18:
+
+    I think as it relates to the capital allocations they clearly are. One of the things that if you look back in the footnote that we highlighted is we will refresh those allocations in 2014 and continue to have more capital pushed out within the businesses.
+As you look at the returns within the markets business, I think you need to adjust for two numbers when you look at those. The litigation number within markets business was north of $600 million for the quarter, and then you had another couple hundred million dollars during the quarter for DVAs. So when you look at the returns, you need to adjust for those two numbers and realize that, in the fourth quarter, you are looking at what is seasonally the slowest quarter.
+
+Answer_19:
+
+    Well, I think if you look at it, you could calculate statistics, but we were down. We had two things going on during 2013 in the second half, especially as the HARP volume started to fall off because we sized our portfolio down in terms of total servicing size. So our HARP opportunity went down and then obviously as rates went up, sort of midyear out, the volumes dropped. And so the third quarter, the pipeline pull through helped us get $20 billion odd and in fourth quarter down to $11 billion.
+But if we look at it non-HARP share, we are pleased with the progress we are making and we will continue to grind that direct-to-consumer, grind that forward from where we are now at about $9 billion this past quarter.
+So I think we are fine. It is going to be a business which we shape to size -- to serve the customers and the wealth management business does a couple billion a quarter. It is a good solid position.
+I would say in January with the rates moving down a little bit and stuff, you saw another kick up of about 20%, 25% in application volume in our book already. Now I don't know if that holds and how much seasonality because the way Christmas and New Year's fell this year and things like that as we move through the month, but it immediately kicked up over the last several days as rates moved a little bit in our favor. And the purchase volume has also moved up in January.
+So we are looking for this business to start to grow again, but it obviously suffered a couple of different -- both the rate effect and also the HARP effect in the fourth quarter.
+
+Answer_20:
+
+    I think that the important thing, and I understand your question, when you look at the time to required funding, one of the reasons why -- there are a couple components that go into that, the amount of liquidity that you have at the parent obviously and then what the debt footprint is over the course of the period of time that you are measuring it.
+And if you look at what we have done, we basically -- if you looked at our Company at the end of 2012, we had $70 billion of debt maturities that we needed to work through over the course of 2013 and 2014. And you obviously need to carry significant amounts of liquidity to be able to basically meet your time to required funding when it is that lumpy.
+What we have done is, between the debt that we repaid this year, as well as the activity you saw when we tendered for debt several times in 2013 for debt that was maturing in 2014, was to knock down those maturity profiles.
+So you are asking a very good question, which is over time what you should expect us to be able to do is continue to move the parent company funding down and as we flatten out those debt maturities, we will be able to do that and not have nearly the impact on time to required funding because the maturity profile will be much flatter.
+
+Answer_21:
+
+    I think a couple things. Keep in mind we told you when we reported on the third-quarter earnings that the Merrill Lynch holding company that had previously issued debt before the merger of the two companies. That has been merged into the BAC holding company so when you look at that debt profile realize today it is one and the same.
+I think the important thing I would look at is on page seven. What we do is that we do give you the actual what we consider parent company, and that parent company back in previous quarters prior to [ML and BAC] merging is a combined number. So if you look at those red bars on the bottom on page seven that is the combined debt footprint of the two companies that is now one and you can see it over the course of five quarters migrating down.
+
+Answer_22:
+
+    The first thing I would say is that generally we would expect that gap to narrow over time. But as you look at the actual content of it I think the biggest reason that you have is just given the percentage in some of our commercial loan balances that we have relative to our peers that under Basel III advanced get impacted significantly based on the actual credit quality, where when you go to standardized it is just 100%.
+So I think you have got -- the first thing is you do have some of that activity or difference between the two metrics. Then I would say that the second thing is that we still do have some assets that under Basel III standardized do get some fairly heavy risk weightings that we will continue to work off over the next couple years.
+So there is no question relative to what we have seen out there, we are a little bit wider. I think those are a couple of the differences. And as I say, I would expect over the course of the next 12 to 18 months you will see that gap tighten.
+
+Answer_23:
+
+    No, the commercial credit getting better really isn't going to -- that is not going to lead to it getting tighter, because under standardized a commercial loan is a commercial loan. There is no benefit of credit quality. It is going to be more the runoff of some of the different positions that we have within the Company as opposed to anything specific on commercial.
+
+Answer_24:
+
+    As we look out at and as we look at 2015, 2016 we don't do anything besides just look out at the forward curve, so you do get a little bit of benefit at the very end of 2015 and a little bit more so in 2016. So there is embedded some of that. At the same time, to the extent that we are not in an environment and an economy that is growing and where we are seeing some of that movement up in short-term rates, if we are not seeing that there are other actions that we are going to need to take within the Company.
+
+Answer_25:
+
+    I would say on that that as we work through 2014 a fairly healthy percentage of what would show up in the tax provision line will not reduce our regulatory capital. And as we go out in 2015 and beyond how quickly the balance of that goes is going to be a function of profitability.
+But what I would say is that as it relates to working through the DTA, and it is a complicated calculation, that we should get a very large amount of what we pay in taxes back in regulatory capital during 2014.
+
+Answer_26:
+
+    Unfortunately, I can't answer a way around. We're not going to give any more guidance on CCAR than we have already given.
+
+Answer_27:
+
+    It was a good attempt, though.
+
+Answer_28:
+
+    We think that, ultimately, if you look at our market share and other product capabilities, given the ebbs and flows of the rate environment, Paul -- fast refis, lower refis, whatever is going on. But if you look at it we should be able to better we should be able to -- we have a 10% or 13% deposit share we think in consumer deposits. We have a higher percent in cards, etc. Home equity is bigger. We should be pushing towards upper single-digit level in mortgage.
+It just will take time because we are rebuilding that process, which was not geared to serving the core customers, and just doing it. The team has been doing a good job of building that fairly steadily. The purchase volume percent is in the 30%s this quarter and so we are getting there. That is our goal; it will just take us time and we will drive that.
+But in terms of direct-to-consumer production, I think we are second largest now and we plan to keep driving.
+On the non-QM and things like that we will meet the needs of our customers by using our balance sheet, because remember we do a lot of mortgages today through our wealth management business and stuff and so we will work through the rules. But for the standard products obviously, for the general consumer and the Fannie eligible and Freddie eligible, FHA type products we will be following all the rules and making sure they go through the standard process to get them off the balance sheet and into the securitization process.
+But in terms of putting stuff on the balance sheet, I think we meet the needs of customers and we have been doing it for years.
+
+Answer_29:
+
+    Inherently, when you have one of the largest wealth management businesses it is a focus. So of our production about 20-odd-percent comes from the wealth management business. And the yields are -- Bruce, I guess the yields on the product are competitive. We have to compete in the market, so it is a market-driven business.
+
+Answer_30:
+
+    I would say it obviously depends on the product, floating versus fixed, but you are clearly seeing credit spreads on a floating basis where some of those customers in the spreads of 100 to 150 basis points over from a floating rate perspective.
+
+Answer_31:
+
+    We do not. There is no update at all besides the fact that the trial is over. At this point you know what we know.
+
+Answer_32:
+
+    The thing you need to look at within legacy assets and servicing, I know it is completely counterintuitive, but recall that the reps and warrants is a contra revenue line item. So we had the lower rep and warranty provision for the quarter was the big delta.
+
+Answer_33:
+
+    I would say on the affinity side we identified the one -- I think we basically repositioned that business over the last three or four years and I think we are kind of where we are at this point. The strong affinity partners we have that have done well we continue to support them and continue to drive production there.
+But the real story on the card business is think about the Cash 1-2-3 product, the Balance Rewards, and the Travel Rewards products, core products that we continue to drive. The production of those products continue to be up significantly year over year and that is what is driving us from a couple of years ago maybe 600,000, probably 700,000 cards a quarter up to 1 million-ish now per quarter. And so that is good because it is our core brand of product with a great product for the consumer and they use it.
+So what you are seeing is if you look at some of the detail we give you in the supplement stuff you will see that the average spending is going up, the average spending per card is going up and so that obviously is more efficient and an indicator that you are becoming the primary card in the wallet for customers. With that though one of the drags is the spend rate.
+We are in the low 20%s on payment rate. In other words, the people are paying us off and not caring balances because of the affluent customers. So that is a little bit of drag, but they charge enough that you make it through the interchange.
+We are very comfortable with the business. We spent three or four years in positioning, but the good news is with the credit quality that we have seen from originations and things like that we are getting a 9% risk-adjusted margin. So we have ended up with the right spot where we are getting production growth, i.e., more cards, with our direct customers with a good, strong margin and we like that.
+Then you might say: well, why don't you push it harder because it is returning so well? The issue is to do that you have to go to places where I think it is our core strength and so you should expect us just to grind forward on that.
+
+Answer_34:
+
+    I think that the interesting thing is that as you move forward into -- as we move forward and you look to test under Basel III NOLs are not eligible as capital under Basel III. So there is good news and there is bad news. The bad news is you don't get to count it. The good news is that it eliminates the likelihood that you have a difference relative to the way somebody else looks at your deferred tax position.
+Given that CCAR is based on the way regulatory capital works, that is how the deferred tax asset flows through. And once again under Basel III you don't get to count NOLs.
+
+Answer_35:
+
+    I can't comment on the way the Federal Reserve looks at that, but our belief is that is correct.
+
+Answer_36:
+
+    The point would be this year you are in transition, but as you go forward and the expectation is you move purely to Basel III, this becomes sort of a non-element in that it is out of the calculation already.
+
+Answer_37:
+
+    I think as you look at the preferreds that we redeemed the yields on those preferreds were between 8% and 9%. Our belief, and once again I am not going to speak for the Federal Reserve, but I think most people looked at that and said -- at least the way we looked at it was that we look at the heavy content of Tier common that we have and you look at preferred that is 8% to 9% after tax. I think most people would look at that and say it makes good corporate finance sense and it is a good thing for Bank of America to retire those.
+Given the work that we have done on the balance sheet, you can see that the majority of what we have left from a preferred stock perspective is priced at competitive rates. So I would be very careful to thinking of and including that preferred stock redemption and assuming that it was evaluated as common stock.
+
+Answer_38:
+
+    No, because it was straight preferred stock. It had no conversion features whatsoever.
+
+Answer_39:
+
+    You are absolutely correct. If you adjust for the FAS 91 the delta Q3 to Q4 the increase was only 2 basis points.
+
+Answer_40:
+
+    I would make a couple of comments on that, Guy. We have got teams, as you can imagine, culling data and spending a lot of time with it. The couple of comments I would make is that the changes that were made from prior BCBS rules to the new rules, as it relates to both the credit conversion factor as well as the netting for securities financing transactions, clearly are less punitive than what the original BCBS proposals were.
+I would say on a very preliminary basis as we look at it I would say that we think the negative or the impact to us was a little bit more than what JPMorgan quoted. That being said, with our ratios above 5% at the parent and above 6% at each of the banks coming into this, we feel like we are in very good shape with respect to compliance with this supplementary leverage ratio.
+
+Answer_41:
+
+    I will let Bruce give you sort of his thoughts on that from his perspective, but before we get there you got to remember what I said earlier is we -- our company has shrunk and our equity has gone up. So when you think about that if you shrunk the Company by $300 billion to $400 billion in size across the last three or four years and your equity balance has gone up then your deposit balance has gone up. The only thing to do to balance the balance sheet is to take the long-term debt footprint down.
+That is because we fundamentally got rid of businesses and assets and things that weren't necessary to do what we do today. There is just a difference between us and someone, our peers who have been more organic in how they came together in the last few years.
+I would just be careful that -- obviously we work with the Fed and all this redemptions it's not like we can make capital plans and, as you said, liquidation authority and structure. But a lot of our reductions come by just shrinking the scope of the Company to $2.1-and-change-trillion from $2.4 trillion to $2.5 trillion and that is going to allow us to reshape the thing. And then getting rid of assets that were non-core, not yielding.
+So I will let Bruce answer the rules, but remember we started from a different place because, as someone said earlier, Merrill had a lot of debt because they didn't have the deposit funding we did. Bruce?
+
+Answer_42:
+
+    I think, Guy, we hear the same thing that you do where we hear the numbers quoted of very high teens that you need to be at from a common, plus your debt footprint that is greater than a year. If we look at where we are today from that metric, we are in the low 20%s today, which as we compare ourselves to our peers is higher than where our peers are.
+I think what you are going to see as we go forward, and I referenced this earlier, that this is the last year of big debt maturities where we have got north of $30 billion at the parent that comes due. So I think what you will see for us going forward is you will see us issue less today at the parent than what matures at the parent. As you get out to 2015 and beyond it tends to be much more a $20 billion a year type maturity profile.
+The impact in 2015 and beyond -- assuming we continue to do what we should with the balance sheet, the impact in 2015 and beyond is going to be more about the cost at which we are raising debt relative to the debt that we are retiring, whereas we do have one more year, which is this year, of shrink in the actual total amount.
+
+Answer_43:
+
+    If you look at the -- couple things that would drive that. If you look at the last three or four quarters you can see that we have kind of flattened out. Remember around the holidays you get a seasonal bump and it comes out, so Bruce said earlier that you should expect the card balances to come down in the first quarter just because of that. But if you look at it, it has been $90-odd-billion in the US business consistently.
+What we did see in the latter part of last year is more usage on the credit side, which from a general economy perspective is actually good news in that people were using the credits versus debit when we look at our usage of the cards and what they are used for in a given quarter. So the credit spending was up better among all the customer bases in October and November and into December. So I would say we are set up to -- because we had gotten rid of the balances of the cards that we were running off, and that is really a very low percentage now, to have the thing stabilize.
+I don't think it will have large balance growth because it will kind of work with our -- it will work with our customers and what they are doing and we have a substantial part of the people pay us off. But the good news is underlying it you have seen a little more credit usage fundamentally in the last couple quarters.
+
+Answer_44:
+
+    I would say when I reference the 5,000 that was in the context of starting at just under 6,000 branches and the work that we were doing with respect to new BAC. I would say that we continue to track towards that 5,000 number.
+What is probably a little bit different from what we saw in new BAC is that we have been able to actually sell some of those branches that are, for us, out of market to local banks as they look to build up their local presence, which I think is a good thing for everyone. As we look forward, I think there will be a continued evaluation that we have at this point as to the opportunity and the cost versus the benefit of the branches. But I would directionally think of us being 5,000, maybe a few less than that by the end of 2014 and there will be a continued evaluation that we have beyond that.
+
+Answer_45:
+
+    We would always focus people on the branch count. It was a fairly objective way to show how we were trying to do it.
+The reality now is as you look at the different formats we are always putting new branches in the market. In other words, as leases run off, repositioning the branch, consolidating branches, and adding these express formats that we are testing and stuff. So the definition of a branch is changing in terms from what you would traditionally think.
+After the period which Bruce talked about, you are really going to be where the customer is leading you, but the branches are critically important. You always use the example, in one market we were able to take four branches and put them in one larger one; have Merrill teammates, U.S. Trust teammates, and the core personal bankers and teammates in the branch.
+So we don't know exactly where this goes because it will be dependent upon customer behavior, but what we do know is we have to dominate the physical side and the e-commerce, online, mobile side at the same time. And that is where we are investing heavily in both platforms. We have a fairly stated probably $0.5 billion we put in the online mobile platform across the last three or four years and we will continue to invest at that rate. You can see the future functionality return and the usage of the platform has grown tremendously.
+For example, in the fourth quarter of 2013 9% of all the checks deposited by consumers went through the iPads and mobile phones. That was up from 7% the quarter before and didn't exist until basically the third quarter of 2012. So that is what we are driving, because of customer convenience and usage. At the same time we have 8 million customers coming to the branch and the engagement rate for those customers is going up.
+And so the team is less about what number of branches and more about how the distribution process works between phones and ATMs and mobile in branches and express branches, ATAs which are tellers through the branch, and then we are deploying more people to sell in all those regards. And that is what we are trying to do.
+
+Answer_46:
+
+    Yes, dedicated to transactions, but the square footage dedicated to sales could increase.
+
+Answer_47:
+
+    32% was purchased this quarter. I think it was 21% in the previous quarter.
+
+Answer_48:
+
+    We look at -- in each quarter look at our asset sensitivity on the balance sheet. As we look out at and our constant metric that we look at is what does 100 basis points do to our net interest income. Obviously that flows directly to the bottom line and at the end of the year 100 basis point move up was worth between $3 billion and $3.1 billion to us from a net interest income perspective.
+So we clearly will benefit from short-term rates. We obviously don't control that. And so I think the important thing, Nancy, is that as we look at near-term benefits that we have we continue to have a lot of work to do on expenses in both 2014 and 2015, because we have got another $0.5 billion a quarter of new BAC savings that will get implemented between end of 2013 and end of 2014. Then with the guidance that we gave today another $700 million a quarter to get out going into 2014 to where we end 2014.
+So we do look forward to those days of higher rates, but in the meantime we have got a nice chunk of expenses to get out that we do not believe will impact the revenue-generating ability of the Company.
+
+Answer_49:
+
+    Nancy, if you look at page 11 where we give the profitability of the consumer business banking, and that is obviously the one that benefits the most by the short-term rate rise because they have a huge constitution of deposits that is non-interest-bearing and then picks it up. Then you can look at the returns there and in the supplement and you can see we are up to about $2 billion in after-tax income and the returns clearly exceed the cost of capital.
+It will benefit, but in the meantime what we will be doing is driving the cost structure down in the deposit franchise for almost 300 basis points of cost to run the deposit franchise as a percentage of deposits down to 200 and opening that up. So it will absolutely help that business. But, meanwhile, it earned $2 billion this quarter, which is not a bad -- after tax, which is not bad either.
+
+Answer_50:
+
+    There was one piece internally between the LAS or, excuse me, the home loan space within LAS and what we have in all other. So if you adjusted that out you are not seeing material changes in the gain on sale.
+
+Answer_51:
+
+    The core production margins that has come down and stayed pretty flat at the levels. Don't read into that is something we are doing, something different.
+
+Answer_52:
+
+    Yes.
+
+Answer_53:
+
+    I think I characterized the backlog as strong at this point, and I would say it is strong both relative to the third quarter as well as to the year-ago period.
+
+Answer_54:
+
+    I think the interesting thing that we have seen coming into this is that the M&A business, and if you look at activity levels and just what has been announced over the course of the last week, that it does feel like that some of the -- the M&A deals that are being talked about are going to happen. Obviously there are a number of them that are still being negotiated and may or may not happen, but M&A activity clearly feels like it is beginning to pick up and ramp up from what we have seen.
+You saw within the overall debt businesses very good growth, both year over year as well as linked quarter, and I would say that that business, as well as the market conditions, continue to be quite strong. You then move to the equity side. The fourth quarter was obviously a very good quarter from an IPO perspective.
+Typically coming into the year you have a little bit less visibility on that, because a lot of that tends to happen after people wrap up their year-end numbers. But given overall valuations and what we are seeing, we are optimistic on the equity side as well. So I think there is not one piece that we look at within those pipelines that don't feel pretty good.
+The only thing I would say as a brief cautionary note is that you are comping against a period that is the highest investment banking revenue period we have ever seen in the history of the Company.
+
+Answer_55:
+
+    U.S. Trust adds maybe 150 to 200 basis points to it.
+
+Answer_56:
+
+    Mike, so that gives you a sense of it. But be careful; what drives our margin is what I said before. It is the wholistic nature of the Merrill Lynch wealth management business. In there they have the wonderful classic investment business, but also they have a good deposit base and a good loan base and all the work the team does there under [John Thiel]. But it adds about 150, 200 basis points.
+
+Answer_57:
+
+    Within commercial it continues to be in the very low 30%s.
+
+Answer_58:
+
+    No change. The only thing that we are seeing that is a little bit of change, and we have talked about it before, is the -- if you look at the amount of funded commercial and corporate loans relative to our total commitments, that has been very much a focus of what Tom has looked at. And we have seen that migrate up to where it is just under 50%.
+So while we are not seeing line utilization as much, we are seeing across our commercial and corporate books that the funded commitments relative to total commitments has increased.
+
+Answer_59:
+
+    I think that we talked about that which drove the margin in the fourth quarter. I would say that across the board the margin was very strong in the fourth quarter. You have seen numbers in the low 240s; you have seen it at 251. I would think about that being generally range bound at this point in time with what we see.
+
+Answer_60:
+
+    We have said that we have got $500 million to get through over the course of the next four quarters and I would say that is going to generally be earned over time. So I wouldn't think of it being any more than 100, 125 is generally the way that you will see it phase in.
+
+Answer_61:
+
+    Well, we have committed to saying that our new BAC savings have to be net savings to the Company with the caveat that to the extent that businesses are doing more revenues from where we started that will pay out. And that is what we did see during the fourth quarter from both the global banking side as well as wealth management.
+Keep in mind, and I think this is important as you look at the first quarter, is that we have got two things that generally happen in the first quarter. One that we know does and one historically that trend would suggest it does. I mentioned the FAS 123 that you have in the first quarter. We know that is going to be an incremental $900 million.
+The other thing that historically has been true is that the sales and trading business the first quarter historically is the most significant quarter within that business. So the incentive compensation, given that we accrue based on revenues, tends to be seasonally highest in the first quarter. You add that plus the $900 million I mentioned and it is not an insignificant number.
+We, once again, feel very good we will get the net new BAC savings on a net basis over the course of 2014. Just realize that the first quarter has those two components.
+
+Answer_62:
+
+    What we are referencing is at the end of it -- as we look at over three years, at the end of the third year that is where we would look to get to which, given our current leverage profile, is around 14% on tangible common.
+
+Answer_63:
+
+    That is correct.
+
+Answer_64:
+
+    I would say the general expectation should be that that number is going to be at or probably move down a touch from where we are today given the performance of the core deposit franchise.
+
+Answer_65:
+
+    I think the targets that we have for performance we will put out in the proxy this year when the Board goes through the process over the next several weeks here, Mike. But I think in the past it has been based on getting us back to a level of profitability in the Company and that is what is reflected.
+
+Answer_66:
+
+    The one piece, and once again we are not going to give it, is that if you are just doing that simple math you have not made any assumption with respect to the change in shares. Once again, given that we are in the middle of CCAR, we are not going to comment on that, but you do have some benefit over time through share count.
+
+Answer_67:
+
+    We have a very stringent program that is driven in each market by our marketing president and teammates where we count the referrals that go in, we count the close rate, and who participates in all of that. And then markets are stack ranked and we monitor it monthly to see how they are doing and reward the people doing well.
+We set aggressive goals and this year for 2013 they hit all the goals. Every market was in good shape and so it is a fundamental way that our teams operate in the markets together.
+When you get specifically into things that work well for wealth management, you have the connectivity when there are liquidity events, so-called business sales, IPOs, and things like that, where we bring in business. We will get through November and I haven't seen a final count yet.
+We have about 675 401, retirement plan closed sales in 2013 and we had about 200 and some in 2012. That is driven through the Merrill institution of retirement planning business that [Andy Sieg] and John Thiel drive and delivered between national teams and the financial advisors in the market.
+So that gives you the kind of sense of how this works. The dollars of that is in the $5 billion, $6 billion range, if I remember exactly so it is all those types of flows.
+And then it is several tens of thousands of customers come from the consumer bank into the wealth management platform referred from the preferred team. But that goes on and those customers, they come into the branch, they have asset bases that are consistent with Merrill Lynch and U.S. Trust service models we move them in. So it is a whole bunch of things, but it is tracked, literally, person by person to make sure that it happens.
+But, frankly, the teams like to work together and win in the market. And that is what you see when you go into our markets and talk to the teams that do it.
+
+Answer_68:
+
+    I would say the leverage finance business is a very good business for us. If you look at historically we are number one or number two in that business, and if you look at -- on an overall basis if you look at our debt origination, both investment grade as well as non-investment grade, it tends to be an $800 million to $1 billion a quarter type revenue stream.
+As it relates to the risk -- and we believe, particularly given some of the new capital guidelines and the competitive landscape, that we are doing better in that business than we have. From the risk management perspective of it you have got two different components of it.
+You have the underwrite to distribute component to it, which one of the most notable changes I think has been over the last couple years is the risk gets distributed from the underwriter to the investor generally much quicker, even in the context of deals that have a lag time from the time that they are committed to to where they are distributed. So that is a positive from a risk management perspective.
+Then, with respect to the hold pieces, we continue to be very disciplined with respect to the hold levels that we have on those deals. The other thing I would say is, if you just look at mix of business now relative to what you saw 12 months ago, a lot more of the leverage finance business tends to be coming from corporate customers that are either privately held or public. And as valuations have gone up less of it tends to come from the private equity firms.
+It is a business that we think that we are very good at. Our team has done a very good job of being mindful of the risk that is associated with it over the last couple years and it is a business that we are optimistic about.
+
+Answer_69:
+
+    The revenue outlook, I think in many respects, as we look out at the profitability we feel very good about the outlook. This is probably the business that most benefits from increased M&A activity, particularly on the corporate side. So to the extent that corporate M&A picks up, you would look to see this business continue to have favorable trends.
+The word of caution would just be that it is a market-dependent business and, as you all know, periodically there are gaps in time where the new issue market, particularly on the high-yield side, does slow down, sometimes materially. But on balance we feel very good about the business going forward.
+
+Answer_70:
+
+    The relative amount, obviously, you are getting more and more to the core franchise, so the relative amount of movement we can make -- and remember, couple that with we are investing in people and we are investing in technology to make it all work. And so I would be careful about assuming -- we are always going to be working this, that is our job, but I would be careful about assuming beyond the new BAC cost that Bruce talked about that there will be a lot net after that. Only because we are investing so heavily in the electronic space, which is still building in front of us.
+But the theme is right; it is really how do you keep driving down the overall operating cost of all the platforms relative to the revenue stream and the deposit base obviously, because that drives a lot of the revenue stream in the business. And so I wouldn't hold the bottom line, but you should assume that we are going to be diligent in terms of managing that transition to help provide more investments, frankly, as we can.
+
+Answer_71:
+
+    We have got a great product and we just -- I think we are at a steady state. We spend just overall, we decide which business, about $3-billion-and-change in annual technology development, just development, and we expect that number to stay constant over time here. And as we take 
+
+Answer_72:
+
+    On an annual basis, yes. We are rebuilding a system, so I think that -- but that is all built into the dialogue we had about new BAC.
+
+Answer_73:
+
+    I think if you look at the chart we gave you we try to isolate on the costs on page, the bar chart on page nine. You can see that the red bars are sort of the core if take out the litigation and LAS. You have to put some back because there will always be litigation. You have to put some back for just running the servicing portfolio, but we are shooting to drive into numbers that -- take those numbers and then you have to grow them and be careful of the FAS 123 type of thing and which quarter you are looking at.
+But our job is to keep driving towards that core expense base. Then as you grow, if we are growing revenues -- the economy growth rate 100 basis points above that, we will grow expenses probably half of that. And that takes a lot of work to keep that expense down because the people content reaches 50%, 60% of our expense base. Our people do a great job and we will pay them.
+
+Answer_74:
+
+    I would just add that, Andrew, on the LAS piece we guided to roughly $1.1 billion at the end of the year. So with respect to the gray bar on page nine that Brian referenced, I would look at and think about $1.8 billion to $1.1 billion happening generally pro-rata over the course of the year.
+
+Answer_75:
+
+    We still got a lot of clean up there. If you look at one of our peers announced yesterday, you can see that they are probably doing their mortgage servicing expenses maybe 30% to 40% of ours, and that is because we just are still getting through the higher delinquency content portfolio. And it lags a little bit getting the stuff done.
+
+Answer_76:
+
+    I think you are closer to the end on magnitude from a reserve release perspective. It always a little bit hard to predict obviously because the reserve releases are a function of what is happening in the underlying credit. But generally, Andrew, I would say that you expect to see charge-offs continue to decline.
+And you are obviously going to see the reserve releases, given the magnitude that they have been, you are going to see those slowdown as well with the one delta just being what is the overall loan growth that you are seeing.
+
+Answer_77:
+
+    We agree with your characterization of the $10 billion number.
+
+Answer_78:
+
+    You are trying to creatively ask the same question. You are doing a good job.
+
+Answer_79:
+
+    That was our last question, so once again thanks, everyone, for joining us.
+
+Answer_80:
+
+    Thank you.
+

exam/part2_problem1/Problem_1_Conference_Call_Segments/call_25_presentation.txt

@@ -0,0 +1,79 @@
+
+Good morning everybody on the phone as well as the webcast. Thanks for joining us this morning.
+Before I turn the call over to Brian and Bruce, let me just remind you we may make forward-looking statements today. For further information on those, please refer to the website and our SEC filings about our forward-looking statement information.
+So without further ado let me turn it over to Brian, our CEO.
+
+Thanks, Lee, and good morning to all of you and thank you for joining us to review our fourth-quarter results.
+As we talked over the last several quarters, we have been on a journey of simplifying our company and we talked to you about some consistent areas of focus: capital generation, reducing our cost, managing the risk down, addressing the legacy issues and driving business growth overall. Each quarter you have seen the progress our teammates have made and the momentum is becoming more evident.
+On the first page, slide two, of the deck you can see the annual comparisons that will show you the progress over the last couple years. First, we have improved the balance sheet. Our Tier 1 common capital has grown 16% this year.
+Liquidity and time to required funding have further strengthened. This strength in capital and liquidity allowed us to begin returning capital through share buybacks to shareholders in 2013.
+Another area of our early focus has been rightsizing our expense base. We have been meeting the goals of our cost programs each year. While we make progress on this each quarter, there is still significant progress when you look across the last couple years.
+After reporting expenses, excluding goodwill and impairment of $77 billion in 2011, we have worked that number down to $69 billion in 2013. As we have been clear with you, we expect additional cost savings in 2014 as we continue to execute on both our new BAC and our legacy assets and servicing initiatives.
+We have also focused on addressing our legacy mortgage issues, and although we still have work to do, we have made progress. On our credit costs and our provision costs we see tremendous results as net loss rates in our portfolios are levels not seen in nearly a decade. As a result of all this work earnings have improved significantly, but we still have not approached the true earnings potential of Bank of America.
+So as we move to slide two let's talk about recent results in the business on a business-by-business basis. We have been delivering solid growth and activity in relationships across all the groups of our customers and clients we serve. Let me highlight a few of those for you.
+Deposit levels continue to reach records each quarter. While this growth has been occurring in balances, the rate paid has been declining to what we believe is low against our peers, that 8 basis points in our consumer business. Our operating costs, which we focus on heavily, of our deposit business has declined to just 200 basis points now.
+Driving this improvement is the work we have done to optimize our delivery network, our stores, in response to customer behavior changes across time. Banking centers over-the-counter transactions continue to go down, but ATM, online, and mobile transactions continue to grow. We understand this and we observed this in our customers and we are working with them to capitalize on arguably the largest and best positioned branch network in banking.
+However, branches do remain a critical component of everything we do. We have about 8 million customer visits a week, the kind of traffic that we really appreciate and most retailers would give their right arm for. Meanwhile, as that traffic comes in, the customer behavior continues to shift to ATMs, online, and mobile, and that is giving us the opportunity to be more efficient at the same time continuing to deliver innovative products to our customers.
+When you move to our mass affluent customer base we have seen deepening across the customer relationships. Merrill Lynch brokerage assets continue their strong growth. We have invested heavily in the salesforce for what we call our specialist salesforce and that has grown to 6,700 people in 2013. Looking at what that salesforce has been able to do, this year we opened 350,000 new Merrill Edge accounts; 125,000 new small business deposit and card accounts as well during 2013.
+As we move to our industry-leading global wealth investment management business, we continue to break records on top line and profitability. We just recorded the best year in the Company's history for wealth management results. We have more customers and clients doing more business with us and now we manage client assets of over $2.4 trillion.
+In our global banking business loan flows have been very strong, now growing for six consecutive quarters. Investment banking is coming off a very strong year and a very strong fourth quarter where we have once again maintained our number two position overall, improved in fees overall, and grew market share year over year.
+As we look at our trading business, or our global markets business, we have been really pleased with the success we have had in equities over the past year and that has helped offset some of the industry challenges facing the larger FIC business that we had. Now both remain very important customer-facing businesses for us. They face some tough regulatory changes as the rules have changed about what the scope of activities is over the past couple of years, but the team under Tom Montag has been managing those changes well.
+Importantly, we rank for the third year as a top global research firm. All-in-all we believe, if you think back, 2013 was a significant year for the progress this company has made against all the focus areas I mentioned earlier. As we look to 2014, we are well positioned as a company to meet our customers' needs by delivering the whole company to every client and every customer and winning in the marketplace.
+With that brief introduction I would like to turn it over to Bruce to cover the numbers for the quarter. Bruce?
+
+Great. Thanks, Brian, and good morning, everyone. I am going to start and go through the fourth-quarter results starting on slide number four.
+We earned $3.4 billion, or $0.29 per diluted share, this quarter. Total revenues in the quarter on an FTE basis were in line with the third quarter of 2013 at $21.7 billion and were $22.3 billion if we exclude the negative impact of FVO and DVA as a result of the significant credit spread tightening we saw in our credit spreads during the quarter.
+Our revenues benefited from increased net interest income, strong investment banking and wealth management fees during the quarter, and were partially offset by lower equity investment gains. Total noninterest expense of $17.3 billion increased from the third quarter of 2013 as a result of increased litigation costs, which were $2.3 billion during the quarter.
+If we back those litigation costs out and back out $1.4 billion of the foreclosure look back expense that we saw in the fourth quarter of 2012, our expenses during the quarter declined $300 million from the third quarter of 2013 and $1.4 billion from the fourth quarter of 2012. Asset quality continued its improvement and resulted in provision expense of only $336 million.
+I would also mentioned two additional items that impacted results during the quarter. As I mentioned, FVO and DVA $618 million and we also recorded discrete tax benefits of approximately $500 million during the quarter that were driven by tax items that were related to non-US operations as well as the resolution of certain global tax matters.
+On slide five you can see that our period end balance sheet came in at $2.1 trillion, below the prior quarter on lower trading assets versus that third quarter of 2013. Ending loans declined $6 billion due to the decline in residential loans in our discretionary portfolio. Outside of residential mortgages, client and customer lending reflected good commercial and seasonal credit card growth that was offset by expected declines that we have within our runoff portfolios.
+Period-end deposits grew $9 billion from the record levels that we saw during the third quarter of 2013.
+Moving down the page tangible book value improved to $13.79 as the full benefit of earnings was partially offset by a negative move in AOCI as a result of higher rates. Tangible common equity increased to 7.2% during the quarter and during the quarter we repurchased 92 million common shares for roughly $1.4 billion.
+The last thing that I would mention on this slide is, despite the earnings of $3.4 billion, our return on tangible common equity at 8.6% remains lower than we would like it to be, but we continue to make very good progress on this front.
+On slide six, you can see our Basel I Tier 1 common ratio of 11.19% increased from the third quarter of 2013. If we look at Basel III on a fully phased-in basis, we remain above our 8.5% 2019 minimum requirement under both the standardized as well as the advanced approaches.
+Let's first look at the advanced approach. Under that approach Tier 1 common capital increased from the third quarter of 2013 to more than $132 billion. Our Basel III risk-weighted assets remain steady at $1.3 trillion and our common ratio improved slightly from the third quarter of 2013 to 9.96%.
+Under the standardized approach, our estimate of Basel III Tier 1 common ratio improved a touch from the third quarter of 2013 and remained slightly above 9%. If we turn to the supplementary leverage ratios, based on the proposed US requirements that are expected to take effect in 2018, as of the end of 2013 our bank holding company leverage ratio improved from the third quarter of 2013 and continues to exceed the proposed minimum of 5%.
+Looking at our primary bank subsidiaries, BANA and FIA, they also continue to both be in excess of the 6% proposed minimums. The last point I would make on this topic the BCBS published final supplementary leverage rules over the weekend, and while we do note some improvements from the original proposal, we are still evaluating the exact impact to us.
+If we turn to slide seven, funding and liquidity, our long-term debt ended the quarter $6 billion lower which further improved our funding cost. Global excess liquidity sources during the quarter increased $17 billion to $376 billion and was driven by our strong deposit flows. The time to required funding at the parent company increased to 38 months. As we look at 2014 we have $31 billion of parent company maturities during the year and once again we would expect the issuances to be below that number as we both reduce as well as smooth the maturity profile of that debt footprint.
+The other thing I would mention is that we do expect to see some additional issuance within our banks this year, given the applicability of the new liquidity rules and how they apply to the bank subsidiaries.
+If we turn to slide eight, net interest income, our net interest income on an FTE basis was $11 billion, which was $520 million over the third quarter of 2013. The fourth quarter of 2013 did include $210 million of positive benefits in market-related adjustments driven by lower premium amortization from slower prepay assumptions on mortgage-backed securities as long-term rates rose 30 basis points from the end of 2013 to the end of 2014.
+Our net interest income excluding those adjustments was $10.8 billion, representing a $241 million increase from the third quarter of 2013. Roughly two-thirds of that improvement was driven by traded-related net income and the balance, once again excluding market-related adjustments, was driven by lower long-term debt levels and, to a lesser degree, higher deposit levels and lower rates paid. Net interest income in those benefits was partially offset by lower consumer loan balances and lower yields.
+As a result of these different factors, our net interest yield, excluding market-related adjustments, improved from 2.44% in the third quarter of 2013 to 2.51% in the fourth quarter of 2013.
+As we move into 2014, I do want to remind you that the first quarter includes two less interest accrual days so the Q4 2013 base of just below $10.8 billion, excluding the market-related adjustments, all else being equal would start at roughly $10.6 billion for the first quarter of 2014. Our asset sensitivity position remains positioned to benefit from higher rates, particularly from the short end of the curve.
+If we move to expenses, as I mentioned earlier noninterest expense was $17.3 billion in the fourth quarter of 2013 and included a $2.3 billion charge for litigation expense. Litigation expenses increased $1.2 billion from the third quarter of 2013 as we continued to evaluate our legacy exposures, largely our MBS litigation, which led to additional reserves. Excluding litigation, total expenses were $15 billion during the quarter which compares favorably to the $15.3 billion in the prior quarter and $16.4 billion in the fourth quarter of 2012.
+Our legacy assets and servicing costs, once again excluding litigation, declined nearly $400 million from the third quarter of 2013 and were below $2 billion this quarter as we previously guided. This drove the $300 million improvement in expenses adjusted for litigation in the quarter. As we continue to reduce the delinquent loans serviced over the course of 2014 and reduce operating costs, we expect the fourth quarter of 2014 LAS cost, excluding litigation, to be roughly $1.1 billion.
+Move for a moment to new BAC, the benefits from new BAC in the most recent quarter were offset by a small seasonal uptick in costs when comparing to the third quarter of 2013. And when comparing to the fourth quarter of 2012 our new BAC savings are partially offset by roughly $300 million of increases from revenue-related costs on higher global banking in markets and GWIM revenues. We remain on track to achieve the expected $2 billion of new BAC cost savings in mid 2015 as these initiatives wind down near the end of 2014.
+If we move to the number of full-time equivalent employees, we ended the quarter at 242,000 employees, a decline of more than 5,000, or 2.3%, from the third quarter of 2013. And that was split pretty evenly between staff reductions in LAS and the production side of the mortgage business as volumes declined and, to a lesser extent, we reduced staff associated with our branch optimization.
+Before I leave expenses, I do want to remind you all that the first quarter typically includes the annual cost of incentives for retirement eligible associates. And once again we expect in the first quarter of 2014 that number to be approximately $900 million, which is consistent with what we saw in each of the first quarters of 2012 and 2013.
+If we move to slide 10 on asset quality, you can see that credit quality once again improved nicely. Net charge-offs declined to a reported $1.6 billion or a net loss ratio of 68 basis points. The quarter did include $144 million of charge-offs related to clarification of regulatory guidance on accounting for TDRs in the home loans portfolios. If we exclude that change, net charge-offs were approximately $1.4 billion, or 62 basis point net loss ratio, and improved $250 million, or 15%, from the third quarter of 2013.
+Delinquencies, which are obviously a leading indicator of net charge-offs, declined again as well. Our fourth quarter provision expense was $336 million on the back of this steadily improving consumer data, resulting in a reserve release of $1.1 billion excluding the regulatory guidance change. As we move into 2014 we continue to see credit quality improve.
+Let's now move into a discussion of the businesses and I am going to start on slide 11 with consumer and business banking. Within this segment we delivered improved earnings from both the previous quarter as well as the prior year's quarter. Net income of nearly $2 billion in the fourth quarter of 2013 is up 11% from the prior quarter [and] 36% from the fourth quarter of 2012.
+Stability in revenues, lower credit costs, as well as expense reductions driven by network optimization drove the improvement in both periods. If we take a step back and review customer activity during the quarter, we saw our average deposits grow steadily in rates paid down to 8 basis points. Our brokerage assets increased 7% from the third quarter of 2013 and are up 26% year over year on both improved market valuation as well as account flows.
+Our consumer card loans show seasonal growth this quarter as well as continued strong issuance with 1 million cards issued during the quarter.
+I would note that our fourth quarter of 2013 balances reflect the reclassification of roughly $1 billion of an affinity portfolio that was moved to loans held for sale and we would expect seasonality to move these balances lower in the first quarter of 2014. Our risk-adjusted margin on credit cards is now back above 9%, driven by seasonal spending and improved credit quality as net charge-offs and delinquencies continued to improve.
+Our expense levels during the quarter do include approximately $112 million of litigation costs and that masked the benefit of our delivery network optimization as mobile banking usage continues to increase and we continue to consolidate banking centers.
+Let's move to slide 12, consumer real estate services, which as you all know represents only 8% of the Company's revenues. In our supplemental information we report two separate components of this segment, one focused on loan origination and the other focused on servicing and legacy issues.
+As we signaled last quarter, our first mortgage retail originations of $11.6 billion were down 49% from the third quarter as the amount and level of refinancing opportunities slowed given the rising rate environment. Locked volumes declined 37%, leading to lower core production revenue. We continue to reduce our production staffing levels to be consistent with these lower volumes that we are experiencing.
+Our rep and warrant expense was $70 million during the quarter and declined by roughly $250 million from the third quarter of 2013, which benefited Mortgage Banking income.
+One item I do want to mention from the appendix of our slide deck is on page 20 regarding rep and warrant exposure. We did receive increased levels of private-label claims, but it is important to note that the vast majority showed no evidence that the claimant reviewed the individual loan file ahead of the submission. That obviously impacts the overall claim quality and, therefore, the process for claims resolution.
+The other primary revenue component in this segment, servicing revenue, declined $54 million from the third quarter of 2013 as a result of our smaller servicing portfolio.
+From a cost of servicing perspective our number of 60-plus day delinquent loans dropped 73,000 to 325,000 units at the end of 2013. As a result of this once again, our LAS expense, ex litigation, declined nearly $400 million during the quarter to $1.8 billion.
+Global wealth and investment management on slide 13, this represents 21% of our company's revenue and our wealth management business achieved records for net income in both the quarter as well as for the full year of 2013. Within this segment both Merrill Lynch as well as U.S. Trust maintain their strong leadership positions managing a total of $2.4 trillion in client balances.
+Revenue approached $4.5 billion in the quarter, increasing 7% year over year and 2% on a linked-quarter basis. I would also note it is the fourth consecutive quarter in which the pretax margin was above 25%.
+Our asset management fees once again achieved a new record during the quarter, driving the revenue improvement from the third quarter of 2013. Our client engagement remains strong and market levels are providing an additional tailwind.
+Our long-term AUM flows for the quarter were $9.4 billion and $48 billion for the year, nearly doubling the 2012 production level. Ending deposits also grew nicely again and our ending client loan balances of almost $119 billion reached record levels as we continue to see very good activity in both consumer real estate as well as our security space lending.
+Turning to slide 14, global banking, our fourth-quarter earnings of $1.3 billion show good growth over the third quarter of 2013 with strong investment banking results, but are down from the fourth quarter of 2012 due to higher provision expense. Provision in the year-ago quarter included reserve releases while we built reserves in the fourth quarter of 2013 associated with the commercial loan growth that we have seen.
+While we are on credit quality, I would note that our net charge-offs within the banking segment for the quarter were only $7 million versus $132 million in the fourth quarter of 2012 and $35 million in the third quarter of 2013.
+Our expenses reflect effective cost control, but also reflect increases related to revenue-related compensation for investment banking. Our investment banking fees this quarter across the Company were a record $1.74 billion, up 9% from the fourth quarter of 2012 and 34% from the third quarter of 2013. Based on deal logic we did maintain our number two position in fees with an 8% market share. In addition, during the quarter we ranked number one in America's investment banking fees with a 10.7% market share.
+During 2013 we advised on 10 of the top 20 announced M&A deals. And as we move into 2014 the pipeline remains strong.
+If we move to the balance sheet, average loans increased $8.8 billion from the third quarter with solid C&I growth, particularly in large corporate and healthcare, along with growth in commercial real estate. Our average growth did outstrip our $2.3 billion end-of-period growth as we funded several deals near the end of the third quarter of 2013 which benefited the overall average balances. We see solid customer demand for loans as we head into 2014, but would note that competition is particularly aggressive for middle market loans.
+Lastly on banking, our average deposits increased almost $20 billion from the third quarter of 2013 as our customers continue to show strong liquidity.
+We switched to global markets on slide 15. Ex-DVA we earned $341 million in the fourth quarter of 2013, consistent with the fourth quarter of 2012 but down $190 million compared to the third quarter of 2013 after we exclude the UK tax charge. Higher revenue in both comparisons was offset by litigation costs, mostly associated with RMBS securities litigation.
+Our sales and trading revenue, once again ex-DVA was $3 billion, 19% above the fourth quarter of 2012 and in line with what we saw in the third quarter of 2013. Our fixed sales and trading revenue were up roughly $300 million, or 16%, compared to the fourth quarters of 2012 as the strength we saw in our credit and mortgage businesses more than offset slowness in both rates and commodities. Our fourth quarter of 2013 did include roughly a $200 million benefit from recoveries on certain legacy positions within the FIC business.
+Our equity sales and trading area finished a very strong year. Revenues, although down 7% from the third quarter of 2013, were up 27% over the fourth quarter of 2012 as we continue to benefit from the repositioning of this business over the past 18 months. We gained market share and improved our performance in each of the different product lines.
+Expenses excluding litigation showed very good cost controls and small increases in line with revenue improvement. Our average trading-related assets are down $54.3 billion, or 11%, from the year-ago period and are generally flat with the third quarter of 2013.
+On slide 16 we show you the results of all other. Profitability this quarter compared to the third quarter of 2013 declined as the tax benefits this quarter that I described earlier were more than offset by lower revenue and less reserve release.
+The revenue decline from the third quarter of 2013 was driven by lower equity investment gains -- if you recall we sold CCB shares during the third quarter of 2013 -- as well as more negative FVO valuations. The expense within all other includes $250 million of litigation in the fourth quarter of 2013. Lastly, I would note we expect an effective tax rate of approximately 30% in 2014 absent any unusual items.
+Before we open it up for questions, let me make a few comments on the quarter. Capital and liquidity have never been stronger. On the revenue side customer activity drove stronger core business results. Our consumer banking saw a modest improvement on card income and service charges after troughing in early 2013.
+Our global wealth and investment management business had a record year. Our global banking had a record year as well with higher investment banking fees and stronger lending activity. And our global markets business is performing well against the market opportunities that they are seeing. We kept our cost initiative work on track and credit improvement continues its track towards historic lows.
+We also made significant progress in 2013 in continuing to resolve legacy mortgage matters with the more significant ones being settlements with Fannie Mae and Freddie Mac, on GSE rep and warranty issues, MBIA in the monoline space, and the Luther Maine State class-action suit in the private label area of RMBS litigation. With that let's go ahead and open it up for Q&A.

exam/part2_problem1/Problem_1_Conference_Call_Segments/call_25_questions.txt

@@ -0,0 +1,349 @@
+Question_1:
+
+    Good morning, Bruce. I was wondering in terms of the core net interest income you mentioned that the seasonally adjusted starting point for the first quarter would be 10.6, but it sounds like you expect that to keep grinding higher with the debt paydowns and rates being a little bit higher on the long end. Is $300 million that we saw this quarter, is that a good representation of the pace that core NII could grow at?
+
+Question_2:
+
+    Okay. Any change, material change in your interest-rate sensitivity overall, Bruce, to long rates and/or short rates?
+
+Question_3:
+
+    Okay. Then I was wondering if you or Brian could speak at a high level about how you approach this year's CCAR. Are you looking to grow your buybacks off of the $5 billion common request from last year? And do you feel that you have improved the earnings enough and consistency here to start moving the dividend up yet?
+
+Question_4:
+
+    Okay. Then last thing is you mentioned, Bruce, the 8.5% return on tangible and hope that that goes higher over time. Your ROA was 64 basis points. I guess what kind of goals do you have for ROA and ROE over the next few years, and any thoughts on timelines that you will hope to get there on?
+
+Question_5:
+
+    Okay, thanks.
+
+Question_6:
+
+    Thanks, good morning. Couple of questions, one on the NIM discussion that we just were having.
+When you look at what happened with the yield and the cost of funds it looks like you are getting a little bit more competitive on non-resi consumer. Just wondering how to think about how you are looking to shift either the loan growth going forward and how you are thinking about that loan yield relative to your cost of funds in an environment where NIB probably doesn't grow as much as it had been in the past, maybe your cost of funds is flattening out or potentially increasing a little bit.
+
+Question_7:
+
+    Sure. It is an interesting mix shift because you have got a little bit of shrinking going on obviously with the legacy resi still coming off, yet the yields there are increasing. And on the non-resi consumer you have got some yield compression happening, but your loan growth is at margin inflecting more positively.
+At the same time, cost of funds looks like it is probably settling out here and potentially even going up a little bit. I mean NIB average balances were still up Q on Q, but end of period was down, so that is kind of the fuller context of the question.
+
+Question_8:
+
+    When do you think you get that inflection point in loan growth? Clearly, it is a function of legacy basically not weighing on the loan growth overall. When does that inflection point happen?
+
+Question_9:
+
+    Okay. Then just turning to the mortgage for a moment. On LAS expenses, did I hear you right that you are looking for LAS expenses to be at about $1 billion at year-end? Is that correct on a quarterly basis for 2014?
+
+Question_10:
+
+    Okay, so that is an uptick, right, from what you had been saying before, sub $1 billion by year-end?
+
+Question_11:
+
+    Okay. Then so $1.1 billion by year-end 2014; is there still runway in 2015 to bring that down further?
+
+Question_12:
+
+    Then just lastly on the litigation reserving, you called out the $2 billion litigation reserve for the mortgage business, highlighted that that reflects a lot of the litigation risk you think you have. The question we get from people is how many more quarters of this should we build in going forward, because you do still have some lumpiness in the lawsuits that you face.
+
+Question_13:
+
+    All right, thanks.
+
+Question_14:
+
+    Good morning. We are seeing some peers that came out yesterday actually increasing liquidity and long-term debt levels to meet the LCR. I think you guys were starting at a higher point maybe than they were, but just give us a sense of maybe where you are for LCR with the current proposals.
+And as we think about kind of the net impact of long-term debt running off at the holding company, increasing at the bank, how does that all shake out on the net basis this year?
+
+Question_15:
+
+    Then at the parent, being around 100% right now, any sense of how much cushion you want? I think some banks are running maybe like a 15% cushion. Some banks are still trying to get to where you are right.
+
+Question_16:
+
+    Okay. Then just separately, we saw out of JPMorgan yesterday a one-time valuation adjustment on certain derivatives. Just wondering is that applicable to you or have you been absorbing it over time or still to come?
+
+Question_17:
+
+    Okay. All right, thank you very much.
+
+Question_18:
+
+    Thanks very much. So just kind of [wheezing] into some of the next questions, but on the balance sheet migration over the past year cash and equivalents up 19%; repo, trading assets, and derivative assets all down, say, 10% to 14%. Is that a function of some of the sluggishness on the trading side during the year in the market and just a reaction to what is out there, or is this your obviously intent to get on size for SLR and LCR?
+
+Question_19:
+
+    Okay, appreciate that. In global markets the trading in absolute numbers in relative to some peers is pretty good. The question I have is if you look at the return on capital or the return on average assets it is pretty low.
+I am curious A) how much litigation costs dented that, because I know it dented it; we just can't see exactly how much. And are these metrics we should be looking at on a consistent basis? They are in the supplement and I am assuming that they mean something, I just don't know if the capital allocations and the asset allocations are fair things to judge on.
+
+Question_20:
+
+    Okay, that is totally fair. Final one is in mortgage. I think there was a bit of a hiatus as you are getting things battened down. I think you picked up about 100 basis points market share since then on the retail side. Just curious for an update on, A, how the fourth quarter looked and then, B, your thoughts on going out in terms of intentions to continue to push that share higher.
+
+Question_21:
+
+    Okay. Thanks both very much.
+
+Question_22:
+
+    Yes, I wanted to come back to the debt footprint discussion and just looking on page 11, you can see total average long-term debt down $27 billion year-over-year and at the same time, looking at page 7 of the presentation, the time to required funding expanded from 33 months to 38 months.
+So I'm just curious, is there some other liability that is extending while you are bringing down the debt footprint and how can we gauge for the year ahead? What I'm getting at is how much further can you get, how can we triangulate on how much further room there might be in the debt reduction?
+
+Question_23:
+
+    Okay. Then as a follow-up, looking at your 10-K and 10-Q, you gave us a very nice breakdown of the debt by parent company versus Merrill versus BofA and A. And your parent company debt looks like, at least between year-end and September, like it was relatively flat and the declines in the long-term debt came primarily from Merrill Lynch going from like $90 billion to $60 billion.
+Does Merrill Lynch as an entity need to continue to pay down debt or can that essentially be all squeezed into other subsidiaries and does that have an impact on the cost of funds?
+
+Question_24:
+
+    Okay. All right, I will follow up, thanks. That is it for me.
+
+Question_25:
+
+    Good morning. Just a couple of quick follow ups. On your Basel III Tier 1 common, the standardized versus advanced, you have I guess almost a 90 basis point difference. Some of your large bank peers are closer to a 10 basis point difference. Can you help us think about why you have such a large gap between the standardized and advanced?
+
+Question_26:
+
+    So on the commercial side as credit gets better we should see that gap close for that reason?
+
+Question_27:
+
+    Okay, got you. Then just a follow up on your eventual ROE target or a tangible ROE of 14%. When you are kind of discussing that target is that assuming some help from interest rates being higher, or is that without that help?
+
+Question_28:
+
+    Okay, great. That is very helpful, thanks.
+
+Question_29:
+
+    Good morning. So one thing that we did see over the past year is a pretty robust pace of DTA consumption, which certainly helped boost your capital ratios. I know when contemplating DTA utilization the mechanics can be quite complicated, but how should we think about the potential level of progress as we enter 2014 as your earnings profile continues to improve?
+
+Question_30:
+
+    Okay, great. Then just thinking about some of the profitability targets you highlighted, such as the 14% tangible ROE, what are you guys assuming in terms of capital return over that potential horizon?
+
+Question_31:
+
+    Fair enough. All right, that is it for me. Thank you for taking my questions.
+
+Question_32:
+
+    Thank you very much. On the origination side, you did talk a little bit about that you are improving our retail side but the refis have gone down. You're down to like 4.5%; where do you see your market share and where do you think you can take your retail market share?
+And also, what do you think about non-QMs? I know some banks have come out and said they will start doing some non-QMs. I didn't know where you stand on that.
+
+Question_33:
+
+    And on the jumbo loans I know a lot of the institutions are going after the jumbo product. You don't break out your jumbo product, but is that an area of focus for you guys? And if it is, what type of yields are you getting on that product?
+
+Question_34:
+
+    And is there any update on the state of New York, where they stand with approving the Bank of New York settlement of $8.5 billion? Do we know when that is going to come to a conclusion?
+
+Question_35:
+
+    Okay. Thank you very much.
+
+Question_36:
+
+    Great, thanks. A couple of things. In the mortgage business I noticed that it looked like the revenue stream from the LAS servicing actually went up from the third quarter. Is that something that will remain at that level, or does that come down kind of with the servicing assets?
+
+Question_37:
+
+    In terms of the card business, I mean you had talked about the million-plus accounts and you have done that both third and fourth quarter. Just talk a little bit maybe more generally about the strategy there; are there any things that you are doing to kind of maintain or increase that?
+Also, on the other side are there other affinity portfolios that your partners are going to ask for back as we go into 2014?
+
+Question_38:
+
+    Got you. Following up on the DTA question, how do you think about and how do you believe the Fed thinks about that DTA consumption kind of as part of a CCAR submission?
+
+Question_39:
+
+    So you are saying though they do consider the capital generation as opposed to just your earnings?
+
+Question_40:
+
+    Thanks, Bruce.
+
+Question_41:
+
+    Great, thanks.
+
+Question_42:
+
+    Good morning. Question on how we should think about the fact that last year your capital return really included not just the buyback authorization of shares, but also the redemption of the preferreds. So you could add the two numbers together and say $10.5 billion out of last year's CCAR. Is there some conversion factor that we should think of for the preferreds in terms of saying what the 2013 baseline really was?
+
+Question_43:
+
+    Right, but I mean is there a factor that you used in thinking about what it would convert into in terms of the capital return?
+
+Question_44:
+
+    Okay, fair enough. I have had a number of clients ask me the question this morning about the significant increase in the yield on the securities portfolio just from the third quarter to the fourth. Obviously long rates are up a lot, but is it just that or can you link that to the couple hundred million dollar benefit that you were talking about in terms of the market-related impact?
+
+Question_45:
+
+    Got it, that helps. I know you said that on the SLR with the Basel add-ons you are still evaluating that, but JPMorgan was out saying yesterday that their estimate was that it probably only increased above and -- beyond the NPR decreased their leverage ratio by about 10 basis points. Are you thinking similar order of magnitude or are you really not in a position to comment at all at this point?
+
+Question_46:
+
+    Fair enough. That is very helpful. Then I guess the final question that I would have for you, and it is along the lines of some of the ones you have been asked about further reductions in the long-term debt footprint.
+Obviously there has been some speechifying by members of the Fed about not seeing banks reduce their long-term debt levels much below where they are now. Is there some rule of thumb that you guys are using in the absence of any defined orderly liquidation or bail in capital definition yet as to what you would want your total sort of long-term debt plus Tier 1 capital to look like as a percentage of risk-weighted assets? That you are using as a guidepost to help you figure out how much long-term debt to bring down.
+
+Question_47:
+
+    Got it. That is really helpful perspective. Thanks so much for taking my questions.
+
+Question_48:
+
+    Good morning. First I guess a bigger picture question and then just a couple of administrative questions.
+You have mentioned a couple of times your view about cards and the progress you are making not only in getting cards in the hands of your customers, but also the use that your customers are taking with the card in terms of charging more. I guess I'm just curious as to what your outlook is for actual balance growth over the course of 2014, presuming that we are in a somewhat better economic environment this year versus the last couple of years.
+
+Question_49:
+
+    Okay. Bruce, I think you mentioned a couple of quarters ago that you were targeting a branch count for the Company, round numbers, around 5,000. You are basically there at the end of this year. Is there potentially a push to get that number materially below 5,000 or at this point do you think you are where you want to be?
+
+Question_50:
+
+    Presumably over the next two to three years you could see the square footage of the total branch base come down potentially fairly dramatically given all the electronic delivery mechanisms that you just mentioned?
+
+Question_51:
+
+    Fair enough. Then just finally, what was your percentage of mortgage volume this quarter that was dedicated to purchase? And how does that compare to the third quarter?
+
+Question_52:
+
+    Okay, that is it for me. Thank you very much.
+
+Question_53:
+
+    Good morning, guys. I think we all appreciate the tremendous progress you have made on increasing profitability at the Company and getting things turned around, but there is a perception out there that you are going to have a gap up in profitability when short rates start to go up. Can you just give me your thoughts about that? Is that indeed a correct view?
+
+Question_54:
+
+    Just kind of to add on to that; do you have a sense at this point -- and this sort of goes back to the previous question. When rates do start up how much will the profitability of -- given everything you have done in the deposit-gathering network, how profitable will that be in the next cycle as opposed to, let's say, I don't know, three or four years ago?
+
+Question_55:
+
+    Okay, thank you.
+
+Question_56:
+
+    Thanks very much. Most of my questions have been answered, but just one small question also on the mortgage business.
+Doing the simple gain on sale mathematics it looks like you had a rebound in your gain on sale sequentially, which is pretty consistent with what we have seen from others. But the magnitude looked much greater. It looked as if your gain on sale in the period was back to, more or less, year-ago levels, which doesn't seem intuitively right so I just wanted to get your view on that.
+
+Question_57:
+
+    Got it. So just sequentially you would characterize the margins as largely flat, is that right?
+
+Question_58:
+
+    Okay. Thank you very much.
+
+Question_59:
+
+    You said the banking backlog was up. Was that versus the third quarter or year over year? And can you quantify that?
+
+Question_60:
+
+    And which areas in particular?
+
+Question_61:
+
+    Then switching gears, the wealth management margin, 26.6%, can you give that to us excluding U.S. Trust? It just helps with apples to apples comparisons with peers.
+
+Question_62:
+
+    Okay.
+
+Question_63:
+
+    Okay. Loan utilization in commercial and wholesale, where does that stand?
+
+Question_64:
+
+    So no change?
+
+Question_65:
+
+    I wasn't sure; what is our net interest margin outlook for the next quarter or two? You mentioned FAS 91 for the debt security yield. To what degree, if the yield curve has flattened here a little bit here recently, do you give some of that back on the net interest margin?
+
+Question_66:
+
+    And with regard to new BAC, can you just repeat how much do you have left and how much do you think hits the bottom line this quarter? You spent a little bit more money for revenues, which I guess makes sense if you have the opportunity, but I just want to size that again.
+
+Question_67:
+
+    I'm sorry, like $100 million to $125 million per quarter then and that should hit the bottom line, or you might look at reinvesting those gains?
+
+Question_68:
+
+    Then lastly, you mentioned a goal for an ROA of 1% over three years and I just want to understand what you mean by that. Do you mean at the end of 2016 going into 2017 you look to have an ROA of 1%, or do you mean the average over these three years?
+
+Question_69:
+
+    So at the end of 2016 you look to have an ROA of 1%?
+
+Question_70:
+
+    With the forward curve the way it stands. And with that, with those assumptions what sort of change do you expect with the certificates of deposits or CDs, which are historically low for you and others? Do you have money moving out of CDs at that point or not yet? You are around 15% of deposits; historically it is around 35%.
+
+Question_71:
+
+    Then in your page 49 of the proxy it mentions PRSUs and they kick in with an ROA of only 0.5%, whereas you seem to be shooting for an ROA of 1%. How will your new expectations here for the next three years translate into kind of more formalized metrics or compensation? Is it more than simply a general target? How does it kind of sink into the organization?
+
+Question_72:
+
+    Okay. In very simple terms, if you look for a 1% ROA on $2 trillion of assets, you hope to be at kind of a $2 annual run rate in the later 2016?
+
+Question_73:
+
+    All right, thank you.
+
+Question_74:
+
+    Good morning, guys. I just have two questions. First, I think in the December conference you mentioned there has been a 70% increase in referrals to wealth management from other parts of BAC. I was just wondering if you could elaborate on that a little bit.
+Is that environment driven or have you implemented some specific programs? And then maybe just give us a sense of how meaningful those referrals have been at the net income level?
+
+Question_75:
+
+    Okay. Then switching gears entirely and just talk about the leverage finance business. I think when you look at the industry you are seeing record  issuance and you are seeing some pretty favorable pricing for issuers. How do you think about this business over the next few years, both from a revenue perspective but also from a risk management perspective?
+
+Question_76:
+
+    Okay. Maybe just to follow up, so just to paraphrase what you said, you are very comfortable on the risk management side and you have taken market share it sounds like. But I don't think you gave an answer in terms of where you think the revenue outlook is for this business over the next couple of years.
+
+Question_77:
+
+    Great. Thank you very much.
+
+Question_78:
+
+    Morning, guys. Just wanted to go back to the retail branch banking strategy shift and, Brian, you have been clear about this evolution of everyone having a branch in their pocket, so not totally surprised about targeting maybe shrinkage in branch count in 2014 and 2015. But, to frame it out a little bit more, does that provide additional expense leverage beyond what you have long been talking about on new BAC and LAS, or is there an investment spend component that we need to be mindful as well?
+
+Question_79:
+
+    And where do you think you are in terms of that investment cycle for mobile banking, other deliverables?
+
+Question_80:
+
+    On an annual basis?
+
+Question_81:
+
+    Got it, that is helpful. Then separate, but sort of related on expenses, so with new BAC that is left to realize in LAS how much of that should we have kind of a step function down on the absolute level of expenses off the core 4Q run rate of, call it, $15.5 billion type level? Should we see by the end of 2014 I guess heading into 2015 should we take out $1.5 billion or are there other costs related to maybe investment spend elsewhere that we need to be mindful of?
+
+Question_82:
+
+    Got it, that is helpful. Then, Bruce, you have said I think in some of your prepared remarks that credit quality continues to improve into this year. Should we read into that that there is still meaningful credit leverage left to be realized in terms of reserve releases, or are we closer to the end here in magnitude?
+
+Question_83:
+
+    Got it, thanks. Then just lastly, just to wrap up some of the Q&A on the CCAR capital deployment. Just to be clear, it seems like one should not use kind of the $10 billion combined kind of preferred and common last year as a base. It really needs to be kind of a $5 billion as the baseline on common that you got approved for last year.
+Hopefully we will make our own assumption, but it seems like it is fair to assume you could move upward in terms of deployment this year off that kind of base. Is that fair summarization?
+
+Question_84:
+
+    Okay. Thanks, guys.
+

exam/part2_problem1/Problem_1_Conference_Call_Segments/call_26_answers.txt

@@ -0,0 +1,306 @@
+Answer_1:
+
+    That's correct, Betsy. As we said, substantially all of the $2.4 billion related to a build in our litigation reserves for matters that we have disclosed previously.
+
+Answer_2:
+
+    You bring up a good point. It does not relate to the previously announced Article 77. It does not relate to the remaining monoline exposure, given that we settled the FGIC closure within the context of our reserve level, so it relates to other mortgage-related matters outside of those that we have disclosed previously.
+
+Answer_3:
+
+    And I wouldn't interpret or necessarily assume that the build in the reserves suggest a settlement is eminent.
+
+Answer_4:
+
+    Sure, I think if you -- obviously, the numerator in both is the same and we saw during the quarter -- we saw improvements in OCI in the numerator and we saw some significant improvements in our threshold deductions. That numerator applies to both standardized as well as the advanced approaches.
+If you look at the standardized risk-weighted assets, the big driver down there, related to the reductions in our consumer real estate, both first mortgage as well as home-equity, is those portfolios reduced from longer dated assets. In addition, you had the seasonal decline within the card portfolio that helped, and that was moderated a little bit by the growth that we saw in commercial loans.
+So I think as you look at that Basel III standardized ratio, what was driving risk-weighted assets were actual reductions in exposure. There wasn't anything related to the models or assumptions that factored into that.
+If you move over to the advanced approach, where we reported at 9.9%, which was down a touch, the biggest change and we continue to work with and look to refine and take guidance that we are getting with respect to operational risk, the operational risk-weighted assets during the quarter as we continue to refine that, we're up about $50 billion and now represents almost 25% of our overall Basel III advanced risk-weighted assets. And I think as you look at relative to our peers, brings us -- puts us in line with where our peers are with that and we'll continue to refine and work through that in the future.
+
+Answer_5:
+
+    I'm sorry, Betsy, I missed the first part of your question on --
+
+Answer_6:
+
+    On the global markets, the trimming that we did was announced as sort of the annual trimming that goes on. You remember we always are adding -- and we had, frankly, record hiring from schools this year coming in so we always are adjusting the head count to keep the expenses in line based on -- we are going to have a lot of new people joining us here as we get to the summer that we have already made offers to, and it is kind of the general vetting.
+So I wouldn't put that as anything other than day-to-day expense management and also just the natural turnover in the business. The second part, Bruce?
+
+Answer_7:
+
+    Yes, on branch optimization as we look at that, and I think you really get a sense for the progress within branch optimization when you flip to the Consumer and Business Banking segment. A chunk of that relates to new BAC, and you can see over the course of 12 months as we have taken the branches down by about 300 units, that has contributed to on a year-over-year basis the $180 million of expenses that we saw during the quarter.
+
+Answer_8:
+
+    Betsy, so this is a long-term strategy, so whether it is New BAC or not, we will continue to optimize the platform. And what we show you back in the appendix slide is the mobile banking growth is pretty strong. So at the end of the day, if you look at it across the last 5 or 6 years we have more customers, a lot more deposits and a lot less cost structure as we reposition to meet the customers' changing uses of first computers then phones and the enhanced effect of the ATMs.
+So you should expect those techniques to continue. But be that as it may, we also still have 7, 7.5 million people come in our branches every week that are great opportunities to engage with customers that we also continue to see strong foot traffic. So we are manning this to meet those needs from both the people who come into the branch and the people who use the automated technique. And that is the challenge as we go forward.
+I think we have done a pretty good job of bringing them down and keeping the expenses moving with the customer flow.
+
+Answer_9:
+
+    We will adjust -- every month they keep looking at it and making adjustments as they look over multiple years in the future, but if you remember originally we said we would get around 5,000 out of New BAC. That was kind of a number we gave you and we are there.
+But also remember that what you define as a branch will change. We have these express branch formats where there are salespeople plus what we call ATAs, which are ATM machines that you can actually pull up -- work with tellers directly. It allows you to cash checks to penny, authenticate without your card to stick into the machine, the same things you do with a regular teller, and so it is all important to us.
+I think focusing on the numbers as opposed to the overall cost of the structure, all of the parts is and that is what I focus on. If you look at that, we continue to drive that down, taking all the costs of the whole infrastructure relative to the deposit base, that is down from -- it is down near 200 basis points.
+
+Answer_10:
+
+    Sure. The first is -- why don't we start -- if you start with the -- within the global banking segment, you saw loans relative to year end up about $2.5 billion and up more significantly than on a year-over-year basis.
+We say that we continue to see good loan demand within the commercial space. It is across both C&I as well as real estate, so we feel good about that.
+But as I did note that during the quarter, there were certain opportunities and things that we looked at that we did not do in that we very much have a focus not just on growing the loans but the returns that is generated from those loans. And going forward, you should expect to see us grow loans but we are going to be prudent and it needs to be at returns that makes sense and for those customers that we have good relationships with.
+If you move to the consumer side, as I did note, and you can see it when you look within the CSDB segment, that the majority of the loan reduction we saw in consumer was really three things. It was the payoff of first mortgage loans that were held for investment purpose within the investment portfolio; it was the continued reduction within the home equity business where we have about $3.5 billion of home equity loans that repay each quarter. Those tend to be older vintages, and we get back to the home equities that we are doing when I finish, and then the third was the overall card balances were down about $4 billion, which on a seasonal basis is what we would expect and we would look to see those card balances stabilize as we go throughout 2014.
+As it relates to new activity, we did note that the pipeline is up about 23%. What we saw was not materially different than others in the first month, two months of the quarter.
+Applications in volume were down with some of the weather, but we did see a pickup in that activity which led to, obviously, off of a low base, a 23% increase in the pipeline as we go into the second quarter. The other thing I would reference is if you look back, you can see that we have been able to increase and move up what we are doing on the home equity fronts where we have $2 billion of originations during the quarter.
+And I would just note from a credit quality perspective and what we are seeing there, those loan to values tend to be in the sixties with FICO scores deep into the 700s. So that area is providing an opportunity for us as well.
+
+Answer_11:
+
+    Especially in the consumer business, the runoff affects the overall numbers.
+
+Answer_12:
+
+    Because remember, we have still got the portfolios that we inherited from acquisitions that they are still running through the system.
+
+Answer_13:
+
+    Are you referring to the range of possible loss that we disclose when we put the Q out?
+
+Answer_14:
+
+    Yes, I think we are working through and refining that. We don't put that out with earnings, we put it out when we file the 10-Q.
+But to your point, I don't think there is -- we obviously made progress with getting FHFA put behind us as well as FGIC and some other related matters. And we are working through where exactly that range of possible loss comes out, but hear your point.
+
+Answer_15:
+
+    Yes, as we noted in the script, that we did complete the final monetization of an investment that was a decent chunk of that. So I would not expect to see those revenues at those levels going forward.
+
+Answer_16:
+
+    Yes, keep in mind, you only pick up one day, Q1 to Q2, but I think you have a couple things, as I mentioned. You've got relative to the first quarter, you do have lower card balances given the seasonal bump that you see at year end that you carry a fair bit of during the first quarter.
+We did build up throughout the first quarter a significant amount of liquidity anticipation of those rules. That will contribute a little bit to the decline in the second quarter, and then as we solve for that, you would expect to see that move up, so nothing structural.
+We do have some seasonal stuff in the markets business that we do, that depresses things that touch in the second quarter. So as we said, it is obviously early in the quarter, but we are expecting a slight decline but then we would expect the trajectory to get back to the levels that we have previously talked about.
+
+Answer_17:
+
+    Sure. I think, as you look at it, one of the things that we continue to work through is that the debt footprint will come down, although more modestly, but what we are seeing is as we look at the levels at which we raised debt going forward, the cost of that has come down significantly. So you have some pick up there.
+You obviously have some pick up with some of the loan growth that we are seeing within the commercial space. And we continue to take deposit pricing down as well, although we are down to levels that are harder to get much lower. And I do just want to remind you, John, I know you know this that as we give this guidance, it backs out and it excludes market-related impacts that come out of FAS 91.
+
+Answer_18:
+
+    I think, John, I think you have to split between -- we continue to -- and I'd just remind, as you look at the litigation pipeline and you look at where we are, we have obviously gotten through the base rep and warrant with respect to the GSEs. We were able to get through and reach an agreement with FGIC, which is the fourth monoline settlement that we have, and then we are working through and the Article 77 case is going through a judicial process.
+So as we continued to reduce the number of outstanding litigation items that we have, that should obviously bode well for what I would characterize as the base litigation expense. That being said, I think we need to be realistic and you saw it this quarter that as it relates to the remaining couple of matters that we have disclosed, it can be lumpy and that it is just very hard to predict.
+But as we talked about in the presentation, during the quarter, we did have a pretty significant build as we continued to evaluate those positions as well as the discussions that we have that are parties to the litigation.
+
+Answer_19:
+
+    John, I think the simple way -- if you think about things that -- litigation matters that sort of arrived after 2008/2009, the cost of those in the P&L is very modest. If anything it's sort of new -- these costs really relate to the stuff before the crisis and the [Bonner] cleanup.
+So your point about what would be the ongoing litigation costs would be much, much lower. But the question is the lumpiness Bruce refers to the transition we have got left on a few of these matters.
+
+Answer_20:
+
+    I think that is fair, John. It can bounce around in any one quarter, but I think the provision number broadly speaking is in line with what we would expect over the next couple quarters.
+
+Answer_21:
+
+    So, John, one of the ways -- if you look at the supplemental material and the pages on the charge-off by product, you have got to remember that there is -- if you look at the credit card charge-offs, in US and domestic, they are down in the -- this quarter it was $700 million and a 3.75% charge-off rate. You're kind of hitting a place where the business is geared to have some amount of charge-offs and it is the way the business works, part of the cost of doing business through the credit costs.
+If you look outside that number, that is -- card charge-offs are like 80% of the charge-offs -- or 60%, 70% of charge-offs. And so they are going to be hard to get down a lot more. So there is work to do on mortgage charge-offs, home equity charge-offs, but if you look across the rest of the board, they are in pretty good shape.
+
+Answer_22:
+
+    I wouldn't highlight any real seasonality of note as it relates to drastic ups or downs throughout the quarter. The one piece that I would say that -- I think generally, rates in foreign exchange given where the market was and the fact that there was not a lot of volatility in the quarter was clearly negatively affected.
+And on the positive side, I would say that the overall credit trading businesses, whether it be loans, high-grade bond trading or high-yield bond trading, given market activity levels as well as our position from an underwriting perspective, were very strong during the quarter.
+
+Answer_23:
+
+    It's a very good question. What I would point out is, and if you go back to the fourth quarter of 2012, that was when we announced our significant MSR transfers and so as you look at where we are, as it relates to just pure MSR transfers, we are through the significant majority of what we would expect.
+We have got some cleanup in sparse smaller ones during the second, third and fourth quarters. We don't have any reason to believe, given they are small and who they are going to, that there will be a problem with the transfer. So we feel, and as it relates to getting to the expense targets with what is left to go, that will not be an issue for us.
+
+Answer_24:
+
+    Sure. Well, let me answer the last part of your question first, which is we would expect the core trajectory to trend down as we go throughout 2014.
+When you look at the -- and if you are looking on slide 7 and we compare the $13.8 billion to $13.6 billion, let me just consider and give you a couple numbers that affected that core. During the first quarter of 2014, as we continue to reduce headcount, we incurred over $100 million in severance expense on both an absolute basis as well as a year-over-year basis within those numbers, so you had $100 million to the negative there.
+The second thing is, and as we disclosed, we have been investing within corporate banking, cash management salespeople to a lesser extent, capital markets people and some of the technology that goes along with that. And we think as we look going forward we are through a lot of that investment but as I referenced in my comments, I would ask you to flip back up to page 26 because we are seeing the benefit from revenue growth from those investments and we would obviously expect those to moderate going forward.
+The other couple things that I would note there is if you look at, within the wealth management business, you need to consider within that area that we did have a $200 million-plus increase in revenue from asset management fees. So there is obviously compensation that goes out with that as well as some of the technology dollars that were spent for our Merrill One project that we have rolled out within the wealth management area.
+So I would just say as you look at that $200 million, the benefit from New BAC was clearly on a year-over-year, much more significant from that. But we are investing in the areas where we think and where we are seeing revenue growth. And we would obviously expect those investments, given that they have been made and are generating the revenues that you would expect those to moderate going forward.
+
+Answer_25:
+
+    Obviously we continue to look at that and we will continue -- we started after this -- as you know, in 2011, and so if you go back -- I think we had $80 billion-odd expenses when we started this thing and so we had been driving this down year after year after year but that doesn't mean it stops with New BAC. It's just the challenge inherent in the slow growth environment is how to manage the relative investment rate, expense growth rate versus revenue growth rate.
+And so that is something we as management continue to have to focus on. But if you think about the $13.6 billion and think about continuing to make some improvement against it and annualize that, add back whatever the $1 billion to the one-time retirement costs and then some litigation, you start to get into levels that we think are consistent with the earnings -- sort of restoring the normalized earnings pool.
+The question is -- and you are right, is that we have got to make sure that the investments we make are yielding the revenue benefits and we have got to keep the total expenses overall net. That is what we're up to.
+And I think the way to think about that is look at 3,500 more employees, headcount reduction this quarter and you will continue to see that work its way down. That is a leading indicator what is going to happen next quarter because those employees -- that is a spot-to-spot number went out there in the quarter but they are still in the payroll for the quarter.
+
+Answer_26:
+
+    If you think about the longer-term trend there as we had a big change in terms of fee structures in the consumer business broadly going back a few years ago and you kind of came through all that and that affected, what has happened now is if you just look at our card activity, our purchases on our cards are up by 5% or so quarter to -- last year to this quarter -- first quarter last year, fourth quarter this year. So we continue to see better than market growth in the activity levels that the general spending levels and things like that which helps on the interchange.
+Once we got off sort of the reductions that were due to the change, interchange rule. And so I think it will keep grinding forward based on just general activity but most of the real downdraft came out in 2011/2012, early 2013 timeframe.
+
+Answer_27:
+
+    The other point, too, is if you look at within the consumer business we actually saw service charges during the quarter were up about 3% on a year-over-year basis. So some of the card income tends to be seasonally higher in the fourth quarter. It drops in the first quarter then builds backup, but within the consumer space we were pleased with what we saw on the service charge line during the quarter.
+
+Answer_28:
+
+    And so if you go back and look at 17, we have been producing from a sort of 700,000 to 800,000 run rate in new cards to 1 million-plus. And those cards are being used as a core card by the customers, and such driving up the pay rate's still high so the balances aren't moving much but the activity underneath is moving.
+And we are still replacing some affinity portfolios that we sold and things like that. So our view is that the transactional behavior of our customers continues to grow and will benefit in some of the fee lines too.
+
+Answer_29:
+
+    You should look at relative to the $2 billion a quarter, we are in the $1.7 billion area.
+
+Answer_30:
+
+    That's correct.
+
+Answer_31:
+
+    That's correct.
+
+Answer_32:
+
+    You should expect it to hit the bottom line with just the one caveat that to the extent that there are revenue-related things that have costs attached to them, that could moderate that reduction. But ultimately, that would be a positive to the pretax income line.
+
+Answer_33:
+
+    I think if you go back and look at what we talked about in the fourth quarter, where we talked about where we would like to get to from an ROA, return on tangible common equity, and we talked about once rates starting to move up that as we looked out, if we look out at a couple years, that efficiency ratio should be in the high 50%s.
+
+Answer_34:
+
+    I think as we look at it, it is just the point in time that rates are up roughly 100 basis points across the curve. And, obviously, to the extent that we don't see rates move up, we are going to need to run harder on expenses to try to get it to the extent that the rate environment doesn't move up.
+
+Answer_35:
+
+    I believe it was roughly -- it was about 50% -- somewhere between 58% and 60%.
+
+Answer_36:
+
+    It would be -- the core tax rate we project out and look out over the years, the core would have been 31%, but you always have a little bit of noise when you -- and obviously it was a pretax loss. But the discrete item always kind of overwhelm things in a low period, but the base rate from which you are starting from is a 31% and it was just a little bit skewed given what we saw from a pretax loss perspective.
+
+Answer_37:
+
+    I am not sure what the context of that is, Mike, but the net flows in the wealth management business were around $11 billion, $12 billion this quarter, which was $16 billion or $17 billion -- nearly $17 billion to $18 billion due to long-term flows and $6 billion of short-term liquidity flows out through net of around $12 billion. If you look in the Merrill Edge platform, which is more akin to the online type of thing, I think we had 80,000-plus new accounts this quarter.
+The assets continue to grow; it topped 100 billion daily average trades. Darts are up I think 25% to 30% year-over-year, and so it continues to progress and we continue to see good asset flows there, too. So big, small, large, traditional, all that's sort of blended together, we operated the core consolidated franchise, you are seeing good momentum on both sides.
+
+Answer_38:
+
+    Well, let me just start -- the allocation of capital is how we take the capital that we have at the Company and push it out to the businesses. I think you need to go segment by segment within that, Mike, I think the first is that as you look at the global banking segment and look at the allocation and what we have done, the first is on a year-over-year basis you had average loans up about $30 billion so there were more loan balances against which you need to allocate capital.
+The second thing that I would say is as you look at that segment and you consider Basel III standardized ratios, they tend to risk weight almost all commercial loans at 100%, regardless of what the models would suggest they should be risk-weighted at. So I think the combination of the loan growth, along with some of the impacts from regulatory capital led us to increase what we did with respect to global banking.
+Within global wealth management, as you go back and refine operational loss models and assign operational risk capital, that was topped up as well as reflecting the fact that within the wealth management business that we have seen loan growth within that segment. So there was additional monies allocated there.
+And then as we look at, and just continue to refine and look at both comparables as well as asset mix we thought it was prudent to increase modestly what we saw within global markets. And as I said in my comments, when you consider it in the aggregate and we look at where we are at relative to peers, we have got virtually all of our capital at this point pushed out to the different businesses which is the way it should be.
+
+Answer_39:
+
+    I think the last one is what you have got to keep focused on.
+
+Answer_40:
+
+    I think when you look at it, as I commented, I think we give fairly fulsome disclosure in the 10-K as it relates to the matters that are out there. And when you look at the matters and compare where we are now to what is out there, that obviously from the K that FHFA was resolved and that was the $3.6 billion number we mentioned.
+You have seen resolutions during the quarter from an Allstate RMBS perspective. You saw resolution of force-placed insurance, you saw CFTB, OCC. And you saw the deal that we completed and announced with FGIC today.
+So as you work through and look at those matters, it largely with what's disclosed leaves you with respect to one monoline. And then in addition to the monoline the other remaining legacy mortgage-related matters that we put out in our disclosure.
+
+Answer_41:
+
+    I didn't give you a number. Let me give you a way to think about it.
+In our environment, coming out of the extreme issues in 2008 and 2009, we built a lot of personnel and headcount to get after this stuff and we are still finishing up the cleanup. And so if you look in the expense base, a lot of that has been in expense base for a couple of years. And then so if you think about something like our audit team, we doubled the size of our audit team in probably 2010 and it has been held fairly constant against that.
+Against the backdrop we probably divested tens of businesses. And the rest of the headcount in the Company has come down fairly dramatically from a high of around 305,000, I think.
+So the amount of control environment relative to the total cost structure has gone up. But the raw numbers haven't gone up as dramatically because, frankly, we've put them back, just a lot of men, in the 2010/2011 timeframe.
+So, it is our duty to get it right, it is our duty to keep working on it and make sure that we get these things wrestled to the ground. But one of the key ways that we are doing this is by focusing the scope of the Company.
+So the force-placed -- or excuse me, the products settlement this quarter, we quit offering those products a while ago, it just took a while with the OCC and the consumer bureau to finish up the negotiations and finish up the rebate. We have been sending money back to customers but we quit offering the product as an example.
+And so the idea of narrowing the products set, narrowing the geographic scope of the Company, making the Company a lot less complex; we will always be big, but we make ourselves less complex. But against that, a growing -- a strong growth in the controlled cost in the 2009, 2010, 2011 timeframe and then a flattening of that but relative to a smaller company is actually an increase.
+
+Answer_42:
+
+    Well, Merrill One is a new product they brought out and it has been successful. And like anything else, you put the product out there, you spend all the money to put the product together and then the assets come on it.
+And so we are feeling good about that tens of billions of dollars of assets that moved to the platform. It is a good platform for customers and for the advisors.
+I think more broadly, I talk about technology, if you look at the expenses we had going back after the crisis, we saw the Merrill transition expenses and all in we were spending around $3 billion on technology development a year. We now spend about $3.5 billion and obviously the transition expenses are out of there.
+So everything we are spending is to better the platform, better the business, invest in the growth. And again, some of your questions about costs, that number I don't expect to change going forward because it takes that kind of technology investment to drive the product capabilities of our Company, Merrill One being one product this quarter, along with a new card system, and new trading platform Tom and his team are in the middle of putting in, a new backbone for the Company in terms of our general accounting systems, which has been a tail end to going in and across the board.
+So across four- or five-year format, timeframe, we will replace almost every system in the Company but we would expect that to continue. So the GWIM, if we swung around off of last year we did more in other businesses, cash management, started building -- rebuilt the first -- the front end mortgage process and a lot of other things. This year we swung more to GWIM and it is really a decision of which business we invest in at which time and they asked for more investment this year.
+
+Answer_43:
+
+    Well, I think the final supplementary leverage ratio rules that reflected that came out in April. And so the numbers that we have given you where we are above the 5% at the parent and the 6% at the bank reflects the impact of those rules with respect to netting and the other changes. So the numbers we have given you reflect that April release.
+
+Answer_44:
+
+    Yes, that's correct.
+
+Answer_45:
+
+    I think I will say that our focus has been on wrapping up the work, given what the April pronouncement is. And I am not -- my understanding was that the Fed -- I think what came out in April is what we are assuming that we are going to need to operate in and if there is something else that changes where there is some benefit, that is great, but our assumption is we are going to be living with what came out on April 8.
+
+Answer_46:
+
+    I would make a couple points here. If you go back, the guidance that we have given is that we would grind up from roughly a $10.5 billion number and as we look out to the third and fourth quarter, that is what we see in our numbers.
+I do think there have been -- relative to if you go back two, three, four quarters ago, several things that have changed. The first is that as we have worked hard to get in the position that we are in from an LCR perspective, we have -- not only LCR but with the rate environment that we are managing the OCI risk that we have directed more of the investment portfolio to shorter dated treasuries and mortgage-backed securities.
+And as you go out over a couple of quarters, that has a negative impact. The second thing, as you look at where we are and you look at the forward curve, our assumptions on what yields are going to be that we can reinvest in outside of the switch and mix, obviously those yields have not moved to the extent that the forward curves would have suggested at that point.
+And I would say, generally with respect to the loan portfolio, I wouldn't say there is much changed. I do think the one thing to note that we have not talked about, if you look at within our global banking segment, this is the first quarter in a while where we have actually seen the loan pricing spreads stabilize and actually, in certain of the portfolios, move up a touch, so that is a positive.
+I don't think there is anything to your question, that material that there are just some small things here and there. And we wanted to update and share our thoughts with what we thought the second quarter would be, but longer-term, I think we are still in the same place as far as the 10, 5 grinding up.
+
+Answer_47:
+
+    Yes.
+
+Answer_48:
+
+    I would just say, I hope so but I wouldn't -- let's just get it down to that level and we'll figure out what we can do from there. It's been an arduous task and there is still a lot of work ahead.
+
+Answer_49:
+
+    I would say that we have said we are above 5%. We have said that assuming that the Buffett preferred amendment gets done that adds roughly another 10 basis points, which obviously helps move us up.
+And you can assume that -- the only other guidance I would say is that the bank ratio relative to the limit is stronger than where we are with the parent today. But once again, the Buffett amendment will help.
+
+Answer_50:
+
+    Your point, Marty, is a good one, which is that the operational risk models are based on a fairly long time series as we look at it, and one of the things that we do continue to try to discuss and stress is that a lot of those operational risk losses are with respect to activities that we no longer engage and have no intention to engage. There are some of that dialog does continue, but your point, which is a fair one is that the time series are fairly long, and it will remain out there until the data runs out and I wish there was more that I could say but your point is a fair one.
+
+Answer_51:
+
+    Well, I think your point, Marty, is the one that we are working through. And in effect, we have done what you suggested that we have done in that if you look at those activities that led to those losses, we are no longer engaged in those activities.
+If you look out at -- we are not doing business with monolines from a new rep perspective. You look at private label securitizations, that activity was rep and warrants, it is not continuing.
+So we think we have largely done that and I think the question just going forward is if you have proven and you clearly are outside of the activity is there any relief to be had? Not the way that it works now and we will just have to work through and deal with it.
+
+Answer_52:
+
+    There was really nothing. I think that the comment that we made was that the question of the hedging performance this quarter relative to a year ago. So the hedging was still a positive number, it was just less so on a year-over-year basis.
+
+Answer_53:
+
+    If you go back, we have been pretty consistent that the reason for the investment portfolio is to preserve the long-term value of the deposit. And as you look at that portfolio, it is very clear there are only three things that we do within that portfolio.
+There is treasury securities, there is agency securities and there is AA and AAA super-sovereign type activities. And as it relates to becoming a little bit more asset sensitive, we just think given the first -- and you have seen a large portion of it happen that to drive and get to the point we have with LCR, the shift in the portfolio helped this quarter.
+It has the same benefit, as I said, of shrinking and reducing your OCI risk as you go through this. And we are not interested in starting to try to do things from a derivative and other perspective to somehow change that. The investment portfolio needs to work with how we set it up and we are going to be prudent with respect to how we do it.
+
+Answer_54:
+
+    Nancy, we kind of did that in 2011, we got out of all of the direct-to-consumer. So basically we have focused the business on really supporting the core customer base and not trying to drive standalone market shares in the scheme of things.
+And so what has happened to that is as we sold off the non-core servicing we have gotten down to a significant less number of loans serviced and your originations, $10 billion just this quarter are all direct-to-consumer, which is the second highest total in the country, direct-to-consumer mortgages so I think we are comfortable where we are. Now the question is, with the LAS aside, the core business, what does it look like?
+It will be a small business -- smaller business. It will generate customer, mortgages for our customers because it is a core product they need. But also that sales force, quite frankly, sells other products and does other things for us, refers people for other products.
+So I think that the days of being a 20% market share and stuff are far behind us. The days of being a 4% market share direct-to-consumer and growing are there and we will make a little -- we will make some money in it and we will make some money servicing those four loans through the delinquency statistics in those and what we have been doing in that are far superior to even what we would have predicted and that is how we will run the business.
+So effectively, we have done what you said. It is just that we are still sort of bound by the overhang of effectively the LAS portfolio still working through the system and the 300,000 delinquent mortgages of which only about -- the delinquency of the core portfolio is about 50,000, 60,000 of them.
+
+Answer_55:
+
+    That is different in the sense that, on the card side, we actually took it down unfortunately through charge-offs and  more than not. But I think we have been relatively consistent on a domestic piece, around $90 billion-odd of outstandings and kind of grinding up and down from there and producing more cards that are coming out of the wallet first from our customer from 700,000 we showed you two years ago first quarter to 1 million plus this quarter and pretty consistently was 1 1/3 million plus the third quarter almost 1 million in the fourth quarter, another 1 million plus this quarter.
+But the core of what we see there is actually usage of those cards. They are still 60%-plus to our primary customers, but also usage of the cards because of the core three or four card products is driving it. And we have to go some good affinity program.
+So I think the card business is -- likewise, it is where we want it but it is a bit more of a payment stream business than it is a pure lending business as it was in some of the past. So the balances ought to be stable and ought to grow, but the high-quality portfolio of the payment rates in the 20%s now, means people pay us off because they are using a transaction card.
+
+Answer_56:
+
+    Yes, I think -- I just want to be clear that we've said that we thought that the core MII ex-market-related impact would be down slightly in the second quarter and then build modestly through the rest of the year. What you will see in the second quarter, given that you have a full quarter of the liquidity, it is on the books, you would expect to see that the NIM in the second quarter moderate a little bit, given that you've got the full quarter of the liquidity and then, obviously, as it starts to grow during the latter half of the year, you would expect the NIM to follow that.
+
+Answer_57:
+
+    And Nancy, over all, now that we have a better insight as to what these rules are we then have to go back and -- we've got a 7% change of common equity ratio so we have very strong common equity ratio. We have to go back and sort of look at -- Bruce actually -- with the rules now in hand he can start to go work and say, okay, how do we optimize the next round because in terms of how we create maximum liquidity per dollar a balance sheet size, right?
+
+Answer_58:
+
+    Sure, there were two things that come Jim, banged this up -- good question -- to the tune of about $50 million each. There were some home equity stuff that we just wrote off that was going to have foreclosure costs that were greater than what it was going to be worth to try to get repaid.
+So that happened during the quarter. And then the second thing is there was some regulatory guidance that was given as it related it to second lien loans that were behind first lien that have been modified or charged-off, that we saw during the quarter. We think we got most of it in this quarter, there may be a little bit left in the second quarter, but a good question that those two items banged us up to the tune of about $100 million and that was the reason for the change.
+
+Answer_59:
+
+    I think what we have seen is the overall markets continue to be strong. The pipeline and the amount of activity and discussions from an M&A perspective is encouraging. And I would say as we go forward that we talked about, we felt the pipeline was strong at the end of the year.
+And as we look at the pipelines, they have not changed materially one way or the other at the end of the first quarter versus the end of the year. And as we said, we feel very good about the quarter with the revenue side being north of $1.5 billion and the highest of any firm that has reported at this point.
+
+Answer_60:
+
+    Super. Well thank you very much, everyone, for joining and we will talk to you next quarter.
+

exam/part2_problem1/Problem_1_Conference_Call_Segments/call_26_presentation.txt

@@ -0,0 +1,81 @@
+
+Thank you. Good morning. Thanks for joining us on the web as well as the phone this morning.
+Before I turn the call over to the CEO, Brian Moynihan, and CFO, Bruce Thompson, let me just say that we may make some forward-looking statements. For details on those, I will refer you to our -- page 24 and 25 in our earnings deck material, on either the website or our SEC filings. And with that I will turn it over to Brian.
+
+Thank you, Lee. Good morning, everyone, and thank you for joining us to review the first-quarter results.
+As you can see from our numbers we report a loss this quarter. That lost reflects the cost of resolving more of our legacy mortgage issues as well as adding reserves primarily for previously disclosed legacy mortgage related matters.
+As disappointed as we are in the bottom line results, we are pleased to report that the businesses reported earnings at a level that allow us to substantially offset these losses. And also at the same time, we are able to still grow and improve our Basel III standardized regulatory capital ratio during the quarter.
+Bruce will take you through the particulars of our results. But first I wanted to spend a couple of minutes looking at the progress we continue to make across the customer groups that we serve.
+In particular, we added some slides to the appendix on pages 17 and 18, which highlight multiyear trends across our customer groups. Let me just touch on a few of those and connect them to our results.
+When you think about our broad consumer franchise for mass-market consumers, affluent and wealthy consumers, as we think about the mass-market group, the strategy in our retail segment has been to lower the cost of service while we improve our customer experience. We do that by continuing to optimize our delivery networks of all types in response to customer behavior changes.
+Banking centers and basic teller transactions continue to decline as customers move their business to mobile and online transactions. Yet we still have many millions of visits each week to our branches.
+But in the aggregate, our self-service channels of ATM, online and mobile transactions continue to grow. This quarter, more than 10% of all the deposit transactions that consumers make in our Company are now done through mobile devices as people effectively carry a branch in their pocket. This, coupled with other measures, allowed us to reduce our costs in our consumer banking business, 4% from last year's first quarter and allows us to continue to invest in other areas to further improve customer satisfaction and grow sales.
+On the preferred side of our consumer business where we serve mass affluent clients, we continue to invest in this group by adding sales specialists. We now have more than 6,500 sales specialists concentrated in the top banking centers. We also increased service associates to drive satisfaction to these clients as well.
+The end result when you put all the consumer business together is the segment is organic deposit growth of $23 billion from last year to a total of $535 billion in deposits. On the investment side of this general consumer client base, our Merrill Edge assets grew 21% from last year and when we put the segment together, the earnings in our consumer and business banking business improved 15% year over year to nearly $1.7 billion this quarter.
+As we move through the wealthy part of our consumer client base, in our wealth management business with US trust and Merrill Lynch, client balances again grew this quarter, now totaled over $2.4 trillion. This has driven record asset management fees in this segment and we are seeing growing demand from these customers for other banking products as loans and deposits continue to increase. This business made over $700 million after tax this quarter and had a pretax margin of more than 25% for the fifth consecutive quarter.
+We'll move to our Company side of our house, our commercial and corporate client base, we continue to retain our leadership position in investment banking fees with $1.5 billion in fees received this quarter. We also saw solid loan and deposit flows this quarter in these -- from our commercial customers. These activities drove a 6% increase in revenue in our global banking business from last year.
+In our global markets business, which serves investment clients, we earned $1.3 billion after tax as our top-tier sales and trading platforms generated over $4 billion in revenue this quarter. So we put it all together we have leadership positions that we continue to work on in each area and continue to see good momentum across the quarter. We are pleased also to be in a position to return capital to shareholders as we increase dividends in addition to our newly authorized share repurchase program.
+As usual, as we see each day each quarter remain focused on executing this strategy that connects the capabilities of this Company with as customers and shareholders for your benefit. With that, I want to turn it over to Bruce to cover the earnings results.
+
+Thanks, Brian, and good morning, everyone. I am going to start on slide 2 and work through the first-quarter results.
+We did record a loss of $276 million, or $0.05 per diluted share this quarter. Driving the loss during the quarter was litigation expense of $6 billion, which cost us roughly $0.40 a share during the quarter. We recorded $3.6 billion in litigation expense for the previously announced FHFA settlement and we recorded another $2.4 billion primarily associated with the increase in reserves for previously disclosed legacy mortgage related matters.
+Revenue during the quarter on an FTE basis was $22.8 billion, which was $1.1 billion higher than the fourth quarter of 2013, but below the $23.4 billion we saw in the first quarter of 2013. On a linked-quarter basis, our revenues benefited from improved sales and trading results and asset management fees and were offset by lower net interest income as well as lower mortgage banking revenue.
+Compared to the prior-year period, revenue was down slightly on lower net interest income, mortgage revenue in sales and trading but did benefit from higher asset management fees. Total noninterest expense during the quarter was $22.2 billion, but did include $6 billion of litigation expense as well as $1 billion of retirement eligible incentive costs that we recognize during the first quarter of each year. If we exclude these items from both the first quarter periods for comparability of the underlying trends that we saw within the Company, expenses did improve by $1.2 billion, or 7% and were driven by lower LAS non-litigation costs as well as some of the new BAC improvements that we saw.
+Versus the fourth-quarter 2013, the slight increase in noninterest expense reflects increased revenue related compensation in our market business and was partially offset by the decline that we saw in our LAS non-litigation expense reductions. Provision for credit losses was $1 billion during the quarter, an increased $673 million versus the fourth quarter of 2013. In the first quarter this year, we released $379 million from our loan-loss reserves and that compares to a release of $1.2 billion in the fourth quarter of 2013.
+Before we move off of this slide, let me mention that we had a few other items in the quarter that in the aggregate benefited EPS by about $0.04 a share as higher equity and debt security gains, net DVA and the resolution of tax matters were positives and they were offset in part by the cost of retirement eligible incentives as well as the negative market-related impacts on our net interest income.
+One last point on FVO and DVA, this quarter and moving forward, we report the net impact of these two items as one net DVA valuation number for our derivatives and structured liabilities within our global markets business.
+On slide 3, you can see our period-end balance sheet increased from the end of 2013 as we grew both cash and securities in light of increasing liquidity requirements in our primary banking subsidiary. Ending loans declined $12 billion led by lower residential mortgages, principally within our discretionary loan portfolio as well as seasonal declines in credit card.
+Loans were up in our global banking segment, which I will cover in a bit. Period-end deposits were up $14 billion from the fourth quarter and are up year-over-year by more than $38 billion.
+Our tangible common equity ratio declined to 7% due to the increase in liquidity that I mentioned earlier. Tangible book value did increase slightly during the quarter and we repurchased 87 million shares for $1.4 billion, which completed our share repurchase program that we established at this time last year. Following our CCAR result, we announced a new $4 billion share repurchase plan as well as the intention to increase the quarterly common dividend to $0.05 a share in the second quarter of 2014.
+We move to slide 4, we look at our capital ratios under Basel III. Recall this is the first period reporting under Basel III transition which became effective January 1 of this year. Under the transition roles, our common equity Tier 1 capital was $151.6 billion, while our risk-weighted assets were $1.28 trillion, which resulted in a ratio of 11.8%.
+While there are no comparative reporting periods, we did provide pro forma fourth quarter of 2013 numbers to allow you to see the slight movement up in the ratio during the quarter. We do continue to provide our Basel III numbers on a fully phased-in basis as we have done in prior periods. The numbers in the chart reflect risk-weighted assets under the Standardized Approach with the common equity Tier 1 ratio improving to 9.3% and remaining above our 8.5% proposed minimum requirement in 2019.
+If we move to the advanced method, our CET1 ratio was 9.9% and was impacted by an increased level of risk-weighted assets related to operational risk, which were largely offset by reductions in other risk-weighted assets as well as the increase in capital. We move to supplementary leverage ratios, we estimate at the end of the first quarter of 2014, we exceed the recently updated US rules that apply in 2018. Once again, that would mean our bank holding company is above the 5% minimum and our primary banking subsidiaries, BANA and FIA, are both in excess of their 6% minimums.
+I also want to remind you that our Tier 1 capital and supplemental leverage ratios will benefit by approximately $2.9 billion in the second quarter of 2014, if we receive shareholder approval to amend our Series T preferred stock. One last item I want to note regarding capital in the first quarter of 2014, it includes the adjustment to capital allocations across our business line.
+We included a slide in the appendix that notes that the new allocation. As you look at that, you will see that the primary adjustments were allocating more capital to our global banking business, given the loan growth we have seen in that segment and to a lesser extent, increases in both our global markets as well as our global wealth management business. As a result of these changes, the amount of unallocated capital that tell that the parent declined from $16 billion to $5 billion at the end of the first quarter of 2014.
+If we move to slide 5, funding and liquidity, our global excess liquidity sources increased more than $50 billion to a record level of $427 billion as a result of seasonally strong deposit flows as well as some of the bank debt issuance that we did earlier in the quarter. Our total long-term debt of $255 billion was $5 billion higher than the fourth quarter of 2013. These figures do not include the $7.6 billion of debt issuance that settled on April 1 and was executed at more favorable spread than our existing debt footprint.
+That issuance has enabled us to maintain our strong excess liquidity position at the parent, despite the cash flows required by both scheduled debt maturities as well as recent litigation settlement. Our time to required funding remain very strong at 35 months with parent company liquidity unchanged at $95 billion.
+Moving forward, and as we consider the FHFA settlement, we would expect parent issuance to be below maturities as the focus evolves towards continued yield improvement following the past several years of sizable balance reductions within our debt footprint.
+If we move to slide 6 on net interest income, net interest income on a reported FTE basis was $10.3 billion, which was a decline of $700 million from the fourth quarter of 2013. That decline was driven by a swing of roughly $500 million associated with our market-related adjustments, or FAS 91. FAS 91 was approximately $300 million negative in the first quarter of 2014 compared to the $200 million benefit that we saw in the fourth quarter of 2013.
+The balance of the decline was largely due to two less interest accrual days in the first quarter of 2014 relative to the fourth quarter of 2013. Our net interest income, if we exclude those market-related adjustments, was $10.6 billion, once again down a little over $200 million from the fourth quarter of 2013. Other drivers in the quarter were lower average consumer balances and yields, which were largely offset by a reduction in long-term debt costs as well as continued declines in our deposit pricing.
+As a result of these net interest income impacts, as well as the higher earning assets, the net interest yield, once again adjusting for FAS 91, declined 3 basis points, 2.36% in the first quarter of 2014. As it relates to asset sensitivity in the balance sheet, we continue to remain poised to benefit from higher rates, particularly when the short end of the curve moves up. As we continue to manage our OCI sensitivity, we are also mindful of both liquidity and leverage rules.
+Our first-quarter 2014 increase in securities included shorter duration treasury securities instead of mortgage-backed securities and these treasury securities are much more LCR and OCI friendly, but do have lower yields. Given the continued growth that we have seen in our cash balances at central banks as we increase liquidity, we have adjusted our net interest yields to reflect the impact of adding these low yielding cash deposits once again at central banks into earning assets. This had no impact on net interest income but prior-period net interest yields have been adjusted to reflect the change.
+Given the added liquidity during the quarter, coupled with the average balance impact of seasonally lower consumer balances, we expect net interest income in the second quarter of 2014 may be slightly lower compared to this quarter's $10.6 billion level, excluding market-related adjustments, before moving up modestly throughout the second half of 2014.
+We move to our expense highlights on slide 7, noninterest expense was $22.2 billion in the first quarter of 2014 and once again included a $6 billion charge for litigation expense and a $1 billion cost for our retirement-eligible incentives. As previously mentioned, the $6 billion litigation expense did include the cost of the FHFA settlement as well as $2.4 billion in increased reserves associated with our previously disclosed the legacy mortgage-related matters.
+If we exclude the litigation and retirement eligible incentive costs, our total expenses were $15.2 billion and declined $1.2 billion from the first quarter of 2013 driven by lower LAS costs but were up roughly $200 million from the fourth quarter of 2013 on incentives related to improved sales and trading revenue. Legacy assets and servicing costs, ex-litigation of $1.6 billion declined more than $250 million from the fourth quarter of 2013. As you look at that $1.6 billion number, the savings we generated during the quarter were 40% of our targeted quarterly reductions that we have communicated to you previously.
+We continue to make progress on cost savings and as a result our expense program targets for both New BAC as well as LAS remain unchanged.
+Turning to slide 8, you can see our credit quality continued to improve again. Net charge-offs declined $194 million to $1.4 billion, or a 62 basis points net loss ratio. Delinquencies, a leading indicator of charge-offs, showed improvement again as well, and our first quarter of 2014 provision expense was $1.0 billion and we released approximately $400 million of reserves during the quarter.
+Looking forward, we would expect provision expense for the balance of the year to reflect both modest reductions in net charge-offs as well as reserve releases. Let's move to slide 9 and go through the different business segments, starting with consumer and business banking. Net income of nearly $1.7 billion in the first quarter of 2014 was up 15% from the first quarter of 2013.
+Lower expenses, higher service charges, a portfolio divestiture gain and lower credit costs all drove that improvement in the first quarter of 2013. Return on allocated capital within the segment remains very strong at 23% this quarter. As we reflect on customer activity during the quarter, mobile banking customers grew 19% from the first quarter of 2013 to 15 million customers and customer deposit transactions using these devices now represent 10% of all transactions.
+Average deposits of $535 billion are up organically $23 billion, or 5% compared to the first quarter of 2013 and our rates paid were reduced nearly in half to 7 basis points. Our brokerage assets surpassed $100 billion in the quarter and are up 21% year-over-year with the growth split fairly evenly between both increases in flows as well as valuations within the market.
+Our card issuance remains strong at 1 million new accounts in the first quarter of 2014, but our end-of-period balances are down seasonally from the fourth quarter of 2013. Importantly, our risk-adjusted margin remained above 9%. Overall, our credit quality within the segment remains strong as our net charge-offs declined versus both the linked-quarter period as well as the year-ago period.
+Provision expense was $812 million during the quarter. Net charge-offs improved $360 million from the year-ago quarter, and we released $69 million in reserves this quarter, which is $220 million less than the first quarter of last year and down $426 million from the fourth quarter of 2013.
+One litigation item to note before we move off the consumer results is the resolution we reached last week with the CFTB and the OCC on issues related to the marketing, sale and billing of credit card debt cancellation and ID theft protection products. This settlement included cash payments to both regulators and provides for redress to customers and was covered by reserves that had been established in prior periods.
+We move to slide 10, consumer real estate services, the higher loss in the quarter was driven by $5.8 billion of litigation within the segment. Let's first focus on the reported subsegment of home loans where we record the origination of consumer real estate.
+Our first mortgage retail originations of $8.9 billion were down 24% from the fourth quarter of 2013, in line with overall market demand and drove a 32% reduction in core production revenue as margins held relatively steady compared to the fourth quarter of 2013. We continued to reduce production staffing levels in the quarter, consistent with the volumes that we are seeing, but those expenses don't flow through the P&L immediately.
+Home equity originations of $2 billion were up from the fourth quarter of 2013 level. If we move to legacy assets and servicing subsegment, once again the driver here is the previously mentioned litigation costs. On litigation costs you saw the press release on March 26 regarding our settlement with FHFA, which identified the $6.3 billion payment and led to the $3.6 billion litigation charge this quarter.
+We are obviously pleased to have this matter put behind us. Within our earnings release we also included information regarding a settlement with FGIC and related parties on involved securitization trusts which resolves all outstanding litigation in rep and warranty claims on second lien loans for approximately $900 million to $950 million, depending on the final outcome of two of the remaining trusts -- two of the nine remaining trusts, excuse me.
+This settlement was covered by reserves that we had established in previous periods. The primary revenue component within the LAS subsegment, servicing revenue, declined $205 million versus the fourth quarter as the size of our servicing portfolio continues to decline as it aligns with our market share of production. And we also had less favorable MSR net hedge performance during the quarter.
+Also impacting revenue during the quarter was rep and warrant expense of $178 million, which increased by roughly $100 million from the fourth quarter of 2013, given the settlement during the quarter with FHFA. From a cost of servicing perspective, our 60-plus day delinquent loans were reduced by 15% to 277,000 units at the end of the first quarter of 2014. And once again, our LAS expense, ex-litigation, declined $262 million to $1.6 billion.
+We move to slide 11, global wealth and investment management, during the quarter, we achieved record revenue of $4.5 billion, which was up 3% from the first quarter of 2013 and 2% from the fourth quarter of 2013. The improvement was driven by record asset management fees during the quarter.
+Net income of $729 million was slightly higher than the first quarter of 2013, but was down modestly from the fourth quarter of 2013 as expense was 3% higher than both periods. Expense increased compared to both periods on higher revenue-related incentives increased volume-related costs as well as certain investments in technology. Notwithstanding those increases, our pretax margin remains strong, north of 25% for the fifth consecutive quarter.
+Our return on allocated capital was 25% but declined from prior period as the relative earnings stability was coupled with the increased capital allocations that I mentioned previously. Client engagement remains strong in the markets providing additional tailwind as our client balances increased $30 billion from the year-end 2013 to $2.4 trillion.
+Long-term AUM flows of $17.4 billion for the quarter were the second highest in our Company's history. Ending client loan balances of $120 billion reached record levels and are up 9% year over year.
+One other highlight I would like to mention is the core dated referral efforts that we are seeing across wealth management and the banking groups as we funded more than 300 Institutional Retirement plans worth more than $2.4 billion in client assets during the quarter.
+On slide 12, global banking, earnings during the quarter were $1.24 billion. Earnings compared to the first quarter of 2013 show a 6% improvement in revenue that were offset by higher expense.
+Investment banking fees for the quarter were $1.54 billion, consistent with what we saw during the first quarter of 2013, but 11% lower than the record level that we saw during the fourth quarter of 2013. We do believe for the second consecutive quarter this would rank us as a global leader in investment banking fees.
+The remaining revenue drivers in this business, treasury services and business lending, show very positive trends year-over-year across both our commercial as well as our corporate client base. You can see some of these metrics on page 26 of the supplemental information that we provide to you.
+Provision was up $116 million from the first quarter of 2013, driven by additions to our loan-loss reserves. The first quarter of 2014 included a build of $282 million versus a build of $81 million in the first quarter of 2013 and $434 million in the fourth quarter of 2013.
+The expense increase in the quarter of $186 million on a year-over-year basis relates to investments in technology for our global treasury services and lending platforms, additional client facing personnel and to a lesser degree, some litigation that we saw during the quarter within this segment. We look at the balance sheet, average loans are up $27.4 billion, or 11% compared to the first quarter of 2013 and are up $2.6 billion compared to the fourth quarter of 2013. The overall pace of growth that we are seeing has slowed from the past few quarters as pricing for loans is quite competitive and we have chosen returns over growth in certain cases.
+Return on allocated capital was 16% and is down from prior periods reflecting stable earnings that were more than offset by a 35% increase in allocated capital.
+We switch to global markets on slide 13, excluding net DVA, we earned $1.24 billion in the first quarter, which is in line with the first quarter of 2013 and up $893 million from the fourth quarter of 2013. Ex-DVA, sales and trading revenue was $4.1 billion, 1% lower than the first quarter of 2013, but 37% higher than the fourth quarter of 2013.
+Our FICC sales and trading revenue was down 2% compared to the first quarter of 2013, but we would note it would be down 15% after adjusting for a monoline write-down that we incurred in the first quarter of 2013. Our rates and currencies experienced declines for market volumes and lower volatility during the quarter. I would note that our FICC business did increase 42% over the fourth quarter of 2013.
+Equity sales and trading flat with the first quarter of 2013 and up 28% from the fourth quarter of 2013. Expenses were stable compared to the first quarter of 2013 and when we compare expenses to the fourth quarter of 2013, they increased $453 million on higher revenue-related expenses, after excluding litigation of $655 million that we recorded in the fourth quarter of 2013 within this segment.
+Our trading-related assets, on average, remain flat at $440 billion on a linked-quarter basis. Our return on allocated capital during the quarter was 16%, even after we consider a 13% increase in allocated capital.
+On slide 14 we show all other. Revenue was down $193 million from the fourth quarter of 2013 on lower net interest income, which was driven by the swing in market-related adjustments that I discussed earlier and was partially offset by higher equity investment gains which were driven by the final monetization of an investment. First-quarter 2014 expense includes the retirement-eligible incentive costs which are in line with last year but still drive the expense variance compared to the fourth quarter of 2013, and was partially offset by lower litigation costs.
+Provision benefit in the quarter was relatively flat to the fourth quarter of 2013 but did improve $385 million from the first quarter of 2013. Net charge-offs of $206 million improved $88 million from the fourth quarter of 2013, and $279 million in the first quarter of 2013.
+Our first quarter of 2014 results in this segment included $341 million reserve release compared to a release of $482 million in the fourth quarter and $235 million in the first quarter of 2013. During the quarter, our effective tax rate was impacted by our loss position. For the rest of 2014, we would expect an effective tax rate of approximately 31% absent any unusual items.
+We make a few comments before we open it up for questions. We obviously don't like to report a loss to shareholders but this quarter we achieved resolution of rulings around significant legacy matters -- FHFA, FGIC, CFTB and OCC as well as the positive court ruling on Bank of New York Mellon private-label securities matters, which is under appeal just to name a few.
+We established additional reserves to help address previously disclosed mortgage-related issues and we did that and still built our already strong Basel III standardized capital ratio. Our supplemental leverage ratios at both parent and banks are compliant well in advance of their 2018 implementation dates under the more stringent new rules.
+Our liquidity is at record levels and we are well positioned to meet the new LCR requirements. Asset quality is strong and improving. Our expense programs show good progress and most importantly, four of our five operating segments reported revenue and earnings that were essentially flat or higher than the prior year.
+In our fifth segment, legacy assets & servicing, we made progress on legacy issues. We drove down 60 day plus delinquent loans and our costs, excluding litigation, declined $1 billion from last year's first quarter.
+So as we move into the second quarter of this year, we feel that we are better positioned than we were coming into 2014. And with that, we will go ahead and open it up for questions.

exam/part2_problem1/Problem_1_Conference_Call_Segments/call_26_questions.txt

@@ -0,0 +1,266 @@
+Question_1:
+
+    Hi, good morning. A couple of questions. One on the litigation reserve build that you did in the quarter, you mentioned that the FGIC and the trust settlement were fully reserved for. So that means that none of the $2.4 billion increase in reserves in 1Q that you called out was for that settlement?
+
+Question_2:
+
+    So I guess I am just wondering, if you could give us a sense or color as to what you are referring to there. It doesn't look like that went to the monolines or the PLS so is this something that is broadly mortgage related or is it something else? Given that it is such a large reserve build, does it suggest that there is another settlement on the near term?
+
+Question_3:
+
+    Okay.
+
+Question_4:
+
+    Okay. Just moving to capital, on Basel III, you gave us some great information on the transitional to the fully phased in walk there in the appendix.
+I guess I am just wondering, you did narrow the gap between standardized and advanced by 30 bps. Could you run through how you did that in the quarter?
+
+Question_5:
+
+    Okay, that's great. Thanks for the color. Just lastly on expenses.
+You did show a nice reduction in core expenses. Could you speak to some of the things that have been hitting the headlines recently? Cuts in global markets, 5%, is this accurate?
+Is it part of New BAC, or is it more a normal course expense management? And then the branches are down 10% over the last two years. How much more optimization is there?
+
+Question_6:
+
+    Right, but from here this branch level you think holds or you still have more work to do on pulling it down?
+
+Question_7:
+
+    Got it. Thanks.
+
+Question_8:
+
+    Thanks very much. Looking for a quick comment on the overall loan picture.
+There is always a lot of puts and takes, so the commercial side grew by 8% year over year. The consumer shrunk by 4.7%.
+A lot of that is run off. So can you just give a general comment on how you are feeling about loan growth, and then weave in there your commentary on the mortgage origination pipeline being up 23% in the first quarter. Thank you.
+
+Question_9:
+
+    And summing it all up, I just -- I don't want to put words in your mouth but if you look at the net of up just 50 basis points for total loans year on year, it just sounds like it is better than that just because of the runoff and I just wanted to make sure that I get that specific comment.
+
+Question_10:
+
+    Okay.
+
+Question_11:
+
+    Right. Follow up on the legal, you mentioned the first two were fully reserved for.
+The 2.4 adds to the reserve, where are we now in terms of the estimated losses above and beyond what you reserve for? In other words, I would think it could go down as you continue to add for the reserve.
+
+Question_12:
+
+    Correct.
+
+Question_13:
+
+    Okay, appreciate it. And then last one on slide, I think it is 14.
+Just curious, the equity investment income, what is driving that? It seems to have a nice steady and upward trending slope.
+
+Question_14:
+
+    Okay, that's good for me. Thank you.
+
+Question_15:
+
+    Hi, Bruce, hi, I was wondering if -- just want to understand the dynamic of the net interest income outlook I guess in the second quarter. It is the increase in lower yielding liquidity on an average basis and that is going to push the NRI down a little bit.
+That overwhelms the day count. Is that what is happening in the second quarter?
+
+Question_16:
+
+    Okay, and what is helping it grind higher beyond the second quarter, Bruce? Just as a reminder, what helps it grow in the third and fourth quarter and beyond?
+
+Question_17:
+
+    Okay, then on litigation expense, Bruce, with the big reserve build in the settlements this quarter, what is the outlook there? I know it is tough to forecast but should we assume that a few hundred million of litigation expense will persist for the next several quarters?
+
+Question_18:
+
+    Okay, and then, Bruce, just to clarify the provision commentary that you made, your outlook is for net charge-offs to grind lower modestly, and reserve release to continue, but probably at a smaller level than the 380 we saw this quarter.
+
+Question_19:
+
+    Okay, and last thing for me, just wondering if trading and fixed income in particular, do they have any notable sequential trends in the quarter? Did trading get better in March and early April as rate volatility started to pick up a little bit or anything like that?
+
+Question_20:
+
+    Okay, thank you.
+
+Question_21:
+
+    Morning. This is actually Thomas LeTrent on behalf of Paul.
+Another sort of expense-themed question. There has obviously been an increased amount of regulatory scrutiny on MSR transfers. Can you [stretch] for me a little bit, whether if those transactions got delayed or pushed out if it would impact your ability to meet expense targets or just a little color there?
+
+Question_22:
+
+    Okay. That's very helpful. Thank you very much.
+
+Question_23:
+
+    Thanks. Good morning. I wanted to ask you about just operating leverage and, again, expense progress.
+So year-over-year, revenues plus or minus are down $1 billion and if I am looking at slide 7, I am looking at the core expenses were down a few hundred million and that is net of all the New BAC benefits. So can you talk to us about just the push and pull between the net BofA, the new BofA, New BAC reductions and then what cost inflation you are seeing, if any, underneath the core? And then as you look forward, just how we should expect that core line to interject, you know, the $13.6 billion excluding the retirement eligible?
+
+Question_24:
+
+    Thanks, Bruce. And as just a follow-up to that, then, we are going to continue to see improvements to get to that $2 billion New BAC level by mid next year, but given what you anticipate on the revenue side, do you feel that that is enough to get you where you want to go in terms of profitability improvement or is there anything you can contemplate or need to contemplate as far as finding other incremental ways to fund those investments or drive more to the bottom line?
+
+Question_25:
+
+    Got it. One last one, just card income and service charges, a lot of other banks have been seeing weakness there, partially weather, partially regulatory, partial pricing changes. Anything that you guys are seeing or anticipate seeing on any of those fronts looking ahead?
+
+Question_26:
+
+    Okay. Thanks very much.
+
+Question_27:
+
+    Good morning. First, just a couple follow-ups. How much of the New BAC savings were achieved by the end of the quarter?
+
+Question_28:
+
+    All right, so you have $300 million per quarter to be achieved by mid-2015?
+
+Question_29:
+
+    Okay, and then the LAS savings, you have another $500 million a quarter to be achieved by the end of the year?
+
+Question_30:
+
+    All right, so $800 million total, quarterly expense savings we should expect over the next year or so. So should we expect all of that to hit the bottom line?
+
+Question_31:
+
+    Okay. Do you have an efficiency target for the firm? I am just looking at page 3 of the supplement and the efficiency ratio is kind of thrown off by the charges and it has been in the 70%s the last few quarters.
+97.68%, I don't think you consider that your core efficiency ratio. But, so what do you consider your core efficiency ratio and where should it be and where do you hope to get -- when do you hope to get there?
+
+Question_32:
+
+    Okay, so do you have a specific timeframe for that or just when rates go up?
+
+Question_33:
+
+    Shifting gears, the tax rate excluding the mortgage charge for the first quarter was what?
+
+Question_34:
+
+    I'm sorry, the tax rate? You said the tax rate going ahead will be 31%. I am just trying to figure out what was the core tax rate for this quarter, excluding the charge?
+
+Question_35:
+
+    Okay. You had record wealth management for the quarter and one of the online brokers recently said that the big brokerage firms are doing better. Do you -- how much do you attribute the record wealth management to the environment versus what you are doing versus it is better to be a big broker?
+
+Question_36:
+
+    You are allocating more capital to GWIM as well as global banking and global markets. Is that increased capital allocation due to regulatory capital changes or a deliberate move by you guys to invest more for growth in those segments?
+
+Question_37:
+
+    I agree, so it sounds like it is partly business growth and partly regulatory related and partly a desire simply to have less unallocated capital?
+
+Question_38:
+
+    Okay, and then lastly, the Bank of New York ruling was good; I did not expect that, but you still had a $6 billion charge this quarter and another $2.4 billion extra charge in the last 15 work days since the FHFA amount was announced. And I know you have had several questions on the call, but what is left as far as potential legal charges because it seems just so lumpy and within just a few weeks you could have another $2.4 billion charge, seemingly out of the blue for some of us. What is left?
+
+Question_39:
+
+    All right, thank you.
+
+Question_40:
+
+    Thanks very much. Good morning.
+Let me just start out by saying on the litigation front I actually thought it was very good that you have provided now for a bunch of the issues that are actually still pretty visible out there, so that is just a thank you for having done that. I have a question for you on the control environment costs.
+Some of your competitors, JPMorgan and Citi, have spoken to billion dollar type numbers for increased control environment cost in the wake of CCAR issues over the last few years and obviously all of the heightened scrutiny. I was wondering if you could give us a sense for what your control cost increase has been over the last year or two?
+
+Question_41:
+
+    Thanks. That's helpful color, certainly in terms of thinking about the timing. You did allude to some increase in technology investment in GWIM and obviously the margin they are contracted a little bit. Maybe you can give us a little bit of a sense for what this -- I think you alluded to Merrill One?
+
+Question_42:
+
+    Thanks, and then final one for me. You gave the leverage ratio as being above the 5% and the 6% requirements based on the most recent NPR. Subsequent to that, I guess Basel came out in March with some suggested changes to the netting on a standardized basis for counterparty credit and I was wondering if you have any sense at this point what the impact on the leverage ratio would be of those changes, if implemented?
+
+Question_43:
+
+    That is from the Fed, right? The April release from the Fed?
+
+Question_44:
+
+    Right, no, what I was referring to is that Basel had come out with something in March which one would assume that eventually the Fed will adopt for the standardized approach to counterparty credit. And I think JPM alluded on Friday to the idea that that could add, depending on whether you look at the holding company or the bank unit upwards of 20 basis points to the leverage ratio because it takes into account the netting to a greater extent. And I was wondering if you had any -- if you had done any preliminary work on that?
+
+Question_45:
+
+    Got it, okay, thanks very much. Appreciate that.
+
+Question_46:
+
+    Good morning. If I could just follow up on the net interest income comments and thoughts. I guess just bigger picture, it seems like the outlook is a little bit lower than what you had previously thought, and I guess I think about building liquidity, it tends to be dilutive to NIM but not net interest income dollars. And some of the things you pointed to were seasonal.
+So just like big picture I guess when you think about where you had thought net II might be a couple quarters ago, looking out. What is worse?
+Is it more runoff than you thought? Less loan growth because you are tightening up versus what some others are doing or is it just the rates haven't moved at all, or some combination of all that?
+
+Question_47:
+
+    Okay, and then just switching topics, on the core LAS cost, so ex-all the litigation, you reiterated the target for year end, I think of about $1 billion or $1.1 billion. Still feel good about the $500 million per quarter late next year?
+
+Question_48:
+
+    Okay, and is that something that we could see overshoot to the downside like we are seeing in charge-offs? Obviously like credit is getting much better than a lot of us would have thought a couple years ago? Do you think those core LAS costs end up just being much lower than expected once you work through all the issues?
+
+Question_49:
+
+    Okay. And then just lastly, on the SLR again, just care to provide any more details in terms of how much above 5%, how much of a 6%, roughly?
+
+Question_50:
+
+    Okay. All right, thank you.
+
+Question_51:
+
+    Thank you. Three questions.
+One is, operational risk, you talked about that now represents about 25% of your risk-weighted asset, so in doing that in the past, that is very sticky. How do you think you can manage around that amount of capital just being trapped and the fact of all these past settlements that you have had to kind of live through?
+
+Question_52:
+
+    I mean is the only true way is just almost disembark from mortgage because there was so much in that particular area, the only way to clean it up is to say maybe if that is all related to those mortgage settlements, mortgage-related settlements it is just not worth caring that baggage going forward even though it wasn't really your fault, it was the Countrywide legacy more than it was your own operations.
+
+Question_53:
+
+    Got you. Secondly, you called out that mortgage servicing hedging was unfavorable this quarter. If you kind of look at the environment, it seemed like I have seen in others that it was actually a positive, not a negative. What was in particular happening in your mortgage service hedging?
+
+Question_54:
+
+    Got you. And then lastly, when you think about moving from your mortgage-backed securities into agencies and treasuries that have shorter durations, that is kind of throwing you to become more asset sensitive. Are you thinking about because the liquidity rules are making the balance sheet become more asset sensitive employing more interest rate swaps or off-balance-sheet hedging to rebalance and not become so much more asset sensitive due to these other pressures?
+
+Question_55:
+
+    All right, thanks.
+
+Question_56:
+
+    Good morning, guys. Question on the mortgage business.
+I think there was an article in the Wall Street Journal this morning or somewhere that the business is getting off to a slower start than we would have thought given the spring bounce back that was expected from the winter weather. Has there been any rethinking, Brian, on sort of the eventual size and direction of the mortgage business there?
+
+Question_57:
+
+    Also, could you make sort of a similar pronouncement about the card business, where you stand in terms of share and growth right now and are you where you want to be?
+
+Question_58:
+
+    And just finally, Bruce, you've indicated that net interest income is going to decline somewhat due to liquidity issues, etc. Is that same going to be true of the NIM or is there anything in the mix change coming in the near term that can send the NIM up, or the adjusted NIM up, from this 236 level?
+
+Question_59:
+
+    Right. Okay, thank you.
+
+Question_60:
+
+    Hey, good morning. Hopefully I will keep these two quick.
+Just first on home-equity net charge-offs, I guess if you exclude the TDR impact last quarter, they were up and so were home equity NPLs. Could you just sort of talk through what is going on there?
+
+Question_61:
+
+    Okay, that's helpful. Then just on the investment banking pipeline, any commentary?
+
+Question_62:
+
+    Okay. That's great. That's it for me. Thanks.
+

exam/part2_problem1/Problem_1_Conference_Call_Segments/call_27_answers.txt

@@ -0,0 +1,366 @@
+Answer_1:
+
+    Yes. We took, Betsy, a piece of our nonperforming loans out. And as nonperforming loans, and as you know, when you receive it -- to the extent that you receive income, you write down the basis to those loans. And we took those loans out and saw healthy gains.
+We continue to look at the sale of nonperforming loans, but I would not expect anything near the magnitude from the sale of nonperforming loans that we saw this quarter.
+
+Answer_2:
+
+    I think the timing is going to progress on the schedule that it otherwise would have. I think you all know that from an objector perspective that they were probably the strongest and most vocal objector with respect to the case. And we'll just have to see as we move forward what the impact from them dropping their objection to the case is.
+I think the other thing that's important is as it relates to holdings of the securities, or at least a basis to object. They were the largest holder that was out there from holding securities as a part of the settlement. And I think they noted that in their release this morning.
+
+Answer_3:
+
+    Sure. A couple things. If you look at asset sensitivity, you will see that the exposure to a 100 basis point parallel shift in rates, that the benefit increased this quarter from about $3.2 billion in the first quarter to $3.4 billion.
+As you look at the deposit base, a couple things of note. The first is, north of 70% of the overall deposits that we have throughout the Company are within our Consumer and Wealth Management business. As it relates to, I would say overall asset betas that through history, given the branch network and the relationships, those tend to be very stable. I think you get a sense for that as you look at the continued deposit growth that we have seen, while at the same time taking rates paid down pretty significantly.
+If you move to the institutional side and look at where we are, roughly 75% of the deposits that we have within the institutional business are domiciled here in the US. And the predominant mix of that is with our core Corporate and Commercial customers.
+If you look at the reason that they are holding those deposits with us, it is because we tend to be their core relationship bank. We do their cash management; we do their Treasury service revenue and have relationships that are beyond just a place for them to put their deposits.
+So as we move forward, there is obviously a level of uncertainty to the extent of a Fed withdrawal. But as we look at the overall deposit base, the stability of it, and our outlook going forward, we feel like that we are very well positioned.
+
+Answer_4:
+
+    I would add on the consumer side also, as you look at year-over-year dynamics in terms of deposit growth of $25 billion, also look at the -- we are still running off a CD portfolio that was more of a funding portfolio for some of the companies that we acquired. So that I think there is, round numbers, a $10 billion reduction in CDs over that time period. And we've also obviously sold some deposits; not a huge amount.
+So that growth is over top of all that and net. So we feel good about the Consumer franchise, the ability to continue to grow deposits, even while being very disciplined on price. And as rates rise, that value will be recognized.
+And we expect those deposits now are much more core. The average checking account deposits year-over-year I think are up 25%, 30% in terms of average balance.
+
+Answer_5:
+
+    I think if you look at the -- just on a Consumer business, the year-over-year growth was $25 billion and the linked-quarter growth was $10 billion. So obviously we're growing at a faster rate in the current environment -- at the spot, so to speak, Jim -- than we have been year-over-year.
+So the growth rate of 2% was nominal in a quarter which would be annualized 8% and about high 5%s to 6% year-over-year. So it's accelerating still by the good core activity.
+
+Answer_6:
+
+    Sure. Let's go -- it's a very good question, Jim, and I think we need to break out and discuss -- if you look at the declines that we saw in the residential mortgage area, those are largely due to whole loan repayments of loans that are held within our investment portfolio. So if you look at the Consumer Business, I think there are a couple key things that I would note.
+The first is on a linked-quarter basis this is the first quarter in some time where we actually saw ending card balances within our domestic card balance increase. Those were up, as we mentioned, roughly $1.3 billion from the first quarter to the second quarter. So we saw growth there.
+Then if you move to what we saw within the Wealth Management area, as I mentioned we saw very strong growth both in securities-based landing as well as within mortgage originations there. Once again, on the home equity front the progress that we're making on the origination front, where we saw about $2.6 billion, is really being masked by the runoff and the amortization of the home equity book that we had; that runs off to the extent of $3 billion to $4 billion a quarter.
+So within the Consumer businesses, if you look at the core front-end, we are seeing some consumer loan growth. It just gets masked by the runoff of some of the Consumer Real Estate.
+On the overall Commercial and Corporate side, I did reference the couple payoffs. As we look at -- one of the benchmarks that we look at is the revolver draws that we have within our Commercial Banking business. That number, which has gotten as low as in the low 30%s was up almost 100 basis points this quarter and is now in the high 30%s. So we are starting to see some greater activity on the revolver space within our Commercial Banking customers.
+And overall activity with the corporate customers continues to be good, but we are seeing, as I referenced, customers taking advantage of favorable debt capital markets, which we obviously benefit from, from a debt underwriting perspective.
+
+Answer_7:
+
+    We did not. At the parent at this point we are above 100%, at the parent. So we're good from a 2017 compliance there.
+If we look at the combined BANA/FIA LCR ratio, those two companies or two banks will be put together October 1. That LCR number is in the high 80%s at this point and we'll continue to build the LCR ratio at the banks to be at least a year ahead of where we need to be.
+
+Answer_8:
+
+    It should not. As we look at it, there has been a significant build at this point. And as we look at the funding and the balance of that between both core consumer deposit growth as well as where we are, that should not have an effect.
+If you look at the build that we talked about in the first quarter and second quarter, at this point I would say we have eaten that expense. And we now need to get after it and optimize it to get the expense knocked back down.
+
+Answer_9:
+
+    I think in the near-term, Matt, the number-one thing about costs is continuing to work down the LAS legacy costs, down to a more normalized level on a per-loan basis and also keep reducing the number of delinquent loans. So that's the real expense leverage.
+And what Bruce talked about earlier is we've got to make sure we do it the right way, and especially in connection with finishing up some of the regulatory work there. So that is the real large dollar amount.
+You're pointing out exactly the situation on the core. You're running about $13 billion a quarter on core expenses; not a bad number if you annualize it and think that through. But the real question is: How do you hold it there and keep investing in the businesses?
+So when we started the New BAC, we never gave a target that said we're going to save all this money but we're going to reinvest it. We gave you sort of a net target, and now we're reaching that.
+So what we're challenging our teams to do is how to maintain a good operating leverage going forward. So we're more about simplifying the Company and continuing to take out expenses; but a lot of that will offset the thousand people we have added in the branches to sell more products that you're seeing the benefits of, the continued adds we make in the Wealth Management business and the training programs. We hired 30% to 40% more people out of schools this year because we got to keep replenishing our talent base, commercial bankers, etc.
+So as you look forward, the inflationary type things that go on, merit raises and healthcare expenses, and stuff like that, and investing in the business, including the $3-billion-plus we put in technology development every year, will need to be offset by hard expense work. So that's the plan we have, and we're putting those -- we keep driving those plans in place.
+But it would be less bottom-line reduction on that core expense base and more how you hold it there in a relatively slow growth environment.
+
+Answer_10:
+
+    Yes, with one exception. When markets kicks up you are going to have more comp related to that, or Wealth Management comp, which is good. So you've got to be careful, because those things come and go, and you can see that just in the last couple quarters.
+But on the -- like, if you think about what David Darnell and the team have done in the retail business, they are still rationalizing the branch structure, which will offset putting more people in the branches that are more personal bankers and FSAs. And they have done a pretty good job at offsetting that.
+In addition, we are repatriating some jobs to help on the consumer credit, customer delight scores and stuff, from places that legacy enterprises had them in other places, and bringing them in. And that rationalization is going on, and that is adding to our job count in the near term but will rationalize back out.
+
+Answer_11:
+
+    Yes. And obviously that is going to trail and move with it as we drive down the 60-plus-day delinquent loans. But clearly the $1.1 billion that we'll either have in the fourth quarter or the first quarter of next year is still way too high given the number of 60-plus-day delinquent loans that we have, as well as the size of the servicing portfolio.
+
+Answer_12:
+
+    Sure. We recently -- we submitted our materials to the Fed on May 27. They have up to 75 days to respond. I believe the 75th day is August 10, and we continue to see where they come out.
+
+Answer_13:
+
+    Yes, I would say, Glenn, probably more than anything, if you go back and look at both the notional size of the balance sheet as well as the match book, we were probably a little bit lower at the end of the first quarter of 2014 than you would normally see. So that number will bounce around, but I wouldn't read anything into the fact that it was up, because it was much lower at both the end of 2013 as well as the first quarter of 2014.
+
+Answer_14:
+
+    I think the pricing is probably more theoretical. Because I think if you look across the industry, we continue to see both the banks in Europe as well as the banks in Asia provide it. So I'm not sure you are seeing any meaningful movement in what you are able to charge from a match book perspective.
+
+Answer_15:
+
+    Sure. Well, you've got a couple things. The first is, as you look at the expense growth during the quarter and you look at the buckets, roughly half of it relates to incentive-related comp that is a result of increased revenues.
+We do have a couple of initiatives that you would expect to roll off over the next couple quarters within the Wealth Management business. We obviously had the rollout of Merrill One over the last couple quarters, where you saw some expense there.
+There has been some additional money spent as we invest in systems related to retirement systems and retirement programs, as we continue to see growth there. So you do have some of that activity as well as just making sure that the right investments within the various control and support functions are appropriate.
+So at the same time, as we look forward you need to see positive operating leverage, not negative operating leverage. And that's what we will look to work for as we go through the next couple quarters of the year.
+
+Answer_16:
+
+    You point out, it's an obvious point and we -- the team is focused on it. But we have made some near-term investments, including training programs and hiring people into the business, working in the branches and stuff, to help.
+But it is something that we've got to monitor closely, and we think it will come back down and more in line with what you'd expect.
+
+Answer_17:
+
+    Sure. I think the notable thing that I would call out is that when we get private-label claims that come in, there are two different types of claims that come in. There is the first that are claims where people have had the ability to look at loan files and submit a claim based on a loan file not being what they thought it could be. And the second is that you can have people that at points in time do what we call -- or throw in what we would characterize as a bulk claim, where they're just throwing it in without having done any work whatsoever on the loan file.
+And what's important when you look at what we saw during the second quarter of 2014, we saw roughly $1.9 billion of original unpaid balance on the loans not lost, growth of that amount. The amount of bulk claims where no file reviews had been down was $1.9 billion. So I would not read too much into that number, because it's not for loan files where there has been any work done.
+And I would just say generally, if you look at what we have seen regarding some of the recent decisions where there seems to be some stickiness at this point on different statutes of limitation, as well as a recent ruling that came out of California with respect to RMBS litigation, that we do feel like we're moving forward. And getting AIG behind us is significant in regards to putting the rest of this behind us.
+
+Answer_18:
+
+    Sure. As we've said, given where we are from a disallowed DTA position, that we're at a point where broadly speaking we accrete capital on a pretax as opposed to an after-tax basis. So as you look at the results, we had roughly $3 billion of pretax income; we had roughly $3.5 billion of pretax OCI. That gets you to about $6.5 billion.
+And then as you look at threshold deductions of roughly 10%, take 10% of that $6.5 billion; it gets you roughly $700 million. That gets you to roughly $7.2 billion of capital build.
+You back out the common dividends of $100 million, and that get you to your $7.1 billion build.
+
+Answer_19:
+
+    Clearly at least over the next, I would say, probably two to four quarters, it will be a function of the exact earnings. But for the near term, that's correct.
+
+Answer_20:
+
+    Yes. I believe that the excluded DTA was roughly $15 billion. And it was down a little over $1 billion.
+
+Answer_21:
+
+    Yes, we're mindful of the fact of settlements. There's obviously a lot of discussion and dialog around op risk RWA.
+If you look at -- and when we noted that the reason risk-weighted assets went up during the quarter under the Advanced Approach it was for doing exactly what you referenced, was reflecting an increased amount of operational risk RWA.
+We don't give the exact number, but you should assume that that amount is in the 26% to 27% of our total risk-weighted assets number and is in line with our largest peer.
+
+Answer_22:
+
+    Sure. Well, the first, John, is just to manage the notional size of the balance sheet, which we continue to do. The second thing that I would note is, when you look at the sale of the re-performing loans that we did, those are the types of assets that in the CCAR -- at least we believe; we don't have access to the Federal Reserve's models -- but those are the types of assets that tend to get hard.
+So we continue to look hard and look to drive down the nonperforming Consumer Real Estate piece of what we have. And this quarter was a good example of it.
+Then, you're exactly right with respect to the leverage ratio, that there is a benefit that preferred stock gives. We are north of $4 billion this quarter that we generated. We will continue to look to see if more preferred makes sense.
+And then lastly, we will continue to look at and see if sub-debt makes sense from a total capital perspective as well. The incremental cost of those is very low, and we just want to make sure the balance sheet is optimized for those different buckets.
+
+Answer_23:
+
+    Yes, our activity levels -- and if you saw a P&L throughout the quarter, while June was marginally better, I would characterize the activity that we saw within the sales and trading business during the second quarter to be fairly consistent. And as we look out at the third quarter, typically with the summer the third quarter is a little bit seasonally slower than the second quarter. If you look at our results last year, you see that.
+And as we come into the third quarter, there is nothing unusual in our third-quarter numbers of last year. And how we compare to those numbers is going to be a function of how well we perform this quarter, and that's obviously up to us.
+
+Answer_24:
+
+    John, if you look at page 19, you can see the second quarter, second quarter, second quarter across the last 3 years. And it's remarkably stable in terms of markets revenue, on the lower part of that page.
+So what Tom and the team did a few years ago was actually reduce the headcount almost 5,000 people and that's allowed us to make $1 billion in this kind of environment, as we did this quarter. So this will ebb and flow; and as you and I have talked about on various occasions, it is a core part of what we do.
+But we show you the separate P&L to show that in the first quarter, have a good quarter; this quarter had $1 billion. And it may come down. Activity moves around for clients, but it is a relatively stable revenue base that we can make money on because of the expense adjustments we made last year -- in the last several years.
+
+Answer_25:
+
+    Yes, there's -- we've got one more sale that we will look to wrap up this quarter that's got fairly high content of 60-plus-day delinquent loans. But beyond that one transfer this quarter, we are largely at the end of servicing sales.
+And we're at a base of what you see should be what we have going forward, with the pluses and minuses being what runs off versus what we put on.
+
+Answer_26:
+
+    As you look at it, I think rep and warrant was less than $100 million this quarter. You're going to always have that as you go forward; but we're not seeing much rep and warrant at all on recent originations. It's going to be more legacy related.
+
+Answer_27:
+
+    From a number of units perspective, as you look at the bulk sale there was a piece of it that we serviced, and there was also a piece that others serviced. So in the context of the number of 60-plus-day delinquent loans, it was not meaningful relative to the total.
+
+Answer_28:
+
+    That's correct.
+
+Answer_29:
+
+    A couple things. We don't give the exact numbers; but if you go back, Guy, and look at the first quarter, we look at and try to understand what the tax treatment is for the different settlements. There was a piece of it in the first quarter that we would have assumed was not tax-deductible.
+And, you're right, the piece that -- in the reserve that we took this quarter there was a presumption that it was tax-deductible. And the short answer is, until you get to the end, you don't know the exact mix.
+But -- so we have tried to be thoughtful with that and just say, as it relates to the total number, as we said last quarter there was -- I think it was $2.4 billion of litigation expense over and above what was for settlements. In this quarter, you've got in the high $3 billions. And I think it gives you a sense as to the magnitude of the reserves that have been built over the last two quarters.
+
+Answer_30:
+
+    Sure. If you look at -- and embedded under the Global Banking segment we've got the loans that are down within our Corporate Investment Bank that tend to be for the larger companies. And as we looked at spreads and yields on a linked-quarter basis within our business we saw relative stability in the yields in those businesses.
+And, as we look out at -- in the marketplace, given that those loans that are brought for those customers tend to be broadly syndicated, and there tends to be a relationship in the yield between that and where they can access capital in the capital market, that loan pricing over the last quarter has hung in there and, like I said, was generally flat Q1 to Q2.
+I would say where you tend to see a little bit more of the competitive pressure tends to be within the base commercial bank, which is core middle-market companies, where they tend to be more one-, two-, or three-bank deals. And we have seen that area continues to be pretty competitive and we are just being disciplined with how we approach that market.
+Given the footprint that we have, we do have the flexibility to not chase things within some of these regional markets.
+
+Answer_31:
+
+    No, I would -- for the core commercial customer, that's going to be the traditional banking customer as you'd think of it.
+
+Answer_32:
+
+    Yes; that's correct. So we had a position that went public during the quarter. There was a gain, and it's reflected in the revenues of the Global Markets segment. But we did not think it was appropriate to include that in the core FICC and equity sales and trading.
+So if you go to the table on page 13, when you look at that FICC and equity sales and trading number, ex-DVA, that does not include any benefit from the gain that we saw within the overall segment during the quarter.
+
+Answer_33:
+
+    Sure.
+
+Answer_34:
+
+    Well, if you start from a home equity perspective, I think the repayment and run off of those is a good thing and not a bad thing. So you will continue to see, I would expect, over the next couple years that the amortization of those is going to be greater than the new loans coming on the book.
+We would not expect, though, as you look at net interest income, given the yields on those versus what you can do with other things, that the runoff of that book will have a negative impact from an overall net interest income perspective.
+As it relates to the whole loans piece that we have, I would expect that over time that will continue to run down. We continue to look, as we've talked about before on the Home Loans business, to put and to originate mortgages for customers where we want to hold those loans.
+During the quarter we put about $6 billion of home loans that were originated for our customers on our balance sheet. Roughly 75% to 80% of those would have been of the jumbo variety.
+But I think to be realistic, over the next probably couple years you're likely to see a little bit more runoff of that than you will see new loans coming on. We obviously have the decision at that point of: Do you want to reinvest those proceeds in other whole loans that you can buy out in the market, or invest those in securities?
+And I would say at this point, with LCR as well as what we're focused on from a customer perspective, they're much more likely to be invested in securities than new whole loans that are not for our customers.
+
+Answer_35:
+
+    Yes, a couple things. The range of possible loss that you quoted, of being flat from the first quarter to the second quarter, relates to our representation and warranty reserve, not our litigation RPL. So you're correct that the rep and warrant piece was flat quarter-over-quarter.
+We do not update and provide our range of possible loss on litigation expense until we file the 10-Q.
+As it relates to overall litigation reserves, we do not put out an exact -- or a level of our litigation reserve. What I do think is notable and probably most relevant is the information that I gave you as it relates to the litigation reserve that has been built over the last two quarters that relates to legacy mortgage-related matters. And I think you can see and people are aware of what the most significant of those matters are.
+And obviously each quarter, as it relates to the reserving, we go through each quarter and assess where we are and what we think is appropriate from a reserving perspective. And we did that again in this quarter, just like we do in any quarter.
+
+Answer_36:
+
+    Yes, the first goal is obviously, as we've talked about, is to find and invest in loans that are for our core customers across the platform. And that is priority one.
+To the extent that there is residual or excess, which there has been given the deposit growth that we've seen, the money does get invested. And it's been invested primarily in the most recent several quarters in securities.
+I mentioned OCI risk. The notable thing is if you look at the OCI risk that we have as a Company, even though the securities book has increased significantly over the course of the last 12 months, the overall level of OCI risk based on the different metrics that we look at has not changed. And that is a result of us shortening the portfolio, investing it in shorter-duration Treasury securities.
+
+Answer_37:
+
+    Yes, I think as it relates to the risk-weighted assets, you need to bifurcate risk-weighted assets under Basel 3 Standardized versus those under Basel 3 Advanced. As you look at the Basel 3 Standardized ratios, the benefits that we have there tend to come from the roll-off of the different consumer loan portfolios, both in first mortgage as well as in home equity.
+And we would expect, as we've talked about throughout the call, that you will continue to see a runoff there. And given that a lot of the stuff that's running off is higher loan-to-value than the new stuff that's coming on, that there is incremental benefit there.
+So if you look at over the last five quarters, I think in the way that the Standardized metric is set up, the Standardized metric is going to tend to mirror the overall loan growth that you have. I would just say, as I mentioned, going forward on average it will probably be a little bit lower mix coming on than what rolls off.
+On the Advanced approach, at this point as we look forward there will continue to be opportunities on stuff that is Advanced but tends to be heavier risk-weighted that rolls off between now and 2017. It's not going to be anywhere near as material as what we've seen. And under the Advanced approach, the recent increases you've seen have largely been attributable to operational risk as opposed to what we're seeing within the core loan categories.
+
+Answer_38:
+
+    I think you've got -- one of the levers in the business that people often overlook is the lever towards rising rates. Because in the business itself the amount of total deposits and loans are significant, $250-billion-odd of deposits and significant loans. I think we said on the last call and have said many times, we can see this margin moving towards 30% in that dynamic, in that yield, in that environment.
+But I think when you get to there, you start to top out a little bit, if you just understand the broad base of the revenue and the amount that goes through the grid and things like that, that become a governor on what you can do beyond that.
+But the mix of our business of wealth management with the private banking business and the loans and deposits from the general client base and what we see [in Europe], that gives us leverage to the upside as you describe.
+
+Answer_39:
+
+    I think if you look at the charge-offs, the key is that -- when you really think about the broad constitution of $1.3 billion, if you remove the recoveries, but some range -- you've got to look at the card business. And what changed since that time is we have changed our position in the card business fairly dramatically with the sale of some international portfolios and even how we have approached the US just based on the dynamics of the card business.
+The good news is the card business is starting to grow in terms of balances. And going back to an earlier question, we got rid of the non-core aspects and now you're seeing the core start to come through. 1.1 million new cards; people are using the card more; and the balance is growing.
+So I think that if you just think about that, that number is going to be -- is today and will be the dominant part of the charge-off question. And you should think that that $90 billion, $100-billion-ish in balances as you look forward you would expect that to grow, but not to change itself dramatically -- not for us to change it dramatically in terms of position on our balance sheet, because we need to keep that book balanced. Because it has higher charge-offs in a period of unemployment levels.
+So I would say if you went back and looked at that, and that is the biggest core adjustment between the two items. And then -- but the core -- the counter to that is if you look at the appendix pages and see the charge-offs on the mortgage business, in the first mortgage business you had recoveries. But if you look at the home equity side you still have a charge-off rate which, based on the underwriting criteria, the stuff going on would be much higher.
+So we had a couple hundred million dollars in quarterly charge-offs that you can see on page 21. So we would expect to see improvement in that from where we are.
+But I would say the card business is about as good as -- is getting very strong. You ought to see a little bit of help in home equities. You're going to have a reversal from the recoveries on the first mortgage loans, but it is a fundamentally different level because we've mixed the balance sheet differently on purpose.
+
+Answer_40:
+
+    Sure. The first thing -- I want to be clear, Paul -- that getting to the $1.1 billion is moved back -- may be moved back one quarter, not two.
+
+Answer_41:
+
+    So we're looking at one quarter. The second, though, the biggest item that really relates to the trajectory of LAS expenses is your number of 60-plus-day delinquent loans. Because the cost to service that is many multiples what the cost of servicing a current loan is.
+So as you go forward, we have full implementation of the national mortgage settlement effective September 30. That will be a big benchmark.
+Then as you go beyond then, on a, as we've always said, a one- to two-quarter lag, you will see expenses trend down as your number of 60-plus-day delinquent loans trend down. And as those trend down you need less people as well as a variety of other expenses. So that is the key metric to watch.
+And as it relates to just how long that's going to continue, I would not expect that we get down to the level of what should be a recurring number of 60-plus-day delinquents until probably the end of 2015 or the first part of 2016. So as it relates to continued expense leverage, we would expect to see upside in that business probably all the way through the end of 2016 as it relates to driving expense down.
+
+Answer_42:
+
+    Paul, we've got work to do, in a sense. If you go back, I think, and if you looked at the fourth quarter of 2012, it was about $3.1 billion; the fourth quarter of 2013 I think it was $2.1 billion, Bruce; and then originally we said higher, then we brought it down to $1.1 billion, and now think that it's somewhere a little higher than that.
+But that's the broad move, and the question is: How do you keep going on that? And that is really going to be, as Bruce said, the number of 60-plus delinquent loans, which allows you to release people.
+But we are also getting a condition that we have now got the place stabilized enough behind us that we can start to invest in technology, what will add a level of improvement that we haven't been able to invest in, where we just had to get the work done.
+So we expect there is systems deployment in that business as we move into the middle of 2015, into 2016, and we expect consolidations of physical plants and things like that, which will add to the expense leverage, but we haven't been able to do that as much yet just because of just the massive amount of work that had to take place.
+So there is still a lot of work ahead of the team, but if you put it in a context of $2-billion-ish per quarter and expense reduction across eight quarters, a lot of work has been done, too.
+
+Answer_43:
+
+    The MSR sale that I referenced that will happen in the second half of the year, in the context of what we've done is relatively small. It's just that the delinquency content associated with that sale is high, so it's material from that perspective. But from an overall size perspective it's not material.
+
+Answer_44:
+
+    As you look at those gains, we are committed to not -- as we continue to see liquidity build, not taking incremental OCI risk, as I referenced. So over the last year, even as the securities portfolio has grown, we have managed to keep the OCI risk from an absolute dollar perspective relatively flat.
+As you see markets move up and down, obviously selling longer-duration securities as you have growth in the securities portfolio is part of that strategy.
+
+Answer_45:
+
+    Yes. You are exactly correct.
+
+Answer_46:
+
+    Yes. We should be able to penetrate them with more lending. So that's -- if you look on page 17 it is -- or 18, excuse me -- you can see the growth in card originations, the growth in home equity originations, which go on the balance sheet, that -- as Bruce talked about early, we're putting about half, broadly stated, of the originations and mortgages are going on the balance sheet.
+In the Business Banking segment, which is a small part of our Commercial Banking segment geared to the $50 million and under revenue companies, we're actually starting to see net loan growth the first time in a lot of times, as we ran off some non-core portfolios.
+So that's the core opportunity in the franchise, is to continue to originate credit to the core customer base. There's lots of opportunity there, but you can see us making progress against it each quarter.
+I think on a broader context you've got to think about these businesses and how they mix together. So in every company's retail business it's an excess deposit generator, just by the very nature of it. And not only is it fund the loans of the consumer customers, but also provides the funding for the rest of the franchise.
+So I think you have to keep that broader context. And that is why we invest -- going to your first question -- in mortgages in securities to, for lack of a better term, get the value out of those deposits for the shareholder.
+
+Answer_47:
+
+    The other point that I just want to mention is that historically, if you look at the front-end lending in Consumer Real Estate that we've done, from a segment perspective that Consumer Real Estate lending on a first mortgage basis, it shows up in the balance sheet in All Other. So you can't assume that those deposits that you see within page 9 -- a lot of the loans that they do for our customers are reflected in the All Other segment.
+
+Answer_48:
+
+    A couple things. The first is within Consumer Real Estate Services, if we look at the Home Loans business on the front end, we talked about how we saw during the quarter that we increased both front-end originations as well as took down expense. So Q1 to Q2 we saw about a $100 million improvement on the front end of the business that's reflected in Consumer Real Estate Services.
+And as it relates to the $700 million number that you quoted, we obviously relative to the guidance have $300 million of expense to get out of that business over the next 90 days. And then as we have talked about earlier on the call, we've got work to do to continue to drive that down significantly in both 2015 and the first part of 2016. And that is clearly one of the highest priorities we have within the Company.
+
+Answer_49:
+
+    I think your point -- the value and the fact that on a basis point basis it came down was reflective of the lower rates that we saw at the end of the second quarter relative to the end of the first quarter. And you're right; at a point in time when rates start to move out, you would expect that MSR to extend and for there to be value there.
+But we do not -- I want to emphasize, we look to manage the MSR risk as part of the overall strategy and are managing that to have it be a flat book.
+
+Answer_50:
+
+    At the end of the day, it comes down to what the customer does. You're exactly right.
+
+Answer_51:
+
+    We do not quote, Mike, the actual deposit beta. We obviously go back and look at historical data. Our assumption is, as it relates to pass-through rates, as far as how much of the first 100 basis points that has to get passed along, we're in the 40% area, with respect to that.
+
+Answer_52:
+
+    Correct.
+
+Answer_53:
+
+    You're exactly correct. If we go back and look at what it's been throughout time, at points where arguably we don't have the competitive position now, we look at a lot of historical data to come up with that number.
+
+Answer_54:
+
+    We've been growing underlying activity, if you look at some of the statistics in the back [thing throughout], Mike. But you're right; if you go back a couple years ago, we started New BAC. We were running $15-and-odd-billion in core expenses; now we're running $13-odd-billion, and so we're largely getting there.
+The question then is: Now, how do you hold it there in an economic environment which is lower growth than traditionally expected in the United States? And that is going to take constant vigilance on our part.
+But during that whole time period we have invested literally thousands and thousands of people into the sales side and stuff to drive that growth. And we will continue to do that. The question is: How do you balance that investment rating?
+
+Answer_55:
+
+    And I just, Mike, before -- I just want -- achieving the balance of the $2 billion in quarterly New BAC savings in the fourth quarter is not dependent on future branch sales. So I just want to make sure that that there is not an assumed linkage there.
+
+Answer_56:
+
+    It's not a big project. I mean this is done by the people running the businesses. It's just committed plans that we did.
+This wasn't -- it's not a huge project group that actually accomplishes it. It's done by whoever runs each business, each function.
+
+Answer_57:
+
+    Our sense is, from what we saw during the quarter, it was more a one-off event. They were a couple loans that were for acquisition-related purposes, that people then went out and refinanced. So it was just a little bit of an anomaly that we saw in the second quarter.
+And if you look at just the attractiveness that the capital markets have been, you would expect that to largely be over. But every now and then, when you deal with large, multinational companies where some of the loan holds are a little bit higher, you can have those one-time events where that happens.
+And we had a little bit of that in the second quarter. It's not something we would expect to recur.
+
+Answer_58:
+
+    Sure.
+
+Answer_59:
+
+    Bruce gave it to you earlier, but I'll have him do it again.
+
+Answer_60:
+
+    Sure. The middle-market utilization rate was 37%-plus at the end of the first quarter and was up about almost 1% to be mid-38%. Which I don't think in and of itself is not material, but it does seem that people are a little bit more willing to access their revolving credits.
+At the same time, practically speaking you're not going to tend to see loan growth that is dramatically higher than the rate at which the overall economy is growing. So clearly, as Brian alluded to in his opening comments, we did see added an economy that improved in the second quarter relative to the first quarter. And on the Commercial side, our loan growth is going to tend to mirror or be a little bit above what we see in the macro-economy.
+
+Answer_61:
+
+    We have seen -- we are seeing signs of improvement. I'm not sure I'd go as far as saying it's an inflection point.
+
+Answer_62:
+
+    We've been pretty consistent if we go back, I believe, Mike, to the third- or fourth-quarter earnings call, that as we look out to and as we look at and embedded in our models a 100 basis point parallel shift in the yield curve, that we're looking at that point with a tangible common equity ratio of 7%, a return on asset of 1%, to be at a 14% return on tangible common equity.
+As you get into the -- and you don't see that rate environment until 2016. And if you look at those metrics and back out what we have said 100 basis points is worth to us on a parallel shift, you get a sense for what we need to get to, ex- the 100 basis point move.
+
+Answer_63:
+
+    It's going to be roughly $3.3 billion or $3.4 billion pretax.
+And at $0.63, it's $2 billion less, which on roughly $140 billion of tangible common equity is going to be about 20 basis points less on assets at that point.
+
+Answer_64:
+
+    As you said, Mike, I think we can't discuss that. You'd get a rendition of all the different criteria that people have written about.
+But I think that this quarter we were able to put away the AIG case, which if you remember back in 2011 a lot of people said was worth a lot more money for $650 million. So we will continue to figure out what we can get put behind us at reasonable cost to our shareholders. We just can't talk about details that much.
+
+Answer_65:
+
+    There are several other objectors that have not been as vocal. And as I said, we will have to see where it goes with them dropping out.
+
+Answer_66:
+
+    That's correct.
+
+Answer_67:
+
+    It's part of the settlement agreement.
+
+Answer_68:
+
+    Great. Super. Well, I think we're through all the questions, so thanks a lot for joining us and we will look forward to talking next quarter.
+
+Answer_69:
+
+    Thank you.
+

exam/part2_problem1/Problem_1_Conference_Call_Segments/call_27_presentation.txt

@@ -0,0 +1,106 @@
+
+Good morning. Thanks, everybody on the phone as well as the webcast for joining us this morning for our second-quarter results.
+Before I turn the call over to Brian and Bruce, let me just remind you we may make some forward-looking statements today. For further information on those, please refer to either our earnings release documents, our website, or the other SEC filings.
+So with that, I will turn it over to Brian Moynihan, our CEO, for some opening comments before he goes to Bruce.
+
+Thanks, Lee. Good morning, everyone, and thank you for joining us.
+As you look at our results, you can see the storyline for this quarter is much the same as it was for last quarter. You can see that the revenue is showing stability in most of the core businesses; you can see the good core expense control, continued credit improvement, and solid business activity throughout the franchise.
+You can also see, obviously, that the litigation expense from our legacy mortgage issues continue to affect our earnings this quarter. And you can also see that we have continued to build our strong balance sheet position and capital and liquidity.
+In a minute Bruce will take you through the details and results, but I thought it would be good if we spent a couple minutes at the outset here talking about what our customer and client data is telling us about the economy and what we see in our franchise.
+As we all know, the economy is off to a little bit of a slow start this year, but growth has picked up recently. The most recent jobs data shows nearly 1.4 million jobs were created in the first half of this year.
+As we have strong positions, leadership positions, across consumer and commercial companies in America, we have a view into the key indicators of an improving economy which shows signs everywhere of improvement. Even in advance of the short-term interest rates changing, which would help our deposit-rich Consumer & Business Banking segment, our Consumer business had another good quarter. It performed well, growing earnings 29% from last year, including solid origination activities across the various products.
+In addition, as we look at our underlying consumers, they have increased their spending. We can see in our data that the retail volumes on debit and credit cards were up 4% from last year's second quarter, but more importantly up 8% from the first quarter this year, showing increased momentum in spending among our card customers.
+Consumers are growing card balances also; they are borrowing a little bit more. And they continue to add to their deposit balances.
+As you know, home sales continue to improve across the industry, and we can see that in our own results as our originations and mortgages increased from first to second quarter. But importantly, our purchased mortgage origination continue to grow. Our home equity originations also were up almost 30% for the quarter.
+When we look at the underlying transactional activity and volume activity in our stores, 7 million to 8 million visitors come in each week, showing continued strong activity. We could also see that in our online activity, where the 30 million online customers continue to grow their overall volumes, and importantly in our mobile activity, where our 15.5 million mobile customers continue to increase the use of technology, including depositing 10% of all the retail checks in our Company through their mobile phone and other devices.
+The health of the consumer is also evident in our asset quality. Delinquencies continue to improve. Our consumer card loss rate ended the quarter at less than 3%.
+We see on the Wealth Management side the markets growth has added to consumer wealth. We have nearly $2.5 trillion in client balances in our Global Wealth & Investment Management business, including $100 billion in the brokerage assets with our retail and preferred customer base in our Consumer business.
+We also see encouraging signs throughout our Commercial customers. Commercial construction has improved, and manufacturing activity in our clients has accelerated.
+The borrowing of our commercial customers remains healthy across the industry, and credit quality is very strong. Encouraging is that middle-market utilization rates are moving forward again this quarter, ever so slightly.
+Industry sales and trading activity among our trading counterparties has been low, as many of our peers have talked about in this low volatility environment. However, our underlying business performed well. Tom Montag and his team, head of our Global Markets business, posted $1.1 billion in earnings for the quarter.
+Our Investment Banking pipeline remains strong and the back half of 2014 looks healthy.
+While the economy still faces challenges, progress is being made throughout the economy but also throughout our Company. We are seeing good business activity and its strengthening as we go throughout 2014. We are seeing improved financial health for our consumers and our customers and our corporate customers.
+But the most important thing to think about is the signs of a gradually improving economy. This is how our business has continued to be positioned to take advantage of the activity and deliver for you, our shareholders.
+With that, I will turn it over to Bruce.
+
+Great. Thanks, Brian, and good morning, everyone. Let's start on slide 2 and work through the second-quarter results.
+We reported earnings of $2.3 billion or $0.19 per diluted share this quarter, which included pretax litigation expense of $4 billion, which equated to roughly $0.22 a share after-tax. $3.8 billion of the litigation expense is associated with the build in reserves for previously disclosed legacy mortgage-related matters, which also included the AIG settlement that we announced this morning.
+We're very pleased to reach a definitive agreement with AIG, which resolves all outstanding RMBS litigation between the parties for a settlement amount of $650 million. This agreement is important for two primary reasons.
+First, we have now resolved 95% of the unpaid balance of all RMBS as to which securities litigation has either been filed or threatened for all Bank of America-related entities. It also includes AIG's agreement to withdraw as an objector to the Bank of New York Mellon private-label securities settlement, referred to as the Article 77 proceeding.
+Revenues this quarter on an FTE basis were $22 billion. Relative to the second quarter of 2013, revenue was down $990 million, driven by lower net interest income and mortgage banking income. Relative to the first quarter of 2014 it was approximately $800 million lower, as higher investment banking fees, higher mortgage banking revenue was more than offset by seasonally lower sales and trading revenue as well as lower equity investment income.
+Total noninterest expense for the quarter was $18.5 billion, but included $4 billion of litigation expense. If we back out that litigation expense and compare it to Q2 2013, expenses improved by $1 billion or 6%, which was driven by lower LAS non-litigation expenses and, to a lesser extent, our New BAC savings.
+If we back out the $1 billion of retirement-eligible incentive comp from our first-quarter results as well, you can see expenses declined roughly $700 million from the first quarter as a result of lower revenue-related compensation within our Global Markets business; lower LAS expenses ex-litigation; and to a lesser degree, our New BAC savings.
+Provision for credit losses was $411 million, with net charge-offs of $1.1 billion and a reserve release of $662 million during the quarter.
+Our results from the quarter also benefited from the sale of $2.1 billion in nonperforming residential loans. The income statement benefit from that sale was approximately $350 million pretax, or $0.02 a share after-tax. And you saw roughly $150 million of that benefit flow through other income and the balance through the recovery of net charge-offs.
+Lastly, the aggregate amount of a few other items, including debt securities gains, equity investment income, net DVA, as well as FAS 91, resulted in a benefit to EPS of approximately $0.04 a share.
+If we move to slide 3 and look at our balance sheet highlights, you can see the balance sheet increased $21 billion from the first quarter of 2014. Our debt securities increased as a result of valuations and increases to highly liquid securities in our primary banking subsidiary. Our repo match book increased as well.
+If we look at ending loans, they were down $4.3 billion, primarily due to lower residential mortgages, principally within our discretionary portfolios. And that also included the $2.1 billion bulk sale that I just mentioned.
+If we exclude residential mortgage loans, our Consumer loans rose slightly as our US card balances grew $1.3 billion and our securities-based lending with our Wealth Management clients increased $1.8 billion. This was partially offset by paydowns within our home equity book.
+If we move to the Commercial side, Commercial loans were up modestly as C&I growth was mostly offset by a few sizable loan paydowns as well as a focus on overall relationship returns. Period-end deposits were over $1.1 trillion and reached record levels.
+Our tangible common equity ratio improved 14 basis points from the first quarter of 2014 to 7.14%. Tangible book value per share was $14.24, a 3% improvement from the first quarter, and was driven by both our earnings during the quarter as well as a $2.3 billion increase in the value of our debt securities, which you saw flow through OCI.
+Lastly, to further enhance our Tier 1 capital structure, during the second quarter we received shareholder approval and amended the Series T preferred shares, which increased our Tier 1 capital by $2.9 billion, and we issued $1.5 billion in preferred stock during the quarter at a favorable rate.
+On slide 4, we show our capital ratios under Basel 3. Under the transition rules our CET1 capital was $153.6 billion; risk-weighted assets, $1.28 trillion; and that resulted in a ratio of 12%.
+If we look at our Basel 3 regulatory capital ratios on a fully phased-in basis, we saw very strong improvement from the first quarter of 2014. Our CET1 capital improved $7 billion, driven by earnings, OCI improvement, as well as lowered threshold deductions. The numbers in the chart reflect risk-weighted assets under the Standardized Approach, with our CET1 ratio improving from 9% to 9.5%, well above our 8.5% 2019 proposed minimum requirement.
+Under the Advanced Approach, our CET1 ratio improved from 9.6% at the end of the first quarter of 2014 to 9.9%. That was driven by the improvement in our capital, partially offset by an increase in risk-weighted assets.
+If we turn to the supplementary leverage ratios, we estimate that at the end of the second quarter of 2014 we exceeded the updated US rules that are applicable beginning in 2018. Our Bank Holding Company exceeds the 5% minimum, and our primary bank subsidiaries, BANA and FIA, are both in excess of the 6% minimum.
+We turn to slide 5, on funding and liquidity, our long-term debt of $257 billion was up modestly during the quarter as our debt issuances were larger than maturities during the period. As we look forward at our debt issuance during the balance of the year, we will continue to be opportunistic; but we do expect our parent issuance to be below the $13 billion of contractual maturities in the second half of 2014. We will also likely to continue to issue term debt out of our primary bank subsidiaries.
+Our second-quarter 2014 long-term debt yields improved 12 basis points from the first quarter of 2014 to 2.29%. We have realized significant improvement, given only 2 years ago this yield was over 3% and our average debt balances were nearly $75 billion higher.
+Our total Global Excess Liquidity Sources during the quarter increased to a record $431 billion as bank liquidity continued to grow in the second quarter, and our time to required funding remains strong at 38 months.
+If we turn to slide 6, our net interest income on a reported FTE basis was $10.2 billion, consistent with the first quarter of 2014, as a less negative impact from market-related adjustments was offset by an anticipated decline in the core net interest income. Negatively impacting our reported net interest income during the quarter were market-related adjustments $175 million, and that compares to $273 million negative in the first quarter of 2014. As you all know, long-term rates declined again during the quarter.
+Our net interest income, if we exclude the market-related adjustments, declined as previously expected and communicated, due to seasonally lower average consumer loan balances and yields, offset by an extra day of interest. And all of that resulted in net interest income of $10.4 billion.
+As a result of the increased liquidity in the first half of the year as well as lower loan balances and loan yields, the net interest yield excluding market-related adjustments declined 10 basis points to 2.26%.
+We continue to thoughtfully manage our OCI sensitivity and are very mindful of the liquidity and leverage rules, as this quarter we invested more into shorter-duration Treasury securities. We continue to remain positioned to benefit if interest rates move higher, particularly from the shorter end of the curve. And as we head into the back half of 2014, we still expect modest improvement off of the second quarter of 2014 level of net interest income, which was $10.4 billion, excluding market-related adjustments.
+Noninterest expense on slide 7 was $18.5 billion during the second quarter and once again included $4 billion of litigation expense. As we mentioned, $3.8 billion of the litigation expense relates to a build in reserves associated with previously disclosed legacy mortgage-related matters, including the AIG agreement.
+If we exclude litigation, total expenses were $14.6 billion this quarter. If we compare those to the first quarter of 2014 and exclude retirement-eligible cost that we saw during the first quarter of 2014, our expenses declined $700 million on lower incentives related to sales and trading revenue, reduced LAS non-litigation expense, and to a lesser extent New BAC savings.
+Our Legacy Assets & Servicing expenses during the quarter, ex-litigation, were $1.4 billion and declined approximately $150 million from the first quarter of 2014.
+As we look forward, with respect to our two expense programs, New BAC, as well as our LAS expenses, ex-litigation, we have modified our expectation slightly. Our New BAC expense program is ahead of schedule, and we now expect to reach a quarterly level of $2 billion in expense savings in the fourth quarter of 2014 as opposed to mid-2015.
+This means on an annualized basis we will have fully achieved the $8 billion target that we announced in 2011. In the second quarter of 2014, our quarterly savings rate that was achieved on New BAC was $1.8 billion plus.
+Moving to our LAS expenses, ex-litigation, we continue to make very good progress. But our compliance with applicable mortgage programs as well as governance guidelines may delay the expected timing of achieving our $1.1 billion goal by one quarter.
+If we turn to asset quality on slide 8, you can see credit quality once again improved on all fronts. Net charge-offs declined $315 million from the first quarter of 2014 to $1.1 billion, or a 48 basis point net loss ratio.
+As I mentioned earlier, this quarter did include a $2.1 billion sale of bulk nonperforming loans, which included recoveries of $185 million on previously recorded net charge-offs. If we exclude the effect of the bulk sale net charge-offs, they declined $130 million or 9%; and the net loss ratio would have been at 56 basis points. These are decade-level loads.
+Delinquencies, a leading indicator of net charge-offs, also showed improvement during the second quarter. Provision expense during the quarter was $411 million, and we released $662 million of reserves.
+We would expect net charge-offs going forward to continue to show modest improvement from the second quarter of 2014 levels of $1.3 billion, which excludes the recoveries that we received on the nonperforming loan sales. We would also expect reserve releases to decline modestly through the balance of 2014.
+Let's walk through the business segment results now starting on slide 9 with Consumer & Business Banking. We continue to make solid progress on the strategy in this business through deepening relationships and reducing our costs by optimizing the delivery network.
+We are simplifying the product set as we reduce the number of offerings and focus the smaller product set on customer feedback, and offer greater rewards to customers who bring us more of their relationships. Some of the more significant operational activity during the quarter included the rollout of an advanced platform for mobile banking that had added functionality; rolling out the Safe Balance checking account; as well as an enhanced Preferred Rewards program that we launched after a successful pilot program.
+We are pleased with the results again this quarter, as our earnings of $1.8 billion grew 29% from the second quarter of 2013 and were up 7% from the first quarter of 2014. This business generated a 24% return on allocated capital during the quarter.
+Our revenue was relatively stable across the periods, as lower net interest income was partially offset by higher service charges. Our expenses are down 4% from the second quarter of 2013 on lower operating, litigation, and personnel costs. Our network delivery optimization benefits continued as we reduced another 72 Banking Centers through both sales as well as consolidations.
+Our credit quality remains strong, as net charge-offs declined versus both periods. Our US credit card business exited the quarter with less than a 3% loss rate in June.
+Second-quarter provision expense was $534 million. Our net charge-offs improved $313 million from the second quarter of 2013, and $36 million from the first quarter of 2014. We released $120 million more in reserves this quarter than the second quarter of 2013, and $242 million more than the first quarter of 2014.
+From a customer activity perspective this quarter, we saw continued growth in our mobile banking customers, which reached 15.5 million customers. And our customer deposit transactions using mobile devices represented 10% of all transactions.
+Our average deposits of $544 billion are up organically almost $11 billion or 2% compared to the first quarter of 2014, and up 5% or nearly $25 billion compared to the second quarter of 2013. And we did that as our rates paid on our deposits reached a new low of 6 basis points.
+Our brokeraged assets surpassed $105 billion and are up 26% year-over-year based on both improved market valuation as well as customer flows.
+Our card issuance remains strong at 1.1 million new accounts in the second quarter of 2014, with approximately two-thirds of those cards going to existing customers. We saw growth in ending US credit card balances this period, with ending balances up $1.3 billion relative to the first quarter of 2014; and our risk-adjusted margin remains strong at approximately 9%.
+If you move to Consumer Real Estate Services, the loss in the quarter was driven by $3.8 billion of litigation expense. Overall, we saw higher originations, improved mortgage banking revenue, and lower cost in both the fulfillment as well as the servicing sides of the business.
+Let's focus first on the reported subsegment of Home Loans, where we record the origination of Consumer Real Estate. Our home loans saw better leverage versus the first quarter of 2014 as both revenue and expenses improved.
+Our first mortgage retail originations were $11.1 billion and were up 25% from the first quarter of 2014, leading to higher core production revenue. As Brian mentioned, our mix of originations continues to shift to purchased, as we are now at 47% purchased versus 17% in the year-ago quarter. At the end of the quarter, our origination pipeline was up 15% from the first quarter of 2014, but our applications per day are slowing a bit.
+Our home equity originations were $2.6 billion and increased 31% from the first quarter of 2014. We continued to reduce production staffing levels; and the savings from several quarters of these reductions are beginning to show in our expense levels.
+If we move to the Legacy Assets & Servicing subsegment, the driver here was the aforementioned litigation cost. From a cost of servicing perspective our LAS expenses, ex-litigation, did decline $141 million to $1.4 billion; and our number of 60-plus-day delinquent loans dropped 14,000 units to 263,000 units, or down 5% from the end of the first quarter of 2014.
+The primary revenue component in our LAS subsegment, servicing fees, declined $40 million versus the first quarter as the size of our servicing portfolio declined. This was offset by a better net hedge performance on our MSR. Also during the quarter, we did benefit from lower rep and warrant provision, which was $87 million, or down nearly $100 million from the first quarter of 2014.
+If we turn to slide 11, Global Wealth & Investment Management, this business turned in another record revenue quarter. Our pretax margins remained strong, north of 25% for the sixth consecutive quarter.
+Our revenue of $4.6 billion was up 2% from the second quarter of 2013, and 1% over the first quarter of 2014. Record asset management fees offset the softness in transactional activity. Net income, $724 million, was slightly lower than both comparative periods, driven by increased expenses.
+Our expense levels versus the second quarter of 2013 reflect higher revenue-related incentive comp, other volume-related costs, as well as continued investment in technology and other areas to support the growth that we are seeing within the business. Relative to the first quarter 2014, expenses were driven by higher revenue-related cost, litigation-related expenses, as well as marketing.
+Our return on allocated capital during the quarter was 24%. The momentum we are seeing in flows continued and was quite strong during the quarter.
+Client balances were up $72 billion from the end of the first quarter of 2014 to a record $2.5 trillion. Long-term AUM flows were nearly $12 billion for the quarter, marking the fifth straight year of positive quarterly AUM flows. Our ending client loan balances were up $3.9 billion to a record $123 billion, which is up 3% from the first quarter of 2014, as we saw growth in both our securities-based lending as well as our residential mortgage lending.
+From a referral perspective, we continue to see coordinated efforts across Wealth Management and the banking groups, as our referrals resulted in the funding of more than 250 institutional retirement plans worth more than $2.4 billion in assets this quarter. And that compares to 156 wins in the year-ago quarter for $600 million in assets.
+If we turn to slide 12, our Global Banking earnings for the quarter were $1.4 billion, up 4% from the second quarter of 2013, and up 9% over the first quarter of 2014. Our return on allocated capital was very strong at 18%.
+Compared to the second quarter of 2013, our revenue showed modest improvement, while expenses increased and credit costs declined. Within the revenue category, our investment banking fees companywide this quarter were $1.6 billion, up 5% from the second quarter of 2013 and up 6% on a linked-quarter basis. We maintained a solid leadership position in investment banking fees, and we had particularly strong equity underwriting results during the quarter.
+Our provision was $132 million during the quarter. It included a $156 million reserve build. Our provision costs were favorable to both comparative periods, as we added less reserves in the first quarter of 2014 and had less charge-offs compared to the second quarter of 2013.
+Expenses increased $50 million versus the second quarter of 2013 on higher litigation, but improved $129 million from the first quarter of 2014 on lower personnel and back-office support costs.
+If we look at the balance sheet, average loans were $271 billion during the quarter, up 6% compared to the second quarter of 2013, but flattish compared to the first quarter of 2014. Our loan balances relative to the first quarter of 2014 bear, I think, several comments that I would like to make.
+The first is we saw sizable paydowns during the quarter as our customers accessed the capital markets. We had approximately $2 billion of such paydowns, where our customers chose to access the markets and refinance existing bank loans.
+Within Commercial Real Estate, we continued to optimize the mix, with several small portfolio sales that took those balances down a little over $2 billion. And we are being sensitive with respect to pricing of commercial loans, as we are not going to chase loans at the expense of overall client relationship profitability goals. Lastly, within the Global Banking segment deposit flows remained solid and were stronger at the end of the quarter.
+If we move to Global Markets on slide 13, we earned $1.1 billion in the second quarter of 2014. That is up 14% from the year-ago period and down seasonally 16% from the seasonally strong period of the first quarter.
+Net DVA during the quarter was a gain of $69 million, versus gains of $49 million in the second quarter of 2013 and $112 million in the first quarter of 2014.
+Despite the slowdown in FICC across the industry group, we were pleased with the results this quarter. Our revenue was up 9% from the second quarter of 2013, but down 9% from the seasonally high first quarter of 2014.
+Our second-quarter of 2014 revenue did include an equity gain of roughly $240 million on the monetization of an equity investment. That is not reflected as part of our sales and trading revenue.
+Our sales and trading revenue, net of DVA, was $3.4 billion, which was 1% lower than the second quarter of 2013 and 17% lower than the first quarter of 2014. Our FICC sales and trading revenue during the quarter increased 5% compared to the second quarter of 2013 and was down 20% from the seasonally higher first quarter of 2014 levels.
+Driving the year-over-year improvement within FICC will result in both our mortgage business, our munis business, as trading conditions and our performance improved in both areas. Those improvements were partially offset by weaker financial performance in foreign exchange as well as commodities.
+On the equity sales and trading side, we were down 14% from the second quarter 2013 and 11% from the first quarter of 2014, as lower market volatility depressed overall secondary market client activity.
+Expenses were up from the second quarter of 2013 on higher technology and staff support investments and, to a lesser degree, incentives, but down from the first quarter of 2014, in line with the seasonal revenue decline that we saw. Trading-related assets on average increased $23 billion to $460 billion during the quarter, and our return on allocated capital was 13% during the second quarter.
+On slide 14, we show All Other. Revenue was down $463 million from the first quarter of 2014 on lower equity investment gains of $618 million, which were partially offset by lower negative market-related adjustments to net interest income during the quarter. Our second-quarter 2014 expense in All Other is down $1.3 billion from the first quarter, as it included retirement-eligible incentive cost and some litigation expense.
+The second quarter of 2014 provision benefit of $246 million was $111 million better than the first quarter of 2014, and $67 million better than the second quarter of 2013. Net charge-offs of $11 million improved $195 million from the first quarter of 2014, driven by the recoveries that I had mentioned associated with our bulk NPL sales.
+During the quarter, our effective tax rate was relatively low, primarily as a result of the impact of tax preference items on a lower earnings base. For the back half of 2014, we would expect to see an effective tax rate of approximately 31%, ex- any unusual items.
+I'm going to wrap up before we take questions with a couple closing comments. We feel like we made very strong progress during the quarter. We saw good business activity across the customer base.
+We experienced year-over-year revenue growth in our Global Banking, Global Markets, and Global Wealth Management businesses. Our Consumer Business profitability grew 29% from last year. And in the mortgage business we are taking costs out of the fulfillment side as well as the cost to service our delinquent loans.
+We reported $0.19 of earnings in absorbed cost, allowing us to resolve all outstanding RMBS issues with AIG and build substantial reserves for our remaining legacy mortgage issues. We did this while adding to our already-strong Basel 3 capital ratios and improving our liquidity measures to record levels. And our asset quality improved to decade-low loss ratios.
+With that, we will go ahead and open it up for questions.

exam/part2_problem1/Problem_1_Conference_Call_Segments/call_27_questions.txt

@@ -0,0 +1,309 @@
+Question_1:
+
+    Hey, thanks. Good morning. Hey, a couple questions. One, you had some callouts on some nice gains; and I know a couple of other banks reporting here this cycle have done the same thing.
+I am wondering how much more in your pipeline do you think you have to extract some value from the mortgage-related portfolio here that you're in the process of selling down this quarter?
+
+Question_2:
+
+    Okay. Separately, on just litigation-related stuff, you highlighted the AIG agreement; that looks like a great win for you guys. I guess the question is: Does them pulling out as a dissenter do anything to speed up the timing on that Article 77 case?
+
+Question_3:
+
+    Yes, thanks. Okay. Then just lastly, there's been a lot of debate recently about how the Fed could potentially start to exit. Obviously in the [F one two] minutes they talked about that, and it's been on some of the calls recently about how people are thinking about rate betas.
+I know from the Q you have a relatively positive outlook for what rising rates does to your earnings stream. Could you just remind us what percentage of your deposits are consumer, and how you're thinking about rate betas in a rate rise environment relative to asset betas?
+
+Question_4:
+
+    Okay. Thanks a lot.
+
+Question_5:
+
+    Yes, hey. Good morning. Yes, I just wanted to follow up quickly, up on that deposit question. I noticed that noninterest-bearing was up 11%; interest-bearing up only 1%. So that speaks to your efforts.
+Do you think there is more to go there? Or should we start to see deposit growth more in line with your peers at this point?
+
+Question_6:
+
+    Right. Okay, great. Then on loan growth you still have, as you mentioned, a couple of asset sales, still some legacy asset runoff. When do we start to see the inflection point, in your view? And maybe if you can give us a sense of underlying demand that you're seeing in your customer group.
+
+Question_7:
+
+    Right, that's fair. Just one last question on the LCR. Maybe I missed it. Did you disclose where you are on that front?
+
+Question_8:
+
+    Will that put any further pressure on NIM, if you're building more liquidity there?
+
+Question_9:
+
+    Okay, great. Thanks.
+
+Question_10:
+
+    Hi, good morning. On expenses, it seems like most of the New BAC savings are in the run rate here. Yet we still read about various expense initiatives that you have underway in terms of branch rationalization and simplification and things like that.
+So just wondering. Is there another New BAC, or just ongoing efforts to bring down costs, and how meaningful those might be?
+
+Question_11:
+
+    Okay. So just to try and summarize, even if there is some modest revenue growth, you would hope to keep that $13 billion relatively stable on a net basis, then?
+
+Question_12:
+
+    Okay. Then on the LAS costs, obviously making good progress there. I am not sure there is too much concern if it gets pushed out one quarter. But is there still the goal of getting down to $500 million or below $500 million per quarter?
+
+Question_13:
+
+    Okay. Then just lastly if I can squeeze in on the CCAR capital resubmission process, just remind us when you expect to get an update on that.
+
+Question_14:
+
+    Okay, thank you.
+
+Question_15:
+
+    Thank you. Quick question. The match book was up, or at least the Fed funds sold and repurchased on the asset side was up 6.5% quarter-on-quarter. It's the opposite of what we're seeing at a lot of banks and trends in the market. So I am just curious.
+Is there an opportunity to get closer to clients? Is this a function of the fact that your SLR is in great shape, so why not use it when you can? Just curious on what is underlying that trend.
+
+Question_16:
+
+    Anything different on the client usage front? It is bucking a trend, though I hear your comments on the year-end. It's just with the changes in SLR, it's changing pricing theoretically; I just don't know if it's more theoretical than actual.
+
+Question_17:
+
+    I get that, yes. Okay, switching gears. In Wealth Management, obviously everything is doing pretty darn good in Wealth Management. But I will pick a little bit and I will just ask.
+Expense -- negative operating leverage in a quarter when the markets are doing well, meaning revenues were up or expenses are up more. I heard and saw your comments on the additional investments in technology.
+Is it comp, or is it that additional investment technology? In other words, when markets are growing and flows are great you would expect margins to hold their ground, not give it up. Maybe a little more color on what investments to help that business grow would be helpful.
+
+Question_18:
+
+    Right. I appreciate that. Last one is, slide 20 shows that the private-label outstanding claims keep going up every quarter. Anything new there?
+I am not sure what's driving that and if -- I know that we have most of this stuff accounted for in the settlements. But just curious.
+
+Question_19:
+
+    Okay. I appreciate it. That's it for me. Thanks.
+
+Question_20:
+
+    Hi, good morning. Bruce, the increase in Tier 1 common of $7 billion was impressive relative to the net income in the quarter. Any more color on the drivers there?
+You mentioned AOCI. What were the threshold deductions that helped drive the capital expansion so much more than that income?
+
+Question_21:
+
+    Okay, and that building at a pretax due to the DTA, that is something that should continue on a steady pace, right?
+
+Question_22:
+
+    Okay. Can you give us the numbers on what the excluded DTA is today and what it changed in during the quarter?
+
+Question_23:
+
+    Okay. On RWA, are there risks that the continued legal settlements would drive up your operational risk metrics? Or is there a forward-looking component to the op risk calc that already anticipates more settlements coming?
+
+Question_24:
+
+    Okay. On capital, on the last CCAR your binding constraint was the leverage ratio more than the risk-based Tier 1 minimum. I assume the recent preferred issuance and the Buffett conversions will help close that gap and position you better for next year's CCAR minimum.
+Could you comment on that? Or are there more things you can do to close the gap and have a quantitative cushion that's bigger to that leverage ratio next year as well?
+
+Question_25:
+
+    Okay, thanks. On sales and trading, just in terms of the dynamics of the quarter, did you see a pickup in June as the other banks did? And any sense of what drove that? Have you seen any follow-through on that?
+
+Question_26:
+
+    Okay. Last thing for me, Bruce, on the CRES page, in terms of mortgage servicing revenues, is this quarter's core mortgage servicing revenue a stable base as you see it? Or is there further shrinkage in the size of the servicing book from sales that are ongoing that would impact the servicing fees?
+
+Question_27:
+
+    Okay. You're still taking rep and warranty provisions. What are those for? Is that for current originations, or is it still catch-up from past stuff?
+
+Question_28:
+
+    Okay, thank you.
+
+Question_29:
+
+    Thanks, good morning. The first question I had was just a follow-up on CRES. Is there any immediate benefit in terms of the ability to accelerate LAS legacy servicing cost reductions now because of the bulk sale?
+
+Question_30:
+
+    Got it. So what we're really looking at is more what you were talking about in response to John's question a minute ago, which is the potential for one more sale this quarter and then just normal runoff.
+
+Question_31:
+
+    Got it. Question for you, while we're on the topic of mortgage stuff. Obviously you had the $4 billion litigation reserve build essentially this quarter.
+It appears, based on what you gave as an after-tax impact that you take a full tax benefit against that. Of course, what we find with a lot of these things, especially with like the DOJ settlements, is that a large amount is not deductible. Do you have any flexibility with respect to being able to use a lower tax rate?
+
+Question_32:
+
+    Got it. Switching topics, you did talk about pricing on commercial loans in the context of not seeing a meaningful increase in commercial loan balances this quarter, and I guess alluded to some discipline that you're exercising. Can you talk a little bit about the conditions that you're seeing in the commercial loan market and where you think there is froth?
+
+Question_33:
+
+    Just to follow up on that, when you say banks competing for that business, are you using the word bank in a traditional sense? Or are you actually seeing a lot of the competition for those type of mid-market loans coming from outside of what we would think of as the traditional banking sector?
+
+Question_34:
+
+    Okay. Then just a housekeeping question, just to make sure I understand what you were saying. You said there were maybe $250 million of gains in Global Markets, I guess. Probably -- not to put words in your mouth -- but things like market.
+But I think you said that you did not include those numbers in the core equities or fixed income segment revenues. Is that right?
+
+Question_35:
+
+    Got it, perfect. Thanks for the clarification.
+
+Question_36:
+
+    Great, thanks. I was wondering; you've got a little less than $250 billion of residential real estate loans and $90 billion of home equity. How much do you think those decline before those stabilize?
+Because I think you tried to talk about in terms of the overall loan growth. But that's really -- those are really the categories that are shrinking. Do you have a sense as to where those categories will level out?
+
+Question_37:
+
+    Got it. Secondly, the reserve build for legal, I guess, could you talk about how much you have in reserves in total? Or maybe address as to how you came up with that number? Given the fact that I think, if I'm reading the footnotes correctly, that your possible but not accrued losses have stayed flat from the first quarter.
+
+Question_38:
+
+    Great. Just a quick follow-up to the first one. You had mentioned investing some of the runoff from the mortgage and home equity portfolio in securities. Is that in the context of keeping those balances stable? Or would you actually increase that portfolio?
+
+Question_39:
+
+    Okay, thanks.
+
+Question_40:
+
+    Hi, good morning. The first question I have pertains to capital and RWA specifically. Over the last five quarters, we have actually seen the RWAs on a flat to upward trajectory; and then effectively the growth has mirrored the balance sheet growth that we've seen over that same period.
+I just wanted to get a sense as to whether there were any additional mitigation levers that you guys could potentially pull; or whether those types of opportunities have been largely exhausted, and thus the growth going forward will likely continue to mirror the balance sheet.
+
+Question_41:
+
+    Okay, thanks. No, that's really helpful. Switching over to GWIM for a moment and actually taking a longer-term view on the earnings power within the segment, there is one area where we have struggled from a modeling perspective. It's trying to contemplate exactly how high the operating margin can get in a rising rate scenario.
+Because the operating leverage improvement can be fairly dramatic, but presumably there is that peak margin level where competition is going to intensify to such a degree that effectively there's going to be no more room for improvement beyond, I don't know, let's call it 30%. I didn't know if that was something which you guys had evaluated at least in the context of a rising rate scenario.
+
+Question_42:
+
+    Okay, great. One final one on credit. At your Analyst Day a number of years ago, you had given some guidance on through the cycle charge-off rates. But clearly since that update your loan mix has changed fairly dramatically; and at the same time underwriting standards have tightened meaningfully.
+From what I recall, I believe the through-the-cycle charge-off rate at that time that was implied was somewhere in the neighborhood of 120 bps. And clearly it's going to be lower than that going forward, but I was hoping you could give us an update, maybe some updated guidance on where you think that through-the-cycle and that charge-off rate will likely end up.
+
+Question_43:
+
+    Okay, that's great. Thank you for taking my questions.
+
+Question_44:
+
+    Yes, thank you very much. Going back to your LAS costs, excluding litigation, where you mentioned that it's probably -- to get to that $1.1 billion target is going to take another quarter or two. What should we be watching?
+And how long do you think that LAS expenses are going to move to become nonmaterial, I guess is another way to say it? Can you give us things, what we should be tracking?
+
+Question_45:
+
+    I'm sorry.
+
+Question_46:
+
+    And just a follow-up. You talked about you do have another MSR sale. I don't know how material that is. But right now there has not been a lot of transfer of MSRs due to various -- well, Lawsky, up in New York, questioning a lot of the stuff that other companies are doing.
+Is that -- can that interfere with the sale? Or you think you can sell the MSR without the headline risk of Lawsky?
+
+Question_47:
+
+    Okay, guys. Thank you very much.
+
+Question_48:
+
+    Thanks. I wanted to ask you a couple questions. First off, you've been harvesting about $400 million worth of gains out of the debt portfolio. Is that in the sense of trying to minimize your AOCI risk when rates do go up, as you're shortening the portfolio? Or just wanted to think about your strategy; because that's been a pretty consistent flow through over the last year.
+
+Question_49:
+
+    So I just want to make sure that the gains are just an outflow of that overall strategy that you had talked about.
+
+Question_50:
+
+    Okay. When you look at the Consumer and Business Bank, you have a considerable amount more in deposits than you really have in loans, which to me seems a little bit more skewed than what you would normally expect. How do you strategically think you can utilize that balance sheet funding over time?
+Or what are some of the initiatives that you are doing? Because you should be able to penetrate that customer base with more lending.
+
+Question_51:
+
+    Then in the mortgage segment, the CRES, you're still, if you take out the litigation, generating about a $700 million negative loss in the sense of your just pretax pre-prevision between the revenues and expenses. You're talking about bringing down the Legacy Assets & Servicing expenses. But what is the timetable in your mind that would be reasonable to think of closing that $700 million gap?
+
+Question_52:
+
+    Just lastly -- and thanks for letting me ask you a few questions. Because if you're looking at valuation of your servicing portfolio, it dropped off to 82 basis points this quarter, which seems relatively low as the duration of that portfolio is extending.
+I know interest rates came back, so the models force you to write it back down. But when you're looking at the prepayment speeds and the refinancing behavior, it seems like eventually that there is some value as that portfolio lasts a lot longer than the model assumes at this point.
+
+Question_53:
+
+    While from an interest rate standpoint I understand that, it just seems like the models have assumed a lot faster prepayments than we really actually experience, which eventually has to true up.
+
+Question_54:
+
+    All right, thanks.
+
+Question_55:
+
+    The questions have been asked and answered. Thanks very much.
+
+Question_56:
+
+    Hi. A couple follow-ups. First on the deposit beta, I appreciate you giving us the color, for every 100 basis point increase it would help by $3.4 billion. You describe the deposit base. But what is the actual deposit beta that you use to come up with the $3.4 billion benefit?
+
+Question_57:
+
+    Okay, 40% for the first 100?
+
+Question_58:
+
+    All right. I think that's in the ballpark of one of your large peers, but below some others. Is the reason that would be below others just because it's a lot of branch-based deposits?
+
+Question_59:
+
+    As it relates to expenses, you've achieved 90% of the $8 billion New BAC savings. I see the branches are 5,023; and I think you said you wanted to be around 5,000 branches. So if I heard you right, I think you're going from a period of rightsizing to growth. Is that a fair characterization?
+
+Question_60:
+
+    Are you reallocating some of the people assigned to New BAC to other areas? It seems like you could dismantle that project group, so to speak.
+
+Question_61:
+
+    Okay. As it relates to loan paydowns, Bruce, you mentioned that some bank loans declined as customers went to the capital markets. In a way, a type of disintermediation from the bank.
+But can you elaborate on that? Are you still seeing that this quarter? Do you think that was a one-off event, or is that something we should watch out for?
+
+Question_62:
+
+    What I'm getting to is, do you guys think this is an inflection point for loan growth? I can find one of your large peers who implied that it is; and I can find a large regional bank who says it's not.
+Where do you fall out on the spectrum? You said, Brian, that middle-market utilization was up ever so slightly. Can you just give us that utilization number and where you stand?
+
+Question_63:
+
+    So do you think this is an inflection point for loan growth? Or is that an answer you would rather not delve into?
+
+Question_64:
+
+    Okay. At the Annual Meeting, the clock ran out on me before I could ask one question. Very simple. What are your financial targets with and without higher interest rates?
+
+Question_65:
+
+    I'm sorry. So without the 100 basis point shift, the target for ROA and ROTCE is what?
+
+Question_66:
+
+    Okay. Then last question. As it relates to Citigroup's settlement with the DOJ for MBS securitizations and CDOs, you had quite a bit more in MBS securitizations and CDO structuring; and so how can we think about this number and the amount of reserves that you have? I read one press article that you were willing to offer $12 billion and the DOJ wanted $17 billion.
+I know you can't go into too much detail on this. But can you just give us a framework for how you view resolving this?
+I mean, on the one hand, you could argue maybe you shouldn't pay hardly anything because you bought a lot of these entities that created these deals, and you're just punishing the new shareholders. And on the other hand, if you say that you had 10 times the level of some of this MBS activity, it could be a huge number. So how should we think about that?
+
+Question_67:
+
+    All right. Well, good job with the AIG. I was one of those people who thought it was going to be more, and it wasn't. But that's fine.
+I will take any guidance I can get on the legal costs ahead. Thanks a lot.
+
+Question_68:
+
+    Thanks. Most of my questions have been answered. Just on the AIG settlement, I actually thought AIG was the only remaining objector. Are there others?
+
+Question_69:
+
+    AIG has agreed to dismiss all its claims -- or its objections, I should say?
+
+Question_70:
+
+    Okay. Great.
+
+Question_71:
+
+    Great. Thanks very much.
+

exam/part2_problem1/Problem_1_Conference_Call_Segments/call_28_answers.txt

@@ -0,0 +1,260 @@
+Answer_1:
+
+    Sure. A couple things, Betsy. I think the first thing, if you look at the balance sheet from the second quarter to the third quarter and you look at the securities portfolio, you can see that virtually the entire increase in the securities portfolio related to treasury securities that tend to have a maturity in the four to five-year life perspective as opposed to longer-dated agency securities.
+The second thing that I mentioned is just, and references what we would look to do with respect to our buy ticket during the fourth quarter and I think at this point we're being very cautious in looking at that buy ticket given the overall rate environment that we see that's 30 to 35 basis points lower than what we saw during the second quarter of 2014. And there's also a little bit of roll to spot risk that you have as we look out and I'd say if we aggregate those two items and put it in the context of NII risk for the quarter, those two items could be roughly $100 million of risk relative to what we saw during the third quarter.
+
+Answer_2:
+
+    The $100 million risk that I referenced is relative to the actual net interest income in the third quarter once we back out for market-related items.
+
+Answer_3:
+
+    Sure. I think the biggest thing I'd point to, Betsy, is if you look at what we've done, if you look at the number of FTEs that we have, which tends to drive a lot of the expense, we're down 7% year-over-year and down 2% on a linked-quarter basis. And you see the flow-through of those benefits through a number of line items. I think one of the most important things to look at is if you go to our supplemental materials and flip to page 4, we show you nine different expense items and if you look at those line items and exclude the other category, which includes litigation expense, all eight line items are down both on a linked-quarter and a year-over-year basis. So as we continue to be efficient and continue to manage down overall headcount as a result of the various programs we've talked about, as well as just generally, you do continue to see grinddown expenses across all categories across the Company.
+
+Answer_4:
+
+    And Betsy, just to put it in a broader perspective, I think how would you manage the Company if a low rate environment continues is a lot like we've been managing it now, continuing to be careful in every expense item, every headcount, but at the same time investing in the business. And so if you think over the last year, we've added small business bankers and financial service advisors, the people who work in the branches for Merrill Edge and the Merrill Lynch teams. We've added sales of mortgage loan officers in the retail segment while we reduce the overall numbers. And so we've been able to accomplish a reduction in expenses at the same time we're making the investments, $3.5 billion in technology last year, probably $3.3 billion or so this year. So we'll continue to make those investments. So that means that the New BAC left to implement helps offset any kind of inflationary growth you get and on top of that, we continue to work on initiatives to continue to simplify the Company and eliminate non-core products, etc. to continue to keep the expenses where they are.
+
+Answer_5:
+
+    No, we're just doing the daily work that we need to do and remember, we're offsetting all the inflation and healthcare costs and wages and everything that goes on in a normal day. But we've made the raw reduction we talked about; now it's just business as usual and go to work.
+
+Answer_6:
+
+    Sure. No, we went back and noticed the same thing, Glenn. There were a few items that were 10s, 20s, and 30s that rounded, but as we go out and look and as we have freshened up and look forward, I would say that the forward look on credit as we look forward relative to when we looked at it last quarter, we do continue to see continued improvements, albeit at a slower pace from a charge-off perspective once you adjust for the non-performing loan sales.
+
+Answer_7:
+
+    I think as we looked out and as you look to fill up the various non-CET1 buckets, you can see that we obviously had the Buffett Series T in May and we've issued about $4.6 billion to get where we're largely filled up on the preferred bucket and the sub debt issue of $3 billion was relative to approximately $5 billion to fill up that bucket from an overall capital perspective. And at this point, I would say from an OLA perspective we continue to read what you do. We feel like we've been very prudent in building up the significant debt stack at the parent and we'll just have to see where the regulation goes from here and we're obviously waiting to see exactly what that is.
+
+Answer_8:
+
+    I'd say the first is, as it relates to the balance sheet, I believe it was roughly two-thirds of the production from a first lien perspective would have gone on the balance sheet during the quarter.
+
+Answer_9:
+
+    In terms of just the origination quality, we continue to focus as we have for quite a long time here on originating high-quality prime mortgages while still fulfilling our duties to get customers credit for home purchases. The originations continue to rise. The purchase component obviously is rising too, so we feel good about where we are and you can see that the new purchase requests from the agencies and stuff have come down dramatically. So we're not going to change course at the end of the day because we feel good about the credit quality that we're taking on producing for ourselves and for investors.
+
+Answer_10:
+
+    Well, I think we have a strong Board. It's a team with various people with various skills and backgrounds and that diversity really helps us. So I think the Board's decision, as we put out a few weeks ago when the announcement was made, this is continued great governance, continued commitment to good governance. Jack Bovender, the lead director, takes over from Chad Holliday, who served as Chair for about 4.5 years and did a great job for us and the Board is very committed to continuing to have the strong governance, especially in the heightened expectations from the regulators and the enhanced supervisor prudential standards from the Fed. And so we feel good about the governance, but it's a team effort in how the Board works together and I think your points that Chad made in the announcement are that the Board feels very good about the accomplishments of the management team and this is part of the progression in that regard.
+
+Answer_11:
+
+    It's the Board's decision, but we consult with the regulators on all our major decisions in the Company, but I think the key is to how we operate as a Board and how we govern the Company and I think it will be for the benefit of the shareholders as it has been.
+
+Answer_12:
+
+    A couple questions. The first thing is we focus on the deposits. I wouldn't say it benefited LCR, but what it enabled us to do was continue to rationalize the balance sheet without hurting LCR. That relates to the deposit optimization. With respect to the mortgage loans, the $6.5 billion that we reference where we converted mortgage loans into agency securities, that's basically taking $6.5 billion of non-LCR benefit asset and converting them to $6.5 billion of LCR benefit. So that would have been the one pickup of the activities that we mentioned, as well as just the reinvestment of repayment of legacy loan proceeds into securities once again helps LCR. So the actions with respect to bullet one under the key balance sheet benefited LCR. The $15 billion of deposits just enable us to rationalize the overall size of the balance sheet.
+As it relates to CCAR and the actions that are taken, as we look to manage the Company, we continue to look to manage out the higher risk categories of loans. And if you look at what we did in the second quarter with just over $2 billion of non-performing loan sales and $2.5 billion this quarter, we would clearly expect that, as you look at those from a CCAR perspective, they would be higher loss content loans relative to the rest of the portfolio. But the rationale and the goal to move those out was to reduce the risk in a market environment that was very favorable and we feel good about those actions that we took.
+
+Answer_13:
+
+    Sure. So from an overall LCR perspective at the parent, we're at approximately 110% at the parent, so we're well in excess of where we need to ultimately be in 2017. Within the bank level, we're well above the 80% level and would look to drive that to be north of 100% during the first half of 2015, well in advance of the 2017 implementation. As we move forward and we look at the balance sheet, the goal as we go forward, and you saw a little bit, it's interesting, if you compare the loans in the three principal businesses where we make loans in the segments that we've laid out here and that would be in our Consumer business, in our Wealth Management business, as well as in our Global Banking business, that average loans within those segments are up about 2% on a year-over-year basis and we're clearly very focused on looking to drive out and push out and grow loans. We're obviously focused on growing deposits with our core customers, which will benefit LCR as well and I think as it relates to the overall size of the balance sheet, we want to continue to be more efficient, but I don't think you're going to see the magnitude of move in the balance sheet going forward that you saw during this quarter.
+
+Answer_14:
+
+    It would reflect two things, John. It's both the roll to spot risk, as well as the buy ticket during the fourth quarter.
+
+Answer_15:
+
+    Well, to the extent that we don't reinvest and build up cash, it will increase our asset sensitivity and the benefit to rising rates when that occurs.
+
+Answer_16:
+
+    This is much more, John, I think just realizing what we've seen during the quarter and being cautious on buy ticket during the fourth quarter to manage net interest income risk with OCI risk, but we're not talking about any kind of material shift. We're just flagging something for you given the magnitude of the rate move that we've seen so far this quarter.
+
+Answer_17:
+
+    I would say that the -- it tends to move -- the FAS 91 moves most and is most correlated to the 10 year and I would say that as you look at OCI risk, it tends to be more correlated to long-term mortgage rates.
+
+Answer_18:
+
+    I think, John, I would look at the charge-offs adjusted for the portfolio sales that we said came down from $1.3 billion to $1.2 billion and assuming the overall economic environment doesn't change, we have continued to see improvements in the credit portfolios. And I think practically speaking, if you look at the reserve release during the quarter, once you adjust for the DOJ amount of $400 million, that you're not going to see reserve releases. I think clearly they will be a fair bit below the $800 million that we would have seen this quarter on an adjusted basis.
+
+Answer_19:
+
+    Sure. The disallowed amount continues to be in the $15 billion to $16 billion type area. And as we look out between now and the end of 2015, we would expect that the CET1 should build generally consistent with pre-tax earnings all the way through the end of 2015.
+
+Answer_20:
+
+    I believe between what came through in the charge-off line and the net, I think the NPAs were roughly $150 million, Mike.
+
+Answer_21:
+
+    Correct.
+
+Answer_22:
+
+    As we look at rate assumptions, what we do is when we go through our internal forecasting process, we snap and manage the business just based on the forward curve of what the market is telling us. And clearly, I think if we look out at and look at the rate movement that we've seen over the course of the last couple weeks, people are obviously more cautious that rates may not be moving up at the level that they had had, but it's clearly been very volatile over the last 30 days.
+
+Answer_23:
+
+    Well, I think that as we look forward, Mike, I think it's a little bit of why we said what we did about a little bit of caution during the fourth quarter; that at this point as we look out and given the impact that OCI has to capital, until we see where rates settle out as they continue to move around, we continue to be very cautious with the buy ticket. And when we do it, we're investing clearly a little bit shorter than longer at this point, given the risk that OCI has to capital and being mindful of that.
+
+Answer_24:
+
+    No, I think it's a couple things, Mike. The first is that I want to make sure that we emphasize is that we still have a couple hundred million dollars of expenses to get out in the LAS area between now and the first quarter of 2015. And clearly, $1.1 billion of LAS expenses that we've set to get to in the first quarter of 2015 is not where we would expect to operate on a longer-term basis. And there's additional work that we need to do there.
+The second area, just broadly speaking, that we highlighted is that clearly we'd expect, given what litigation has been, that that over time is going to come down. And then the third thing -- and when I said directionally expenses moving with revenues is just if we look at some of the areas, particularly within the wealth management area that we've seen, that there is a component of compensation and incentives that's very clearly tied to revenues, not unlike what you see within the Global Banking and the Global Markets space.
+
+Answer_25:
+
+    I think if rates don't go higher, what you see in terms of earnings is what we've got to drive through this quarter. So, Mike, when you look at the charts Bruce showed you and I showed you, you can see that the core businesses have earned several billion dollars after-tax this quarter, and the CRES business took it away. And as that comes down, you'll see those earnings flow through. So you can compute the ROE based on that.
+But basically we're earning -- you can see on page 18 the net income levels across the businesses each quarter. And our job is to take the commercial real estate business which is -- you see it for the year to date -- take the commercial real estate business which has lost money and get that back to breakeven. And that's the work we'll do. In absence of rate rising, it's not a lot different than it is right now.
+
+Answer_26:
+
+    I think what they've been clear about in the published documents by the OCC and their heightened standards, their enhanced standards and recently in the Fed, they care about the engagement of the Board and the diversity of the Board and the experience of the Board and we have a good Board and it's experienced and has all the diversity and credible challenge and all the words that are used to describe that. And that's the core of the governance point that they make.
+
+Answer_27:
+
+    Sure. I think I would start and just reiterate as we look at capital on a go-forward basis, you basically have three items that are going to affect things. The first is your level of profitability and I just want to reiterate that we would expect once again on a go-forward basis to accrete capital on a pre-tax basis. And the second is the impact that OCI has to those capital ratios. We obviously saw during the quarter rates went up on the mortgage side. I believe it was about 5 basis points during the quarter and there were some security gains as well. That was what led to the change in overall OCI and as I said before, given the environment we're in where rates are down about 30 basis point so far quarter-to-date, that would have a benefit today to capital and we're just mindful of reinvesting so that we don't take on any greater OCI risk on a go-forward basis.
+As it relates to what we're looking through and as you look at the overall risk-weighted asset work that's been done, I would say that clearly as we continue to work through the legacy home equity, as well as the first mortgage portfolios that do not benefit from a standby agreement, as we continue to work those assets down, that should enable us to grow the core and still keep risk-weighted assets generally constant. And I think more specific to your point, the other two things are that we continue to look to work through and we have the runoff of some of the structured credit and other portfolios that we're trying to accelerate that come off between now and 2017.
+Then the last piece that we continue to work hard on and you saw it in the op risk, that is we updated the models for the time series. You do have the increase to risk-weighted assets and we're working hard to get to where we need to be from that model perspective as we would hope in 2015 if we're successful to go ahead and exit parallel run at that point.
+
+Answer_28:
+
+    I think it's -- obviously as others have noted, it's an ongoing process. I think the important thing is if you compare our operational risk number relative to our peers, we're at roughly 30% and if you do the math against the risk-weighted assets, we're at the if not the top the upper end of where others are from that, but we obviously have work to do to get that finalized to be in a position to exit.
+
+Answer_29:
+
+    Sure. I would say that the most competitive area that we continue to see is within the commercial banking space of our Global Banking segment, which are those middle-market type companies that tend to be loans that have one or two banks provide all of the credit and clearly the remaining services that go along with servicing those customers tends to go to those that provide the credit. And that's where you've seen the most competition.
+I think it is interesting, if you look at and go back to our table on the international side as we've continued to shape the balance sheet and look for return, you've actually seen a step up in the yield in our international lending activity. And within the large corporate space of our Global Banking space, we have seen some stability in yields within that. So I'd really focus -- most importantly it's within the commercial -- the middle-market commercial space where we're seeing the most pressure on yields.
+
+Answer_30:
+
+    So just to add a little color there. Our view was along two dimensions. One, on the international side, we had strong loan growth a couple years ago into last year and now we have to materialize our structured management and other revenue streams under increasing our credit exposure and Tom and the team growing the business. So there was a growth of loans that then has to be a follow-through of growth of transactional revenue, etc.
+And on the middle-market, I think the team went for optimization and we are going to continue to stress that they need to be able to manage both the optimization and the growth of the portfolio. So we're pushing on them to get the balance probably back a little bit more in skew than they had in the last couple quarters.
+
+Answer_31:
+
+    I think they're related to each other, that we think it's prudent balance sheet management, but they're independent actions that are part of prudent balance sheet management.
+
+Answer_32:
+
+    So Guy, I'd say thematically, but not necessarily directly.
+
+Answer_33:
+
+    No, it's not.
+
+Answer_34:
+
+    So to be clear, when we set up the $5 billion reserve or the $5.3 billion hit this quarter, that was to cover cash payments, as well as all expected costs associated with implementing our $7 billion of consumer relief. And the part of it that flows into the provision line item that's $400 million, that is a reserve to take care of the what would have been the P&L impact from the modifications that would happen within the different loans that we're modifying. So on a go-forward basis, assuming that we've got this set up the way that we do, there should not be any future P&L impact from DOJ. The only impact there will be on the balance sheet is you see the reserve number come down as we implement the consumer relief programs.
+
+Answer_35:
+
+    Obviously this is a matter that we take very seriously from the Board engagement, the talents that we have on the Board to help us with this all the way through management. Cathy Bessant and her team in tech and ops and we spend hundreds of million dollars on it a year and it's been growing and we expect it to continue to grow. It's the key to keep our customers and our teammates secure and we continue to work on it. So this is nothing but hard work and we continue to work with both the law enforcement authorities, the various government agencies and among our industry through the various trade groups and formal engagements to try to drive our competencies in industry up. So we're spending a lot of money on it, several hundreds of millions of dollars and we expect that to continue to increase.
+
+Answer_36:
+
+    So if you recall, Guy, what we've done and what we continue to refine each quarter is that as we continue to see rep and warrant claims, there was a reserve set up back in the second quarter of 2011. A piece of it was for Gibbs & Bruns. There was a piece of it that was for bank-issued rep and warrant and then there was a piece that was for third party and we obviously look at those reserves each quarter and adjust those reserves for the activity. In those cases where we have enough activity to have a reserve, we obviously have those and to those areas that are still uncertain, we provide the range of possible loss. As you referenced, the range of possible loss with respect to rep and warrant activity continues to be up to $4 billion.
+
+Answer_37:
+
+    That's correct.
+
+Answer_38:
+
+    It's a good question. So the decision to move the $6.5 billion from loan to security form was based on LCR. It doesn't change the fact that when you move that that you still have the asset on the balance sheet. So I think that $6.5 billion is a fair adjustment to make and I would agree that the $2.5 billion where we sold the non-performing loans and quite frankly there's not much left there to attack is a fair adjustment, which gets you to the $9 billion.
+The other thing when you look at those loans that I do think is important is that, on the home equity side, with those legacy home equity portfolios, which we want to get repaid, that repayments within those were roughly $3.5 billion, which were greater than the funded amount that came on from a new home equity origination perspective. So I come back to that, within those more discretionary portfolios, what's happening there is what we want to happen there, that they're repaying and we're converting them to more liquid instruments. And I think as we look at actual business activity and how we're doing, we'd focus you back within the segments and as we talked about within the Consumer business where average loans were up a little bit linked quarter on a card basis where we saw very strong continued growth within the home equity space, go back to the Wealth Management area where loans reached a record level and then I think we've already addressed the work that we need to do on the commercial front.
+
+Answer_39:
+
+    Sure. I think I would look at, as you go forward given that we're not buying whole loans from third parties, that you're probably looking at a high single digit continued reduction for the next couple quarters with respect to whole loans that we hold for others. The second thing I'd say that you have is you've got roughly $3 billion a quarter in home equity payoffs, a portion of which will be mitigated by new originations, but you are looking at roughly $3 billion there. And then you have some other less than $1 billion type items, but I think it's fair to say that, as you go forward, outside of what we think is core, you're probably looking at in the Consumer businesses in the ZIP Code of $10 billion to $12 billion that will go away. We will either have the ability to reinvest and make new loans or otherwise reinvest.
+
+Answer_40:
+
+    Correct.
+
+Answer_41:
+
+    I'm sorry, when you referenced margin, margin in what area?
+
+Answer_42:
+
+    Yes, if you look at it and you go through the different areas, you tend to have 40% type payouts with respect to the revenue piece. So when you look at the margin improvement of a couple hundred basis points, I would put it more in the context of just good core expense management. I do think there was a little bit less litigation within the quarter that benefited us, but it tends to be just across the board, whether it be a little bit lower support cost, a little bit lower licensing fee number, a little bit less litigation. There was no one number that was particularly dominant in driving the margin.
+
+Answer_43:
+
+    And last quarter, we had some startup costs for the Merrill One product that you can see has had strong success in terms of AUM. So that was sort of in the second-quarter technology expense and stuff to roll that out, but it comes back off [too].
+
+Answer_44:
+
+    Yes, exactly. If we remember last quarter when we talked about it, they had a decline. It was because some of the stuff was going in and this quarter, you saw it revert back to more where they had pretty consistently been over the last many quarters.
+
+Answer_45:
+
+    I think it was a little -- it was all in that much, but whether it was all in that one quarter or not, I don't remember.
+
+Answer_46:
+
+    Yes.
+
+Answer_47:
+
+    Sure. The first thing, I just want to clear up that there's, in the quarter, the only comment with respect to the quarter that we're referencing is just some caution on the buy ticket given where interest rates are at this point during the quarter. I think if you go back and you look at over the last couple quarters, it's been a very consistent message in that we've said we're going to direct more of the buy ticket to shorter-dated treasuries and you can see that there's been a buildup of those treasuries over the course of the last three to four quarters. So this quarter was a continuation of that and we were just calling out a note of caution given the rate environment.
+I think as it relates to overall OCI sensitivity, if you look at what we've typically said is, in a 100 basis point parallel move up in rates, how long does it take back or take to earn back that OCI. Said consistently, it has been around three years. It peaked at about 3.5 years and at the end of September, it would have been less than three years. So we have on a consistent trend line continued to look to move down the overall OCI risk as it presents itself to capital.
+
+Answer_48:
+
+    No, that's the period of time that it takes to earn it back. You're looking at the overall -- I think the overall duration it is going to be in the five plus years.
+
+Answer_49:
+
+    I'd refer you to page 21 in the appendix in the lower left-hand corner and you can see this is the third quarter of 2012, 2013 and 2014 laid out side-by-side. And so I don't think this is a change in position if you look at it. The average trading-related assets of 460 to 440, the VAR is $55 million and $56 million, $50 million and you can see the revenues. What Tom and the team have done a good job is building a relatively stable -- this business is going to fluctuate in the market, but a relatively stable core amount of activity comes through this. And if you look at it over several quarters with the exception of seasonality in the first quarter that typically occurs each year, but we laid this out for you. The second quarter of 2012, 2013, 2014 last quarter, the third quarter, you see it's a relatively consistent $3 billion revenue type of number and we've maintained that.
+So the adjustments we've made in the business on expenses, the scope of activities and stuff we actually made in 2010 and 2011 to bring the business in line, so we're very comfortable with where they are now. They are always moving around and paring risk and continuing to manage carefully the overall returns of the business. It's relative size to our Company. We think we've gotten a good place; we've simplified it. And so there's no change in strategy here and in fact, you can see there's a fairly consistent result from that activity. What's different this quarter versus last quarter obviously without the UK tax thing, you're seeing the bottom line come through to the third quarter, but we made $700 million odd after-tax and that's good performance.
+
+Answer_50:
+
+    I think if you look at the servicing revenue, as I said, the biggest reason for the decline was the adjustment in the cost to serve. If you saw the actual servicing fee line that came through linked quarter, it was only down about $25 million on a linked-quarter basis. So what you're going to see on a go-forward basis is not so much the impact on the sale of MSRs, but just the servicing revenue that's derived based on the size of the MSR asset. So given that there aren't any more large-scale sales of that MSR, you're going to see that more vary on a core basis as opposed to a step function.
+
+Answer_51:
+
+    And the big advantage you'll see is that the number of 60 plus delinquents continues to normalize now and we have to continue to push that. That's where we think that we get the additional expense leverage in LAS going forward. And so it's $100 million this quarter and a couple hundred million dollars quarter four. It's just grinding through and working those loans for the customers and modifying or short-selling and going through foreclosure. So that number is still elevated as a percentage. You can see it. And if you look at our delinquency off of the things we produce really since after the crisis, the numbers are much smaller and imply a delinquency level ultimately of half that amount that you see now. So that's where the real work will come in unit reduction. The overall 3.9 million units was fluctuating around a little bit, but we're kind of getting to equilibrium where our production is nearly what runs off absent sales in the 60 plus bucket.
+
+Answer_52:
+
+    I think the first thing that we're focused on is getting it down to $1.1 billion and then longer term I think if you look at any metric with where we would see from a number of loans serviced, as well as the number of delinquent loans in the portfolio, we still have some significant work to do to drive that $1.1 billion down because given the size of the portfolio, it's way too high.
+
+Answer_53:
+
+    Yes, there were some servicing transfers during the quarter. My recollection is it was between 20,000 and 25,000 units that were actually transferred during the quarter. So it was a very good quarter for us as far as MSR sales and driving that number down. But I think you're right that, on a go-forward basis, it's not going to be at that level. Although we do think we will make some significant progress between now and the end of 2015.
+
+Answer_54:
+
+    There are obviously a lot of factors that can go into that that are going to have it [bump] around, but I don't think -- if you believe that with what we're seeing from the quality of the portfolio and you believe the foreclosure process continues along the same trend, you're probably looking at plus/minus 20,000 units a quarter on an organic basis, on a net basis.
+
+Answer_55:
+
+    Well, some of that stuff that people experience are pieces that we have already taken care of in prior quarters and some of it relates to completely different -- as it relates to mortgage matters, some relates to other matters. We will always have litigation expense in this Company, but in terms of the mortgage, we've talked to you in many quarters, but if you think just the last three quarters, three major pieces fell behind it and we're still waiting for the ultimate approval of the Gibbs & Bruns settlement. 95% of the RMBS by principal amount, we had settlements and settlements at this point are awaiting final approval. So a lot of the pieces we had settled up, FHA and things like that, along the way. So we've got -- in the monolines, four out of the five are settled, so we've been picking away at them. So without knowing all the ins and outs of the other competitors, from our standpoint, a lot of the smaller stuff was getting done as a lot of you focused on the larger things. A lot of the smaller stuff was coming in and out every quarter underneath that and we should see less of that going forward.
+
+Answer_56:
+
+    I think as a broad construct and I think you're asking more the strategic level, Christian Meissner and the team with Tom have done a good job of adding people in the markets where we needed to build our capabilities and while we're always looking to add more and more talent and more and more capabilities, I don't think there is any huge change in expenses or numbers. It's more of continuously upgrading our talent and adding incremental talent. But in the grand scheme of things, it's a pretty small expense base in the context of our Company with the level of expenses.
+But you're point is exactly right. The global -- the US competitive franchise is obviously demonstrably stronger as you can see in the US rankings versus the global. The global has picked up honestly and as activity picked up in Europe and in Asia, we continue to drive forward. But we still are working hard to improve our positioning and across the board, but we've made a lot of the investments already.
+
+Answer_57:
+
+    It has. It's affected it in two ways. So when you look at the declines that we saw within the loans outside of the US, a chunk of that decline was a decline in trade finance, but I think what's also notable is that trade finance tends to have the lowest spreads. So when you look at the yields within the international loan portfolio, they're up and that's because you've got more corporate type loans that have higher spreads than trade finance, which tends to have lower spreads.
+
+Answer_58:
+
+    Well, a couple things. I go back to the first comment, which is that you have to break out a little bit what's going to happen for our Company over the next five quarters between the growth in tangible common equity versus the growth in regulatory capital that flows into the capital ratio because, as I said before, over the next five quarters, we will accrete capital on a pre-tax basis absent any other changes. That's the first thing I'd keep in mind.
+The second thing is that as we look out, we do believe at this point that CCAR is the governor and we're obviously getting ready to go into the 2015 CCAR process and without instructions or assumptions or scenarios, I think it's premature to look at that.
+The third thing is, as you look at return targets, and Mike touched on this a little bit in his earlier question, I think the thing that, as we look to getting to those 12%, 14% type targets, the thing I would encourage you to do because I do think that you start to get a bridge to that is if you take the earnings that we announced today and normalize them for the things that I touched on in my comments, you tend to be starting at a point that's in the 10% plus type return during the quarter from a tangible common equity perspective. And you've got really four things that are going to change that on a go-forward basis -- the continued reduction within our LAS expenses. We would expect obviously longer-term litigation expenses to go down. You have the benefit of rates and then you've got what we do within the core businesses.
+So those are the four things that we're focused on and the last point I would say as it relates to just CCAR, we feel like getting ready for CCAR during this quarter and quite frankly throughout the year that we've made a lot of work between moving out of the Company those assets that tend to have high loss content in stress. We've augmented our CET1 ratios as we've gone forward and we think we've taken a lot of tail risk out.
+So long-winded way of saying you can look at the bridge to more normalized returns. When you adjust what we saw this quarter, we feel very good about the progress that we've made as we prepare for CCAR. We'll look to see what the instructions are and we'll have to see if our assumption about that being the governor given the evolving regulatory landscape continues to be the case or if we need to update that assessment.
+
+Answer_59:
+
+    So we do not have an exact number to disclose at this point. What I would say is we have worked through and we've done the work to get to where we need to be from an LCR perspective, that at this point there's not anything that gives us any concern that we're going to have to change in any material way what we're doing to satisfy NSFR.
+
+Answer_60:
+
+    I've got an exact number for you. Bear with me one second. You should see during next year a preferred number of 1262.
+
+Answer_61:
+
+    Thank you, everyone. Look forward to seeing you next quarter.
+

exam/part2_problem1/Problem_1_Conference_Call_Segments/call_28_presentation.txt

@@ -0,0 +1,50 @@
+
+Good morning. Thanks to everybody on the phone, as well as the webcast for joining us this morning for our third-quarter results. Hopefully you've had a chance to review the earnings release documents available on our website.
+Before I turn the call over to Brian and Bruce, let me just remind you we may make some forward-looking statements today. For further information on those, please refer to either our earnings release documents, our website or our other SEC filings. So with that, let me turn it over to Brian Moynihan, our CEO, for some opening comments before Bruce goes through the details.
+
+Thanks, Lee and good morning, everyone. Thank you for joining us to review our third-quarter results. As you know, our bottom-line results were heavily impacted by a previously announced settlement with the Department of Justice. But given that, I'm still encouraged by what we accomplished this quarter. Our business has generated enough earnings to absorb the $5.3 billion charge and still reported positive net income before preferred dividends.
+Now the themes we see are consistent with the past several quarters. You can see in our numbers a prudent balance sheet management. You can see in the numbers good core expense control. You can see in the numbers continued credit improvement and you can see in the numbers solid business activity.
+Before Bruce takes you through the details of the quarter, I thought I would focus quickly on the profitability of our business segments and some of the key statistics that give rise thereto. If you look, we've included in the appendix to the materials on page 18 and 20 some information about net income, PPNR and business statistics.
+So when you step back and look at that, you can see from our release the Company reported $2.9 billion in year-to-date pre-tax net income. That includes and overcomes $15.6 billion in pre-tax litigation costs to resolve primarily legacy mortgage issues. Now we're not suggesting that we want to incur litigation costs going forward, but what this demonstrates is how much progress we've made behind the noise of the significant legal settlements.
+So as you step back and think about the businesses, you can see on appendix slide 18 a graphic showing year-to-date net income compared to the performance by the businesses.
+Let's first focus on our Consumer & Business Banking segment. Year-to-date net income was $5.3 billion in 2014. That compares to $4.6 billion after-tax in 2013. The return on average allocated capital in Consumer & Business Banking was 24%. It is our largest business and has had a good year. Our Global Wealth & Investment Management business had net income of year-to-date of $2.3 billion in 2014. That is up 3% from 2013. Now this business, our GWIM business, has a pre-tax margin of 26% and its returns on allocated capital are 25%.
+As we move to our Global Banking business, that's the business that provides lending, treasury services and investment banking activities to middle market and large corporate clients around the world. That business earned $4 billion after-tax so far this year, up 8% from 2013 and generated returns on allocated capital of 17%. Those three businesses together have great annuity streams and hold us in good stead as we look forward.
+Our Global Markets business, which obviously is more affected by what's going on in the market on a given quarter, has earned $2.9 billion after-tax this year and for the first nine months versus $2.7 billion in 2013 when you adjust for DVA and in 2013, you exclude the UK tax changes. So in total, these four businesses generated $14.5 billion net income after-tax for the first nine months of 2014. That $14.5 billion is up 10% from last year. You can look on slide 19 and you can see on a pre-tax pre-provision basis, which some of you also focus on, we are up 4% year-over-year and you can see on pages 20 and 21 the business statistics over the last couple years, which give rise to these results.
+We made real progress in the four businesses and we continue to work on the Consumer Real Estate segment and the losses therein. But that real progress shows in the operating leverage and profitability of these businesses and we expect that momentum to continue as we move to the other side of the mortgage issues. With that, I'll turn it over to Bruce.
+
+Thanks, Brian and good morning, everyone. This quarter does reflect what we believe is very solid execution and a lot of what we have been consistently talking with all of you about. We maintained a strong balance sheet as a foundation to operate from. We continued to rationalize our balance sheet for liquidity, profitability, as well as evolving regulatory changes. Our revenue has shown relative stability and our non-litigation expenses continue to be reduced. Charge-offs have continued to come down and we resolved significant legacy mortgage exposures during the quarter.
+Let's start on slide 2 and go through the details. We recorded $168 million of earnings in the third quarter and after preferred dividends, that resulted in a loss of $0.01 per share. Earnings included the $5.3 billion pre-tax impact of the settlement with the Department of Justice and various state Attorneys General that we announced in August. On an EPS basis, the impact was $0.43 a share as a portion of this charge was not tax-deductible.
+As you can see on the right-hand side of slide 2, the $5.3 billion impact was split between $4.9 billion in litigation expense and $400 million in provision expense that relate to additional reserves that are associated with the consumer relief portion of the settlement.
+Revenue during the quarter on an FTE basis was $21.4 billion versus $21.7 billion in the year-ago quarter. If we exclude the DVA impact from both periods, as well as the $1.2 billion of equity investment income that we recorded during the third quarter of 2013 that was driven by gains from our CCB investment, adjusted revenue of $21.2 billion was up slightly from the third quarter of 2013.
+On a segment view, revenue was stable to modestly up in four of our five businesses from last year with CRES being the exception. Relative to the second quarter of 2014, revenue was 3% lower driven by the lack of equity investment gains, seasonally lower investment banking fees and lower mortgage banking revenue. Total non-interest expense was $19.7 billion, which included $5.6 billion in total litigation expense. If we back out litigation expense compared to the second quarter of 2014, expenses declined roughly $400 million from both our New BAC and our LAS cost initiatives, as well as lower revenue-related incentives.
+On the same basis, looking back to the third quarter of 2013, expenses improved by $1.1 billion, or 7%, which were driven by reduced LAS costs and to a lesser degree our New BAC cost savings. Provision for credit losses during the quarter was $636 million and included $400 million, as I mentioned, for the DOJ settlement while our net charge-offs were $1 billion. Our results during the quarter did benefit from roughly $200 million in DVA or about $0.01 per share as our debt spreads widened during the end of the quarter. There was also approximately $0.04 of benefit to earnings that relate to certain discrete tax items. Lastly, the quarter also benefited by about $0.01 as our weighted average share count excluded the impact of diluted shares given the financial performance.
+On slide 3, we show you all the usual balance sheet highlights that we do each quarter, but we did want to focus you specifically on our efforts to rationalize the balance sheet as our actions led to a $47 billion decrease from the second quarter of 2014. We took prudent actions to increase liquidity, as well as to reduce both credit and market risk. We shifted the mix of some of our discretionary assets out of less liquid loans into more liquid debt securities. For example, we converted $6.5 billion of residential mortgage loans that benefited from standby insurance agreements into agency securities. We also sold $2.5 billion of non-performing and delinquent loans during the quarter and had $4 billion of net paydowns in our legacy Consumer Real Estate loans. We reduced our Global Markets balance sheet and associated funding by $11.7 billion from the second quarter of 2014 and that included low-margin prime brokerage loans of approximately $3.3 billion. Our decline in quarter-end deposits was primarily driven by optimization efforts that included the reduction of approximately $15 billion of deposits that had little to no benefit to our LCR ratio.
+From a capital perspective, I'll remind you that we did issue $3.1 billion of preferred stock during the quarter that improved our Basel III Tier 1 regulatory capital ratio. And lastly, as a reminder, we increased our quarterly common dividend to $0.05 a share during the quarter.
+We move to slide 4 where we show our capital ratios under Basel III. Under the transition rules, our CET1 ratio was stable at 12%. If we look at our Basel III regulatory capital ratios on a fully phased-in basis, you can see CET1 capital declined $1.6 billion. That was driven by a $1 billion decline in OCI. Our operational risk-weighted assets did increase that negatively impacted our advanced levels, but not the standard levels. Other RWA balance sheet improvement benefited both approaches and that partially offset the increase in RWA under the advanced approach.
+If we look at the ratios under the standardized approach, CET1 improved slightly to 9.6% during the third quarter of 2014 and under the advanced approach, the CET1 ratio was also at 9.6%, both well above our 8.5% 2019 proposed minimum requirements. If you look at our operational risk-weighted assets under the advanced approach, they now represent approximately 30% of our overall risk-weighted assets.
+If we move to supplementary leverage, this is the first quarter that we've actually disclosed the actual ratios from a supplementary leverage perspective. The bank holding company during the third quarter was at 5.5% and if we look at our primary banking subsidiary, BANA, its ratio was 6.8%, which is pro forma for September 30 as we merged FIA, our card services unit, into BANA on October 1. We are obviously very pleased with the capital and supplementary leverage ratios in the context of the resolution of the DOJ matter during the quarter.
+If we turn to slide 5, we feel very good about the work that the funding team did during the quarter. In addition to the $3.1 billion preferred stock issuance, we issued $3 billion of Tier 2 subordinated debt, which also adds to our total capital metrics. Lastly, we issued $4.5 billion of straight debt at the parent. Our goal is not only to build the Basel III non-CET1 component of the capital stock that we thought were levels that were appropriate, but also to build liquidity in advance of the payments that we'll make during the month of October for the DOJ and state AG settlement.
+Total long-term debt for the quarter ended at $250 billion, which was down $7 billion from the end of the second quarter of 2014. If we look at the cost of our debt, our long-term debt yields improved 10 basis points from the second quarter of 2014 due primarily to maturities of higher-yielding debt, as well as issuances at more favorable levels. Global excess liquidity sources remain very strong at $429 billion and our time to required funding was stable at 38 months.
+If we turn to slide 6, net interest income on a reported FTE basis was $10.4 billion, up from the second quarter of 2014, as we had a less negative impact from market-related adjustments and that was coupled with modest improvements in our adjusted net interest income. The market-related adjustments during the quarter were a negative $55 million in the third quarter of 2014. That compares to a negative $175 million in the second quarter of 2014. Net interest income of $10.5 billion, excluding the market-related adjustment, improved modestly as lower long-term debt balances and yields, as well as an extra day of interest accruals, were partially offset by lower loan balances, as well as lower loan yields. The net interest yield improved 4 basis points on an adjusted basis and 7 basis points on an actual basis. We continue to remain positioned to benefit as interest rates move higher, particularly from the short end of the curve.
+Since we're largely done at this point with our debt footprint reductions, the direction, as well as the trajectory of our net interest income and net interest yield, we will be more dependent on rate, as well as balance sheet movements going forward. And given the volatility of the rates, should the opportunity present itself, we could decide to take actions to reduce OCI risk in preparation for what we will be in an eventual rising rate environment. Those actions could have a relatively small near-term impact to net interest income, but reduce our duration risk, as well as to provide additional liquidity to reinvest in a higher rate environment.
+Non-interest expense on slide 7 was $19.7 billion in the third quarter of 2014 and included $5.6 billion of litigation expense. As I previously mentioned, $4.9 million of the expense related to the DOJ settlement while the remainder was associated with a number of smaller pre-existing cases. One of which caused us to book approximately $200 million in our Global Markets business. If we exclude litigation, total expenses were $14.2 billion this quarter, which declined $400 million from the second quarter of 2014 on both our New BAC, as well as our LAS initiatives, as well as lower revenue-related incentive costs. Compared to the third quarter of 2013, expenses our $1.1 billion lower driven by LAS cost savings.
+Our legacy assets and servicing costs, once again ex-litigation, reduced by approximately $100 million in the quarter and remain on track to hit $1.1 billion in the first quarter of 2015. In the third quarter, we have now reached our New BAC savings initiatives with the targeted goal of $2 billion a quarter or $8 billion on an annualized basis. So as we move forward, we believe that expenses apart from litigation, as well as the continued reductions in legacy assets and servicing expenses, should move more directionally with the revenue streams that we see in the businesses.
+Asset quality on slide 8, you can see credit quality continued to improve. Net charge-offs declined slightly from the second quarter of 2014 to $1 billion or a 46 basis point net loss ratio. A new decade low. NPL sales, which I mentioned, produced modest recovery in both the second quarter of 2014, as well as the third quarter of 2014 and if we normalize for those benefits, net charge-offs would have been $1.3 billion in the second quarter of 2014 and $1.2 billion in the third quarter of 2014 with the third quarter being about 8% lower. Delinquencies, a leading indicator of net charge-offs, remain very low. Our third-quarter provision expense was $636 million and we released $407 million of reserves given the continued pace of asset quality improvement. If we exclude the reserve that was associated with the DOJ settlement, we released $807 million from our reserves.
+Let's now focus on the businesses starting on slide 9 with Consumer & Business Banking. Results again this quarter showed year-over-year improvement as our net income grew 4% to $1.9 billion and increased 3% from the second quarter of 2014. This business generated a 25% return on allocated capital during the third quarter. Revenue was relatively stable at $7.5 billion compared to the third quarter of 2013 and up from the second quarter of 2014 led by higher card income and service charges for both comparative periods.
+As you can see on this slide, Q3 provision expense was lower than the third quarter of 2013 as net charge-offs improved and we also released less reserves. Expenses of $4 billion were stable compared to both periods as the benefits from our network delivery optimization were offset by investments that we made in our specialist salesforce.
+With regard to the specialist salesforce, over the course of the last year, we've added nearly 500 financial solutions advisors and small business bankers. Growth in mobile, as well as other self-service customer touch points, has allowed us to continue to reduce our banking centers where we went below 5000 units during the quarter while at the same time our customer satisfaction scores continued to improve and customer activity continues to build.
+If we look at customer activity during the quarter, we had good deposit growth and our rates paid remain very low. We experienced modest improvement in average loans on a linked-quarter basis driven by activity that we saw within the US consumer credit card business. Brokerage assets were up 21% year-over-year as we benefited from both improved account flows and market valuation.
+Our mobile banking customers reached over 16 million during the quarter and 11% of all of our customer deposit transactions are now done through mobile devices. Card issuance remained strong at 1.2 million new accounts in the third quarter of 2014 with 64% of those cards going to existing customers of our Company. And lastly, credit quality continued to improve as our US credit card loss rate fell below 3% and where we continue to see north of a 9% risk-adjusted margin.
+If we move to Consumer Real Estate Services, as I mentioned, the loss in the quarter was driven by the DOJ settlement, which impacted expense, provision, as well as income tax. Revenue was down about $300 million from the second quarter of 2014. The servicing income component of revenue was driven by an approximate $100 million charge to adjust our MSR for cost-of-service assumptions and a smaller amount as our level of servicing assets did decline. Our production revenue decline was driven by an approximate $80 million increase in rep and warrant expense.
+First mortgage retail originations of $11.7 billion were up 6% from the second quarter of 2014. If we look at the pipeline at the end of the quarter, our first lien origination pipeline was down 12% from the second quarter of 2014. On the home equity front, we continue to see very good demand where originations during the quarter were $3.2 billion, which were up nicely on both a linked quarter and a year-over-year basis. Expenses once again included $5.3 billion of litigation costs during the quarter versus $3.8 billion in the second quarter of 2014. If we exclude that $1.5 billion increase in litigation costs, expenses declined $117 million. Our LAS expense for the quarter was just over $1.3 billion and once again remains on track to hit $1.1 billion in the first quarter of 2015.
+Our number of 60 plus days delinquent loans of 221,000 that are serviced by LAS dropped 42,000, or 16%, from the end of the second quarter of 2014. In addition, we continue to reduce our production staffing levels in line with the market opportunity as we continue to lower our fulfillment costs.
+On slide 11, Global Wealth & Investment Management delivered another strong quarter where we saw both record revenues, as well as record earnings. Pre-tax margins remained strong, north of 25% for the seventh consecutive quarter. Record asset management fees drove revenue higher, but were offset by some softness in transactional activity. Although I do want to mention that we did see transactional activity pick up during the month of September.
+Net income of $813 million was up 12% on a linked-quarter basis as the business continues to focus on operating leverage and drop the revenue growth to the bottom line. We increased the number of financial advisors and year-to-date the retention of our more experienced advisors remains at record levels. Client balances were nearly $2.5 trillion with negative market valuation mostly offset by positive flows that we saw during the quarter. Long-term AUM flows were $11.2 billion during the quarter, the 21st consecutive quarter of positive flows. Ending client loan balances also increased to a record level from the second quarter of 2014 as we see good activity in both securities-based and residential mortgage lending. And return on allocated capital in this segment was 27% during the quarter.
+If you turn to slide 12, Global Banking, earnings were $1.4 billion, which is up 24% from the third quarter of 2013 on lower credit costs and to a lesser degree higher revenue. Compared to the second quarter of 2014, earnings were up on lower credit costs, which were slightly offset by seasonally lower investment banking fees. Return on allocated capital during the quarter was strong at 18%.
+Within the revenue line item, investment banking fees for the Company this quarter were $1.4 billion, which is up 4% from the year-ago quarter, but down seasonally from the second quarter of 2014. Our overall investment banking pipeline does remain very strong, but I do want to note that our fourth quarter of 2013 was a record quarter from an investment banking fee perspective. Provision during the quarter was a slight benefit, which reflected continued low loss rates and a small reserve release.
+If we look at the balance sheet, average loans were $267 billion, which is up 3% compared to the year-ago period, but which has slowed over the past couple quarters as we continue to focus on client profitability. We've also seen some significant prepayments from some of our larger corporate banking clients during the last couple quarters. Although our average deposits during the quarter did increase, our end-of-period balances declined and that's due, as I mentioned earlier, that we intentionally managed down certain deposits, which have little LCR benefit.
+If we move to Global Markets on slide 13, we earned $769 million during the third quarter of 2014. To put the third quarter of 2014 on a like basis to the third quarter of 2013, you should exclude a $1.1 billion impact from the UK tax rate change that we saw in the third quarter of 2013, as well as the impact of DVA for both periods. Once again, DVA this quarter was a benefit of $205 million versus a detriment of $444 million last year. If we make those adjustments, we saw very strong growth in earnings of 21% on a year-over-year basis. Earnings are down from the second quarter of 2014 as a result of the typical seasonal declines in sales and trading, as well as higher litigation expense during the third quarter of 2014 within this segment.
+If we back out DVA, revenues up 7% from the year-ago period driven by strong sales in trading results. We're pleased to report both FICC and equity sales and trading revenues were up versus the year-ago period. FICC revenues were up 11%. The improvement was driven by results in currencies given the increased volatility that we saw during the month of September, as well as improved performance in both our mortgages and our commodities areas. Equity sales and trading was up as well, up 6% from the third quarter of 2013 driven by higher client financing revenues.
+On the expense front, they were up 2% year-over-year driven by higher revenue-related incentives. Relative to the second quarter, expenses were up $70 million from the second quarter due to higher litigation expense. If we backed out the $200 million litigation expense during the quarter, expenses declined by about $130 million in line with the lower revenue levels on a linked-quarter basis. Average trading-related assets were down about $13 billion from the second quarter of 2014 and our overall VAR remains very low. Return on allocated capital during the quarter was 9%.
+On slide 14, we show All Other. Our non-interest revenue during the quarter was down on a year-over-year basis as we had $1.1 billion of equity investment gains in the third quarter of 2013 and during the third quarter of 2014, we had a $300 million charge for UK payment protection insurance. Expenses on a year-over-year basis are down about $400 million due to lower litigation expense in All Other, as well as lower personnel cost. Income tax expense is included within All Other as the benefits related to discrete items that I mentioned earlier are largely reflected in this segment. As we look at the fourth quarter of this year, we'd expect the tax rate to be roughly 31% absent any unusual items during the quarter.
+So before we open it up for questions, I'd like to summarize the quarter. We feel we made once again very good progress during the quarter. We saw good business activity across the customer footprint. This led to year-over-year earnings improvements in four out of the five businesses. And in our mortgage business, we're taking costs out of the legacy assets and servicing side and have taken costs out of the fulfillment side as well. We generated enough earnings during the quarter from the businesses to offset a significant charge to settle our RMBS issues with the DOJ and RMBS working group and at the same time maintain a very strong capital position. Asset quality continued its trend of improvement and we did take some deliberate balance sheet actions to improve liquidity, manage OCI risk and reduce both credit and market risk. And we'll go ahead now and open it up for questions.

exam/part2_problem1/Problem_1_Conference_Call_Segments/call_28_questions.txt

@@ -0,0 +1,268 @@
+Question_1:
+
+    Hi, thanks very much. Good morning. So just wanted to touch on a couple of things that you mentioned during your prepared remarks here. One is on the NII actions that you were talking about you might take with the securities portfolio as a way to protect OCI. But it might have a hit on the top line when you do that. Could you just talk through what kind of size you're thinking about and what the triggers for that action might be?
+
+Question_2:
+
+    Okay. And then obviously a question that a lot of people have is the current rate environment and what that impact is. So this is in addition to the typical negative impact on NII from the long end of the curve, I would assume, [coming down]?
+
+Question_3:
+
+    Got it, got it. Okay. And then the other comment was on expenses where you indicated that you are obviously done with New BAC, which is fantastic and LAS is on track. So outside of the LAS expense reductions, more directionally expenses would move in line with revenue. Could you give us a sense as to what you think you could do on expenses in the event that the long end of the curve stays where it is right now, hovering at like [$2.01]?
+
+Question_4:
+
+    So just to rephrase, you still have expense reduction coming through from the work that you've done so far; you're just not going to name it something new?
+
+Question_5:
+
+    Okay, super. Thank you.
+
+Question_6:
+
+    Hi, thanks very much. On slide 8 is this tiny uptick in consumer 30 day past due. It's a small number, but it's the first time I've seen it go up in a long time. Credit outlook is great. Just curious if that denotes like a bottoming and what you're seeing. And then in conjunction with that, how you feel about what appears to be a very large loan allowance as a percentage of charge-offs.
+
+Question_7:
+
+    That's good; that's comforting. You mentioned the $3 billion of sub debt that you issued during the quarter. Just curious if there's any thought process of is that getting ahead of OLA and do you feel that there's going to be a sub debt component? Is that just you being cautious and having some diversification in the debt structure?
+
+Question_8:
+
+    Okay, last one. On mortgage, just curious what percentage of current originations you're keeping on balance sheet and then related part two would be how much is the unfinished question around repurchase risk constraining any mortgage lending or is it really still a function of demand at this point?
+
+Question_9:
+
+    Okay, thanks both.
+
+Question_10:
+
+    Hey, good morning. Two questions. First on governance, can you just kind of talk through the reasoning on the Board's perspective to kind of change the Chairmanship and with a lead director how you think that dynamic may change, good or bad? And I guess secondly is this a vote of confidence in you, Brian, in terms of the leadership and current strategy?
+
+Question_11:
+
+    And does the Fed take part in reviewing this decision in any way?
+
+Question_12:
+
+    Okay, great. And then second question on the balance sheet, with the $47 billion reduction, clearly it helps the LCR, but can you give us a sense on how it benefited -- I'm sorry, the SLR -- but can you give us a sense on how it might have improved your LCR, number one and if there's any additional benefits beyond leverage that helps the stress test?
+
+Question_13:
+
+    So is it fair to assume that you guys are near or at the 100% LCR threshold? And I guess secondarily should we expect balance sheet growth to start -- loan deposit growth, balance sheet growth start to pick up from here or you still have more to do?
+
+Question_14:
+
+    Okay, great. That's helpful. Thanks.
+
+Question_15:
+
+    Hi, Bruce. I wanted to follow up on the NII outlook and the potential strategic actions. Is the potential $100 million headwind on the core NII, does that reflect the possible strategic actions or is that just reflecting the fact that reinvestment rates for the maturing cash flows are lower today than they were in the second quarter?
+
+Question_16:
+
+    Okay. And this buy ticket or these kind of actions that you might take, how might they impact your projections of rate sensitivity to rising short and long rates?
+
+Question_17:
+
+    Okay. So you're not talking about a major restructuring of the bond portfolio; it's just being patient in terms of investing? I think I might've misunderstood the actions.
+
+Question_18:
+
+    Got it. Okay, totally understood. Thank you. And Bruce, just in terms of the FAS 91 or the premium amortization charges that move around with the 10 year, is that pretty proportional to how the 10 year moves up and down or are there levels where it stops kind of being a straight-line impact?
+
+Question_19:
+
+    Okay. And just a follow-up on the provision, just wondering how we should think about the jumping off point for the provision relative to the $600 million reported or the $200 million ex-DOJ this quarter? How should we think about where to start off with that?
+
+Question_20:
+
+    Okay. That's helpful. And then just on capital builds, Bruce, it seems like you're still able to grow the Tier 1 common at a multiple of the GAAP earnings. Is that primarily as DTA, and could you remind us what the status of the DTA balance is and how much is disallowed currently?
+
+Question_21:
+
+    Okay, thank you.
+
+Question_22:
+
+    Hi, good morning. Were there any gains in the $2.5 billion of NPA sales?
+
+Question_23:
+
+    $150 million gain?
+
+Question_24:
+
+    Okay. As far as the outlook for rates, have you changed your rate assumption for the next year, given what the 10-year has done?
+
+Question_25:
+
+    And is that changing the way you're managing the portfolio or the Company? In other words, at what point do you look at the low rate environment and say our prior assumptions might have been off a little bit; we need to revise the approach?
+
+Question_26:
+
+    Sure. No, it's tough figuring out the rate environment right now. I'm just revisiting the comment you made. You said expenses should move more directionally with revenues. And if I look at the first nine months, I guess revenues are down but expenses are down more. Do you mean that instead of having positive operating leverage, it might be flat operating leverage looking ahead?
+
+Question_27:
+
+    Okay, and then two questions for Brian or perhaps it's for you, Bruce. I know I asked this before, but if rates do not go higher in 2015, what is Bank of America's ROE target?
+
+Question_28:
+
+    And then lastly, just following up on the other question relating to the separation of the CEO and the Chairman role, when you consult with regulators, do they care one way or another if the CEO and Chair position is split? There are several corporate governance experts who say it's better to have those two roles split and others say it doesn't matter. Do you know what the regulator view is on that because you're going from what some consider a preferred corporate governance approach, splitting the CEO and Chair role, to now combining them?
+
+Question_29:
+
+    All right. Thank you.
+
+Question_30:
+
+    Good morning. If I could just follow up on some of the capital commentary you provided, especially in the deck here. It seems like there's a number of adjustments that were made this quarter and then just right after the quarter, you consolidated the bank subs. There's some increase in operational risk RWA. You commented on OCI, managing to that. Just as we think big picture on managing capital, what's left and is there opportunity to bring down some of the off-balance sheet exposures now that you have more final rules on the SLR?
+
+Question_31:
+
+    Okay. And then as you think about -- I guess the adjustment on the operational risk RWA side, do you think that's about done or is it an ongoing process until you hopefully exit the parallel run?
+
+Question_32:
+
+    Okay. And then just separately within the C&I lending book, you talked about pricing pressure, as well as some paydowns, but I guess specifically on the pricing pressure, what are you seeing now versus a quarter or two ago when you were still trying to grow or growing the book in terms of not just the magnitude of pricing, but what types of products?
+
+Question_33:
+
+    Okay, all right. Thank you very much.
+
+Question_34:
+
+    Good morning, this is Guy. A question on, first of all, the optimization that you talked about with respect to commercial deposits around $15 billion and the, I think, roughly $12 billion in securities financing transactions. Should we look at those two things as directly related to each other?
+
+Question_35:
+
+    Okay, so the $15 billion isn't all essentially prime brokerage-related as well like the asset reduction that you are talking about?
+
+Question_36:
+
+    Okay, that's helpful. Another question is with respect to the provision related to the DOJ settlement. Should we look at this $400 million, which, as you said, offset what would have been an $800 million reserve release, should we look at that as essentially now a one-time true-up and going forward, you now feel that you have the provision that you'll need for multiple years to fulfill the settlement terms or is the settlement going to essentially be a pay-as-you-go thing through the provision?
+
+Question_37:
+
+    Got it. That's a very helpful explanation. Thanks. And finally, cyber security issues. Obviously you were not the bank that's been in the crosshairs here and yet I would imagine that this is something that has caused some consternation internally and some spending. JPMorgan has talked about a $250 million budget for cyber security issues, which is expected to double. Can you give us a sense for what you're spending there and how you would expect it to increase?
+
+Question_38:
+
+    Thanks. I actually do have one more if that's all right and it's with respect to the rep and warranty RPL, which in the footnote you say it's the same as it was last quarter at about $4 billion. Can you update us on where you are with any lawsuits related to the non-Countrywide originations, which add up to around $420 billion of UPB?
+
+Question_39:
+
+    Okay. So no movement there obviously this quarter?
+
+Question_40:
+
+    Thanks very much.
+
+Question_41:
+
+    Yes, good morning, guys. A quick one on loan growth. So at first glance, it looked kind of weak. It seemed to be driven by Consumer. I just want to make sure I've got the right adjustments here that I think you guys have laid out. In mortgage, $12.5 billion decline sequentially, but should we be backing out the $2.5 billion of NPL sales and then the $6.5 billion of agency conversion from that decline so you know you get kind of like a normalized decline rate sequentially of more like $3.5 billion on the mortgage side?
+
+Question_42:
+
+    Sure, sure. And maybe if you could, is it possible to give us an idea about the runoff portfolio, what's left in that at this stage and what your guys' expectations are for like a runoff headwind just so we can think about it for modeling purposes?
+
+Question_43:
+
+    Okay. And that's on a quarterly headwind basis?
+
+Question_44:
+
+    Okay, terrific. And then thinking about Wealth Management, could you break down the expansion in the margins there this quarter? How much of it came from reduced spending? I know you guys have been investing there and so maybe could you help us understand how much of a contributing factor that was here this quarter and how much investment is left to wind down here?
+
+Question_45:
+
+    Sorry, Wealth Management pre-tax.
+
+Question_46:
+
+    Yes, so that technology spend also rolled off too, which probably helped, right?
+
+Question_47:
+
+    Cool, cool. All right, I seem to remember that being somewhere in the ballpark of like $50 million to $100 million, is that right?
+
+Question_48:
+
+    Okay, so a decline from that might be less so?
+
+Question_49:
+
+    Cool. And then last one, I know you guys had talked about here the repositioning that you guys want to take as far as AOCI risk and such. When we think about the AOCI hit that you guys lay out versus other money centers and the interest rate shock, it's a little bit higher than where some of the other folks are. So hoping to maybe get a little bit of color on where the current duration is, where you expect the duration to go based upon the actions that you take and then maybe help us also square the circle of understanding, the larger AOCI hit and whether that's a result of a barbelling with the portfolio or what.
+
+Question_50:
+
+    Okay. So is it right then to assume the duration on the AFS portfolio is a little under three years or is that not a correct inference?
+
+Question_51:
+
+    Okay, thanks a lot.
+
+Question_52:
+
+    Hi, thanks. Just a question just on the trading business. Obviously you guys and the other companies did well amidst the volatility in September and I'm just wondering with regard to the balance sheet changes you guys have been making and the optimization of RWAs and given what's happening in the environment right now, any changes in terms of how Tom's running that business as far as being able to capture the revenue opportunity out there or any inhibition given by your views around risk-taking and these capital balance sheet changes that you guys have talked about today?
+
+Question_53:
+
+    Thanks, Brian. And to follow just on the mortgage business, the servicing line has continued to just trickle out. I'm just wondering have we seen the bottoming of the former sales and the related revenues moving away from that.
+
+Question_54:
+
+    And my last follow-up just on that point, you had talked about $1.1 billion by 1Q 2015. You had previously talked about getting it down to about $500 million a year out from that. Is that still a reasonable expectation given that backdrop you just laid out?
+
+Question_55:
+
+    Okay, thanks, guys.
+
+Question_56:
+
+    Yes, I just wanted to follow up on that. You talk about 60 day delinquent loans down 42,000 to 221,000. I don't think there's any sales of that. Is that just working through the portfolio and that seems like a very high pace? Can we expect that type of pace or what type of pace of loans do you think you can work out on a quarterly or annualized basis?
+
+Question_57:
+
+    Outside of the servicing trends, it was 20,000 to 25,000, so it was down roughly about 15,000 give or take, give or take 1,000 loans. Is that a pace that we could model going forward?
+
+Question_58:
+
+    Okay. And then relative to the big Department of Justice settlement, where do you think you are on legal costs? I know it's hard to sit there and say, but we've seen a couple other competitors get the Department of Justice behind them, but there still tends to be this nagging $1 billion here and there in legal costs that just won't go away. Where do you think we are -- is Bank of America, since they've paid probably the most out than anybody, are you more through that than most other people?
+
+Question_59:
+
+    Okay, hey, guys, thank you very much.
+
+Question_60:
+
+    Hi, Brian. Thanks for taking my question. I guess just a question in terms of the investment banking product rankings on page 32. Obviously most of the numbers are in the top three, particularly in the more important category. I guess just looking at the global rankings in terms of some of the numbers that aren't in the top three, are there further investments you all plan to make in that business that would have any effect on the operating expense ratios in Global Banking or is that pretty much steady-state in terms of the investments you all are putting into those businesses?
+
+Question_61:
+
+    And then if I could just ask a follow-up on the non-US commercial loans, a couple of competitors have mentioned that there's been some weakness in trade finance lending. And I'm just curious how much, if any, that has affected the loan growth within the non-US commercial side of the balance sheet?
+
+Question_62:
+
+    Thanks very much, Bruce.
+
+Question_63:
+
+    Mine were asked and answered. Thank you.
+
+Question_64:
+
+    Hi, good morning. Bruce, first question regards capital and profitability targets. I know at a recent investor conference you alluded to the fact that you believe that CCAR currently represents the binding capital constrained for the bank, which just presumably you'll need to manage to a higher core Tier 1, which I guess from my perspective could put at risk the 14% ROE T goal that you guys had established in the early part of this year and I suppose it's really a two-parter. First, what core Tier 1 target do you believe you'll need to manage over the cycle and then as a follow-up to that, how does that inform your outlook for meeting that goal?
+
+Question_65:
+
+    All right. Thanks for that, Bruce. That's really helpful. And then just switching gears to the liquidity side of the equation, one measure which hasn't garnered very much attention is the net stable funding ratio. And my understanding is that Basel's at least intended goal was to have the NSFR calibration completed by the end of this year. And I was hoping you could disclose where you currently stand on this metric.
+
+Question_66:
+
+    All right, thanks. And maybe just one more quick modeling question. I was hoping you could clarify given all the preferred issuance that's been done, assuming nothing incremental is completed going forward in terms of issuance, what the preferred coupon should be on an annualized basis next year.
+
+Question_67:
+
+    All right, perfect. That's it for me. Thanks for taking my questions.
+

exam/part2_problem1/Problem_1_Conference_Call_Segments/call_29_answers.txt

@@ -0,0 +1,287 @@
+Answer_1:
+
+    Sure. A couple things. If you recall, Betsy, we've historically been saying that the 100 basis points is in the $3.1 billion to $3.2 billion range. And think of the increase to $3.7 billion more or less just representing the recapturing of the FAS 91 that we saw this quarter.
+That's why we referenced that there's been more asset sensitivity on the long side. The short-end side really hasn't changed at all.
+
+Answer_2:
+
+    Yes, it's a good question. I think when we looked at this last night, that the movement that we've seen so far in the first quarter of 2015 is almost identical to what we saw during the fourth quarter. So if you were to snap it off of what we saw last night, it would be a comparable-type number, realizing we still have two and a half months ago.
+
+Answer_3:
+
+    Yes, it's, say, if we look at -- we referenced in refi activity increased as a percentage of overall mortgage production in the fourth quarter. And as I said in my prepared remarks, if we look at the pipelines and compare the mortgage pipeline at year-end relative to the comparable period, it's up pretty significantly.
+We'll just have to see how that plays out, realizing that the first quarter does tend to be a little bit seasonally slow.
+
+Answer_4:
+
+    The other thing, Betsy, is that in January to date there's been a stark move in the amount of applications coming in -- a very stark upward move due to this last rate fall-off. So as those things close through we'd expect to see some pickup in production this quarter from the refi.
+
+Answer_5:
+
+    Sure. That's a good question, John. I think there are a couple things.
+The first is, if you look at in the quarter -- I think we did a good job with respect to the overall debt footprint, which was down $7 billion, which helped us out a little bit. Secondly, if you look at we were able to get another basis point out on the deposit front. And throughout the quarter we saw some loan growth that was a little bit better than what we would have seen when we spoke to you during the quarter.
+The other thing that we did see during the quarter is we were able to invest and get some of the investments in the portfolio in -- I believe it was in mid-November when rates did back up. And as we go forward, we do have liquidity to invest in the second and third months of the quarter and will be prudent with how we invest it relative to OCI risk.
+The other thing I would say just before we leave this, John, that I should've referenced with Betsy's point is that it's easy to focus on the FAS 91 because we're resetting the amortization of premium. I think the other thing you need to realize that we did see in the quarter is, with the rate movement up, while you do have a negative on FAS 91 you've got a significant positive from a capital perspective, where OCI in the quarter from the rate movement was north of $3 billion.
+
+Answer_6:
+
+    I think, as I said in my comments, the $10.4 billion you really need to start out with at about $10.2 billion because you've got two less days during the quarter. Then say there is a little bit of headwind to hold that on a core basis, and we are obviously doing everything we can to keep it as close to $10.2 billion as we can, realizing that we're not going to take outsized OCI risk.
+
+Answer_7:
+
+    Yes, I think as we look out and we look at the plans and actions along with the progress that we've made on the 60-plus-day delinquents, I think broadly speaking -- and as you know, this number can bounce around a little bit -- that we'd look to have the LAS expenses down to the $800 million type area by the end of the year. And we are obviously working through plans as we look out to 2016 to continue to drive that number south of $800 million as we go forward.
+
+Answer_8:
+
+    You know, John, I think -- I will answer at a broad level and then Bruce can touch in. So if you think about it in the fourth quarter, a couple things happened.
+One is, you've got to remember the market spread, that revenue, it was down. So be careful not to forget that as we see it coming back this quarter, expect it to rise as it traditionally does in first quarter: that would be an increased expense -- which you should want, obviously.
+But from the rest of it, it's basically a continuous process of taking out expenses and then either bring in the bottom line or reinvest in the growth. So to give you a straightforward way, in the fourth quarter the reduction to headcount of approximately 5,000, 1,100 or so was LAS and the rest was core activity where we just keep drawing down the expense base. At the same time, we've added salespeople during that quarter.
+So what we're trying to do is -- I wouldn't expect it to fall dramatically. But I'd expect you guys to be able to see us continue to make strong investment in sales capacity, technology, products while holding expenses relatively flat with a slight downward bias, irrespective of -- you just got to be careful of compensation related to revenue, because we'd all want that to be higher.
+
+Answer_9:
+
+    No, not at all. You have to go back to the core premise that we talk about, which is that the Banking and Markets businesses are run as an integrated business. And a lot of the activity that we see within the Markets area is in market making and other things that are done off of the new issue platform from an underwriting perspective.
+I think what we saw during the quarter, particularly in December, was that there was a significant slowdown as we saw overall volatility in the markets from both a new issue as well as a secondary market perspective that flowed through. But there were not any -- if you're looking, there were no losses or particular pain points within the Global Markets piece of the equation during the quarter.
+
+Answer_10:
+
+    Well, I think this is a customer profitability exercise that -- as we look at driving the franchise, the way Tom and [Fab Gall] and the team have done a good job of repositioning the equities business, we have to constrain the prime brokerage a bit due to size, because it's lower balance sheet return, as you would be aware of.
+But importantly, it's a customer profitability: we're looking for customers who will use us with multiple products and services, whether it's fixed income, equities, in all aspects of fixed income. So as we take the scarce resource, which is the GAAP balance sheet and the RWA balance sheet, and allocate it across customers, we've got to make sure we get the returns, and this was a natural reflection of it.
+
+Answer_11:
+
+    I would say no; it's all pretty much through it right now. As you look at the revenues quarter-to-quarter they run plus or minus $1 billion, and Fab and the team have done a good job of increasing the yield from the other clients at the same time. So that absent market forces, I wouldn't expect it to have much of an effect.
+
+Answer_12:
+
+    Well, you've got the . There's and in there, so it is all the servicing expense in the Company is in that unit, for all good loans and bad loans. So it doesn't go to zero, but it's got to get a lot better.
+Because if you start to noodle on the 4 million or so units we have in first-mortgage servicing, and think about the annualized cost, we've got to get it down significantly, make servicing mortgages make sense to us. But that's a project that we are working against doing it the right way for the customer, doing it the right way for the regulatory environment, and the consent orders and all the things that have gone on, as you're well aware of. So we've just got to keep peeling that away.
+So when we say $800 million or so, that is the next way station on our train ride here. But it's got to go a lot further than that for the 3.5 million to 4 million of good units we have, so to 
+
+Answer_13:
+
+    Well, I think -- yes, we've talked about $0.5 [million], but I'm not sure that's a great performance in that over time either. So just assume that there is nobody more interested in driving that number down to a normalized servicing cost than this Company.
+
+Answer_14:
+
+    Yes. I think if you look at the -- a couple things. The first is that from a margin perspective, you had a little bit of a headwind with NII being lower than what it was. But as you look at the support costs during the quarter, I would think of that as being about 200 basis points on the margin during the quarter that we saw.
+
+Answer_15:
+
+    Sure. I think if we look at the amount of funded exposure across what we refer to as oil and gas, that the amount of funded exposure, which includes derivative exposure, was roughly $23 billion at the end of the year. As you look at that $23 billion, I would think of it generally as 60% that's directly reflected or affected by the price of oil. There are a lot of those that are not.
+So you've got roughly $22 billion, $23 billion funded; 60% directly affected by oil. Well north of 80% of that are investment-grade borrowers. And for those noninvestment-grade borrowers, they are obviously secured facilities and in most cases have formulas upon which they can borrow based on the value of the assets that we are secured by.
+
+Answer_16:
+
+    I think if you think overall, one of the things that give you a perspective that we see is in the consumer spending in January -- debit and credit cards basically. We've seen the spending go up by 3%. And if you look at the fuel side of that, it's about 5% of that total spending, and it is down 28% year-over-year.
+So the people are getting a benefit. Our consumer customers are getting a benefit, but they are re-spending that benefit and the overall spending levels are growing through it.
+So there is competing -- there is a technical risk to the oil-producing companies that Bruce just talked you through. But the overall economy, even in the first week or so of January, we're seeing the benefit to the consumer very starkly in the year-over-year comparison.
+
+Answer_17:
+
+    Yes, well, I think on average the fundings are roughly 50% of what the commitments are. As it relates to the pulling back of commitments, I think what I would point to and what our teams did a very good job with is we obviously have commitments in the originate-to-distribute piece, which if we look at, we ended the year I believe with two commitments of investment-grade borrowers on an originate-to-distribute basis, one of which has had a significant positive event from a financing perspective already this year. The other is a single-A credit that will get done in the second quarter.
+And outside of the investment-grade originate-to-distribute, I think there was a couple hundred million dollars that still needed to get done. So you're not pulling commitments from borrowers; but as it relates to commitments that needed to be distributed, the teams have done a very good job.
+
+Answer_18:
+
+    We're comfortable with the positions. You should assume as we are making these commitments in environments where oil is higher, we're continually running and stressing those portfolios to be comfortable with the commitments.
+And as Brian referenced, to the extent that we are in a prolonged period where these prices persist, to the extent that there are costs that run through because of difficulties that a commercial or corporate borrower may have, that as we look across the overall credit platform you'd expect there to be offsets, given what we're seeing with consumers and other people that are benefiting from lower energy prices.
+
+Answer_19:
+
+    I think if you look at where we are from a TLAC perspective, we are generally in the 21% type area. And embedded in that 21% type area is the fact that structured notes -- we've assumed for that purpose that we would not benefit from structured note funding. And if we refinanced out those structured notes you'd pick up another 1% to 2% based on the current size of the debt footprint.
+
+Answer_20:
+
+    No, it's gross of. That is a gross of. So you're roughly 21%, call it, plus another 1% to 2% for structured notes; and then depending on the exact treatment of the buffers as we go through that, that number would be reduced by the buffers.
+
+Answer_21:
+
+    Yes, I think what you're going to see as we go forward is that, as we look out into our forecasted models, we would expect there to continue to be strong deposit growth throughout 2015. And as we referenced before, obviously the goal with that deposit growth is very much a focus to grow loans within our core customer segments.
+As I referenced, we saw that within the Global Banking space this quarter. We saw it within Wealth Management. We are seeing pickups in overall mortgage activity.
+So I think you're likely to see the balance sheet creep up as deposits come in and as we look to grow loans. I just want to make sure, though, that we remind you that we will continue to see the discretionary portfolio that has got whole loans in it, that in this rate environment they will continue to repay. So as you judge how we do on loan growth, you need to look at the core businesses.
+As I said, we would expect to start to see the balance sheet move up. And at the same time, we're trying to get things that don't have a return and aren't core to what we do off. But to your point, I think we are largely through that.
+
+Answer_22:
+
+    Yes, and I think if you think about it, say two years ago I think we cited about $100-odd-billion of noncore loans; that's down around to $30 billion. And a dominant part of that is still in the home equity area, quite frankly.
+So in the card business and in the Business Banking area where we had some stuff that was put on by some predecessor company, we're largely through all that. And that's why you're seeing some growth there.
+So the card you saw grow; it's seasonal, but it grew and it started to -- it's been stable for a number of quarters. The good home equity side is growing quite strongly.
+The stuff we're running off in home equity starts is high charge-off contents, a better decision economic for the Company to run it. But the rest of the loan balances, we ought to see grow, with the exception of the discretionary residential mortgage holdings which will continue to run down, based on a better view of what we want to do for [ALCO] management going forward.
+
+Answer_23:
+
+    That's correct.
+
+Answer_24:
+
+    Yes, we've done a lot of work. We have not put anything out public on that, but as we've looked through it and sorted through it, we do not see that being a constraint as we go forward.
+
+Answer_25:
+
+    Sure. We're not going to provide an estimate, but what I would say is that, as you look at overall capital levels, if you start with the numerator, as we project out and look at the earnings stream we think that at least through 2015, and possibly into the first part of 2016, that on average -- and you can have some quarterly bounces around based on timing and payments -- but that generally we should accrete capital over the course of at least four and up to six quarters largely based on the pretax earnings of the Company, as opposed to the after-tax earnings. And that's what you saw during the fourth quarter.
+The other thing on the numerator, as I referenced, that there is -- and if we were to snap a quarter today, there would be OCI benefit from the downward movement in rates.
+As it relates to what we are seeing on the risk-weighted assets side, I would say generally we continue to benefit, although it declines a little bit each period. We continue to benefit from the runoff of some of the Global Markets positions that would have been put on in the 2005 to 2008 time frame that tended to have tenors of 7 to 10 years.
+In addition to that, as we continue to have payoffs and as we continue to move out some of the tougher Consumer Real Estate assets and put higher-quality real estate assets on that are better credit borrowers, while the asset levels may stay comparable you do have an RWA pickup from that as well.
+
+Answer_26:
+
+    No, I mean I think as you look forward, these tend to be -- I think outside of op-risk quarter we had roughly $30 billion of risk-weighted asset benefit under the Advanced Approach. Roughly half of that was in the consumer books, half of it was in the wholesale books. I think you'll continue to see benefits, but I don't think you'll see the quarterly benefit of that magnitude on a go-forward basis.
+
+Answer_27:
+
+    The biggest thing you had in home equity this quarter is that I believe it was roughly $150 million that went through charge-off that was related to the DOJ settlement. So realize you have $150 million of charge-off, $150 million of reserve; so from a net P&L perspective, it was a push.
+But you did have that during the quarter, and it's the reason that we wanted to give you the core charge-off number Q3 to Q4. Because as we implement the DOJ settlement you will see both charge-off and reserve release come out in each of probably the first and second quarter; then we should be largely through that.
+
+Answer_28:
+
+    Answer the question slightly differently, which is that as we work through an iterative process with our regulatory supervisors, we do believe at this point that, from an op-risk perspective, that we are adjusted and the amount of op-risk RWA that we have now is consistent with what you would need to exit parallel run.
+
+Answer_29:
+
+    We think with respect to op-risk RWA that we are there. We obviously need to get through those elements that are the rest of parallel run. But from an op-risk perspective we feel like we're there.
+
+Answer_30:
+
+    Yes, it's interesting, and we have to be a little bit careful. I would say as we looked at the backlog in the pipeline, particularly from an M&A perspective, that we feel very good about where the pipeline was at year-end. It's one of the stronger year-end pipelines that we have.
+I think the only tone of caution I would say is that we've obviously seen a little bit more volatility in both the fixed income and equity new issue markets. But as it relates to the amount of business that we are winning, that's getting queued up and is in the pipeline, we feel very good about that. It was a good back backlog at year-end.
+
+Answer_31:
+
+    I think the only thing that's out there is that, as part of exiting parallel run we are working through with our supervisors the different wholesale and other credit models that you need to exit parallel run. So we are working through that.
+But I think absent that, you're largely at the point of looking at and you'd expect that the RWA is going to largely follow the GAAP balance sheet. The one thing, and I think you all know this, where you could possibly diverge from that is that there is a procyclicality to the extent that you have volatility in the Markets businesses as it relates to the stress VaR calculations that go into the risk-weighted asset. But outside of that, you would directionally expect it to follow the GAAP balance sheet.
+
+Answer_32:
+
+    I think you're probably going to largely see it in the ZIP Code and probably be most correlated to the overall deposit balances. If you look at the range that we've been running at over the last 12 months, it's been in the 2.1 to 2.15, 2.175 type area. And I'd expect that area or that range to hold for 2015.
+
+Answer_33:
+
+    Sure. Well, I think if we go back -- and let's start with the fact that we saw during the quarter that if we back out any impact of loan sales as well as the DOJ settlement, charge-offs in the fourth quarter came down from $1.2 billion to just over $1 billion. I think as you look at charge-offs, when you're at virtually zero from a commercial perspective, it's hard to see getting much better than that.
+I do think where we are probably a little bit different is that as we continue to work through -- and we had another solid improvement of a couple billion dollars from an NPL perspective within the Consumer Real Estate space -- that we continue to work through and reduce those tougher Consumer Real Estate credits. But I think that if you look at this $1 billion charge-off type level that we've seen, we're probably at areas where you're going to see that flatten out.
+I think as we look forward there may be a little bit of reserve release on the front end -- on the first half of the year. And you'd probably expect that to flatten out and go away as we get through 2015.
+
+Answer_34:
+
+    Yes, it did. It [does] that and the plus side is that you have an ability to push the numbers down faster as the economy continues to improve and the market continues to improve and the opportunities for borrowers and time passes, frankly.
+The flip side of that, though, is in the states that -- in the areas where the process is slow, you're sort of boiling the beaker, and what's left is in the really slow areas. So we've sort of caught up in the states where the process goes through at a reasonable fashion; and we still have the laggards in places that the process is traditionally oriented.
+So I think you're absolutely right. There is a bias that as you get better at it and get lower, it starts improving; but against that you get to some of the rocks that are harder to move because the process is so slow.
+Secondly is, remember that we had -- we took it up to almost 58,000 employees in that business. And there is a lag to getting the real estate costs out and letting off the buildings and all the stuff that we have to do. So we've got to be a little careful we're getting ahead of ourselves.
+The headcount comes out first; the facilities then come out second. And so we are working hard on that.
+So you're right, that once you see the improve -- the pace of improvement continues almost nominally or even nominally better than the past, but there are obvious -- there are just some things that work against you in terms of assets left are harder, and then secondly there is a lag to the hard costs over and above the people costs.
+
+Answer_35:
+
+    It's the FAS 91, Guy; you're absolutely correct.
+
+Answer_36:
+
+    We probably wondered the same thing this quarter. All kidding aside, I think if you go back, you're right; there are two ways that you can do this.
+The first is the way that we do it, which is: you have the premium; you look at the average life of the premium; and each quarter you reset it and basically retroactively make that adjustment from when it started. And that was the determination that we had made a number of years ago.
+But you're right. The other way that that is allowed and provided for under GAAP is that you just basically adjust as you go, and take it through the P&L as you go. And you can do it either of two ways, and we obviously do it the way that we do.
+
+Answer_37:
+
+    No, I think it goes the other way. The reality is, is that we run through the P&L that amortization to catch up for, in effect, if rates ended up being lower than when the premium was set on. So I think the way that we do it is absolutely appropriate.
+And keep in mind, the other thing -- and I referenced in my earlier comment -- is that as you do this from a balance sheet perspective, you're always adjusting the valuation of your AFS securities to be the fair market value at the time that you publish your financials. And obviously that flows through OCI.
+
+Answer_38:
+
+    It will not result in a large portion of mortgages being moved. There may be a smaller amount or a percentage of it that we continue to evaluate, because the one thing that we want to make sure that we do is to have the geography of the financial statements motivate the behavior of the people that serve the client base that they do.
+So there may be possibly a relatively small amount of home equity loans that could travel into the Consumer business. But it's not going to be anything that distorts things in any meaningful way.
+
+Answer_39:
+
+    I think there's a couple parts of that. The first is, I think if you look at overall risk levels that we ran within the Global Markets business and if you look at our information that we put out at year-end, that even with a little bit of a pickup in volatility at year-end, VaR was at low levels and overall balance sheet levels were at low levels as we exited the year.
+I think we are nine trading days into the quarter, so I think it's a little bit early to forecast what you would expect for the quarter for the overall sales and trading businesses. The only thing I would say is that clearly the activity levels that we've seen, that it's been more of a return to normal than what we experienced in the month of December, but I wouldn't want anyone to draw any conclusions when we are nine days through 62 trading days in a quarter.
+
+Answer_40:
+
+    Yes, my recollection is there was -- roughly a third of that came from the sales of both servicing as well as the underlying loans themselves. Then in addition to that, we saw continued improvement in the net new 60-pluses. And then we obviously worked others through the normal foreclosure process, as well as for those borrowers that cured.
+
+Answer_41:
+
+    I'd say it is much too early to figure out what the oil price impact would have on mortgage defaults. What we are saying is you're actually seeing consumers spend the money they are getting; and you're seeing the consumer credit quality stay strong.
+But as you project out a period of low prices, you would see a benefit on the consumer side offset by the commercial side. So I'm not sure, Paul, in the context of what's in that 60-day bucket that it will have a meaningful impact.
+It hasn't had a meaningful impact so far. It's just pretty early days.
+But the good news is if you look at our delinquencies in the first-mortgage portfolios they keep coming down. And that's what drives long-term reduction.
+
+Answer_42:
+
+    Consumer spending increased. Is that what you're referencing, Paul?
+
+Answer_43:
+
+    So far, January of 2015 versus January of 2014, spending on credit and debit cards is up about 3% year-over-year. And that is overcoming a drag effect of about 1.5 percentage from lower fuel prices.
+
+Answer_44:
+
+    If I understand your question, I think that the answer to that is no. If you go back and look at -- with the exception of last year, the fourth quarter does tend to be the weakest quarter of the year seasonally. It was obviously a little bit more so this quarter.
+But structurally, there's nothing that would lead you to that. I would just -- obviously, it's a market that ebbs and flows. But no, there is not anything structural that would lead you to believe that that should be different.
+
+Answer_45:
+
+    Well, I think largely what you saw in the fourth quarter was a reflection of the change in the incentive levels due to the lower revenue. And you'd expect that to happen.
+But let me bring that up a little higher to a more broader point, which is about two, three years ago, Tom Montag and the team made a fundamental restructuring of that business to drop its expense base to where as long as we get $2.5 billion more revenues, more or less, we start making some money. And if you adjust the FVA charge, which is the one-time charge, they made somewhere around $300 million this quarter, to give you a sense.
+So in its worst quarter, it earns $300 million; in its best quarter it earns over $1 billion. And that largely is really marginally profitable when you see the revenues go from the high $2 billions to the, say, $3 billion level up to the $4 billion level. Most of that comes through with a tariff on compensation of around 19%, 20% or something like that.
+So there is elasticity, but as you get the lower level you start to hit the floor on the fixed cost structure.
+
+Answer_46:
+
+    Yes -- no, one of the things you've got to be careful of is they reflect -- all these charges that we talk about in NII get pushed out to all the businesses. So there's some elements that really aren't in the business's control, for lack of a better term.
+And then secondly, you're still seeing -- as we move from a period where reserve releases were going on at the business level, you're seeing provision changes across-the-board that have it. But by and large, the rest, if you look at the fees and the direct expenses, which are the two things they control the most, you see a pretty good relationship going on and pretty good stability.
+And I'd say as you look across the businesses, the Consumer Bank continues to make good progress on sales capabilities. And its actual sales, you can look at some of the later pages; you can see it.
+I said Wealth Management, we've got to make sure the expenses and the revenue stay in line there. We talked about that last quarter, and John Thiel and the team, especially in Merrill Lynch, are doing a good job of getting after that.
+Then in Banking, I think you've seen a pretty good relationship, if you back out the fundamental impacts of FAS 91 and the provision and things like that, which they -- those are adjustments we make at the top of the house and push through.
+
+Answer_47:
+
+    Yes, I'd say, Mike, the other piece of that is obviously the credit costs you've got to think about, in terms of if you look back and look at the higher revenue levels at the time. The charge-off run rate was $2 billion and $3 billion a quarter; at one quarter it was $10 billion if you remember, for cards especially. So be careful about that.
+But I'd say your point really is: what do you do from now forward? And we see -- we talked about it in the core expense base, leave aside the LAS, the litigation, all that stuff, but just the core expense base. Basically what we continue to do is to take out nonproductive expenses and invest part of that back in the franchise and bring part of that to the ability to see that core line continue to move down -- nudge down.
+Remember that when we are doing this we're absorbing health cost increases, wage and salary increases, incentive comp increases. So we are heavily focused on maintaining a rational balance between the core revenue and the core expense dynamic going forward.
+So you should expect, assume, that there is a continuous program of looking at this, to continue to simplify our Company, continue to take out the vestiges of the cost of the crisis. And as we have downsized the Company, take out the overhead that was harder to shake out, as you're well aware.
+So we are laser focused on it. But I think on the other hand, we continue to invest in sales capacity; and you see that reflected in things like card sales and home equity sales and auto loan sales, direct auto loan sales. All increased.
+
+Answer_48:
+
+    No. Remember, we absorb -- if you think of 60% of our costs being people costs, and you think of inflationary level of cost increases of 3% on those, basically to keep costs down and flattish you've got to work your tail off. Whether -- and that's the process going forward.
+We had to drop the cost down to get into a reasonable level. We'll continue to make improvement relative to the revenues.
+And if the world gets different, we will then have to revisit it. But right now in this revenue environment, even a slow growth environment, we can keep the costs flat as revenues start to rise.
+
+Answer_49:
+
+    Mike, we don't give specific projections, but our goal is to continue to take the earnings from the $3 billion level this quarter and drive them forward. And our view is that, based on everything we see, as we see the impact of all the work we're doing plus the rollover of the cost saves, the reduction in LAS costs, the litigation falling back to the kinds of levels you saw this quarter, you'll see us move towards those long-term goals of 1% ROA and 12% return on tangible common equity.
+
+Answer_50:
+
+    We take additional action on expenses every afternoon. In other words, we had 4,000 reduction in FTE in the fourth quarter of 2014, Mike, out of the core franchise to keep getting efficient. So we work on expenses every day, and we have teams of people working to do all the things that you expect us to do.
+
+Answer_51:
+
+    Yes, Nancy; sorry if we confused you. Let's talk about the production of new card units.
+That's the 1.2 million -- 1.184 million, if you look on page 19 you can see that; and you can see it building from the fourth quarter of 2012, 830 million -- or 830,000. So the first is production of units, and the second was balances.
+Balances in the card business were up in the fourth quarter almost $3 billion, $2.5 billion to $3 billion. That we've got to be careful, because it's Christmas season; people spend and borrow and then they pay down.
+So the point there is that has a little seasonal help to it. But if you look back in prior quarters you've seen a stability in our card balances, which as we continue to sell more units and people continue to use the card, we ought to expect a positive growth there.
+But it's units at 1.2 million. Balances grew at $2.5 billion to $3 billion, and the balances are common in seasonality. Units have been above 1 million new production units each quarter for the last several quarters.
+
+Answer_52:
+
+    Yes, that is our core card offering. We've simplified our offering to three or four core products, and that's the biggest one. And it's contributing to card income being up year-over-year by about 7%. Bruce, come in.
+
+Answer_53:
+
+    Yes.
+
+Answer_54:
+
+    So that card is selling well. And the good news, as you can see, is 67% came through basically our web online sales process and our branch sales process in the core customer. So we continue to drive it.
+
+Answer_55:
+
+    It's a couple things to that, Nancy. I think the first is that we've said that over the course of a couple years that we need that Wealth Management margin to get to 30%. I think you've got a couple things going on right now.
+In the low rate environment, that business has an artificial drag because, as you know, you don't tend to pay out compensation, which is a significant portion of the expense, to those things that are net interest income related. So we would expect -- we also have in 2016 some deferred comp and other programs running off; so as we go through over the course of the next couple years, between the business growing, a normalization of rate environment, and some other things that that should be a 30% type pretax margin business.
+
+Answer_56:
+
+    I think we're through all the questions. So thank you very much for joining us and we'll look forward to speaking next quarter.
+

exam/part2_problem1/Problem_1_Conference_Call_Segments/call_29_presentation.txt

@@ -0,0 +1,82 @@
+
+Good morning. Thanks to everybody on the phone as well as the webcast for joining us this morning for the fourth-quarter results. Hopefully you guys have had a chance to review the earnings release documents available on the website.
+Before I turn the call over to Brian and Bruce, let me just remind you we may make forward-looking statements. For further information on those, please refer to either our earnings release documents, our website, or our other SEC filings.
+So with that let me turn it over to Brian Moynihan, our CEO, for some opening comments, before Bruce Thompson, the CFO, goes through the details. Thank you.
+
+Thank you, Lee. And good morning and thank all of you for joining us to review our fourth-quarter results for 2014. As we think about the year, we've accomplished a lot, including resolving many significant legacy issues that were overshadowing the underlying progress in our franchise.
+Settling those issues obviously came at a cost and drove a decline in year-over-year net income. But importantly, the settlements removed uncertainty for all of us -- for investors, regulators, rating agencies, and others. Allows us to focus on the core business and operations of the Company going forward.
+As we move to slide 2, you can see that we have a simplified and stronger Company. Today we reported earnings of $3.1 billion after-tax.
+The Company is simpler and more straightforward, with improved risk profile. Everything we do now is focused on driving the Company forward and delivering for our customers and clients.
+On this slide you can see some of the important results. This year we completed arguably the industry's largest-ever cost-savings program, which achieved $8 billion of annualized savings.
+Let's think about that. We started that program in 2011 when we had around 290,000 FTE. Nevertheless, in the three years since then, driving it the right way, we completed 2014 ending the year with around 220,000 FTEs.
+Noninterest expense, excluding litigation, declined $4.4 billion compared from 2013 to 2014, and is down more than $8 billion in the last couple years, and yet we have more work to do ahead of us. We further strengthened an already strong and liquid balance sheet and increased our common stock dividend during 2014 for the first time since 2007.
+As you can see on this page, our credit costs are at a decade-low level. So not withstanding the headwinds our industry faces with rates and an ongoing global economic sluggishness, we have built our platform for growth, especially in the context of a continually improving US economy.
+We have built a Company with leading market positions across every core customer base, and our task now is to continue to build on that foundation and the progress we've made. As you look at our results, you'll see that year-over-year earnings in our primary businesses, with the exception of the Consumer Real Estate business, made progress that shows stability in a volatile rate and geopolitical environment.
+Importantly, as you think about our Company, we have been investing in growth while taking out expense. We reduced our overall headcount during 2014 by around 8%; but at the same time we invested.
+We invested by reallocating resources to sales capacity from those savings, increasing in all our core businesses. We invested by reallocating expense reductions to product capabilities, our mobile capabilities, our cash management capabilities, and other capabilities around the world.
+We've invested some of those savings and our technology, spending over $3 billion in 2014 to improve and protect our Company. Now you can see the results in the appendix pages, and Bruce will touch on them in the line-of-business presentations.
+We expect to continue this effort going forward. We have teams working on it every day. They are working to reallocate nonproductive expense to drive towards growth, allowing us to maintain the good expense management you have come to expect from our Company.
+At the same time we are laser focused on winning market share and growing with our customers, the economy continues to improve, and we look forward to reporting that progress during the year ahead. With that, I'll turn it over to Bruce to take you through the quarter's numbers.
+
+Great. Thanks, Brian, and good morning, everyone. Let's start on slide 3, and I'm going to go through the details.
+During the fourth quarter, we recorded $3.1 billion of earnings, or $0.25 per diluted share. Let me give you a few thoughts on revenues.
+There were two significant adjustments to revenue as well as negative DVA charges that in the aggregate reduced reported revenues this quarter by $1.2 billion pretax or roughly $0.07 a share after-tax. Of the components of the $1.2 billion impact, we recorded a roughly $578 million negative market-related adjustment which, as you all know we refer to as FAS 91, in net interest income for the acceleration of bond premium amortization on our debt securities that was driven by lower long-term rates. Otherwise, our core net interest income, which excludes this market-related adjustment, was pretty stable, with the fourth quarter coming in a little bit better than we signaled to you all during our third-quarter earnings call.
+In addition, this quarter we adopted FVA, which is for funding valuation adjustment, and incurred a $497 million charge against our sales and trading results as a result of that adoption. And as we normally provide to you, our credit spreads tightened; and this tightening caused a negative charge for DVA in the trading account of approximately $130 million during the quarter.
+Expenses during the quarter were well managed. Our total noninterest expense in the fourth quarter was $14.2 billion, which included approximately $400 million in litigation expense during the quarter.
+This level of expense is the lowest level of expense that we've seen since the Merrill Lynch merger. And credit costs during the quarter improved, as our provision for credit losses was $219 million and included $660 million in the release of reserves.
+On slide 4, reduced asset levels in our Global Markets business drove our balance sheet levels lower, coming down $19 billion from the third quarter of 2014. And we finished at just over $2.1 trillion in assets. We continued our focus on balance sheet optimization for liquidity as we continued to shift our discretionary portfolio into HQLA-eligible securities from non-HQLA loans and also improved our deposit composition.
+As we signaled to you in the third-quarter earnings call, discretionary portfolio first-lien loans declined from the third quarter of 2014 levels; but we were very pleased with the loan growth we saw in our core businesses during the quarter. If we look in those core businesses, Global Banking loans increased $4 billion during the quarter; within Wealth Management, loan balances grew $3 billion; and our US consumer credit card receivables increased $2.9 billion during the quarter.
+We did have a $2.7 billion decline in our direct and indirect portfolio as we transferred a portfolio of student loans to held-for-sale. Our deposits grew from the end of the third quarter while short-term funding declined.
+We executed another successful issuance of $1.4 billion of preferred stock early in the third quarter, and that benefited regulatory capital. Shareholders equity improved with both the earnings growth as well as the improvements in AOCI. As a result of that, our tangible book value increased to $14.43 per share, and our tangible common equity ratio improved to 7.47%.
+If we move to regulatory capital on slide 5, under the Transition rules our CET1 ratio was 12.3%. If we look at our Basel 3 regulatory capital metrics on a fully phased-in basis, CET1 capital improved $6.2 billion during the quarter; that was driven by earnings, deferred tax utilization, as well as the improvement in AOCI.
+Our operational risk-weighted assets during the quarter increased again. They now represent 34% of total risk-weighted assets. But notwithstanding that increase, we were able to keep our Basel 3 Advanced ratio at levels consistent with what we saw at the end of the third quarter.
+Under the Standardized Approach, our CET1 ratio improved from 9.5% in the third quarter of 2014 to 10% at the end of the year.
+If we look at our supplementary leverage ratios, we've done a lot of work over the past year to improve those. Obviously, the fully phased-in kick in in 2018. We look at where we ended the quarter: at our Bank Holding Company, our SLR ratio was at 5.9%; and at our primary banking subsidiary, BANA, we were at approximately 7%.
+We turn to slide 6, funding and liquidity, long-term debt ended the quarter at $243 billion, down $7 billion from the third quarter of 2014. We've done a lot of work over the past couple years to smooth out our Parent Company maturity profile; and as you can see, we have $22 billion scheduled to mature in 2015 and comparable amounts over the next four or five years.
+Our Global Excess Liquidity Sources reached a record level during the quarter and closed at $439 billion. Within those Global Excess Liquidity Sources, our Parent Company liquidity improved $5 billion from the end of the third quarter to $98 billion at the end of the year.
+Time to required funding increased to 39 months during the fourth quarter. And during the quarter we continued to increase our estimated liquidity coverage ratios at both the consolidated as well as at the Bank levels. At the end of the year, we are well ahead of the 100% fully phased-in 2017 requirement at the consolidated level, and at more than 90% at the Bank level, which is well ahead of the 80% phased-in 2015 requirement, and are well positioned to achieve the 2017 requirement.
+If we turn to slide 7, on net interest income, our net interest income on an FTE basis was $9.9 billion, down from the third quarter of 2014 as a result of the more negative market-related adjustment I mentioned a moment ago, which also drove a reported net interest yield decline of 11 basis points.
+Lower long-term rates coupled with a flattened yield curve resulted in adjustments to our assumptions to our bond premium amortization, which drove the $578 million of market-related adjustments in the fourth quarter versus the negative $55 million we saw during the third quarter of 2014. If we adjust this market-related adjustment, NII was $10.4 billion and declined less than $100 million from the third quarter of 2014, despite the challenging rate environment we saw during the fourth quarter. The adjusted NII decline was driven by the impacts of the lower discretionary loan balances within the Consumer Real Estate portfolio.
+If we look at net interest yield on an adjusted basis, it was up a touch from the third quarter of 2014 to 2.3%. Given the movement lower in rates that we saw during the quarter, we did become more asset sensitive, such that a 100 basis point parallel increase in rates from what we saw at the end of the year would be expected to contribute roughly $3.7 billion in NII benefits over the course of the next 12 months. And given the movement in rates, the sensitivity is now more evenly weighted to both long-term as well as short-term rate moves.
+Before we leave this slide I do want to remind you that during the first quarter of 2015 we have two fewer interest accrual days than the fourth quarter of 2014, which will negatively impact NII by a couple hundred million dollars.
+Noninterest expense -- and I moving to slide 8 -- was $14.2 billion in the fourth quarter of 2014 and included approximately $400 million in litigation expense. As I said earlier, this is the lowest quarterly expense amount that we have reported since the Merrill Lynch merger.
+If we exclude litigation, total expenses were $13.8 billion, which declined $300 million from the third quarter of 2014 and was driven by our LAS initiative cost savings as well as lower revenue-related incentive costs within our Global Markets business. If we compare these expenses to the fourth quarter of 2013, we were down $1.2 billion, driven by LAS cost savings, new BAC benefits, and, to a lesser degree, the lower revenue-related incentives.
+Legacy Assets and Servicing costs, ex-litigation, were $1.1 billion in the quarter, $200 million lower than the third quarter and $700 million lower than the fourth quarter of 2013. As we continue to work through these delinquent loans, we expect these quarterly costs will come down a few hundred million dollars more by the end of 2015.
+Headcount was down 5,800 during the quarter. And as we look at expense, a reminder that we will record our normal annual retirement-eligible incentive cost in the first quarter of 2015; and we expect that number to be roughly $1 billion, consistent with what we've seen the past couple years.
+We turn to asset quality on slide 9. Credit quality continued to improve during the quarter. Q4 provision expense was $219 million, and we released a net $660 million of reserves, given the continued pace of asset quality improvement, particularly within our Consumer Real Estate portfolio.
+Reported charge-offs were $879 million and declined from the third quarter of 2014. I would remind you both periods of net charge-offs included NPL sales and other recoveries, and the fourth quarter included approximately $150 million of costs related to actions that were taken in relation to our DOJ settlement, which were previously reserved for.
+If we exclude the recoveries and the DOJ component, charge-offs in the fourth quarter were just over $1 billion versus a similarly adjusted net charge-off amount of $1.2 billion in the third quarter of 2014. Loss rates on this same adjusted basis were 47 basis points in the fourth quarter of 2014 versus 52 basis points that we saw in the third quarter of 2014.
+Let's now move to the business segment results, which we start on slide 10 with Consumer and Business Banking. Our results within Consumer and Business Banking show solid bottom-line performance, with earnings of $1.8 billion. Those were down from the fourth quarter of 2014 due largely to lower release of loan loss reserves and, to a lesser degree, higher tax rates.
+The business generated a solid 24% return on allocated capital during the quarter. Revenue was up slightly on a year-over-year basis despite net interest income being down, as our noninterest income grew more than 5%, with a strong improvement in card income.
+We look at customer activity during the quarter, we had solid deposit growth; and our rates paid is now at 5 basis points. Loans on a linked-quarter basis increased seasonally, driven by US consumer credit card.
+Our card issuance remains very strong, at 1.2 million new cards in the fourth quarter of 2014, of which approximately 67% of those were issued to existing customers. We look at all of 2014, we issued 16% more cards in 2014 than 2013 and increased the percentage of the issuance to our existing customers, which is consistent with the overall strategy. Credit quality improved again, as our US credit card loss rate fell to 2.7% and continues to have a very strong risk-adjusted margin at just below 10%.
+Our Merrill Edge brokerage assets grew to $114 billion, which is up 18% year-over-year, on new accounts, strong account flows, as well as higher market levels. Our mobile banking customers reached 16.5 million in the fourth quarter, and now 12% of all customer deposit transactions are done through mobile devices.
+If we adjust for portfolio divestitures, combined debit and credit purchase volume was up 4% relative to the fourth quarter of 2013 and, if we back fuel out, was up 5%.
+Let's move to Consumer Real Estate Services on slide 11. The improvement in the results compared to the third quarter of 2014 was driven by the third quarter of 2014 DOJ settlement, which impacted expense, provision, as well as income tax.
+Revenues did increase slightly over the third quarter of 2014 while expense, even after we exclude litigation, declined from the third quarter as both fulfillment costs on the production side and costs on the delinquent loan servicing side were down from the third quarter. Core production revenue and servicing fees were both stable compared to the third quarter of 2014, while servicing income did benefit from better MSR hedging results.
+On the production front, first-mortgage retail originations were stable with the third quarter of 2014 at $11.6 billion, and the pipeline was consistent with the third quarter of 2014 as well, albeit up on a year-over-year basis. On home equity, we're the number-one lender; and line originations during the quarter were $3.4 billion, in line with the third quarter of 2014 and up north of 70% on a year-over-year basis. The credit quality of those second-lien originations remains very strong, with average FICO scores over 790 and combined loan-to-value ratios at less than 60%.
+Expenses in the segment did include $262 million of litigation costs in the fourth quarter versus $5.3 billion that we saw in the third quarter of 2014. We continue to work through and resolve our MBS securities litigation matters, including this quarter the FHLB of San Francisco matter. With the resolution of that, we now estimate that we've resolved approximately 98% of the unpaid principal balance of all RMBS as to which RMBS securities litigation has been filed or threatened against all Bank of America related entities.
+LAS expense, ex-litigation, this quarter was just over $1.1 billion as we achieved our first quarter of 2015 goal a quarter ahead of schedule. Importantly, the number of 60-plus-day delinquent loans that we have dropped to 189,000 units, which is down 32,000 or 14% from the third quarter of 2014.
+If we turn to slide 12, Global Wealth and Investment Management delivered another strong quarter. Pretax margin was strong. Net income was just over $700 million, but was down from the fourth quarter of 2013 as solid fee-based growth was offset by lower net interest income and higher expense.
+Record asset management speeds offset some weakness we saw in transactional activity and still drove a 7% increase in noninterest revenue relative to the fourth quarter of 2013. Our asset management fees now represent 45% of revenue within this segment, up from 40% a year ago.
+Noninterest expense did increase from the fourth quarter of 2013 as a result of higher performance-based incentives as well as increased support costs. We increased the number of financial advisors; and year-to-date retention of our experienced financial advisors remains at record levels.
+Return on allocated capital was 23%. Client balances were nearly $2.5 trillion, up $36 billion from the third quarter of 2014, and were driven by strong client balance inflows.
+Long-term AUM flows were $9 billion for the quarter and represented the 22nd consecutive quarter of positive flows. Our record loan flows during the quarter reflect $3 billion in growth over the third quarter of 2014 in securities-based as well as residential mortgage lending. And our period-end deposits were up $7 billion or 3% from the third quarter of 2014.
+If we turn to slide 13, Global Banking earnings for the quarter were $1.4 billion, up from the fourth quarter of 2013 on lower credit cost and, to a lesser degree, reduced expenses.
+Results were partially -- the net income was partially offset during the quarter on a year-over-year basis by lower investment banking fees off of what was a record level in the fourth quarter of 2013. Return on allocated capital was strong at 18%.
+If we look at the investment banking revenues of north of $1.5 billion, we feel very good about the results. They were up on a linked-quarter basis, and our investment banking team executed very well in a tough distribution environment, given the volatility of rates as well as energy prices.
+Provision was a slight benefit in the quarter and reflected continued low loss rates and a small reserve release compared to the year-ago period, which included a reserve addition of $434 million. If we look at the balance sheet, we'd point you to average loans were $271 billion, up $3.7 billion from the third quarter of 2014 levels.
+We switch to Global Markets on slide 14. The business reported a modest loss in the quarter, but that did include a $497 million charge to implement FVA.
+For those unfamiliar with FVA, funding valuation adjustment is an adjustment to the fair value of uncollateralized derivative trades to account for the present value of funding cost. This is an accounting practice many of our peers have also adopted; and as you all know, this is a one-time transition cost for implementation.
+Separately, net DVA for the quarter was a loss of $130 million versus a loss of $617 million during the fourth quarter of 2013. Earnings are down from the fourth quarter of 2013 as a result of a decline in sales and trading revenue that was mostly offset by a decline in expense. If you recall, on our fourth-quarter 2013 call, FICC sales and trading during that quarter included $220 million in recoveries on legacy positions in the fourth quarter of 2013.
+Sales and trading, adjusting for net DVA and FVA, were $2.4 billion in the fourth quarter of 2014 versus $2.8 billion in the fourth quarter of 2013, after we adjust for the recoveries. On this same adjusted basis, FICC sales and trading revenues of $1.5 billion compare to $1.9 billion in the year-ago period.
+December results were particularly challenging during the quarter, with the toughest areas of performance being the credit-sensitive businesses within FICC, most notably mortgages and credit trading, which are generally our largest trading revenue-related businesses. On the positive side, we saw increases in both FX and rates revenues versus the prior year that were driven by increased volatility, given global deflationary expectations leading to the US dollar strengthening.
+Equity sales and trading was up modestly from the fourth quarter of 2013, as increased volatility was a positive for secondary flows across both our cash and derivative trading businesses.
+On the expense front, the decline reflects litigation expense of $655 million in the fourth quarter of 2013. If we take that litigation expense out, expenses still declined 5% from the fourth quarter of 2013 as the incentives were reduced to align with the revenue performance that we saw.
+On slide 15, All Other, the results in the fourth quarter of 2013 reflect lower revenue from NII, largely associated with the market-related adjustments that we've discussed, as well as lower securities gains and equity investment income, partially offset by gains on the sale of certain loans with long-term standby agreements that were converted to securities. Significant equity investment income is largely a thing of the past for us, as we've reduced the size of the principal investing positions in the business as well as strategic positions, and should be modeled accordingly.
+You'll also notice we took additional reserves for the payment protection insurance, but at a lower level than we saw during the third quarter of 2014. Our fourth-quarter 2014 expense is down year-over-year on less nonmortgage litigation expense and lower infrastructure costs.
+Our effective tax rate for the quarter was 29%, and I would expect the tax rate for the Company in 2015 to be in the low 30%s absent any unusual items.
+One other thing I want to mention before wrapping up is some movement in our business lines that you'll see as we report them to you in 2015. In the first quarter of 2015, we expect to align Business Banking into our Global Banking business, which takes this more commercial business out of our core Consumer and Business Banking unit. In addition, we expect to move the home loans portion of our Consumer Real Estate Services business to Consumer Banking, as this product remains integral to their relationships with us.
+So to conclude my comments, as we look at both 2014 and the fourth quarter of 2014, capital and liquidity reached record levels, which provides a solid base to support our businesses that hold leading or top-tier positions in the industry. We continue our focus on expense and operating leverage after reaching significant milestones this year on both New BAC as well as LAS cost-saving initiatives.
+We reported a quarter of much lower legacy assets and servicing operating and litigation costs, which have been burdening our reported results. Asset quality continued its trend of improvement against a slowly improving US macroeconomic backdrop, and we continue to remain well positioned to benefit in an environment where rates start to increase.
+With that, we'll go ahead and open it up for questions.

exam/part2_problem1/Problem_1_Conference_Call_Segments/call_29_questions.txt

@@ -0,0 +1,270 @@
+Question_1:
+
+    Hi, good morning. Hey, I just want to talk a little bit about the asset sensitivity and how we should be thinking about that from here. In particular, as you know, the long end of the curve has come down since the end of the quarter.
+So just wanted to understand: is that FAS 91 effect Q-to-date given what the long end of the curve has done? And then maybe you could speak to what you are doing to try to minimize any further pressure.
+
+Question_2:
+
+    Sure. Then given the fact that the 10-year is now yielding like 1.8% or so, should we assume -- like if we end the quarter in 1Q at 1.8%, that the same type of 10 basis points down draw is FAS 91-affected, the same in first quarter as it was in fourth quarter? Or is it, because you're more asset sensitive, there is a little bit higher impact?
+
+Question_3:
+
+    Okay. Is there any give-back in refi activity that you are expecting?
+
+Question_4:
+
+    Got it. Okay. That's super. Thank you.
+
+Question_5:
+
+    Hi, Bruce. Just wanted to follow up on the NII. On the core side of NII, ex- the FAS 91, your core NII held up well despite what you'd indicated in October about being conservative with the buy ticket.
+I guess, how did you hold the core in on NII? And how are you navigating that now in what feels like an even more difficult environment for reinvesting cash flows today, with the 10-year where it is?
+
+Question_6:
+
+    Got you, got you. So on the core piece, Bruce, do you expect it to be more challenging, to hold in to that $10.4 billion with the 10-year where it is? Does it make it more difficult? And what kind of -- how should we think about the risk to the $10.4 billion if rates stay low?
+
+Question_7:
+
+    Okay. Then shifting gears on expenses, you got the LAS target a quarter ahead of time. Do you have a year-end target? I think you said you expect to continue to reduce the LAS to $1.1 billion. Can you just clarify that?
+
+Question_8:
+
+    Okay. How should we think about the core rest of Bank of America expenses where you came in nicely at the $12.7 billion for the fourth quarter? Obviously, you mentioned the stock option expense stuff in the first quarter; but as we think about 2015, what are you hoping to do on the core expense base?
+
+Question_9:
+
+    Okay, okay. Thank you.
+
+Question_10:
+
+    Yes, hi; good morning. In FICC, seems a little bit below what certainly I was looking for. I know you highlighted some of the difficult markets that you are large in. Was there any specific positional pain, given what we saw in some of the credit spreads and some of the movements there?
+
+Question_11:
+
+    Okay, thanks. That helps. Then can you guys add any comment to the press reports we've seen recently about you all rationalizing the PB business and cutting ties to 150 hedge fund clients?
+
+Question_12:
+
+    Should we expect to think about some revenue headwinds in your equities business as we model out 2015, as a result of some of those efforts?
+
+Question_13:
+
+    Terrific. Okay. Then helpful to hear about the target of around $800 million for LAS by year-end and then driving it lower in 2016. Can you help us think about how you think about that number to zero?
+Because I mean, ultimately, that's -- given the title, the L in the LAS, right? That's got to go to zero eventually. How should we think about that?
+
+Question_14:
+
+    Okay. So no indication about where that settling-out level might ultimately be? Even if not a win, but kind of what the number would be?
+
+Question_15:
+
+    Fair enough. And then, last one for me. You guys hit on in the Wealth Management business and the margin there, support costs and revenue-related comp. Could you maybe quantify how much each of those factors impacted the margin change quarter-over-quarter?
+
+Question_16:
+
+    Great. Thanks a lot.
+
+Question_17:
+
+    Hi. Thanks very much. I wonder if we could get your best comment that you can give us on energy-related exposures. In your Q you have a general comment on energy and $20 billion. But if you could break it down a little bit more, what's secured, what's not secured, what's investment grade, what's not, and just how overall you feel your position there -- it would be helpful.
+
+Question_18:
+
+    I definitely appreciate all that. You said that was the funded to oil and gas. Is commitments a larger number, I think, than that? And do you have the ability to pull back on the commitments?
+
+Question_19:
+
+    Okay. I don't want to put words in your mouth, but it sounds like you are semi-comfortable with the positioning. There will be some hits along the way, but this is not a major risk to the portfolio? Again, I don't want to put words in your mouth.
+
+Question_20:
+
+    Okay, that's helpful. Last one from me is I didn't hear anything on TLAC. If you could tell us where you think your ratio shook out, net of the conservation buffer and the SIFI buffer, that would be helpful.
+
+Question_21:
+
+    Okay. I just want to make sure: the 21% is net of the conservation buffer and your SIFI buffer, or gross of?
+
+Question_22:
+
+    Got it, okay. Perfect. Thank you very much.
+
+Question_23:
+
+    Good morning. Just a quick question on the balance sheet and NII. Appreciate the efforts to keep NIM flat; but to really get NII growing, we've got to start to see, I guess, the balance sheet on a net basis grow.
+I think your balance sheet was down close to $25 billion this quarter. At what point do we start to see the net balance sheet -- the restructuring of the balance sheet start to give way to growth?
+
+Question_24:
+
+    Okay. I think, Bruce, to your point, the deleveraging around trying to improve the leverage ratio is -- the impact of that should be easing going forward. Is that what you're saying?
+
+Question_25:
+
+    Okay. Just one last, a follow-up on -- I don't know if you mentioned this: where you guys are in the NSFR.
+
+Question_26:
+
+    Okay, great. That's it for me. Thanks.
+
+Question_27:
+
+    Good morning. The capital ratios grew more than expected. Obviously the decline in rates helped the positive earnings, and you mentioned the DTA consumption.
+As we think about 2015 and the drivers of capital, is it more of the same? Or is there, call it, optimization overall? Not just the loan runoff that you address, but as we think about -- you've had Final Rules for the last few months; there are still some adjustments to the business throughout.
+How should we think about the capital build? And if you have an estimate for 2015, that would be interesting as well.
+
+Question_28:
+
+    On RWA, any numbers you can provide in terms of how much benefit you get from the -- I guess just priced on the credit correlation book and some of those contracts and the real estate running off, just those two pieces?
+
+Question_29:
+
+    Okay. Then just separately, the home equity charge-offs increased a fair amount versus 3Q. Obviously, 3Q is a very low level. But remind me what's going on there.
+I think there was an accounting or methodology change a year ago. Has that fully worked through? Or is there a seasonality or ? What's going on?
+
+Question_30:
+
+    Okay. Thank you.
+
+Question_31:
+
+    Hi, good morning. Bruce, I was hoping you could maybe help explain what prompted the increase in operational risk RWA? The 34% I guess makes you an outlier relative to some of your peers, whereas previously you were more in line.
+I know the process typically is you submit the models to the regulators and/or the Fed and then they give you feedback. I wanted to know: was the increase prompted by the feedback from the regulators themselves as part of the annual review? Or was it what you determined based on your own internal models?
+
+Question_32:
+
+    Okay, understood. So we shouldn't expect any further increases as a percentage of RWA going forward; or is it simply too early to make that determination?
+
+Question_33:
+
+    Okay. That's really great. Then just one more quick one for me. I didn't hear in the prepared remarks any color on the investment banking backlog and didn't know if you can give us an update there as well.
+
+Question_34:
+
+    Okay. Great. That's it for me. Thank you for taking my questions.
+
+Question_35:
+
+    Thanks. Good morning. I just wanted to follow up on a couple of topics that have been touched on already. Maybe just starting with the risk-weighted asset discussion once more, I just want to make sure I understand all the puts and takes of what's going into the risk-weighted asset calc.
+It sounds like on the positive side, obviously, there is the benefit of a GAAP balance sheet reduction as well as the trade-off between lower-quality and higher-quality assets. And it sounds like the operating-risk component is now fully baked in. But are there any other components that could drive that up in a way that's different from what's going on, on the GAAP balance sheet?
+
+Question_36:
+
+    Okay. And with respect to the GAAP balance sheet, what is your overall expectation about the net growth over 2015?
+
+Question_37:
+
+    Great. Then just to talk about the asset quality for a moment, obviously it was the lowest provision that we've seen from you in some time; and many of your peers are inflecting from the point of asset quality improvements to some modest now deterioration and the rebuilding of reserves. I just want to get a sense from you about where you think you are in that spectrum.
+
+Question_38:
+
+    Great. Then just finally on the LAS expense, which I know you've touched on several times, but I'm just wondering if the pace of that improvement changes at all as you are getting into the later stages of the delinquency and foreclosure inventory improvement.
+
+Question_39:
+
+    Great. Wonderful. Thanks very much.
+
+Question_40:
+
+    Good morning. I just want to go back to the net interest margin discussion a little bit. I thought that I heard you say in the prepared comments that there had been a shift in the balance of the asset sensitivity to more of a balance between long-term versus short-term rates. I was wondering if that is strictly a function of the FAS 91 issue in a falling long-rate environment. Or is there something more structural that you've been doing with the portfolio that has caused that to happen?
+
+Question_41:
+
+    Okay. Then if we can just take a look at that one historically for a second, obviously over time that has caused quite a lot more volatility in your NIMs than it has for a lot of the peer group. I seem to remember that for regional banks, say, that have often had the same issue, there is a difference, I guess, in the way they accrue versus doing the constant resets that you do. And I was wondering why you do it in the way that you do, which seems to create more volatility.
+
+Question_42:
+
+    Would you ever consider changing that? And if you were to do so, would there be a significant one-time charge that would be associated with that?
+
+Question_43:
+
+    Yes, fair enough. You also talked about changing line items or lines of business, where certain things are booked, as we move into 2015. That was fairly clear, except I was wondering: will this also entail moving the very large investment portfolio of your mortgages from All Other into the Consumer category?
+
+Question_44:
+
+    Got it. Thanks. Then final one for me. You talked a little bit about the Investment Banking backlog at the turn of the year. But more broadly for Global Markets and Global Banking taken together, can you give us a sense -- now that we're a couple weeks into the year -- how the, in particular say, trading activity has started off?
+And given some of the increase in volatility, especially with big moves like what happened with the Swiss franc today, are you instructing the Global Markets business to pull back on risk? Or generally are you seeing that some of those volatility levels are in some way beneficial?
+
+Question_45:
+
+    Sure, it's early. Thanks very much. I appreciate the color.
+
+Question_46:
+
+    Thank you very much, and most of the questions has been answered. But on your legacy assets -- and you talked about this a little bit, where your default numbers have dropped roughly to 189,000 from roughly I think 220,000. Did you sell anything? Or is that all improvement in just credit in the quarter?
+In other words, did you move the houses out, or did you also sell?
+
+Question_47:
+
+    One of the things that -- because I -- on your -- you made a comment about that the lower oil prices has improved some of the consumer credit, consumer spending, and all that. Are you seeing any improvement in working through those 60-day defaults from that? Or those loans are just so old relatively speaking in the default bucket that the lower oil prices really doesn't help out?
+
+Question_48:
+
+    Brian, I missed -- I was writing it down as fast as I could, but you talked about how that you are seeing consumer balances increase over the last couple months, I guess, or last month. Can you go over those numbers again?
+
+Question_49:
+
+    Yes.
+
+Question_50:
+
+    Okay. Hey, guys, thank you very much.
+
+Question_51:
+
+    Thank you. I wanted to drill into the Markets business a little bit. In the sense that we've seen pressure on fixed income the last two quarters, is there anything in the drivers of that weakness that would jeopardize the seasonal uptick that we usually see in the first quarter?
+
+Question_52:
+
+    Then there is a lot of noise in the Markets business, and I tried to take out as much as I could. What I'm trying to look at is expense elasticity relative to the revenues.
+From third quarter to fourth quarter it looked very effective, was about 80% in relation to expenses to revenue reduction. But over the last year, when you take out the litigation expense, looks like operating expenses only declined about 20% of what revenues declined.
+So I was just curious what you thought maybe the right elasticity number would be there.
+
+Question_53:
+
+    That's very helpful. Then Brian, lastly, you've talked several times about the core expenses and the investments you're making. A lot of the core businesses, really all except Banking, showed declines in net income sequentially and year-over-year. Do you feel like you're investing to try to reignite some of that growth going forward?
+
+Question_54:
+
+    Thanks.
+
+Question_55:
+
+    Hi. You highlighted that the expenses are at the lowest levels since the Merrill merger, and we estimate that they are down almost one-fourth over five years so that's certainly good. But we also note that revenues are down quite a bit over that time frame too.
+So how do you evaluate the trade-off between more aggressive restructuring and investing in the franchise? And specifically, you're pretty much done, I think, with New BAC. Would you have a program -- maybe Even Newer BAC, or a new restructuring plan?
+
+Question_56:
+
+    So don't expect another new program with expense targets, just more of a day-to-day perspective now?
+
+Question_57:
+
+    Then a separate question: what are your key financial targets for 2015? I know you've expressed some of your targets, assuming interest rates increase. But if interest rates don't increase, what should investors evaluate you on at the end of 2015?
+All I had to go on without the higher interest rates is page 42 of the proxy that talks about the PRSUs. It says as long as you get over a 50 basis point ROA you go in the money on the PRSUs. So I'm not sure if I should be looking at the 50 basis point number, or it's 80 basis points, 100% in the money, or the 1% number that you've talked about before.
+But again, assuming rates don't go up, what's your ROA and ROE target for 2015?
+
+Question_58:
+
+    One last try. That 1% and 12%, that assumes higher interest rates. If your forecasts do not expect higher interest rates as soon as they do right now, at what point would you take additional action with expenses? And how do you think about that?
+
+Question_59:
+
+    All right. Thank you.
+
+Question_60:
+
+    Good morning, guys. Two questions.
+Brian, I'm a little bit confused about the card growth. I think you said you got 1.2 million new cards out in the fourth quarter. Is that -- and didn't you mention something about it being seasonal? You've got lots of ground that you can gain in that business, and I just want to clarify whether this is something extraordinary going on here and what your projections are for the future for growth there.
+
+Question_61:
+
+    Is there one particular card that's proving to be very popular? I see your ads for the cash-back cards, etc. Is that the card of choice at this point?
+
+Question_62:
+
+    Okay. Secondly, the 25% margin in Wealth Management, I think back to the old days when you had much fatter margins in that business. What do you see as a normalized margin in Wealth Management?
+Number two, to what impact is the Wealth Management margin being maybe impacted by high liquidity levels that customers are maintaining? And do you see that changing?
+
+Question_63:
+
+    Okay, great. Thank you very much.
+

exam/part2_problem1/Problem_1_Conference_Call_Segments/call_2_answers.txt

@@ -0,0 +1,92 @@
+Answer_1:
+
+    I will take the second part of the question first. In terms of new fulfillment centers, we have announced three in the US right now and then a few outside of the US consistent with prior years. It is early; we really like the growth that we are experiencing. We will be adding more FCs through the course of the year. But stay tuned and we'll update you as we go.
+In terms of FBA, there's not a lot I can talk to there. We are very pleased with the FBA business. We think it is great for sellers, great for customers and we are pleased to offer that service.
+
+Answer_2:
+
+    The second half of the question there's -- it is organic so there is no -- it is consistent year-over-year. So this is the first quarter that it will be consistent year-over-year.
+In terms of your question on international, we are seeing still very solid growth, 21% on a local currency basis. As you have read, certainly there is some softness from a macro standpoint that others are seeing. Hard to know whether that is impacting us and how much; we are not a bellwether for the economy. But we are very pleased with the growth that we are seeing; again 21% on a local currency basis, unit growth is actually growing substantially faster than that. So again, that is what we are seeing.
+In terms of investing, you're absolutely right; we are investing in a number of geographies including certainly China we have been investing for several years, we continue to invest in there. We think it is a great long-term opportunity, but we are in investment mode. And certainly some of the more recent additions that we have had with Italy and Spain, that's certainly in investment mode as well.
+
+Answer_3:
+
+    Sure. As we've been consistently doing, we're giving a wide range. We think that's appropriate given all the factors. That is not something new that we are doing, that is something that we have been doing for some time. And you are right; the growth rate guidance for Q2 is 13% to 26%. Certainly foreign exchange is having an impact, that includes approximately 275 basis points of foreign exchange. So it is approximately 16% to 29% on a local currency basis.
+So again, it's a wide range. And there's probably not a lot to add there, but it takes into account all of the things that we think we need to take into account as we give guidance. And in terms of the absolute dollar range, it is very similar to what we would have -- in terms of the dollar range; we would have given for Q1. I think it is maybe a $100 million difference in terms of the absolute value of that range that we gave. So again, a wide range; we think that that is appropriate.
+
+Answer_4:
+
+    The one factor I would call out -- first of all in terms of overall unit growth, our overall unit growth is 30% year over year, again very solid growth. It compares to approximately 49% in Q1 of last year. So we are certainly overlapping a pretty strong growth last Q1.
+In terms of the physical and digital, certainly one thing that we are seeing is certainly digital is growing at a much faster rate. And where you do see that a little bit is in our third-party units as a percentage of total units. You will see that that's approximately 40% this quarter. That compares to last year up about approximately 100 basis points.
+But what we are seeing is because the digital units are growing at a faster rate and they are mostly first party, you are seeing that number impacted where that percentage as a percentage of our total is not growing as fast as it has the last few quarters. And again, that is largely driven by the digital units growth that you are seeing.
+So again, that's -- if you were to back out, for example, and just look at our physical units, our third party physical units as a percentage of total physical units this year versus last year is up over 300 basis points. Again, that is 3P growth as a percentage of total physical units.
+
+Answer_5:
+
+    We are not giving -- certainly not giving guidance on any specific line item, but certainly over a long period of time we think there is opportunity to be more productive there and there are certainly efficiency gains to be had there. And that's something that certainly the team will continuously work on.
+
+Answer_6:
+
+    No, I don't think that there is. I think that the team is doing a fantastic job in terms of developing services that are great for many different customer types including enterprises. And the team is heads down focused on making sure we have a great operational -- these services are great from an operational standpoint and security standpoint and they are doing a terrific job.
+And so, it is a very great opportunity for enterprises to adopt our Web services and the team is certainly focused on that along with the other customers, and so -- other customer sets. So again, it is a great opportunity for those customers and for us.
+
+Answer_7:
+
+    Sure. It is certainly one of our digital offerings and we have a number of different -- a few different services. We have certainly content that we are using as part of our Prime offer that we have a lot of free content for customers. We think that is a great service to customers along with our express shipping offers, as well as other content that we have free, for example our Kindle owners lending library for books.
+So again, we think it is a great -- Prime is a great value for customers and it's part of that value proposition. We also have a very good transaction business for video as well that's growing very, very fast and certainly customers like it and we are seeing that reflected in the results that you see today.
+
+Answer_8:
+
+    We are very pleased with our Kindle and digital business and we are super excited. In terms of the ecosystem, you are certainly seeing that in our results that you see today. For example, if you look at our media growth we are certainly -- that ecosystem is more penetrated there than it is in international and you see that reflected in those associated growth rates.
+Another way you see it is if you take a look at our top 10 best-selling items worldwide in Q1, the top 10 are all either digital or Kindle related, Paperwhite is our best-selling product worldwide. But again, all 10 spots in the Q1 were either Kindle or digital items and I believe that that is the first time that we have seen that.
+We have been looking at that from a quarterly results standpoint for some period of time and we have had various levels of the top 10, but I think this may be the first quarter that we have had all top 10 being either or Kindle related or digital related. So again, we are very pleased with what we are doing there and we are going to continue to innovate on behalf of customers.
+
+Answer_9:
+
+    The one thing I would say is we certainly are investing. It is certainly an area of investment and you are seeing that reflected. We are making a number of investments across the business and certainly we are investing in Kindle and our digital offerings, we are investing in some of the other things I mentioned earlier like China, some of the emerging geographies. So those are certainly some of the larger key investments we are making.
+
+Answer_10:
+
+    No, have nothing to announce. We are very pleased with what we have seen in the Seattle area, but again it has been a test and we continue to monitor that test carefully. It is certainly something that we see that customers love the experience. The challenge has always been making sure we can get the economics right and that is something we will continue to focus on.
+
+Answer_11:
+
+    Thanks for the question. Yes, it is something -- we haven't released any of the numbers, it is something that we are tracking very closely. It is something that we believe over time will reduce churn and is certainly helping today.
+What we are seeing is great traction. We see a lot of usage of the service. Customers love it and we think it is a very interesting part of Prime offering and that is why we have been expanding and why you see some of the more recent announcements including some of the stuff included in the earnings release today around original content. So again, it is something that we find very interesting and we are excited about it.
+
+Answer_12:
+
+    No, there is not a lot I can add. I think the -- 30% is still a very strong growth rate. Again, it is growing at a faster rate than revenue, revenue at 22%, revenue at a local currency growth of 24% very strong; third-party growth continues to be very strong. Retail growth is strong.
+So again, there's not a lot I can provide you there. But again, keep in mind that we are overlapping 49% growth last year Q1 which is certainly a little bit of a difficult compare. But again, pleased with the 30% growth rate.
+
+Answer_13:
+
+    In terms of the platform itself, we think it is a very sizable, very good long-term opportunity for us and it is something that we've been working on for some time and we just think it is very interesting. One thing you will notice on our site, we're being obviously very -- making sure the customer experience is great.
+What we're really trying to do is we are trying to help customers find and discover what they want to buy online. So we are very -- again, it is very customer centric, but it is also from a business standpoint a very good long-term opportunity. We have a great team that is working on the opportunity and we are excited about the long-term potential of it.
+
+Answer_14:
+
+    I think the only thing I can help you with is we see -- I will take Prime customers for example. We certainly see adoption of the service in terms of free content, but those same customers are purchasing content as well. And so there is a good attachment to it which we like.
+And what we see Prime members doing not just within video content, but we see them doing a lot of cross shopping. So it is not surprising; we see them do -- maybe a customer comes and has been traditionally purchasing them pre-Prime in a few categories. We find that they do a lot more cross shopping.
+Same thing with digital content. As they use the service they might start with free content and then they will also continue to view and stream free content, but they will also purchase paid content. So it is a nice effect that we are seeing which is why we like Prime so much.
+
+Answer_15:
+
+    In terms of the international media growth, this quarter it was 1% on a dollar basis, 7% on a local currency basis. In terms of the overall growth rate, certainly what you are seeing is digital content as part of that is growing very fast, but it is not as large or as penetrated or ecosystem isn't as developed I would say as it is in the US.
+And so, when you compare the two geographies for a second, that is one of the more meaningful differences that you see between the two is you see that both are growing digital content very fast, it's just the ecosystem is more built out in North America.
+But again, certainly we see very positive signs in that given the growth we are experiencing in international; it's just on a lower base. So that is -- again, to be helpful there.
+In terms of the unit growth, we said that our overall unit growth was 30% for the quarter. Our 3P unit growth -- I don't have the overall growth rate but it is growing at a faster rate than the total.
+
+Answer_16:
+
+    In terms of geographic expansion, there is not a lot I can say specifically about Brazil. We think we are in the right geographies right now. We have expanded into a number of geographies over the past few years. That is certainly something we always look at and you should expect us to expand into additional geographies over time.
+In terms of any questions related to our product roadmap -- we have a long-standing practice of not talking about what we might or might not do there. But we are certainly excited about the product roadmap that we have for the future. And again, we have a long-standing practice of not giving details until closer at launch.
+
+Answer_17:
+
+    We are actually pleased with the growth from a customer standpoint. We have seen very good growth and we continue to -- we have many, many teams across Amazon that are just heads down focused on trying to improve the customer experience and inventing on behalf of customers. So we couldn't be more pleased with what they are doing, and you see that reflected in our overall growth rate this quarter with revenue up 24% on a local currency basis and units growing at 30% on top of a strong growth quarter last year Q1.
+
+Answer_18:
+
+    Great. Thank you for joining us on the call today and for your questions. A replay will be available on our Investor Relations website at least through the end of the quarter. We appreciate your interest in Amazon.com and look forward to talking with you again next quarter.
+

exam/part2_problem1/Problem_1_Conference_Call_Segments/call_2_presentation.txt

@@ -0,0 +1,27 @@
+
+Hello and welcome to or Q1 2013 financial results conference call. Joining us today is Tom Szkutak, our CFO. We will be available for questions after our prepared remarks. The following discussion and responses to your questions reflect management's views as of today, April 25, 2013 only and will include forward-looking statements. Actual results may differ materially.
+Additional information about factors that could potentially impact our financial results is included in today's press release and our filings with the SEC including our most recent annual report on Form 10-K. As you listen to today's conference call we encourage you to have our press release in front of you which includes our financial results as well as metrics and commentary on the quarter.
+During this call we will discuss certain non-GAAP financial measures in our press release, slides accompanying this webcast and our filings with the SEC, each of which is posted on our IR website. You will find additional disclosures regarding these non-GAAP measures including reconciliations of these measures with comparable GAAP measures.
+Finally, unless otherwise stated, all comparisons in this call will be against our results for the comparable period of 2012. Now I will turn the call over to Tom.
+
+Thanks, Sean. I will begin with comments on our first-quarter financial results. Trailing 12-month operating cash flow increased 39% to $4.25 billion. Trailing 12-month free cash flow decreased 85% to $177 million. Trailing 12-month capital expenditures were $4.07 billion. This amount includes $1.4 billion in purchases of our previously leased corporate office space as well as property for development of additional corporate office space located in Seattle, Washington which we purchased in fourth quarter 2012.
+The increase in capital expenditures reflects additional investments in support of continued business growth consisting of investments in technology, infrastructure including Amazon Web Services and additional capacities to support our fulfillment operations.
+Return on invested capital was 1%, down from 12%. ROIC is TTM free cash flow divided by average total assets minus current liabilities excluding the current portion of long-term debt over five quarter ends.
+The combination of common stock and stock-based awards outstanding was 471 million shares compared with 464 million one year ago.
+Worldwide revenue grew 22% to $16.07 billion or 24% excluding the $302 million unfavorable impact from year-over-year changes in foreign exchange rates. We are grateful to our customers who continue to take advantage of our low prices, vast selection and shipping offers.
+Media revenue increased to $5.06 billion, up 7% or 10% excluding foreign exchange. EGM revenue increased to $10.21 billion, up 28% or 30% excluding foreign exchange. Worldwide EGM increased to 64% of worldwide sales up from 60%.
+Worldwide paid unit growth was 30%. Active customer accounts exceeded 209 million. Worldwide active seller accounts were more than 2 million. Seller units represented 40% of paid units.
+Now I will discuss operating expenses excluding stock-based compensation. Cost of sales was $11.8 billion or 73.4% of revenue compared with 76.1%. Fulfillment, marketing, technology and content and G&A combined was $3.83 billion or 23.8% of sales, up approximately 289 basis points year-over-year. Fulfillment was $1.74 billion or 10.8% of revenue compared with 9.5%. Tech and content was $1.26 billion or 7.9% of revenue compared with 6.5%. Marketing was $616 million or 3.8% of revenue compared with 3.6%.
+Now I will talk about our segment results and, consistent with prior periods, we do not allocate to segments our stock-based compensation or other operating expense line item. In the North America segment revenue grew 26% to $9.39 billion. Media revenue grew 14% to $2.51 billion. EGM revenue grew 28% to $6.13 billion representing 65% of North America revenues up from 64%.
+North America segment operating income increased 31% to $457 million, a 4.9% operating margin. In the international segment revenue grew 16% to $6.68 billion. Adjusting for the $301 million year-over-year unfavorable foreign exchange impact revenue growth was 21%.
+Media revenue grew 1% to $2.54 billion or 7% excluding foreign exchange and EGM revenue grew 28% to $4.09 billion or 32% excluding foreign exchange. EGM now represents 61% of international revenues up from 56%.
+International segment operating loss was $16 million, a 0.2% negative operating margin compared with income of $49 million. CSOI increased 11% to $441 million or 2.7% of revenue, down approximately 27 basis points year-over-year.
+Unlike CSOI, our GAAP operating income includes stock-based compensation expense and other operating expense. GAAP operating income decreased 6% to $181 million or 1.1% of net sales.
+Our income tax benefit was $18 million and includes $46 million of discrete tax benefits primarily resulting from the retroactive reinstatement of the federal research and development credit that was enacted in January 2013. GAAP net income was $82 million or $0.18 per diluted share compared with $130 million and $0.28 per diluted share.
+Turning to the balance sheet, cash and marketable securities increased $2.18 billion year-over-year to $7.89 billion. Inventory increased 27% to $5.4 billion and inventory turns were 9.5, down from 10.4 turns a year ago as we expanded selection, improved in-stock levels and introduced new product categories. Accounts Payable increased 29% to $8.92 billion and accounts payable days increased to 68 from 62 in the prior year.
+I will conclude my portion of today's call with guidance. Incorporated into our guidance are the order trends that we have seen to date and what believe today to be appropriately conservative assumptions. Our results are inherently unpredictable and may be materially affected by many factors including a high level of uncertainty surrounding exchange rate fluctuations as well as the global economy and consumer spending. It is not possible to accurately predict demand and therefore our actual results could differ materially from our guidance.
+As we describe in more detail in our public filings, issues such as -- settling intercompany balances and foreign currencies amongst our subsidiaries; unfavorable resolution of legal matters; and changes to our effective tax rates can all have a material effect on guidance. Our guidance further assumes that we don't conclude any additional business acquisitions, investments or settlements, record any further revisions to stock-based compensation estimates, and that foreign exchange rates remain approximately where they have been recently.
+For Q2 2013 we expect net sales of between $14.5 billion and $16.2 billion or growth of between 13% and 26%. This guidance anticipates approximately 275 basis points of unfavorable impact from foreign exchange rates, GAAP operating income or loss to be between a $340 million loss and $10 million income compared to $107 million income in the prior year period. This includes approximately $340 million for stock-based compensation amortization of intangible assets.
+We anticipate consolidated segment operating income which excludes stock-based compensation and other operating expense to be between zero and $350 million compared to $360 million in the prior year period. We remain heads down focused on driving a better customer experience through price, selection and convenience. We believe putting customers first is the only reliable way to create lasting value for shareholders. Thanks. With that, Sean, let's move to questions.
+
+Great. Thanks, Tom. Let's move on to the Q&A portion of the call. Operator, will you please remind our listeners how to initiate a question?

exam/part2_problem1/Problem_1_Conference_Call_Segments/call_2_questions.txt

@@ -0,0 +1,104 @@
+Question_1:
+
+    Great, thanks. In February you changed your FBA fulfillment fees. Any comments on how this affected third party sales and what was the overall merchant response? And then just quickly, any update on your latest plans for new fulfillment centers in 2013? Thanks.
+
+Question_2:
+
+    Great, thanks.
+
+Question_3:
+
+    Thanks. Tom, the international segment sales growth of 21%  continues to show modest deceleration and I think with the exception of 4Q it has been trailing US growth. And I understand that AWS is mostly booked in the US so that is a piece of the delta. But you have talked in the past quarters about the investments in international driving margin to these breakeven levels in international. I was wondering if you could just talk through the deceleration in the revenue growth in those markets and whether that is comp related, Europe macro or otherwise?
+And then secondly, shipping cost on a net basis is again leveraging, I think that is the second consecutive quarter. I just wonder if you could refresh us in terms of when the accounting change occurred in terms of the shipping revenue calculation for FBA to just understand if that is an organic number now. Thank you.
+
+Question_4:
+
+    Thank you.
+
+Question_5:
+
+    Thanks. Just a broad question on demand, this kind of midteens at the low-end revenue growth that you have been kind of guiding to for a quarter or two now, that would seem well below the average that you've seen in the past. Are there any other factors you would want to call out or specifically not call out?
+Do you think that things like the imposition of state sales taxes are having a near-term drag on growth rates? Last quarter I think you talked about consumer electronics at the high-end. Are there any particular categories there you would want to call out as maybe driving that low that could produce the low-end of the range outside of negative FX? Thanks, Tom.
+
+Question_6:
+
+    Thank you, Tom.
+
+Question_7:
+
+    Are there any factors that are impacting the unit growth, particularly the shift from physical to digital? For instance a rented video versus purchasing a video? Or are there any other factors that you would highlight that are impacting the unit growth?
+
+Question_8:
+
+    Thanks.
+
+Question_9:
+
+    Thanks, guys. A question on the -- a follow-up question on the shipping. So just your shipping cost, not your net shipping margin, but just shipping cost relative to gross profit declined about 300 basis points, similar to what you have seen over the past four quarters. So as you start to comp some of these efficiency gains that you are seeing in shipping, do you think that line will continue to show leverage or is it going to start to level out from here? Thanks.
+
+Question_10:
+
+    A question on Web services. I wonder if you can comment on enterprise-level adoption and whether there are any meaningful barriers to that happening over time. We noticed you have been pretty aggressive in hiring enterprise-level salespeople. Thanks.
+
+Question_11:
+
+    Thank you.
+
+Question_12:
+
+    Thanks for taking the question. You have clearly been more aggressive in terms of video content recently and you are sort of leading with it more in the release tonight in terms of the business content. I was hoping you could just add some more color here on the value that you think that TV and movie content adds to consumers' overall purchase patterns? Thanks.
+
+Question_13:
+
+    Thank you.
+
+Question_14:
+
+    I was wondering if you could help us a little bit about the Kindle ecosystem. On prior calls a few years ago you singled it out as a fast growth area and you were very happy with the performance. We haven't heard as much about it lately. Kind of the impact part of how units are doing against your expectations and then the impact it is having on Prime subs and also your gross and operating margins? Thank you.
+
+Question_15:
+
+    And any impact on your gross or operating margins that you want to call out?
+
+Question_16:
+
+    Thank you.
+
+Question_17:
+
+    Good afternoon. We are hearing reports that there is refrigeration equipment going into some of your fulfillment centers outside of the Seattle area. Just wondering if you can update us on plans to expand AmazonFresh? Thanks.
+
+Question_18:
+
+    Anything you can say in terms of how much Amazon is in video as well as potentially your own in-house produced content currently helps and should in the future help reduce churn in Amazon Prime? Thanks.
+
+Question_19:
+
+    I was just hoping you could maybe provide a little bit more color on the unit growth deceleration. And looking back over the last four quarters it seems like about 500 basis points or so each quarter of deceleration. You had about 200 basis points here which is an improvement, but anything you would say just to any signs of maturity in some of the businesses and maybe where that deceleration is specifically coming from? Thank you.
+
+Question_20:
+
+    Great, thanks. Just a question on the Amazon advertising platform. Given the immense amount of purchase data you have on Amazon customers, how is that being used as a competitive advantage and maybe just provide an overall view on the direction of the Amazon ad platform over time?
+
+Question_21:
+
+    Thanks. I am just wondering what you are seeing in terms of the attach rate of your transactional video on demand business versus usage of Prime instant video. I am wondering just if your consumers tend to choose between the two when they are making a selection. Or does one sort of drive the other? Does a Prime subscriber have a higher transactional VOD attach rate than a non-Prime? So it would be helpful to hear what you are seeing there in terms of usage.
+
+Question_22:
+
+    Okay, thank you very much. Two quick questions please. Going back to the international question, what it causing international media to decelerate? I think last year Q1 I think it was up 22%, FX adjusted this quarter it was up 7%. Is it all macro or are there any maybe other factors that you can talk about maybe specific to SKUs or something?
+And the other is more of a clarification. I know last quarter you gave the unit growth in aggregate versus the unit growth of 3P. I was wondering if you could give that to us as well.
+
+Question_23:
+
+    I was hoping you could comment on the market entry and expansion strategy for Amazon in Brazil. There seemed to be a tremendous amount of press last year about it and it seems to have died down to some degree. I know the Company may already be there with Amazon Web Services and some Kindle offerings, but when do you think that might get a little bit broader?
+And secondly, there have been some stories recently about an Internet streaming device box, a set-top box, something of the sort. Can you comment on any new hardware form factors including that plus some sort of a cell phone or handset that might be coming down the pike? Anything to look forward to in the Kindle family or related? Thanks.
+
+Question_24:
+
+    Thanks. Can you give us a little more color around customer growth? I mean, that number has been slowing not dramatically, but that is a slowing trend? Are you focused more on higher value customers to drive the business and any color around the quarter would be helpful? Thanks.
+
+Question_25:
+
+    Thank you.
+

exam/part2_problem1/Problem_1_Conference_Call_Segments/call_30_answers.txt

@@ -0,0 +1,237 @@
+Answer_1:
+
+    A couple of things. One is if you parse expenses, Betsy, into three basic buckets, the litigation expense bucket, which you are seeing come down to more reasonable levels and then there is a cost of that litigation, the external legal fees and stuff, which we will continue to see lift in which is in the expense numbers. Then you have a second bucket, LAS, we are at the $1 billion level and as Bruce said, we expect to get that down to $800 million and keep moving that to lower numbers over into 2016.
+And then you get into the baseline and I think the thought on the baseline is even as we reduce the headcount we continue to reinvest in sales capacity. So just in our consumer business, headcount down year-over-year but we have 1000 more salespeople roughly out there selling. And then so the idea is to continue to drive salespeople into the businesses at the same time we are taking out wealth management, etc.
+So when you think about the broad expense base, there is adjustments always in first quarter, second quarter just because of revenue and stuff in terms of the aggregate amount but we will continue to pare away. You can look linked -- year-over-year quarters over the last four years, we have continued to chip away. This year it was 300 on the core base. We will continue to work at that but I would say that a lot of it we are trying to make sure that we create the investment rate, continue to grow the franchise  size. This is a matter of holding these expenses relatively flat as revenues start to pick up with the expected increase in rates and the economy continue to grow. If that changed we would have to go aggressively and push down the core also.
+
+Answer_2:
+
+    We manage it every day.
+
+Answer_3:
+
+    We manage it every day and you can see the headcount is a leading indicator because that headcount reduction in the quarter really benefits us in the second quarter.
+
+Answer_4:
+
+    On the first question, John Thiel, who runs Merrill Lynch for us, where largely we are affected by the discussion on fiduciary standards because remember U.S. Trust is actually a private bank and operates under the fiduciary standard in most of its activity. So John Thiel does the lead in our business, does a great job for us, has been clear. We believe that doing what is in the best interests for your customers is absolutely the right thing to do. And while this rule has just come out yesterday afternoon and frankly, Betsy, to get prepared for your questions this morning, I haven't spent a lot of time examining it in detail. But from a basic standpoint, we have been clear that we see the industry moving and we expect to help move it there.
+On the robo-advisor I think that the clear segment match for us in that area in terms of what Schwab and other people are talking about is really in the Merrill Lynch business, which is below the Merrill Lynch cut off, for lack of a better term. So John and his team drive people $250,000 in investable assets free to invest, which is net worth $0.5 million/$1 million in [uprating] of the client. And then Dean Athanasia and his preferred team drive the business below that and if you look in our information, you will see that that business has got about $118 billion of brokerage assets. It is growing faster than the industry year-over-year. I think the assets are up 18%. The numbers of accounts are up, the sales levels are up and so that's really the automated rebalancing portfolios and stuff like that and we are driving that through as a core execution.
+And by the way, they also refer tens of thousands of customers a year up to Merrill Lynch at the same time, so we are trying to have the best of both worlds.
+
+Answer_5:
+
+    I think what we wanted to disclose, Matt, is that I think that we are coming out of the disclosure that we had in the K, there were a lot of questions and you are absolutely right that what we disclosed today was the requested amount from our banking regulators to exit parallel run. That was the ask on their behalf. Discussions continue but we did want to put out there what the ask was.
+
+Answer_6:
+
+    I think that those things are always hard to predict but we are obviously working hard to get through it over the next quarter or so.
+
+Answer_7:
+
+    You ask a very good question, which is that to the extent that there is an adjustment in the RWA, you obviously as you look to refine and improve your models, always have the ability to work hard to get that back. But there's obviously a lot of scrutiny with respect to models. But your point is spot on is that there would be the opportunity as we work through and look to refine, improve and become better with our models, to get some of that back over time.
+
+Answer_8:
+
+    And Matt, in a broader context, we have flipped the binding constraint in our Company to some degree with a move to advanced and so therefore, continue to look at the balance sheet what mix of businesses and how you approach the businesses changes again because standardize was a constraint we were focused on and was our binding constraint and now it's going to flip to advanced, as you can see in the numbers. And that then just -- expect us to be as aggressive and in depth at thinking through how we mix the businesses right to make sure that we are focused on that constraint now that it has become a binding one.
+
+Answer_9:
+
+    There was some servicing of loans that was moved as well as the outright sale of some nonperforming loans, so there was some inorganic activity but as you look at those reductions, it was very strong from both organic as well as inorganic. And I would say the other thing that we are seeing, Paul, is just less new delinquencies coming in than what we would've expected. So you've got the benefit of less coming in, you've got the benefit of working through some of what you have and then we are supplementing that with moving additional out.
+
+Answer_10:
+
+    We have been using it as an advantage. If you go back and look at the results, Paul, I think we were one of the first out there that started to move those loans in the first half of 2014. We have been aggressively doing that both to take the risk of the loans off as well as to move the servicing. And I think if you look at the impact of that and how it flows through different things, you really get a good sense for it when you look at some of the CCAR results where the loss content that we have, particularly within both first mortgages as well as home equity, has come down. So we have been at that for some time at this point.
+
+Answer_11:
+
+    And Paul, I think overall remember as you get further and further removed from the crisis, what is left over even though at the time when we set up LAS or set up some of these non-core portfolios would have been a product or service you didn't want to continue. Seven years later, you are seeing the customers are left over and paid and so there's a good bit but also we want to make sure we measure the economics of the portfolios. Now that they are much smaller, the risk is way down and so we judge that really on the basis of who the customer is and whether we want to roll them into core loans in our Company and then also what the economics of the outside are.
+So I wouldn't expect us to change our course there. We will just look at the opportunities we have to keep moving in the right direction. On both servicing and assets we own too because remember, Paul, there's also the servicing side of this even though we don't own the asset, the is a strong bid. Even the agencies are moving to move some portfolios.
+
+Answer_12:
+
+    No, your point is exactly right, which is that as we talked about last quarter that the op risk relative to the total advanced RWA was upwards of 30%. That's obviously higher than our peers. It is something that we are working hard on to be able to drive down. And to your point, the question is when are you able to get benefit from a declining litigation trend as we wrap up the legacy matters and that does take some time. Obviously the last two quarters from a litigation perspective have been much lighter than what we experienced going back several years. So it is up to us to continue to work that and to look to convince people that the level op risk capital should come down given the resolution of the matters.
+And I would just highlight that we once again whether you look at Article 77, there was an Ocala litigation matter that was wrapped up as well as on the RMBS front with settlements that we got through this quarter were at roughly 99% of all threatened or filed litigation with respect to RMBS. So we continue to work through that and drive through that and ultimately the benefit from that should be lower op risk capital from an RWA perspective.
+
+Answer_13:
+
+    I think in all these cases clearly that we work closely with our supervisors on all model related activity and as you look to make changes that are to the good you obviously need to work through your regulators to get those put through.
+
+Answer_14:
+
+    As you think forward remember you saw a good capital build this quarter and we will continue to build. But remember that if we keep on the course of earnings that we expect -- and the issue wasn't CCAR last year when we went to the ask. You have to remember we came off a really low nominal earnings environment and so we retain a lot of capital between now and the next time we can ask to actually change the capital position of the Company and we have a big cushion.
+So we will close this gap relatively quickly and then we have a longer-term question of what you are saying which is as op risk runs off, how do you get that reflected ultimately in your capital requirements and the same with the models and the other [side].
+
+Answer_15:
+
+    I am always hesitant to comment on results given that we are nine days into a new quarter but I think if you look at what we saw from both I would say both a sales and trading as well as an overall investment banking fee perspective, the January on the margin was a little bit slower than what we would've expected and we saw activity and momentum build up throughout the quarter to where if you had to grade which of the three months of the quarter did you feel best about, it was clearly March. And like I said, we are only nine trading days into the new quarter but we have not seen anything change directionally. Some of the activity that we saw in March, we have continued to see in April.
+
+Answer_16:
+
+    As I think you read the response in the proxy, Glenn, you will see this is a core Board duty and they do look at it periodically and think about the optimal company structure, capital structure. So the idea to have a special element around it is really the whole Board looks at it and that is who should look at it. So then the technical terms of what the request is are a little hard to understand when you think about how a company really operates. But we do look at the question of do we have the optimal business mix? Is it optimal for shareholders? And the Board will look at it continuously and we will continue to look at it.
+
+Answer_17:
+
+    A couple of things, Glenn. The first is that in many respects we were at 3.5/3.6 at the end of the year and we went to 4.5/4.6 this quarter. Keep in mind that a chunk of what you see as far as becoming more asset sensitive is just the FAS 91 that we lost during the quarter. So I'd keep that in mind.
+And to your point you are exactly right. If you looked at where we were at year end, I think we were just over in the 2.1 to 2.2 benefit from short rates moving and that has not changed materially. So to your point, the asset sensitivity is based almost solely on long-term rates and given the deltas that we saw change from the end of the year to the end of the first quarter.
+
+Answer_18:
+
+    It is something we have spend a lot of time on, John. When we got to the end of the first quarter we looked at and said during the balance of 2015 what is the impact that we would see if in effect we rolled a spot throughout 2015, which just means that you don't get the benefit of the curve as we go through. And if you look at that, it is roughly a couple hundred million dollars a quarter relative to $10 billion of NII.
+So we think that we've done between the debt footprint, deposits and if you actually look at the clean yields during the quarter Q4 to Q1 that we've done a pretty good job of managing this exposure in what has been a tough environment. But to your question, there is probably a couple hundred million dollars a quarter in risk if you roll the spot.
+
+Answer_19:
+
+    It would be about $200 million per quarter over the next three quarters.
+
+Answer_20:
+
+    That's correct.
+
+Answer_21:
+
+    Yes, and continuing to shorten the balance sheet every time we get a chance to.
+
+Answer_22:
+
+    A couple of things on that. I would say we continue to see, John, if you look at within the consumer space and overall consumer credit that the first quarter typically all of the things being equal is the toughest consumer quarter in the first quarter. So I think there's probably a little bit of room there if we continue to see what we see in the economy on the consumer side.
+The tougher piece of it is probably to judge commercial because outside of what we see in the small business lending, there really haven't been many charge offs and we will just have to see how long that benign environment covers.
+On the reserve release for the quarter, the one thing I want to make sure that we point out that while we release 400 plus of reserves, 200 of that was from the DOJ where with the mailings you had both charge-offs and reserve release, so as it relates to just from a -- as you look at the provision perspective, realize that which impacted the provisions is more like 200.
+
+Answer_23:
+
+    Yes. And I think we have said that we clearly expect reserve releases to moderate, so we will have to see as we roll into the quarters. But I think you are directionally right on your charge-off number and we will see if there's anything left in the reserve releases as we go through the second and third quarters.
+
+Answer_24:
+
+    Yes, I think you need to go down to and we lay it out in the footnote but if you start up in the new claim trends, if you recall there is a case going through where the statute of limitations on rep and warrant claims in the ACE case was found -- the statute was six years and if you look at the claims that you see up in the new claim trends, you can see virtually all of those claims were in the pre-2005 through 2006 area. So absent any tolling, a good chunk of those are going to be time barred.
+The other part that -- the other point that I would mention is if you go down to the footnote you can see that the vast majority of these claims were put in with no file work done on whatsoever or no individual loan work that was done.
+So I think there continues to be obviously activity on that front but there is not a lot of work being done as those claims are being filed.
+
+Answer_25:
+
+    Yes, I think you're absolutely right that we got the bucket filled up this quarter. I think the only thing that is out there is depending on exactly where we come out from an overall RWA perspective as we exit parallel run. That beyond 2015, could there be a couple billion dollars more preferred sometime during 2016? That's a possibility but you are absolutely right that based on where we are from an RWA perspective, the bucket is filled up, so we don't see much if any at all in 2015. Maybe a little bit in 2016 but not much.
+
+Answer_26:
+
+    Yes, there is an open question out there that you are absolutely right that for the different CCAR submissions that went in in 2015, that those submissions are against the standard ratios. And as an industry, we just don't know the answer if we will test under just standardized in CCAR 2016 or if advanced will be brought in. That is an open question that is out there for the industry.
+
+Answer_27:
+
+    I think if you look at the numbers you can see the difference that we have within our numbers. As to advanced, I think the open question that is out there as you look at moving to advanced in a CCAR scenario is that under advanced you hold capital for op risk and then that there's the open question if you go to stress test under advanced, what do you do with respect to CCAR in those op risk litigation type items? And like I said, that is an open question for the industry.
+
+Answer_28:
+
+    There is no question that there is a procyclical aspect of it that intuitively I think you are right but it is just until you understand exactly the completeness and the entire picture of what you are looking at, I just don't want to speculate.
+
+Answer_29:
+
+    From a high-level that team has continued to invest and grow and there is a couple of things driving that. One is they are adding more core advisors. So in the last 12 months I think we added 120 experienced advisors and we added almost 900 total. So there's a carry cost to bring those up but that is good for the future.
+The second thing is there's a little bit of a business mix issue which is that the investment management side of the business continues to grow but we have seen weakness in the brokerage transactional side just as the business gets repositioned in that sort of year-over-year is enough to hit you.
+And then third, frankly, is that the NII that Bruce pointed out earlier, just the way we allocate and we won't let businesses take an excuse for intercompany allocations but the way we allocate year-over-year, a big chunk of the NII loss is just due to the way we allocate out the impact on the market and less NII.
+
+Answer_30:
+
+    I think as Bruce talked about earlier, if you think about a couple of broad things. One is, as we continue to drive to be the core checking account for households, we are seeing higher sales. We are seeing higher primary sales but with that comes less fees in the sense but the average balances are higher. And so what you're seeing is a flattening of the fees charged on accounts, overdraft and other fees while you see an increase in the consumer balances, which in this environment are worth something but will be worth a lot more as rates rise because these are core checking account.
+So there is some elements of how the business has been shifted based on our priority of making sure that we just don't have a lot of checking accounts, we have a lot of core checking accounts and that has caused it. So you are seeing a far faster growth and balances and actually a slight decline in total checking accounts out there.
+When you put debit fees and other fees plus the interest rates together, which is core checking revenue, it's actually a little better picture. But that is kind of the story there.
+On the credit card fees, it is basically we have absorbed most of the compression on the interchange at this point in the rebates we give. So really year-over-year you have a bit of loss there because we added a divestiture of a big Affinity program, two big Affinity programs that hurt us and you should expect to see that a little bit more in line with our spending growth going forward, which has been about 3%, 4%.
+
+Answer_31:
+
+    I think a couple of things. So the shift to the discretionary portfolio, you probably have about $5 billion of that in each of the second quarter and the third quarter of this year and at that point that work is done. I would say as you look at just discretionary mortgage balances and what you are seeing from a payments for the old stuff that was put within the investment portfolio, you are probably looking at before what the new is that we put on within the business that you are in the $10 billion to $14 billion type run off in each of the next couple of quarters. Realize all of that net interest income doesn't go away because there is reinvestment of that and there is new loans coming in but you do have probably two more quarters where we will move stuff into securities and obviously there does continue to be a run-off of that portfolio as well.
+
+Answer_32:
+
+    The RMBS piece I quoted, there were both amounts in litigation for things that were settled as well as accruals during the quarter. And once again, Eric, I would go back to that from an RMBS perspective at this point we are 98% or 99% of threatened or filed claims on original UPB that we're through, so that's where we are with the RMBS.
+With respect to the FX piece, I think if you go back and look at where we said that we were in October, that we resolved the matter with the OCC, the top up that we saw in the quarter related to FX with respect to other banking regulators and there was also the resolution and we are working through the final documentation of the civil piece of the overall FX work. And that is all included within the litigation reserve during the quarter.
+
+Answer_33:
+
+    No, the civil piece with respect to a class-action type matter, not the DOJ.
+
+Answer_34:
+
+    That is correct.
+
+Answer_35:
+
+    So, Mike, as we said, our goal is to continue to drive towards the 1% return on assets and depending on where we end up with capital between 7.5% and 8% tangible common equity ratio, that would translate into a 13 down to 12 return on tangible common equity. In this quarter we moved to up to where we have a return on tangible common equity is 8% and so -- and our return on assets was 64 basis points, so we are sort of two-thirds of the way to that goal.
+
+Answer_36:
+
+    I think if you adjust our earnings this quarter for a couple of things, the FAS 123, the FAS 91 and then continue to think of LAS normalizing, you see us get close to that goal and that should happen between now and the end of 2016 because we just keep chunking away at LAS as we have described.
+
+Answer_37:
+
+    I think the way you asked that, we basically have to give you our earnings estimates for 2015 and we just don't do that. But our targets long-term we told you each time you asked is the same, 1% return on assets and a 12%, 13% return on tangible common equity based on where we think our tangible common equity ratio will settle out.
+
+Answer_38:
+
+    We made $4 billion in change last year against the expectation by you and your colleagues of $15 billion. So clearly we didn't meet the financial targets due to the litigation we took last year.
+
+Answer_39:
+
+    The insights we have when you look at the returns on page two or three of the material show that the core businesses return is above our cost of capital and that the mix between them and the revenue synergies and the diversity we get have been there.
+But let's back up. What a lot of people are looking at here, Mike, is can you simplify your company to make it tighter? We started that in 2010 with about $2.4 trillion in assets. We are down to $2.1 trillion. We started with about $70 billion in capital or $80 billion in capital. We are up to $140 billion. And we started by getting rid of 60 operating businesses and so we have done a lot of simplification.
+So what is really left and this is one of the reasons why our market business is more constrained in its growth prospects potentially than some other people's is because we keep it to about one-third of the franchise in terms of size. And that market business is really focused on driving the value of our issuer side customers going to market and then with our investor side customers providing sources of capital for that. So it's a very synergistic basis.
+So we will continue to try to provide insight but if you look at it, the businesses return above their cost of capital and then if we put them out there the question would be what we would look like after and we would have capital we can't deploy and we would have less earnings power.
+
+Answer_40:
+
+    I think number one in terms of we received approval for what we had asked for which is a nickel a share of dividend and $4 billion of stock buyback in the CCAR. And we had to be conservative in that ask, leaving aside the modeling and other questions -- but this had to be conservative in base ask because if you think about it, our run rate of earnings was such that we were coming off a $4 billion plus earnings quarter. We had to keep our head on in terms of how we were accumulating capital and make sure we earned the capital before we paid it out.
+The second thing is that the $22 billion cushion shows that based on all the works at CCAR we have a strong cushion going forward. So the key for us to be able to increase the dividend and continue to push forward is to get that normalized earnings stream in a couple of quarters, $3 billion plus in earnings we are getting.
+Long-term we have said many times our ultimate goal is to take about 30% of our recurring earnings and pay it out in dividends and then to use the rest for capital management. At this price we would be buying stock back and if there's a different scenario where our multiple to book and earnings multiples are higher we might pay additional dividends but the goal would be about a 30% payout ratio of recurring earnings as we get there.
+
+Answer_41:
+
+    Nancy, what you asked is really the core question, which is if you look a few years ago we put core capital Global Markets out as a separate reported segment to ensure that people saw that that was a less volatile earnings stream than people perceived and it was not the earnings stream of the Global Banking segment, high investment banking which you can see the fees move up or down and were relatively stable in clearly the loan book and the treasury services. So we tried to sort the businesses so people can see what we are doing with Global Markets.
+Based on our capital and based on our view of how the franchise fits together, we keep that business to about one-third of our total size. So this total balance sheet deployed is under $600 billion and has been for years. That then requires Tom and the team to make a series of choices how they deploy that based on our appetite for risk expressed by VaR, our appetite for size expressed by the $600 billion, which other people have far bigger balance sheets deployed in the business. And that then does limit their ability to take risk and do certain things.
+So there is a mix issue based on this quarter. In other quarters we have performed better relatively and that is this issue. But from a core standpoint, it's not an existential question at all. It's an actual determination we made to have our SIFI buffer lower, to have our overall risk lower to man demand the company, which is really customer focused on the core banking middle markets, franchise and the core investor, it would still be big enough to be a very impactful, number one research house in the world and have $3.5 billion, $4 billion of revenue in a given quarter. We had to basically optimize around size, capital, the capital deployed in the business and then the risk we were willing to put in the P&L and that's where we ended up and that's resulted in us having 100 basis points less SIFI buffer requirement than other people.
+And we think that's balanced because with our book of business if we increased that, we've got to carry that 100 basis points across the whole franchise, not just the markets business and that extra capital in our balance would really increase the capital requirements that is really not needed for our core banking business.
+
+Answer_42:
+
+    No. We are always -- never happy because we always wanted to do better. But on the other hand, it is fair to say that we are not unsatisfied when we make almost $1 billion after tax in the quarter where they had a couple of big elements. This mix in the macro businesses, which we are positioned in on purpose. And then secondly, remember a core part of our business we are still adjusting to which was the leverage finance transaction business, which you can look at is down dramatically year-over-year as we adopted the guidance and what was acquired. That is through the numbers now and then we will build back based on that business doing it the way that meets the regulatory standards.
+So happy -- we are never happy with any business. We are always pushing them to do better but given the constraints, there is an understanding I would say more than happiness of where we ended up.
+
+Answer_43:
+
+    I think at this point we have walked through and as we said on the last call that we are at the level that we need to be from an overall op risk perspective. And to your point, if we look at the last two quarters relative to when that op risk capital was set, we have seen fairly sizable declines in overall litigation expense. So you obviously work through that but our belief over time is that number should be less, not more but we need to deliver that to the shareholder.
+
+Answer_44:
+
+    . Just as we said, there's a bid ask on the RWA related to commercial credit factors and models. There was a bid ask an operating risk. We closed that out and we have actually moved our RWAs to a number of those asks. And then from then you just look at it very simply, think about the last four quarters versus last year just picking up the third and fourth quarter, you have a complete change in the amount of litigation expense that is gone through the enterprise and you will see that keep rolling through. It will take a while for that to average out but basically assume that we've agreed to an amount which was requested to bring our op risk and we put that through last quarter.
+
+Answer_45:
+
+    Yes, we have had some retirements of people worked in the business for 25 years, Henry and the team and it's just the ebb and flow of business. I don't think there's any major issues going on there. I think that  not this past fall but the fall before.
+So I think you should not read anything into that other than the usual ebb and flow of people deciding to do other things.
+
+Answer_46:
+
+    The average deal last year I think was -- for the highest end producing FAs, which there were 100 of, 120 of, the average deal was like 1.27 times trailing 12 or something like that, or slightly less than that. Don't hold me to those exact numbers but think of it conceptually. So the rumors about these payouts are probably far in excess. The reality is only 120 people or so. So take whatever number. So let's broaden out the productivity question. The productivity per advisor in our business is extremely strong and has sort of structurally been strong for many years and continues to increase.
+You wouldn't mind diluting that to get faster long-term growth prospects for the business and broaden out the business and that is what John and the team are doing. Whether it goes down or not is really going to be a factor. How fast the revenue stream grows -- it has been outgrowing that impact of investing in the lower-end business but we aren't -- I wouldn't say it is going to go down or up based on the added younger advisors but let's flip that and say that the way we think this business has to drive for our competitive advantage as a franchise is the linkage from preferred to Merrill Lynch Wealth Management and the interaction between the financial services centers and the people that come in there and the tens of thousands of people that get referred to Merrill is a competitive advantage for Merrill. And we will continue to drive that and part of that connectivity is we are now putting Merrill team-based brokers in the branches to work with clients and ultimately move physically onto the teams in the offices.
+So we've got a lot of programs going. They seem to be working very well. It could dilute the productivity a little bit but it would be immaterial because of the strength of the core franchise is so strong.
+
+Answer_47:
+
+    Most all of that given that the number I quoted was within the commercial bank, that's almost exclusively outside of the energy space so it has nothing to do with anything distressed. It is just core commercial clients drawing more. Those numbers bottomed out in the low 30s and they are now up in the high 30s.
+
+Answer_48:
+
+    Think of that, when we say commercial, that is middle-market, general middle-market for us. Not the corporate bank where the energy exposure would be. So it is back to basically where it was not the highest point because it ran up right before the crisis but if you look back, it is higher than it was in say 2004 and 2005 at this point, or right on it. So you're starting to see a normalization of that borrowing, which is good news because that means that people are borrowing the money to do something.
+
+Answer_49:
+
+    I think the first thing as you look at that, you have to consider as we went through with the different regulatory metrics we needed to get to that the last metric that we needed to solve for and we wanted to get behind us was the satisfaction of where we needed to be from an LCR perspective in 2017 at both the bank level as well as the parent. And we are to the point where we've gotten to that point, so from an overall liquidity HQLA perspective, we feel very good about that progress.
+As you look at on a go-forward basis, obviously the big focus and the reason as a company that we are looking to drive the loan growth that we have is to basically take the excess deposits today that are within the investment portfolio and release them from the investment portfolio into core loan activity to do more with our clients.
+So as you look at the changes and mix in the balance sheet as far as the build that you've seen with cash, I think we are at the point where from an overall balance and where we need to be with the different metrics, that we have satisfied that at this point and it will be more of a normal course on a go-forward basis.
+
+Answer_50:
+
+    I think generally thematically if you think about, as we see roles come up we try to get in full compliance as fast as possible even though there is delay dates and then you can then work back on how to continuously improve the way you get there. But the first thing you've got to do is get over the hump because it affects every other aspect of the franchise. And so I think the LCR is another case that we got over the hump. 2017 is two years away still and we are in compliance and then the idea is that you keep -- to figure out how to work the dials to make it more and more shareholder friendly over time. But the first thing you want to do is show you can do it.
+
+Answer_51:
+
+    I think that was the last question. Thanks for joining today and we will talk to you next quarter.
+

exam/part2_problem1/Problem_1_Conference_Call_Segments/call_30_presentation.txt

@@ -0,0 +1,92 @@
+
+Good morning. Thanks to everyone on the phone as well as the webcast for joining us this morning for the first quarter results. Hopefully everybody had a chance to review the earnings release documents that are available on the website.
+Before I turn the call over to Brian and Bruce, let me just remind you we may make forward-looking statements. For further information on those please refer to either our earnings release documents, our website or other SEC filings.
+So with that, let me turn it over to Brian Moynihan, our CEO, for some opening comments before Bruce goes through the details. Brian?
+
+Thank you, Lee, and good morning and welcome everyone to the earnings call for our first quarter of 2015.
+I am going to start on slide two. So the highlights are there. We earned a $3.4 billion after tax in the quarter, which is up both on a linked quarter and year-over-year basis. We continue to work to drive growth in all our core businesses. We are beginning to see it overcome the run off with non-core portfolios in many areas. At the same time, we continue to focus on managing expenses carefully. As a result, we are beginning to see more predictable earnings with more improvement expected ahead.
+Both capital and liquidity remain at record levels in our Company. We expect to return more capital to shareholders this year than we have in the past.
+Revenue on an adjusted basis was $21.9 billion for the quarter. From the top of the house, revenue remains challenging in an environment with below trend economic growth and rate environment which comes from that. In addition, we remain faithful to our customer strategy with strong risk management and risk appetite to ensure we do not repeat the outsized credit losses of the past. With that said, we are seeing our core business stabilizing across the drivers of the revenue.
+This quarter we saw continued growth in our wealth management revenues and a rebound from the fourth quarter in trading revenue. In our loan and deposit areas, we saw continued core growth albeit subject to continued spread contraction.
+Our expense management efforts continue. The year-over-year expenses, excluding litigation costs, are down 6%. Including litigation costs, year-over-year expenses are down 30%. We continue to see our efficiency efforts drive forward beyond New BAC through our simplified and improved program.
+We also continue to see progress on LAS expense. As proof of our efforts for the quarter we ended with our headcount at a little under 220,000 full-time employees, a reduction of 4000 employees for the quarter, about 2% and 19,000 employees year-over-year, or 8%. For the quarter this reduction came to about 35% from LAS and about 65% from the rest of the Company. To put it in a broad context, we are approaching employment levels where we were in early 2008 prior to bringing in over 100,000 people from Countrywide and Merrill acquisition. We are doing that to the investments we are making in technology to reduce costs and they continue to take hold. And we will continue to drive this effort even as the economy continues to improve and rates rise helping keep balance to our operating leverage.
+During the last year even while we were reducing those costs and headcount, we continued to invest in the client facing growth capacity in this Company. We've added financial advisors in U.S. Trust and in Merrill Lynch, focused on building for the future. We have added commercial bankers in all our Global Banking areas to help fill in our franchise. We have added new financial centers in areas of opportunity and we continue to invest in products and innovation as well as efficiency. A simple example is our Consumer Mobile Banking space where we now have 17 million mobile banking customers, up over 2 million from last year.
+Turning to slide three, you can see what we simply need to do. Each of the four core lines of businesses on the left-hand part of the slide earned above our cost of capital for this quarter. In addition, the aggregate earnings for all those businesses were $4.4 billion after tax. The LAS segment had a much smaller loss this quarter showing we are making progress.
+The other area on the right-hand side of the slide has affected this quarter by the impacts of retirement eligible incentive costs and the market related NII adjustments which affect top of the house earnings. They are booked there in distributed business over the quarters. But this shows that we need to keep working LAS to get it to break even and the other will take care of itself in subsequent quarters.
+Turning to slide four, with regard to CCAR, as previously disclosed, we received a conditional non-objection to our capital plan. We received the approval for our requested capital actions that we requested in the original submission, a dividend of $0.05 per share and $4 billion of stock repurchase on the relevant periods. As you can see, the cushion we have increased from about $2 billion last year under the tightest constraint to over $22 billion this year, in both of those cases under the tightest constraint after all capital actions.
+These quantitative results bode well. However, the conditional approval is an area with which we are focusing. We are focusing our energy to the September resubmission and beyond. Our efforts are well underway. We are bringing additional resources to task. We simply have to be the best at CCAR to meet our shareholder objectives in our Company. To ensure that we achieve that success, I have asked Terry Laughlin to lead our efforts. As many of you know, Terry helped us clean up the mortgage issues over the last several years.
+I can assure you that our Board and management are extremely focused on our resubmission and our core process improvement for CCAR 2016 next year. Terry has retained a team of external experts, increased the internal staffing to ensure we are successful. We have had in depth discussions with our regulators regarding the particular specified issues that we need to remediate with the resubmission and we are focused on getting that done by September.
+With that, I will turn that over to Bruce.
+
+Thanks, Brian, and good morning, everyone. I'm going to start on slide five. As Brian mentioned, we recorded $3.4 billion of earnings in the first quarter or $0.27 per diluted share. That compares to $0.25 a share in the fourth quarter of 2014 and a loss of $0.05 if we go back to the first quarter of 2014. I'd like to note a few items as you review these results.
+Both first-quarter periods include $1 billion in expense for the annual cost of retirement eligible incentives awarded. This was $0.06 in EPS impact in each of the first-quarter periods. The first quarter of 2015 also includes a negative market related adjustment to net interest income of $484 million for the acceleration of bond premium amortization on our debt securities that is driven by lower long-term rates. That cost us $0.03 in EPS during the quarter.
+The other large item that is worth noting as you look at the comparisons is the outsized litigation amount of $6 billion in the first quarter of 2014.
+I'd like to spend just a moment on total revenue comparisons. Our first quarter of 2015 revenue on an FTE basis if we exclude the market related adjustment to NII and a small DVA adjustment, was $21.9 billion during the quarter. If we compare that to the fourth quarter of 2014 and adjust for the same items, revenue is up $1.7 billion or 8% and that 8% increase is attributable to a rebound in sales and trading results as well as higher mortgage banking income and is offset somewhat by lower net interest income mostly from two fewer days during the quarter.
+If we compare back to the first quarter of 2014 and we further adjust for $800 million in equity investment gains as a result of monetizing a single strategic investment in the year-ago period, revenue is now a couple hundred million dollars or 1% and that is from lower net interest income and lower sales in trading results.
+Total noninterest expense during the quarter was $15.7 billion and included the $1 billion in retirement eligible costs as well as $370 million in litigation expense. I will go through the comparisons from an expense perspective several slides back.
+As we look at provision for credit losses during the quarter, they were $765 million and included $429 million in reserve release versus $660 million in the fourth quarter of 2014. Preferred dividends during the first quarter were $382 million and as you all look to update your models given the preferred issuances that we have had the majority of which pay semiannually as you look at preferred dividends, they should be roughly $330 million in the second and fourth quarters and $440 million in the first and third quarters going forward based on our existing preferred footprint.
+Let's go ahead and move to slide six on the balance sheet. Our balance sheet was up slightly to $2.14 trillion and that was driven almost exclusively by cash balances associated with the deposit growth that we saw during the quarter. We continued our focus on balance sheet optimization for liquidity as we continued to ship some of our discretionary portfolio first lien loans into HQLA eligible securities.
+Loans on a period end basis were down modestly reflecting good core loan activity in both our Global Banking as well as our Wealth Management segments. That was more than offset by seasonally lower card balances in our discretionary consumer real estate area as well as run-off portfolios.
+Deposits were up $34 billion or 3% from the end of the year and some of that obviously has to do with seasonal tax activity. We issued $3 billion of preferred stock in the quarter that benefitted regulatory capital and as you look at common shareholders' equity, you can see it improved driven both by earnings growth as well as improved OCI. As a result of these factors, tangible book value increased to $14.79, 7% higher than 12 months ago and our tangible common equity ratio improved to 7.5%.
+The last point that I would note is that we did add a slide in the appendix as we updated our capital allocations across the segments coming into 2015 and the returns that we show you are reflective of those updated capital allocations.
+Let's go ahead and flip to slide seven and go through loans. From several calls, we are as frequently about the decline in reported loans which are down modestly again from the fourth quarter levels as you can see in the upper left-hand chart. I want to make a few points though as we go through this.
+As we have discussed many times, much of the movement in loans has been driven by two pieces of non-core loans. The first relates to shifts in our discretionary mortgage loan levels that are used to manage interest rate risk and predominantly recorded in the all other unit. Many times based on the investment decisions that we make, these loans are replaced with debt securities on the balance sheet.
+The other component as you look at loans to consider is the run-off that we have within our LAS unit, which are mostly home equity loans. As these home equity loans go away, it enables us to reduce our operating costs as we have less work to do.
+As you can see over the past five quarters, these non-core loans have declined approximately $59 billion. If you adjust for that $59 billion though, and I'll go to the upper right-hand box, you can see that our loans have actually increased by $21 billion from the first quarter of 2014. The bottom chart on this slide provides the mix of this loan growth across our primary businesses. And you can see within our Wealth Management area, we have experienced strong demand in both consumer real estate as well as securities based lending and that has led to year-over-year loan growth within that segment of 10%.
+Within Global Banking, we saw modest growth on a year-over-year basis but importantly we saw a significant pickup in activity in the first quarter of 2015 relative to the fourth quarter of 2014. Over that time frame, loans were up $6.7 billion or 8% on an annualized basis.
+We move to slide eight and take a look at regulatory capital. This quarter the standardized transition reporting includes the switch from reporting RWA under the general risk-based approach to Basel III and the capital number includes another year of phase-in for capital deductions. With those changes, our CET1 ratio was 11.1% in 2015 under the new reporting.
+If we go ahead and look at Basel III regulatory capital on a fully phased-in basis, our CET1 capital improved $6 billion during the quarter and was driven by earnings, lower DTA, lower threshold deductions as well as an improvement in OCI. That translated under  approach to our CET1 ratio improving from 10% in the fourth quarter to 10.3% in the first quarter of 2015 while under the advanced approaches the CET1 ratio improved from 9.6% to 10.1%.
+As you know from our 10-K disclosure, we are working with our banking regulators to obtain approval of our models in order to exit parallel run. Our regulators have requested modifications to certain commercial and other credit models in order to exit parallel run which we estimate would increase our advanced approaches RWA and negatively impact the CET1 ratio that we show here by approximately 100 basis points.
+If we look at supplementary leverage, we estimate that at the end of the first quarter of 2015 we continue to exceed the US rules applicable in 2018. Our bank holding company SLR ratio was 6.3% and in our primary banking subsidiary, BANA, we were at 7%.
+We turn to slide nine, long-term debt. At the end of the first quarter was $238 billion, down $5 billion from the fourth quarter of 2014. In the lower left box you can see that from a maturity profile perspective, we have $16 billion of parent company debt that matures during the balance of 2015 and we will be opportunistic as it relates to refinancing that indebtedness.
+Our global excess liquidity sources reached a record level of $478 billion this quarter and now represents 22% of the overall balance sheet. The increase from the fourth quarter reflects the deposit inflows as well as the shift from discretionary loans into HQLA securities.
+Within the liquidity, our parent company liquidity remains quite strong at $93 billion and our time to require funding is at 37 months. During the quarter, we did continue to increase our liquidity coverage ratios at both the parent as well as at the bank levels and at the end of the first quarter, we estimate that our consolidated company was well above the 100% fully phased in 2017 LCR requirement.
+On slide 10, net interest income on a reported FTE basis was $9.7 billion, down a couple hundred million dollars from the fourth quarter of 2014 driven by two fewer interest accrual days during the quarter as well as some spread compression. If we exclude the previously mentioned market related adjustment, NII at $10.2 billion was largely in line with our expectations and lower than the fourth quarter of 2014 given two fewer interest accrual days.
+Modest improvements in net interest income mostly from lower funding costs in the quarter were offset by some of the continued pressures that we saw in loan and securities yields as well as balances in new assets coming in at lower long-term rates. This drove the adjusted net interest yield to 2.28%.
+If we look at the movement down in rates during the quarter, our balance sheet did become more asset sensitive compared to year-end such that 100 basis point parallel increase in rates from the end of the quarter would be expected to contribute roughly $4.6 billion in net interest income benefits over the next 12 months. Slightly more than half of that $4.6 billion is on the long end and just under half is based on the short end.
+On slide 11, if we moved to expenses, non-interest expense was $15.7 billion in the first quarter of 2015 and included roughly $370 million in litigation expense. First quarter 2015 once again did include $1 billion in annual retirement eligible incentive costs consistent with what we saw in the first quarter of 2014.
+Litigation expense during the quarter included FX and RMBS items and was significantly below what we saw a year ago, which included the cost of the [FHFA] settlement.
+While we are on litigation, I do want to make sure that you notice this quarter that we did get one step closer on our Article 77 settlement as the Appellate Court approved the Bank of New York Mellon settlement in all respects and I would also note that the deadline for further appeal at this point has passed.
+If we exclude litigation and retirement eligible costs, our total expenses were $14.3 billion this quarter, down nearly $1 billion from the first quarter of 2014 driven by three factors; continued progress on our LAS initiatives, our New BAC cost savings as well as lower revenue related incentives within Global Markets.
+Relative to the fourth quarter of 2014, the expense level on an adjusted basis is up about $0.5 billion on higher revenue related incentives mostly for the improved sales and trading results on a linked-quarter basis. Our legacy assets and servicing costs, ex-litigation, were $1 billion. They improved approximately $100 million from the fourth quarter of 2014 and more than $500 million if we go back to the first quarter of 2014. And we remain on track to hit our Q14 target that we laid out for you of $800 million dollars in LAS costs, ex-litigation once again in the fourth quarter.
+Beyond the LAS business, our teams continue to do very good work in optimizing our delivery network as well as our infrastructure and as you can see headcount was down 8% over the course of the last 12 months.
+If we look at asset quality on slide 12, reported net charge-offs were $1.2 billion in the first quarter versus $900 million in the fourth quarter of 2014. I do want to note that the first quarter of 2015 included a net impact of approximately $200 million in losses associated with the DOJ settlement that was previously reserved for and that was offset in part by recoveries from certain NPL sales.
+Our Q4 2014 included similar items but with the net adjustment positively benefiting net charge-offs to the tune of about $163 million. If we adjust for all these impacts, our net charge-offs during the quarter were $1 billion dollars, which is slightly lower than what we saw in the fourth quarter of 2014.
+Our loss rates on the same adjusted basis were at about 47 basis points in the first quarter of 2015 consistent with what we saw in the fourth quarter of 2014. In both our consumer delinquencies as well as our NPLs declined from fourth-quarters levels.
+On the commercial front we did see a slight pickup in reservable criticized exposure from the fourth quarter of 2014 as we bounce off comparatively low levels.
+The first quarter of 2015 provision expense was $765 million. We released $429 million in reserves. Most of those reserve releases were in our consumer real estate portfolio, while we did see a modest increase in reserves in the commercial space that was associated with the strong loan growth that we saw during the first quarter.
+We can flip to slide 13 on consumer banking. Hopefully last week you all saw and had a chance to review the filing of our recasted segment results. We mentioned to you during the last earnings call that we made changes in segment reporting where we moved the Home Loans into our Consumer Banking segment from CRES, which left our legacy assets and servicing as a standalone segment. We also moved the majority of business banking from Consumer Banking to the Global Banking segment which is how we manage the business. All of these changes have been made retroactively.
+Let's go ahead and walk through then the business segment results starting on slide 13 with Consumer Banking. The results showed solid bottom-line performance with earnings of $1.5 billion, which is up slightly from the year-ago quarter and down seasonally from the fourth quarter of 2014, which tends to be a better consumer spending quarter. Business generated a solid 21% return on allocated capital.
+Total revenue was lower compared to the first quarter of 2014 from a decline in net interest income. Two-thirds of that decline in NII was a result of pushing out in the allocation of a portion of the market-related NII adjustment to the deposits business.
+Our non-interest income was stable compared to last year, reflecting good growth in both mortgage banking as well as higher card income, but was offset by a portfolio divestiture gain last year of roughly $100 million in the first quarter. Expenses were managed tightly and non-issue expense declined from the fourth quarter of 2014 as we continue to reduce our financial centers and the associated costs driven by consumer behavior patterns shifting to more digital.
+The number of mobile banking customers continues to increase. We ended the quarter at roughly 17 million and these -- activity from these customers accounts for roughly 13% of all deposit transactions.
+Page 14 we have added some additional slides here to give you a sense as to some of the trends that we are seeing in the business and key drivers. You can see we remain a leader in many aspects of our consumer bank, doing business with nearly half of all US households.
+We look at fees compared to the first quarter of 2014, card income was up modestly despite some Affinity portfolio divestitures over the last year. Our card issuance remains very strong. Our balances did decline as our customers began to pay down holiday spend balance levels and our net charge-offs remain low at 2.8% and risk-adjusted margins remain high.
+If we move to mortgage banking income, it was up 60% as originations for the Company ramped up during the quarter. Year-over-year first mortgage originations were up 55% to $13.7 billion while our home equity line and loan originations increased 62% to $3.2 billion.
+The revenue improvement was driven by these increased volumes as well as the mix of first lien originations that was 76% weighted towards overall refinance activity. And looking forward, the pipeline remains strong, up 50% from the end of the year.
+Moving to service charges, service charges were down versus the fourth quarter of 2014. This fee line continues to be muted as more of our customers take advantage of our reward plans and are opening accounts with higher balances. We also continue to reduce the number of less profitable accounts serviced and migrate customer activity to more self-service channels. As a result, we are getting the same or slightly better account fees and debit interchange from fewer accounts, which is allowing us to reduce our infrastructure.
+Expense is declining and if you look at cost of deposits, it has dropped from just less than 2% in the first quarter of 2014 to 1.87% in the first quarter of 2015.
+And lastly, as you can see while we are bringing down our overall headcount in this business, I want to note that we have been increasing our sales specialists in the financial centers and their sales are driving client balances higher. For example, our deposits are up 5% from the first quarter of 2014 and our brokerage assets are up 18%.
+If we moved to slide 15, Wealth Management, it generated earnings of $651 million during the quarter. If we compare this to the first quarter of 2014, there's a $78 million decline as the solid fee growth that we saw during the quarter was offset by lower net interest income and higher expense. Once again, the allocation of the market-related NII adjustment drove the decline in NII, which more than offset the benefits that we saw from solid loan growth.
+Our asset management fees continued to grow driven by strong client flows and higher market levels. Our non-interest expense increased from the first quarter of 2014 as a result of higher revenue related incentives as well as investments in client-facing professionals.
+Our pretax margin was down 23%, down last year largely impacted by the decline in net interest income. Return on allocated capital remains strong at 22%.
+If we look at the activity and drivers within Wealth Management on slide 16, you can see our management fees continue to grow and are up 10% from the first quarter of 2014 but this is partially offset by some of the sluggishness that we've seen in transactional revenue within the brokerage line. We do continue to be an employer of choice in this business increasing financial advisors by more than 850 individuals over the course of the last 12 months.
+Our client balances climbed to over $2.5 trillion, up $12 billion from the fourth quarter of 2014 driven by strong client balance inflows. Long-term AUM flows at $15 billion for the quarter were positive for the 23rd consecutive quarter.
+And as I mentioned earlier, when we discuss loans, we continue to experience strong demand in both our securities based and residential mortgage lending areas of the business reaching a new record level in loans during the quarter.
+On slide 17, our Global Banking earnings during the quarter were $1.4 billion, which generating 16% return on allocated capital. Earnings were up 6% from the first quarter of 2014 as the decline in net interest income was more than offset by lower expense as well as improved provision expense.
+As we look at NII, the year-over-year decline was driven by three things: the allocation of the market related to NII adjustment, which I have touched on in previous segments; the push-out of the firm-wide LCR requirements, a good chunk of which goes to Global Banking as well as some year-over-year compression in loan spreads. Our provision expense was lower than the first quarter of 2014 by $185 million as we did not build reserves to the same magnitude as we did in the first quarter of last year.
+Non-interest expense was down 8% from the first quarter of 2014 driven by three factors, lower technology initiative spend, lower litigation as well as lower incentive costs.
+Moving to the Global Banking metrics on page 18, we chart the components of revenue which show stability across the quarters with the exception of NII, as I just mentioned. Our investment banking fees companywide during the quarter were $1.5 billion, down 4% from the first quarter of 2014. I would highlight during the quarter we recorded the highest level of advisory fees since the Merrill merger, up 50% from the first quarter of 2014. This helped to offset the drop that we saw within our leverage finance business as a result of the regulatory guidance that was implemented during the first half of 2014.
+Equity underwriting was also up nicely, up 10% from the first quarter of 2014. And as you look at the balance sheet, loans on average were $290 billion, up modestly on a year-over-year basis but if you look linked quarter, as I mentioned earlier, we had a fair bit of momentum ending the first quarter with balances up $7 billion on a spot basis from the fourth quarter of 2014.
+The $7 billion improvement was broad-based. We saw middle-market utilization rates at levels that we have not seen for six years at this point so we feel good about that. And within commercial real estate, we saw linked quarter improvement as well.
+On slide 19, Global Markets, we earned $945 million on revenues of $4.6 billion in the quarter. That was an 11% return on allocated capital during the quarter. Our earnings were up nicely from the fourth quarter of 2014 but down from the first quarter as our revenue was down 7% excluding net DVA and FVA. The decline from the first quarter of 2014 was driven by lower fixed sales and trading results.
+On the expense front, non-interest expense was modestly higher year-over-year as we had $260 million in litigation expense in the quarter. Ex litigation, expenses were down 7% on reduced levels of revenue related incentives.
+If we look at the Global Markets metrics on slide 20, sales and trading revenue of $3.9 billion ex-DVA and FVA as I mentioned was up nicely off fourth quarter of 2014 levels but down 5% from the first quarter of 2014. Fixed sales and trading was down 7% on a year-over-year basis while equities was effectively flat with the year-ago period.
+Within the macro related product areas like FX and rates, there was a solid return in volatility and client trading activity in the quarter while the credit spread traded products area experienced lower activity in line with lower issuance levels during the quarter. And as you look at and we lay out a mix between macro and credit in the upper box, upper right-hand box and you can see that our activity tends to be more heavily weighted towards credit spread trading given the position that we occupy within the issuer market.
+And the last point I would make on markets, our asset levels were fairly flat while VaR was below the level that we experienced last year.
+Slide 21, Legacy Assets & Servicing, you can see we saw improvement in revenue and expense trends compared to both periods within Legacy Assets & Servicing. The loss in this segment narrowed to less than $240 million. Revenue improved as both rep and warrant was down $156 million from the year-ago period and we had a more favorable MSR hedge performance. Those two factors were partially offset by lower servicing fees as we continue to reduce the servicing portfolio.
+Non-interest expense ex-litigation was $1 billion in the quarter once again improving approximately $100 million from the fourth quarter and more than $500 million since the first quarter of 2014. Importantly, our 60-plus days delinquent loans were 153,000 units but were down 36,000 units or 19% from the fourth quarter of 2014.
+If we move to slide 22 All Other, All Other reflects a loss of $841 million and that includes once again the impact of the annual retirement eligible incentive costs as well as some of the market-related NII impact. If we compare this quarter to the first quarter of 2014, revenue is lower by about $683 million and that was driven by nearly $700 million in equity investment gains in the first quarter of 2014 compared to essentially nothing in the first quarter of 2015 and it was partially offset as well by the absence of payment protection costs this quarter compared to about $141 million in the prior-year quarter.
+From a modeling perspective, the effective tax rate during the quarter was about 29% and as we look out during the balance of 2015, we would expect the tax rate to be roughly 30% absent any unusual items.
+So I would just wrap up the prepared part of my comments that as we end the quarter, we end the quarter with record capital. We end the quarter with record liquidity. We will begin our $4 billion share repurchase program this quarter. The team is very focused on addressing our CCAR resubmission. Expense management remains a key focus across the Company. Our businesses are showing good activity including a pickup in lending across several businesses in the Company, credit quality remains strong and we remain well positioned to benefit in a rising interest rate environment.
+And with that we will go ahead and open it up for questions.

exam/part2_problem1/Problem_1_Conference_Call_Segments/call_30_questions.txt

@@ -0,0 +1,221 @@
+Question_1:
+
+    So Brian, very impressive commentary in the beginning of the call on headcount getting back to 2008 levels before CFC and the Merrill Lynch acquisition. The one question we get continually from investors is what is left to do on the expenses and you've already got the core expense number coming into the $13 billion range, so can you give us some sense as to where you go from here on expense management and is it steady as she goes, or is there room to become even more efficient?
+
+Question_2:
+
+    Got it. And then just separate topic on GWIM and maybe you could give us some commentary around how you are thinking about the impact of the fiduciary language that has been coming out if the Department of Labor and also how you deal with the competitive threats coming from Silicon Valley including some of the robo-advisor efforts?
+
+Question_3:
+
+    Okay, thanks. You have been a leader there, so appreciate that color. Thanks.
+
+Question_4:
+
+    Any sense of when we get a clearer picture on the final impact of exiting parallel run? Should we just assume the 100 basis point hit that you mentioned is a done deal or is there a potential for it to be less than that?
+
+Question_5:
+
+    Okay. In terms of timing of a conclusion on that?
+
+Question_6:
+
+    Okay. And then just related, obviously capital build was very good this quarter of 50 basis points, so you essentially got half that back already. But assuming that 100 basis point hit goes through, are there additional RWA levers to pull or model adjustments in the future that we can think about?
+
+Question_7:
+
+    Okay. That is very hopeful, thank you.
+
+Question_8:
+
+    On your legacy asset servicing in your discussions you said that the loans went down from 36,000 loans in the quarter. Did you sell any loans in the quarter?
+
+Question_9:
+
+    Yes, I know one of the things out there is what we are seeing or hearing is that there is a strong market right now for people wanting to buy either re-performing or nonperforming loans. Are you going to use that as an advantage to start moving this stuff off your books quicker?
+
+Question_10:
+
+    Okay, thank you guys.
+
+Question_11:
+
+    Just want to follow up on the capital discussion. You guys had pretty good progress on the advanced approach, up 50 basis points quarter over quarter but the gap between standardized and advanced is still very large. And I guess if you have to go through with the full 100 basis points, I guess about 120 basis point gap versus your peers that are less than half that. I guess -- is the big difference operational risk because of the larger litigation you faced over the last couple of years and how do we think about that coming down and getting more in line with the peers? Is that just a time as you get further away from that, those op risks come down or how else do we think about the trajectory of the closing of the gap?
+
+Question_12:
+
+    Right and sorry, is that sort of a negotiation process on the models with regulators, so is it going to be sort of a step function or is it just really just time value as you move further away? I'm just trying to understand the process.
+
+Question_13:
+
+    Right. And to your point, the stress test is based on standardized, not advanced.
+But just one quick follow-up elsewhere, on the FICC revenues, can you talk about the trajectory over the quarter? Did it improve in March? It sounded like some of your peers have talked about a slow start. Did it get any better in March, or how do we think about the trajectory through the quarter?
+
+Question_14:
+
+    Okay, great. That's very helpful. Thanks.
+
+Question_15:
+
+    Quick question on Proposal 8 in the proxy. I don't think the regulators want it to happen. I don't think it should happen and I assume you have been doing a lot of the work on this along the way for the last couple of years. But curious why the Board is so against shareholders voting for it and what you actually have to do if it does get the yes vote?
+
+Question_16:
+
+    Okay. I appreciate the comments you made on the increased asset sensitivity and if I remember the numbers correctly, it sounds like more of the increased sensitivity came out on the long end. So I guess my question is, it is great you make a lot more money if the curve shifts up 100 basis points. But I think a lot of people are more fearful of what happens if we get into a [flattener] environment. So is it is simple as you capture at least half by short rates going up and if we're in a flattener, that's where it ends?
+
+Question_17:
+
+    Okay. I appreciate it. Thank you.
+
+Question_18:
+
+    Just a follow-up on in terms of if rates stay pretty flat, what kind of outlook would you have for the core NII if we take the 10.2 this quarter as a jumping off point? Do you have any room to lower the debt costs from here or how would you expect the core NII to trend if we don't see too much movement on rates?
+
+Question_19:
+
+    Got it. Okay and that's couple hundred million over a couple of quarters, Right?
+
+Question_20:
+
+    Got it. And that's just kind of core leakage from new stuff coming on or lower yields and you not investing much in a low rate environment?
+
+Question_21:
+
+    Okay. And then just switching gears, Bruce, on the credit side, do you see the net charge offs kind of bouncing around the $1 billion per quarter level, or is there room for those to come down or is that kind of stabilizing? And how should we think about reserve releases from here relative to the 400 or so you did this quarter?
+
+Question_22:
+
+    Okay. So that should be something -- the jumping off point is more like a 200 reserve release number?
+
+Question_23:
+
+    Okay. Last quick thing for me. In terms of rep and warrants, the slide 26, not sure if you mentioned this already, Bruce, there was a pickup in the claims, the new claims this quarter showed a big increase. Just what is the driver of that? Why would those show up now? And any color you can provide on whether that is a concern or not.
+
+Question_24:
+
+    Okay. Thank you.
+
+Question_25:
+
+    So Bruce, I just wanted to touch on the preferreds for a moment. So saw that you completed another $3 billion of issuance in the quarter. But seeing as you are already at the 150 basis point target contemplated under Basel III, whether it's fair to assume that you are now full on press at the moment and we shouldn't expect any additional issuance?
+
+Question_26:
+
+    Excellent. Thanks for clarifying that, Bruce. And I suppose since you mentioned RWA, one thing that I just wanted to clarify, I believe it was relating to your response to Jim where you noted that for CCAR it only contemplates a standardized approach. But I just wanted to know if that determination had been finalized since some are speculating that the advanced approach could be incorporated within the CCAR exam going forward?
+
+Question_27:
+
+    And do you have a sense at least for the moment as to what the impact would be on RWAs if they were to incorporate the advanced approach versus the standardized?
+
+Question_28:
+
+    Right. But would it be fair to expect that because it is a -- the advance calculation is more procyclical in nature that the RWAs calculated under a period of stress would be higher versus the standardized?
+
+Question_29:
+
+    Fair enough. That's it for me and thank you for taking my questions.
+
+Question_30:
+
+    I was wondering if you could talk a little bit about the investments in brokerage services business. The metrics continue to look very strong as far as assets gained but the growth rate on a year-over-year basis looks like it has slowed considerably. Any context you can provide around revenue generation and is there a potential catch up that we should see or expect going forward based on either markets or just activity levels?
+
+Question_31:
+
+    Okay. And then secondly, just extending that to the other consumer fee lines, card income flattish and service charges down a bit. Is this customer behavior driven or additional repositioning in there and can you talk about growth expectations on the consumer side as well?
+
+Question_32:
+
+    Okay. And then last one, just Bruce, you mentioned on the discretionary portfolio on the switch out to HQLA. Can you give us a sense of just how much more of that mix shift we should expect or at some point do you get to a point where the loan portfolio finally starts to bottom out?
+
+Question_33:
+
+    Thank you.
+
+Question_34:
+
+    Just one quick question on the legal expense that was incurred in this period. Are those issues now the FX and the RMBS, are those issues now settled or are they ongoing?
+
+Question_35:
+
+    Okay. And sorry, just so I understand that last point -- the civil component, is that with the DOJ or some other kind of authority?
+
+Question_36:
+
+    Oh, I see. Okay. But that was contained within the accrual in this period?
+
+Question_37:
+
+    Okay, great. Thank you for the clarity.
+
+Question_38:
+
+    What are your financial targets for 2015 and 2016?
+
+Question_39:
+
+    And what timeframe do you expect to get then?
+
+Question_40:
+
+    So is that your specific financial target -- what is your target for 2015 when it comes to your financial metrics?
+
+Question_41:
+
+    Okay. I guess when I look back at 2014 I ask myself the question did Bank of America meet its financial targets? And I have trouble because I'm not sure if you had specific targets just for the year 2014 as opposed to your longer-term targets.
+
+Question_42:
+
+    Okay. Let me just ask a separate question then. Glenn Schorr brought up Proposal 8 and the proxy and I guess my reaction is why not give more information on the trade-offs of the business model? One of your competitors gave three slides on this topic at their investor day. They weren't asked to do this and they have some higher ROE and ROA. So more information I think would be good and in the proxy it says that your Board believes that the proposal would not enhance stockholder value. If that is the conclusion of the Board, just why not share some of the insights of the Board to investors?
+
+Question_43:
+
+    All right. Well if you can share additional insights into that conclusion in addition to what you just gave that would be great at least in the future. Thanks a lot.
+
+Question_44:
+
+    I have one straightforward question and one that is more existential. I will ask the straightforward one first. Brian, could you just restate your position on paying or raising the dividend? I know the CCAR this year has distorted that a bit and if you could just state how you feel about dividends versus buybacks?
+
+Question_45:
+
+    Okay, thank you. The second one is this and this is maybe a little bit more difficult to answer. You had a good trading quarter but we have seen one of your competitors have a much better trading quarter and I know that there is a mix issue there. But also as I kind of look at the composition of your businesses there, have you de-risked the trading desk to the point where you can't really take full advantage of the volatility in markets? And I'm wondering if you see that as the case? And secondly, if there will come a time when you are able to do some re-risking there?
+
+Question_46:
+
+    So basically you are happy with the trading desk as it is?
+
+Question_47:
+
+    Okay, thank you.
+
+Question_48:
+
+    A quick follow-up on the op risk questions. So if we still have pending settlements out there on a few of the remaining large issues, could that lead to op risk at least sustaining at elevated levels and could it even potentially cause a little bit of an uplift there?
+
+Question_49:
+
+    Yes, from your lips to God's ears, but if we still have some potential settlements my only point is that it might take a little while before we end up seeing that come down. Isn't that a similar reason?
+
+Question_50:
+
+    Okay, thanks. And then it seems some high-level turnover in your equities business. Can you comment maybe on what is driving some of those departures, any potential implications and what you are doing about it?
+
+Question_51:
+
+    Okay. Thanks for that color. And then the last one for me following up on Ken's question, it sounds like the FA headcount adds are sort of biased a little more to the junior side. So should we count on a bit of a headwind from that on your productivity metrics in GWIM? And maybe could you also comment on the recruiting environment currently and if you still think that comp may moderate as some of those deals with FAs from crisis level sunset?
+
+Question_52:
+
+    Thanks for the color.
+
+Question_53:
+
+    A couple from me. First of all, you mentioned the commercial utilization rate being up a lot. Can you give me some or give us some idea of how much of that is energy complex driven versus maybe coming from other less stressed industries?
+
+Question_54:
+
+    Okay. And looking at the balance sheet, can you talk a little bit about the plans, the level of excess cash? 22% of assets in cash, a 7% plus SLR ratio. It would seem awfully tough to generate ROE or ROA with that much of the balance sheet sitting in cash. Is there something you can do there?
+
+Question_55:
+
+    Okay, thank you.
+

exam/part2_problem1/Problem_1_Conference_Call_Segments/call_31_answers.txt

@@ -0,0 +1,276 @@
+Answer_1:
+
+    I think, Betsy, in the broadest context we continue to work expenses. If we talk to all of you about each quarter, 18 straight quarter reduction in core operating expenses outside litigation, 15 straight quarters of 3,000 people or more reduction each quarter. So we just continue to apply technology to continue to over the long term reduce expenses.
+So the goal we have in SIM is to keep the expenses flat as revenue increases. And if the world economic situation changes different what people are expecting we'd have to look at it differently. But as you can see this quarter that will result in a constant downward pressure given where we are in the economy.
+
+Answer_2:
+
+    No, clearly what the case is significant is this, Betsy. We looked at and as we do every quarter look at the rep and warrant provision and you're right it was a net benefit of $200 million this quarter.
+I think the important thing I think more than the $200 million is if you look back on our slide 20 in the earnings materials the effect of the decision led to two things that do reduce tail risk on a go-forward basis. The first is you can see the number of new claims that came in was just over $200 million which is a dramatic improvement from what we've seen historically. And second as a result of the time barring of certain claims that the outstanding claims that we have, and keep in mind these outstanding claims are based on original UPB, came down fairly significantly to just below $19 billion.
+So while it was nice to have the modest benefit that we did in the quarter I think importantly on a go-forward basis it does reduce the tail risk that's out there. We saw some of the benefits from that in the activity levels this quarter.
+
+Answer_3:
+
+    There's no question, Betsy, as we look at and I'll just remind people that we were at $3.9 billion for a 100 basis point move. If you look at that roughly 60% of it is on the short end now. 40% of it is on the long end, and there's no question that we would expect to drop a significant portion of that to the bottom line if and when we see that 100 basis point move.
+
+Answer_4:
+
+    Yes, Betsy, really to your last question we've been investing in headcount to open up a customer facing capacity. So I'd rather give you some of the statistics earlier, so we're comfortable from a technology spend rate, from an investment and client facing capacity, marketing and everything we're at a good run rate. So there'd be downward pressure as headcount continues to come down through the application of technology across the platform with customers internally.
+So we're comfortable that we can continue to drive it. And make no bones about it this is what we work on every day and we're reluctant to put out a dollar target because frankly that tells the team we've made a goal and stop as opposed to just get better at it every day. So we are constantly working to improve the dynamics of revenue versus expense in this Company.
+
+Answer_5:
+
+    Thanks for the question. It's a good question. I think if you look at we typically have a little bit of seasonal pressure in the second quarter on NII so as we sit here today based on the curve we would expect to see the core net interest income which obviously excludes FAS 91 move up from Q2 to Q3 and we'd expect further growth from Q3 to Q4.
+
+Answer_6:
+
+    It's just based on the realization of what the existing curve is which quite frankly we don't look at and our models don't show Fed funds going up until January 2016. So there's not a lot of great benefit in that at all.
+
+Answer_7:
+
+    I have two comments. I think the first is that when we talked about the discretionary balances coming down that's basically the whole loan portfolio as well as certain pieces of the home equity portfolio. So we referenced that those came down about $15 billion quarter over quarter, half due to sales and half to paydowns.
+We probably have one more quarter where you'll see some of the conversion of those loans to securities. But if you actually look at the amount of securities from a balanced perspective they went up a little bit Q1 to Q2 based on the conversion of those loans to securities. And as we continue to see the deposit footprint grow we will continue to invest and we're obviously mindful of the balance between increasing net interest income like I spoke about as well as being sensitive to OCI risk.
+
+Answer_8:
+
+    As we look and snap forward there are a lot of things that influence that number. One is obviously the ability and how much we've put the increase in deposits to work through growing loans and clearly we've seen during the second quarter we saw that loan growth move up which is obviously a good thing which lessens some of that sensitivity.
+And as we look at the amount and what we're doing from an investment portfolio there's less to do during the second half of the year. So all in all as we look at those different factors it's why we're comfortable saying that we'd expect the core to increase both Q2 to Q3 as well as from Q3 to Q4.
+
+Answer_9:
+
+    I think I can say that we can't say too much about regulatory matters. I think given the updated disclosure we've given you can assume that we're getting closer to having that resolved. You never know until you're ultimately done but we feel very comfortable with the guidance of 9.3% factoring in the adjustments based on where we were at the end of the second quarter and we'll look to get that wrapped up sooner than later.
+
+Answer_10:
+
+    Sure. As I mentioned roughly 40% of it's long end which is $1.5 billion of the amount and roughly half of that is FAS 91 and half of it is non-FAS 91 related.
+
+Answer_11:
+
+    Well I mean ultimately over time if you get to the 100 basis point number you have that, I think your point is that if they move 25 basis points is it 25% or is it more than 25%? And I think the thing that you have to keep in mind and we've talked about it a lot with what we would expect from a deposit repricing perspective that clearly you'd expect the first 25 to 50 basis points move up that we would not have to do much from a deposit perspective. So net-net on a relative basis that should be a positive as you look at the numbers.
+
+Answer_12:
+
+    No, it's in other income and it's reflected in the All Other segment.
+
+Answer_13:
+
+    I would say that generally that the hedge results on the MSR were fairly decent in the quarter and then like we've said there just wasn't much litigation during the quarter as well. So all of those things led to the results being where they are. But you're right we've typically had 100 to 200 of rep and warranty provision and we had 200 benefits, so you get a sense of the magnitude of the swing on a comparable period basis.
+
+Answer_14:
+
+    I think this quarter I think you're seeing a continuation of what we've been talking about and I want to be careful that I think we need to exclude DOJ both on the top as you did in your $929 million number as well as in the reserve release. So if you back out what we had for DOJ the reserve release was about 150, the charge-offs of $929 million were down roughly $75 million.
+And while this can bounce around a little bit I think what you're likely to see over the next couple of quarters is probably a convergence where the charge-offs and the provision number become more closely aligned. And I would just say that particularly on the consumer side we continue to like what we see on credit and on the commercial side you can see that charge-offs are virtually nil within the large corporate space and there's nothing that we see out there that's going to change that materially.
+
+Answer_15:
+
+    As it relates to that I want to think, John, that it will be in the $100 million type area as it relates to both charge-off and reserve release and then by the time we get to the fourth quarter it should virtually go away. It can bounce around a little bit but it should largely be gone by the end of the third quarter.
+
+Answer_16:
+
+    But it pares off John so the way you subtract this quarter continue. So it's a number it's offset by a previously established reserve.
+
+Answer_17:
+
+    Yes, it's interesting, if you look year over year and you adjust for FAS 91 which shows up in the NII when you're looking back at the table that the yields were almost identical from the second quarter of 2014 to the second quarter of 2015 once you make that 91 adjustment.
+
+Answer_18:
+
+    Sure. I think when you look at commercial loan spreads there are two things that those numbers reflect. I think the first thing which just from a macro perspective that has been a little bit of compression although we're seeing it slow as it relates to just the competitive landscape and where loans are getting done.
+As it relates to your question about the new loans, the responsible growth, if you looked at in particularly in the areas that picked up during the second quarter that on our risk rating scale they would translate to credits that tend to be in the strong BBB or a single 8 area so that they are largely investment-grade type credits where we're extending it and if you look at average spreads in that area they tend to be in the LIBOR plus 150 type area on average which is a little bit lower than the average across the commercial platform. But as you can see the credit is clearly at the upper end.
+
+Answer_19:
+
+    So Glenn it's probably say if you think about it we're not on credit structure we held our discipline, on price there's been pressure but then you have to look at that on a whole relationship basis with the other fees and revenues you get from cash management and stuff. And we try to have a client focused discipline to do it. But your observation is right, there is a little pressure on those spreads due to that.
+
+Answer_20:
+
+    In the sales context there is there are incentives for production but it has to be done the right way with the right customers in the right structure so it is not -- it doesn't drive their behavior. It's different than let's say the Wealth Management business in terms of the balance between incentives.
+But yes they are paid to open, the mortgage loan officers are paid to produce mortgages and to open up checking accounts and other things. But it's really, it's actually deploying the people and building the capacity to sell, that's where we are reducing the need for services through all the automation that's going on and shifting that group of people.
+So that it is really just having more of them than think of it as incentive driven behavior. And then really then having the information at the point of the sale through our technology of offers that have been made to people for credit cards, etc., so you can make the offer again that's already been made to them online or something. So it's a combination of sales practices, more people and then just the discipline of the team, Tom, Glenn and Dena  then it would be incentive driven.
+
+Answer_21:
+
+    Well as you look at the consumer on page 5 you can see the balances and you can see the different pieces. We had change of practice of how we booked residential mortgages for our consumer customers that has an impact on that. But overall you remember they're still fighting a couple -- we're still fighting a couple of things on consumer.
+One is the card balances are finally stabilize and you saw from first quarter to second quarter a slight uptick there. That's because we've been hitting increasingly record sales of credit cards so I think we did about $1.3 million this quarter, Bruce, that is again a record for us and since we changed the business model six, seven years ago. And if you look at -- but if you look at things like the home-equity balances and things like that those are under pressure just because we're still seeing significant repayments even though we're producing a lot in that area.
+So if you look at that you can see it's across the board just a little bit upside tilt, in part the interplay between some of the runoff in the other category and the buildup in residential. But they do a lot more than sell loans in that place and so the investment sales levels that drives that Merrill Edge, in fact at the FSAs and the branches that we deploy do $4 million of notional on average a month of new investment products. In building $4 million to $5 million they sell obviously checking accounts, net checking accounts this quarter.
+We're in a net checking account growth position even taking into account the runoff from divestitures and other things and then you have the loan side. So they are responsible for driving all that and so it shows up in the loans a little bit but also that's why the feed category is stable in other areas.
+
+Answer_22:
+
+    Well, for example in the small-business arena in the first half of the year we did about $5 billion of originations and what the world would define as small business we have it across two divisions and they helped grow that. Merchant services growth, you know they sell that goes into the Business Banking -- Global Banking segment and they sent about 20,000 customers a year into Wealth Management that literally walk in a branch are wealthy and they get moved over and that helps our Wealth Management business.
+So you can't think of -- you're right. That salesforce does what it does in the segment but it has the benefit across the board and then service is a lot for all customers.
+Business Banking, Commercial Banking customers come into the branches obviously for the cash -- related to the cash management revenue. So it is across the board and contributes and so the good news is they are making more money than they made last year on their own but they are still providing that services and capabilities across the platform.
+
+Answer_23:
+
+    As the runoff subsides in the consumer categories this is Consumer Banking here and then you've got the LAS piece, the LAS home equities will continue to go down because frankly those are products we put in there because we decided not to do them. But on the consumer you should see as it stabilizes you'll see a little bit better loan growth.
+But remember that focus on the responsive part of responsible growth we're not going to open up the credit card business in a way that will produce charge-off later down the road that we won't be happy with. So we are driving that growth into the core strong credit quality that we want to have in this Company. And so I'd be careful about assuming it will just leap to us because to do that you'd have to go into credit postures that we won't do.
+
+Answer_24:
+
+    And I would just add, Brian, if you look at home-equity it's a good example where if you look within the consumer banking space during the second quarter of this year the home equity originations of line amounts were about $3.2 billion. They were to loan to value less than 60%, FICOs deep into the 700s and so there were more than $3 billion of those booked.
+It's number one market share, roughly $1.5 billion of that was funded, but you do have some of the legacy stuff that's running off. So I think when you wonder about activity levels and what's happening I think you need to realize that with that number one share in what we're doing it is growing. It's just that there is a runoff that mutes that effect.
+
+Answer_25:
+
+    I think there are couple of things. We're obviously working hard to move as many of the exposures from CEM treatment to IMM treatment which generally has favorable benefit there.
+The second thing I talked about better collateral management as well as looking to work to do more compression and to net things out and we continued to see some benefit there. I think third is we continue to move out and we're largely through this but as we continue to move out some of the non-performing consumer real estate as well as the benefits of improved consumer credit quality, we're seeing benefits there. And there still are a few RMBS and other type positions that we'd expect to get benefit for over the next couple of quarters.
+So I think this quarter was clearly a quarter between the activities that we undertook as well as what happened from a rates and FX perspective where we saw pretty good quarter-over-quarter improvement. And obviously that was not only in the markets business but also in the consumer businesses.
+
+Answer_26:
+
+    I'd say, Bruce, the other thing we have a healthy dose of operating capital due to the operating risk embedded from Countrywide and other things that we have to figure out over time how we can work through the system because we never did the activities in the Company but on the other hand we had to deal with the cost of them. And so both operating and general, so as you think about that longer term we had to get a more rational view of that operating risk relative to the Company we run today which is different but that will take time and working through the models there too.
+
+Answer_27:
+
+    A couple of points on that. I think first there's clearly a building up of advisors particularly if we're bringing them in and training them, that there's a ramp up in productivity that occurs. I don't think there's any question.
+The second thing that I do think is important is that when you look at the net interest income line that as I mentioned it looked a little bit muted, if you saw gross loan net interest income you would see this increasing. So some of the push out of the ALM activities has muted the NII line a little bit.
+And then the third thing which you reference that I do think is a little bit more of a trend and I think is not only is somewhat consistent with some of the regulatory standards which we're seeing more and more of the assets that we manage being managed on a long-term basis where we're managing them. And so that's leading to growth in the asset management fees and the corollary to that is that you do have lower brokerage income but net-net you can see that we are growing in the segment and we feel good about the activity that we're seeing there.
+
+Answer_28:
+
+    And I'd say that the few quarters we saw the margin, the pretax margin come down and you're seeing it start to turn back and go up. And there's positive pressure out in the future on that at the end of this year because of some of the deal stuff runs off will add a couple of points to margin that it's in the numbers this year but won't be in the numbers next year.
+And then your point is the maturity of the investment cycle so if you go back we're adding financial advisors, their books are coming in, they're building the books and as that maturity happens you'll see it match a little better. But the encouraging signs we're seeing the margin comeback up.
+And remember this business also benefits a lot by the rate changes, too, ultimately. It is a big bank, it's got $250 billion deposits, round numbers, a lot of loans, and it has a lot of the same sensitivity our Consumer Bank does that people don't think of it in this context.
+So as we think about the comp structure is in place but there's an added deal piece that runs off you're seeing the maturity cycle of the people coming up. And the team is just working hard on the revenue expense management and we started to see some better signs they've got some work to do still though.
+
+Answer_29:
+
+    You make me the caveat that this assumes that we don't have a significant change one way in market conditions because obviously there's a part of Basel III that's somewhat pro cyclical. But I think net-net if we do a good job of managing this the way that we would expect to that absent any exogenous changes we should be able in the institutional business which is both Global Banking as well as sales and trading that we should be able to grow loans while at the same time have reductions in the overall risk-weighted assets that are attributed to that area. Now where you will probably see it be more dollar for dollar is obviously under standardized those loans tend to be every dollar of loan is a dollar of RWA so you have to be a little bit careful between which method you're looking at.
+
+Answer_30:
+
+    It's both because you're right, as it relates to a ratio pro forma for this it is the lower number. But keep in mind you have to keep the focus on standardized as well because at least based on last year's CCAR as well as guidance that's out there standardized is very important from a CCAR perspective.
+
+Answer_31:
+
+    A couple of things on that front. The first is as it relates to G-SIB, their application, where they may or may not be used, at this point while we participate in industry forums I think that the supervisory area has been very transparent and sharing much of the same things that they share with us you are also aware of. So I think that the information is fairly disseminated amongst everyone.
+As it relates to contingency planning it's really an ongoing continuation of what we did from 2013 to 2014 which if you recall is related to our quantitative CCAR results in a timeframe where we didn't have significant levels of net income that our CCAR cushion grew significantly. So what are we doing to focus on that? On the investment portfolio we're mindful of managing OCI risk given that it flows through the overall CCAR process.
+We continue to be very focused on moving out those loans and those assets that have higher loss content and at the same time making sure that the originations that we put on were of the highest quality. So we continue to focus on that.
+If you look at the overall risk that's being taken within the markets business, we're managing that so that there's not a surprise as it relates to that. And clearly we continue to work hard to move out those exposures that have high loss content there.
+So I think I would say it's really much more of a continuation of the work that we've been at for several years now. And we're mindful of making sure that we continue to push that stuff out at the same time that we're originating those things that we'll perform well as part of that overall exercise.
+
+Answer_32:
+
+    I think that the TLAC ratio as it relates to where we are and this assumes that we exclude stuff that's less than a year, I think the TLAC ratio is roughly 21% at this point, we'll have to see the deducts that come in and out of that based on G-SIB and other things. But I think we're just below 21% at the end of the quarter.
+
+Answer_33:
+
+    We'll let Lee get back to you on that. I don't have that off the top of my head in terms of -- I just don't have that fact right in front of me.
+
+Answer_34:
+
+    Yep, Lee can fill you in on that.
+
+Answer_35:
+
+    So let's step back and make sure that we understand one thing is the idea here is we're moving because the customers are moving and how they conduct business. And so you've got to run your changes consistent with what they're doing. That's a baseline that you have to stick to because if you forget that you can overshoot or undershoot frankly and so that being said that's one point.
+The second point is in the 6,100 branches that we had at the peak down to this level there were multiple things we were doing, customer behavior changes, change in the configuration of the markets we attack, etc., so there are lots of elements. So now we're now on a business as usual ongoing practice which will really be driven more by the customer behavior as opposed to some viewpoints we have about markets and arranging the franchise.
+So I'd expect that they will continue to work themselves down and I wouldn't predict a steady rate because it's a very complex equation but then let's flip to what's really going on. As Bruce talked about earlier we have 17.6 million mobile users. We have 31 million bank computer banking users, that number is actually growing again.
+For a while it was kind of flat, it's actually growing, so it's interesting that that's happening. 16% of all our sales are all digital now. About 6% of the sales of digital which is computers and mobile are mobile and that's growing at 300% so it's catching up.
+And then you get things which are interesting because it goes to the efficiency of your branch. There are about 10,000 appointments scheduled in a mobile device a week at the branch which then allows us to have a more efficient branch structure. Even though we may have less we may have bigger branches because you have more sales going on in them.
+So think about that, that's up from 2,000 last year, second quarter of 10,000 times a week now and growing at that rate implied there. People are scheduling appointments to come see us which is a lot better experience for us and then to help us to serve them.
+So it allows us to have our staffing levels done. Bruce referenced the checks deposited are 13% of all the checks so the activity of all this is critical to that question. So I won't give you a 5% reduction or 4% reduction.
+I think you can mathematically derive what we've done. But I'd be careful about assuming it will be that ratable but it will be more based in behavior change. But the key is our customer scores have gone up overall and even in the mobile channels we've gone up year over year 1,000 basis points in our mobile channel, top two box satisfaction.
+So it will be a complex thing. It's an integrated pool of capabilities. Phones, online ATA and branches and you'd expect it to be pressure going down but remember we were early into this and if you think about 1,400 branches that's bigger than a lot of companies out there already out of the system. So we've been at this for a long time but we will do it the right way because if you push too hard you will upset the client.
+
+Answer_36:
+
+    What I'm referencing is discrete away from the entire recruiting process. This is a -- was set up at the time of the transaction for a group of people at that time and it just came in over the years and it's not this last year it goes away.
+The forgivable loan practice and all the other stuff in recruiting is a whole different thing. But for John in key banks and the teams they're successfully recruiting on the experience level the attritions for the top two quintile financial advisors is at an all-time low, I think again I think it's running at 2% or something like that. So we're retaining those and then we're recruiting at both the experienced level but importantly what is obvious to us is to drive the amount of client need here, drive against the client need which is huge and underserved in our belief.
+We had to create more advisors than there are out there and so we've really worked hard on what they call the PMD program which is basically bringing people in the business who may have experience in other firms by bringing them into our firm and also other industries into our firm. And that is now reaping benefits to us given we've been working on it for two or three years to retool it and drive it.
+So you should expect our advisor count to go up and our productivity may come down per advisor. But frankly there's a lot of business where remember our value predict is 1 million and so on so bringing it down a little bit to get a lot more growth, a lot more growth in advisors would not be -- would be a great trade for our Company.
+So our recruiting is strong. We're net doing a decent job at the higher end that you hear a lot about, that is not a big part of the advisor count, several hundred a year, like in a couple 200, 300.
+But what's going to drive our advisor and capabilities to serve our clients is the broader buildout of the teams which is the BFAs and the PMDs that work at the branches in some cases and work with people. And that should redound to our benefit over time although it will have a little drag on profitability right now because it's investment.
+
+Answer_37:
+
+    I don't have 50 basis points, Marty, but the number we quoted was on a 100 basis point move the FAS 91 benefit would be $775 million.
+
+Answer_38:
+
+    There's clearly some of that because we would expect as we go forward with the composition of the balance sheet that there will be incremental cash that's generated. Obviously some of that goes into loan growth and some of it goes into the investment portfolio. So embedded in that those comments is an assumption that there will be a little bit more to be invested.
+
+Answer_39:
+
+    I would think of it as on the low end of that during the third quarter and a comparable amount in the fourth. And there's one other thing that I did want to correct that I said earlier that if you look at the securities balances yield the stability that we saw once you adjust for FAS 91 was Q1 to Q2.
+
+Answer_40:
+
+    I think if you look at -- I think the important thing is that so that rate tends to manifest itself in the market based NII. There are a lot of things that drive that when rates move around as much as they have but I don't think there's any question that over time as you're in an increasing rate environment that there is a part of the yield component that flows through NII that you would expect to get a little bit better.
+
+Answer_41:
+
+    It would but the question is it works its way through but if you look across long periods of time it's relatively constant.
+
+Answer_42:
+
+    At any one point in time it can move around but you should assume it's comfortably above $100 billion that's on the Fed in any one night during the quarter. And I think that when you look at where we are with LCR where we are at both the parent as well as the bank, that I think and $484 billion of overall liquidity which is a record that we feel we're in a reasonable place and I don't see significant changes going forward, Nancy.
+
+Answer_43:
+
+    Probably both.
+
+Answer_44:
+
+    In the mortgage business, for example the bank originators we're number one in JD Power survey and I think we're number two or three overall of all mortgage companies. So I think in terms of originating mortgage loans a guy name Steve Boland runs that for us has gotten that platform settled in and you'll get momentary spikes where the refis will bump up and things slow down.
+From a get the loan done, from keeping our credit quality where we wanted that ends up with us having some noise around people who don't get mortgages. So we did $15 billion or whatever we did this quarter, 30% of those loans were moderate income so we're still serving that segment. But again we are not pushing for credit terms and mortgage and I think you'd understand why, Nancy.
+
+Answer_45:
+
+    Well, if you look at our customer scores continue to rise almost on a monthly basis and in the broadest context our brand and part of that is due to what happens at the branch. Part of it is also due to there's less stuff going on about the Company and that's gone from the low point in the fourth-quarter 2009 and has rose fairly steadily. So it's been in fact back to within 95% of where it was at it is highest point in 2005 and 2006.
+So with that we're satisfied. And if you actually go to the customers who actually get served when we measure all the channels which we measure with tens of thousands of customers a week and a month you find that those scores continue to go up and the top two box score I think we're in the 70s to 80s of the various channels and including mortgage.
+So because you just have a lot of customers you'll find out that once in a while we're bumping up in our jobs to fix something we do but if you think about it we've added mortgage production, checking accounts net new, credit cards and that's the ramification of good service and driving it and the team just continues to work on it. We're not perfect and we will always get better but I think if you look at it over the last three or four years it continues to get better.
+
+Answer_46:
+
+    And by the way if you look at our deposit growth it continues to accelerate in over the top of the CDs continue to run off year over year of $10 billion. So we're up $31 billion in deposits and consumer year over year I think it has and CDs were probably down I don't know $10 billion or so.
+So think about that if people didn't like us a lot they wouldn't be giving us their core checking account and that is happening more and more every quarter. And that will serve us well as rates change because we are a hugely primary focus checking account company in the broad mass-market business which is different than the past.
+
+Answer_47:
+
+    Yes, I think the first thing that you have to keep in mind, Mike, when you quote the numbers within the business is on a year-over-year basis you have two significant things happening. You've had FAS 91 in a significant movement in rates as it relates to push out of those charges as well as we push the LCR out to the businesses from a reported segment perspective that has a significant impact.
+And so I think as we've gone through the presentation that the numbers that I would focus on are very much what's going on within the segments looking at the fee income line because there is activity from a net interest income perspective of greater activity within the businesses. So I'd be a little bit careful with that characterization and I think in that context I'd go back to Brian's initial comments which we continue to push hard, we're adding client facing personnel across the Company, at the same time we're reducing aggregate headcount and that's leading to declines in the expense numbers and we're very, very focused on continuing to keep that balance as we go forward.
+
+Answer_48:
+
+    Don't take GWIM because I got that number off the top of my head Mike. I think year over year the difference in GWIM NII allocation due to sort of unfundamental things is Bruce how much of --
+
+Answer_49:
+
+    Yes, let's just go through. Relative to the second quarter of 2014 you've got consumer from an overall NII impact was more than $200 million. GWIM was as Brian said roughly $130 million, overall Investment Bank, our Global Banking was a couple hundred million and then you have de minimis amounts within markets and LAS.
+
+Answer_50:
+
+    That is nothing more than us changing the allocation method, it's because of LCR and other things becoming important. So we pushed down the businesses to get the behavior of the businesses aligned with the parent.
+So this is why you have to be a little careful about micro assessing these movements because things change in the methodology year over year and we don't go back and restate this. We didn't do it last year.
+
+Answer_51:
+
+    Mike, we are satisfied that we are starting to see the hard work of all our teammates come through but we're not satisfied in the sense that we expect better performance on both the revenue expense dynamic in the future. That's -- we'll keep working at it.
+But if you look at it over the last several quarters what you've seen in stability in revenues but continue to work on expenses both in the dollars but also in the headcount. 15 straight quarters, 3,000 more personnel reductions per quarter is a pretty strong record to show that we're disciplined in workers.
+
+Answer_52:
+
+    It may be the pagination. It's been listed in our documents consistently.  focused on those goals and we've told you that each time you've asked the question.
+
+Answer_53:
+
+    Mike, as I told you at the Annual Meeting when you were there with a few other people and asking the questions on this question, we had the building blocks in place to get us to where we are and we can see the building blocks falling in place to get us to our goals. And there are external factors, the rate increase and stuff that you see in the market curve that's changed just in the last 15 days in this quarter and has moved around dramatically. But with our control of elements we continue to drive and we see the progression towards it over the next several quarters like we told you.
+
+Answer_54:
+
+    And I think, Mike, just to be clear we've talked about 100 basis points and 12% to 14% return on tangible common equity. Obviously at 99 basis points we're bumping right up against that.
+And I think what's important is as you look to the path to what we've talked about we're basically there in the second quarter, you could say you had the $700 million in FAS 91, the $400 million of loan sale gains and a couple hundred million dollars from rep and warrant provisions. But what I think is interesting and as you look at the path there is if you look at and assume the 100 basis point parallel shift in the yield curve what that would mean in the quarter as well as if we ultimately get to where our LAS expense goals are you're basically back to all other things being equal where we were this quarter. So what was articulated is something where you couldn't see a path or a way to get there, I think it was a step forward this quarter as far as seeing how we can get there.
+
+Answer_55:
+
+    Let me take a stab at a couple of parts of that question. The first is and I think you referenced that what would you do if global market expenses were lower on a go-forward basis? I think this quarter was reflective of the way you'd expect us to manage it which is the pure sales and trading number was down 2% and total expenses within the segment were down 5%.
+So I think some of what Brian communicated inmate you saw evidence of that happening during the quarter. The second thing that I would say is that it's obviously earlier in the quarter but I wouldn't draw any conclusions as to overall performance based on the volatility that we've seen during the first couple of weeks to the negative.
+And then third I think your question was and is just that with what's going on within some of the European banks as well as changes in management and questions around capital, how does that translate and what are you seeing in the US business? I think what I would say is that we obviously have significant share in the US business. We're looking to do a better job of that and I think that as you look at some of the loan growth that we've seen that it is reflective of the fact that we're deepening in the US but just as importantly that loan growth is not only in the US, it's throughout Europe.
+There's been a little bit in Latin America and there's been growth in Asia-Pac. So we are looking to use some of these market opportunities as a basis to deepen and look to grow the overall global banking segment.
+
+Answer_56:
+
+    Well thank you everyone. That's the last question. We look forward to talking to you next quarter.
+

exam/part2_problem1/Problem_1_Conference_Call_Segments/call_31_presentation.txt

@@ -0,0 +1,89 @@
+
+Good morning. Thanks to everybody on the phone as well as the webcast for joining us this morning for the second-quarter results. Hopefully everybody's had a chance to review the earnings release documents that are available on the website.
+So before I turn the call over to Brian and Bruce let me just remind you we may make some forward-looking statements. And for further information on those please refer to either our earnings release documents, our website or our SEC filings.
+So with that I'm pleased to turn it over to Brian Moynihan, our CEO, for some opening comments before Bruce Thompson, the CFO, goes through the details. Brian?
+
+Thank you, Lee. And good morning everyone and thank you for joining us for our second-quarter results.
+As you can see from our release we reported $5.3 billion in after-tax earnings this quarter which is up from last quarter as well as more than double what we made last year. Not only were we pleased with the bottom line but revenue was up and expenses were down comparatively against both periods.
+Lots of things came together to achieve these results and we continue to work on all these also. On the expense side we told you that we achieved the new BAC cost savings back in the third quarter of last year. However, we didn't give up on our focus on expenses and you can see those in the results.
+It's the lowest non-litigation expense base since 2008. At the same time we continue to invest in the future of this Company. Just to mention a few of these investments, we added sales specialists in our financial centers, up a 3% versus last year.
+We added 3% to our financial advisors since last year. 4% to our commercial and business bankers. We've opened new financial centers in new markets that we previously didn't have coverage and we continue to upgrade those in other markets.
+In addition we continue to invest in young new talent in our Company. We hired a record number of teammates from college, over 1,200, and we upped our intern program to over 1,800 this summer.
+And we continue to invest as we have said in technology with over $3 billion we've spent this year to continue to improve and drive our products and our capabilities in the Company. As we are doing that we continue to focus on our process improvement. Our Simplify and Improve effort continues to take hold and you saw that and some of the effects of that this quarter.
+The goal of the program is to hold the cost management well as the economy continues to recover and our revenues continue to recover. Away from the expenses, a few other highlights of the quarter, we saw our overall loan growth and balances from the first quarter, we saw a continued improvement in our net charge-offs in credit quality, our deposits and our consumer continue to grow even faster this quarter than prior quarters.
+We also built capital and tangible book value despite the OCI impact of higher rates. We returned over $1.3 billion to our shareholders through share repurchase and common dividends. And looking at the results this quarter you can also see that we're making progress on our path to our long-term targets to return on assets and return on tangible common equity.
+Bruce will take you through the business activity in the various pages in the slides but some highlights. This quarter again we averaged about 5,000 new customers a day to our mobile banking platform. But importantly the team continues to make progress in bringing that platform into the Company in multiple ways.
+An example of that is this quarter our digital channel sales were up 30% from last year in the second quarter. In addition to that we continue to focus on our mortgage area; our direct-to-consumer mortgage and home equity originations improved 40% from a year ago.
+In the mass affluent space our Merrill Edge product continues to have record assets and they're up 15% to over $122 billion. And that's on top of our investment brokerage services revenue teammates in US Trust and Merrill Lynch that continues to grow.
+We also continue to drive our 401 business and this year we've added some of the industry's largest companies to our platform. So those are the trends in the business and Bruce will cover more later.
+From a broad economic standpoint what do we see out there? Notwithstanding uncertainty in economies outside the United States we see the US economy continues to steadily improved. In our middle-market business, our commercial businesses, our Company's balance sheet is strong and they continue to draw loans at a higher rate than they did last quarter.
+Our consumers continue to spend on our debit and credit cards, this quarter spending over $127 billion this quarter, up 3% from last year even with a downdraft in gas prices in the year-over-year comparison. Our industry-leading research team under Candace's leadership and Bank of America research expects US GDP growth for the second half of the year to be 3% for each of those quarters and we see that in our statistics.
+Our Company is well-positioned to benefit from that continued health in the economy. And we continue to manage this Company to deliver for our customers, clients and for you as shareholders. With that I will turn it over to Bruce.
+
+Thanks, Brian, and good morning everyone. I'm going to start on slide 3 and let's go through the results.
+We recorded $5.3 billion of earnings in the second quarter or $0.45 per diluted share. This compares to $0.27 a share in the first quarter of 2015 and $0.19 in the second quarter of last year.
+A few items to note as you review the results. In the second quarter we had $669 million of positive market-related adjustments in net interest income primarily driven by premium amortization on our debt securities from higher long-term rates. This provided a $0.04 benefit to EPS.
+The quarter also included $373 million in benefits from consumer real estate loans which added $0.02 a share. One other item worth noting is the rep and warrant provision which is a net $205 million benefit this period. This was mostly associated with positive developments in legacy mortgage-related matters which
+I'll discuss later in the presentation.
+This added $0.01 to EPS. Revenue on an FTE basis was $22.3 billion in the second quarter and included the items that I just mentioned. Total non-interest expense in the quarter was $13.8 billion and reflects lower litigation costs, lower LAS cost and good core expense controls compared to both the first quarter of 2015 and the second quarter of 2014.
+Provision for credit losses this quarter were $780 million and included improved net charge-offs on an adjusted basis as well as less reserve release compared to the first quarter of 2015. Return on tangible common equity this quarter was 12.8%, return on assets was 99 basis points and the efficiency ratio was 62%. If we adjust for those metrics for the few items I mentioned earlier return on tangible common equity was 10.9%, return on assets was 85 basis points and the efficiency ratio was 65%.
+On slide 4, the balance sheet was up less than 1% versus the first quarter of 2015 as loan growth and higher securities balances were offset by a decline in the ending balances within our Global Markets business. Loans on a period-end basis were up reflecting good core loan activity. All of our loan categories showed growth from the first quarter of 2015 with the exception of Consumer Real Estate which declined from both discretionary activity as well as other one-offs.
+Common shareholders' equity improved. This solid earnings growth was partially offset by a $2.2 billion decline in OCI and $1.3 billion in capital returns to common shareholders.
+We repurchased 49 million shares for $775 million and paid approximately $500 million in common dividends this quarter. Tangible book value increased to $15.02 and tangible common equity improved to 7.6%.
+If we look at lending activity on slide 5 our reported loans on an end-of-period basis increased for the first time since the third quarter of 2013, growing $8.5 billion from the first quarter or 4% on an annualized basis. Activity in our discretionary portfolio which is reflected in the LAS and All Other box where we use consumer real estate loans to manage interest rate risk in the LAS unit where we have a home equity run-off portfolio together showed a decline from the first quarter of 2015 of $15 billion.
+The loan sales I mentioned earlier accounted for roughly half that amount and included certain loans with long-term standby arrangements that were converted into securities. After we exclude this activity, our core loans increased $23.5 billion, or 4% from the first quarter of 2015. Commercial lending was strong.
+Among other initiatives the management team challenged our corporate and commercial lenders for the past several quarters to more fully utilize the credit limits to drive responsible growth. In that light, Global Banking showed a continuation of loan growth from the end of the first quarter of 2015 growing $11.4 billion, or 4% during the quarter from a mix of C&I across large corporate and middle market as well as growth in commercial real estate.
+Our Wealth Management business continues to experience strong demand in both securities based lending as well as consumer real estate. And our Consumer Banking area grew both card and auto loans.
+If we move to regulatory capital on slide 6, under the transition rules our CET1 ratio improved to 11.2% in the second quarter. If we look at our Basel III regulatory capital on a fully phased-in basis CET1 capital improved $1.1 billion driven by earnings, partially offset by the OCI decline, share repurchases and dividends.
+Under the standardized approach, our CET1 ratio was steady at 10.3% as RWA was stable with the first quarter of 2015. Under the advanced approaches, CET1 ratio increased from 10.1% to 10.4% as RWA improved by approximately $34 billion. Lower counterparty RWA drove this decline and was equally split between three factors.
+The first lower derivative exposures mainly driven by movements in both rates as well as FX. Second, optimization through better collateral management and reductions in certain positions. And third, an increase in the population of trades eligible for model treatment.
+The balance of the improvement was driven by lower levels of market risk. In regards to the Fed's requested modifications to models in order to exit the parallel run that we have previously communicated to you, at the end of the quarter we estimate if we made the requested modifications that our advanced approach's CET1 ratio would be approximately 9.3% at June 30.
+Moving to our supplementary leverage ratios we estimate that at the end of the second quarter we continue to exceed the US rules that are applicable in 2018. Our bank holding company SLR ratio was approximately 6.3% and our primary bank subsidiary BANA was approximately 7%.
+If we turn to slide 7 on funding and liquidity, long-term debt of $243 billion was up $6 billion from the first quarter as issuances outpaced maturities. As you can see from the maturity profile we have $10 billion of parent company debt scheduled to mature in the rest of 2015 and we'll continue to be opportunistic in regards to issuance.
+Our global excess liquidity sources reached a record level during the quarter at $484 billion and now represent 23% of the overall balance sheet. The increase from the first quarter of GELS reflects a continued shift from discretionary loans into HQLA securities as well as the increased step balances.
+Our parent company liquidity increased to $96 billion and our time to required funding improved to 40 months. At the end of the second quarter we estimate that the consolidated Company was well above the 100% fully phased-in 2017 requirement for the liquidity ratio.
+If we turn to slide 8 on net interest income, on a reported FTE basis was $10.7 billion, an increase of $1 billion from the first quarter of 2015. Volatility in long end rates over the past few quarters has clearly caused some variability in out reported NII. The market-related adjustment from our bond premium amortization this quarter was a benefit of $669 million as rates rose 40 basis points in the quarter while in the first quarter of 2015 we reported a negative $484 million adjustment from a decline in rates in the period.
+If we adjust for those items our NII declined approximately $100 million from the first quarter of 2015 to just over $10 billion as the impact of lower discretionary balances and consumer loan yields more than offset the impact of one more day of interest. At the end of the second quarter an instantaneous 100 basis point parallel shift increase in rates would be expected to contribute roughly $3.9 billion in NII benefits over the following 12 months and that's split roughly 60% to short end rates and 40% to long end rates. Given the movement higher in long end rates our balance sheet did become less sensitive to long end rates compared to March 31 as we realized some of that sensitivity through FAS 91 in the second quarter.
+As you can see on slide 9, non-interest expense was $13.8 billion in the second quarter and included $175 million in litigation expense. Litigation expense did decline significantly from the second quarter of 2014 levels. If we exclude litigation expenses were $13.6 billion in the quarter, a decline of $900 million, or 6% from the second quarter of 2014.
+On balance we're quite pleased with our year-over-year expense improvement even while we continue to invest in the franchise. In the third quarter of 2014 we wrapped up the new BAC cost savings initiatives and several quarters later we continue to see good progress on operating cost reductions in LAS as well as in other areas. Our headcount is down 7% compared to the second quarter of 2014 and as a reminder we do expect to incur some costs associated with our CCAR resubmission through the balance of the year.
+If we go ahead and switch to asset quality on slide 10, reported net charge-offs were $1.1 billion versus $1.2 billion in the first quarter 2015. Both periods include charge-offs associated with the August 2014 DOJ settlement which we had previously reserved for. If we exclude these impacts and a small impact from recoveries on NPL sales, our core net charge-offs declined $75 million from the first quarter of 2015 to $929 million.
+Loss rates on the same adjusted basis improved to 43 basis points in the second quarter of 2015. US consumer credit card delinquencies improved as well and on the commercial front we saw an uptick in NPLs and reservable criticized exposure from the first quarter driven by downgrades in our oil and gas exposures. Despite these downgrades we feel good about our exposure in this area as they are well collateralized and most of these credits only had a one level migration on a risk rating scale.
+The second-quarter provision expense was $780 million and we released a net $288 million in reserves which includes the utilization of previously accrued DOJ reserves. Releases in consumer card and consumer real estate were partially offset by reserve builds within the commercial loan growth area.
+Let's go ahead and move to the businesses on slide 11, Consumer Banking. Consumer Banking had earnings of $1.7 billion which was 4% greater than the second quarter of 2014 and 16% above the first quarter of 2015 level. This in turn generated a strong 24% return on allocated capital.
+Within revenue fees were up 2% from last year driven by higher card and higher mortgage banking revenue but this growth was more than offset by a decline in net interest income. The decline in net interest income is a result of the allocated impact of our ALM activities as well as some compression in card low yields. Provision decreased $44 million from the second quarter of 2014 driven by the continued improvement that we saw in both the credit card as well as the auto portfolios.
+Our non-interest expense was down 4% from the second quarter of 2014 as we reduced the number of financial centers and associated costs and personnel. The cost of average deposits ratio is now less than 175 basis points and we have a 57% efficiency ratio within this segment. This business is a good representation of how the Company is doing more business while we continue to reduce expenses.
+We also continue to experience a shift in consumer behavior patterns away from branches and towards more self-service. For example, the number of mobile banking customers continues to grow and increase to more than 17.6 million customers this quarter and these customers look to mobile devices for approximately 13% of all transactions or all deposit transactions.
+If we look at some of the key drivers and trends within the consumer area on slide 12 we remain a leader in many aspects of Consumer Banking doing business with roughly half of all US households. Let's look at card activity. Card income increased 5% from the second quarter of 2014 on strong sales and solid spend levels.
+Card issuance reached almost 1.3 million units in the quarter on increased sales efforts while the average book FICO score was also strong. Average loan balances were down slightly from the second quarter of 2014 as we do see customers paying down more of their balances.
+Net charge-offs declined from very low levels and were 2.7% in the second quarter and risk adjusted margins remain high at roughly 9%. Mortgage banking income in this segment was up 8% from last year as originations had nice follow-through from the elevated pipeline at the end of the first quarter as well as higher production margins.
+First-quarter mortgage -- first mortgage originations for the total Company were $16 billion, up 44% year over year and up 16% from the first quarter of 2015. Home equity line and loan originations increased 23% to $3.2 billion from the year-ago quarter and were stable with the first quarter.
+Revenue improvement versus the second quarter of 2014 was driven by improved margins. Although the mortgage pipeline remains solid it is down 15% from the end of the first quarter driven in part by higher rates.
+Service charges were down modestly versus the second quarter of 2014. This fee line item does continue to be somewhat muted as we continue to open higher quality accounts and those accounts are carrying higher balances. Compared to the second quarter of 2014 our average deposits of $545 billion are up $31 billion, or 6% even as we lowered the rates paid which now stands at 5 basis points.
+Lastly, while we are bringing down our overall headcount in this business we continue to invest in the growth opportunity of our preferred client base. And we've been increasing sales specialists in the financial centers and that's resulted in increased activity.
+If we turn to slide 13, Global Wealth and Investment Management produced earnings of $690 million which was up 6% from the first quarter of 2015 levels but down 5% from the second quarter of 2014. Compared to the second quarter of 2014, solid fee growth was offset by lower net interest income, higher credit cost and modestly higher expenses which resulted in a decline in year-over-year results.
+The allocation of the impact of our Company's ALM activities more than offset the NII benefits that we had from solid loan growth within this space. Year-over-year non-interest income was up 4% on strong asset management results. Non-interest expense was modestly higher in the second quarter on the strength of our asset management fees as well as the continuing investment in client facing professionals.
+The year-over-year increase in provision reflects larger reserve release in the prior periods. Pretax margin was 24% and the return on allocated capital remained strong at 23%.
+If we look at activity and drivers on slide 14 asset management fees continue to grow and are up 9% from the second quarter of 2014. This was partially offset by sluggishness of transactional revenue in the brokerage business. We did increase our financial advisors by 6% over the last 12 months and we feel good about the number of advisors that are joining us from competitors.
+Client balances are above $2.5 trillion, up almost $12 billion from the first quarter of 2015 driven by solid client balance in-flows as well as improved market valuations. Long-term AUM flows were $9 billion for the quarter and that's the 24th consecutive quarter where we've seen positive flows. As I mentioned earlier we continue to experience strong demand in both our securities based and residential mortgage lending areas and we reached a new record for loans within this space during the quarter.
+If we turn to slide 15, Global Banking earnings were $1.3 billion which is 14% unallocated capital. Earnings did decline 13% from the second quarter of 2014 as lower non-interest expense was more than offset by lower net interest income, lower investment banking revenues and higher provision expense that was associated with a strong loan growth that we saw during the quarter.
+The year-over-year decline in net interest income reflects the allocation of our ALM activity and liquidity cost as well as some compression in loan spreads. Non-interest expense did decline 3% from the second quarter of 2014 as lower litigation and other technology initiative cost were partially offset by investment in client facing personnel.
+If we look at the trends on slide 16 we chart the components of revenue. Investment Banking fees for the Company were $1.5 billion, down 6% from the near record levels that we experienced during the second quarter of 2014.
+Advisory fees were up 5% during the quarter. Debt underwriting was relatively stable as increased activity in the investment-grade and other products offset the declines that we saw within our leverage finance area.
+Equity underwriting was down 19% from what was a record level for our Company in the second quarter of 2014. Outside of Investment Banking fees other banking revenue declined from lower leasing gains partially offset by modestly higher treasury fees and card income. If we look at the balance sheet loans on average were $301 billion, up 4% from both the year-over-year and linked quarter periods.
+The growth was broad-based across both corporate and commercial borrowers. Although average deposits were relatively stable versus the second quarter of 2014 we did see a favorable shift in mix with our non-interest-bearing deposits up over $20 billion and our interest-bearing deposits down $17 billion versus the second quarter of 2014. This growth in non-interest-bearing balances was driven by a continuing focus on the growth within operating balances.
+The decline in interest-bearing balances was driven by targeted reductions in these low liquidity value deposits.
+Switching to Global Markets on slide 17, in the second quarter earnings were $1 billion on revenues of $4.3 billion. We generated 11% return on capital in this business during the quarter. Earnings were up modestly from the first quarter of 2015 levels which included higher litigation but down from the second quarter of 2014 is revenue declined.
+Total revenue excluding net DVA declined from the second quarter driven by lower equity investment gains, lower FICC and sales and trading results and lower investment banking fees. If we exclude a $188 million difference between periods on the sale of an equity investment, revenue was down 4% from the second quarter. Non-interest expense was reduced 5% from that same period in line with the revenue reductions.
+If we focus on the sales and trading performance components on slide 18, sales and trading revenue of $3.3 billion ex-net DVA is down 2% from the second quarter of 2014 levels. Compared to the same period a year ago, FICC sales and trading was down 9% and not unlike what we saw in the first quarter of 2015 strength within the macro-related products like FX, rates and commodities was offset by lower levels of activity within the credit products space. And to remind you, our mix does remain more heavily weighted to credit products based on the size of our new issue business.
+Equities trading was up 13% year over year driven largely by increased client activity within the Asia-Pacific region as well as a strong performance within the derivative area.
+Slide 19 shows our Legacy Assets and Servicing business where we were profitable during the quarter given the net benefit in our rep and warrant provision. Revenue excluding this benefit did decline from the first quarter of 2015 on less favorable MSR hedge performance as well as lower servicing revenue. Litigation expense declined significantly from the second quarter of 2014.
+Non-interest expense ex-litigation was roughly $900 million this quarter, improving $122 million from the first quarter of 2015 and $526 million going back to the second quarter of 2014. We remain on track to hit our fourth-quarter goal of approximately $800 million in LAS cost ex-litigation.
+We were also pleased that during the quarter our number of 60-plus day delinquent loans decreased to 132,000 units. That's down 14% from the first quarter and almost 50% from the prior period of last year.
+Before I move away from the mortgage space let me mention an important development in our legacy mortgage exposures. This quarter there was a closely watched case in New York's highest court which confirmed that the New York six-year statute of limitation on filing rep and warrant claims begins to run at the time the reps and warranties are made and not at some later point in time.
+Based on our review of the relevant documents we believe the vast majority of the bank's remaining PLS representation and warranty obligations are governed by New York law. As a result of the case ruling you can see on slide 20, a significant $7.6 billion reduction in our gross outstanding private label claims as a result of certain claims now being time barred.
+This ruling also had positive implications on our rep and warrant provision as I mentioned as well as the range of possible loss above those reserves. You recall, the RPL had been a range of up to $4 billion for several years and so the top end of that range has now been reduced to up to $2 billion.
+On slide 21 we show all other. The $637 million of earnings this quarter resulted in a swing in profitability as a result of the improvement in the NII market-related adjustment from quarter to quarter as well as the prior-period inclusion of the annual retirement eligible incentive cost. The loan sales I mentioned earlier also included in revenue.
+Our effective tax rate for the quarter was 29% and I would expect the tax rate to be roughly 30% for the rest of 2015 absent unusual items like the recent UK tax reform proposals. Among the UK proposals were a reduction in the corporate tax rate, a surcharge tax on bank earnings and a reduction in the bank levy rate. Our preliminary read is that we could have a one-time charge of several hundred million dollars later in this year to reprice our UK deferred tax assets upon enactment.
+At this time on an ongoing basis we expect a recurring tax impact to be modest. Before wrapping up on this slide let me remind you that our preferred dividends in the third quarter should be $440 million and $330 million in the fourth quarter of this year.
+So to wrap up as Brian started the presentation with many things that our teams have been focused on for some time came together nicely this quarter and that enabled us to report more than $5 billion in earnings and move closer to our long-term targets. Revenue reflected relative stability, we lowered cost, we grew loans nicely, our credit quality remains very good and we're focused on operating leverage within the business. The foundation of the Company's balance sheet has never been stronger with record capital and record liquidity levels and we remain well-positioned to benefit from a rising rate environment.
+With that let's go ahead and open it up for Q&A.

exam/part2_problem1/Problem_1_Conference_Call_Segments/call_31_questions.txt

@@ -0,0 +1,254 @@
+Question_1:
+
+    Hi, good morning. The question I'm getting from people this morning is around the expenses. You showed some very nice improvement in core expenses coming down meaningfully Q on Q and year on year, and the question is have we reached the end state here or is there any further opportunity to bring down expenses from here?
+
+Question_2:
+
+    Okay. And then on the reps and warranty side you had what looks like a little bit of a true-up based on this litigation decision. Is that the right way of reading it or is there potential even in more to come in the future as you go through these cases?
+
+Question_3:
+
+    Okay, thanks. And then just one last question.
+You indicated the upside that you have in the event of a rate rise $3.9 billion if the parallel shift is 100 basis points. The question is how you're thinking about dropping that to the bottom line? Is there reinvestments that would take up some of that or are you at sufficient run rate in investment spend that you would be able to drop more to the bottom line?
+
+Question_4:
+
+    Okay. And then just back to the expense side, the expense run rate that you've got right now is something you think you can hold at least if not improve from here, is that fair?
+
+Question_5:
+
+    Thanks a lot.
+
+Question_6:
+
+    If we look at the core net interest income ex- the market-related marks it was down a little bit versus last quarter but you're starting to see the loans inflect as you mentioned earlier. Do we start seeing stability in the core net interest income looking at next quarter or two or do we really need higher short-term rates for that?
+
+Question_7:
+
+    Okay. And that's without any benefit from rates?
+
+Question_8:
+
+    Okay. And then on the discretionary book you mentioned it came down a little bit when you look out on a combined securities mortgages basis and I guess just we saw long-term rates go up and some banks have been increasing the discretionary book with higher reinvestment rates or higher investment rates here. What's the thought on bringing that book down as rates have gone up?
+
+Question_9:
+
+    Okay, thank you very much.
+
+Question_10:
+
+    Hey, good morning. Just a quick follow-up on the NIM outlook.
+I think Bruce last quarter you mentioned that if the yield curve stayed where it was you'd have about $600 million of drag in NII over the next few quarters. Are you saying that that's pretty much changed with the steepening of the curve since April when you spoke last and not only NII is growing but NIM should stabilize or is it just sort of offsetting each other?
+Are you getting a boost from that? How do we think about the yield curve versus your prior comment?
+
+Question_11:
+
+    Okay, fair enough. And just on the capital side, when do you think the modifications become official and you exit the parallel run? How long do we think we have to wait for that and is there anything that could change in terms of your expectation around I guess the 90 basis point hit to your CET1?
+
+Question_12:
+
+    Okay, that's helpful. And just one last quick one on the $3.9 billion of sensitivity to higher rates, how much is FAS 91 related versus core?
+
+Question_13:
+
+    Okay, thanks a lot.
+
+Question_14:
+
+    Hi, thanks. Bruce just one more question on the rate sensitivity, the $3.9 billion move for 100 basis point parallel move I assume that illustration is to a 100 basis point move that's a shock or an instantaneous move in rates? Can you give us any feel for how that number would change if the move in rates is more gradual? As the Fed is saying if I go gradually how does that change if it's not instantaneous?
+
+Question_15:
+
+    Okay. And a clarification, where it is the gain on consumer real estate loans? Is that in the Mortgage Banking line?
+
+Question_16:
+
+    Okay. The Mortgage Banking income was very strong on the fee income line, obviously you had the rep and warrant in there. Was there anything else in there that helped on the Mortgage Banking line?
+
+Question_17:
+
+    Got it. Okay, and then last question for me on the credit, do you see the net charge-offs bouncing around the current level the $929 million and how do you see it playing out in terms of provision reserve release relative to what you just did this quarter?
+
+Question_18:
+
+    Okay. And on top of that will the DOJ still be a factor for the next couple of quarters?
+
+Question_19:
+
+    Got it. Okay, thank you.
+
+Question_20:
+
+    Hi, thanks. Two quick ones on the average balance sheet.
+When you look at the debt securities line, the yield went up some version of a lot from 2% to 3.2%. I'm assuming some of that is LAS loans converting, but could you give a little color on what drives that? Because the overall size of the book didn't change that much.
+
+Question_21:
+
+    Okay. Similar but different question, inside the C&I book, the used commercial book it was just a 4 basis point drop quarter on quarter but there's growth there. So I'm just curious the trade-off between price and yield give up on the new loans you're putting on versus the responsible growth you talked about.
+It doesn't seem that bad. I'm just curious on what kind of yield you're putting new loans on?
+
+Question_22:
+
+    Okay, I definitely appreciate that. Last one is when you talk about the pushing for growth and you mentioned the different specialists in the branches, the Business Banking, the financial investment consultants, I'm curious what are you doing to incent and to encourage them? In other words are there actual incentives or do they get paid on their production?
+
+Question_23:
+
+    All right. Thanks very much.
+
+Question_24:
+
+    Thanks very much. Just to follow up a little bit on that last point, when I was trying to shift through the core loan growth numbers this morning it looked like the core loan growth coming out of the institutional bank and the Wealth Management looked strong but I'm still unclear what the core level of growth was inside the consumer organization and so I'm just trying to reconcile that with where the incremental hiring is occurring on the sales front. So can you just clarify what the core level of consumer growth was?
+
+Question_25:
+
+    And so do you have a sense or is there some sense maybe you can give us to how that investment in front office staff is contributing to growth outside of the segment?
+
+Question_26:
+
+    And so when this is my final question on this if we divorce just the runoff from some of the legacy assets that are still occurring, would you expect the core consumer asset growth to accelerate as a consequence of this investment or do you think that it's currently run rating?
+
+Question_27:
+
+    Great, thanks very much for the answers to all my questions.
+
+Question_28:
+
+    Thanks, good morning. First question just on the RWAs, looks like when you look at the reconciliation of the move to fully phased-in there is a little bit of a help on the advanced models this quarter and just in a general sense obviously we still have that finalization to come but what additional tweaks are you working on inside the models and what additional mitigation could we still see from here on the RWA side?
+
+Question_29:
+
+    Okay. And then my second question relates to the Wealth Management business and Bruce you alluded to there being a little bit of a slowdown on the revenue. So if a look at the segment or the line item on the income statement there has been a deceleration, advisor productivity looks a little bit lower and you've added a lot of people. You've added a lot of assets.
+So I'm just wondering what do we need to see to get a re-acceleration of the revenue side in brokerage and Wealth Management? And is it just a time lag relative to those additions?
+
+Question_30:
+
+    Understood. Okay, thanks, guys.
+
+Question_31:
+
+    Hi, good morning. So I have a couple of questions on the topic of capital.
+The first is a follow-up to Ken's earlier question regarding RWA mitigation potential. And Bruce I do appreciate the color you cited relating to all the mitigation opportunities on the horizon. I'm just trying to get a better sense given your efforts to grow the core loan portfolio how we should be thinking about the trajectory in advanced RWAs, maybe excluding the upward adjustment tied to the regulatory guidance just to give us a sense as to what that trajectory should look like over the next couple of quarters?
+
+Question_32:
+
+    Okay. But presumably the focus at least on your part is going to be on mitigating the advanced RWAs given that that appears to be your longer-term binding constraint.
+
+Question_33:
+
+    No, understood. Okay and then actually it's a great transition to my next question on the topic of G-SIB surcharges where I'm sure you're aware there's been some discussion around the possibility of incorporating the surcharges within CCAR. And I was just hoping to get a better sense as to what contingency plans you might have in place if the surcharge were to be included and are there opportunities that you see to sufficiently mitigate the G-SIB indicators so that you could move into a lower bucket?
+
+Question_34:
+
+    All right. Thanks Bruce. That detail is extremely helpful.
+And then one more quick final one for me. I was hoping you can give us an update on where your TLAC ratio sit today?
+
+Question_35:
+
+    Okay, great. Thank you for taking my questions.
+
+Question_36:
+
+    Good morning. Thanks for taking the question.
+A quick one on Wealth Management. Is it possible for you to quantify for us how much of your total Wealth Management client assets are in retirement accounts and of that, what percentage are advisory?
+
+Question_37:
+
+    Okay. Just the whole idea there is trying to get at the DOL proposal and maybe what could be potential downside even based on how it all gets finalized understanding that it's preliminary at this point.
+
+Question_38:
+
+    Okay. And then looking at the branch declines that you guys referenced earlier should we count on the 5% year over year as a reasonable decline rate sustainable from here given the trends that you're seeing in your mobile platform? And could this potentially add additional juice to your expense declines beyond the business as usual type pushing that you've spent a lot of time talking about here on the call today?
+
+Question_39:
+
+    That's helpful color, Brian. Thanks. And then last one for me you made a reference earlier to a couple of points margin from the employee forgivable loan amortization dropping off next year.
+Is next year a bump in the trend or is that indicative of potential further declines in forgivable loans as they continue to roll off? And does it assume some level of counter pressure offsetting pressure from continued recruiting? And maybe a little update on the recruiting environment for FAs would be helpful.
+
+Question_40:
+
+    Great, thanks for that.
+
+Question_41:
+
+    Thank you. I wanted to ask about the asset liability management.
+When you look at the market adjustments that you had of $669 million this quarter, as rates go up there is less and less impact from that. How much is remaining in the next 50 basis points in just the prepayment speed slowing down?
+
+Question_42:
+
+    Okay. Perfect. And then when you're talking about being able to see the margin go up in the back half of the year because of the current steepness of the yield curve does that include some utilization in the sense of increasing your securities portfolio while you invest some of the liquid assets you have on the balance sheet?
+
+Question_43:
+
+     range $10 billion, $20 billion, $30 billion, any kind of rule of thumb there?
+
+Question_44:
+
+    Got you. And lastly this is a nuance but when you look at the trading activity typically in the past when I had a trading activity in the bank that I was managing when you had a steepening of the yield curve you get some pickup because you're getting the current long-term yield funded by short-term rates. The rate on the trading activity account did not go up this quarter but averaging into the next quarter would you expect some benefit there?
+
+Question_45:
+
+    I'm just more focused on the steepness versus the flattening of the yield curve. A steeper yield curve typically brings a little better spread on the trading account?
+
+Question_46:
+
+    Okay. Thanks.
+
+Question_47:
+
+    Hi, good morning. Guys, just another liquidity issue. Could you just tell us what's on deposit, what excess deposits you've got with the Fed now and what your plans are for those going forward?
+
+Question_48:
+
+    Okay, you mean in overall liquidity or at liquidity on deposit with the Fed?
+
+Question_49:
+
+    Okay, that's a lot of liquidity. My second question, Brian is for you.
+You've gone through a lot of change over the past few years and this transition to mobile, etc., etc., but one of the things I still get from talking to people are persistent gripes about service quality particularly in the mortgage company. Can you just tell us what your internal polling or whatever shows in terms of improvements in credit quality and how you feel about that entire subject?
+
+Question_50:
+
+    But how about just more the issue of service quality at the branches, etc.?
+
+Question_51:
+
+    All right. Thank you.
+
+Question_52:
+
+    All right. Good to hear. Thank you.
+
+Question_53:
+
+    Hi, I just wanted to follow up on Betsy's question at the start talking about expenses being at a run rate or maybe going lower. The expenses are down $400 million year over year but if you look at your four business lines the revenues are down twice that implying a lot of the rest is coming through the other line. So I guess I'm just wondering how much more there is to cut or should cut if the expenses are down again $400 million but the revenues in the four business lines are down $800 million? How do you balance that trade-off?
+
+Question_54:
+
+    Okay. Just to understand because I'm just looking at your slides, slide 17 and the other slides in your presentation today, I looked at the four slides related to GWIM, Global Banking, Global Markets and Consumer Banking, I took second quarter of 2015 versus second quarter of 2014 and looked at the delta in revenues and that's how I got the $800 million decline. So you would say which adjustments should we make from that?
+
+Question_55:
+
+    Okay. I will follow up on that. So are you comfortable, are you satisfied with the revenue progression that you've had no matter how you take a look at it?
+
+Question_56:
+
+    And then a separate question, I think it's the first time you've listed ROA and ROE on the first page of your press release. And should we read anything into that that we're more focused on achieving these targets with a specific timeframe or what changed?
+
+Question_57:
+
+    And then lastly just, I know I've asked this question before is there a specific timeframe that you can commit to to achieve your ROA and ROE goals?
+
+Question_58:
+
+    All right. Thank you.
+
+Question_59:
+
+    Yes, good morning gentlemen and I'm sorry to raise the subject of cost again. But I just want to square away what you said I think to Betsy's question at the very beginning to what you said at the conference back in May when you actually said that if trading revenues didn't pick up you'd have to adjust costs further. I just wondered where you were on that because obviously trading revenues were down about 2% year on year I think in the quarter and I'm having to assume that the start to the quarter has been pretty bumpy with Greece and China.
+So could you just talk a little bit about how you see that? But perhaps also talk a little bit about how you might address that situation in global markets and global banking in respect of the US business and the international businesses? Because it is really clear that the US business seems to be offering more opportunities not just because they are more buoyant but also because you're seeing European banks play a lesser role.
+And obviously seeing three of the big banks get new CEOs in the last few weeks I hardly imagine they are going to be allocating more capital to Investment Banking. Thank you.
+
+Question_60:
+
+    Thanks very much. Thank you.
+

exam/part2_problem1/Problem_1_Conference_Call_Segments/call_32_answers.txt

@@ -0,0 +1,222 @@
+Answer_1:
+
+    Sure. So assuming some loan growth and adjusting for day count, we would expect normalized NII excluding market related adjustments to be flat to grind up as long as rates don't decline in the future. In the fourth quarter, we think they will grind up slightly based upon the realization of the expected forward curve and some loan growth.
+
+Answer_2:
+
+    If you just look at commercial loans year-over-year up 10%, last quarter up 3%, so you've got to annualize that out and what we are looking at is that we replaced discretionary assets with actually good core assets so whether the balance sheet grows a little bit or not is not as critical as the assets. So it is probably driven in the near-term more by mix than aggregate size growth on a GAAP basis.
+
+Answer_3:
+
+    Sure, so the short answer to your question but then I would like to elaborate a little more is yes, we kept core expenses flat and we absorbed CCAR and other CCAR expenses and other investments in the business in the quarter.
+To take a step back, I think the way we would ask you to think about expenses is we are seeing good expense progress within our business importantly as we continue to invest in the future. So core expenses which for everybody excludes litigation and LAS are expected to remain relatively flat at call it a little less than $13 billion per quarter in a moderately improving business environment as we invest in growth and use SIM and other initiatives to offset inflationary pressures.
+If the business environment slows, we would have to adjust. If the business environment gets better, we are going to use SIM and other efforts to improve the operating leverage of this Company even as incentives and other expenses increase.
+
+Answer_4:
+
+    So, John, I would remind everybody that we did guide you that we would have increased CCAR expenses in the second half of the year so we do have a little bit of that in the fourth quarter as well.
+
+Answer_5:
+
+    So, John, just so you think about it from a headcount perspective because that is what is going to drive our 60% people cost down. For the quarter we were down about 1.5. In that, we actually had an increase in client facing headcount in the quarter up 1.6 so basically we were able to achieve a reduction while we continued to invest. On top of that, the risk in CCAR FTE count was up about 400 for the quarter and other business hiring especially the new kids from school were up about 1000. So through attrition and then through other reductions we got that down to net 1.5.
+So if you follow that course, last quarter we were down 3000 or so and that was 15 quarters in a row or something like that. We are down a little less this quarter which is expected to be a similar pickup next quarter. So the 12.7 we did in the second quarter remember was a surprise to all of you. We called it flat this quarter which I think exceeds what our expectations were. We are laser focused on keeping it at that kind of level while we continue to invest in 1000+ people to go generate the business growth you are starting to see.
+
+Answer_6:
+
+    I would expect to see provision in 2016 roughly where it is today.
+
+Answer_7:
+
+    Yes, because we are going to get a little help. John, if you look at it, you've still got a little excess mortgage charge-offs going through card continues to work its way down because of this period of credit quality and the question on the commercial side is bouncing around, gets lumpy. But you look at the reserve release, we are down to 100 so think of that sort of 800 to 900 range a quarter and I think that is a way to think about it over the next several quarters.
+
+Answer_8:
+
+    Sure. I think the answer is we just sold for lack of a better word, sold some lower yielding assets that we used to grow our business end markets and we positioned them to higher yielding assets. So as an example, we would do a little bit less in prime brokerage and a little bit more in fixed income where some  worths and yields are higher.
+
+Answer_9:
+
+    By core do you mean loan growth in the business segments or for the consolidated Company?
+
+Answer_10:
+
+    So we grew loans as a consolidated company year-over-year by 1%. It was up slightly quarter over quarter. I would expect that we would be able to continue to grow the whole Company in the sort of, in that range. You are going to see faster growth in the core lending businesses, we grew that year-over-year 9%. I am not going to stand here and tell you that we are going to do that every quarter but we would expect to see more robust growth in our lending segments.
+You have to remember that in LAS home-equity loans are still coming down and in the discretionary portfolio even though we are not going to have $6 billion as much as $6 billion in LTSE conversions, we still are going to see first mortgages run off there.
+
+Answer_11:
+
+    In terms of running off yields, Betsy, versus the coming on yield?
+
+Answer_12:
+
+    It is relatively stable.
+
+Answer_13:
+
+    Our portfolio has been priced down over the years and so it is relatively stable.
+
+Answer_14:
+
+    Why don't I start with CCAR and then maybe Brian will speak to some management. So in terms of CCAR, we submitted our resubmission on September 30 as planned. That has the involvement of the leadership of the Company and the Board, significantly involved within the line of business we tried to keep the regulators involved and up to speed every step of the way and they have until 75 days after that submission to get back to us.
+
+Answer_15:
+
+    In terms of the change three months ago we told you that we were making the changes, nothing has changed in that Terry continues to work on the CCAR process, Terry Laughlin and Andrea has moved over as Chief Administrative Officer and been heavy in the process from the day that we announced it and that transition will continue to take place over the period of time between now and the next CCAR submission in 2016.
+
+Answer_16:
+
+    I think we mentioned in the prepared remarks that our criticized assets were up modestly if you sort of dive into the oil and gas segment. And remember last quarter we increased criticized assets about $1 billion because of oil and gas. This quarter we saw that increase decline significantly to about 40% of that level and then be offset by improvements in the rest of the portfolio. So we saw a modest increase in criticized assets. We feel pretty good right now where we are with oil and gas. As you know, clients are going through the redetermination process.
+
+Answer_17:
+
+    I think the answer is yes, higher in the structure and a lot of the risk is distributed out to investors and things like that. The Company has had reserve base methodologies have hedges involved and it is more complex I think than oil price changes. So I think as you look at it, our lending portfolio is done consistent with our credit quality standards and had held pretty well under the significant change in revenue from oil price changes.
+
+Answer_18:
+
+    And large corporates, we are just dealing with larger companies that have a lot of different options and in middle-market as Brian said, a lot of that lending is secure.
+If you look at our overall energy portfolio, we are at about 22-ish and really only about 40% of that really isn't tied. Of course everything in that sector is tied in some way to oil and gas but 40% of that is not really directly tied to the price of oil and gas. So when you start just working through the numbers and you whittle that down and then you whittle it down for the number of loans that we have where we have reserves, it gets to something I think that is manageable.
+
+Answer_19:
+
+    We generally don't comment on our issuance plans. I guess the only guidance I would give you is we are going to try to have preferred that is roughly 1.5% of Tier 1 capital and sub debt that is roughly 2%. And in terms of TLAC, we don't know what the rules are yet. We may have to issue a little bit more debt. But based upon what we are hearing at least from a sort of rumor perspective, it looks to be quite manageable.
+
+Answer_20:
+
+    Technically quarter to quarter there were some hedges that went from a deduct to a benefit or the other way around that changed that rate. So I wouldn't think that the underlying rates haven't changed much is the way to think about it. There is just a hedge cost and a hedge benefit that came through that increased the spread.
+
+Answer_21:
+
+    Or you were referring to the decline to the yield, sorry.
+
+Answer_22:
+
+    Remember we are focused on -- in the Consumer business on two things that we have been consistently focused on. We are making loans to our customers in connection with the whole franchise. And then secondly, we are staying in the very prime orientation. So as you think about this quarter, home equity production was $3 billion-ish which was kind of consistent with other quarters. It has grown from $1 billion up to $3 billion across the last couple of years and been very consistent.
+As Paul said earlier, mortgages tipped down a little bit but year-over-year they are up strong, a little bit of seasonality in there and a little bit of refi runoff. Our auto lending business is still was strong. The direct to consumer piece of that we didn't have two, three years ago. We are up to $0.5 billion a quarter production so we are seeing good demand but part of it is just capturing that inherent client share, wallet share that we have been after and you are seeing that materialize.
+The other key honestly in terms of nominal growth for us is the runoff non-core part that has gotten small enough over the last couple of years that we can overcome it. So the only place we still have that hole from a corporate perspective is really the home equity business. So we have resized the card business and you are seeing all the hard work, the 1.3 million cards producing some loans even though it is a huge payment rate on that.
+You are seeing the auto lending business, both direct to consumer and then what we do with dealers and stuff strong and stable, and you saw the car sales numbers strong. And you are seeing the Consumer Real Estate strong from the home-equity production and I think solid.
+When you go over to GWIN, you saw loan growth there between US Trust and what we call structured lending, but don't think of it that way. It is lending -- as well as assets and then also in the margin lending was fairly stable. I talked to John . We haven't seen a big change in our margin lending. A lot of people think investors have lowered their risk and stakes have been relatively stable across the last few months.
+
+Answer_23:
+
+    We always manage the balance sheet against all the different constraints whether you can see the improvement in pro forma advanced ratio by 40 basis points this quarter, closing down the gap. So we are always looking to manage the balance sheet. I wouldn't put a lot of stake in the us moving ourselves fundamentally in buckets at this point because we have been working at that for the last three years to make sure as this rule was going to come out, that we had ourselves positioned as well as we could. So we will continue to work on it but I wouldn't expect us to change.
+If you look about the risk assets and Level III assets and things like that and our Company continue to trend down and we just worked the balance sheet back. But I wouldn't say that we expect to move a bucket. We could but we don't expect to.
+
+Answer_24:
+
+    If you remember the last quarter we talked a bit about this. There are some things that will help us which are that some of the deal stuff runs off this year relative to next year which will give us some positive help but round numbers nearly $100 million a quarter of expense help. That is just amortization that finally runs off so that is positive.
+And I think Paul cited and you cited back the examples of some nonrecurring things. I think you have to be careful in the year-over-year comparisons on the margin because this business, there is a big bank inside our GWIN business, that $250 billion deposit franchise, big-money franchise so all of the dynamics that we talk about from the corporate obviously hit them also. And so they will benefit more by stability in that as we compare quarters and hopefully grow out of that as they grow loans and deposits.
+But I think that is the thing. The question then comes down to more philosophically would you quit investing in new advisors to get a point on margin or so and in the context of that business earn $600 million to $700 million after-tax for us in the context of needing to drive it to another level. We still believe the right trade is to continue to invest in growth. And if the world changed and those people weren't becoming successful which they are, we would change that.
+And the thought is that we are adding advisors, you don't see that in other people's franchises and we are doing it in connection with Consumer Bank which is a critical increased success factor for our advisors. In other words, we hire people in what they call BFAs without -- that work within the Consumer franchise but on Merrill teams and we are seeing them get up to speed fast. We think that is a competitive advantage for people we during this business and we will continue to invest in that.
+So if we can't seen the success we will pull back on that but right now it is worth it for our shareholders and our customers.
+
+Answer_25:
+
+    I will let Paul hit that but in terms of that. Just want to make sure you are talking about trading or investment banking fees or both?
+Steven Chubak
+Both.
+
+Answer_26:
+
+    Okay, Paul?
+
+Answer_27:
+
+    So I guess in terms of the pipeline, the pipeline right now looks quite -- this is investment banking fees -- the pipeline right now looks quite strong. There is a decent amount of M&A in it, the timing of which can move around a lot. Some of the pipeline increase I guess can be attributed to transactions that were in our pipeline in the third quarter didn't it come out in the third quarter and are rolling over into the fourth quarter. We saw that type of activity in ECM and as markets improve, we hope that pipeline activity will come out.
+In terms of sales and trading, we talked a little bit about that in the prepared remarks. We saw I think good activity in equity sales and trading as clients needed to rebalance risk or take advantage of opportunities particularly in Asia. We were getting some of that flow and feel good about it. On the other hand, we do have a strong FICC business that is tied to new issuance and the new issuance market in the third quarter wasn't as strong so some of those flows just weren't there.
+
+Answer_28:
+
+    Year-over-year, last year's fourth quarter was pretty tough so I think being better than that wouldn't be great performance in sales and trading. But Tom and the team have got the business pretty well positioned in terms of effectiveness and that is why even with the slowdown in the latter part of the quarter we still made $1 billion and you subtract out DVAs, $800 million or so and that is good performance in that business.
+
+Answer_29:
+
+    I don't think we have any of that perspective with us handy and I am not sure we disclose that but we will follow up with you if we do.
+
+Answer_30:
+
+    Yes, I think that as we grow loans, obviously our RWA is going to increase particularly on a standardized basis. It is less of an increase on an advanced basis but they are completely tied. And as you said, we are comfortable with that given the interaction with our clients and the opportunity that brings to increase our margins relative to other investment opportunities.
+
+Answer_31:
+
+    As you think about it, remember that if you look at page five and you look at the content of what is leading coming on especially in the Consumer business and then think about running that through all kinds of models including the CCAR process and think about getting rid of $5 billion of home equity loans which were basically nonperforming and putting on $3 billion of good home equity loans, that dynamic is pretty favorable to the overall calculations. And so it is not only within categories -- not only in categories it is also within categories that we are seeing improvement in credit quality on what is coming on especially when we run through models and things like that.
+
+Answer_32:
+
+    Are you talking about the percentage of equities as a function of what?
+
+Answer_33:
+
+    I think it is less than half but I don't have the number off the top of my head but I think you can look at it in various pieces. We are checking it now but remember it is an integrated business, it is between 30% and 40%. We just found a number but remember it is an integrated business so you can't say growth or derivatives but cash -- the clients do all things with us including fixed income and equities so we are growing it together. So think 30%, 40%.
+
+Answer_34:
+
+    Yes, if you look at the different segments, if you think about on the Consumer side using -- it is more sales force growth and effectiveness and so in building that team and then also the digital sales coming up whether it is autos, whether it is credit card are up dramatically. So think of that engine as being both people and machine for lack of a better term. But don't think of it as changing credit quality or taking any kind of more risks. So [Tom and Dean] that run that business for us has done a good job and so I would say these supply is there more from a delivery capacity than it is from an expanding the box or anything like that. We've really kept it to where we want it and we think that holds us in good stead as you think through all the different dynamics in our Company.
+When you go to the commercial side, it is simply a couple of things. In the very small business which is reporting, we have actually seen that business stabilize and start to make its way out of a run-off position and that is again a more automated scored approach. We sped up approval times and done a lot of work to make ourselves more competitive more on delivery than credit. But if you go into business making, commercial banking, global corporate investment banking segment are three versions.  in our middle-market business, I think is up 60 this your, something like that, 70 people delivering lending and products and things behind that also as treasury services people.
+So again capacity expansion in the global corporate investment banking a little differently but as we look at middle market, I think that is an area where we are -- we used to think if we were going to take 10, let's only take eight, that is better, we are now telling our teams you need to -- we to understand why you are not taking 10 if that is our whole limit and our capacity in a given transaction as an example and they are doing that. So I think we are probably creating a little more not risk weighting type of supply but just we are taking a little bit more loans because we are twice the equity we used to be and therefore we can absorb it and the team does a great job in credit quality there.
+So I would say if you looked at it across the board, Consumer, it is more delivery capacity and in commercial it is more both delivery capacity and then as you cite, sort of take a little more risk in terms of dollar denomination but not in terms of unwanted credit quality.
+
+Answer_35:
+
+    AUM? So we continue to grow AUM and that is all good. I mean it was a little bit slow this quarter but in a bad market environment we continue to grow AUM, we continue to grow deposits, we continue to grow loans so I think everybody is doing their job. You are right that when market activity is lower, we tend to see less activity in the transactional side of that business. There is a lot of new issuance there, mutual funds, other products that just don't come to market and so that sort of exacerbates things when the markets are bad. Does that answer your question?
+
+Answer_36:
+
+    I don't think, Nancy, the idea of a loan type of reserving on the commercial -- all loans it is out there, the FASB is working on it. I think there has been voluminous comments and questions about it. But when it comes out, we well make it -- it will be basically a one-time adjustment type of thing and then it would be over with and so over the course of time, it should come out the same because you think about it this is just putting it all up front as you put the loans on and the commercial side especially would be a change.
+So we will get to that when we get to that but it hasn't been clarified what the rule is. Lots of people have commented on it and it would be a one-time thing and as you say somewhere around 2018 is what people currently think.
+
+Answer_37:
+
+    Well, we are still seeing reserve releases on the Consumer side of a bank. They are certainly starting to moderate and consistent with loan growth, we are seeing some reserve additions on the commercial side of the bank. And as I said earlier, if you are looking for when those lines are going to sort of cross, we think provision as Brian and I both said is going to be roughly sort of 800 to 900 in 2016. That is kind of where the conversion is going to happen someplace per quarter that is someplace in 2016.
+
+Answer_38:
+
+    Nancy, remember, we still have massive risk coming off in Consumer that we are not -- reserves are going over to the commercial side and some is coming out net of that 100 plus million this quarter. We expect that to probably mitigate and then if you get loan growth, you will build reserves at some point but I think that is still a bit out there.
+
+Answer_39:
+
+    Well, it depends on what the loan growth is and it depend on the best economic scenario. But I think we still we are still repositioning reserves on the Consumer side that are [excessive]. You can see in the credit statistics we are carrying a healthy reserve for areas that are continuing to come down in terms of risk.
+
+Answer_40:
+
+    If you go to page 17, you can see that the rate of reduction will come down, will slow down but it will still come down on the theory of the units doing. But remember the other issue we have is we are holding more of the loans so that from a corporate perspective that also -- comes in yield and not in servicing fee. So expect it to work its way down to 345 this quarter I would think 300-ish is where it ought to sort of flatten out.
+
+Answer_41:
+
+    I would say most of it is just runoff.
+
+Answer_42:
+
+    We are just working it out contemptuously and so we've still got room to go to get it normalized but there is nothing big material going on in terms of sales and stuff this quarter.
+
+Answer_43:
+
+    In total on our gains, on all our sort of loan sales in the quarter, it was $400 million.
+
+Answer_44:
+
+    $400 million.
+
+Answer_45:
+
+    If you look, Mike, it is in the puts and takes we put on the first slide there.
+
+Answer_46:
+
+    We have not changed how we manage the interest rates of the Company. All that happened was long end rates went down from Q2 to Q3 increasing the  that number.
+
+Answer_47:
+
+    The FAS 91 is really the major difference.
+
+Answer_48:
+
+    So let me answer that and then I will let Paul talk. As we talked about three months ago, Bruce had served as Chief Risk Officer and CFO for a combined six years and wanted to get back and run a business or do something different so we announced that and Paul became CFO. There is nothing new to add.
+In terms of how we will deal with the environment as we said most times to earlier questions, we continue to be able to hold the core expenses flat while we make the investments, pay the increased CCAR expenses, pay for the cost to reposition the franchise, severance and everything and we will continue to work that. If the environment changed and we didn't think we were getting returns on that, we will just go to the long-term interest of our shareholders, we would reduce the investment rate.
+
+Answer_49:
+
+    I think it is a little early for me to have developed a plan in terms of radical change. Bruce did a tremendous job of cleaning up the balance sheet and positioning our Company for growth and we have a great team that he built and I'm getting to know all of that and we will see how it goes.
+
+Answer_50:
+
+    Thanks for joining, everybody. We will talk to you next quarter.
+

exam/part2_problem1/Problem_1_Conference_Call_Segments/call_32_presentation.txt

@@ -0,0 +1,85 @@
+
+Good morning. Thanks to everybody on the phone; thanks on the webcast for joining us as well. Welcome to our third-quarter results. Hopefully everybody has had a chance to review the earnings release. It is only available on the Bank of America investor relations website.
+So before I turn over the call to Brian, let me just remind you we have our new CFO that will be going through the results this morning, Mr. Paul Donofrio. And so we will -- we may make some forward-looking statements. For further information on those please refer to either our earnings release documents on our website or our SEC filings.
+So with that I will turn it over to Brian.
+
+Thank you, Lee, and good morning everyone and thank you for joining us to review our third-quarter results.
+Today we reported $4.5 billion in after-tax earnings or $0.37 per diluted share. When we think about the quarter, the key messages we continue to make good progress in a tough revenue environment due to low interest rates and a sluggish economic recovery. In addition with the late summer's  volatility especially in the fixed income trading markets, are remaining challenging but with that we produced another good quarter of progress in all of the businesses.
+Before Paul takes you through the details of the quarter, I want to provide a little context from my vantage point. We have continued to make progress toward our full earnings capacity here at Bank of America and this quarter represents the fourth consecutive quarter of solid results following the resolution of our large legacy exposures in the third quarter of last year. When you think about it over the last four quarters we have reported over $16 billion in after-tax income. That compares to the previous four quarters leading up to the third quarter of 2014 of about $5.2 billion, including the significant litigation cost.
+Returns over the last four quarters in aggregate have generated an ROA of about 76 basis points and a 10% return on tangible common equity. This quarter we were able to keep the absolute level of our balance sheet flat to the second quarter. But by doing that we continue to replace discretionary assets with good core customer loans and we believe that is a very good trend. We continue to build record liquidity and we believe we are well positioned against the 2017 LCR requirements.
+Our capital is again at record levels and we returned over $3 billion back to shareholders so far this year through common share repurchases and dividends.
+Our tangible book value per share improved this quarter to $15.50. It is the highest level in many, many years.
+So I want to spend a couple more minutes focusing on a few drivers in our business. Our teams here at Bank of America are focused on the everyday engagement with our customers, deepening relationships by growing the core of things we do with them deposits, loans, managing their risks, helping them invest their assets all while keeping our costs down and you can see that in our results.
+When you think about our deposit franchise, we grew $50 billion in deposits over the last year on an all organic basis. That in and of itself is a large bank. As a reminder, our Consumer franchise is the largest retail bank in the United States. In our Consumer Banking business as you can see, we grew revenue and earnings year-over-year despite the low interest rate environment.
+We have been restructuring our branch structure selling some branches, closing some branches and changing account structures and with that this quarter our core consumer checking accounts continue to grow. We grew those accounts and improved the percentage of those customers who use us as a primary bank and importantly the average balance per account continues to grow.
+On cards, on credit cards, we issued another 1.3 million credit cards this quarter and active accounts continue to grow. The good news is we are doing it through the lowest cost possible through our core franchise, much lower than other means of growth.
+When you go to the change in our financial services business for mobile and digital banking, we now have 18.4 million active mobile customers and 31 million active online customers. Digital sales this quarter were up 30% over last year. More customers are using mobile device to deposit checks and access their accounts and now are starting to buy products as well as book appointments. To get a sense of that, we are now looking 15,000 appointments a week off of our mobile devices.
+Our Merrill Lynch teammates who work within our Consumer business helped push us through a new standard of 2 million accounts this quarter.
+When we go to our Wealth Management business, this business is showing the effects of lower market valuations pressuring revenue but activity here has reflected good long-term flows, good deposit flows and good loan growth. In addition, we continue to invest in long-term growth in this business, more advisors, better products and better advice in building and preserving wealth for our clients and these clients continue to use the full range of our products including banking products.
+As we have switched to our commercial banking business, the business we call Global Banking, loans to commercial and corporate clients around the globe grew nicely from last quarter and the year ago quarter. Although investment banking fees were down year-over-year, the industry fee pools appear to be down as much or more. We maintained our leadership across many of the products.
+In our Global Markets business despite the challenging market conditions in the late August and September timeframe, we reported $1 billion in after-tax earnings in that business. Excluding DDA impacts, this is the best third quarter in earnings for this business we have seen in recent memory.
+Our net interest income in the Company is benefiting from loan and deposit growth showing momentum this quarter after you exclude the impact of FAS 91.
+Focusing on expenses which we've talked to you much about, we continue to hold our costs in check. Expense less litigation LAS costs remain well below the $13 billion threshold of $12.7 billion and that was in line with our second quarter despite the additional cost of CCAR and additional investments in the business.
+We are taking the benefits of our simplify and improve program which keeps our costs flat while we continue to invest in customer facing client people to grow our businesses. This ability to invest in growth is key to driving our franchise forward.
+When you go to the risk side of the house, credit risk remains very strong, market risk remains subdued and we get a great return on that VAR as you look at it across the competitors. We continue to feel good about our legacy exposure risk and LAS business continues to work itself down.
+So in the context of the environment we faced, we are operating what we feel is a solid quarter and as evidenced the continuing progress on our strategy, our strategy of responsible growth with our customers.
+With that, let me hand it over to Paul.
+
+Thanks, Brian. Good morning, everybody. Starting on slide three, we present the summary of our income statement and returns for this quarter as well as Q2 and Q3 last year. As Brian said, we earned $4.5 billion in the quarter compared to a loss of a couple hundred million dollars last year and earnings of $5.3 billion in Q2. Earnings per share this quarter were $0.37.
+Let me mention a few larger items that in aggregate, benefited diluted EPS this quarter by a penny.
+First, a negative $597 million market related NII adjustment, primarily FAS 91, cost us about $0.03. More than offsetting this was a $0.02 benefit from DVA of $313 million and a $0.02 benefit from a collective impact of three other items, gains from selling some Consumer Real Estate loans, tax benefits from restructuring some non-US subsidiaries, and a provision for payment protection insurance in the UK.
+Revenues were $20.9 billion this quarter; expenses were $13.8 billion, significantly lower than a year ago because of litigation costs and compared to Q2, expenses were flat as we managed cost well while investing in our franchise. Return on assets was 82 basis points this quarter and return on tangible common equity was 10%.
+Turning to slide four, the balance sheet ended basically flat relative to Q2 with assets of $2.15 trillion. However, we grew deposits $12 billion from Q2 while long-term debt declined by approximately $6 billion. Liquidity rose to nearly $500 billion, a record level and the time required for funding is now 3.5 years. Tangible common equity of $162 billion improved because of earnings supplemented by $1.5 billion in OTI. This was partially offset by $1.3 billion in capital return to common shareholders through share repurchases and dividends.
+Tangible book value increased 10% from Q3 last year and our tangible common equity ratio grew to 7.8% as equity improvements outpaced asset growth.
+With regard to regulatory capital, I want to start by pointing out that our transition ratios under Basel III increased with CET1 ending the quarter at 11.6%. However, I will focus my comments on Basel III fully phased in regulatory capital ratios. CET1 capital improved $4.8 billion to $153 million driven by net income, positive OTI and DTA utilization. This was partially offset by capital return to shareholders.
+Under the standardized approach, our CET1 ratio improved to 10.8% as risk-weighted assets decreased modestly even as loans grew. Under the standardized approaches, the CET1 ratio increased from 10.4% to 11% as RWA improved by roughly $30 billion largely due to reductions in risk. During the quarter we announced that we exited the parallel run and we will begin reporting under the advanced approaches beginning in 4Q.
+So we have also presented our CET1 ratio for 9-30 on a pro forma basis which includes the addition of approximately $170 billion in RWA primarily for wholesale credit under the advanced approaches. The pro forma CET1 ratio at 9-30 was 9.7%, an increase of approximately 40 basis points from Q2 on the same pro forma basis.
+In terms of the supplementary leverage ratio, we estimate that as of 9-30, we continue to exceed US rules applicable at the beginning of 2018 at both bank and parent.
+Turning to slide five, we grew loans and deposits both of which are key drivers to our financial performance. Reported loans on an inter-period basis increased $1.2 billion from Q2. However underneath the consolidated number, there was significant activity I want to take a moment to point out.
+With that in mind, let's review why loans in All Other and LAS are declining. First, the portion of our mortgages that we report in All Other continue to run off due to paydowns. This runoff is being replaced by new loans which are now recorded in business segments like GWIM and Consumer where they are originated.
+Second, also in All Other, we converted $6.2 billion of mortgages with long-term standby agreements into securities thereby improving HQLA. These types of conversions are largely complete.
+Third, we sold roughly $3.6 billion of other mortgages and NPLs as we continue to clean up and optimize the balance sheet. Lastly, in LAS where we report our legacy home equity portfolio, second lien loans continue to run off.
+Now if one excludes the above activities in LAS and other, ending loans in our primary lending segments increased $19 billion or 3% from Q2.
+Turning to deposits on an ending basis, they reached $1.16 trillion this quarter growing $50 billion or 4% over Q3 last year. We produced solid growth across the franchise, Global Banking grew deposits 6% year-over-year. GWIM grew 3% and Consumer grew 7%. However as you can see at the bottom right, if one includes CD runoff, Consumer deposits grew 10%. We have also included two other tables to give you a sense of the composition of our deposits.
+Turning to asset quality on slide six, I won't spend a lot of time here as asset quality continues to be strong and mostly consistent with Q2. Net charge-offs were flat around $930 million versus adjusted Q2, Q3 provision expense of $806 million and we released a net $126 million in reserves. Releases in Consumer real estate and credit card were partially offset by reserve builds in commercial. In commercial we saw small increases in reserve over criticized exposure from Q2 driven by downgrades in oil and gas that were partially offset by some improvements in the rest of the commercial portfolio.
+Also noteworthy, the increase in oil and gas reserve over criticized in Q3 was less than half the size of the increase from Q1 to Q2.
+Turning to slide seven, net interest income on a reported FTE basis was $9.7 billion, declining $1 billion from Q2. The decline in long end rates in the quarter caused adjustments in our bond premium amortization which resulted in a linked quarter decline in NII of $1.3 billion partially offset by good growth in NII otherwise. The Q2 adjustment increased NII by $669 million while the Q3 adjustment decreased NII by $597 million.
+NII excluding these adjustments improved $292 million from Q2 to $10.3 billion. Three factors drove this increase. First, we grew core commercial loans. Second, we improved the composition of the balance sheet and our Global Markets business which improved trading related NII. Third, we benefited from one extra day in the quarter.
+With regard to asset sensitivity, at the end of the third quarter our overall asset sensitivity increased as a result of the decline in long end rates which drove the FAS 91 adjustment. As of 9-30, an instantaneous 100 basis point parallel increase in rates is estimated to increase NII by approximately $4.5 billion over the subsequent year with a little more than half of that improvement caused by increases in short end rates.
+Turning to slide eight, noninterest expense was $13.8 billion in Q3 matching the level of expense reported in Q2. The $20.1 billion expense in Q3 last year included $6 billion in litigation costs. Litigation this quarter and in Q2 was less than $250 million. Excluding litigation, expenses were $13.6 billion in the quarter, a decline of $600 million or 4% from last year and consistent with Q2 despite additional costs related to our CCAR submission.
+Headcount continues to trend lower, down 6% compared to Q3 last year. LAS costs excluding litigation were relatively stable compared to Q2. However, we still expect to lower that number to roughly $800 million in Q4 and move lower in 2016. As a reminder, in fourth quarters we tend to experience some seasonal increase in expenses as we close out the year.
+Let's walk through the business segments starting on slide nine with Consumer Banking. Consumer $1.8 billion, 5% greater than Q3 last year. The business segment generated a strong 24% return on allocated capital. Revenue increased over last year as increases in noninterest income outpaced a decline in NII.
+With respect to NII compared to last year, the benefit of higher deposit levels was more than offset by the allocation of ALM activity and lower car deals. Noninterest income benefited from divestiture gains as well as higher card income driven by increased customer activity while service charges declined. Expenses declined from Q3 last year despite a 5% increase in sales specialist and higher fraud costs in advance of ruling changes regarding EMV chip implementation. Those increases were offset by savings from the continued optimization of our delivery network. The cost of operating our deposit franchise remains low at 180 basis points and the consumer bank reported an efficiency ratio of 57%.
+We continue to experience shifts in consumer activity away from branches towards self-service options. Self-service trends are driven by mobile banking, online banking and ATM usage. Mobile banking customers increased to 18.4 million and deposits via mobile devices now represent 14% of consumer deposit transactions. Mobile processing is better for us and it is better for our customers. It is one-tenth the cost relative to processing and financial centers and more convenient for customers.
+On slide 10, we present key drivers and trends. Average loans grew across mortgages, card and vehicle lending. Deposits, as Brian mentioned, continue to increase particularly if one excludes the impact of CD declining. On this basis, deposits are up 10% from the year ago.
+Regarding brokerage assets, Merrill Lynch accounts crossed the $2 million mark and are up 2% while asset levels are up 8% from last year even with declines in equity markets this year.
+Mortgage production although up from 3Q last year was down from 2Q as refinances declined. In the future, mortgage banking income in the Consumer segment will be lower by approximately $30 million per quarter given the Q3 sale of a small appraisal business. A similar amount of expense should reduce quarterly as well.
+Looking at card activity, card issuance was strong at 1.3 million. Combined credit and debit spending volumes were up 3% from last year despite the decline in fuel prices. Average outstandings were down slightly from Q3 last year as customers paid off more of their balances. However, average balances showed modest growth over Q2.
+US card credit quality was strong as net charge-offs declined this quarter to a decade low of 2.5% driving risk-adjusted margins higher to 9.3% excluding divestitures.
+Turning to service charges, they were down moderately versus Q2 last year -- excuse me -- versus Q3 last year as we continued to open higher quality accounts that carry higher balances. These higher quality accounts tend to have fewer account fees.
+Turning to slide 11, Global Wealth and Investment Management produced earnings of $656 million. Results were down from Q3 last year driven by lower market values and lower related client activity. Compared to Q3 last year, Asset Management fees were up 2% but more than offset by declines in transactional revenues.
+The trend of lower transactional revenues continued this quarter as clients migrated from brokerage to managed relationships which was compounded by lower markets and muted new issuance. On NII, the benefits of higher loan and deposit flows was more than offset by the Company's ALM activities driving NII down from Q3 last year.
+Noninterest expense was modestly higher than the year-ago period as litigation cost were higher and wealth advisors grew 6%. Pretax margin was 23%, down from a strong Q3 last year. Margins were pressured this quarter by a few factors.
+First, markets declined pressuring revenue across many products especially those in which we record transactional revenues. Second, operating leverage was challenged as areas of revenue where incentives are high like asset management grew while NII where incentives are much lower, declined.
+Moving to slide 12, despite the lower market levels, business drivers improved. Wealth advisors were up almost 1000 or 6% from Q3 last year. Long-term AUM flows were more than $4 billion. Deposits increased more than $7 billion. Average loans were up 10% from last year, our 22nd consecutive quarter of loan growth in this segment.
+The last thing I would note that is not shown here is referral rates across the Company remained strong. For example, our retirement solutions business continues to win in the marketplace. We have won more than 1200 retirement plans year to date, many of which were referred from global banking. On a year-to-date basis, this is up more than 40% from 2014.
+Turning to slide 13, Global Banking's earnings were $1.3 billion, generating a 14% return on allocated capital. Earnings declined from Q3 last year but were up modestly versus Q2. The comparison to Q3 last year reflects higher provision expense and lower NII driven by the Company's ALM activities as well as increased liquidity costs. Additionally, we saw year-over-year compression in loan spreads. However, loan growth was a positive contributor to NII. Growth from Q2 reflects improved NII from loan and deposit growth.
+Regarding provision expense while flat to Q2, it is up $243 million from last year. We added $125 million to reserves in Q3 compared to a release of $116 million in the year-ago quarter.
+Looking at trends on slide 14, let's first focus on fees relative to the same period last year given seasonality. Despite a lower level of IBCs this quarter, we maintained our number three global fee position and believe we increased our market share as industry fees pools declined. Investment banking fees for the Company this quarter were $1.3 billion, down 5% from Q3 last year. Advisory fees were up 24%, debt underwriting was down modestly, equity underwriting was down from Q3 last year, in line with industry volume declines.
+Outside of IB, our Treasury fees improved from Q2 on increased activity. Looking at the balance sheet, loans on average were $310 billion, up 9% year-over-year and a similar percent relative to Q2 on an annualized basis. The growth was broad across both corporate and commercial borrowers and asset quality was consistent with our overall portfolio.
+Importantly, the decline in spreads year-over-year flattened as the decline from Q2 was relatively small. On deposits, we saw good performance with average deposits increasing by $8 billion over Q2 and we continue to optimize the portfolio, improving the composition towards higher quality deposits from an overall LCR perspective.
+Switching to Global Markets on slide 15, earnings were $1 billion on revenue of $4.1 billion despite challenging markets. We generated an 11% return this quarter. Earnings were up from Q3 last year which included litigation costs of roughly $600 million most of which was nondeductible for tax purposes. As you can see, we have a net DVA gain this quarter which was higher than last year. Total revenues excluding that DVA declined from Q3 last year driven by lower fixed sales and trading and to a lesser extent IBCs, offset partially by improved equity sales and trading. Noninterest expense excluding litigation improved $102 million versus Q3 last year, a 4% improvement.
+Moving to trends on slide 16 and focusing on the components of our sales and trading performance, sales and trading revenue of $3.2 billion excluding net DVA is down 4% from Q3 last year. Comparing to the same period a year ago, fixed sales and trading revenue declined 11%. Similar to the first half of this year, the year-over-year comparisons reflect good activity in macro related products like rates and after tax. Conversely, market activity remained muted in credit products driving lower client activity this quarter than Q3 last year.
+As a reminder, our mix remains more heavily weighted toward credit products driven by the strength of our new issues capability and market share.
+Equity rose 12% driven by strong performance in equity derivatives reflecting favorable market conditions. Asset levels were down modestly from Q3 last year.
+Turning to Legacy Asset & Servicing on slide 17, this segment lost roughly $200 million. I want to focus on three things here, the reduction in delinquent loans, mortgage banking income and expenses and compare each to Q2.
+First, the number of delinquent first mortgage loans continued to decline, down 14% this quarter as the teams continue to work through solutions for customers.
+Second, mortgage banking income declined by more than $400 million. This decline was driven primarily by three factors: servicing fees declined about $50 million as the units we service declined; net MSR and hedge performance declined $100 million driven by gains on MSR sales in Q2; reps and warranty provisions swung nearly $300 million from a benefit of $204 million in Q2 to a revision of $77 million this quarter.
+Lastly, I want to focus on expenses which excluding litigation were flat compared to Q2 as increased professional fees offset improved operating costs from the decline in delinquent loans. We believe we are on track to achieve our goal of reducing expenses excluding litigation to approximately $800 million in Q4.
+On slide 18, we show All Other which primarily includes our ALM actions and the operations of our UK card business and other smaller activities. All Other reported a $503 million pretax loss more than offset by certain tax benefits. The pretax loss was a result of a negative NII market-related adjustment and an increase in provisioning for UK credit, UK credit card payment protection insurance. This was partially offset by gains from securities and loan sales.
+Regarding the change in PPI liability, we increased it because of a notice of future regulatory guidance regarding treatment of claims and a case ruling.
+A comment or two on taxes before we wrap up. The Company's effective tax rate for the quarter was 26%. It was lower than Q2 due to the tax benefits I mentioned earlier. I would expect the tax rate to be roughly 30% next quarter excluding unusual items and specifically the recent UK tax proposals.
+In terms of 2016, I would expect it to be in the low 30s. As a reminder from last quarter's announcement, we expect that the UK tax proposal announced in July will result in a one-time tax charge of approximately $300 million upon enactment from revaluing our UK DTAs.
+Let me conclude our prepared comments by offering these takeaways. Although the US economy is improving slowly, revenue growth remains challenging in this interest rate environment. We are focused on those things we can control and drive. These include delivering for our clients and customers within our risk framework and driving those things we know will result in sustainable profits and returns. Our results reflect this focus.
+We grew both loans and deposits across our business. We delivered to our corporate and institutional clients in a challenging market environment. We stayed focused on managing risk and we kept costs in check while investing in the business. We are getting better positioned each quarter for the current business environment and we remain well-positioned to benefit when rates rise.
+With that, let's open it up to Q&A.

exam/part2_problem1/Problem_1_Conference_Call_Segments/call_32_questions.txt

@@ -0,0 +1,186 @@
+Question_1:
+
+    Thanks, good morning. Just wondering if we could maybe just speak a little bit at the NII outlook given the dynamics about the stable balance sheet, shifts within the balance sheet and how we should think about both the GAAP and adjusted NIM if the interest rate environment continues to look more or less like it does today? Can you just help us think through what all of those dynamics mean for NII?
+
+Question_2:
+
+    Okay. And with respect to the loan growth, is that in the context of growth in the overall balance sheet or continued stability given mix shift?
+
+Question_3:
+
+    Thanks very much.
+
+Question_4:
+
+    Wondering on expenses, you kept the core expenses flat to last quarter. Did you digest additional CCAR expenses and also some costs related to the proxy vote? What are the puts and takes on keeping that flat and what is your outlook on the core expenses going from here in this kind of environment?
+
+Question_5:
+
+    Okay. Paul, in terms of the credit outlook, do you expect to kind of bounce around here, you've got charge-offs in the low 900s and you did about $100 million in reserve release. So charge-offs 900, provisions 800, is that the kind of ballpark you expect to stay in near-term?
+
+Question_6:
+
+    So that is around 800 a quarter, something like that, ballpark?
+
+Question_7:
+
+    Okay, thank you.
+
+Question_8:
+
+    Good morning. Paul, I just wanted to just you to elaborate a little bit on the comment you made during prepared remarks regarding the composition of the balance sheet improving that being a benefit for trading related NII. Could you just talk through what you did and is that sustainable? The benefit to NII?
+
+Question_9:
+
+    Okay. And then on the conversion of the loan to securities for HQLA given the fact that you mentioned that is done, what kind of core loan growth are we looking for as we move forward here?
+
+Question_10:
+
+    I guess I will take consolidated more than anything.
+
+Question_11:
+
+    And then just lastly on this topic when you are thinking about reinvesting deposit growth etc. in securities, where are you relative to your new investments in securities versus what the portfolio yields are? Are you close to breakeven there?
+
+Question_12:
+
+    Correct.
+
+Question_13:
+
+    Okay.
+
+Question_14:
+
+    Okay, thanks.
+
+Question_15:
+
+    Good morning. Can you give us an update on the CCAR resubmission and then also comment on some of the management changes that occurred there as we think about the 2016 process just how you might approach it differently or similar to what you have done in the past?
+
+Question_16:
+
+    Okay, and then just separately in terms of the credit quality comments that you provided for the next several quarters, how are you thinking about energy as part of that?
+
+Question_17:
+
+    Just a big picture question following up on that, there is a lot of concern I think among credit folks that energy defaults have increased a lot and will continue to increase from here but we are not really seeing all that much pressure either at you guys or the banks. Are you guys higher in the structure, different customer base, why do think there is less pressure maybe with you guys than we are seeing from the industry as a whole outside of banks?
+
+Question_18:
+
+    Okay, thank you very much.
+
+Question_19:
+
+    Good morning, Paul. Just a quick question on the liability side of the balance sheet. You had highlighted that long-term debt was down $6 billion or so in the quarter. I noticed that long-term debt costs were down about 11 basis points quarter over quarter. Is that sustainable in the context of TLAC? Is there just some movement underneath the hood or is it timing? Just kind of help me think about where that footprint and cost go from here.
+
+Question_20:
+
+    No, that is all helpful. Maybe just on the loan growth side, what are you seeing on the demand side as Consumer has begun to pick up for you guys? Where are you seeing the most strength and do you think the environment still is pretty positive from the loan demand perspective in the US?
+
+Question_21:
+
+    Okay, great. That is helpful. Thanks.
+
+Question_22:
+
+    So one of your competitors revealed that their efforts to mitigate some of the GSIF indicators had actually helped push them into a lower GSIF bucket and looking at the metrics that have been published as of year-end, it looks like you are actually closer to the lower end of that 3% threshold. And we have seen some progress in terms of reduction in Level III assets at year end. And just wanted to see if you actually see opportunities to manage that bucket lower somewhere closer to 2.5%?
+
+Question_23:
+
+    Okay. That is really helpful. Thanks, Brian. Maybe just digging into some of the GWIN guidance that, Paul, you had given earlier, the negative operating leverage has been fairly pronounced which you acknowledged and I did appreciate the detail at least on some of the specific factors that weighed on the margin such as litigation and maybe some remixing in terms of revenue.
+But just wanted to get a sense as to how we should be thinking about that margin trajectory going forward assuming no elevated litigation and without any rate boost, just to get a sense as to how we should be thinking about that profitability trajectory?
+
+Question_24:
+
+    Okay, thanks for that detail, Brian. Maybe just one more for me on the investment banking side. One of your competitors was talking about a pause in activity that they have experienced so far in 4Q. I recognize it is early days but just wanted to get a sense as to what you are seeing within the global banking and markets businesses and also if you could provide just some additional color or detail on what you are seeing in the backlogs by channel, that would be really helpful too.
+
+Question_25:
+
+    All right, great. That is it for me. Thank you for taking my questions.
+
+Question_26:
+
+    Thanks. A couple of quick follow-ups. I hear all o your comments so no need to repeat them on the feeling decent about credit quality and energy specifically. Just looking for two pieces of info if you are willing to share either reserve as a percentage of loans for energy specifically or maybe what percentage of the criticized exposure is energy related? Just looking for more detail behind the comfort. Thanks.
+
+Question_27:
+
+    Okay, worth trying. In terms of what is going on in terms of the mix shift on balance sheet out of some of the discretionary assets and into the core loan growth, I think everybody will take that all day long. And I am curious on if there are RWA implications that we need to think about, is that a heavier RWA mix even though we will take it -- I am just curious on how that plays on the capital side?
+
+Question_28:
+
+    Okay, I appreciate that. One last one. You commented earlier about the strength in equities partially driven by the good performance in the derivatives business during the quarter. I guess the question is it ebbs and flows but maybe over the last 12 months, not just the last quarter, is derivatives 40%, 50% of overall equities, is that a number you are willing to share?
+
+Question_29:
+
+    I'm saying in any given period, your equity markets revenues, how much of that is driven via the derivatives business?
+
+Question_30:
+
+    Okay, thank you.
+
+Question_31:
+
+    Good morning. Brian, just one question follow-up on the loan side. You talked about the demand and where you are seeing it but I'm just wondering in terms of like the no excuses growth mentality from a supply side, where are the lending officers now in terms of like using the excess capacity to continue to grow the balance sheet? Is there still room from the Bank of America supply side to extend that growth on top of what the economy and the market place is giving you broadly?
+
+Question_32:
+
+    Okay, got it. Paul, one quick follow-up on GWIM, can you just remind us how that business kind of marks itself in terms of asset level pricing versus the transactions? It seems like those kind of went different directions this quarter and the result was kind of flattish on a revenue perspective. So what do we need to think about in terms of where the markets have come and where we are looking ahead in terms of asset level versus transaction type revenue activity?
+
+Question_33:
+
+    Good morning, guys. Two questions. One, there is an issue out there I think supposed to happen in 2018 on credit quality. It is this current expected credit loss. Can you just tell us where the argument is about that right now and whether you have been able to do any preliminary work about how that would impact you?
+
+Question_34:
+
+    Okay. Secondly, another credit quality question. There was a lot of speculation before the quarter and I think this is probably based on the energy outlook that this would be the quote inflection point quarter and beginning to build reserves. But what you are saying and what J.P. Morgan said yesterday was that the credit quality outlook remains pretty stable. Can you just comment on this inflection point issue and when you think we will get there?
+
+Question_35:
+
+    So sometime in 2016 probably?
+
+Question_36:
+
+    Okay, thank you.
+
+Question_37:
+
+    Good morning, guys. It is actually Thomas LeTrent on behalf of Paul. Most have been asked and answered but one quick question on the servicing side. The servicing income has been coming down at a faster rate than the portfolio and I know you guys have sort of exited most of the sales on the portfolio side. So at what point can we sort of expect the fees to level off and is that just a function of the legacy stuff continuing to run off?
+
+Question_38:
+
+    And then also on slide 17 if I may on the 60 days delinquent, how much of that is the quarterly change, how much of that is from sales or is that mostly just runoff?
+
+Question_39:
+
+    Okay, that is all. Thank you.
+
+Question_40:
+
+    I had three small questions. First, you sold $3.6 billion of assets, mortgages and NPLs. What was the gain or sale on those sales? I'm sorry, the gain or loss?
+
+Question_41:
+
+    I am sorry, $400 million?
+
+Question_42:
+
+    That added a little bit. Can we assume that repeats or this is kind of a one-off?
+
+Question_43:
+
+    Okay, that is fine. Higher rates, you are more asset sensitive now I guess $4.5 billion to 100 basis points. You were $3.9 billion last quarter. Are you intentionally -- I mean how do you think about that, are you leaving money on the table by being so asset sensitive? Do you want to be this asset sensitive? Maybe give the answer in the context of the last jobs report which seems to imply rates will increase later than previously expected.
+
+Question_44:
+
+    And then lastly, Paul, you are new in the job as CFO. Actually Brian, this is the first call where we can ask the question, why did the old CFO leave? We have heard a lot of different reports so why did the last CFO leave?
+And, Paul, as you are new in the job as CFO, what changes might you want to make? And Paul or Brian, if rates don't go up for a lot longer than you expected, what is your Plan B to deal with the tougher environment?
+
+Question_45:
+
+    And Paul's philosophy on being CFO, any changes with your predecessor?
+
+Question_46:
+
+    All right, thank you.
+

exam/part2_problem1/Problem_1_Conference_Call_Segments/call_33_answers.txt

@@ -0,0 +1,284 @@
+Answer_1:
+
+    This quarter, the fourth quarter I think represents as I said in the comments the fifth quarter out of six that we've been below $12.8 billion. As you know I think we've been talking about maintaining core expenses below $13 billion, so we feel really good about our progress.
+I have to remind everybody that we're maintaining those core expenses at those levels while we're investing in front office professionals while we're investing in technology, while we're absorbing the natural increase in pay for our employees and fraud cost and CCAR costs and other things. So I think we feel good about the work we're doing there. In terms of global markets what was the question?
+
+Answer_2:
+
+    Matt, in the fourth quarter we did reduce headcount in the business, the markets businesses and the related capital markets business. We didn't make a big announcement but that led to the $130 million in severance in the fourth-quarter numbers that you see. So we will continue to adjust that headcount. Tom and his team will continue to adjust it but they made an adjustment in headcount in the fourth quarter, just didn't make quite the press other people's did.
+
+Answer_3:
+
+    The only thing I'd add, Matt, is my focus was on core expenses. We're going to see total expenses I think continue to come down as we work on LAS and continue to hopefully see some moderation on legal expense.
+
+Answer_4:
+
+    I think we've made great progress in terms of getting expenses down. I think we started at what, $3.1 billion quarters ago but we've made great progress getting down to $800 million.
+Our net milestone is $500 million per quarter. That's going to be a little bit harder, as you get lower and lower it's a little bit more unpredictable. And so we're not really giving a target at this time but we're going to get there as soon as we can.
+
+Answer_5:
+
+    You should expect us to make good progress, Matt, towards this year. And so as you look towards the end of the year we should be getting there.
+
+Answer_6:
+
+    Sure. Well as we said in the comments we've got reserves against that energy portfolio of $500 million. That's 6% of the high risk subsectors and we develop reserves on an incurred basis.
+We develop them by looking at loss given default, probability of default, exposure to default. We go loan by loan. We have a lot of imprecision, other factors that we look at for imprecision and we put judgment on all that.
+One of the things we look at when we come up with our judgment of what we should be is our stress testing. And so that's how that gets factored in to our reserve which again has to be on an incurred basis.
+
+Answer_7:
+
+    In part, Betsy, because the idea is you can only incur for what you see through today. In terms of the operating structure of these companies and the asset-based lending, these are asset-based loans, derivative-based loans. So they've ratcheted down based on price but at year-end you're only reserving for what you see today.
+If you're nine quarters from now and oil is still at that price you'd have to have it reserved for what's left of the portfolio of the exposures. But coming down it would come down during those nine quarters by the losses you took at least in resolving those credits. So it's in part covered but not fully because that's an estimate of a future that as Paul said it's an incurred view of the portfolio.
+
+Answer_8:
+
+    The other way to think about it is we've got a $500 million. As we go, theoretically you go through the nine quarters if that $700 million were to come true if our model was perfect it would go against that model $500 million but you'd be building reserves as you went through that process.
+So if you told me what you wanted to end the nine quarters at, if you wanted to end at $500 million you can do the math. If you wanted to end at more or less it's going to be more or less in terms of you kind of have to build.
+
+Answer_9:
+
+    I think you've got it. I think we have a legacy, we have a large legacy portfolio on the consumer side. As we continue to work through that and if home prices continue to stay where there or improve, the economy stays where it are or improve, I think you're going to continue to see reserves from us in 2016 or reserve releases I should say from us in 2016 but they are going to moderate from what they have been in the past.
+
+Answer_10:
+
+    Yes, some of that swings over to the commercial book as you saw this quarter. So we have come down from a lot of reserve releases last year, I think it's 800 million or so in the fourth quarter, 700 million or 800 million or something down to 200 million, a couple of hundred million. And you'd expect that to mitigate during the course of 2016.
+
+Answer_11:
+
+    Yes, and we've built reserve in commercial.
+
+Answer_12:
+
+    I think we feel good about the operating leverage we achieved in 2015. You can see that with the revenue growth relative to the EPS growth and I think we're looking to continue that trend.
+We got hopefully a little bit of a tailwind here on rates. We're going to continue to manage expenses carefully.
+So in terms of our EPS growth in 2016 we don't give estimates but in terms of our EPS growth in 2016, I think it will be more of the same. Revenue growth with some hopefully expense discipline that will get us some operating leverage.
+
+Answer_13:
+
+    John, we haven't seen the scenarios yet and stuff like that so I think it's probably premature to discuss that. Our goal is long term is to return more and more capital to shareholders through dividends and stock buybacks.
+At this price obviously stock buybacks are favored. But when we see the scenario and play that out it would be getting ahead of the process to talk about it today.
+
+Answer_14:
+
+    I wouldn't say that's why but obviously there's a benefit from paying off those trust preferreds. They had I think it was $175 million per quarter -- I've got that right? Yes.
+And so there's a benefit there. The way I would think about those is we're not going to, quote, replace them because they don't count toward our regulatory capital, so why would we replace them?
+We're going to have a capital structure that meets our regulatory requirements which requires us to have a certain amount of CET1. We're going to have the appropriate amount of preferred and subject and of course we have to meet the TLAC requirements. So that's how I would think about it.
+
+Answer_15:
+
+    John, if you look at it what global is affecting us 2013, 2014 was we're continuing to run off portfolios that have yield to them. And obviously the reinvestment rates on the investment side of the house as we ran those off were flattish. That's kind of all run through the system.
+So now what you're seeing is $80 billion a period deposit growth from fourth quarter last year to this year. And the overall pay rate for that is in the low single-digit basis points. All core, all in consumer, wealth management and driven by middle-market and the banking business.
+So that's the deposit funding side. And the asset build is now good core loans that have reasonable yields to them and you start to see it and then pick up just a hair from that. And we expect it to drive in our core as long as the economy continues to grow a couple percent.
+
+Answer_16:
+
+    Hey, John, just real quick I want to correct one thing I said. The $175 million is full-year.
+
+Answer_17:
+
+    We sold a little bit but not as much as we had in the past.
+
+Answer_18:
+
+    Largely Paul, that's been, it's very incremental at this point on the sales side.
+
+Answer_19:
+
+    Well, Paul, the 103,000 is of the total portfolio. So there's a normal piece in that and an abnormal piece in it. But we should be driving it down to the 60 days, 103,000 is across both portfolios.
+But that number should come in I don't know pick a percent, percent and a half of the service loan units. So it's still got some room to go.
+And that's the key that I think Matt pointed out earlier is the FTE headcount in LAS we had a 2,000 person headcount drop in the Company overall in the fourth quarter, about half LAS, half the rest of the Company. The LAS percentage rate was 8 percentage points not annualized for the quarter at 30%. It's still dropping its headcount but it's getting flatter and now we've got all the old cost to drive out of the portfolio.
+So in terms of thinking about real estate and old systems and stuff and so that's what takes a little more time now than just the people cost.
+
+Answer_20:
+
+    Sure. The short answer is that we have seen no real movement.
+Of course we're very focused on making sure that we pay an appropriate deposit rate but so far there's been no movement. We have been modeling deposit betas on our interest-bearing deposits in the high 40s.
+
+Answer_21:
+
+    We think that makes sense. And given the quality of our deposit base as Brian walked through already the portion we have in our consumer and GWIM franchises, the number of primary checking accounts, even on the wholesale side if you look at our deposits less than 5% of them are 100% runoff deposits.
+So we feel good about our $1.2 trillion in deposits. We took this year the deposit rating came down another basis point to 4 basis points for all deposit. So we feel good about that modeling.
+
+Answer_22:
+
+    And Jim, remember that modeling is not 40% of everything, it's a lot nothing and a lot less for the first couple of bumps. So I think that's what you're thinking about. So if we continue along with one or two rate rises there will be a lot more capture then as it gets into the higher --
+
+Answer_23:
+
+    Exactly. I think that's what you're asking.
+
+Answer_24:
+
+    If you look at the full-year 2015 and you do those puts and takes with the things that we've talked about through the year and you make any sort of a reasonable guess as to the progress we're going to make around LAS, we're in the 65%-ish range, we're going to continue to focus on growing responsibly and working on our total expenses as we talked earlier. And so with a little help from growth and some more work on expenses we think we're in shooting range.
+
+Answer_25:
+
+    As we model ourselves and look at sort of the peers, so the average efficiency by business units and model against our business mix we're going to be a little higher because the high-level wealth management in our business relative to the total. But look, three things on expenses.
+Number one, we'll continue to drive it them and funding all the growth and FTE for the sales side we have 6% growth in consumer FTE sales side, 3% wealth management, maybe 8% in global banking year over year. So we're paying for all that, paying for all the incentives attached to it, paying for all the infrastructure attached to it. So we're going to continue to drive it down.
+So just rest assured that is. And then we are not satisfied in the mid-60s efficiency ratio of the Company and we should be able to drive that down and it will come from both just hard work and as you say with a rate lift and stuff which affects -- we're still affected a little bit more by low rate structure than other people we should pick it back up. But don't think we're complacent on this.
+
+Answer_26:
+
+    Outside of energy we are not seeing asset quality change nor are we seeing a reduction in appetite for credit. I would remind everybody that we were very, very focused on our customer framework and our risk framework. But within that framework we continue to see a lot of opportunities to help our customers grow their businesses.
+If you look at this quarter and you just focus on the core we had 3% quarter-over-quarter growth or an annualized growth rate of a little over 12% or $22 billion. I'm not going to sit here and tell you that's what it's going to be next quarter. But we're not seeing material decline in conversations with our clients about how to help them grow.
+
+Answer_27:
+
+    I think to give a additional color if you think about it if you go back a couple of years we grew the international business because we had to round out that franchise. We sort of slowed that down, 24 months ago that started to drop in terms of growth rate. And so because of the client selection criteria there is very high in clients, multinational clients, etc.
+But we slowed it down just to keep the Company in balance and that's been our watchword. If you think about on the consumer no subprime, no lowering FICO scores. If you look at the coming on FICOs they are higher in the portfolio still which is almost hard to believe, the charge-offs, delinquencies in both home-equity, delinquencies across the last four years and continue to get lower every year.
+This year was the lowest they've been all the way back a long time in both credit card and home-equities. And if you look at the client selection in the US a couple of things. One is we're adding officers in the middle-market business but they are going after our target clients and this is not go find new industries, etc.
+So whether it's the way we lend to commercial real estate which is very high-end real estate developers, etc., the way we lead in middle-market is very strong. So as you look across this client selection in the middle-market business has been strong.
+The best  that we're seeing is things in our business banking, small business portfolios. We're actually starting to see growth there, again sticking to our credit risk which is the first time in many years because we had to run off some stuff that came in through LaSalle, Merrill and everything else that we're finally seeing nominal growth.
+And so I think this client selection we slowed down international, it sort of always watching and in fact using your stress test to make sure you stay balanced. And if you look at us we feel we're pretty balanced between the consumer and commercial sort of 50/50. And then within the consumer we're really sticking to our knitting which is very strong, high-quality, both creditworthy borrowers.
+
+Answer_28:
+
+    It's coming from both. The reality is that the number one issue they face in the wealth investment and brokerage services revenue line is the decline in transactional revenue.
+And it has gone from two years ago probably $600 million a quarter even in non-robust market times down to I don't know $300 million, $400 million. That is hard to make up on the annuity piece. Even though they are having record net flows it's just the revenue rate on that is less.
+So that's the factor. So it's not to do with really recruiting. The production per FA continues to be solid at 1 million-plus.
+It's really that core fundamental issue that they are facing. And that transition is what we're all going through. It's getting to the point where it's becoming less material and i.e., less material to the total revenue line from the transaction side.
+
+Answer_29:
+
+    On the other hand I would just remind everybody that we've got significant positive loan base in that business. And so again if rates rise we're going to see some benefit there.
+
+Answer_30:
+
+    Let me start with the last one and pick up on just some comments Brian made again. The decline in the margin has been because of decline in transactional revenues.
+In addition over the last couple of quarters there's been a lot of market volatility. Markets have ended down in certain months and that affects what we make on asset management.
+We would hope in a better market environment we would see some improvement in some aspects of the transactional business because there's a lot of selling of mutual fund products and other products there. And then again as I point out we've got a business here with close to $140 billion in loans and $240 billion to $260 billion-ish of deposits and as rates move we're going to start seeing some benefit from that on which the payout ratio is quite different than on the more traditional asset management products.
+So that really I do think is the revenue story that will affect margins. And again in the first quarter of this year we're going to see $100 million reduction in expenses because of the runoff of the compensation programs we've put in place around the Merrill merger.
+So I think that's what I would say about the margins. What was the second part of the question?
+
+Answer_31:
+
+    So I think people ought to think about GWIM, the margin has come down, we think it's flooring out here and it will start to pick back up in part because of some of the unfundamental changes in the ATP program running off and stuff. But we've invested in a PMD program. It cost a few hundred million dollars of drag to do that.
+That's the right thing to actually build the advisor base over time and service the clients. And the team if you look at it underneath the US the flows and stuff are strong and the US trust business is having some of its best quarters ever just because of the difference that it didn't have the secular runoff you referred to in terms of the fee-based business.
+So it's a good business, it does a good job with its clients. We expect more out of it. And that's the job for John and Keith and Andy and Terry going forward.
+
+Answer_32:
+
+    We feel good about our metals and mining exposure. It's about $8 billion but most of that exposure is much more short dated and much more collateral. So we feel good about that exposure.
+
+Answer_33:
+
+    Yes, that's not a bad way to think about it. Again if you remember our guidance from last quarter we said $800 million to $900 million for the first two quarters of 2016. And the way I would think about those two quarters would be yes, we could see some lumpiness.
+
+Answer_34:
+
+    But I think the one thing overall is that as you look at the question on the exposure that we're also paying close attention to is it sort of a demand or supply issue for oil prices. And if it's a supply issue that affects these companies and related companies and demand from.
+But if it's a demand in the broadest context i.e., economies continue to slow down and that's the broader concern. So we're looking at not only the impact on all the portfolios thinking about who gets the benefits in our portfolio basis from low energy cost which are serious benefits to the consumers and to companies that consume energy versus those producing it.
+So there's a balance here that we've got to think through. Right now it's pretty isolated the energy companies and even if you look at consumers who work for them in our basis by ZIP Code and unemployment levels and stuff we've seen relatively modest deterioration or none in the consumer side people employed in these businesses.
+So I think as you think about it the real question is going to come down to for 2016 in terms of all our industry is are we in a demand-driven issue i.e., a general economic issue or is the United States going to plug along and if it does then I think Paul's guidance is the right one. If you're in the supply it's all going to be localized on these industries.
+
+Answer_35:
+
+    It's not demand, it's again worth emphasizing there are a lot of people who are helped by low prices. That helps our asset quality not only on the consumer side but also in places like India and manufacturers all around the world.
+
+Answer_36:
+
+    So you're talking about going with the first half of 2016?
+
+Answer_37:
+
+    Well, on a standardized basis I think you're going to see RWA trend up if it we're able to grow deposits and loans. On an advanced basis there's all sorts of puts and takes there.
+I don't think you'll see as much growth as you would on a standardized basis -- on an advanced basis, yes, as you would on a standardized basis as we continue to work on our RWA.
+
+Answer_38:
+
+    Well we need to get to more inventory target. From a CET1 under an advanced basis our goal is to get to 10%-plus a buffer by 2019.
+So we're at 9.8%. I feel like we have the time to do that.
+We're certainly not going to need to take all that time. We would expect to get there soon. But it is impacted by changes in rates, changes in OCI.
+We're hopefully returning capital. But we're not -- we feel like we're on track to get to 10% plus an appropriate buffer.
+The only other thing I would add is we still have some opportunity to optimize RWA from an advanced perspective. That's in two fundamental areas. It's always stuff you can do in markets and other areas.
+But in two fundamental areas, one is the extra RWA we got on the wholesale side when we exited parallel run. That's not a permanent thing. We need to work on our models, work with our regulators and hopefully over time we can make some improvements there.
+The other one is operational risk. We have $500 billion of RWA for operational risk under the advanced approach. That is 25% more than the net highest bank and that operational risk is for businesses that we are no longer in.
+It's for products we no longer sell. It's for a risk profile that we no longer tolerate. So again that will take time but that's another opportunity for us to lower RWA from an advanced perspective.
+
+Answer_39:
+
+    I think -- the buffer to the capital?
+
+Answer_40:
+
+    Yes, B3A.
+
+Answer_41:
+
+    We're basically thinking the buffer we need to be above the requirements, the 10%. We'd say 25 to 50 basis points would be where we're at.
+
+Answer_42:
+
+    Look, I'm not sure we're in the business of giving guidance on loan growth we think we can grow. If you were looking for some perspective from us I wouldn't even call it guidance. Mid-single digit is what we hope we can accomplish.
+
+Answer_43:
+
+    I think it's going to continue to be driven by commercial but you're going to see growth in consumer as well.
+
+Answer_44:
+
+    In our mortgage business I think we are focused on originating prime and sort of non-conforming loans. There's been good progress here I think if you look over the last year.
+The number of non-conforming loans that we are originating has increased meaningfully and a reminder a that those loans we book on our balance sheet. So that's NBI when you're booking, when you're selling less loans it's going to affect your NBI income but it's going to come through the NIM on a more annualized basis.
+
+Answer_45:
+
+    From a broader -- we decide the fees because of the geography and how the accounting works when you put I think 60%, 70% of loans on balance sheet. In terms of overall production we expect to continue to make progress because, and you can see that in the numbers, that we're going to as other people are flattening out we continue to have lots of opportunity with our core of customers.
+A set amount of 10 still that are creditworthy in our customer base are still getting a mortgage elsewhere and that's what the team is chipping away at. And it's never going to be the hugest business of Bank of America compared to things like the Merrill Edge business in consumer, the credit card business and consumer. But we expect to get broader market share from each of the segments.
+
+Answer_46:
+
+    I think it's interesting I'm not going to sit here and tell you that it's directly 100% correlated, we've done all the work but we've added sales professionals in our branches. They are focused on originating mortgages that are more prime-oriented. We've got them working with our GWIM specialists.
+That client group is generally more prime-oriented and we see progress. We see the prime loans growing.
+
+Answer_47:
+
+    Well, I have to think about that. We spend a lot of time, our credit people do spend a lot of time just combing through that portfolio and looking at cash flows from the Company and making sure we understand the collateral, making sure we fully understand our structures. So I think it's a lot of blocking and tackling and talking to clients and making sure we understand what's going on with their businesses in terms of the energy portfolio.
+I would emphasize again that outside of the energy portfolio we are not seeing movement in NPL and criticized assets. Our NPLs continue to come down.
+
+Answer_48:
+
+    Sure. So in terms of card when we look at our credit losses they are at low points, historic low points and they've been bumping around at that level. We've seen a little bit of increase the last couple of quarters but that again I think is just a reflection of things just bumping around at really low levels.
+In terms of the home equity and of draw based on the volume we've seen to date which we've seen a lot of volume the portfolio is performing in line with our expectations. And we continue to monitor the end of draw portfolio and continue to work with our customers to manage the risk.
+I just would remind everybody that these borrowers have paid through the downturn and this portfolio continues to improve as home prices improved. The risk is an ongoing part of our reserve process and we think we're well-reserved.
+
+Answer_49:
+
+    Just on card and those 30 days delinquency or 90 they came down during the course of from the end of 2014 all the way through 2015 and in both cases is running at multiple-year lows in both percentage-wise and nominal amounts. So we're seeing no deterioration of credit in either of those, and the same with the home equities. It's just in home equities just have a little more cleanup because of the legacy portfolio in there.
+
+Answer_50:
+
+    Oil, let me take the last one first. So we've got a reserve on our energy portfolio of $500 million. That is 6% of those two subsectors that we think are high-risk and we have done modeling stress test modeling at various oil prices.
+The one we've been talking about on this call has been at $30 and that's over nine quarters. And so if oil stayed at $30 for nine quarters we would think that our losses over those nine quarters would be $700 million.
+Again that would go against the $500 million we already have reserved. And one would presume we would be building reserves during that time period to make up the difference.
+
+Answer_51:
+
+    So Mike, when you look at consumer benefits from the oil and gas just to give you a simple thing, if you look at our card base in the fourth quarter of 2015 the spending on debit and credit cards rose 4% from the fourth quarter of 2014. And if gas prices would have been stable it would have grown at 5.7%.
+So what that means is consumers had effectively on that base of 1.7% that they received the benefit of year over year. If you translate that to dollars round numbers that's $20 million a day of less spending on gasoline by our consumers in our portfolios per day and from like $90 million down to $70 million-ish or something like that.
+That is the benefit they get. So for a large number of consumers median income the cash flow increases and that gives them more money to spend.
+
+Answer_52:
+
+    I think Mike it comes down to the question of whether you think this is a  price is a reflection of our broader issue of growth in the economies or we're going to get slow growth 2.5% in the US and I guess 3.5% in the world. If you're going to get that in 2016 it's going to be isolated, the negative is going to be isolated to the oil companies and related commodity producers just because of a slow growth environment.
+If you're saying there's going to be a much different economic scenario than so-called consensus predicts that's a broader based problem. But right now it's really an oversupply of oil driving prices down and that's impacting the people in the industry. And the rest of the consumers, I mean corporate customers and consumers that use oil and energy are getting a good benefit.
+
+Answer_53:
+
+    And Mike, the only thing I would say, Brian is spot on, if it's a demand issue we're going to see it in other parts of the economy. However, we have not seen that yet. We have not seen a change in our asset quality outside of energy.
+
+Answer_54:
+
+    As we've said we've ran about 9, adjusting for everything about 9.5 for the year. And return on tangible common equity we believe we have a path to get that to 12. Rates get us part of it and hard work on expenses and core revenue growth and driving gets us the rest of it and so an LAS expense drop-in.
+We're chipping away at that and if you look from 2014 to 2015 we made a substantial step and we'll continue to drive away. We haven't put a specific timeframe on it. It's just a goal to keep driving and we'll drive beyond that.
+On the efficiency it follows that as efficiency it follows that sort of map that right now we're operating 66%, 67%, 67% probably normalized for 2015. And between LAS we can drop that down to 65% and that's just hard work and we're grinding away at it every day. You're seeing loans grow, you're seeing deposits grow and so you should see an improvement in 2016.
+
+Answer_55:
+
+    Expenses are on our mind every day at Bank of America. We have everybody focused on expense discipline. That's translating through our culture under our simplify and improve program where the teams are always coming up with ideas to make it simpler for our customers, make it simpler for our employees and improve the expenses of the Company.
+That's how we're going to achieve our objectives around core expenses that we've talked about on this call. We're all very focused on expenses.
+
+Answer_56:
+
+    Thank you, everyone. We look forward to talk to you next quarter.
+

exam/part2_problem1/Problem_1_Conference_Call_Segments/call_33_presentation.txt

@@ -0,0 +1,113 @@
+
+Good morning. Thanks to everybody on the phone. Thanks for those that are joining us on the webcast as well.
+Welcome to the fourth-quarter earnings results presentation. Hopefully everyone's had a chance to review the earnings that we released. It's available on the Bank of America investor relations website.
+And so before I turn the call over to Brian and Paul let me remind you we may make some forward-looking statements. For further information on those please refer to either our earnings release documents on our website or our SEC filings. So with that I will turn it over to our CEO, Brian Moynihan.
+
+Thank you, Lee, and good morning. Thanks to all of you for joining us this morning to discuss our fourth-quarter results.
+Before Paul Donofrio takes you through the details of the quarter I just wanted to provide some overall context on our progress in 2015 and the opportunities and challenges ahead. As you know for the fourth quarter we reported $3.3 billion in earnings or $0.28 per diluted share.
+For 2015 we had net income of $15.9 billion. That's the highest net income we've had in a long time.
+Full-year return metrics are 74 basis points for ROA and 9% for return on tangible common equity. During 2015 we continued to drive our eight lines of business forward. We focused on driving responsible growth across all our businesses and as you look at the annual earnings of the Company and see how they fell you can see how they came through.
+Our consumer and wealth management business serving mass-market customers all the way to the wealthiest Americans delivered $9.3 billion net income this year. Our global banking business, which provides services to small, medium and large companies around the world, produced $5.3 billion in net income this year.
+Our institutional investor clients, our markets business, with its market leading research capabilities and top-tier platform across the globe delivered $3 billion in earnings after adjusting for DVA in a very challenging market. What's clear in these earnings despite the gyrations in the markets especially at the end of the year last year is the annuity nature that we get from our franchise by driving customer and client flows. That's the power of the Company, its balance and its scope and its strong customer base.
+We aim to continue to improve it every day for our clients and customers and our shareholders. These results reflect the work we've done over the past several years to develop a more straightforward simplified operating model and focus on responsible growth.
+As you can see on slide 2 across a variety of measures, loan growth, business activity, capital, liquidity, credit losses and cost management, we've made meaningful progress and believe we're positioned for a variety of economic cycles. At the foundation of all of this is a strong capital liquidity base. We added to our record liquidity levels in 2015 and we believe we're well positioned against the 2017 LCR requirements with total global excess liquidity resources now over $500 billion.
+This amount represents nearly a quarter of our balance sheet. We have enough parent liquidity to last more than three years before we need to tap the market for funding.
+Now our liquidity levels were driven by strong growth in deposits this year. And we were able to put that funding to work to grow loans on an absolute basis for the first time in several years.
+Loan growth was all driven by organic activity and consistent with our risk posture. Our tangible common equity of $162 billion is at record levels as well. We returned $4.5 billion to shareholders this year in common dividends and share repurchases.
+Our tangible book value per share improved 8% in the past 12 months to a new high of $15.62. Our responsible lending focus also shows in our underwriting results. Our net charge-offs were down to $4.3 billion this year, consistent with 2014 but much lower than previous years.
+Commercial charge-offs increased off a very low base, mostly from oil-related charge-offs, while consumer losses as a core continue to improve. This reflects both our responsible underwriting and continued improvement in our legacy portfolios.
+Finally, we get to the cost management side. At the heart of our work has been improving expenses which you can see are down sequentially from last year, mostly on lower litigation costs but also on improved LAS and other operating costs.
+These have improved steadily across the last several years. We began new BAC in 2011 and completed it in 2014. Since then we have been using our simplify and improve initiatives to find savings that more than offset increased compliance, merit and other inflationary cost.
+But most importantly those savings fund investments in our business whether it's in technology, our salesforce growth or other infrastructure costs.
+As we move to slide 3 we include a few examples of trends of business activity in our consumer side of the house and wealth management side of the house. As you can see we grew average deposits in consumer banking wealth management business $52 billion or 7% comparing year-over-year fourth-quarter periods.
+These deposits were up over $105 billion in core deposits since the end of 2012. This is strong organic growth as a result of hard work and improving the customer satisfaction our franchise by making it easier for customers to do business with our bank and strong product management simplifying the product set. All this has been done, we've optimized our delivery network reducing our financial centers, divesting certain markets and also expanding our award-winning mobile capabilities and the customer base that uses that.
+As you can see this work also extends to our wealth management business. We've had long-term net flows for every quarter for a 6.5 years in wealth management. We have record low levels and significant higher deposit levels.
+Good products and advice, a growing sales force and two of the leading brands in the business position us well here. When you move to our global banking markets area you can see in the institutional side of the house set forth on slide 4 we saw solid activity in 2015. Loans to commercial and corporate clients around the globe have grown nicely.
+Client demand has been good and our bankers have met our challenge to capture market share responsibly. This focus allows us to demonstrate a strong 12% growth in loans and global banking in the past 12 months. And you can see the deposit growth has been strong here over the last year as well.
+If you look at the markets business Tom Montag and his team have done a good job reducing assets and lower their risk and still generating relatively stable revenue. Despite the recent market challenge we remain quite profitable in this business and well-positioned around the globe with both a strong FICC and equity platform.
+As we step back we remain focused on our core customer strategy. We continue to invest in the future even as we continue to address the legacy issues of the past. We have been able to grow even as the operating and economic environment remains in a low growth mode.
+Our model is solid but there is still plenty of work to do but also there's plenty of opportunity ahead for us. Overall I'm pleased with the progress we made in 2015 and we have more to do in 2016.
+In 2016 you should expect us to continue to focus on responsible growth. We'll continue to drive the investments made in the franchise to deliver the value to you as shareholders. We'll continue our sharp focus on risk management and we'll continue our cost discipline as we look to continue to improve return on capital metrics of our Company.
+With that let me hand it over to Paul.
+
+Thanks, Brian, good morning everyone. Starting on slide 5 we present a summary of the income statement returns for this quarter as well as the fourth quarter of last year which had similar seasonal aspects.
+We earned $3.3 billion in the quarter compared to earnings of $3.1 billion in 4Q 2014. Earnings per diluted share this quarter were $0.28, up 12% versus a year ago. Results include two significant charges that were previously announced and impacted EPS by $0.06.
+First, we recorded a pretax charge of $612 million associated with trust preferred securities which phased out of Tier 2 capital at the end of 2015. Second, we had a tax charge of $290 million associated with the UK tax changes that were enacted during the quarter. Lastly, we had a few other items that benefited EPS this quarter by a penny on a net basis.
+These included a negative net DVA impact in sales and trading that was more than offset by positive impacts of market-related adjustments in net interest income and some one-off tax benefits. Revenue on an FTE basis was $19.8 billion this quarter, up 4% from Q4 2014. Expenses were $13.9 billion, approximately $300 million or 2% lower than a year ago driven by good expense discipline across the Company.
+We also provide returns of a few other metrics on this page. I would remind you that client activity and revenue in our global market segment tend to be lower or lowest in the fourth quarter, affecting returns and other statistics.
+Lastly, as many of you are aware there was a recent accounting change that requires certain unrealized debit valuation adjustments to be recorded directly to OCI rather than through the P&L. We early adopted this change, effective as of the beginning of 2015. The slides and the supplemental earnings material that present 2015 results have been adjusted.
+Turning to slide 6 and focusing on the balance sheet, we grew deposits by $35 billion from Q3 and we used these increased deposits to fund responsible loan growth. In total assets declined $9 billion as increases in loans and security balances of $30 billion were more than offset by reductions in trading-related assets and cash.
+Liquidity rose to just over $500 billion, a record level and time to required funding remains over three years. Tangible common equity of $162 billion improved modestly from Q3 as earnings were offset by both the return of $1.3 billion in capital to common shareholders and negative OCI driven by security values. Tangible book value per share increased to $15.62, another new record high.
+Turning to regulatory metrics, we began reporting regulatory capital under the advanced approaches for the first time this quarter. On a CET1 transition ratio under Basel III, ended the quarter at 10.2% and really has no comparable metric as transition ratios in prior periods were reported under the standardized approach with lower RWA levels.
+On a fully phased-in basis, CET1 capital improved modestly to $154.1 billion. Under the advanced approaches compared to Q3 2015 pro forma estimate the CET1 ratio increased slightly to 9.8%. RWA was essentially flat as growth from commercial exposures was mostly offset by lower activity and balance sheet levels in our global market segment.
+We also provide our capital metrics under the standardized approach. Here our CET1 ratio was flat at 10.8% with modest improvements in capital, offset by modest increase in RWA. In terms of the supplementary leverage ratios we estimate that as of 12/31 we continue to exceed US rules applicable beginning in 2018 at both parent and bank.
+Turning to slide 7, we had strong loan and deposit growth this quarter. Recorded loans on an end-of-period basis increased $15 billion from Q3. This is the third consecutive quarter of recorded increases in total loan balances.
+We continue to see solid loan demand in our primary lending businesses, partially offset by runoff in LAS and all other. Excluding declines in LAS and all other, ending loans in our primary lending segments increased $22 billion from Q3.
+$8 billion of this increase was in consumer loans as GWIM increased mortgages and security-based lending. Consumer banking also saw good loan growth in mortgages as well as vehicle loans.
+We also had some seasonal growth in credit card partially offset by selling $1.7 billion of card receivables at the end of the quarter. Commercial loans were $15 billion spread across multiple industry groups.
+Turning to deposits on many basis they reached nearly $1.2 trillion this quarter, growing $78 billion, or 7% in Q4 2014. Growth was solid across the franchise. Consumer led the way, growing 9% year over year while both global banking and GWIM each grew at a 6% pace.
+Turning to asset quality on slide 8, while still strong we did see net charge-offs increase modestly from recent levels. Total net charge-offs increased $212 million versus Q3. $144 million was from consumer items previously reserved for and lower recoveries on the sale of NPLs in the fourth quarter versus Q3.
+We also saw a $73 million increase in net charge-offs from our energy portfolio. Outside of these two areas net charge-offs were stable compared to Q3. Provision of $810 million in Q4 was relatively flat with Q3.
+Reserve releases in consumer real estate and credit card were partially offset by reserve builds in commercial which were driven by increases in criticized exposures as well as loan growth. Reserve releases excluding the previously reserved items I mentioned earlier were roughly $200 million.
+On slide 9 we provide credit quality data on our consumer portfolio. Net charge-offs increased $137 million.
+The two items of note that make up this increase were reserved for in prior periods and did not impact provision expense in the quarter. $119 million was the result of collateral valuation adjustments.
+In addition we had some small charge-offs associated with our 2014 DOJ settlement. We expect to complete our commitments under this settlement in the first half of 2016.
+Adjusting for these two items consumer net charge-offs were relatively flat versus Q3. Delinquency levels and NPLs continued to decline and reserve coverage remains strong.
+Moving to the commercial side, on slide 10, net charge-offs increased $75 million primarily from losses in our energy portfolio. Outside of the energy portfolio, commercial losses remain very low.
+Given the focus on the impacts of low oil prices on companies in the energy sector we want to spend a minute to describe our energy portfolio and provide some perspective. The pie chart breakdown our $21 billion of utilized exposure to the energy sector. This represents a little more than 2% of our total loan balances.
+Within that $21 billion, $8.3 billion or less than 1% of total loans is loans to borrowers in two subsectors, exploration and production as well as oilfield services. We consider these two subsectors to have significantly higher risk than the rest of the energy portfolio.
+Of our $8.3 billion utilized exposure to these two higher risk subsectors $2.9 billion has already been downgraded to criticized. So 35% of the higher risk subsectors has already been downgraded to reservable criticized exposure, thereby driving a portion of the reserves. And allowances for loan losses for the entire energy portfolio is approximately $500 million, or 6% of the funded exposure of these two subsectors.
+Companies in the vertically integrated subsector represent $5.8 billion of the energy portfolio. We believe this subsector has a better ability to withstand lower oil prices. Nearly 100% of the companies have a market cap of $10 billion or more or they are sovereign owned and the average company has a market cap greater than $60 billion.
+We believe the remaining exposure in refining and marketing as well as other is also less dependent on oil prices. As part of our standard risk management process we stress test our credit portfolios including our pension portfolio. Our stress analysis of the energy portfolio includes various sustained low oil prices over extended periods.
+As an example, if we held oil prices at $30 per barrel for nine quarters we estimate our potential losses on the energy portfolio would be roughly $700 million. In energy and across our commercial sector we continue to support clients while managing lending limits and actively engaging with stressed borrowers.
+Before moving from asset quality I want to refocus on total provision expense and how one should think about it over the next couple of quarters. As we continue to assess and react to future changes in the energy sector we could see lumpiness that could potentially drive provision expense over $900 million.
+Turning to net interest income on slide 11, on an FTE basis NII was $10 billion increasing roughly $300 million from Q3. NII included a negative $612 million charge associated with three trust preferred securities. These securities were scheduled to be completely phased out of Tier 2 capital as of Jan 1 and with 7% to 8% coupons became expensive debt.
+NII also included $116 million of positive market-related adjustments to the amortization of bond premiums under FAS 91. NII excluding market-led adjustments and the charge on the trust preferred improved $188 million from Q3 to $10.5 billion. This improvement was driven by increased deposit balances which we used to fund growth in loans and securities.
+As we move into the first quarter, please note the following. First, we will have one less day of interest. Second, recent changes by Congress will lower the amount of dividends we receive from the FRB by approximately $50 million a quarter.
+Having said that, if the forward curve is realized and if we have some modest deposit and loan growth we still expect to show some growth in NII in Q1 2016 relative to our adjusted NII of $10.5 billion.
+With regard to asset sensitivity, at the end of the fourth quarter out overall asset sensitivity decreased slightly as a result of increases in long-end rates as well as security balances. As of 12/31 and instantaneous 100 basis point parallel increase in rates is estimated to increase NII by approximately $4.3 billion over the subsequent year. A little more than half of that improvement comes from the increases in short-end rates and a little less than one-quarter of the benefit comes from market-related adjustments.
+Turning to expenses on slide 12 non-interest expense was $13.9 billion in Q4, $300 million lower than Q4 2014. This was driven by good expense discipline across the Company.
+Litigation expense was a little higher this quarter at $428 million, exhibiting some lumpiness as we work to resolve legacy issues. Keep in mind that annual litigation expense decreased from $16.4 billion in 2014 to $1.2 billion in 2015. Legacy asset servicing costs excluding litigation finished Q4 a little better than our target of $800 million.
+As we have said our net goal is $500 million per quarter. Expenses excluding litigation and LAS were $12.6 billion and represents the fifth quarter out of the past six below $12.8 billion. We continue to look for ways to streamline and simplify how we do business.
+This is important because it allows us to invest in growth while maintaining relatively flat core expenses in a sluggish revenue environment. Importantly, this relative flatness continued even as we invested in additional sales professionals and improved technology.
+Looking towards expenses in 2016 let me remind you in the first quarter we will record as normal approximately $1 billion in cost for retirement eligible incentives. In addition, the first quarter typically includes seasonally higher payroll taxes of roughly $300 million. And if we experience additional rebound in Q1 sales and trading revenue this would also increase incentives and other associated costs.
+Turning to the business segments and starting with consumer banking on slide 13. Consumer earned $1.8 billion, 9% greater than Q4 last year. These results reflect good operating leverage on increased customer activity. The segment generated a strong 25% return on allocated capital.
+Revenue of $7.8 billion was up modestly from Q4 2014. Net interest income benefited from higher deposit and loan levels. Non-interest income was down slightly from lower mortgage banking.
+The decline in mortgage revenue reflects selling fewer nonperforming loans as we hold more on our balance sheet, in addition with the absence of $30 million in quarterly revenue from the Q3 sale of the small noncore appraisal business. Expenses declined 2% from Q4 2014 as the savings from reduction in financial centers and personnel more than offset higher product cost and investment in increased sales specialists.
+The cost of operating deposit franchise remains low at 177 basis points. Operating leverage drove improvements in the efficiency ratio to 56% as we continue to experience shifts in customer activity away from branches towards self-serve options. Mobile banking users increased to 18.7 million which is up 13% from Q4 2014 and deposit transactions from these devices now represent 15% of deposit transactions.
+Slide 14 presents consumers progress across a number of customer activities. I would highlight activities in three areas: loans, deposits and brokerage assets where we continue to grow responsibly. These three products are at the core of our rewards program where we share benefits with customers who deepen relationships with us.
+Average loans grew $12 billion from Q4 2014 in mortgages and vehicle lending. Ending deposit growth was strong at $48 million or 9% from Q4 while the rate paid decline to 4 basis points.
+Regarding brokerage assets, Merrill Edge asset levels of $123 billion are up 8% from last year even with declines in equity markets this year. Total mortgage production was up 13% from Q4 last year and stable with Q3. Looking at card activity which includes GWIM card issuance was strong at 1.3 million.
+Average US card balances of $89 billion were down modestly from last year but up seasonally from Q3 2015. US card credit quality was strong as net charge-offs remained at decade-low levels of 2.5% with a risk-adjusted margin of 9.4%. Credit spending volumes finished on a high note as Q4 spending was 5% higher than last year, outpacing what we believe to be total market spend levels.
+Debit spending was strong as well. For example, on Christmas Eve day we saw record debit card spending of more than $1 billion.
+In our consumer segment we expect technology adoption by customers to continue to be a cornerstone of not only improved customer satisfaction but also efficiency gains and operating leverage. The latest examples of this are around digital selling and appointment setting.
+Digital sales in the fourth quarter were up more than 31% from last year. Digital appointments reached more than 16,000 in a recent week. We expect these adoption trends to play an increasing role in future performance and customer satisfaction as we continue to advance online and mobile capabilities.
+Turning to slide 15, global wealth and investment management produced earnings of $614 million. Results were down from Q4 last year driven by lower transactional revenue and the impact of the market decline on asset management fees. Transactional revenue continues to be impacted by the shifting of activity from brokerage to managed relationships as well as market uncertainty.
+NII benefit followed loan growth and solid deposit growth but was offset by the Company's ALM activities, leaving NII relatively flat with Q4 2014. Non-interest expense was modestly higher than the year-ago period. Investment in client facing professionals continues while lower revenue caused a decline in incentive compensation that was more than offset by amortization of stock awards issued in prior periods.
+Pretax margin was 21%, down from Q4 2014. Beginning in the first quarter of 2016, we will benefit from lower expense resulting from the completion of amortization related to advisor retention awards given at the time of the Merrill Lynch merger.
+Moving to slide 16, despite the volatility in market levels we continue to see solid client activity and we continue to invest in the business growing wealth advisors 5% from Q4 last year. Long-term AUM flows were $7 billion and remain positive for the 26th consecutive quarter. Deposit flows were strong growing end-of-period balances $15 billion from Q3.
+By the way, this may have been driven in part by client concerns with market volatility. Loans continue to grow, improving 10% from last year. This is the 23rd consecutive quarter of average loan growth in this segment.
+Turning to slide 17, global banking earned $1.4 million, down 9% from Q4 2014 but still generating a 60% return on allocated capital. The earnings decline from Q4 was driven by higher provision expense. Provision expense was up $264 million from Q4 last year driven by higher energy-related charge-offs and reserve build to loan growth and energy-related risk.
+Revenue increased modestly from Q4 2014 while expense declined modestly. Driven by higher loan balances NII improved despite spread compression and the allocation of the Company's ALM activities including higher liquidity cost. Non-interest income benefited from higher treasury services revenue, higher leasing revenue and a small gain from the sale of a foreclosed property, partially offset by lower IB fees.
+Looking at trends on slide 18, in comparing to Q4 2014 IB fees of $1.3 billion were down 17% as leveraged finance and equity issuance was partially offset by advisory fees that were at second-highest level since the Merrill merger. From a marketshare perspective we maintained our number three global fee ranking.
+Looking at the balance sheet loans on average were $320 billion, up 12% year over year. The growth was broad-based across C&I, real estate and leasing. We continue to experience some spread compression although it has moderated relative to a year ago.
+Asset quality of new loans was consistent with the overall portfolio. On deposits we saw good performance with average deposits increasing by $16 billion or 5% over Q4 2014. The mix of these deposits remains very good with less than 5% classified as 100% runoff balances.
+Switching to global markets on slide 19 and comparing to Q4 last year we are pleased with the results here given challenging market conditions as the teams increase revenue while using lower asset levels and less VAR. Global markets earned approximately $200 million but we think one should consider results excluding DVA. On that basis adjusted earnings were $308 million which was relatively flat to Q4 2014 on the similarly adjusted basis.
+Note that our net deviated loss this quarter was $198 and compared to a loss of $626 million in Q4 2014 which included an initial FTE adjustment. Total revenue excluding DVA improved $313 million, or 10% from the fourth quarter last year on improved FICC sales and trading.
+Outside of sales and trading global market share of lower investment banking fees was offset by a gain on the sale of an equity investment. Non-interest expense increased 9% in line with revenue improvement.
+Moving to trends on the next slide and focusing on the components of our sales and trading performance, sales and trading revenue up $2.6 billion excluding net DVA was up 11.5% in Q4 2014. Compared to Q4 last year FICC sales and trading of $1.8 billion improved 20%, reflecting improvements across most products notably in rates and credit-related products.
+Equity trading of $882 million declined 3%, reflecting lower client activity. Average trading-related asset levels were down 9% in Q4 2014 while VAR was down 14%.
+Turning to legacy assets and servicing on slide 21, this segment lost roughly $350 million in line with the prior year. Focus areas here are mortgage banking income, the number of delinquent loans and expenses all compared to Q4 2014.
+First, mortgage banking income which improved slightly was driven by three factors. Rep and warranty provisioning improved $237 million to a provision of $9 million this quarter. That favorability was offset by a decline in servicing fees of $108 million as the units serviced declined as well as a decline in net MSR hedge performance of $152 million.
+Next, the number of first mortgage loans that we service that are 60 days delinquent continued to decline and are now at 103,000 units. And last, the team did an excellent job lowering expenses. Excluding litigation we achieved our goal of $800 million, moving costs down $309 million or 28%.
+On slide 22 we show all other which reported a loss of $289 million. This was an improvement of $86 million from Q4 2014. This loss was driven by the $612 million pretax charge associated with our trust preferred as well as the impact on the UK tax law changes.
+This was partially offset by gains on debt security sales as well as reserve releases on consumer real estate loans booked in all other.
+A comment or two on taxes before wrapping up. The Company's effective tax rate for the quarter excluding the UK tax charge was 25%, reflecting reoccurring tax benefits plus a few small one-off benefits. We would expect the tax rate to be in the low 30s for 2016 excluding unusual items.
+Before closing I want to cover our early adoption of DVA accounting in more detail. In January of this year the Financial Accounting Standards Board issued an update to allow early adoption of a new rule regarding recognition of DVA on financial liabilities from changes in our own credit spreads.
+The update means these types of debit valuation adjustments will now flow through OCI instead of the income statement. We believe this change makes our earnings comparisons more meaningful and easier to understand, therefore we adopted early.
+We restated all prior years, excuse me, we restated all propose this year per the FASB rules and those numbers are contained in the supplemental package. This has no impact on capital as it moved dollars between retained earnings and OCI but it did impact revenue earnings taxes and EPS in the first three quarters of 2015.
+The changes reduced previously reported EPS by approximately $0.02 each in Q1, Q2 and Q3. This accounting standard adoption did not impact DVA on derivatives which continued to flow through trading account profits.
+Okay, let me conclude by offering a few takeaways. Although the US economy is improving slowly revenue growth remains challenging. This quarter we continued our progress on those things we can control and drive.
+These include delivering for clients and customers within our risk framework and driving client and customer activity that will result in sustainable profits and returns. Our results reflect this focus. We maintained a strong foundation of capital and liquidity.
+We grew loans, deposits and investment flows. We continue to invest in our franchise by adding sales professionals and improved technology. Our strength, global capability and experience allowed us to deliver for clients in a challenging market environment.
+And we did all this while closely managing expenses. With that we will open it up to Q&A.

exam/part2_problem1/Problem_1_Conference_Call_Segments/call_33_questions.txt

@@ -0,0 +1,202 @@
+Question_1:
+
+    Good morning. Can you talk about the outlook for the core costs beyond some of the lumpy items in 1Q?
+And then specifically maybe comment on how you feel like your markets business is sized. We've obviously seen some cost savings announcements at your US and non-US peers. I want to get a sense of how you feel you're positioned for the markets?
+
+Question_2:
+
+    Just in terms of the staffing and the positioning there how you feel for I don't know about the current environment but just not bouncing back in a big, big way. And obviously we're seeing reductions being announced at some of your US and non-US peers. So how are you feeling about the sizing of your business for the environment you expect?
+
+Question_3:
+
+    And just on the timing of the LAS getting to that below $500 million you did disclose a big drop in the headcount if we look year over year and obviously there's delay in terms of costing [self] coming to down but what's the timing of getting to that $500 million or below?
+
+Question_4:
+
+    Okay, thank you.
+
+Question_5:
+
+    Hi, good morning. I just want to dig in on a couple of things, one was on energy since it's the flavor of the day.
+You know you gave a lot of color there and you indicated that those $30 holds for nine quarters, that's a loss of $700 million. I just wanted to understand is that already reserved for or that's over and above what you've reserved for?
+And then maybe you could give us an even more bearish case, if we go below $30 what you've got baked in? Because I don't think it's linear, I just want to understand how you're thinking about it.
+
+Question_6:
+
+    Right. So when you indicated that if $30 holds for nine quarters your model suggests a loss of $700 million. That's already reserved for or that's on top of what you already have reserved?
+
+Question_7:
+
+    Okay, I get that.
+
+Question_8:
+
+    And then could you talk a little bit about the reserve release that's still possible from the other portfolios? You had a $200 million reserve release this past quarter. Just wondering what the legs are on that?
+We've seen other institutions essentially finish up their reserve release. I know you had a big legacy book, so maybe there's a little more legs there. Just wanted to understand how you're thinking about the trajectory there.
+
+Question_9:
+
+    Okay. So there's still some legs but at a decelerating pace?
+
+Question_10:
+
+    Okay, thanks.
+
+Question_11:
+
+    Hi, good morning, Paul. I was recalling I think you had for a goal this year to generate positive operating leverage. I was wondering how you feel about the ability to achieve that, what kind of revenue environment are you planning for and how will you manage expenses to try to get some positive operating leverage this year?
+
+Question_12:
+
+    Okay. And then Brian, could you talk a little bit about what your goals will be with your 2016 CCAR submission? Are you looking to make some progress on both the dividend and buyback potentially and if you maybe could share some thoughts about that?
+
+Question_13:
+
+    Okay, and Paul, one quick follow-up on the NII, is there a benefit from the paydown of trust preferreds that you're get in 2016? And is that why you're able to grow the core NII a little bit in 2016?
+
+Question_14:
+
+    Okay. And so it's really just the loan growth and pretty stable rates driving some core NII growth?
+
+Question_15:
+
+    Okay, thank you.
+
+Question_16:
+
+    Okay.
+
+Question_17:
+
+    Thank you very much. On your NPAs you have really good disclosure, you're getting it down to 103,000. Did you sell any this quarter or was that all workouts through your servicing?
+
+Question_18:
+
+    And then, at this point when do you think you can get that down to I guess it's not a normal level because you're just going to run this whole portfolio off. Could you have any idea when that would be over with?
+
+Question_19:
+
+    Okay, guys, thank you very much.
+
+Question_20:
+
+    Hey, good morning. Maybe just a quick question on deposit behavior. Since the rate hike have you seen anything unusual? I would assume it would be more on the institutional side where you would see movement at this point.
+And then maybe you can give some update on how you're thinking about the deposit betas this year.
+
+Question_21:
+
+    And do you still think that make sense or do you think that's relatively conservative?
+
+Question_22:
+
+    Right, it will be more back-end weighted.
+
+Question_23:
+
+    Okay and just one last question, maybe on the expense side, if we look at, I mean you guys have done a good job, but if you look at your core expenses normalized for all the puts and takes it still seems like your efficiency ratio would be sort of in the 63%, 64% range and a lot of your peers are well below 60%. Is this sort of you grow into the improving efficiency ratio with the revenues as you reinvest or is there do you think you can get there more quickly? Just trying to get a sense of how you get the trajectory into more in line with the peer group on the efficiency ratio side?
+
+Question_24:
+
+    Okay, I appreciate it. Thanks.
+
+Question_25:
+
+    Hi, thanks. So I think you put the heat on a little bit on loan growth over the last couple of quarters. And if you look at lending in your primary lending segments it's picked up and I think that's good.
+The question I have is with new information that we have, I mean the markets digesting and anticipating I don't know if I'll call it a recession but a lot of fear around recession on lower oil and China-related fears. The question I have is if you look at the core loan growth are you still okay running it at this level? Do you feel like your customer base that you're making these new loans to are a little more insulated to the world that the market is fearful of?
+
+Question_26:
+
+    Great. One follow-up on the FA growth you noted a 5% year on year, I'm just curious there's not a heck of a lot of core growth in that business. I'm just curious how much is coming from your training programs versus recruiting both traditional and nontraditional sources?
+
+Question_27:
+
+    All right, thank you very much.
+
+Question_28:
+
+    Hi, good morning. So actually I had a quick follow-up to the topic Glenn was just addressing.
+Relating to GWIM and just some of the margin pressures that we've been seeing over the last couple of quarters I wanted to get a better sense as to how much of that do you think is cyclical versus secular, whether it be DoL-related pressures or just intensifying competition for advisors? And along those same lines whether a 30% margin target is still achievable once we get to a more favorable rate backdrop?
+
+Question_29:
+
+    Just about to what extent if you could at least segregate the secular versus cyclical headwind components on the revenue side? But I think that you adequately addressed that in your response.
+
+Question_30:
+
+    All right. Thanks, Brian. And maybe just switching over to the credit side, I appreciate the detailed disclosure you guys have been giving on the energy book and was just hoping you could provide both exposure and reserve levels, maybe some other areas of the commodities complex, specifically metals and mining.
+
+Question_31:
+
+    Okay. And then just as a follow-up to the initial provision guidance you had given, thinking about it from a modeling perspective is the right way for us to be thinking about the provision rate for 2016 taking that $800 million to $900 million quarterly run rate plus whatever additional energy driven reserve building we should be contemplating which presumably is incremental.
+
+Question_32:
+
+    All right, got it, guys. Very helpful. Thanks for taking my questions.
+
+Question_33:
+
+    Thanks very much. I was just wondering if you could help me think through a little bit your GAAP and risk-weighted assets over the first half of the year given the growth dynamics that are pretty robust and some of the runoff and then also some of the changes that are going through on the RWA calculations.
+
+Question_34:
+
+    Correct.
+
+Question_35:
+
+    And so what are the implications of that then for your regulatory capital ratios?
+
+Question_36:
+
+    Thanks. Maybe if I can just sneak in one more. When you talk about an appropriate buffer are you thinking a method 1 or a method 2 as a baseline?
+
+Question_37:
+
+    Okay, thanks very much.
+
+Question_38:
+
+    Thanks, good morning. Just a quick follow-up on the loan growth side, you talked about the credit quality underneath the commercial side. But after 13%, 14% loan growth year do you think you can maintain that type of pace of growth given some of the concerns we've seen underlying even if quality is holding up?
+So just I guess your general outlook for loan growth rates. And can you match or maintain what you did last year? Thanks.
+
+Question_39:
+
+    Okay. Continue to be driven by commercial would you say?
+
+Question_40:
+
+    Just a quick second one. You've been growing the mortgage business again. What's your outlook for continuing to take share in the mortgage business and have we seen the bottoming of results on the fee side of mortgage?
+
+Question_41:
+
+    Thanks, guys.
+
+Question_42:
+
+    Hi, good morning. I guess on commercial if you could follow up on the ex-energy comments, you know in your experience what are some of the best leading indicators for the commercial credit cycle and what kind of trends have you seen again ex-energy and those leading indicators over the past couple of months that gives you confidence that things are stable?
+
+Question_43:
+
+    And then if I could ask a follow-up along the same lines on the consumer side. I just two parts, one you made the point that even in energy-heavy geographies you're not seeing any adverse change in the consumer.
+In part specifically just since it's such a big credit line are early delinquencies still coming in better-than-expected or are they stable or how would you characterize the current early delinquency trends? And then on home equity since again that's another big outsized portion of the reserve is there any update you can give us on how the first wave of HELOC recasts or switches to amortization schedules have performed versus what you had modeled?
+
+Question_44:
+
+    Hi, I have one question for Paul, one for Brian. Paul, lower energy prices you said can help certain segments such as consumers.
+Can you give any examples of that? And also on the energy topic, if oil stays at $30 then your provisions for energy would go up by how much? I didn't understand the answer from before.
+
+Question_45:
+
+    Do you think people are being too negative on the decline in oil prices? You're implying it has a nice stimulative effect. But people sure aren't thinking that these days.
+
+Question_46:
+
+    And then if I can shift gears, Brian, I know I've asked this question in other years but I know you're not satisfied with the mid-60s core efficiency ratio and I know you're not satisfied with a single-digit ROE. So what is your specific financial target for efficiency in ROE and what is your timeframe to get there?
+
+Question_47:
+
+    Any expense initiative plan, Paul, since you've had a couple of quarters now to take a look at that? Are we looking for like an extra $1 billion or I know kind of like a new BAC program or what are you thinking about there?
+
+Question_48:
+
+    All right. Thank you.
+

exam/part2_problem1/Problem_1_Conference_Call_Segments/call_34_answers.txt

@@ -0,0 +1,315 @@
+Answer_1:
+
+    Look about from Q4 to Q1, $300 million in core expense decline. $100 million of that is the roll off of the amortization of the awards we gave to advisors around the Merrill Lynch acquisition. $200 million of it is just good, solid expense discipline being driven by SIM and other initiatives. If you look at the supplement you're going to see expenses came down in nearly every category.
+
+Answer_2:
+
+    Jim, I think there's a lot more to do here because at the end of the day adjusting the efficiency ratio for the two major adjustments, which won't reoccur next quarter, you get in the mid-6 -- 66, 67 and we need to drive that down in the low 60s even with the realities of the wealth management business not being as profitable and a big part of our revenue stream but very return on capital beneficial.
+So then if you flip and say how are we going to get down there? You're exactly right. If you look, we drifted down even further this quarter. Numbers of branches, smaller numbers of customers, but deposits are up. If you look at headcount in Consumer we continue to reposition it towards the sales and relationship management side and away from the transactional side.
+And so that digitization, which is -- we're at $19.6 million, Mobile Banking consumer customers. And interesting enough we're growing on the online customer base, meaning computer-based customers grew over 1 million customers from last year's first quarter. So all that just drives more and more transactions, more and more cost structure of the day-to-day transactional stuff into those environments and saves us money overall.
+And at 170 -- 170 basis points, there was a time when that was 300 basis points five, six, seven years ago. We thought we'd got it into the low 2s -- 220, 240, and thought that was pretty good and now we're at 170, and my guess is we continue to push it down.
+
+Answer_3:
+
+    It's going to be quarterly $100 million beginning in Q3 until the fund gets up to its adequate level and then it will come down.
+
+Answer_4:
+
+    Sure. Look, in terms of reserve build, we think the reserves we have right now are the right reserves for our portfolio. Built in releases in the future of going to be based upon how companies adapt to the level and duration of low oil prices as well as our net charge-offs and we think companies are adapting.
+In terms of reserve releases, we would expect releases in Consumer, but at a slower pace than we've seen in the past as we run off the legacy portfolio and dependent upon the real estate market. Consumer releases would likely go to offset any builds in commercial.
+
+Answer_5:
+
+    I think from a global perspective we continue to implement all the rules and regulations of change over the last few years. And importantly, Volcker was an implementation mid-this year. And all lot of the hard work has been done if you think about LCR, SLR, the core Basel rules and the changes.
+We absorbed the advanced increases over the last year and now we're above the 10% advanced including the $100 billion or more of RWA for the commercial assets and the off risk of capital of $40-billion-odd. And so, we've absorbed a lot of that into the run rate and I think we're now to the point of fine-tuning the Company around the rules and regulations and continue optimizing it.
+And I think that -- we've obviously submitted the CCAR work. We did a tremendous amount of work just on the expense side. That was another $40 million of incremental expense this quarter in the first quarter to continue to get us using third parties to continue to make sure we kept our run rate at best-in-class. And so that's in and being reviewed as we speak.
+And then we've got obviously, as you spoke about, the continuation of finishing up the resolution plan, which we -- has probably spent at least $0.25 billion on external parties to help us with and a lot of internal work. And that's all been in the run rate as we speak and ultimately provide relief as we get through it.
+So I think overall you've seen us implement most of the rules and optimize the Company. We need to continue to do that. That ought to provide some RWA opportunities in the future, but it continues to take time. But we've -- I think we're in pretty good shape and now the question is just to finish up a couple of these key tasks on the resolution plan that you can see. Unprecedented transparency -- you've got the same letter I got, so you know exactly what we have to do, and we'll get it done.
+
+Answer_6:
+
+    If I could just have maybe two thoughts. One, this is not an episodic activity for us. This is being  and meeting the standards under the regulations. That's one.
+Two is it's not a group of people who are doing this. It's everybody in the Company. It's -- we have a significant -- it's really being led in many ways by the line of business. We've got involvement from all of the support functions, so it's become part of the culture of the Company to get to the right standards across all the regulations.
+
+Answer_7:
+
+    So outside of -- on the commercial side, outside of energy and metals and mining, we don't see issues with credit quality. We're obviously watching very carefully, but it feels very good outside of those two sectors. What was the second part of your question?
+
+Answer_8:
+
+    It's on the CCAR results.
+
+Answer_9:
+
+    Oh, yes, yes, absolutely. Look, if you look at our CCAR results, either on an absolute basis or on a comparative basis, you can see what a third-party, the Fed, thinks our losses would be. You're going to see that again in a few months. And I think you can really see, when you look at those results, how much we've improved the credit quality of the Company of both -- across both Consumer and Commercial.
+
+Answer_10:
+
+    Over time, Betsy, our view is that we can grow the Company and grow it responsibly as we talk about. So there's opportunities for growth and that's -- on the Consumer segment a lot of questions we get is how can you grow and keep your credit discipline? You must be changing.
+You can see that this stuff coming on today is as strong as anything we put on and the Commercial you should assume is the same. And so there is still plenty of opportunity for us to grow, which is just good for earnings and prospects.
+When you flip it to the other side of it, yes, our job from the management team was to set this Company up to -- it would never have the kind of risk embedded in it that would lead us to difficult times and a real recession, leave alone the CCAR analysis. And as you see the CCAR analysis over time, you see our loss content continue to come down and that should serve us in good stead to be able to take out capital over time, as you said.
+And if you think about in the Commercial book, it's -- things like commercial real estate, we have been very disciplined and what we inherited through all the deals and development loans -- all that stuff is really nonexistent at any consequence, so we feel very good about the Commercial book.
+
+Answer_11:
+
+    Right.
+
+Answer_12:
+
+    So let's -- just framing from the overall top. Last year this quarter we had 17 million mobile users; this year we have 19.5 million. And as Paul said, there was an interesting point that the nominal rate of growth this quarter was one of the highest we've ever had. So even though smart phones have penetrated, you think you've kind of penetrated the customer base, it's still growing fast, so that's number one.
+And then as I said earlier, Betsy, and you've followed our Company for a long time, you might -- you would've seen a plateauing in the online -- the computer-based banking, for lack of a better term, people coming in through BankofAmerica.com. And that now is growing as fast [nominally] or faster mobile which means people are also using both sides. And so that's one thing. So the core activity is growing.
+And if you look at the activity in the core customer base from card usage -- both debit and credit card usage up 4% plus year-over-year, and that's good. The online mobile part of the spend is now up to 20% of the spend and it's growing 15% per year versus the 4%, 4.5% growth on the total. So that's tremendous.
+Then if you get in the wallet categories, just to give you a sense, just in the last week the growth rates in enrolled cards was 12% week to week growth in terms of volume enrolled, 100,000-odd cards came on. The payment usage was up 3% week over week, so you see this phenomenal growth rate. If you annualized that out, that's a weekly growth rate and it ebbs and flows with holidays and everything else, but think about that.
+And you see that usage going up, but the mobile wallet payments are still less than 0.2% of the total payments made with plastic at Bank of America. So you still have lots of opportunity to convert activity to a platform which is more convenient for the customer.
+And then the other thing we've -- and then a part of that you talk about is the new consortium to build a new P2P deployment for the banking system. We're up and operating that. We still have a few more months before the rest of the colleagues in the consortium get up and then we'll start to push that out in the market heavily.
+I think it's a tremendous improvement over what we have today, even though we have a fair amount of volume on it today through clearXchange and that was an effort to get us all together so we could have a very interoperable payment network.
+We've got the Visa Checkout work that's going on where we're preloading customers' cards in their wallet. We're about, as best we can tell, 13%, 14% of all the spend in Visa Checkout today and we've got 1 million-plus cards; we'll drive that forward.
+And if you put that altogether you're seeing tremendous volume off of all these mechanisms. And in the month of March, to give you an example, we had almost $60 billion of payments off the computer-based platform and about $20 billion off the mobile-based platform. So think about the size of that.
+Now given all that, we still sent out about $8 billion of cash out of our ATMs in the month of March on -- that's $0.25 billion a day or more. So it's still -- you have to have all the capabilities and that's what we're building towards. And going back to I think Jim's question earlier, the cost structure keeps moving in your favor as you keep driving this activity through.
+
+Answer_13:
+
+    Yes, eventually is always an operative word. Even today I think there's about a quarter million checks a day, people take a picture of them and send them in on their mobile phones and that didn't exist three years ago. But there's still a quarter million of them that would have to go way, so it will be a while.
+
+Answer_14:
+
+    Yes, it's everything about payments: processing payments, fraud losses, discussions with the customers about the payment -- the multiple payment faculties that they could use and how they interface. And so, it has been a huge driver. Remember we went from 6,100 branches down to 4,600 or whatever today.
+And the customer base has increased by 10% and the volume of deposits is up by I think 30% to 40% and checking deposits are up dramatically. So I think year-over-year checking deposits were up 8% over 10% I think, Lee, right? Something like that. So the activity is level is growing up on a smaller and smaller base.
+And that cost structure in retail is driven by two things, the people, which we're increasing sales in relationship management content, and the physical plant. And you're absolutely right, driving all that out -- near as we can tell, we spend about $1 billion a year just moving cash around in our Company. So less cash moving around saves us money.
+
+Answer_15:
+
+    The goal is to have it keep going down every day, week, month, quarter. And I think, Betsy, with all these things you've got to be careful about letting my consumer colleagues think they are doing too good a job. So I keep putting pressure on them, so I'm not going to give them a goal that they think they've achieved something.
+
+Answer_16:
+
+    Sure. So look, we're hesitant to give guidance. Given the volatility rate that we've experienced, guidance has not been that helpful, in my opinion, but I'll give you a couple of thoughts. $10.6 billion, if you think about maybe as a launching off point, given some of the seasonal NII gains we had in Q1 I think a more reasonable launch point would be more like $10.5 billion.
+Then you go to the second quarter, we've obviously got to deal with lower long-term rates. Second quarter is always a little bit seasonally lower for us. So there's some -- progress there is going to be challenged. But I think as you head to the third quarter and fourth quarter, when you consider what we're -- think we can do on deposit growth and loan growth, and if rates follow the path along the forward curve, we would expect to make progress in the latter half of the year.
+
+Answer_17:
+
+    It's a leap year, so I think it's normally down 2, but now it's down 1, or --  flat, yes.
+
+Answer_18:
+
+    Sure. So March felt, I think, a lot better than certainly January and February. And April it's really too early, but April feels, at least is starting out, like it's more like March than it is like January and February.
+In terms of Brexit, we are focused on our clients and customers. They are going to need -- there's going to be volatility potentially around the vote and around any changes after the vote. And we're working very closely with our customers to address how they need to manage their risk.
+From our own Company perspective, we are -- we're going to listen. It's a UK -- it's the UK's decision. We're going to -- after we find out what the decision is and understand it, then I think we will react to it and do what we think is in the best interest of our customers and clients and shareholders and other constituencies.
+
+Answer_19:
+
+    No, I wouldn't say -- look, I think you heard from competitors that Asia was a little better in March. We're stronger in the US than we are in Asia. We have a significant business there, but -- so there was some improvement out there. But, no, I wouldn't have any more specifics than that.
+
+Answer_20:
+
+    Sure. 40% of the $6 billion is going to come from an increase in short end rates and then the other 60% is split equally between FAS 91 and reinvesting at longer-term rates. The FAS 91 piece is relatively straightforward. I mean we had a $1.2 billion decline in Q1 because interest rates went down 50 basis points. We're going to retrace that if they go back up.
+
+Answer_21:
+
+    Look, if you think about our ROA and you adjust for FAS 91 market-related NII adjustments and retirement-eligible expenses, you're going to get into the mid-70s. And then if you give us some credit for the progress we've made in LAS over the last few years and continue with that progress, you're going to get even higher.
+From there it's about growing loans -- growing deposits, growing loans, putting on, like you said, assets that are accretive to what we have on the books right now. And, importantly, continuing to grind and work on expenses. And so, that's what we've got to do.
+
+Answer_22:
+
+    It's compensation related given the fact that revenue was a little weak because of the volatile markets. That's not to say we're not working on bringing down costs in that segment as well, but specifically to answer your question in Q1, that's what drove it.
+
+Answer_23:
+
+    Yes, it's -- they are working on all the elements expense, so you've got that right. But also remember as the NII increases there's not as much expense attached to that. So that's one of the operating leverage points in wealth management that we were losing a lot last year that we're going to get back as short-term rates rise because they are a heavy deposit business.
+Remember, they alone are $260 billion of deposits in Wealth Management, which those deposits and loans continue to grow which continues to produce more core NII. As well as what everybody thinks of as being a large Investment Management trust fee type company. But they are a big bank and the loans grow and that's going to drive that up and that is marginally more profitable for the shareholder.
+
+Answer_24:
+
+    I would classify it as little to very little sold this quarter. It's just working service loans -- delinquent service loans down.
+
+Answer_25:
+
+    Very little from any production that was done after the crisis, Paul, as you could expect. So they're delinquency statistics. So really you still have modifications that -- the re-modification work going on because people have had modifications for years. Some portion of them go back in the situation and then you have just the normal flow.
+But that number keeps working itself down and, based on the quality of our portfolio, should come down even significant to where it is. This is a grind now. This is just working through -- if some were involved in litigation take time. It's just a grind to work them out now.
+
+Answer_26:
+
+    Well, as we've told you, our target -- our next weigh station on improving this thing is $500 million at the end of the year and we're well on our way to get there, Paul. But your experienced in this business. That is not an acceptable number, but I just need to keep them tracking it down.
+What's interesting, and if you look at the headcount we show you and stuff, what is changing is they're headcount down is at 9,800 or something like that, 9,900 at the end of the quarter so it's come down from a high of 58,000 internal people plus external contractors dramatically.
+Now we've got to get some of the harder costs out, meaning the systems and technology that was overbuilt for $12 million servicing portfolio, the real estate, and that takes a little harder work. So we're grinding all that out. So say $700 million and change to $500 million and change and ultimately we've got to get it down to significantly below that $500 million to make it makes sense as a servicing.
+I think it's okay, but to actually be an effective servicing platform we should drive it down. Your point about immateriality is something -- this is becoming less and less of an event to us. And so what we've got to execute on -- it's not going to have the impact of when we had $3.1 billion of quarterly costs a few years ago.
+
+Answer_27:
+
+    $1.4 million of 60 plus day delinquent loan service.
+
+Answer_28:
+
+    So $500 million by year end, that's our next goal, and then when we get there we'll give you another one. But we're just -- like I said earlier to Betsy on the Consumer side, we've got to keep moving this in the right direction and we have an idea where we'll get to, but we want to make sure we get the first piece out, it's $1 billion a year.
+
+Answer_29:
+
+    Sure. Look, this is some perspective. We're maintaining our market share in auto lending, but we're very focused on originating prime and super prime loans. Average FICO score, as you can see on the page, of 778 and debt to income ratios are at all-time lows.
+Again, we're not following the market from a structuring standpoint to the longer tenors. 90% of our loans are 73 months or lower, so that's our strategy. And I think if we stick to that, we'll be fine. We did pull forward from -- we had an opportunity this quarter to get more flow. We had planned to do that in later quarters. We pulled that volume to this quarter and we'll evaluate it in future quarters.
+
+Answer_30:
+
+    And you asked a question about residual values and the volume of cars sold and what happens. We also, as part of our stress testing of our -- stress testing our portfolios, internal stress testing and also for the CCAR DFAST work, we stress the collection -- the recognized collection value of cars down 40% and it's not -- it'd obviously have more losses, why wouldn't you?
+But what really controls your losses is the quality portfolio and what runs through that calculation. And that number is, because of the high quality is very low. So we test that question you're asking which is what happens if residual values or used car values continue to -- fell dramatically in a recessionary environment or something and that's one of the things we test, and it's not a big number.
+
+Answer_31:
+
+    We had the opportunity -- we have relationships where -- on the flow side and when we see opportunities we can pull some of that in. Originations come through the branch, they come online and they come through our relationships with financial institutions who have relationships with dealers.
+
+Answer_32:
+
+    And our relationship with dealers also.
+
+Answer_33:
+
+    Yes, our relationship with dealers. So every once in a while we'll see an opportunity to add some balances and if it's within our underwriting standards we'll consider it.
+
+Answer_34:
+
+    Yes.
+
+Answer_35:
+
+    Well, hi, Mike. Thank you. So I guess I would start by again -- just so everybody understands the facts -- we -- if you adjust for FAS 91 and FAS 123, our return on tangible common equity would be roughly 8.5%. And again, as I said before, we've made a lot of progress in LAS. And if you give us any credit for the progress for the progress we think we're going to make in the future, we're going to be able to take that 8.5% even further.
+We've made, I think -- so the key is we've got to continue to make progress on expenses. I'll get to revenue in a second, but we've got to continue to make progress on expenses and, again, I think we've demonstrated that we can do that. If you look just year-over-year, expenses are down $1 billion or 6%. If you go back to Q1, Q1 2011, we've taken quarterly expenses down, core quarterly expenses down $3.5 billion, so that's a $14 billion run rate. We've got to continue to do that.
+If you look this quarter at our Consumer and GWIM segments, you can see the operating leverage. If you look at the whole Company and you back off FAS 91, you can see the operating leverage. So we've just got to continue to work on expenses. We're not sitting around waiting for rates to go up. It would help if they did, and that's what we're focused on.
+
+Answer_36:
+
+    So, they're going -- you sort of have identified the opportunity that we have in a different market environment. It's a judgment I think we have to make. But a portion of these savings are going to increase growth in the future. A portion are going to the bottom line.
+That's the lever we can pull over an extended period of time to adjust for the market environment. We've proven we can get the expenses out. If we wanted them all to drop to the bottom line we could do that, but we need to invest in growth at the same time and we've got to balance that.
+
+Answer_37:
+
+    Look, in terms -- we are focused on driving down expenses every day, every quarter, every week. You can call it anything you want. We've got a lot of focus on this and I think you're going to continue to see progress.
+Our operating leverage on an adjusted basis this quarter was meaningful. You can see it. If you adjust for FAS 91, revenue down 3%, expenses down 6%. We're getting the operating leverage. Look at the GWIM segment, look at the Consumer segment. We are focused on it.
+
+Answer_38:
+
+    A couple things with that. The 26% -- if you think back across the last year when we discussed this, we had the ATP piece. And so a chunk of that is that, the other chunk is good expense management. I said earlier the margin net interest income stabilizing, improving. They been growing the balances now. It's more stable. So I think it is a good starting point.
+It will -- in some cases you would hope that it wouldn't go up a lot because that would mean asset management fees and other things are growing, which attach more compensation, less marginal profit, which will be good news, because the overall profit will grow better. But you should assume that that's a level we should hold onto if -- in a relatively stable environment as we see this quarter starting out at.
+When you go to the fiduciary, we've been working on that, obviously. Just because it's the final rule and it came out recently we've been working on it. So I don't think -- I think to the extent there's cost embedded in that, a lot of it's in the run rate and it will be marginally in the run rate for the next few quarters. It's not a hugely substantial cost and if you even -- look, we've spent a lot of time educating our teammates about doing it. There are operational costs but I don't think it's material in the grand scheme of things.
+
+Answer_39:
+
+    I'll just add a little bit to that. I think from the very beginning we supported the fundamental objectives of the Department of Labor. And if you look at our goals-based strategy, it delivers a lot of what they are getting at with that rule in terms of the best interest standard.
+Our Merrill Lynch One advisory platform, which we successfully completed the transition of a lot of clients this quarter. That's a great example of how we've been up front to create an experience that is really transparent, single fee schedule, etc. That's a significant investment. And we're guessing that that investment is really going to pay off here in terms of implementing this rule.
+If you look at the roughly $2 trillion of [GUM] client assets we have outside of deposits and loans, we think the Department of Labor will probably impact less than 10% of that. And certainly given the implementation schedule we wouldn't expect to see much of an impact, if any impact, in 2016 and as we digest the rules we'll just have to evaluate how it's going to affect out years.
+
+Answer_40:
+
+    That's correct.
+
+Answer_41:
+
+    We're going to continue -- like every other segment, we're going to continue to work on bringing our costs down in this segment as well. I think there's lots of things we can do from an operational standpoint to improve profitability over the medium and long term and we're focused on that.
+You're right, here compensation expenses are significant and they are going to be consistent with the revenue performance. I think we were disciplined this quarter in terms of our compensation expense and you saw that in the numbers.
+
+Answer_42:
+
+    They've been adjusting -- as you read about in the press, there is a -- it's not in the run rate yet, it comes in next quarter because it happened mid-March. They made major adjustments in the size of the platform in mid-March. I'll give you an example.
+We have equity sales people year-over-year down 60 or 70 on a base of -- that's probably down 15% or 20% at least. So fab in that business continues to reposition. Bernie and Jim continue on the fixed income side so they've made some major adjustments in headcount. So we'll hold it down here.
+You want this expense to go up because that means the revenue has gone back up. So you've got to be careful. But the fundamental operating platform has embedded in the run rate cost actually continue to develop a systems architecture, continue to drive the compliance of Volcker and all that stuff as you go in the run rate. So the chances of the non-compensation related expenses moving a lot is not the big deal and the question is just how do you incrementally keep management down.
+
+Answer_43:
+
+    The other thing to remember just in this quarter, I would just point out again, that we did have a little bit of help from litigation. We had a reversal of a prior matter. It helped on the expense line.
+
+Answer_44:
+
+    We don't generally comment on those sorts of things. It was -- look, it was north of $100 million.
+
+Answer_45:
+
+    As you might imagine, the pipeline is -- looks great because everybody -- people need to transact, they just haven't -- they just didn't do it in the first quarter, so it's building up. In periods where there's volatility like this, the best thing our bankers can do is to be in front of CEOs, Boards and CFOs. They are doing that.
+There is going to be -- have to be financing activity at some point because clients need to finance. And so our pipeline looks good. I wouldn't necessarily say we've seen any -- in the first few days of April we've seen any dramatic increase in capital markets activity, but there is certainly lots of dialogue. The pipeline looks good again because I think there's a lot of pent-up demand there.
+
+Answer_46:
+
+    I think the simple thing to think about in the investment banking Capital Market side is the work is ready to go, we just -- if we continue to see the stability, you will see it come through. And that's -- our comments are really based on still -- they're still stabilizing as we speak.
+And so, if that happens, you expect to see it start pulling through and it would be up from the quarter, quarter over quarter. But there are still a few more weeks of stability that you have to see for people to actually pull the trigger on financings and stuff.
+
+Answer_47:
+
+    Obvious, the markets right now are stable. People can finance if they want to. I think it's just a question, as Brian said, of CEOs and Boards just making sure that the stability we're seeing right now is something that they can count on as they go to market.
+
+Answer_48:
+
+    The other thing, Ken, is that you have to remember that for a long period of time we were fighting the runoff of the noncore assets, which are now small enough that we could actually overcome them. So there are a lot of quarters where the core activity was growing but you couldn't find it because -- if you look at the slide you can see the All Other, which is the investment portfolio, really mortgages and then the LAS assets are now small enough so that the quarter-to-quarter runoff.
+But I think it's solid across-the-board. I think that in the segments we focus in on the Consumer side, prime, super prime, there's strong activity. Mortgages, you could see the origination volumes this quarter were solid. I think if you think of home equity has kicked back up a little bit again because people see home equity in their house.
+The auto businesses strong, but it will ebb and flow with how many units get sold ultimately because that's the nature of the business. Although I think we can gain share there because our share on our direct-to-consumer business was very low. We didn't even do it two years ago and now we're up to, I don't know, $0.5 billion or more a quarter.
+So I think from a consumer side, the card business, because we've now sold through all the portfolios we have to sell, I think you should see stable and start to see better year-over-year comparables than we've had the last several years. Obviously the last big portfolio went out in the fourth quarter, and so I think we feel good.
+If you look at the online customers, the creditworthy customers that we deal with are there to borrow and we're lending to them. And if you go on the Commercial side, as Paul said earlier, I think you would expect us the CRE -- we slowed -- we want to be careful in CRE, so we are doing very fundamentally structured loans. But in C&I, and a nice -- business banking, not a huge business for us, frankly, but they finally are making it through their runoff and that's good.
+And so I think across all those businesses you should see -- it may not grow as fast as [normally] it has. Two years ago we had the international book grow and corporate -- we slowed that down based on our judgments about risk. And so I think it's a pretty balanced growth. And so the question always is do you have to compromise your credit standards to grow? No, we don't because you can see that. And then secondly, is there opportunity to actually get growth? And the answer is yes. But -- and that's just good, hard work.
+
+Answer_49:
+
+    We have to be careful and that's what I think we wanted to show you some of the -- there are two -- three basic principles that you have to follow. One is, we had to balance the portfolios between Commercial and Consumer.
+Second, we had to get the Consumer to secure portfolios, dominating versus unsecured both credit card -- now the loans really put us behind -- in a tough situation last time. And then, third, you've got to maintain your individual quality of underwriting. Consumer is more formulaic and Commercial more deal selection and customer selection.
+But if you look at it -- I'll just give you the simplest way to think about this. We have moved probably from 8 out of 10 mortgage holders who are absolutely within our credit box, absolutely we do business with, getting their mortgage somewhere else to maybe 7. So we've still got 7 more to go without talking about expanding the credit parameters in our mortgage business one iota.
+So think of that as a demonstration point that you can go over and over again. So there is plenty of market share out there. And then one of the things, Ken, we're looking at is we look across our 90-odd markets in the United States. There are areas where we have tremendous opportunity to expand our market share where the franchise just wasn't balanced.
+Some areas of franchise, the wealth management business is a high percentage; in some places, it's low. The middle-market business is very high market -- very strong, good market shares in certain markets and a third of that in other markets. And so, where we're deploying these people is also based on our view of which market. So it's going into that market, hiring talent, using this massive customer capability we have to go drive it. Again, target the exact customers we want.
+So, even on a geographic basis, whether it's the deposit business and expanding in some of those markets, but also in the commercial lending business and -- otherwise there's opportunities without compromising credit.
+
+Answer_50:
+
+    As Brian said, that's where those added sales professionals are going. They're going to markets where we think we have synergies across commercial, GWIM and Consumer.
+
+Answer_51:
+
+    Well, I think we've been telling people to focus more on mid-single-digits type of numbers in a given 2% growth -- 1.5%, 2% growth economy as opposed to 10%. So -- but the core business is growing faster and then we're still running off, but we've told people to focus in at that level.
+
+Answer_52:
+
+    I'm not sure you can consider first-quarter banking normal in the sense that we still have extra costs we've got a get out of here, Nancy, that we continue to work down. Litigation was elevated in the quarter from more the normalized level that we feel we can achieve and things like that. But leave that aside.
+The basic principle is we continuously look at the franchise to see about optimization. So generally when people ask that question they are thinking about a couple different areas. One is the markets area. We show you the markets. Profitability returns in this business. But if you get into the supplement you'll see you can never call a markets business an annuity business.
+But what drives our business is really a connection between the issuer clients, the commercial borrowers and commercial clients and the investor clients that we serve. And to do that -- in our Wealth Management business, because that's a group of people that rely on the research platform. If you look, the interconnectedness of that is massive and -- whether it's by us getting out of proprietary trading and Volcker and things like that, the whole -- the real business is driven at that.
+And so, if you -- we've taken the balance sheet from implying at the time of Merrill, probably nearly to $800 billion or more, maybe closer to $1 trillion down to $500 billion and the revenues have stabilized and I think that's a good place for us to be. Number one research plant in the world. Number one in the US this year. The ability to use it in wealth management, the ability to use it to inform our corporate customers.
+So, we look at how we pare away things and look at it -- so in the international business we've pared back -- there was 1,200 -- I don't know, 800 to 1,200 people that were downsized in markets and banking in the first quarter. So we keep -- it's not in or out, it's more how do you keep paring it back.
+And so, if you look across there, we always look at that question. We continue to look at it, but right now we really like the franchise and the connectivity between the franchise of all the different elements, focused on markets, focused on wealth management, focused on the core business.
+And I think now the question is with low rates, we just have to grind the cost down and that's going to come out of really all the pieces and -- well, for a while, it was -- you could go at it at a fairly high level and drive it. Now it's really incrementally idea by idea and taking it out and that's why you see that constant improvement.
+Improvement of core costs of $2 billion run rate first quarter last year to first quarter this year is not -- is working at it. It just takes more time because 130 million square feet of real estate down to 80 million going to 70 million. There's a lot of work to get out of that real estate.
+
+Answer_53:
+
+    Well, I think if you think of branches and think about it as offices as opposed to the historical notion of a place where you transact, the question of how many you have is going to be how many relationship managers you need and how many places they have to sit. And so, what we've done is consolidated the branches to be even bigger.
+So the sheer number -- so we added 6,100, or 4,600. Each year we've repositioned 200 or 300 of them. But what we're doing is getting out of smaller branches and building into bigger branches. So we consolidated three into one and build up -- that branch has in it US trust people, Wealth Management people, small business salespeople.
+So what we're actually -- if you think about it as a real estate question, the number is not as important as they are full and that they are marginally driving the profit. And you can get a lot of salespeople per square inch, a lot of customer activity per square inch, and that's where we're going.
+And so, you're going to see some of the new prototypes that we've deployed. You can see in places like Denver where we're now on our third branch and we'll continue to build out that are much -- look much more like a sales office than what people's vision of a traditional branch.
+But going to your earlier question, Nancy, I don't know where this stops and I'm not -- that's not saying I'm trying to hide an answer that I have, it's just that if you and I were here last year, and we were, and you said 17 million mobile users, that's good penetration, it's 2 million more a year later.
+And as computer-based banking is up 1.5 million or something like that, which is kind of remarkable on top of that. So we don't know where this goes, but we're going to be pushing ahead, following our clients and making sure we stay with them. At the same time, our customer satisfaction scores are now reaching an all-time high, which means the way we're doing it works for them.
+And you've given me your feedback about our customer focus and capabilities over the years, but they are back to the highest they've ever been and that's, importantly, managing that transition carefully and that's what we've got to keep doing.
+
+Answer_54:
+
+    I just want to echo a couple of thoughts the Brian said. I think the branches are going to become not a destination where people come to transact but a destination where people come because they need a product or service because of something changing in their lives. They need to start saving for their kids' college or they need a new -- they need a mortgage or they need a credit card.
+It's more about they are coming there because of some life event or because of some product or [service] they need, not for every day transaction banking. We'll still have the branches that can do that for people who prefer that, but I think over time people will recognize the convenience and safety of doing these things online, doing them electronic not from paper. And the branches will become -- we're organizing our branches so that they become destinations for people who need help with their financial lives.
+
+Answer_55:
+
+    Marty, you can come at this a fairly straightforward way which is we have $1.2 trillion in deposits and we have $900 billion in loans. And if we put our own mortgages on the balance sheet we know the quality, we know the customer and we know that the servicing cost ultimately will be a lot less of how we're doing it.
+If we buy third-party loans -- so to extract the value of those deposits we've got to invest in something. We invested substantially in treasuries. We have to -- back to mortgages and mortgage-backed securities. And so the question is why by someone else's when you are producing your own?
+So it's really a very pragmatic view of -- we want to control our destiny in mortgage going forward so that the customer we look in the eye and originate the mortgage with is the customers we service for, is the customer we have the asset quality with and there is no third party involved. So it's more driven by us just getting to our own, controlling our own destiny.
+
+Answer_56:
+
+    Well, the -- we used to -- there is an element that's just as -- we used to book that retained piece in the central area. We stopped doing that. That's showing the changeover, so you've got to think of it a little bit together. But -- and it's consistent with our peers. Most people have their consumer businesses booked to loans they retain. We just didn't do that for years.
+But remember, those -- you've got to remember that you've got to think of the whole balance sheet. You're looking at the loan category. The money comes out of center because of liquidity demands in the rules. It goes into treasuries and other securities which are not in that chart because they are not loans, mortgage-backed securities and treasuries and that still has a yield to it. Not as dollar-denominated as much as mortgages but has a yield to it.
+That has been driven more by the liquidity demands in LCR than it is by anything else, which is the centralized portfolio. We've gone from $100 billion in liquidity four or five years ago to $500 billion, so that has a cost to it in that -- in prior years that could have been invested in high-yielding assets, but not -- mortgages don't count for liquidity.
+
+Answer_57:
+
+    And again, look -- the facts are we've been growing overall, so year-over-year including those segments which, as you point off by our strategy are running off faster. We're still growing the overall balance sheet.
+
+Answer_58:
+
+    It's marginally -- will be absorbed. If you think about it, the total number of loans is relatively small. The total -- it will go on the platform of very little change.
+
+Answer_59:
+
+    I think -- I would just say that we're trying to be consistent with our strategy of controlling our own destiny.
+
+Answer_60:
+
+    Thank you.
+

exam/part2_problem1/Problem_1_Conference_Call_Segments/call_34_presentation.txt

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+
+Good morning. Thanks to everyone on the phone, as well as the webcast, for joining us this morning for the first-quarter 2016 results. Hopefully everybody has had a chance to review the earnings release. The documents are available on our website.
+Before I turn the call over to Brian and Paul, let me remind you we may make some forward-looking statements. For further information on those, please refer to either our earnings release docs or our website or the SEC filings.
+Let me just remind you, please limit the number of questions so that we can get to everyone's -- so we can get through all the questions that everyone has. And with that I'm pleased to now turn it over to Brian Moynihan, our Chairman, CEO, for some opening comments before Paul Donofrio, our CFO, goes through the details. Brian?
+
+Thank you, Lee, and good morning to everyone. We want to thank you for joining us to review our first-quarter results. Today we reported $2.7 billion in earnings this quarter, or $0.21 per diluted share.
+As you can see in the results, two large items impacted this quarter's results. We recorded negative market-related NII adjustments for bond premium amortization. That adjustment alone cost us $0.07 per diluted share. And we also recorded a $0.05 per share diluted share cost of seasonal retirement eligible incentives.
+When you think about revenue, net interest income, excluding that bond premium adjustment, was $10.6 billion this quarter. This is improvement linked quarter and year-over-year. Our loans are growing across the franchise and, compared to the prior year, are up 11% in our business segments.
+In addition, deposit growth remains very strong. Our deposits were up $64 billion from last year or 6% to over $1.2 trillion. This growth reflects our progress to grow responsibly and deepen relationships with all of our core customers.
+Moving to noninterest income, it declined year-over-year. Of note, the downdraft in that was driven by Capital Markets and related activities and, to a lesser degree, mortgage servicing and other fees as we continue to wind down our third-party servicing book. However, the other banking sources of noninterest income were relatively stable.
+Switching to costs, we continue to drive costs down in this Company. Costs year-over-year in the first quarter were down 6%. FTEs were down 3%. That is $1 billion per quarter, $4 billion on an annualized basis. And if you focus just on the core costs excluding our LAS and litigation, those were down $600 million quarter -- from first quarter of last year or $2.4 billion annualized. We're going to keep driving those costs down as we continue to move forward through 2016.
+Turning to slide 3 and looking at the business segment earnings, you can see the good year-over-year results because of the operating leverage in those businesses. The only exception is the results in Global Banking, which were negatively impacted by the increased [energy] reserves.
+The combination of business segments outside the All Other group earned $4.5 billion in quarter one this year compared to $3.9 billion in quarter one of 2015. Offsetting those earnings were the $1.9 billion loss in All Other. That loss primarily reflects the two large adjustments I mentioned earlier and some legacy litigation costs.
+You can also see the returns and efficiency ratios for each of our segments and note, with the exception of LAS, which came close to breaking even this quarter, they earned above their cost of capital.
+Moving to slide 4, during the period of -- during the first quarter, there was a lot of talk with the market volatility, the Company buying surrounding the question about global growth and the forward-looking economic picture. However, we don't see any evidence of our customer base changing.
+Spending by consumers remains strong and is up year-over-year over 4%. Loan demand remains solid throughout the franchise. And we continue to position our Company to face any potential economic outcome.
+When you think about this, it's important to remember the work we've done over the past years to simplify and strengthen our foundation. We remain a different Company today than that which had entered the last downturn. We start with a clear strategy to serve the core financial needs of the customers.
+We've gotten out of businesses, portfolios, products and client relationships that don't meet those strategic goals. We simplified the Company in every area. We cut the number of legal entities in half and we also reduced costs through programs like New BAC that produced [a loan] more than $8 billion in annual savings and our SIM program which continues to operate today.
+At the same time we've continued to invest in the areas we can grow. $3 billion in technology-related growth initiatives, especially in areas of digital practice, whether it's in Consumer Banking, Commercial Banking, where we lead the industry with mobile and online platforms. We've also invested more in client facing teammates, funding that investment through elimination of bureaucracy and simplification and elimination of management jobs.
+We believe that we have to continue to drive the productivity and will continue to do so in 2016. In the end, when you think about all this, it makes our Company more resolvable. As you all know, we received the latest input from our regulators on our resolution plans yesterday. Those plans were filed nine months ago and we've been busy at work since the day they were filed to continue to remedy the deficiencies and shortcomings stated in those plans and we will do so by the October submission date.
+As you move to slide 5 you can also see the financial foundation that we've built in this Company. Liquidity and capital at record levels. Tangible book value per share, the marker of what we as shareholders own in our Company now stands at $16.17 and has improved over $5.00 a share over the last few years even as we've taken the hits that are now largely behind us.
+Our funding structure continues to improve. Long-term debt has been cut dramatically; deposits have increased over 20% and most of that growth is coming through our Consumer Banking and Wealth Management segments. Our loan book is now well-balanced, half consumer, half commercial. And importantly, the consumer piece is much more secured lending than it was before the last crisis.
+As we look in Global Markets, whether it's our Level 3 assets which are more risky, the total trading assets or VaR, they are all down significantly over the last few years. So as you can see we've simplified our Company and our operating structure.
+As we look ahead to 2016, we remain focused on what we can control. We intend to keep driving the core customer activity you see on the loan and deposit and customer flow growth in each and every business, focusing intently on the Wealth Management and Global Markets businesses to take advantage as markets have stabilized.
+We'll continue to drive on focusing on costs and drive those costs down and we'll continue to drive to deliver more capital to you as we did in the first quarter as investors. With that, let me hand it over to Paul.
+
+Thanks, Brian. Good morning, everybody, and thanks for joining us. Starting on slide 6, we present a summary of the income statement returns for this quarter, highlighting comparisons to Q4 2015 as well as Q1 2015. Earnings this quarter were $2.7 billion or $0.21 per share.
+These earnings include the negative impact of the FAS 91 market-related adjustment which reduced EPS by $0.07. They also include $850 million of FAS 123 retirement eligible incentive expense which reduced EPS by $0.05.
+For comparative purposes, the aggregate impact of these two same items in Q1 2015 reduced EPS by $0.08. Revenue on an FTE basis was $19.7 billion this quarter. Adjusted for FAS 91, revenue was $20.9 billion, a decline of $700 million from Q1 2015 on a similarly adjusted basis.
+This decline was driven by the reduction in sales and trading revenue and IB fees as well as mortgage banking income offset by improvement in adjusted NII. Expenses were $14.8 billion, approximately $1 billion or 6% lower than a year ago, driven by good discipline across the entire Company.
+Before moving to the balance sheet I want to note an adjustment to the financial statements this quarter, reclassifying some operating leases. We moved $6 billion of leases to other assets and we made conforming reclassifications to prior periods to improve comparability.
+This reclassification had no effect on net income. However, as a result of this reclassification, quarterly NII is lower by approximately $50 million, other income is higher by approximately $180 billion and depreciation expense is higher by about $130 million. While these changes are small and don't affect profits, I wanted to note them so that you can more easily adjust your models.
+Turning to slide 7 and the balance sheet. Total assets increased $41 billion from Q4 driven by higher Global Markets repo activity as well as increased cash. Deposits rose $20 billion from Q4 while loans increased $4 billion. Driven by deposit inflows, liquidity rose to $525 billion.
+Time to required funding, while down, remains strong at three years. And note that the first quarter included the $8.5 billion settlement payment to Bank of New York Mellon as trustee in the article 77 suit which was reserved for over four years ago. Tangible common equity of $167 billion improved $4.7 billion from Q4. On a per-share basis, tangible book value increased to $16.17, up 9% from Q1 2015.
+Turning to regulatory metrics: as a reminder, we report regulatory capital under the advanced approaches. Our CET1 transition ratio under Basel III ended the quarter at 10.3% and really is only comparable to Q4 as prior periods were reported under the standardized approach prior to our exit from parallel run.
+On a fully phased-in basis, CET1 capital improved $3.4 billion to $158 billion as improvements from earnings and OCI were partially offset by dividends and repurchases. Under the advanced approaches, compared to Q4 2015, the CET1 ratio increased 30 basis points to 10.1% and is now above our fully phased-in 2019 requirement. RWA decreased roughly $18 billion driven by reductions related to retail exposures as credit quality improved.
+We also provide our capital metrics under the standardized approach. Here our CET1 ratio improved to 11% with the same capital improvement as advanced but less of an RWA improvement given standardized is less risk sensitive. Supplemental leverage ratios for both the Parent and the Bank continue to exceed US regulatory minimums that take effect in 2018.
+Turning to slide 8, we had solid loan and deposit growth in the quarter. Reported loans of $901 billion on an end of period basis increased $4 billion from Q4 and are up $28 billion or 3% from Q1 2015. Loans in our primary lending segments were up $14 billion or 2% from Q4 which is 8% on an annualized basis.
+We continued to see solid commercial loan growth in Global Banking. In Consumer Banking we continue to see strong growth in consumer real estate and vehicle lending. Lastly, in Wealth Management we also saw continued growth in consumer real estate.
+Loans outside the primary lending segments in LAS and All Other were down $10 billion from Q4 driven by continued pay downs of first and second lien mortgages as well as loan sales. During the quarter, we sold FHA loans totaling $2.7 billion and NPLs and other delinquent loans of roughly $1 billion, recording a small gain on sales and other income.
+Turning to deposits, on an ending basis they reached $1.2 trillion this quarter, growing $64 billion or 6% from Q1 2015. Growth was led by our consumer businesses. Consumer Banking grew $43 billion or 8% year-over-year. GWIM grew nearly $17 billion, a 7% pace, and Global Banking grew at a 3% pace.
+Turning to asset quality on slide 9. Outside the energy sector, credit quality is strong. Total net charge-offs were $1.1 billion in Q1 and Q4. We had some immaterial movements this quarter from minor adjustments but overall very little change in consumer losses.
+Commercial losses declined slightly from Q4 despite a slight increase in energy charge-offs. Provision of $1 billion in Q1 was up $187 million from Q4. While net charge-offs were flat, total reserve release declined as reserve releases in Consumer were mostly offset by reserve increases in commercial driven by energy exposures.
+On slide 10, we provide credit quality data on our Consumer portfolio. Net charge-offs declined $41 million from Q4. Consumer real estate charge-offs benefited from continued portfolio improvement and fewer one-time items, primarily collateral valuation adjustments on consumer real estate. Adjusting for those items, consumer net charge-offs were relatively flat versus Q4. Delinquency levels and NPLs improved and reserve coverage remains strong.
+Moving to commercial credit on slide 11, net charge-offs improved $35 million. A decline in non-energy net charge-offs from Q4 more than offset a modest increase in energy losses. Energy charge-offs increased $17 million from Q4 to roughly $100 million in the quarter.
+Given that asset quality outside energy remains relatively stable, let's focus on energy. We continue to support our energy clients while managing lending limits and actively engaging with stressed borrowers. Our overall committed energy exposures declined slightly from Q4 while utilized exposures were up by $500 million.
+As discussed last quarter, within energy, we believe two subsectors, refining and marketing, as well as vertically integrated, which by the way tend to be large market cap and/or sovereign supported. These two subsectors are less dependent on oil prices and therefore carry less risk than our exposures in E&P and oilfield services.
+Looking at our $7.7 billion utilized exposure to the higher risk E&P and oilfield services clients, we saw a decline of $600 million from Q4 as payoffs and charge-offs more than offset draw downs.
+In addition, this quarter we moved $1.6 billion of our energy exposure to reservable criticized, and we added $525 million to our energy reserves. We made these adjustments based upon another quarter of not only low oil prices but also volatile prices. This moves our energy reserve to just over $1 billion.
+And while these reserves cover also energy portfolio, they would represent 13% of our $7.7 billion E&P and oilfield services exposures. We believe that percentage is probably more relevant as you compare exposures across the industry.
+Turning to slide 12, net interest income on an FTE basis was $9.4 billion. Included in NII this quarter was a FAS 91 negative $1.2 billion market-related adjustment for bond premium amortization. This adjustment in Q1 2015 was a negative $500 million. And including TruPS-related charges, Q4 was also negative $500 million.
+Adjusted NII of $10.6 billion improved approximately $500 million compared to Q1 2015, excluding FAS 91, and improved $100 million from Q4 after also excluding the TruPS charge.
+Several factors contributed to the improvement from Q4. We had good commercial loan growth funded by deposits. We also had about $100 million in seasonal benefits in Q1. Offsetting these factors we had one last day of interest and lower dividends on our Federal Reserve stock as required to contribute to the Highway Trust Fund. Lower long-term rates also offset some of the benefits of the Fed rate hike in December pressuring NII.
+Lower long-term rates was also the driver of increased asset sensitivity in the quarter. As of 3/31, and instantaneous 100 basis point parallel increase in rates is estimated to increase NII by approximately $6 billion over the subsequent year. About 40% of this estimated $6 billion increase comes from short end rate improvement and the rest is from long end rate improvement split equally between FAS 91 and reinvestment at higher rates.
+Turning to slide 13, noninterest expense was $14.8 billion in the quarter. That is $1 billion or 6% lower than Q1 2015 driven by good expense discipline across the Company. Legacy asset costs excluding litigation -- excuse me, Legacy Assets Servicing costs excluding litigation were $729 million this quarter, declining $292 million from Q1 2015 and $64 million from Q4.
+Litigation expense of $388 million was in line with Q1 2015 as we work to resolve remaining legacy issues. First-quarter expense also included FAS 123 annual retirement costs of $850 million, slightly below Q1 2015. First quarter of both years also included about $300 million of seasonally elevated payroll tax expense.
+Adjusting for all these items, i.e. the litigation, LAS, FAS 123 and the elevated payroll tax, expenses were $12.5 billion. This decline of $600 million from Q1 2015 was driven by: lower revenue-related costs associated with sales and trading in investment banking, as well as revenue in our Wealth Management business; the roll off of advisory retention awards put in place after the combination with Merrill Lynch; and lastly, SIM initiatives that are improving productivity and helping us lower costs so that we can continue to invest in growth.
+Our employee base is down 3% from Q1 2015 and increases in client facing professionals were more than offset by reductions in LAS and other operations staff.
+Lastly, before leaving expense highlights I want to remind you that quarterly FDIC insurance expense is set to increase at the large banks until the deposit insurance fund reaches 1.35%. For us, this will increase expense by approximately $100 million pretax starting in Q3 2016.
+Okay, turning to the business segments, starting with Consumer Banking on slide 14. Consumer earned $1.8 billion, 22% better than Q1 last year. These earnings reflect continued core customer growth coupled with strong expense management. Lower provision expense from continued improvement in asset quality also benefited the bottom line.
+This work generated a strong 24% return on allocated capital. Note that allocated capital increased slightly for 2016 pursuant to our normal capital allocation reviews completed in Q1.
+On slide 15 we focus on some important trends. First, in the upper left, we continue to lead the industry in a number of ways, as you can see from the stats. Revenue increased $242 million or 3% from Q1 2015 as NII growth more than offset lower noninterest income.
+Net interest income benefited from higher client balances. Noninterest income was down due to lower mortgage banking income offset by increases in card income and service charges. We continue to see mortgage banking income come down given our strategy to book more of our originations on the balance sheet. Expenses declined 2% from Q1 2015.
+On the bottom left, you can see the year-over-year decline in FTEs as Mobile Banking growth continues to help us optimize our delivery network. Note, while overall FTEs are down year-over-year, sales specialists are up almost [900] from Q1 2015.
+Lastly, our deposit franchise continues to drive operating leverage. Our cost of deposits as a percent of average deposits continues to improve and now stands at 171 basis points which we believe is best-in-class in the industry.
+Focusing on Mobile Banking users in the upper right for a minute, we added 910,000 net new mobile users this quarter. We now have nearly 20 million active users and deposit transactions from mobile devices now represents 16% of deposit transactions.
+Interestingly, this quarter we added more net new users than any quarter in the last three years and we continue to add new features and capabilities, improving convenience and satisfaction.
+One way we are promoting adoption is by deploying digital ambassadors in our financial centers. Digital ambassadors engage with customers who come to our branches to transact. They educate these customers on alternatives to branch banking which are not only more convenient for them but also less expensive for us. Digital sales, digital appointments, digital satisfaction all continue to achieve new highs.
+Focusing on client balances, you can see Merrill Edge brokerage assets are up 7% from Q1 2015 on strong flows offset by lower valuations. Moving to the bottom right of the page, note that loans were up 8% in Q1 2015 on strong mortgage and auto growth.
+Okay, moving to slide 16, this is a new page that presents some statistics around loan growth and the quality of originations in our Consumer segment. Starting with card we issued 1.2 million cards in the quarter, which is a bit lower than the past few quarters. Average balances were impacted by the sale of a $1.7 billion nonstrategic card portfolio late in Q4.
+Adjusting for that divestiture, loans were up from Q4. Spending on credit card, adjusted for divestitures, was up 8% compared to Q1 2015.
+As we've discussed many times and shown here, we are originating high FICO loans that have produced very low loss rates and strong risk-adjusted margins currently exceeding 9%. Moving to vehicle lending, one sees similar high-quality, low risk lending stats. Average book FICOs are around 780 and loss rates are low.
+Also, the tenor of these loans is relatively conservative compared to the industry as nearly 90% of our loans are less than 73 months. Margins obviously aren't as high as credit card, but average balances are growing well across multiple channels within the business.
+Our underwriting standards are producing similar results in consumer real estate lending which is presented on the bottom of the page. Net loss rates on first lien mortgages have been negligible. Remember, we began booking these loans in the Consumer segment in the first quarter of 2014 and the macro consumer environment has been healthy, particularly for high FICO borrowers.
+Turning to slide 17, Global Wealth & Investment Management produced earnings of $740 million, up 13% from Q1 2015. Year every year revenue was down but expenses declined more, improving pretax margin to 26%. Overall, revenue declined 2% from Q1 2015 as strong NII growth was more than offset by lower market sensitive revenue.
+Asset management revenue declined on lower market values. Transactional revenue was also down and continues to be impacted by the shifting of activity from brokerage to managed relationships as well as market uncertainty. NII benefited from solid deposit and loan growth.
+Noninterest expense in the first quarter of 2016 benefited from the fully amortized advisory retention awards given at the time of the Merrill Lynch merger. We have not seen a noticeable attrition as a result of this. Lower revenue-related incentives also contributed to lower expense versus Q1 2015.
+Moving to slide 18, despite lower market levels, we continued to see overall solid client engagement and we continue to invest in the business, growing client facing professionals year-over-year. Client balances are $2.5 trillion. Long-term AUM flows were down this quarter as a result of market volatility which impacted client behavior. Average deposits grew $9 billion from Q4 and average loans also grew this quarter concentrated in consumer real estate lending.
+Turning to slide 19, Global Banking earned $1.1 billion, down from both comparative periods as energy reserves weighed on results. Despite this increased provision expense, Global Banking was able to deliver a 12% return on allocated capital. And note that we allocated $2 billion more in capital to Global Banking for 2016, pursuant to our annual evaluation of allocated capital.
+Global Banking continues to drive solid loan growth within its risk and client frameworks and this drove a nice increase year-over-year in NII, mitigated to some degree by spread compression. That NII improvement, combined with revenue growth from credit cards and treasury fees, partially offset a decline in investment banking and other marks on loans and hedges. Noninterest expense, compared to Q1 2015, reflects a decline in revenue-related expense offset by the cost of adding sales professionals over the past 12 months.
+Looking at trends on slide 20 and comparing to Q1 last year, it was obviously a tough quarter for the capital markets with spikes in volatility causing declines in client activity. However, clients still have financing needs and here is where the diversity and strength of our franchise allows us to continue to deliver for them even when capital markets are less attractive.
+You can see that trend in our average loans and lease balances, which increased again this quarter and are up 14% year-over-year. Growth in loans was broad-based across C&I, CRE and leasing, although recently we have slow growth in CRE. Spread compression on average across all our customer sizes has moderated relative to a year ago.
+Average deposits also increased from Q1 2015, up $11 billion or 4%. We remain focused on our deposit mix which is strong with only 3% classified as 100% runoff balances. On the other hand, total firm-wide IB fees of $1.2 billion were down 22% from Q1 2015 with declines broad-based across M&A, DCM and ECM.
+Switching to Global Markets on slide 21 and comparing Q1 last year, again the challenging market condition caused revenue compared to Q1 2015 to be down. The quarter included a benefit from the resolution of a litigation matter and we also had lower revenue-related costs compared to Q1 2015.
+All of this resulted in Global Markets reporting earnings just under $1 billion. Reported revenue was down year-over-year, but note that last year DVA negatively impacted revenue versus added to revenue this quarter. Total revenue, excluding DVA, while up from Q4, was down 17% from Q1 last year on lower sales and trading revenue as well as Global Markets share of lower IB fees.
+Noninterest expense declined 23% from Q1 2015 driven by lower litigation. Adjusting for litigation, expenses were down 9% as a result of lower revenue-related expenses demonstrating a disciplined approach to compensation.
+Moving to trends on the next slide and focusing on the components of our sales and trading performance, sales and trading revenue of $13.3 billion excluding net DVA is up 25% from Q4 with improvement in both FICC and equity, but down 16% from Q1 last year.
+Versus Q1 2015, FICC sales and trading of $2.3 billion fell 17% reflecting a tough environment for credit-related products as well as a tough comparison to a strong Q1 2015 in currencies. Equity trading was $1 billion, declining 11% reflecting weaker trading performance in a challenging market environment. Average trading assets continued to trend down as did VaR which remains at historically low levels.
+Turning to Legacy Assets & Servicing on slide 23. This segment lost $40 million this quarter. I'm not going to spend a lot of time here as trends are consistent with past quarters. Revenue was down a bit from lower servicing fees as the portfolio of service loans declines. Revenue was also impacted by lower net [hedge results].
+As the portfolio shrinks, we continue to lower servicing costs particularly with respect to delinquent loans. The number of 60 plus day delinquent first mortgage loans serviced continue to decline and is now only 88,000 units. Excluding litigation expense this quarter was $729 million, dropping nearly $300 million from Q1 2015 and down $64 million from Q4.
+On slide 24 we show All Other which reported a loss of $1.9 billion. Results were impacted by the $1.2 billion FAS 91 market-related adjustment, the FAS 123 seasonal retirement eligible incentive costs and litigation costs. The loss here is higher than Q1 2015 for a number of reasons.
+First, the market-related adjustment is more negative this year than last. Second, we had higher gains on sales of loans in Q1 2015 than this period. Third, provision expense is higher as both periods had a benefit from provision but this quarter that benefit was smaller than Q1 2015. Lastly, litigation costs were higher this quarter versus Q1 2015 as we worked down legacy issues.
+The effective tax rate for the quarter was about 28%, which is better than we expect for the full year absent any unusual items. One expected item that we want to bring to your attention is another UK tax rate reduction recently proposed in the Chancellor's budget. We expect this to be signed into law in Q3 and will result in a tax charge of about $350 million to reduce the carrying value of our UK DTA. The vast majority of this charge will not impact regulatory capital.
+Okay, so let me offer a few takeaways as I finish. Given the market volatility, revenue growth was challenging this quarter. However, we compensated for this by managing expenses well. If one adjusts this period's reported results for the noncash FAS 91 market-related NII amount and the FAS 123 costs, earnings are largely in line with recent quarters. You can see progress most clearly in our business segments which don't include these adjustments.
+Taken as a whole, the segments, not including All Other, improved earnings by 16% versus Q1 2015. The drivers of this improvement were solid loan and deposit growth across our customer groups. Net charge-offs were largely unchanged as modest increases in energy were mitigated by other improvements. We strengthened our capital liquidity and we returned $1.5 billion in common dividends repurchased to shareholders.
+To Brian's earlier point, we have done years of work to simplify the Company and reduce risk. With $167 billion in tangible common equity, $12 billion in credit reserves and twice the amount of liquidity of a few years ago, we believe we are well prepared to help customers and clients in good and bad times and we are focused on growing earnings in many different economic scenarios. With that let's open it up to Q&A.

exam/part2_problem1/Problem_1_Conference_Call_Segments/call_34_questions.txt

@@ -0,0 +1,232 @@
+Question_1:
+
+    Hey, good morning. Just maybe let's focus -- I'll focus my question on expenses and then I'll get back in the queue. But I think outside of incentive comp expenses generally were better than I was expecting and how much of that is to simplify and improve and how much more do you think there is to do on some of these core expenses I guess is number one?
+
+Question_2:
+
+    And you think there's more to do there? I guess maybe in the context of your discussion around digitization and Consumer, that seems like that could be a longer-term tailwind. Do you guys agree? And do you think that's a material mover or just more incremental?
+
+Question_3:
+
+    That's helpful. And maybe just one ticky tack question on the FDIC charge. It wasn't clear. Is that an annual expense or is that going to be quarterly at $100 million?
+
+Question_4:
+
+    Okay, all right. Great. Thank you very much.
+
+Question_5:
+
+    Good morning. Any outlook you can provide in terms of the potential for additional reserve boosts related to energy? We heard one bank yesterday talk about maybe another [$]500 million, although a lot of variability around that number they pointed to. And obviously their book is different than yours, but any thoughts if conditions stay where they are now on additional reserve boosts?
+And then just related to that, the outlook for additional reserve release in the rest of the portfolio given, as you mentioned, trends continue to be strong or even improve in some areas.
+
+Question_6:
+
+    Okay. That's helpful. And then just separately, kind of big picture from a regulatory point of view if I look back to last year, you've had some steps forward, some steps backwards. Obviously had to resubmit on CCAR. That was a net positive once you got the results back. You got the approval for the extra 1% buyback which I think symbolically a lot of investors view and I view as positive.
+You've got the living will issue that came up yesterday for you and a number of others. Just at a very high level, maybe give us an update on how you are feeling from the regulatory point of view and where the areas are that you feel like you still need to improve.
+
+Question_7:
+
+    Hi, good morning. Hey, couple of questions. One is on the quality of the book. You went through and reminded us how much you've improved the quality of book in the Consumer. Could you speak to that in the commercial as well, ex-energy?
+And then give us a sense as to whether or not you think that's embedded in the CCAR results. I'm just trying to get an understanding of whether or not you think that RWA hit that you had to take could potentially come down as commercial rolls through?
+
+Question_8:
+
+    Do you think that can help in the buyback ask as you go through -- it's not just a question about this year but just over time?
+
+Question_9:
+
+    Okay, and then just separately, you talked a bit about the mobile user increase. And I just wanted to get your sense as to the opportunity from here. You recently launched the new app with mobile pay, which you've been doing internally but now you can do externally.
+
+Question_10:
+
+    Could you give us a sense as to how that's resonating with clients? Is there an opportunity set here for you and are you going to market it a little bit more aggressively going forward?
+
+Question_11:
+
+    I mean eventually you've got an elimination of checks and some of your bill pay costs potentially go down as well, I would assume?
+
+Question_12:
+
+    Okay, but that's in line with expectations to bring down the consumer expense ratio? I mean, is that really the driver of getting the consumer expense ratio down is the backend on the payments piece?
+
+Question_13:
+
+    Okay. And just remind us what your goal is to get the consumer expense ratio to?
+
+Question_14:
+
+    All right. Thank you.
+
+Question_15:
+
+    Hi, good morning. I was wondering about -- on the net interest income side if you could talk a little bit about, Paul, what kind of outlook we should think about for the core net interest income. That was [$10.6 billion] this quarter. If rates are relatively stable and we don't see any hike for a while, how should that trend with all the puts and takes?
+
+Question_16:
+
+    Okay, and you do get a day count [help] modest in the second quarter from the first, right? Doesn't that help?
+
+Question_17:
+
+    Going into the second. Okay. And then just on trading, there was a quote in the media from you this morning, Paul, saying March felt better in certain areas. Could you just give us a little color on what changed in March on the trading front? What got better? Has that carried over a little bit into April? And how are you thinking about the Brexit vote from a risk and revenue impact potentially as that comes up this spring?
+
+Question_18:
+
+    Okay, thank you. And in terms of March, what -- could you just -- any color on what got better? What felt better? Which areas of the business? Could you help on that?
+
+Question_19:
+
+    Okay, thanks.
+
+Question_20:
+
+    Hi, thanks very much. On slide 12 you noted your asset sensitivity increased a bunch from the prior quarter. You mentioned driven by the drop in long end rates. Could you talk through how that actually works. And then how much of the $6 billion is short end versus long end?
+
+Question_21:
+
+    Separate one. If you look at the ROA [full] year on year, it's a large amount on a percentage basis from 59% down to 50%. I'm just curious, I wouldn't think weak capital markets in the quarter was the big driver, but I guess the question is what's the big driver of it. And are the new business you are putting on coming in at higher ROA so we should expect that to rise from here, assuming not so crazy markets?
+
+Question_22:
+
+    Okay. One last tiny one is Wealth Management margins increased a couple hundred basis points quarter on quarter. 500 year on year without the help of revenues. Expenses were down a bunch. You mentioned the $100 million roll off of the previous amortized retention awards. What's the rest of the expense saves inside Wealth Management? It's pretty good in a world that didn't have much revenue.
+
+Question_23:
+
+    Is that nonproduction expenses, meaning usually the comp stuff goes hand-in-hand with revenues?
+
+Question_24:
+
+    Okay, perfect. Thank you.
+
+Question_25:
+
+    Hey, thank you very much, guys. On the legacy asset, on the -- you lowered your loans from 103,000 to 88,000 on the high touch servicing or default servicing. How much of that was sold or are you guys just working through the book?
+
+Question_26:
+
+    Just working it down? And has -- the new stuff coming in, is that still a material amount or it has that been -- is that mainly done? Like you're not really getting a lot of new stuff coming into this bucket?
+
+Question_27:
+
+    And then you said in the quarter -- and you disclosed this a very, very clearly -- that it was about $700 million on this. Where can we -- can this be cut in half by the end of the year? When does this really become immaterial do you think?
+
+Question_28:
+
+    Okay, guys. Guys, thank you very much.
+
+Question_29:
+
+    Thanks very much. If I could just refer back to slide 16 for a moment. There's been a lot of debate about the dynamics in the auto lending market, about deterioration in underwriting and the risks of large amounts of used cars coming off of lease. Could you give us any granularity about what you are seeing in lending across the FICO spectrum and how you are anticipating that residual issue to play out?
+
+Question_30:
+
+    Right, and when you say that you pulled forward some flow, what do you mean by that?
+
+Question_31:
+
+    And that was primarily on the indirect side?
+
+Question_32:
+
+    Okay. Thanks very much for the clarity.
+
+Question_33:
+
+    Hi, my short question is when will the return on equity go into the double-digit range? Look, you have a good franchise and balance sheet. You're showing growth in loans, deposits, online banking, other areas. And you're showing lower, better expenses, branches, headcount, risk but it's not adding up. I mean your stock is 15% below tangible book value and this was yet one more quarter of mid-single-digit ROEs and worse than peer efficiency.
+So my question is why is Bank of America less efficient than peer? And it's tough on the outside to know because you have $2 billion of expenses in Other that's not allocated to the business lines. What is your Plan B if rates don't go up and when will the ROE go into the double-digits?
+
+Question_34:
+
+    All right, if I can follow-up. Despite all the progress that you've made -- and you talked about the LAS expenses, you can talk about New BAC, you can talk about the quarterly expense rate since 2011. But your core EPS is still $0.33 this quarter, and it was a weak -- tough quarter, tough environment, but it still in that $0.35 range.
+So despite all those expense savings we're not seeing it in the core EPS number that's still around $0.35. So where did all those expense savings go or is this going to come through in future quarters?
+And I know I've asked this question on many earnings calls and also thank you, Bank of America, for having that -- and Brian for having that opening letter from the lead director in the annual report. Jack Bovender says that he wants to engage more with investors.
+And so I do hope that he takes my questions at the annual meeting to engage a little bit more because I've asked this so many times. I still don't feel like I have an answer that I understand, so just one more try at it, Paul. Just where are these expense savings going if EPS is still in the same range?
+
+Question_35:
+
+    So, no new New BAC coming up or anything like that? It's just -- as I guess, Brian, you've said, you grind it out. It's just -- it would be nice to see more of the progression. Is it -- do you think it's a 2016 event? A 2017 event? Or we just -- when rates go up we'll see more of it?
+
+Question_36:
+
+    All right. Thank you, Paul.
+
+Question_37:
+
+    Hi, good morning. So, I had a follow-up to Glenn's earlier question on the Wealth Management margin. I just want to get a sense as to whether we should be thinking about that 26% margin that we saw in the quarter as a good jumping off point, just given some of the tailwinds you had spoken to, whether it be the higher-margin NII growth and the absence of the legacy Merrill awards. And I suppose as it relates to that, are preparation efforts for things such as DoL compliance potentially going to weigh on the margin in future quarters?
+
+Question_38:
+
+    Okay. So it sounds as though a lot of the incremental expense is already in the run rate and that you don't anticipate much revenue disruption based on the final rule as written?
+
+Question_39:
+
+    Okay. Got it. And maybe just focusing on the expense base within Global Markets. Was certainly pleased to see the absolute level of dollar expense was, from what I could tell, the lowest level that we've seen over the last five years. So clearly some of the efforts that you highlighted to right size the cost base have borne fruit.
+And as we think about the expense trajectory for this business, what should we expect in an environment where the trading revenues are relatively stable or consistent with what we saw in the most recent quarter? Is that [$2.4 billion] a reasonable run rate expectation?
+
+Question_40:
+
+    Okay. And can you quantify how much of a benefit that provided, Paul?
+
+Question_41:
+
+    Okay, got it. And then just one more final one for me, just on the investment banking side. You talked about stability in March continuing into April on the trading business. One of your competitors talked about actually seeing some improving trends in the capital raising environment in April versus what was clearly a challenging quarter in 1Q.
+I didn't know if you were seeing some improvement on the capital raising side as well. And if you can give us an update just in terms of backlogs in some of the other pockets like M&A, that would be helpful.
+
+Question_42:
+
+    Thanks. Good morning. Brian, right at the outset you said that there has really been no meaningful change in the customer base activity. And then the following on your comments about stable capital markets, you are growing the core loan book now double-digits still, 11%. I'm just wondering how much of that is the environment holding up. How much of that is still the spigot opening from reasonable growth? And just your outlook in terms of customer behavior on the lending side?
+
+Question_43:
+
+    Yes, Brian, to that last point, how much opportunity actually, without pointing to compromising, but how much more spigot opening can you still do, to your point about the post crisis, the tightening up internally? Are you still under lent, if at all. Or you still have to be somewhat careful about where we are in this stage of the economic cycle being that we are seven-plus years into an expansion?
+
+Question_44:
+
+    Okay, got it. so in some -- you think this 10% plus primary lending is still achievable? That's what it sounds like from what you're saying.
+
+Question_45:
+
+    Okay. Understood. Thanks, guys.
+
+Question_46:
+
+    Good morning. Brian, I think we've all over the last few years been trying to find banking normal and it's proving hard to find. And it kind of has begun to strike some of us that maybe first quarter -- what we saw in the first quarter in terms of volatility and continued low rates, etc., etc., is banking normal, at least for the foreseeable future.
+And under that scenario, if you believe that, would you -- have you begun to look at -- take a second look at your businesses again? And will there be any sort of reallocation of capital going forward and are there businesses you might want to exit?
+
+Question_47:
+
+    Right. Just as an add-on and looking at costs in the consumer bank, and you look at your mobile penetration and how it's going up, etc., etc. Is there a magic number in terms of -- mobile transactions, mobile penetration, just the whole use of mobile in your Company where I think you've been a leader that will lead to sort of a step down in branches. Are we sort of on this threshold of being able to take branches down yet another however many?
+
+Question_48:
+
+    Okay. Thank you.
+
+Question_49:
+
+    Thank you.
+
+Question_50:
+
+    Thanks. I wanted to focus on mortgage banking and the retention of those loans, more on the balance sheet than continuing to push them to the GSIBs. Is that regulatory driven or are you really looking for that higher retention rate because you're looking for some assets that have duration, so is that one of the better maybe option adjusted yields that you can get at this point?
+
+Question_51:
+
+    And a follow-up to that is if you look at the impact of that on the business segments you actually are increasing the portfolio by about 30%, which is showing that retention. However, if you look at All Other, it's more than overkill swamping that growth.
+You had about a $45 billion reduction, and kind of getting back to Mike's question about where is the benefits going, just the reduction in All Other, that almost $50 billion of loans is over $1 billion worth of NII that is going away, whereas you are having to do and invest and spend money to generate the 30% growth in the business.
+So is the runoff still part of where some of the leakage is that we are hoping to get in all the improvements in growth that you're showing in the core? And when does that -- what's left is about $100 billion, when is that finally done so that you wouldn't have that leakage anymore?
+
+Question_52:
+
+    Got you. Thanks.
+
+Question_53:
+
+    Hi, it's a follow-up on mortgage. So I think one of your suppliers or one of your partners, PHH, mentioned that you were going to be pulling back some of the servicing to yourself. And I just wanted to understand did you have to do anything to build for that book of business or is this already something that's in your run rate on the expense side and we're going to be bringing in incremental revenues on the mortgage servicing side?
+
+Question_54:
+
+    Okay, and is this the beginning of pulling it all over?
+
+Question_55:
+
+    okay. All right. That's great. Thank you.
+

exam/part2_problem1/Problem_1_Conference_Call_Segments/call_35_answers.txt

@@ -0,0 +1,213 @@
+Answer_1:
+
+    Well, Matt, as we looked at it, this is our current plan, so there's no new news for us in terms of how we operate the Company. But what we saw is that people were not getting the expenses right in the out years thinking that we could not continue the rate of investment and continue to bring down expenses.
+Secondly, to make sure people understood it in terms of blending in LAS and putting it into the base, it's now become less of the contribution; now it's more the general expense base we're working on.
+So, I think it was consistent with the way we were running the Company, but we wanted to make sure people had clarity over the next six quarters and going into 2018 of where we think the expense base goes versus what we saw in some of your guy's estimates and stuff.
+
+Answer_2:
+
+    Yes, it includes an estimate based on current views of both. That's all in expenses for the year. Now they come in different quarters.
+You just pointed out we have a frontloaded of that, but -- so this quarter did not include that -- think about it as $0.25 billion, plus [a quarter] when you think about the $13.5 billion this quarter. But overall, it includes the estimate for that out there plus the litigation estimate.
+
+Answer_3:
+
+    Look, we've worked, I think, extraordinarily hard to transform the Company, its balance sheet, its ability to produce earnings. We've got a customer and risk framework on the Consumer side that is focused on prime and super prime. That strategy, I think, works for our shareholders and our customers and we're sticking to it.
+
+Answer_4:
+
+    And just to give you a simple view of that, Matt, this quarter we did the highest number of new credit card originations we've done for a long time and all of them are consistent with that risk appetite. So there's plenty of market share to gain there by just concentrating on current customers and deepening.
+And while people always ask the question you asked, the answer is there still about 7 out of 10 mortgage customers at Bank of America get their mortgage somewhere else that fit within our credit customers.
+There is plenty of cardholders that fit our credit parameters that are out there that don't have our card or aren't using our card as their primary card. And so, just giving those couple of examples, there's plenty of market share to get there so we don't need to change the standards to grow, and you've seen that come through.
+
+Answer_5:
+
+    Sure, look, as I said in my comments, if rates follow the current path of the forward curve, we would expect, with the extra day and the decline in long-term rates, to be at around the $10.4 billion range in the next quarter.
+So -- but as you get out to 4Q and next year, I think we get more optimistic about being able to grow. Given just our current pace of deposit and loan growth, we're obviously experiencing good deposit growth.
+We've got, as we talked about, a strong risk and client framework, so we'd like to put all of that deposit growth into loan growth, but we're going to only do so if it meets our criteria. Whatever deposit growth doesn't get absorbed by good loans with our clients obviously goes into the investment portfolio and we get a return there.
+So, I think -- look, it's just a question of the further you get out the more that wave of deposits and asset growth kind of overwhelms the change in interest rates and we see growth.
+
+Answer_6:
+
+    Also, if you look at page 6, you'll see -- you can see that the point you made is that the inflection point was hit a few quarters ago where the noncore loans and leases were running down and not being made up by growth.
+We passed that and so as we think about it going forward in the upper right-hand part of page 6 you can see that other loan leases balance is coming down. They'll continue to come down, but there's just less of them.
+And then if you look at the lower left you see the core loans are growing at a good rate -- have been growing at a good rate, now can come through.
+So I think your point about what gives us encouragement because you saw last year's second quarter, this year's second quarter, about how even in a lower for longer rate environment we can grow NII is that you actually are growing the net loan book pretty consistently now each quarter.
+
+Answer_7:
+
+    I think we'd say that you've got to be careful about your rate scenario even on a spot basis because it can move around and move that around. But if you think about it as second quarter next year you'd start to see this breakthrough again based on absolutely no change in rates from the low point they were.
+
+Answer_8:
+
+    Okay. Well, let's start with card. I think card actually is up on a linked quarter basis, down year-over-year, but you have to remember, again, we had portfolio divestitures. So I think we're at the point now where we're not going to be seeing those sorts of divestitures in the future and we start feeling better about more consistent growth around card.
+If you look at brokerage income, we've been in a multi-quarter trend of people shifting from brokerage to more managed accounts. That trend has obviously put pressure on the revenue line because at the same time that was going on we had a lot of volatility in the marketplace, lower overall capital markets, lower overall activity.
+But I think over time as -- if capital markets continue to rise, we will get -- we will offset the decline in transactional revenue.
+
+Answer_9:
+
+    So on the first question; we haven't seen any change in attrition after retention. And most of the retention -- most of the attrition of experienced financial advisors have been more due to our change in the way we do the international business which has been going on for about a year. But in terms of aggregate numbers, it's been relatively stable.
+In terms of -- and the attrition we see is actually in the lower production levels, mainly due to people not being able to build a book of business and we're trying to fix that through the integrated business system with our consumer and preferred teams.
+In terms of department -- DoJ and the fiduciary standard, we're busily implementing this. It's consistent with where we're going with the business. It's consistent with the move from an old view of what Financial Advisory was versus a managed money fee-based loaded with a financial planning driven business.
+Admittedly, it's a little tricky because the actual rules only apply to the $200 billion-odd of 401 in retirement assets we have, but it's consistent with where we've taken the business and the teams [drawing] it. We don't see meaningful revenue or changes due to that. We will see meaningful changes to implement it, but not meaningful revenue changes.
+
+Answer_10:
+
+    Well, we've got -- yes, it's a safe assumption. It's not a silly question, but you've got six quarters between now and then and you can see what we are running at it now to get it down to that level. We'll take work every quarter.
+
+Answer_11:
+
+    Sure. So let me just back up a little bit -- I will definitely answer your question, but I want to emphasize again we're talking about LTM $56 billion going to $53 billion and absorbing in that merit, healthcare, inflation and other investment.
+And the first thing I would point out as you think about the credibility of that -- look at what we accomplished over the last five years. From Q2 2011 to Q2 2016, we reduced quarterly expenses by $4.8 billion; that's a $19 billion annualized run rate.
+And we did this by not only reducing legacy mortgage-related expenses, which were only -- make up about $2 billion of that $4.8 billion, but just through good expense management in every major category across the Company.
+So, from here it's about -- a number of things -- a lot of those things are been identified through our Simplify & Improve initiative. We're investing in technology and capabilities to improve efficiency. The most obvious example of that you can see is in the increasing adoption of customers for digital channels.
+But I do want to emphasize that it is about making progress across the entire Company, from our leaders and our teams. So if you look in Consumer, there are examples -- the digital adoption, we've got mobile users up 15% to over . When they make a deposit that's 1/10 the cost.
+We've got digital sales up 12% year-over-year. We've got more customers using digital statements, a lot more work to do there as we transition from paper to electronic. We are optimizing the coverage model in both consumer and GUM and they all have goals. We all have goals and initiatives around controllable expenses, including travel, supplies, support costs.
+If you look at Global Banking and Global Markets, we're simplifying our legal entities structure and business model. We're integrating wholesale credit origination and processing across the lines of businesses. We're centralizing data platforms. We're expanding electronic capabilities and we're optimizing the coverage model. So there's a lot going on and we're going to need all of it to get to our goals.
+
+Answer_12:
+
+    I think -- yes, Paul gave you a lot of different places it comes from, but I think you've got to back up and say it comes from reducing the expense base and -- by people -- and you can see that even in markets year-over-year we're down 7% and people where revenue went up.
+So, it's electronification to the fixed income platform and the equities platform continuing down that road. So every single area is moving here.
+And then you also have to think about the stability of the platform. This Company has now been operating with a consistent strategy and a consistent ability to execute for many years. And what's gone with the legacy and stuff, that just allows us to keep operating on ourselves.
+And we always have performed best in history when we had that period of time, no acquisitions, no divestitures, no legacy asset servicing. So we're very confident that it will happen.
+On revenue, I'd say look at it year-over-year, look at it linked quarter. So last three or four quarters you've seen revenue stable and -- well, it bounces around with market activity in a given quarter. The core revenue continues to go forward and the expenses keep coming down on a core basis.
+So we're comfortable that there is nothing -- we won't allow our people under our responsible growth to give us cost saves and not grow the business. So it has to be sustainable. It has to be actually taking out real work and yet still investing in more client facing teammates, more salespeople and more technology capabilities for customers.
+
+Answer_13:
+
+    It's for the full year.
+
+Answer_14:
+
+    I would say we haven't experienced that. We can check and get back to you. I would just make a couple more comments about auto. We are maintaining our share but we are very focused on the prime and super prime.
+And as we pointed out last quarter, we are booking these loans at FICO scores of around 774 and we've got debt to income at all time lows. And importantly, we are not, from restructuring standpoint, extending tender the way we see in the marketplace.
+
+Answer_15:
+
+    Well, Mike, the -- if you look at the risk-adjusted revenue, you would come to a different conclusion. So yes, we had a lot of revenue in 2011 or 2012, but the charge-offs were running tens of billions dollars more a year than we have now. So, a lot of that revenue is just going off the backend.
+So, if you look at it from a risk-adjusted base, I think we grew from the low 60[%]s to the low 80[%]s over the last five or six years. So that is actually the work that gets done.
+So we could -- going back to point, we focus on very high credit quality, so we keep that credit cost moving in the right direction or stable when the world has gone a different way.
+We don't have a target efficiency ratio. You can calculate one of that out in 2018, because, as we talked about earlier, the NII differences will be driven by where rates go to some degree.
+But the idea is we are going to take expenses from $56 billion in the last four quarters to $53 billion. We think that's where we'll get them to. And if rates stay stable or go up a little bit, you'll see a lower efficiency ratio. Right now we're running about 62% this quarter, fairly stated, and we think we can push it down from there.
+
+Answer_16:
+
+    Mike, you're missing the FAS 123 in Social Security which is $1.2 billion in the first quarter that doesn't occur this quarter, but will -- you've got to add that back, too.
+
+Answer_17:
+
+    It's been people -- we're down 2,600 people quarter over quarter; it's a constant reduction in personnel through hard work and automation, while we're continuing to increase the investment in salespeople. And so that helps on the revenue side and the revenue equation versus expense.
+It's things like our data center configuration. We've been in a program, take about $1 billion, $1.5 billion out of all the data work, all the data centers and configuration that we're partway through.
+And in part, just -- like Paul said, every line item is just grinding that -- as we continue to bring down people, we have less occupancy, less telecommunications and everything else, so it really comes across-the-board.
+
+Answer_18:
+
+    We have consistently paid as we've gone, as you well know, and even in every quarter we have between $50 million and $100 million of severance expense that we don't even talk about.
+
+Answer_19:
+
+    Yes, I think purchase volumes are up 7% if you normalize for the divestitures.
+
+Answer_20:
+
+    I think we've had divestitures in 2Q last year and in the fourth quarter.
+
+Answer_21:
+
+    Vivek, let me just -- let me make it simple for you. The year to date through July is up -- taking divestitures up about 4% on debit and credit both and up 7% in credit card purchases, normalized for divestitures year-to-year -- the first six months plus this part of July, so it's growing fine.
+
+Answer_22:
+
+    Be careful because those 10,000 people work on the 88,000 loans plus the 3 million good loans. They service both good and not good loans, to make it simple. And so, that's one of the reasons why we're separating.
+And in All Other going forward is loans that we are actually only -- loans we'd never do again and that we're running off 600,000, 700,000 units. Moved into the segments whether it's Consumer, US Trust or Merrill Lynch are the loans that relate to their businesses in terms of servicing costs, too.
+So, that was one of the confusions, as this thing got down you got to the point where the good servicing costs are becoming a more meaningful part of the total. And they'll continue on because that portfolio, whether it's direct servicing costs for third parties or even the stuff on our balance sheet, will continue.
+But to give you a sense, from first quarter to second quarter, when we were down -- the total headcount of about 2,600, about 900 and change came from LAS, from the servicing side. So it still contributes but it's contribution is going down each quarter because the amount left to service the good stuff and just generally service our portfolio will be a higher percentage of what's left.
+
+Answer_23:
+
+    Yes, so this quarter we ran about $600 million and we said we would get -- a long time ago we said it would get to $500 million by the fourth quarter this year, so we're almost there, and the idea is that that will be completed.
+
+Answer_24:
+
+    Both.
+
+Answer_25:
+
+    I'll start with legal. From a legal perspective, if you look over the last four, five, six, seven quarters we've been running around $300 million per quarter. We did $270 million this quarter. That I feel like is a reasonable range if you're building a model for the near-term.
+In terms of the capital markets businesses, not quite sure I get your question. Obviously, they are -- that line is tied to the performance of the business.
+The total performance of the business, returns, earnings and revenue and we have programs in place that we think are competitive with what's on Wall Street, so that we can attract the best of talent and retain the best of talent.
+We're constantly benchmarking against those programs and we feel like we're where we should be for the quality and the market presence we have in those areas.
+
+Answer_26:
+
+    So you should think of the environment we're talking about as an environment consistent where we are now from growth of 1.5%, 2% of US GDP and stuff. So it doesn't contemplate any change to the current environment from just a general operating principle.
+
+Answer_27:
+
+    And again, remember what I think Brian said and what I emphasized again, that $53 billion is absorbing increases in merit, absorbing increases in healthcare, investment that are just -- inflation that are just natural in the business.
+
+Answer_28:
+
+    Yes, based upon our current plan.
+
+Answer_29:
+
+    What's in our current plan. And in terms of legal, I hope it's going to be less than $300 million When we get out there. I'm not telling you to stick that in your model, but that's a good range to be thinking about.
+
+Answer_30:
+
+    Yes, it was $80 billion of AUM again. That was all short-term. It had a minimal impact on margins. Minimal.
+
+Answer_31:
+
+    Sure. Let me -- you're right. The MBI line was down year-over-year; that was planned for. We knew that was coming. I just want to walk -- so for everybody else -- I just want to walk through why it's down and then we can talk a little bit about going forward.
+So four items. First, we sold an appraisal business last year, so there was revenue in last year's second quarter that isn't in this quarter. Second, we had some servicing sales in the second quarter of last year for a game that we didn't have this quarter. Third and probably most significant from a revenue perspective is that we had the Ace decision in the second quarter last year. So we released last year some reps and warranties and that was a significant amount of benefit last year.
+And then fourth, and probably strategically most important and the point you're getting too, is we are selling less mortgages, choosing instead to hold them on our balance sheet. And, obviously, this decreases MBI but increases NII over time.
+So -- plus you have to note that, as we just talked about, servicing -- bad servicing is going to continue to run off. So if servicing is running off and not being replaced as fast, if we're holding more mortgages on the balance sheet as we transition from MBI to NII, you could see that line continues to trend lower.
+In terms of the mortgages, I think in the short-term it's going to be fairly stable and that trend is going to -- it's a good base this quarter. It was a good base to start from.
+I think that trend lower is going to be in some quarters very slow because, as you point out, other line items are a little bit messy and bounce around there depending on what happens in interest rates, but that's the trend.
+In terms of what we're trying to accomplish, all of the loans we originate that are nonconforming, we would like to keep on our balance sheet. And even the conforming loans that have a certain characteristic we're going to be holding on our balance sheet. So right now let's around 75%-ish of the loans we're originating are going on our balance sheet. Is that helpful?
+
+Answer_32:
+
+    Yes, absolutely. On that last part of your question is precisely what I think we've been talking about today in the Q&A and in the remarks. We've got interest rates -- we talked about interest rates following the forward curve. We talked about interest rates being flat.
+And despite both of those circumstances we think in the out years we can grow NII, or in the out quarters we can grow NII because we're growing deposits and we're putting them to work where we can within our risk and client frameworks to grow well priced loans.
+Any amount of deposits that doesn't go to our clients and customers we're sticking in the securities portfolio and getting as much yield as we can get there within the constraints of liquidity and capital risk and interest rate risk.
+So, we think we can grow in even a flat interest rate environment, grow the NII line, not necessarily in the next quarter, but as we again move out into the future.
+Brian has already pointed out all the work we're doing around expenses, so when you combine what we think we can do from a fee base, from an NII perspective and then lowering expenses, we think we can grow earnings in the Company even if interest rates are flat.
+
+Answer_33:
+
+    Again, Dick, you're right, we tend to talk in our disclosures about interest rates moving 100 basis points, 50 basis points as the -- and holding all else equal what's in our plans. We could just as easily do the opposite. We could hold interest rates flat and then you could see the effect of deposit and loan growth.
+We certainly have that analysis. That's how we arrived at our perspective on the future. And I think if that's something that interests you, maybe after the call we can share with you some of that work; it's just math.
+
+Answer_34:
+
+    Yes, okay. That'd be great.
+
+Answer_35:
+
+    Thanks for noticing. So let me start with saying that we are very pleased with our results in CCAR this year and we believe they really do reflect all the hard work we've been putting into that process and improving capital planning.
+Operational risk, we have a third of our advanced RWA roughly is operational risk and we would characterize most of that, or I might say all of it, as for businesses we're no longer in, products that we no longer sell and risks that I don't think we ever took as a basic Bank of America. So there's a lot of RWA sitting there and we have to work overtime to show the regulators that we can get that down.
+
+Answer_36:
+
+    No, I don't think so. Obviously, CCAR is on a standardized basis, so it doesn't incorporate operational risk.
+
+Answer_37:
+
+    Yes, you're right.
+
+Answer_38:
+
+    You're right. I think they improved their models. I don't know, but I think we're all looking at what they've done in trying to understand it. And I think they probably improved their models a little bit around op risk and there was a little bit less across all the banks.
+I think the banks that have the most maybe benefited -- because it was more of an average type of thing. So maybe we get a little extra benefit in that, but I don't know, to tell you the truth. We don't know what's in their models.
+
+Answer_39:
+
+    Yes.
+
+Answer_40:
+
+    Thank you very much and we look forward to talking to you next quarter. Thank you.
+

exam/part2_problem1/Problem_1_Conference_Call_Segments/call_35_presentation.txt

@@ -0,0 +1,142 @@
+
+Good morning. Thanks, everybody, on the phone as well as the webcast, for joining us this morning for the second-quarter 2016 results. Hopefully everybody's had a chance to review the earnings release documents that were available on our website.
+Before I turn the call over to Brian and Paul, let me remind you we may make some forward-looking statements. For further information on those, please refer to either our earnings release documents, our website or our SEC filings.
+So before Brian and Paul get into the results, just let me mention one housekeeping item. Please limit your questions to one per caller so that we can get to everyone and you can circle back.
+With that, I'll turn the call over to Brian Moynihan, our Chairman and CEO, for some opening comments, before Paul Donofrio, our CFO, goes through the details. Brian?
+
+Thank you, Lee, and good morning, everyone, and thank you for joining us to review our second-quarter results. I'm beginning on slide 2 of the materials we sent to you.
+We reported solid earnings of $4.2 billion after-tax, or $0.36 per diluted share, in what was certainly an eventful quarter for the markets from an overall macro perspective. This compares to $5.1 billion or $0.43 per share in the year ago quarter.
+This quarter included negative market-related NII adjustments that cost $0.05 per share, and negative DVA that cost us another $0.01 for a total of $0.06. That compares to a $0.03 benefit to EPS for both those items in the second quarter 2015.
+Earnings neutralizing for the FAS 91 DVA for both periods improved from $0.40 per share to $0.42 per share on a year-over-year basis. Our results represent another quarter of solid progress in the strategies we have been executing. Those strategies are delivering more of the Company's capabilities to each and every client we serve.
+At BAC, we focus on what we can control and, despite low rates and other macro events; we continue to focus on managing our risk, our costs and our delivery of quality products and customer service.
+In Q2, we grew loans $22 billion, or approximately 2.5% versus last year, even as we sold a few portfolios during the year. All this growth was organic and consistent with our risk appetite. We also grew deposits more than $66 billion or 6% over that same time period. And we did so while maintaining disciplined deposit pricing.
+We also continue to transform our Company in a digital way in all things and all businesses. For example, this quarter we crossed over 20 million active mobile users and continue to increase their use of digital channels for book transactions and buying more bank products.
+Active Mobile Banking customers logged into their accounts over 900 million times this quarter, depositing more than 25 million checks, or more than $20 billion via mobile check deposits. They made over 25 million mobile bill payments, up 30% year-over-year, and made nearly 80 million transfers.
+Person-to-person, or P2P payments, continue to ramp up as well. While still a small component of the overall consumer payments this quarter, we had $6.7 billion in P2P payments this quarter. That is more than $13 billion year-to-date and is up 28% from last year. This channel is a value channel for all our customers and made possible by the continuing investment we make.
+As we move to slide 3, we have talked to a lot of you over the last several months, including many of you on the phone today. I thought I'd try to address some of the more common questions we get from those conversations by looking at our results, by looking at the income statement and the items there in.
+First, one of the core questions is what if rates stay lower for longer? Well, for bank management and for you as investors, it would be easier if rates were to rise, but that hasn't happened. So the question is, can would grow earnings without rates improving? We believe we surely can.
+We can do that by continued success on things like expense management, by keeping NII stable to growing, stable and growing fees and continue to manage risk well and hold down our credit costs.
+As you can see, revenue this quarter was $20.6 billion on an FTE basis. Adjusted for the negative impacts of market-related NII adjustments and DVA, that number is $21.8 billion. Adjusted for the same items in the year ago quarter, the total was comparable.
+Now as we focus in on NII, Paul will take you through some of the changes this quarter later in the presentation. However, in summary, adjusted for market-related changes in both last year's second quarter and this year's second quarter, we grew NII by $400 million or 4% year-over-year. And that took place while the 10-year treasury yield fell 86 basis points from last year on a spot basis.
+Going forward in a stable interest rate environment, we believe we can maintain NII around the second-quarter 2016 level based on the current loan and deposit growth we see. And if rates rise, we would expect NII to grow.
+Another question relates to the Global Markets business. That question is often asked how we need to change this business, especially the FICC area, as many of our customers have. I want to hit this head on.
+First of all, fixed income is a good business for us here at Bank of America. It is a business which benefits not only by its core activities but by being coupled with our massive Global Banking franchise that has leadership positions across the globe.
+Combined together they generate a pretty steady $1 billion or so quarterly investment banking fees. It's also an important part of our overall Global Markets platform, the platform which sits on top of the number one global research team for the past five years.
+In the second quarter, this business did well. Global Markets generated $3.7 billion in sales and trading revenue excluding DVA. Compared to the same period last year, that is up 12%. This year-over-year improvement is driven by FICC sales and trading, which is up 22%.
+Now think about that, sales and trading revenue including DVA for this quarter was the highest second quarter we've experienced in five years and it led to one of the most profitable quarters for Global Markets we've seen in the past five years.
+Also, the team served clients well during a period of difficult volatility, so it clearly remains a profitable important business for us to serve clients. We're proud of how the team supported their clients through the Brexit vote and the periods of volatility related thereto.
+Another question is getting clarity on how we're transforming the business on the fee lines. Noninterest revenue was $11.2 billion this quarter; although modestly down from second quarter 2015, it was up nicely from the first quarter. There are a lot of items that run through the various lines of fees.
+First, with regard to consumer fees, we are largely done with the big card portfolio divestitures and branch divestitures. Both those impacted both card fees and banking service charges and you can see them coming off the bottom as you look at the linked quarters. Fees now will grow with the volume of cards and accounts that are now net growing in our Company.
+Our mortgage business is now sized appropriately for our franchise and the fee line there, Paul will talk about later, but will be -- is at near where it's going to be in the future.
+With regard to revenue more closely tied to markets businesses, the ups and downs in volumes of activity in sales and trading, investment banking and brokerage will move back and forth through the market. But the important thing is we have strong businesses -- strong client facing businesses in these areas and we're getting our share of these revenue streams even while the market ebbs and flows.
+So if we look about -- move from the fee line to the expense line, many of you give us credit for having managed expenses from $70 billion five years ago to the mid $50 billion today. But the question is can we do more? If you look at this quarter we continue to manage expenses well.
+Non-interest expense this quarter was $13.5 billion, improving more than 3.5% -- 3% from 2015's second quarter. This continues a trend of performance that has shown expense declining significantly on a quarterly basis quarter after quarter over the past several years. This is the lowest level that we have reported since the fourth quarter 2008, and that's prior to the Merrill Lynch merger.
+If you look at our efficiency ratio and normalize it to the NII adjustments stated above, it would be about 62% this quarter. That's an improvement of 200 basis points from last year's second quarter.
+Cost control and cost-effectiveness is a focus for our management team here at Bank of America. So the question is how much more can we do on expenses? So if you think about this, let's start by looking at the cost of the most recent four quarters.
+In the trailing four quarters, the total expense base was $56.3 billion. As we look out from the third quarter of 2016 through the next six quarters into 2018, we believe that with our SIM efforts and the continued work we're doing across the board in expenses, we are targeting an annual expense number of around $53 billion in total expenses for the year 2018.
+So over six quarters, we continued to absorbed investment, merit increases, rising healthcare costs and bringing expenses down a nominal amount.
+Our continued work in driving down costs to service delinquent loans will help with this, but the other reductions are generally coming from the core work in Simplify & Improve, work we continue to do to simplify those work processes, but also the core work we do to allow us to self fund our growth initiatives, and our continued investments in technology and salespeople.
+While I'm on the topic of expenses, I want to point out another important milestone for our Company this quarter. This quarter we changed our reporting to eliminate the Legacy Assets & Servicing segment. This completes the transformation -- this segment was the last place where product orientation was reported, [not] customer orientation. And more importantly, it also reflects the last of Legacy is really behind us from an operational basis.
+We added a couple slides in the appendix today to go along with our 8-K we filed a few days ago to explain the methodology of the realignment of LAS and the highlights that impact this segment where those loans and associated P&L are reported now.
+But what I want to get to -- across to you is LAS was [not] as an operational segment successfully did what it was tasked to do, to clean up one of the largest mortgage servicing businesses in the US.
+Consider that progress. From 1.4 million delinquent loans mortgage loans, we're down to 80,000 today. At one point we had 58,000 teammates and 20,000 contractors working on this task, and now we're down to 10,000 teammates. From one peak quarter of $3 billion plus in expenses, we're down to $600 million this quarter.
+That phase of the work is complete and we need to move that operating business in with the rest of the Company to do the further consolidation and further work to improve our servicing costs. We are pleased with the accomplishments of this group, but there is still more to be done.
+And that brings us to our provision. Simply put, the question we often get is, is credit deteriorating? As you can see, we remain very pleased with both consumer and commercial credit performance. Not only net charge-offs not gotten worse, but they've improved in the most recent quarter, moving back below $1 billion.
+Provision expense is and will remain roughly equivalent to net charge-offs. Even in our energy portfolio we've seen lower exposures [improved] losses.
+And that brings us to our returns. In this operating environment, can we get our returns above our cost of capital? Well, as you can see, we made solid progress on our returns this quarter. Our return on tangible common equity adjusted for the market-related and DVA impacts was 10.9%. On a similarly adjusted basis, ROA has moved to 90 basis points.
+We still have work to do, but you can see the improvement coming through.
+As we move to slide 4, you can see our business segment results. You see strong year-over-year results in every business driven by the generation of operating leverage. Consumer Banking continued its momentum around client activity and operating leverage. Consumer satisfaction continues to improve as does adoption and use of digital capabilities and functionality.
+In our wealth management business, they grew earnings as costs declined more than revenue while we continue to invest in this business. Revenue was impacted by AUM valuations from market variability.
+Our Global Banking team drove results with continued solid loan growth, operating leverage of 9%, and strong credit results. Global Markets executed well for its clients, as I stated earlier, in a very difficult period and used operating leverage to grow its earnings year over year as well.
+So on a combined basis, those four business segments improved 16% from last year's second quarter, earning about $5 billion this quarter. Partially offsetting this was a loss in All Other and that primarily reflects the market-related NII adjustments I spoke about earlier.
+You can also see the returns and efficiency ratios for each of these segments and note that each segment is earning well above our cost of capital. With that, I'm going to turn it over to Paul to take you through the numbers.
+
+Thanks, Brian. Good morning, everyone. Since Brian covered the income statement, I will start with the balance sheet on page 5.
+As you know, when general deposit flows drive the size of our balance sheet and they, on an ending basis, were relatively flat this quarter as inflows were partially offset by outflows to fund seasonal tax payments.
+So total assets were stable compared to Q1 with loans increasing modestly, security balances rising and cash down a corresponding amount. Liquidity also saw a small decline; however, we remain well compliant with LCR requirements.
+Tangible common equity of $170 billion improved by $3.6 billion from Q1 driven by earnings in OCI. This was partially offset by [$1.4 billion]  in share repurchases and roughly $500 million in common dividends.
+As a reminder, following the CCAR results, we announced an increase in both our share repurchase authorization as well as a planned increase of 50% in our quarterly dividend. On a per share basis, tangible book value per share increased to $16.68, up 11% from Q2 2015.
+Turning to regulatory metrics, as a reminder we report capital under the advanced approaches. Our CET1 transition ratio under Basel III ended the quarter at 10.6%. On a fully phased in basis, CET1 capital improved $4.3 billion to $161.8 billion.
+Under the advanced approaches compared to Q1 2016, the CET1 ratio increased 37 basis points to 10.5% and is above our current 2019 requirement. Our [risk-weighted assets]  declined roughly $13 billion driven by reductions related to retail exposures, primarily from credit improvement.
+We also provide our capital metrics under the standardized approach. Here our CET1 ratio improved to 11.4%. Supplementary leverage ratio for both parent and Bank continue to exceed US regulatory minimums that took effect in 2018.
+Turning to slide 6 and on an average basis, total loans were up $7 billion from Q1 and $23 billion or 3% from Q2 2015. On an ending period basis, loan growth this quarter was impacted by pay downs near the end of the quarter in the non-US corporate loan facilities and about $1.6 billion in FX translations across international loans including UK card.
+Note on the slide there is a breakdown of the loans in our business segments and All Other. Again on an average basis year-over-year, loans in All Other were down $42 billion driven by continued run off of first and second lien mortgages, while loans in our business segments were up $65 billion or 9%.
+In Consumer Banking, we continue to see strong growth in consumer real estate and vehicle lending offset somewhat by runoff in home equity outpacing originations. In Wealth Management, we saw growth in consumer real estate and structured lending.
+Global Banking loans were up $35 billion or 12% year-over-year and up 7% annualized from Q1. Deposits were stable with Q1 at $1.2 trillion but grew $67 billion or 6% from Q2 2015.
+Broad-based growth was led by Consumer increasing more than $44 billion or 8% year-over-year, while Wealth Management deposits rose 6% and deposits with corporate clients and Global Banking improved nearly 4%.
+Turning to asset quality on slide 7, we saw improvement from Q1. Total net charge-offs improved $83 million from Q1 to less than $1 billion in Q2. Consumer losses declined modestly across a number of products and while slight commercial losses also declined from Q1 as a result of lower energy losses. Provision of $976 million in Q2 was down $21 million from Q1.
+Finally, we had a small overall net reserve release in the quarter as consumer releases were modestly offset by builds in commercial.
+On slide 8, we provide credit quality data on our Consumer portfolio. Net charge-offs declined $68 million from Q1. While driven by the real estate losses, the improvement, as I mentioned, was broad-based.
+Over half of the losses in this book are US credit card with a loss rate improved 5 basis points from Q1 to 2.66%. Delinquency levels and NPLs improved and reserve coverage remains strong.
+Moving to the commercial credits on slide 9, net charge-offs improved $15 million from Q1 as energy losses declined. Energy charge-offs decreased $23 million from Q1 to $79 million this quarter.
+There isn't a lot of new news on the commercial asset quality front other than the modest improvement in our energy-related exposure. As you all know, the price of oil and gas was more stable in Q2.
+Within this backdrop, we experienced some improvement in both energy losses and exposure. A few clients refinanced with equity issuances and other financing solutions which also helped improve exposures.
+Overall, ever committed energy exposure declined $3 billion from Q1 with utilized exposure declining more modestly and exposure to exploration production as well as oilfield services, which we believe are the two higher risk subsectors, declined 1% from Q1.
+Outside of energy, commercial asset quality continues to perform well. Let me share with you a few metrics that exhibit the quality of this book and its performance.
+The reservable criticized exposure ratio is 3.8% and, excluding energy, metals and mining, exposure is 2.4%, which is near prerecession levels.
+The commercial net charge-off ratio, excluding small business, has been below 15 basis points for 14 consecutive quarters, even with the elevated levels of energy charge-offs we experienced over the past three quarters.
+The NPL ratio, which today is at 37 basis points, has been below 40 basis points for 11 consecutive quarters.
+Turning to slide 10, net interest income on a reported non-FTE basis was $9.2 billion. Included in NII this quarter was a negative $974 million market-related adjustment to true up  premium amortization. This follows Q1's more negative adjustment of $1.2 billion and it's important to note that the adjustment in Q2 2015 was a benefit of $669 million.
+NII on an FTE basis, excluding market-related adjustments, was $10.4 billion. This was lower than Q1 primarily due to lower long-end rates and Q1's seasonal impacts. Compared to Q2 2015, results were up nearly $400 million or 4% as higher [shorten] rates, combined with loan growth funded by deposits, offset the negative impact of lower long-end rates.
+Looking forward to Q3, we will benefit from an extra day which will be offset by the impact of declines in long-end rates over the past two quarters and put pressure on our MBS bond yields and reinvestment yields more generally.
+As we get into Q4 and the next year, we get more optimistic about NII, assuming both the current forward curve and the current pace of loan and deposit growth.
+With respect to asset sensitivity, as of 6/30, an instantaneous 100 basis point parallel increase in rates is estimated to increase NII by $7.5 billion over the subsequent 12 months, driven by the increase in long-end rates.
+Now we think it's also important to understand what we expect to happen to NII if rates don't rise. Referring to the bottom left of the slide; the adjusted NII has been fairly stable averaging between $10.3 billion and $10.4 billion over the past five quarters.
+If we have stability in long-end rates, we would expect to maintain that level in the near-term, again assuming modest loan and deposit growth. Rates moving up or down from here would obviously impact that perspective slightly in the near-term, but building as we extend that scenario into future quarters and years.
+Turning to slide 11, noninterest expense was $13.5 billion in the quarter. That is $0.5 billion or 3% lower than Q2 2015, driven by good expense discipline across the Company.
+As you can see, we are presenting expenses a little bit differently now that we have eliminated the LAS segment. Having said that, we made steady progress on reducing legacy loan servicing costs this quarter and we still expect to achieve our original goal of lowering the former LAS segment costs, ex-litigation, to $500 million in Q4.
+Q2 litigation expense was $270 million, which was higher by $95 million in Q1 2015. So year-over-year, expense improvement, ex-litigation was actually $600 million.
+Nearly every category of cost was lower year-over-year. It was led by personnel, including the expiration of the fully amortized advisor awards, and the revenue-related incentive mostly in Wealth Management. While the rest of the improvement I would characterize as just good hard work, grinding expenses lower through SIM and other initiatives.
+While the rate of decline has been slowing, our employee base is down 3% from Q2 2015. As the employee base continues to grind lower, we think it's important to point out that the reductions on a percentage basis now include more highly paid managerial associates.
+So while the rate of FTE reduction has slowed, the relationship to expense reductions is not linear. Also, we continue to increase the number of client facing associates to drive growth, while at the same time, through SIM and other efforts, simplify and streamline activities and thereby reduce non-client facing positions.
+Lastly, as I said last quarter, we expect our quarterly FDIC expense to increase approximately $100 million for a number of quarters, starting in Q3 2016.
+Turning to the business segments and starting with Consumer Banking on slide 12, Consumer earned $1.7 billion, continuing its trend of solid improvement and reporting a robust 20% return on allocated capital.
+Revenue and earnings were driven by deposit and loan growth, coupled with continued expense improvement, driving operating leverage. As a result of this operating leverage, the efficiency ratio improved roughly 360 basis points year-over-year.
+Note that the lack of reserve releases this quarter versus a meaningful release last year mitigated some of the improvement in operating leverage. So while earnings were up 3% year-over-year, pre-tax pre-provision earnings rose 11%.
+On slide 13 we focus on additional key Consumer Banking trends. First in the upper left, the stats are a reminder of our strong competitive position. Revenue increased by $107 million as NII growth more than offset lower noninterest income.
+Net interest income continued to improve as we drove deposits and loans higher. Noninterest income was down due mostly to lower mortgage banking income. This decline is in part a result of selling fewer loans and instead holding more on our balance sheet thereby shifting mortgage banking income to NII.
+Expense declined 5% from Q2 2015. The positive expense trend is a result of a number of initiatives. As an example, I would note that our growth in Mobile Banking continues to play an important role in helping us optimize our delivery network while improving customer satisfaction. Our cost of deposits as a percent of average deposits also continued to improve and now stands at 162 basis points.
+Focusing on client balances on the bottom of the page, Merrill Edge brokerage assets at $132 billion are up 8% versus Q2 2015 on strong account flows partially offset by lower market valuations. We increased the number of Merrill Edge customers by 10% from Q2 2015. We now have more than 1.6 million households using our platform for self-directed trading.
+Moving across the bottom right of the page, note that loans are up 5% from Q2 2015 on strong mortgage and vehicle lending growth. Average vehicle loans are up 20% from Q2 2015 with average book FICO scores remaining well above the 770 level and net losses remaining below 30 basis points and improving on a linked quarter basis.
+Mortgage loan growth was aided by solid mortgage production of $16 billion, up modestly from Q2 2015, as customers took advantage of historically low interest rates.
+On consumer card -- or I should say on US consumer card, we issued more than 1.3 million cards in the quarter which is the highest level since 2008. Average balances were modestly down. However, adjusting for divestitures, average card balances grew $1.4 billion compared to Q2 2015. Spending on credit cards adjusted for divestitures was up 7.5% compared to Q2 2015.
+As we viewed in previous quarters, we continue to focus on originating high FICO loans which generally produce low loss rates and strong risk-adjusted margins.
+Last quarter we highlighted the quality of our underwriting in the Consumer business. This quarter, we are highlighting our leading position in digital banking. This technology continues to reshape how our customers bank.
+Importantly, as adoption rises, particularly around transaction processing and self-service, we see improved efficiency and customer satisfaction. We added more than 2.5 million new mobile customers in the past 12 months. With more than 20 million active users, deposits from mobile devices now represent 17% of deposit transactions.
+Mobile customers, on average, process 280,000 deposits per day, an increase of 28% year-over-year and the equivalent to volume of 800 financial centers. Mobile sales are up nearly 50% from last year. We are promoting mobile sales and electronic adoption by deploying digital ambassadors in our financial centers.
+We now have more than 3,500 digital ambassadors in our branches engaging with customers who come into the branch to transact. They educate these customers on alternatives to branch banking which are not only more convenient for them but also more efficient for us. Digital sales, appointments and satisfaction all continue to achieve new highs.
+Also, as you know, we are a leader in person-to-person and person-to-business money movement through digital transfers and bill payment capabilities. The adoption and popularity of these capabilities continues to drive growth with record volume of $246 billion this quarter, up nearly 5% year-over-year.
+Turning to slide 15, Global Wealth & Investment Management produced earnings of $722 million, up 8% from Q2 2015. Year-over-year, revenue was down modestly but expenses were down even more, improving pretax margin to 26%, up meaningfully from Q2 2015.
+This quarter included a modest gain from the previously announced sale of Bank of America Global Capital Management. This reduced AUM comprised of short-term liquid assets by approximately $80 billion. Overall, revenue declined 2% from Q2 2015 as strong NII growth and the gain were more than offset by lower market sensitive revenue.
+Asset management revenues decline from Q2 2015 on lower market values while improving modestly on a linked quarter basis. Transactional revenue was down and continues to be impacted by market uncertainty as well is the migration of activity from brokerage to managed relationships. NII benefited from solid deposit and loan growth.
+Noninterest expense declined nearly $200 million or 6% from Q2 2015 with half of that benefit derived from the expiration of the amortization of advisor retention awards that were put in place at the time of the Merrill Lynch merger. The rest of the improvement was a result of lower revenue-related incentives and other support costs.
+Moving to slide 16, despite volatile markets, we continue to see overall solid client engagement. Client balances at $2.4 trillion were down from Q1 but, excluding the sale I mentioned earlier, were up from Q1 as higher market valuation levels, $10 billion of long-term AUM flows and loan growth more than offset tax-related deposit outflows.
+Driven by the expected seasonality, average deposits were down from Q1 as clients paid income taxes. Importantly, average deposits are up 6% from Q2 2015 driven by growth in the second half of 2015.
+Average loans also grew this quarter. Growth was concentrated in consumer real estate and structured lending as well.
+Turning to slide 17, Global Banking earned $1.5 billion producing solid improvement over both Q1 and year-over-year. Returns on allocated capital was 16%, a 200 basis point improvement from Q2 2015, despite adding $2 billion in allocated capital.
+Double-digit percent revenue growth year-over-year offset a low-single-digit expense growth creating strong operating leverage that improved the efficiency ratio to 45%. Global Banking continues to drive solid loan growth within its risk and client frameworks producing solid year-over-year improvement in NII.
+Revenue benefited this quarter from mark-to-market gains on our [FEO] loan portfolio due to recovery in certain energy and mining exposures. Higher treasury fees and leasing gains also aided the improvement from Q2 2015. While total investment banking fees for the Firm were down from Q2 2015, Global Banking gained a little share supported by M&A fees which were up on an absolute basis.
+A modest increase in noninterest expense compared to Q2 2015 reflects the cost of adding sales professionals over the past 12 months, and a modest increase in incentive related due to the higher revenue.
+Looking at trends on page 18, and comparing Q2 last year, clients were confronted with increased volatility once again this quarter with concerns around both global growth as well as the outcome of the UK referendum.
+However, despite concerns, companies still need to finance as well as store their -- move their money and this is when the strength and diversity of our franchise is most appreciated by our clients.
+Average loans on a year-over-year basis grew $35 billion or 12%. Growth was broad-based across large corporates as well as middle-market borrowers and spread across most products.
+Having said that, we slowed our construction led commercial real estate lending a few quarters ago. Average deposits increased from Q2 2015 up $11 billion or 4% from both new and existing clients.
+Switching to Global Markets on slide 19. The past couple of quarters are great examples of the importance of this segment to not only its clients around the world, but also to our customers and clients in all our business segments.
+Customers and clients were able to live their financial lives better in Q2 because Global Markets delivered for them under challenging market conditions helping them raise capital, buy and sell securities as well as manage risk.
+We believe we increased our relevance with clients during Q2 and, more specifically, during the market volatility after the UK referendum. We did this by showing them that we will be there for them when they need us most.
+That we are there for them with consistent set of products and services at terms that makes sense for our clients and our shareholders. And there for them with thoughtful advice as well as the capabilities, strength and confidence to make markets and execute.
+All of this results in Global Markets reporting earnings of $1.1 billion and a return on capital of 12% -- 13% excluding net DVA impact.
+Revenue was up appreciably year-over-year as well as linked quarter. Total revenue, excluding DVA, was up 8% year-over-year on solid sales and trading results and up 18% over a Q1 that saw challenging market conditions. strong expense management drove expenses 6% lower year-over-year even while revenue was higher.
+Moving to trends on the next slide and focusing on the components of our sales and trading performance, sales and trading revenue of $3.7 billion excluding net DVA was up 12% from Q2 2015 driven by FICC.
+In terms of revenue, this was the best second quarter we have had in the past five years. Excluding DVA and versus Q2 2015, FICC sales and trading of $2.6 billion increased 22% as the improvement which begun in late Q1 continued through Q2 as global concerns abated and central banks took further monetary policy actions.
+Improvement was across both macro and Credit Products driven by stronger rates in currency, client activity as well as improved credit market conditions.
+Tighter spreads benefited mortgage trading and municipal bonds outperformed treasuries with strong retail demand. Equity sales and trading was $1.1 billion, declining 8% versus Q2 2015 which saw significant client activity in Asia driven by stock market rallies in the region.
+On slide 21, we show All Other which reported a loss of $815 million. This loss was driven by the current quarter's $974 million market-related NII adjustment. The loss is lower than Q1 due to both a lower market-related NII adjustment as well as the absence of retirement eligible incentive costs.
+Compared to Q2 2015, the difference is driven by a number of factors. First, the negative NII market-related adjustment in this quarter versus a large positive adjustment in Q2 2015. Second, we had reps and warranty recoveries in Q2 2015 related to a court ruling and gains on the sale of consumer real estate loans. Third, provision expense declined from Q2 2015 driven by continued portfolio improvement.
+The effective tax rate for the quarter was about 29%, which is in line with what we expect for the remainder of the year absent any unusual items.
+And, as a reminder, we still expect to record a tax charge of about $350 million, most likely in 3Q, that reduces the carrying value of our UK DTAs as a result of UK tax reform announced last year. The vast majority of this charge will not impact regulatory capital.
+Okay, so let me offer a few takeaways as I finish. Q2 was another quarter of solid progress in a challenging global environment. While growth concerns persist in many countries, the US economy continues to steadily improve, albeit at a less than optimum pace.
+The diversity and strength of our franchise makes us more relevant to clients and customers during times such as these and you can see that in our results.
+Clearly interest rates affected our financial performance this quarter. Still, while we cannot control interest rates, we are not waiting for them to rise. We grew in this environment by focusing on the things that we can control and drive. We grew deposits, we grew loans, we managed risk well reflected in reduced charge-offs.
+We delivered for customer clients in another challenging quarter, especially around the UK referendum. We invested in our future by adding sales professionals and continuing to deploy technology that improves customer satisfaction.
+We returned capital to shareholders and we announced plans to return increasing amounts. And we did all of this while we lowered expenses and drove operating leverage. Thank you. With that, let's open it up for questions.

exam/part2_problem1/Problem_1_Conference_Call_Segments/call_35_questions.txt

@@ -0,0 +1,199 @@
+Question_1:
+
+    Good morning. I had a few follow-ups on the expense commentary. I guess first, though, just maybe what drove the timing of -- given a three-year expense outlook, is it acknowledging lower for longer rates? Is it finding more opportunities? Or what was the motivation to give expense outlook for 2018 at this point?
+
+Question_2:
+
+    Okay, and then I guess specifically, the $53 billion that you pointed to, does that include the first-quarter stock expense of around $1 billion and some, I assume, nominal amount for legal?
+
+Question_3:
+
+    Okay, and just separately if I can ask, we've had a couple other banks talk about loosening standards a bit on the consumer side. I feel like you've held your standards quite high especially in credit card.
+But just any thoughts on appetite for loosening standards a little bit here given the challenging rate environment and the economy is still hanging in there?
+
+Question_4:
+
+    Okay. Thank you very much.
+
+Question_5:
+
+    Hey, good morning. Maybe I could follow up a little bit on the NII discussion. Maybe if you could help us think through -- you talked about near-term kind of flattish, but as we think a little bit longer-term, if the forward curve is realized and/or maybe give some color -- you've had good deposit growth, core loan growth of 9%, but net loan growth has only been about 2.5%.
+Do we start to see that inflect more? And does that start to help the out years as well? So, just any color on NII beyond the next quarter or two would be helpful.
+
+Question_6:
+
+    So if -- I guess you don't want to put too many numbers around it, but should we think that maybe starting in 4Q or 1Q we might start to see some incremental NII growth and maybe that accelerates, as you point out, the loan growth overwhelms the rate picture?
+
+Question_7:
+
+    Right. Okay, great. Thanks.
+
+Question_8:
+
+    Hey, good morning, guys. Just one, on the fee side you mentioned all the great metrics in terms of the growth of activity and account growth and whatnot, but we're continuing to see declines year-over-year in card income, service charges and the brokerage business.
+So, I was wondering if you can walk us through when you anticipate some of the building blocks turning into revenue. Or are there still some of the spending or competitive pressures building in underneath? So just the outlook for some of those core consumer and brokerage-related fee areas would be great. Thanks.
+
+Question_9:
+
+    A quick two parter on Wealth Management. One, I wanted to see if you saw any difference, post the retention lock-ups of a few months back in terms of [FA] attrition? And then the second part is in wealth management. What specifically -- product or behavioral changes are you putting in place ahead of the DoL rules kicking in in April?
+
+Question_10:
+
+    Okay, appreciate that. And just a follow-up on the 2018 expense target which everyone appreciates. It might be a silly question, but should we -- is it safe to assume that 2017 will be somewhere between 2016 actual and 2018's target?
+
+Question_11:
+
+    Okay. Thanks, Brian.
+
+Question_12:
+
+    Hi, good morning. So I hate to beat a dead horse on the expense question, but Brian or Paul, I was hoping you could provide some more detail as to what specific expense leverage you can pull to really drive that figure to $53 billion.
+It is a pretty meaningful delta versus the $56 billion run rate over the last four quarters. I'm just trying to gauge how those expense initiatives might impact revenues and whether we should expect any revenue attrition as those additional initiatives take hold?
+
+Question_13:
+
+    Got it. Okay. So, Paul, based on your comments it sounds like it's really going to be driven by technology and other efficiency initiatives. So there shouldn't be any expectation that we could see any meaningful revenue drop off or attrition in light of those actions that you are taking?
+
+Question_14:
+
+    Thanks very much.
+
+Question_15:
+
+    Thanks. Just a couple of questions on auto and then one clarification on the OpEx guidance. I'm sorry to come back to that, but on the OpEx, is it -- is the 2018 figure where you expect to begin 2018 or end 2018?
+
+Question_16:
+
+    For the full year? On auto, you underscored the origination quality and the high end of the FICO range, but one of the things that we are hearing from dealers is about the compression in pricing that's occurring in the high end ranges.
+Some other lenders move up out of the mid-FICO range and I wanted to see if that's something that you think you're experiencing or if you're in fact seeing some stabilization in the competitive area around high FICO auto lending?
+
+Question_17:
+
+    Thanks very much.
+
+Question_18:
+
+    Hi, still more on expenses. This might be good news/bad news. I guess the good news is your expenses over the last year, branches are down 2%, FTE down 3%, almost every expense line is lower, so that's good, and for efficiency ratio is down to 62%.
+But the bad news the way I look at it is over the last five years your expenses are down a lot but your core revenues are down even more. So what might resolve at least the issue in my mind? Do you have a specific efficiency target for 2018?
+
+Question_19:
+
+    And I don't want to take away -- I think we collectively appreciate having a 2018 expense target. But if you just take the second quarter annualized, you are at $54 billion. And then if you reduce your LAS expenses you get down to a $53 billion number. So is this ?
+
+Question_20:
+
+    Okay, well that's helpful. And you said a lot is going on and I think some other analysts tried to restate what you're saying. But what are the three biggest drivers then of that reduction and what you might term a core expense base?
+
+Question_21:
+
+    And then lastly, should we expect a restructuring charge or do you pay as you go?
+
+Question_22:
+
+    All right, thank you.
+
+Question_23:
+
+    Hi. I won't beat the dead horse on expenses. Just a quick question on the card business. If I look at purchase volumes year on year, it slowed further from last quarter. Any color on what's going on there?
+
+Question_24:
+
+    Okay, but the divestiture happened in 4Q; it slowed from where it was. It was up 2% year on year in the first quarter and it slowed to 1% year-on-year in the second quarter. So it seems to me a little bit of a weakening trend.
+
+Question_25:
+
+    I know, I am -- in fact, those were both reflected in 1Q 2016 year-on-year growth rates and I'm comparing  --.
+
+Question_26:
+
+    Okay. Got it. Thanks.
+
+Question_27:
+
+    Yes, thank you very much. On the LAS, so you now consolidate the LAS segment into pretty much the Consumer segment. You still -- last on the appendix you said you had about 11,000 workers in that area -- I guess continuing to work through about 88,000 loans.
+Should that number continue to move down? Will we continue to see that move down or what's the thoughts behind that?
+
+Question_28:
+
+    Okay, and then you gave some guidance on where you think LAS expenses will be by the fourth quarter. And I'm not sure I wrote it down correctly and I might have misinterpreted it. But was it close to $500 million, you said, or am I off somewhere?
+
+Question_29:
+
+    So, is $500 million the run rate to service the good loans? I'm confused. Or is that still servicing the bad loans?
+
+Question_30:
+
+    Both? Okay. Thank you very much, guys.
+
+Question_31:
+
+    Good morning. Sorry to come back here, but I just hate horses, so I'm going to take another whack at this thing. On expenses, what should we think about as far as your assumptions for legal and then some of your market-related businesses, market sensitive businesses? GWIM end markets? Just because the expense line items in those businesses do have a pretty big impact from market conditions.
+
+Question_32:
+
+    So overall  --.
+
+Question_33:
+
+    Right. I guess I was just -- so you're saying that first of all on legal, the $53 billion includes a roughly $300 million per quarter rate, and that your operating assumption for the GWIM and other market business would assume a revenue inflation and corresponding payout inflation from those businesses from here?
+
+Question_34:
+
+    Got it.
+
+Question_35:
+
+    Okay, that's really helpful. Thank you. And then one quick follow-up on GWIM. You guys highlighted a gain on sale, but could you talk about how much that impacted the margins in that business and then whether or not there was any EPS tailwind there?
+
+Question_36:
+
+    Okay, thanks.
+
+Question_37:
+
+    Good morning. Thanks for taking my question. Paul, I wanted to follow-up on the mortgage banking side of things. That was one of the areas you highlighted in terms of potential growth. Year-over-year, the mortgage banking revenue was down fairly substantially. It seems like a lot of that was hedging gains and losses and things like that.
+But you also mentioned that you're planning on keeping more mortgages that you originate on the balance sheet. Could you give us a little more color in terms of how you are thinking about that going forward both in terms of the mortgage originations being kept on the balance sheet and how you are thinking about mortgage banking fees?
+
+Question_38:
+
+    Yes, thanks very much.
+
+Question_39:
+
+    Hi. I apologize for going back to the net interest income issue, but obviously the reason why central banks keep interest rates down is because they expect it to increase lending. And I'm wondering if you've done any elasticity studies which show what happens to loans when interest rates go down or up.
+And as part of that, there are multiple examples of what happens to earnings if interest rates go up 100 basis points or down. And I'm wondering if you've done anything to show if interest rates remain flat and loans go up 2%, 5%, 6%, 8%, what the impact on earnings would be.
+
+Question_40:
+
+    What I'm asking to get a lot more specific in the sense that you do this with interest rate changes, right? In other words, there's these bubble charts which show what will happen to net interest income if interest rates go up 100 basis points. There is nothing which says what happens to earnings if you see a 5% increase in loans.
+In other words, what is more important? In the old days people would show these charts, if you hold interest rate flat and volume goes up, what happens to earnings if you get a 5% increase in lending as a result of interest rates staying so low?
+
+Question_41:
+
+    Yes, but the reason why I'm interested is because the whole discussion that we now have is that interest rates are staying flat and therefore bank earnings cannot go up because the other side of the equation, which is what happens to volume when interest rates go down, is just not discussed at all. So I'd love to talk to you more about it.
+
+Question_42:
+
+    Oh, thanks. Thanks. Just a quick follow-up on the capital ratios. Paul, we saw a pretty big improvement across you and your peers in PP&R on seemingly lower op risk hits, particularly legal. Do we start to see that factor into the advanced approach calculation?
+You guys get punished pretty hard on op risk in the advanced approach. Do you start to see some -- I guess some light at the end of the tunnel of being able to reduce that given all the reductions in legacy risk assets that you've seen?
+
+Question_43:
+
+    But you're not -- nothing to read into the results in CCAR yet anyway?
+
+Question_44:
+
+    No, no, but in the PP&R they obviously made that point, that --.
+
+Question_45:
+
+    Okay.
+
+Question_46:
+
+    Right, so it's just a little too early to see any kind of spillover benefits yet?
+
+Question_47:
+
+    Okay, thanks.
+

exam/part2_problem1/Problem_1_Conference_Call_Segments/call_36_answers.txt

@@ -0,0 +1,346 @@
+Answer_1:
+
+    Well let me start with the last part first. Nothing has changed at all for our thoughts regarding the 2018 target that we discussed in the second-quarter call. Again I would note that year over year we reduced expenses by $0.5 billion.
+And I would also just point out to remind everybody that if you look at expenses over a longer term we reduced quarterly expenses ex-litigation by $4.8 billion from Q3 2011. That's a $19 billion run rate.
+So if you think about what we have to do between now and 2018, I think we've talked about this before, roughly a third of that is going to come from continued progress on the  loan servicing. The other two-thirds is going to come from a lot of different initiatives across the Company.
+We've talked about SIM, our Simplify and Improve initiative. We are going to be utilizing technology to digitize processes, eliminating handling costs. We are going to get technology efficiencies from our data centers consolidation and for more efficient servers.
+As I said, we are going to continue to make progress on delinquent loan servicing costs, hopefully see some modest improvement in litigation. Very important part of this is the shift to self-serve digital channels: mobile, online, ATM. So that's what the list sounds like and it goes on and on.
+I would emphasize this shift to self-serve. We're seeing good momentum with more than 21 million mobile banking active users. And that's growing every week, every month.
+18% of our deposit transactions are now completed through mobile devices. That's better for customers.
+It's also better for our shareholders. It's 1/10 the cost of walking into a branch.
+So it's all these things put together. It's initiatives across the whole Company. It's going to come a lot from support and operations, but there's a little bit in the front office, as well, as we get more efficient.
+
+Answer_2:
+
+    Yes, I would say it's going to be fairly spread out throughout the whole process. However, as you think about one quarter over a next, it's not going to be straight down every quarter. Not every quarter is the same, there's going to be some lumpiness.
+If you look at the fourth quarter, for example, we traditionally have some seasonality in the fourth quarter. So generally we will make progress but don't expect that you are going to see it in every single quarter.
+
+Answer_3:
+
+    Sure. So let me I can help you through that. So if you look about a 25 basis point, that would be one quarter of our $5.3 billion in sensitivity.
+If you want to assume that 25 basis points increases the long end by 25 basis points you know the answer. you can roughly take a quarter of it, perhaps even a little bit more, because we're probably more asset sensitive on the first 25 than the last 25 of that 100.
+But if you don't want to increase on the long end just look at the short end. We've disclosed its $3.3 billion. You can divide that by four and get a pretty good sense of what 25 basis points would do over the subsequent 12 months.
+
+Answer_4:
+
+    Yes, I will try to do that but let me just start with a couple of thoughts. First of all, I think it's difficult to see share shifts in Global Markets in any given quarter. The fee pools are just not as transparent as they are in, let's say, investment banking fees or other areas.
+What we know is client activity was up in the third quarter and that's what drives our short-term results. Over the longer term it is easier just to assess what's going on with fee pools and share. So I just want to point out from 2014 to 2015 on declining fee pools we're pretty sure we improved our share.
+Third parties tell us that. And I think that share has come from a number of regions and a number of firms and a number of products as competitors adjust their strategies and capabilities.
+More specifically, we've been investing in rates for a number of years. I think we're making some progress there. We have a very strong credit platform, as you know.
+I think we are making progress there relative to competitors around the world. And I think we are investing in equities. And I think equities revenue is down, but we are seeing an improvement relative to the fee pool in equities as well.
+I do want to emphasize, very importantly, that our strategy is to have a diversified product portfolio across both FICC and equities and globally. That's what our clients need and want from us. And so you could see gains one quarter in one place and see something lower in another place, and that's okay with us.
+That's our strategy. It's about what the client needs in any given quarter. If we are doing a little bit worse in one place we are probably doing better in another place.
+
+Answer_5:
+
+    Clients are going to have three ways to invest in their IRAs: they are going to continue to do it completely self-directed through Merrill Edge, they are going to be able to do it online but enhanced with professional portfolio managed through Merrill Edge Guided Investing and, again, for those clients who want one-on-one advice and service from their FA they are going to be able to do that on a fee-based advisory platform. What we've decided not to do is use the best interest exemption to allow IRA accounts to be added to our brokerage platform where clients pay on a transaction basis.
+After reviewing all her options, let's say, if a client chooses one-on-one advice and service on her IRA we believe the best way to provide that advice is through Merrill Lynch One on our fee-based advisory platform. We took a lot of time to make this decision.
+We took months thinking about this. We did research. We believe this is the best interest of our clients and our advisors.
+
+Answer_6:
+
+    That's right but the advisor is going to have to talk to their clients and explain the best interest exemption. That's going to be much harder a conversation than the one we are going to have.
+
+Answer_7:
+
+    We feel good about loan growth. The economy feels good, so we are confident we can grow. But, of course, there's going to be some uncertainty and as I said in certain sectors in certain regions around the world.
+I would remind you that we are focused on responsible growth. So we are going to look a little bit different than some of our competitors in some places but we feel good. Year over year if you look at our business segments we had 7% loan growth.
+
+Answer_8:
+
+    Betsy, if you go to page 6 of the materials you can see that we are continuing in the mortgage area overall. So I think both in the home equity and first mortgage loans.
+You can see that we continue to run off some of the non-core portfolios and overall the balances grow in the business segments. And we expect that to continue. We are doing about 2,000 applications a day, about 1,000 each plus in each of the products that has continued to grow. And so we will continue to drive that core capability to the customer.
+In terms of expansion of product sets we have a limited product for that we've built for similar to 3% down payment for $0.5 billion a year of production just to give us a more competitive product there but limited the size. And we will do some other things, but we are going to stick with the core credit.
+Remember who you are talking to here, Betsy, and our experience in mortgage is probably deeper than most people. So we will stick with what our customers need and what we think the right business for the Company is.
+
+Answer_9:
+
+    Well, I think if you think about the growth you've got the interest side and you've got the fee side. And if you look at the interest side it's going to be driven by balanced growth between loans and deposits. And I think we keep growing deposits year over year $60 billion, we are paying 4 basis points in Consumer and think about that dynamic and putting that to work in anything we can is important.
+And we continue to grow loans at less rate than we grow deposits. That's going to drive our NIM is just a bigger and bigger, lower lower cost deposit base.
+And on the loan side I think Consumer is growing better now than commercial linked quarter but overall we expect commercial will kick back in a little bit as the economy continues and some of the uncertainty lifts in the political season here. So on loans and deposits it will just be growing and now as you've seen year over year core growth of 7% on loans and growth on deposits.
+On the fee side what you are seeing is the dynamic in especially consumer fee areas finally turn a little bit stable and then turning for us in the card revenue and things like that, which we've hit sort of the inflection point where the run down and relative interchange due to selling some portfolios and getting out of non-core portfolios and putting on the core portfolios with rewards attached to it which helps us generates deposits and things like that has stabilized and you are starting to see in the last few quarters card income start to move up a bit.
+And on service charges it's been relatively stable. So the fee side will be driven more by Wealth Management markets and things like that. And Consumer is stable, which is good because it had been a drag for a long time.
+
+Answer_10:
+
+    We continued -- when we have less people going through our bonus pools and stuff you can see that comp continues to drift down. A large part of a comp, obviously, is the financial, in the Wealth Management business which there is no meaningful changes there. But in the other business we continue, as we have less people we continue to reduce that as a percentage of revenues.
+
+Answer_11:
+
+    I said earlier if you think about the last several quarters of earnings calls it's been getting better than this and every quarter it gets slightly better. And that in part is because we are still getting the benefits of the changes made six, seven, eight years ago coming through the Consumer business i.e., that what we call back book portfolios or legacy portfolios or whatever word you want to use continue to run off with higher credit risk. And we keep putting on and have put on and continue to put on higher credit quality.
+So I think if you think about overall charge-offs of 880 this quarter that's a driven by the Consumer business and that's driven by the card and the legacy home equities. So keeping the card business where we want it is critical and you are seeing this continue even as we start to grow that portfolio, both nominally and rate the charge-off picture is strong. And so when you go back and look at what happened during the crisis the charge-offs came normally from the edges of credit and we've kept ourselves out of it.
+
+Answer_12:
+
+    We have done that.
+
+Answer_13:
+
+    Yes, you are speaking under the advanced approaches we had a drop. We had it under standardized as well just a little bit less. And that drop came, again, from legacy portfolios running off and from continued work by our Global Markets teams to better manage their balance sheet relative to those ratios.
+
+Answer_14:
+
+    Yes, look there's always more to do and we are focused on a lot of different regulatory metrics. We are looking at all of them. There are some that may be a little bit more important than others.
+Right now we are focused on all of them. And I think there is more to come there.
+Obviously, as we do grow the balance sheet, as we grow loans and deposits we are going to continue to see some increase particularly on the standardized side. But I think we can, relative to that growth I think we can continue to make a little bit of progress incrementally.
+
+Answer_15:
+
+    You pick up on the core thing that drives. We have a securities portfolio because we have more deposits coming in, then we have loans. So our view of that portfolio is we don't take credit risk there and so we have two alternatives, treasuries and mortgage-backed securities, or cash I guess is a third.
+And so that's how we invest it. And Paul can take you through his earlier comments a little bit and give you some color on that. But I think people always have to remember the reason why we have more is because our deposits grew at $60 billion year over year and that's more than our loans grew by quite a bit.
+So, Paul, do you want to answer, give some color on that?
+
+Answer_16:
+
+    Just one step back. Obviously what we are doing every day is managing earnings, capital liquidity and interest rate risk when we think about that portfolio and where we want to invest things. This quarter as you noted our deposit growth exceeded loan growth and so we did add significantly to the investment portfolio.
+Most of that incremental amount we devoted to treasuries. Just as we think about the balance in that portfolio we wanted to just add a little bit more treasuries. That's really kind of it.
+
+Answer_17:
+
+    Remember that the reason why you don't see much repricing is really two or three dynamics. One is a full $450 billion of our deposits are noninterest-bearing. So they aren't going to reprice.
+The great debate is about how sticky are those? And if you think about that, those are dominated by our Consumer business and our noninterest-bearing accounts in Consumer have doubled in size over the last five or six years due to focusing on primary accounts, grew up to 90% primary accounts in the household where they run their household finances through our account and, therefore, they direct deposit their check and things like that.
+So the first thing to remember is that $1.2 trillion, $450 million noninterest-bearing and a dominant and part of that Consumer and also in the Wealth Management and the transactional account of both Consumers. And then on the business side similarly we have a driven our deposits to be really LCR friendly into core operating accounts.
+And so those aren't going to move, they are noninterest-bearing and they aren't going to move much and the big debate is how much balance will be in there and we feel confident the balances will stay just because of the nature of the accounts. And then when you go to the second dynamic, remember that even with all this deposit growth one of the things we continue to do and the impact is less and less is we are expecting Consumer business running off CDs still at a fairly decent clip that were historically used to fund prior companies' balance sheets that we don't need the funding that cost. So we have some rollover but that continues to decline.
+That weighted average cost drops off -- that cost drops off and drives down or hold steady the average weighted cost. And then if you look at money markets and other interest-bearing they really haven't moved much.
+So we feel good about the consumer -- we feel good about the deposit base overall. We feel very good about the consumer deposit base, just crossed $600 billion for the first time in the Company's history in Consumers generally.
+And with that, I think if rates rise we think that it's substantial value for the Company. And Paul gave you a way to think about that earlier with a quarter of $3.3 billion -- 25% of $3.3 billion.
+
+Answer_18:
+
+    So look, I think you are noticing some modest card balance growth in the quarter, which we think will continue as we add new accounts. And, again, we are very focused on adding high-quality accounts there.
+I think you probably also noticed that while combined debit and credit card spend was good in the quarter at 5%, 6% if you include fuel, I'm adjusting for divestitures last year, that the growth in the card income was impacted by, as you noted, customer reward programs. However, I think just focusing on the fee income misses some really key benefits of our strategy which is to attract relatively higher-quality card customers and reward them for deepening their overall relationship with us.
+This strategy really drives deposit growth and makes deposits stickier, plus we believe these customers have lower loss rates. They use the call center less which helps us lower costs. I think when you want to see the effect of this you have to look at the overall Consumer segment and what's going on there in terms of growth of profits and improvement in expenses.
+And just lastly I would just point out, look, our risk adjusted margins on card are strong at over 9%. This is in no way a signaling that we are not going to be able to grow the card income line. I just want you to get a better sense of how we think about it.
+
+Answer_19:
+
+    I think if you think about that more broadly, we had the last divestitures of size we made in this card business were the fourth quarter of last year and they are through the P&L, so they are through the balances and through the thing. So what you are starting to see if you look at the trend this year is you are starting to see movement, positive movement both in card income and in balances as we move across the year. And we expect that to continue.
+It will be strong, responsible growth. And one of the great debates we have in the Company is people say, why can't you grow this faster? Or why can't, we are giving up too much in the interchange for the preferred balance or preferred rewards, the interesting question is are you giving up something you'd never have in the preferred rewards i.e., we are bringing more customer relationships in depth and that gets us something.
+So incrementally the net interchange is actually there as opposed to what theoretically you get gross interchange with a non-customer in an affinity program. So we focus on the entire customer relationship. It is very valuable, it is very profitable and believe me if we could grow it faster responsibly we would.
+But the idea is just to grind out the slow, steady growth and we are starting to see that come through. And largely it was masked in 2014, 2015 and behind that 2013, those areas because we were divesting a lot of non-core relationships and now we have the core affinities we want and we have the core card businesses we want.
+
+Answer_20:
+
+    And, again, I think you can see it if you look at the whole segment. I don't want to start comparing us to peers, but just take a look at our PPNR year over year. It's up 10%.
+
+Answer_21:
+
+    Well, I think embedded in that is the future return of capital. And we now have a significant buffer above the requirements. And as Paul said we continue to try to optimize our core.
+So I think you are a little bit of a horse race between increasing earnings and increasing capital. And as we return more you expect that the horse race of increasing earnings would stay ahead of it. But we've got room to go and we are driving at it.
+But if we don't hit -- if the issue is that our capital continues to grow, that capital is also yours as an investor and continues to go into our book value. And so it's not going anywhere. It's there to be returned when we can get through the process of getting from where we are to higher percentages of capital return and ultimately returning excess capital.
+
+Answer_22:
+
+    And we have a goal to return more.
+
+Answer_23:
+
+    Well, let's go to how we run our Consumer business. So we run our Consumer business consistent with responsible growth for the Company. And what that means is that you focus on deepening relationships, what we call a stairstep where the core deposit account, the quarter credit card and getting it used in the core mortgage, in the core home-equity and the core auto loans.
+That's what's been driving it and we'll continue to drive that. That is the backbone of what we did and how we repositioned this Company over many years.
+In terms of the branches, Mike, you rattled off all the statistics which Paul talked about earlier. But it is a complex optimization, but it all starts with the consumer. What is the consumer going to do?
+And so while 18% of deposits are made by mobile deposits, 82% by their nature aren't and where do they go, about 50 percentage points of that go through the ATM machines and about another 30% odd go through the teller line still today. And so you have to be ready and able to serve in all dynamics.
+And so what we continue to do is optimize the branch structure, the call structure, the ATM structure, the mobile structure and the online structure altogether. And the way to think about that optimization and why it's an extremely important business to this Company is that we've gone from 300 basis points of the cost of all that to deposits to about 150 over the last six, seven years. And that's by continuing to optimize the physical plant as well as all these other means.
+And so if you ask me your question is how far can go? You have to also then think about what we want to go on at a branch.
+And so if you look back at some of the statistics that Paul had in the deck for Consumer where you see things like appointments set up or 340,000 in the third quarter, so just think about that. 340,000 times a customer went on a mobile phone and asked to come to a branch.
+And so we need those branches to receive those mobile phone customers and why are they coming? Usually for a much more important financial transaction to them than handing us a check for deposit. So it's a quality versus quantity and making sure we understand that.
+So we are optimizing all those and you can see on page 14 on the lower right you can see the different moves. I'd say we went from 7 million visits probably four or five years ago to 6 million to 5 million. But those five are of a higher quality and we think that's important.
+And there certain transactions and certain capabilities that you just have to have at your branch, you just have to do face-to-face. Very difficult things like how to get a power of attorney for a parent that's sick or I want to do a mortgage, it's still difficult to do through the phone and things like that. So we will have all aspects, we will drive it down and you can see that we continue to make that progress.
+
+Answer_24:
+
+    I'd say that the point is that we run this business and we start with the consumer and their activities and their behaviors, and so what they want to do. And the key is not to get ahead of them because that can cause you problems and not to be behind them because that can be cost issues and empty branches.
+So even in the 112 we are down we've added branches. And places like Denver, the Denver branch that we added are in the top 10% of performing branches today on relationship building. We've added branches in Manhattan, we've added branches in Minneapolis.
+So we are in a sea change in terms of what the branches look like individually. The new branches are different. We are adding branches we didn't have and we are closing branches where the utilization isn't there.
+The nature of how far a customer will travel is also different now than it was 10, 15 years ago. So I think you said what all the different reasons? The answer is I think you said is we will follow the customer.
+And I don't know the exact number because I can tell you eight years ago when we had 6,100 there were people that said there was never going to be less branches in our system and maybe we should add more. And guess what? We are 4,600 -- 4,500.
+
+Answer_25:
+
+    You are right, we had a $280 million benefit this quarter and that was from a higher valuation of the MSR, which was due to slower observed prepayment speeds. So we are just updating our -- the way we value that.
+We have to monitor -- it's a level III assets, so there's a lot of things that go into that. It's hard to value and you've got to continually be looking at that valuation. And we thought it was time based upon observations of prepayment speeds to make a change in some key assumptions.
+
+Answer_26:
+
+    Based upon how we are growing the business, how we are running the business we expect stability.
+
+Answer_27:
+
+    I think the rep and warranty is a contra-revenue. So is that what you are referring to?
+
+Answer_28:
+
+    So that's going to bump around. That bumps around because --
+
+Answer_29:
+
+    Hey, Eric, it's Lee. I think what you are looking at, what Paul is referring to is the contra-revenue item. So it's a negative revenue item when it's a provision expense on the provision, okay?
+
+Answer_30:
+
+    We are continuing to see good growth in consumer vehicle lending the way that we run the business. We are up roughly 7% or $7 billion or 17% year over year. Again, though, we are focused on prime and super prime.
+So originations were down modestly Q3 versus the prior quarter as we accepted a little bit less dealer flow but we still feel good about that product offering. The third-quarter average book FICO scores remained at approximately 770. Debt to income was at all-time lows.
+We are not following the market expansion to 84 months in terms of tenor. We have got a maximum tenor of 75 and I think in the third quarter we were averaging around 67. So we are getting the growth within our responsible growth framework and we feel good about it.
+
+Answer_31:
+
+    Sure. So the primary affected portion of our business is in the transactional brokerage retirement accounts.
+And if you look at our roughly $2 trillion of GWIM client assets outside of loans and deposits we would see the DOL rule having an impact on significantly less than 10% of those balances. And, again, that's as the industry works towards the full implementation of the rule in January 2018.
+So as you noted we are going to see some geography movement on the P&L. There's going to be some shifts.
+And if I had to guess today we might see some modest revenue impact in 2017. But it's really way too early to know how it's all going to shake out. But we would expect to mitigate that in subsequent years.
+
+Answer_32:
+
+    People, Steve, when you talk about backing up to the fuller trends on Wealth Management and there's been a constant decline in brokerage revenue over the years largely because the industry and we have been moving more to a financial device to manage the account execution. And so in, obviously, a limited portion of that is IRA-related in both counts. But the reality is this is against the backdrop that you will see, that brokerage number has the number has been tough to chase for five years now.
+
+Answer_33:
+
+    I think the implementation has to be very carefully handled. And the team, Andy and John, have been leaders in trying to figure this out the right way for the client. And we start with what's best for the client.
+So what you are reading about is there will be adjustments made clients by clients based on their circumstances and what they want from us. And the FAs will engage in a lot of conversations about that as we go through the next several months.
+
+Answer_34:
+
+    Okay, well, look that's, obviously, a pretty technical question. And it's not that we haven't thought about it, but to be frank it's just a speech at this point and he didn't really address that in his speech. So we don't know the answer.
+That's one of the questions we have. I think once we get the Fed's proposal we will have a better idea. But all I can tell you is based upon our current reading of the speech, in particular some of the changes you mentioned in CCAR around asset growth, we think that the substitution of the capital conversion, conservation buffer, sorry, capital conservation buffer with the stress capital buffer would not be a material change for Bank of America given our risk profile and given how we run the Company.
+
+Answer_35:
+
+    Well, the way I come at that debate is to go back along many years ago and think through the repositioning that was done in our Company and so the key was to make FICC work. You are talking more revenue, but we look at profit.
+And so to get the profit we needed to out of the fixed income and equities business we had to take the cost structure down which we did in 2010 and 2011. Tom Montag and the team worked very hard at that and got breakeven down over $1 billion a quarter.
+And then we ran along a number of years and then they've actually had taken out, year over year you can see the costs continue to be managed well despite higher revenue. So I would say taking the discussion I'd say the way our fixed income business generates revenue a lot of it is around our capabilities, underwriting capabilities in all the different variations from high-grade leverage to everything that goes on. And that's a relatively stable pool of revenue that you see repeated.
+What goes up or down is really the activity around that based on the market seizing up in certain quarters in terms of issuance and things like that. When you think about the other thing that Tom and the team had to really go after which is to broaden our capabilities in the macro segment a little bit because that was something that traditionally the Bank of America Merrill Lynch teams came together. And he has done that so that's added some more volume to us.
+So we think we've been gaining share, as Paul said earlier. When you look at revenue comparison among the top 10 banks without all the leak charge for just revenue, and we think it's driven by our fixed income capabilities and it's driven by our connectivity from the issuer of the bonds in debt to the investor. And we will continue to drive that.
+And so the team has done a good job. And I'd say we are at a fundamental level.
+This quarter feels better than last year's quarter. It's not a quarter that when you look across four or five years that we haven't come close to on many cases and have done better than a few times.
+
+Answer_36:
+
+    We feel -- I think let me start with what we noticed in commercial in the quarter was lower industry growth this quarter I think that really reflected a slowdown in closed, actually booked closed acquisition financing for us, which is probably maybe could be different for peers depending on the timing of transactions and then uncertainty around the election and then I think some lingering concerns around certain countries or regions. That's what I think impacted the third quarter.
+When you look at the US, when you look around the globe, when you look at GDP growth we are optimistic. We think the economy feels good. So in a good economy we should be able to grow commercial loans.
+We will have to stay focused on some sectors in some regions but we think we can grow commercial loans. Utilization rates and revolvers, they came off their highs but they are at the higher end of the range which also suggests or reflects good commercial activity.
+We are adding bankers in the US in commercial banking and small business. We are adding them to regions where we know we have some synergies or some capabilities, some big MSAs. So there's no reason why we can't grow within our responsible growth framework assuming the economy continues to chug along here.
+
+Answer_37:
+
+    Also if you think about by sub asset class, in real estate we modulate our growth there based on our view of wanting a diverse portfolio and then how we lend in the business. And if you see that number it was growing and it has flattened out a little bit and that relative to others that was the difference. But I think to Paul's last point is a key point.
+There are creditworthy customers that we can do more with and the only way to do that is because we have a talented world-class commercial banking team is to add more capacity. And that capacity is starting to build, and it takes a while because you hire a commercial banker and we sometimes give them some of the undercovered names in our portfolio or else then they go after the prospects that we have, then it takes a while to build those up. People don't change their commercial banking relationships in an afternoon.
+So in our business banking and our middle market, especially across America, we have been adding commercial bankers and we expect that to redound to our benefit. Given an environment which may be solid but okay we'd expect to gain share in those markets as those bankers come on stream and become more productive and Alastair Borthwick and Katy Knox, the team that's driving that, has proven that those bankers do get share and you will see that come through.
+
+Answer_38:
+
+    I think when you think about fraud most people think about in terms of the electronic side most people think about credit card fraud and fraud as a broad worded, arguments about whether the charge was valid, whether a merchant and things like that. So there's a long history of adjudicating that.
+So more and more sales go online by the consumer the techniques for online are continuing to develop. At face to face or point-of-sale, the chip card when we are largely through our customers having chip cards, merchants, what we call chip-on-chip, i.e. our chip card used with a merchant chip machine is rising a percent or so a quarter and is now as best we judge it in the 30s, the high 20s or something like that, Nancy.
+So all that being said, we expect to get leverage in our fraud losses in a Consumer business year over year and we expect that to continue to come down. So yes, that is a major initiative for us to continue to drive that down.
+Part of it is education to consumers, part of it is getting the chip cards in the hands and getting the machine, merchants using the chip machines. Part of it is the tokenization and the wallets and things that go on in Visa Checkout and all the variations of MasterCard and getting, because that's a tokenized better execution and is more secure.
+So our view as a provider has been to adopt all these wallets and technologies that have this tokenization capabilities and that then drives down the cost of losses due to merchant complaints and other types of things. So you are absolutely right: cyber security, theft of cards from other people and sold on the Internet, all that stuff is important to us. And so we spend, as we said, $0.5 billion a year protecting ourselves but also part of it is making sure we understand who our consumers are in terms of lost cards and things like that.
+
+Answer_39:
+
+    Maybe I will take that one. Look, I want to take just one step back because to really answer that question you just have to have a better appreciation for how we run Bank of America. And it truly really does start with our purpose, which is to help customers better live their financial lives and then from there you have to understand what we mean by responsible growth.
+So if you ask anybody in the Company, responsible growth, it's about developing relationships so that we can grow with our customers over time based upon their needs and goals. It's not about the number of products that we open. It's whether customers want or need the products and services we are offering them and use them.
+That's how we measure ourselves. We've spent years building controls and governance and escalation around this. We are always monitoring them.
+It's just how we run the Company. So that's probably the best answer I can give you in terms of how we think about this issue.
+
+Answer_40:
+
+    Nancy, I'd say this, we have dialogue with all our shareholders often and Jack Bovender, our Lead Independent Director. Obviously, we went through this a year or so ago. And last year the shareholders they voted on it, but the key is how we run the Company and how we govern ourselves.
+So, again, Paul's view of what he talked about responsible growth, one of the tenets is to be sustainable and sustainable, all growth has to be sustainable and it involves things like you've got to invest in the future. But it also involves how we govern the Company.
+And our Board, the independence of our Board, the experience on our Board, how they approach their responsibilities I think is very strong. And I think our shareholders have understood that and agreed with that.
+So I think we govern ourselves in a very tough fashion i.e., the Board's demanding on us and understands the strategy and has helped support the strategy through some times when people would challenge it. And I think it's proven to be the right strategy at this point.
+So if you get to the technicalities our Lead Independent Director duties are as strong as anybody's in the industry. If you look at all the new governance surveys that have come out, all the words about proper governance and all the different things you've seen recently, we meet or exceed everything anybody says to go to. So I feel comfortable with that.
+
+Answer_41:
+
+    Okay, so look. When you look at advisor attrition today it's at all-times lows. And we don't expect significant attrition for the same reasons that attrition is low today. Merrill Lynch is a great place to work and serve your clients.
+So if you are an FA you are looking at a platform, we have market-leading capabilities, we have breadth of products across banking and wealth management, we have lots of options in terms of servicing clients. We have got great technology that we are investing in, tremendous transparency that provided through Merrill Lynch One award-winning research and incredible global execution through global markets. So there's a lot of reasons to be here.
+This is a great place to serve your clients. We are implementing a strategy that creates significant flexibility for our advisors. And we are delivering fiduciary best interest advice to clients.
+I said it before. When we came to this decision not to use the best interest exemption after a lot of months of thinking and research, and this is better for our advisors and it's better for our clients. The best interest exemption is going to create confusion, it's got operational pain for clients, it's going to be inefficient and cumbersome for advisors. This is the best solution we believe for our clients and advisors.
+
+Answer_42:
+
+    And if you look at the brass tacks financials in the third quarter of 2016 we had $4.4 billion of revenue in our Wealth Management business. Of the $4.4 billion, $500 million of it in total was brokerage. And so this part of the business has been declining in favor of financial advice to the client and to managed portfolios that meet the needs of the client and have investment framers and decisions based on the client's goals.
+So the goals-based method is the dominant method in our business. And so you've seen a constant growth in asset management fees, net interest income and other sources of revenue and, frankly, a constant decline in the brokerage business across many years. And so the SEC has an obligation in the rules to issue a rule on this at some point, and they will and we will adjust to that there, but it's consistent with where we have been taking the business for five or seven years.
+
+Answer_43:
+
+    Well, again, just to be clear we are not doing away with brokerage. Brokerage is going to be -- unless something changes in the industry, and that's going to affect everybody, we are not doing away with brokerage. Brokerage is a very important part of our advisory relationship and FAs will work that out with their clients what's best for them.
+
+Answer_44:
+
+    I think you've stated yourself that you are making a lot of assumptions. Let's let it play out.
+We have the biggest and most capable business in the world making more money and having better margins than anybody else. I think we will figure it out.
+
+Answer_45:
+
+    Look, I think it's just too early to tell at this point. We don't know how it's all going to unfold in the UK and in Europe. We don't know what the effect is going to be on our clients on the new rules.
+So as I said on the press call we've developed plans based upon various scenarios and we are going to have to wait and see how everything unfolds to know what we are going to do. But as I emphasized on that call, today we are focused on our clients. And as I alluded to, this impacts them, too.
+So for now we are just working with them, providing them loans, helping them raise capital, store and move their money, manage risk. That's what we are focused on.
+
+Answer_46:
+
+    Just remember materiality here. So the markets business is about 20% of our expense base today.
+That's the entire business. So I don't think the impact of Brexit in the overall Company, we would manage it without having any impact of any great magnitude. As it relates to the European business itself, it will have an impact if it costs us more but not to the whole Company.
+
+Answer_47:
+
+    Yes, it was to credits, one in metals and mining, one in the US. And if you look at the ratio it's at a very comfortable level.
+So that doesn't concern us. If you note criticized assets were down in the quarter. That's because these two credits that went NPL were already in reservable criticized.
+
+Answer_48:
+
+    Yes, we moved some cash into securities. Again, we are always managing the trade-off between liquidity capital in terms of interest rate movements and returns. And we just deployed some of that as I said in U.S. Treasury, so you can think about it going from one part of the government to the other.
+We just moved them to get a little bit more yield. We feel good about that move and we will continue to optimize our cash and investment securities.
+
+Answer_49:
+
+    I'm not sure we're making any -- we are not projecting any view of rates . When we make that move we are just balancing liquidity capital and earnings.
+It's a big portfolio. We are always looking at it to make sure that we feel good about where we are at any point in time.
+
+Answer_50:
+
+    I'm not sure I really want to give much more color than that. They are doing the standard things you might do to optimize RWA, create compression, looking at returns on various assets and just optimizing.
+
+Answer_51:
+
+    Yes, you've got the dynamic. But the reality is as Paul was just answering the last question we continue to build cash that we need to put to work. These are our core customers, very high credit quality mortgages and pipeline has grown quarter over quarter and continues to grow and production capacity and capabilities.
+So you've got it right. The technical differences instead of recognizing the upfront gain on sale of the mortgage and capitalizing the servicing you see that come through NII over time. And so and the other dynamic, remember, is the MSR asset will continue to drift down because we have less and less third-party servicing.
+
+Answer_52:
+
+    And, again, I want to point out we've done a lot of thinking about that. And we think maybe there's a near-term impact on earnings. But long term we think that's a better strategy for our shareholders given the risk profile of the mortgages that we are originating and putting on the balance sheet.
+
+Answer_53:
+
+    In terms of the technical modeling for NII we still use the same assumptions we've used. You could have great debate in our Company whether we think those assumptions are conservative or not. But so in terms of the NII modeling we've been very consistent in terms of what, Marty, a deposit beta and what would change and how it would work.
+I think the pragmatic answer is that we are 90% of our customer consumer checking accounts are core transaction accounts, the primary checking account. Those balances are touching $250 billion-plus.
+They've been doubled over the last seven, eight years. Those balances are the daily cash flow of a household, and I don't think they are going to change much. But until you've got experience, a model has to look backwards as we'd say.
+And so we will see what happens. But so far those of us that take the side that this will be less sensitive of one, let's just say that.
+
+Answer_54:
+
+    So, Marty, moving expenses down, we talked about that earlier, that helps the returns. But we always have to remember that there is basically, leave aside how the allocation works, to the businesses works differently, but when you think about the 10% capital requirements for us 300 basis points or 3 percentage points of that cannot be put to use, it cannot take risk.
+And so we are earning all our money on the 7%. And so when you think about the weighted average of that it comes out over 10, that means you are in a lot more on the 7 even across the whole Company. And so that's one of the difficulties.
+So how do we optimize that? We make that 10% less dollar volume, if we can keep moving dollar volume down and keep increasing earnings you get that that's by all the discussion Paul had in response to earlier questions about optimizing the balance sheet or we get expenses down or we grow less risky earnings that can generate income, but it's a constant optimization. But the basic that people, that we sometimes forget is that when you think about 10% only a 30% of capital can take no risk, and so basically earns your cost of debt.
+
+Answer_55:
+
+    Well, generally you should think that the products which are more straightforward, like a card application, we build a nice auto loan execution that's unique because those things are fairly straightforward applications mortgage and things like that really take a lot more process around them. So I'd say cards and autos are the dominant part of it.
+
+Answer_56:
+
+    I think it will continue to rise in terms of dollar amount, probably rise in terms of percentage. But remember as sales grow overall in the Company, getting it to 50 means they have to win the mix race in the growth overall. But we are becoming more and more capable in delivering this, and that's why you've seen the nice growth, and so we are applying it deeply where it can really be the primary method and things like cards and autos are the easier play.
+
+Answer_57:
+
+    Yes, well, Merrill Edge is, obviously, an across-the-board execution. There are clients that utilize that in Merrill and in US Trust and the broad Consumer business. So it's a broad execution and well-recognized as being one of the leaders by the various authorities.
+We believe, and one of the things Terry Laughlin and Keith Banks and Andy Sieg and John and others are working on is to increase our capabilities for both the advisor and the customer in digital more or less stated in that GWIM business. So we think there's upside for us. Again, less customers, so the leverage is not quite the same, and that's why we spend a lot of our time around the consumer and there's just less leverage.
+In the advisor you have to think about that business because the advisor is the core strength that we have to the customer that we have to have an execution which is universal between the advisor to the customers they can all see the same thing. And so we've got some great capabilities now in My Merrill and things like that.
+But we plan to continue to enhance them and continue to integrate them so when they get the loans and deposits and things like that they are much more integrated over time. You can still see it all, but it's not where we want it to be.
+
+Answer_58:
+
+    Yes, if you remember when we made that target it was in the context of a 1.5%, 2% GDP growth economy much like we have now and a rate environment incremental from where we have now. So I think the shareholders and this management team would be happy if we were having a discussion about revenue-related incentives going up faster than that. That would be good news for the Company.
+
+Answer_59:
+
+    Thank you very much. And we look forward to speaking to you next quarter.
+

exam/part2_problem1/Problem_1_Conference_Call_Segments/call_36_presentation.txt

@@ -0,0 +1,111 @@
+
+Good morning. Thanks to everyone on the phone as well as the webcast for joining us this morning for the third-quarter 2016 results. Hopefully everybody has had a chance to review the earnings release documents that are available on the website.
+Before I turn the call over to Brian and Paul let me remind you we may make some forward-looking statements. For further information on these please refer to either our earnings release documents, our website or our SEC filings.
+One thing before Brian and Paul get into the results I just want to remind you we filed an 8-K on October 4 giving notification the Company changed our method of accounting for the amortization of premium and accretion of discounts related to certain debt securities known by the investment community as FAS-91. Our change to the contractual method which is used by the majority of our peers will provide better comparability of our results. As a result of that change we restated our historical results and provided the historically restated information in the 8-K and our earnings materials today naturally reflect those restatements.
+With that let me turn it over to Brian Moynihan, our Chairman and CEO, for some opening comments before Paul Donofrio, our CFO, goes through the details. Brian?
+
+Thank you, Lee. Good morning everyone and thank you for joining us today to review our third-quarter results.
+Our results this quarter continue our progress on our long-term strategy. We continue to drive responsible growth and deliver more of the Company's capabilities to our customers and clients. This progress is becoming clearer with each successive quarter and you can see the highlights of that on slide 2.
+We reported earnings of $5 billion or $0.41 per diluted share, an EPS improvement of 8% from the year-ago quarter. We improved operating leverage across the businesses, utilizing technology to lower cost and improve our processes.
+Our pretax earnings improved 17% compared to third-quarter 2015. This pretax earnings comparison is important as it eliminates the unusual movements in the tax line like this quarter's tax charge and the UK corporate tax rate change.
+Like last quarter I thought I would address a few topics we are hearing from all of you. To do that let's look at slide 3 and 4 of the earnings material.
+A first question is, are we making progress driving our responsible growth strategy? Yes, we continue to show progress throughout all the businesses. Our revenue growth has more clarity as we move past the periods of significant impacts from implementing regulations, running off non-core portfolios and divesting non-core businesses.
+Revenue grew 3% over the third quarter of last year. Behind that improvement is our continued investment in this great franchise, in our sales teams, in our technology across the board. These sales teams and the buildup we have been doing there helps us to increase our capacity to serve our customers and clients.
+An example of that is in our Consumer business. There our focus is on being the core bank to all our households. This has resulted in fewer checking accounts than we had years ago, but the average balance of the checking accounts we have has doubled and they are now roughly $6,500 per account.
+You can also see this in the growth of our Merrill Edge brokerage balances which now total over $138 billion, adding investment relationships to the mass-market customer base. In general, consumers are deepening their relationships with us as they use our straightforward investing tools to get them started on the path to investing.
+For our affluent and wealthy customers our customer progress also continues. Our Global Wealth & Investment Management teams, US Trust and Merrill Lynch, not only managed $2 trillion-plus in investment balances but also manage nearly $150 billion in loans at more than $250 billion in deposits. And we continue to see net flows of core assets in that business.
+On the commercial side clients continue to respond to our universal banking model for a simplified stop for financing investing advisory services. We will continue to operate within our established risk framework in defined customer groups and we aren't reaching for growth. This will drive more sustainable results over a longer period of time for our shareholders.
+With our global peers restructuring, including in the Markets business, I think this quarter is another great example of our Global Markets business' importance to our investing and issuing clients. We saw better client activity driving the best third-quarter results we have had in five years in Investment Banking and in sales and trading. We are doing that with a smaller balance sheet, fewer people and lower value at risk or VAR.
+So growth in deepening all consistent with our responsible growth strategy continues across all the customer bases. Paul will talk to you more about the statistics and these successes.
+Another question that we get asked is can credit remain this strong? Well, many of you asked that last quarter and the quarter before that and the quarter before that and this quarter it still got better again with our charge-off ratio declined to 40 basis points this quarter at an historic low. This is driven by changes we made right after the crisis, think in 2008 and 2009, and the long-term benefits of that effort continue to come through.
+And, by the way, sticking to our responsible growth strategy even as times have been relatively better. US consumer health is generally good. Over the past few quarters, exposures in our oil and gas that were causing industry concerns for commercial losses have improved and charge-offs have receded. Other commercial credit remains very strong, and Paul will touch on these topics later.
+Another question we get asked is what can we do to drive earnings even if we stay in this low rate, low growth environment? We aren't waiting for interest rates to rise here at Bank of America. We are driving our earnings growth now.
+We work on the things that we can control: expenses, loan and deposit growth and fee growth. Long-term rates are down compared to last year yet earnings have grown. Despite that net interest income is up 3% from third-quarter 2015 while net interest yield has been stable because we grew core loans and deposits.
+Paul will take you through the loan growth details later but I want to pause a moment and talk about our deposit growth. Deposits are a core part of what drives our franchise earnings. We have $1.2 trillion in deposits.
+That's proof that customers entrust us to safeguard their money. We are heavily weighted in the mix of those deposits towards consumers whether the general consumers or wealthy consumers. This, in turn, provides a very stable base of funding for the Company and allows us to be less reliant on the markets for funding.
+Nearly $450 billion or 36% of our deposits are noninterest-bearing, a very strong mix. Deposits on average grew $68 billion year over year or 6%. The teams have done tremendous work here and this quarter wasn't an anomaly.
+This is the fourth consecutive quarter where we have grown deposits more than $50 billion over the previous year. Our commercial teams remain focused on growing deposits also. They are growing deposits that are LCR friendly and doing great work with our industry-leading cash management capabilities.
+As a result year-over-year Global Banking grew deposits 3% to $300 billion. Our Consumer and Wealth Management teams combined have $860 billion in deposits. They grew this large base by 8% in the past 12 months.
+For the first time Consumer topped $600 billion in deposits. These deposits are growing because our capabilities in the business are the best in the industry and our customers and clients see that. Whether t is our 21 million plus mobile banking customers, or 34 million plus online customers or the more than 5 million customers that come into our financial centers every week, these customers show that they appreciate the capabilities and integration of our networks.
+So when we look at what else can we do to control and drive earnings in a low growth environment we get asked a lot about expenses and can those expenses keep being driven down and go lower. Well, the answer is yes. Last quarter we gave you a 2018 expense target and we continue to make progress towards that.
+Our expenses declined 3% from the third quarter of 2015 to 2016. Our efficiency ratio improved to 62% this quarter. That is a 400 basis point improvement from last year's third quarter.
+We continue to deliver on expense reductions while continuing to invest in technology and sales teams and other matters that are important for the future of this franchise. After you take into account the additional large bank FDIC assessment that started this quarter, expense is also down on a linked-quarter basis even as we continue to invest and absorb all the severance, regulatory, resolution planning and other repositioning cost to continue to reduce our operating costs.
+We have been innovating in technology and we will continue to do so to improve processes and eliminate the need for paper and humans handling that paper. Our Simplify and Improve initiatives continue to help drive those costs are down.
+And that leads to the question we also get asked, can we deliver and sustain returns above our cost of capital? As Lee talked about earlier we restate our results to change under FAS-91 and reduce the variability and make us more comparable to peers. As you can see, that makes it a little easier to see the longer-term return on tangible common equity trends.
+This quarter we reported 10.3%. It has now stabilized above the cost of capital, even given our larger and larger capital base.
+We still have work to do here to drive it to our ultimate goals. But this quarter is another strong step in that direction.
+Importantly, on slide 4 you can see that each business has improved its leverage. They grew their earnings, had strong efficiency and returned far above the cost of capital. And all that continues to bode well as we look ahead.
+So as we look forward we are driving responsible growth and maintaining discipline on cost. And this has allowed us to deliver more capital back to you. And we will keep on doing that.
+Now let me turn it over to Paul to cover the numbers. Paul?
+
+Thanks, Brian. Good morning everybody. Since Brian covered the income statement highlights I will start with the balance sheet on page 5.
+Strong deposit growth drove a small increase in the size of our balance sheet versus Q2. Deposits rose $17 billion or 6% on an annualized basis. During the quarter long-term debt fell by $5 billion.
+We put cash to work growing securities in our investment portfolio and more modestly through loan growth. Global liquidity sources rose driven by deposit growth and we remain well compliant with LCR requirements. Tangible common equity of $174 billion improved by $2.8 billion from Q2, driven by earnings.
+In the process we returned $2.2 billion to common shareholders through a combination of dividends and $1.4 billion in share repurchases. On a per share basis tangible book value increased to $17.14 of $1.60 or 11% from Q3 2015. I would note that this increase was driven by both retained earnings as well as share repurchases below tangible book value as we reduced shares 3% from Q3 2015.
+Turning to regulatory metrics, as a reminder we report capital under the advanced approaches. RCET1 transition ratio under Basel III ended the quarter at 11%.
+On a fully phased-in basis, CET1 capital improved $4 billion to $166 billion. Under the advanced approaches compared to Q2 2016 our CET1 ratio increased 40 basis points to 10.9% and is well above our 10% 2019 requirement.
+RWA declined roughly $20 billion, driven by reductions in global markets exposures and improvements in credit quality driven by runoff of non-core legacy exposure. We also improved our capital metrics under the standardized approach. Here our CET1 ratio improved to 11.8%. Supplemental leverage ratios for both parent and bank continue to exceed US regulatory minimums that take effect in 2018.
+Turning to slide 6, on an average basis total loans were up $23 billion or 3% from Q3 2015 and while up from Q2 2016 growth was at a slower pace. Consistent with past periods, we break out loans in our business segments and in All Other. Year over year, loans in All Other were down $30 billion, driven by continued runoff of first and second lien mortgages while loans in our business segments were up $53 billion, or 7%.
+In Consumer Banking we continue to see growth in residential real estate and vehicle lending, offset somewhat by home-equity paydowns which continued to outpace originations. In Wealth Management we saw growth in residential real estate and structured lending. Global Banking loans were up $26 billion or 8% year over year. On the bottom right of the chart, note the growth of $68 billion average deposits that Brian mentioned.
+Turning to asset quality on slide 7, we believe a number of factors including our strategy of responsible growth, enhanced underwriting standards since 2008 and a healthier economy have transformed the risk profile of Bank of America as we look forward to future economic cycles. Total net charge-offs of $888 million improved $97 million from Q2. Consumer losses declined across a number of products and commercial losses also declined, driven by lower energy losses.
+Driven by these improvements, provision expense of $850 million declined $126 million from Q2. We had a small overall net reserve release in the quarter as consumer real estate releases more than offset builds in other products.
+On slide 8 we provide credit quality data on our Consumer portfolio. We remain focused on originating consumer loans with borrowers with high FICO scores and our asset quality remains strong.
+Net charge-offs declined $71 million from Q2. This improvement was broad-based across consumer real estate as well as credit card.
+Note that credit cards accounts for more than two-thirds of losses in our Consumer portfolio and within our US credit card book the loss rate improved to 2.45%. NPLs improved and reserve coverage remains strong.
+Moving to Commercial credit on slide 9, net charge-offs of $110 million improved $26 million from Q2. With respect to energy, exposures are down, losses improved, oil prices have stabilized and we have $1 billion of reserves. More specifically, energy charge-offs of $45 billion decreased $34 billion from Q2.
+While reservable criticized declined from Q2 we did experience an increase in NPLs this quarter which was concentrated with two clients, one in metals and mining and one in energy. Overall, our commercial portfolio continues to perform well. As I shared with you last quarter, the metrics in the commercial portfolio speak for themselves in terms of quality and performance.
+The reservable criticized exposure declined and as a percentage of loans remains low. The Commercial net charge-off ratio is 10 basis points. Excluding small business it is 5 basis points and has been around 15 basis points or better for 15 consecutive quarters and the NPL ratio remains low at 45 basis points.
+Turning to slide 10, net interest income on a GAAP non-FTE basis was $10.2 billion, $10.4 billion on an FTE basis. As Lee mentioned earlier, we changed our accounting method for the amortization of premium or discount paid on certain of our debt securities from the prepayment method to the contractual method. The contractual method is used by our peers and should make it easier for investors to make comparisons.
+Compared to Q3 2015, NII is up $300 million or 3% as loan growth, higher short-end rates and higher security balances funded by deposits more than offset the negative impact of generally lower long-end rates over the past several quarters.
+Okay, with respect to asset sensitivity as of 9/30, an instantaneous 100 basis point parallel increase in rates is estimated to increase NII by $5.3 billion over the subsequent 12 months. This is lower than the sensitivity we reported at June 30.
+The reduction was mostly on the long end, driven by the change to the contractual method and slower prepaid speeds based upon recent trends and customer behavior. Note that this sensitivity on the short end at $3.3 billion has not changed significantly.
+Turning to slide 11, noninterest expense was $13.5 billion. That's $0.5 billion lower or 3% lower than Q3 2015, driven by cost reductions across the Company. This is the initial quarter of the increased FDIC assessment to shore up the deposit insurance fund.
+The increase in expense for us is roughly $100 million per quarter. Compared to Q2 2016, expenses were stable as good core expense control was offset by the higher FDIC cost and modestly higher incentives.
+Q3 litigation expense was $250 million, which is fairly consistent with both Q3 2015 as well as Q2 2016. Most expense categories were lower year over year. This trend was led by personnel expense, which includes the Q4 2015 expiration of the fully amortized advisor awards in Wealth Management. The rest of the improvement was driven by reduced cost of mortgage servicing coupled with same efforts and other initiatives.
+Our employee base is down 3% from Q3 2015. While the overall headcount is down it is important to note that year over year we added over 1,000 primary sales associates across Consumer, Wealth Management and Global Banking.
+Turning to the business segments and starting with Consumer Banking on slide 12. Consumer earned $1.8 billion, continuing its trend of solid results and reporting a robust 21% return on allocated capital. I would note that pretax pre-provision earnings rose $377 million or 10%.
+Expense and NII improvement were both notable and together enough to more than offset higher provision expense and prior-year divestiture gains. Revenue was relatively flat on a reported basis compared to Q3 2015 as 4% in NII was offset, as I said, by the absence of approximately $200 million of divestiture gains in 2015. As a reminder, these gains in Q3 2015 result from divestitures of an ancillary appraisal business, a card portfolio and some financial centers.
+Excluding those prior-period gains, revenue improved year over year and growth in pretax pre-provision earnings was even more substantial. Falling 400 basis points, Consumer Banking's efficiency ratio of 55% improved meaningfully year over year.
+Okay, turning to slide 13 and key trends, first on the upper left the stats are a reminder of our strong competitive position. Looking a little closer at revenue drivers compared to Q3 2015, net interest income continued to improve as we drove deposits higher. Average deposits continued their strong growth, up $50 billion or 9% year over year, outpacing the industry.
+With respect to noninterest income service charges were up modestly while card income was down. Spending levels and issuance were strong but revenue growth was muted by customer rewards. We are attracting relatively higher quality card customers that, on the one hand, have higher spending habits but, on the other hand, receive more rewards.
+This has two important benefits to note. First, rewards deepen relationships, helping to grow deposits and make them more sticky, for example. Second, in our experience these customers have lower loss rates and a reduced need to interact with call centers, thereby allowing us to lower costs.
+Turning to expenses, in the upper right they climbed 7% from Q3 2015 despite, excuse me, turning to expenses they declined 7% from Q3 2015 despite the higher FDIC assessment charges in the quarter. Expense reductions are the result of a number of initiatives. For example, mobile banking penetration helps to optimize our delivery network while improving customer satisfaction, more chip cards help us lower fraud costs and digitalization of processes and statements helps us eliminate paper and related handling costs.
+One can observe the impacts of these types of initiatives on the cost of deposits which continued its march lower, dropping below 1.6% this quarter. Focusing on client balances on the left, in addition to deposit growth Merrill Edge brokers assets at $138 billion are up 18% versus Q3 2015 on strong account flows and market valuations. We also increased the number of Merrill Edge accounts by 11% from Q3 2015.
+We now have nearly 1.7 million households that leverage our financial solution advisors and self-directed investing platform.
+Moving across the bottom right of the page, note that loans are up 7% from Q3 2015 on strong mortgage and vehicle lending growth. As reviewed in previous quarters we continue to focus on originating high FICO score loans which have generally produced low loss rates and strong risk-adjusted returns. Loan growth included consumer real estate production of $20.4 billion, up 21% from Q3 2015 and in line with Q2 2016 as customers continue to take advantage of historically low interest rates.
+We retained about three-quarters of first mortgage production on the balance sheet this quarter. Average vehicle loans were up 17% from Q3 2015 with average booked FICO scores remaining well above 750 and net losses remaining below 30 basis points.
+With respect to US card -- excuse me, US consumer card, average balances grew 7% from Q2 on an annualized basis, aided by seasonal back-to-school lending. We issued more than 1.3 million cards in the quarter and spending on credit cards, adjusted for divestitures, was up 8% compared to Q3 2015.
+Turning to slide 14 and digital banking trends, as I mentioned earlier, we continue to see strong momentum in digital banking adoption with use across service, appointments and sales. Mobile banking is transforming how our customers bank and reshaping our Consumer segment. Importantly, as adoption rises, particularly around transaction processing and self-service, we see improved efficiency and customer satisfaction.
+We continue to improve capabilities with the latest example being the launch of our Spanish mobile app which attracted over 800,000 active users in the first 10 weeks. We added roughly 1.1 million new mobile users in the quarter. The pace of user growth has increased despite an already impressive penetration rate of our checking account holders.
+With more than 21.3 million active users, deposits from mobile devices now represents 18% of deposit transactions and 26 million checks were deposited via mobile devices this quarter. That is an average of 280,000 deposits per day, an increase of 27% year over year and the equivalent to volume of 830 financial centers.
+Digital sales now represents 18% of total sales. And we now have more than 3,500 digital ambassadors in our financial centers driving further adoption.
+Also, as you know, we are a leader in person-to-person and person-to-business money movement through digital transfers and bill payment capabilities. Consumers moved $243 billion in Q3, up 6% from last year.
+And while all this is transformative, I would just remind you that we still have a little less than 1 million people per day walking into our centers across the US. This in-person interaction is important in terms of deepening and retaining personal relationships, providing more complex financial help and creating opportunities for further engagement.
+Turning to slide 15, Global Wealth & Investment Management produced earnings of $697 million, up 10% from Q3 2015. Now it's no secret that this segment operates in an industry undergoing meaningful change as firms and clients adapt to the new fiduciary rules and other market dynamics. The good news is we start from a position of strength with a $2.5 trillion in client balances.
+We have market-leading brands and a wide range of investment service offers from self-service to fully managed. Plus we have the resources to continue to invest in market-leading capabilities that address the changing needs of our clients. Year over year, revenue was down modestly but expenses were down even more, improving pretax margin to 25%, up meaningfully from Q3 2015.
+Overall revenue declined 2% from Q3 2015 as NII growth was more than offset by lower transactional revenues. NII benefited from solid loan and deposit growth, noninterest income declined from Q3 2015 driven by lower transactional revenue that continues to be impacted by market factors as well as migration of activities from brokerage to managed relationships.
+Noninterest expense declined nearly $313 million or 6% from Q3 2015 with half of that benefit derived from the expiration of the amortization of advisory retention awards that were put in place at the time of the Merrill Lynch merger. The rest of the improvement was a result of work across many categories of expense more than offsetting higher FDIC cost.
+Moving to slide 16, we continue to see overall solid client engagement. Client balances approached $2.5 trillion and are up from Q2, including higher market valuations, $10 billion of long-term AUM flows and continued loan and deposit growth.
+Average deposits compared against Q3 2015 are up 4%, driven by growth in the second half of 2015. Compared to Q2 average deposits were impacted by seasonal tax payments.
+Average loans were up 7% year over year. Growth remained concentrated in consumer real estate and structured lending.
+Lastly, earlier this month we announced some innovations to our IRA products and services which we believe positions us to better serve our clients given new fiduciary rules. These innovations are industry-leading and address not only the new fiduciary rules for time and accounts but also client preference for more choice and new ways to invest. First, we announced the rollout of a new offering called Merrill Edge Guided Investing.
+This solution offers clients online investing enhanced with professional portfolio management. With the addition of this solution, clients have three fundamental choices which they can mix and match to best meet their needs. Clients can invest online completely self-directed through Merrill Edge or if they are interested in enhanced professional portfolio management they will be able to use Merrill Edge Guided Investing or they can choose fully advised, working one-on-one with a financial advisor via brokerage or fee-based advisory platforms.
+We also announced that beginning in April 2017 for clients that choose to have a financial advisor provide advice with respect to their IRA accounts, we will provide this service to our fee-based advisory platform, Merrill Lynch One as we believe this is the best way for us to deliver for our IRA clients who choose to have this level of service and advice. Clients will also have the option to invest their retirement through Merrill Edge either completely self-directed or through Merrill Edge Guided Investing.
+Turning to slide 17, Global Banking earned $1.6 billion which is up 22% year over year. Q3 reflects good revenue growth, solid cost control and solid client activity. The efficiency ratio improved to 45% in Q3.
+Compared to previous third quarters, investment banking fees this quarter were the highest since the merger with Merrill in 2009. Return on allocated capital was 17%, a 300 basis point improvement from Q3 2015 despite adding a couple of billion dollars of allocated capital this year. Global Banking continues to drive loan growth within its risk and client frameworks, producing solid year-over-year improvement in NII.
+Revenue growth also benefited from roughly $175 million from gains on FVO loans this quarter versus losses in Q3 2015. Higher treasury fees also added to revenue growth. The decrease in noninterest expense compared to Q3 2015 reflects good expense control that offset modestly higher revenue-related compensation and higher FDIC costs.
+Looking at the trends on slide 18 and comparing to Q3 last year, average loans on a year-over-year basis grew $26 billion or 8%. Growth was broad-based across large corporates as well as middle-market borrowers and diversified across most products.
+Having said that, as we noted last quarter the pace of commercial loan growth has slowed over the past couple of quarters. Demand across the industry appears to have slowed as well. We remain diligent in certain sectors such as commercial real estate and energy and we are also closely monitoring certain international regions.
+Average deposits increased from Q3 2015, up $10 billion of 3% from both new and existing clients. As we grow treasury services we remain focused on quality deposits with respect to LCR.
+Switching to Global Markets on slide 19, let me start by reviewing what I said last quarter regarding this segment. The past few quarters are examples of the importance of this segment to not only its clients around the world but also to the customers and clients of all our business segments. Again this quarter, Global Markets delivered for clients by helping them raise capital, buy and sell securities as well as manage risk.
+We continue to invest in and enjoy leadership positions across a broad range of products. We believe this improves our sustainability -- we believe this improves the sustainability of our revenue and makes us more relevant to clients across the globe. We've been there for clients when they needed us across all these products.
+Our results this quarter reflect this strategy and continued commitment to clients. Global Markets earned $1.1 billion and returned 12% on allocated capital. Revenue was up appreciably year over year and even outpaced typical seasonality by posting modest improvement over Q2 2016.
+Total revenue excluding DVA was up 20% year over year on solid sales and trading results which rose 18%. It's worth noting we achieved these results with slightly less balance sheet, lower VAR and 7% fewer people. Continued expense discipline drove cost 1% lower year over year as increases in revenue-related incentives were more than offset by reductions in operating and support costs.
+Moving to trends on slide 20 and focusing on the components of our sales and trading performance, sales and trading revenue of $3.7 billion excluding DVA was up 18% from Q3 2015 driven by FICC. In terms of revenue this was the best third quarter in five years. Excluding DVA and versus Q3 2015, FICC sales and trading of $2.8 billion increased 39% as we built momentum as the quarter progressed across a host of credit products and continued gains in rates products.
+Mortgages showed particular strength among credit products as investors sought yield. Equity sales and trading was solid at $1 billion in revenue but declined 17% versus Q3 2015 which benefited from higher levels of market volatility and client activity.
+On slide 21 we present All Other which recorded a net loss of $118 million. This loss includes a previously disclosed tax charge of $350 million due to the third-quarter UK enactment of a tax rate reduction which reduced the value of our UK DTA. The loss in the current period compares to earnings of $152 million in Q3 2015 as lower security gains and higher expense litigation offset higher mortgage banking revenue. NBI revenue this quarter includes $280 million benefit from higher valuations on our MSR driven by slower expected prepaid speeds based upon recent observed trends in customer behavior.
+Okay, let me offer a few takeaways as I finish. We reported solid results this quarter that were consistent with our strategy of responsible growth. We remain focused on delivering responsible growth as well as strengthening and simplifying Bank of America.
+Capital and liquidity strengthened. Asset quality remains strong. We grew revenue.
+We grew deposits. We grew loans. We delivered for clients in capital markets.
+We lowered costs. We invested in our future by adding sales professionals and deploying technology that helps customers better live their financial lives and improves satisfaction. And, importantly, we returned more capital to our shareholders.
+With that let's open it up to questions.

exam/part2_problem1/Problem_1_Conference_Call_Segments/call_36_questions.txt

@@ -0,0 +1,299 @@
+Question_1:
+
+    Hi, good morning guys. I wanted to ask about expenses.
+Could you talk about what kind of timing expectations you have on the various projects helping to drive down your expenses further in 2017 and 2018? Maybe just remind us what are some of the big items that you are working on? And should we still think about $53 billion in 2018 as your hard target that you are shooting for?
+
+Question_2:
+
+    In terms of the timing, Paul, is it something that we should think of is ramping throughout 2017? And is it have a longer tail at the end? Can you give us a sense there?
+
+Question_3:
+
+    Okay, thanks. And then a second question just quickly on net interest income.
+Can you help us try to translate your 100 basis point rate sensitivity into something closer to what one Fed hike might do for your net interest income? And what would be the trajectory of NII and NIM if we did get a Fed hike this quarter? What would you expect more in the near term next quarter, too, on NII and NIM?
+
+Question_4:
+
+    Great, thanks.
+
+Question_5:
+
+    Hi, thanks very much. Just curious for a point of clarification, Brian had mentioned Global Markets. It feels like it's taking a little share, alluded to global peers restructuring.
+Completely get it, believe it's going to happen. Just curious if you can give a little color on where you might see some of that evidence taking shape. Product, geography, whatever?
+
+Question_6:
+
+    Fair enough. Nature of the business, I guess. One other, one in GWIM I appreciate all the color on the different products and what you are doing in Wealth Management.
+The curious move in the quarter was the move away from the commission-based IRAs. And I'm curious, is that move specifically done to avoid the best interest contract?
+I'm just curious, based on how we roll forward if the SEC comes in what that might mean. You talked about giving customer choice, but this sounds like less choice for the FA.
+
+Question_7:
+
+    I don't doubt that. I worry about just the execution of it. I'm assuming that it means that the advisor has to talk to the client and explain this whole thing and just --
+
+Question_8:
+
+    Fair enough. All right, thanks, Paul.
+
+Question_9:
+
+    Hey, good morning. A couple of questions. Just one on loan growth.
+Could you give us a sense as to how you think you are trajecting there? We talked a little bit about market share and trading, could we talk a little bit about how you think you are doing in the lending side of the equation and if there's any legs there?
+
+Question_10:
+
+    So one of the areas that I just want to dig in a little bit more to is on the mortgage side where you have had some good loan growth. But I'm just wondering if there's more opportunity there as it relates to either taking some duration exposures or on credit as you've moved into some wider credit boxes with my first home which is insured by Fannie, Freddie but just want to get some color on that.
+
+Question_11:
+
+    Okay, so as you are thinking about your revenue growth from here, which are the three key legs that you expect are going to keep that revenue growth going?
+
+Question_12:
+
+    And then on the expense side you indicated all the various technology efforts that you've got underway but is there more that you can do on the comp side as well?
+
+Question_13:
+
+    Okay, thanks.
+
+Question_14:
+
+    Hey, good morning. Maybe you could talk a little bit about the credit cycle.
+I think one of the major pushback from investors is that we are going to start to see credit get worse but I think you guys have been pretty clear that you are not lowering standards to drive growth. So how do you think about the cycle from here, I guess that's the start?
+
+Question_15:
+
+    So you feel like you can keep your lease ratios as you grow pretty stable?
+
+Question_16:
+
+    Okay. And maybe a follow-up on the capital ratios. Paul, I saw that the RWAs dropped while the balance sheet grew a little bit, so it seems like you've reduced risk. I guess where was that and can that continue?
+
+Question_17:
+
+    Is there any more detail or can you get a little more from here?
+
+Question_18:
+
+    Okay, great. Thanks.
+
+Question_19:
+
+    Good morning. Can you talk about the strategy within the securities book?
+You did mention that you added some later in the quarter and, obviously, deposit growth has been exceeding loan growth to justify that. But maybe just some color in terms of what you are buying, the duration and how to make sure it doesn't get too big relative to the size of the balance sheet.
+
+Question_20:
+
+    Okay. And then a little bit related but on the deposit side, obviously, very strong growth year over year. You mentioned $60 billion and really little to no repricing despite the one bump in Fed rates that should impact the year-over-year comps.
+So I guess the question is if we do get a rate increase, do you think you've got more flexibility to limit deposit repricing given it's basically worked so far and the loan growth is, obviously, not enough to absorb the deposit growth you have?
+
+Question_21:
+
+    Okay, thank you very much.
+
+Question_22:
+
+    Thanks, good morning. I want to ask about the card business a little bit. I saw in the deck that you grew card issuance at the fastest level since 2008, but we are not really -- and there is a burden on the fee side, with reward stuff, balances are still flat.
+I was wondering if you could walk us forward and help us understand a little bit better just the ROA and income direction of the card business? When do we start to see that show up in both balances? And when do expect to see that fee growth come along for the ride given the good underlying growth that we haven't quite seen yet in the financials?
+
+Question_23:
+
+    Understood. Second quick question is you mentioned that you are now achieving the cost of capital in an ROE above 10% and capital is still building.
+Do you think you can continue to hold if not improve the ROE as capital will likely continue to grow, presuming that you still will get those benefits going forward and you are not at the point of returning more than 100% of your earnings yet?
+
+Question_24:
+
+    Understood. Thanks, guys.
+
+Question_25:
+
+    Hi, you've reduced your branch count from 6,000 to 4,600. Where do you think that count can go? And on the one hand we heard you say almost 1 million customers walk into branches each day but on the other hand you have grown deposits $1.2 trillion.
+You did mention more self-service digital channels. You did mention mobile banking is 18% of the deposit transactions. And less reliance on the branches might ease any extra pressure to sell more products in this low rate environment.
+So where do you think you might take the branch count to? And I don't think you mentioned the impact of the cross-selling issues on Bank of America or if we wake up one day and find out that Bank of America did something inappropriate.
+
+Question_26:
+
+    I mean just as a follow-up, on slide 14 it's kind of thing Bank of America we're a FinTech Company, and look how well we are doing. And you are showing some good growth rates, that chart on the upper right.
+So at what point does that lead to a greater number of branch reductions? Is this do you have the answer and you don't want to say for competitive reasons? Or you don't know yet, it's kind of a give-and-take based on the customer experience?
+Some of your competitors talk about closing 100 to 200 branches per year. You've reduced 112 over the last year but it seems to be slowing. So I'm trying to get a sense of that.
+
+Question_27:
+
+    All right, thank you.
+
+Question_28:
+
+    Yes, thank you very much. You guys took an MSR write-up or hedging benefit, I can't really which one it is, about $360 million. But you did write up the MSR from 51 basis points to 60 basis points.
+Was that all rate driven? The 10-year did go up a little bit. Or was that also some better credit metrics out of the servicing portfolio?
+
+Question_29:
+
+    Okay, guys. Thank you very much.
+
+Question_30:
+
+    Thanks. I just wanted to follow up on a couple of questions related to the various consumer lending businesses.
+First, Paul, just from your response to Ken's question a moment ago on card, I heard everything you said about the risk-adjusted margin and the credit quality of the portfolio, etc. But just to be clear, are you expecting improving, stable or deteriorating ROA based on the current competitive environment? Because it seems like many peers are underscoring the near-term risks to profitability from rewards and customer acquisition costs.
+
+Question_31:
+
+    Stability, okay great. And with respect to mortgage I saw there was about $100 million benefit from rep and warrant release. How much of that research still exists and what would be your expectations about potentially realizing it at this stage given where we are with respect to that issue?
+
+Question_32:
+
+    Yes, correct. It's the provision line item. You had a negative provision.
+
+Question_33:
+
+    Okay, maybe I will come back to you in a bit. Just finally on auto, it seemed that some peers were signaling that competitive conditions in auto underwriting were easing a bit after intensifying over the past several quarters. Are you seeing anything like that across any particular segment of the FICO strata?
+
+Question_34:
+
+    Thanks very much.
+
+Question_35:
+
+    Hi, good morning. So I want to kick things off with a follow-up to an earlier question on the DOL.
+Paul, you had noted that Merrill FAs will no longer be permitted to engage in brokerage activities in retirement accounts. And I was hoping you can give us an update as to what portion of Merrill client assets are currently in brokerage IRA?
+And maybe more specifically, how should we think about the net economic impact from transitioning some of those retirement assets into some of the other offerings that you highlighted, whether it be fee-based which should generate higher fees versus robo or self-directed Merrill Edge?
+
+Question_36:
+
+    Got it. Okay. And just one other quick follow-up on the same topic, the press article have highlighted some of the changes that you've made indicated that some clients that would transition to the, quote, higher touch advisory offerings will be rebated some incremental fees.
+And I was wondering how are you planning to apply changes to the fee structure for those brokerage assets that do, in fact, transition? I'm just struggling to see how a two-tiered structure might work in practice across the hundreds of billions of assets that would be affected here?
+
+Question_37:
+
+    Got it. Okay, thanks Brian. Then just one more on the topic of capital, just switching gears for a moment.
+Following Tarullo's recent remarks, there's one area of debate has been whether the Collins Floor would, in fact, apply to this new capital framework, i.e. whether you will be forced to manage to capital minimums under both the standardized and advanced approaches. And now that you've had some time to digest the initial release or guidance I was wondering if you can give us any insights into how you are thinking about that potential change?
+
+Question_38:
+
+    Got it. I recognize it's early days, Paul, so I appreciate you taking, making the effort to answer the question. And that's it for me.
+
+Question_39:
+
+    Good morning. I guess we've had a couple of good quarters in FICC both for you and the industry and I know volatile business not really looking for quarterly expectations.
+But just more broadly there is an investor debate, is it just a couple of good quarters or has the business absorbed all the changes in regulation, absorbed low rates, absorbed all the restructuring required and the cycles inflecting FICCs at the bottom and has upward pressure from here? So where do you come in on the debate? Is it a couple of good quarters at this point or has FICC bottomed?
+
+Question_40:
+
+    Thank you for that. I guess a similar question on commercial lending.
+You referenced some of the strategies you have in place driving responsible growth and how you felt good about the business going forward. But we saw this pause across the industry in the third quarter in commercial growth, the Fed numbers, your numbers, other banks reporting so far. Have you seen signs of customer demands coming back, I guess, late in 3Q and early in 4Q, do you have visibility and confidence that the commercial loan growth cycle more broadly is still in gear?
+
+Question_41:
+
+    Thank you both.
+
+Question_42:
+
+    Good morning guys. We are all, of course, very attuned to the issue of fraud after the recent news at Wells Fargo, both on the customer side and on the employee side.
+I guess my question to you would be as you move more to digital methods of attracting customers and keeping customers, etc., is fraud on either side becoming a bigger issue? Or if you could just speak to the whole issue of how you prevent fraud as you become a more electronic bank.
+
+Question_43:
+
+    Well how about on the other side, the employee side, opening false accounts. If you could just speak to how you think your methodology is different from what produced the problems at Wells Fargo.
+
+Question_44:
+
+    And Brian, I have what is going to be a difficult question for you. But in response to the problems at Wells Fargo we have seen them separate the chairman and the CEO roles. And while that may have been due to exigent circumstances, do you foresee another push now either by regulators or by shareholders to separate those roles?
+
+Question_45:
+
+    All right. Thank you.
+
+Question_46:
+
+    Good morning. I just wanted to follow-up on the fiduciary rule questions before. So I appreciate retirement assets are less than 10% of your balances as you've highlighted before.
+But I think what a lot of folks are thinking about here is that SEC has been pretty clear that they are working on their own version of this applying to taxable. And so when people watch what you are doing here on the fiduciary rule for retirement people it's sort logic to assume you would apply the same policy in the event we see a similar rule come out more broadly.
+So isn't that the message that you are basically sending to FAs? And aren't you concerned that FAs might look at your platform versus some of your competitors that will offer the BIC and think that they might have greater amount of flexibility as some of those other platforms?
+
+Question_47:
+
+    Sure, sure. I get it and there's no question that commissions have been declining.
+It is just that when you look at some of the asset classes like alternatives and such it's hard to get everything to fit into a fee-based approach. So that was the gist of my question. Maybe going a different direction --
+
+Question_48:
+
+    Right. But if we take the logical conclusion that your approach here with retirement would be similar to taxable under the assumption and, look, all of this, I am making assumptions with all of this, but we all have to, that the SEC comes out with a similar rule, then your option within to maintain brokerage is self-direct. And I could see how FAs might dislike the idea of having a component of their relationship move effectively away from them.
+So what has been the response from FAs of this idea that if we want to maintain brokerage it has to go the self-directed route? And has that tapped in on any of the worries that some of these brokers have seen much of their book shift over to discount brokers that would fit in that type of an approach?
+
+Question_49:
+
+    Okay, thanks.
+
+Question_50:
+
+    Thanks for taking my question. Perhaps a bigger picture question. On your media call you were, I guess, asked a question on Brexit, and it sounds like you do have plans in place for that which certainly makes sense.
+I guess given relative to your $53 billion cost target for 2018 and the fact that the negotiations seem to be starting to gear up early next year, how are you thinking about the costs in the Global Markets and Global Banking businesses from Brexit if it ends up being a harder Brexit than a softer Brexit?
+
+Question_51:
+
+    Okay. And then just a quick administrative question.
+You mentioned on slide 9 that the nonperforming loans in the commercial portfolio were increased by $340 million quarter over quarter. It seems like it's mostly in the energy and related space. Is that a US or are those US credits and what's your outlook for those balances going forward?
+
+Question_52:
+
+    Okay, thanks very much.
+
+Question_53:
+
+    Hi, thanks for taking my question. Couple of questions.
+Paul, your deposits at the Fed declined pretty sharply, almost 20% linked quarter even though you had deposit growth and given that long-term rates are still very low. Can you talk a little bit about what drove that thinking?
+
+Question_54:
+
+    Is that saying that you don't expect rates to go up that much given that you move credit a chunk at a time and long-term rates are pretty low?
+
+Question_55:
+
+    One more question. Earlier you mentioned that global, in response to a question that Global Markets was doing a better job managing the balance sheet. Could you give us some more color about what specifically they are doing?
+
+Question_56:
+
+    All right. Thanks.
+
+Question_57:
+
+    Thanks. I wanted to ask you about two strategic balance sheet decisions.
+One is that there seems to be a lot more retention mortgages. So when we have these surges we are not picking up as much mortgage fees but growing mortgage loans maybe a little bit faster. That is a shift, and do you think that will hold mortgage fees down and trade-off for further net interest income down the road?
+
+Question_58:
+
+    And kind of in connection with that you talked about the big question on asset sensitivity which is duration expectation on your deposits. As you've gone through this cycle, and initially we all assumed that there was going to be a lot more volume runoff than the volumes that keep going higher, have you adjusted that duration and is that part of why you are also comfortable putting on more mortgages that have that longer duration feel to it?
+
+Question_59:
+
+    All right. And, lastly, just a strategic utilization of capital, if you look at your allocation of capital and returns by business segment you do a weighted average, you come up with close to an 18% return.
+As profitability is getting higher that is getting further away from the overall return which is still around 10%. How do you envision trying to clean up either the capital positions or the overhang from overhead expenses that brings those two numbers maybe a little bit closer together? Thanks.
+
+Question_60:
+
+    Got it, thanks.
+
+Question_61:
+
+    Thank you and good morning. A question on your digital sales.
+Obviously, you've had 18% of total sales coming through digital channels and 25% through the mobile. Can you share with us what products you are having the most success with selling through these channels and which products proved to be more challenging?
+
+Question_62:
+
+    Is there any target of where you can get these sales to as a percentage of total sales? Can eventually 50% of sales come through the digital channel?
+
+Question_63:
+
+    And then, finally, sticking with digital, is there any application in the digital channel where you can have success like you are having in the consumer bank in the Merrill Lynch brokerage channel?
+
+Question_64:
+
+    Great, thank you, Brian.
+
+Question_65:
+
+    Yes, thanks. I just had one quick question and it is on the $53 billion expense target.
+If we got into an environment where you saw revenues come back more robustly near term, could you still commit to that $53 billion target, meaning you have enough levers to pull? Or would you see yourself switching to maybe an efficiency ratio target if all of a sudden these revenues came back stronger? Thanks.
+
+Question_66:
+
+    Thanks.
+

exam/part2_problem1/Problem_1_Conference_Call_Segments/call_37_answers.txt

@@ -0,0 +1,231 @@
+Answer_1:
+
+    Sure. Maybe the simplest way to answer that question would be to take you back to 9/30 when the interest sensitivity on the long end was $2.1 billion. We saw a 75 basis point increase in long end rates since then, so 75 basis points times $2.1 billion is $1.6 billion. At that time, the short-end sensitivity was $3.3 billion. We saw 25% of 1%, 25 basis points, so 3.3 times 25%, that's another $600 million. So together, that's $2.4 billion that you can see just in the change in the interest sensitivity. If you divide that by four, you get your $600 million.
+Again, I would emphasize that we see NII growing from there as we move through 2017 assuming again we have modest loan growth, modest deposit growth and a stable short and long-term interest rate environment.
+
+Answer_2:
+
+    Yes, conceptually, we've captured the decline in sensitivity -- we are going to capture the decline in sensitivity that you've just experienced in our NII over the next 12 months. You can see that under the calculation I just did for you.
+
+Answer_3:
+
+    Yes, John. So this morning, as part of our release, we announced that we got approval for a de minimis of $1.8 billion to add to the $2.5 billion we have for the first half of this year to bring the repurchase volume to $4.3 billion for the first half here. So we applied for that obviously in December and got the approval and our Board has approved it and that went out with the release this morning.
+In terms of next year, we will see what the scenarios are with all the caveats, but you've seen us constantly move our numbers up and we will continue to do that. Our cushions and stuff are strong on the earnings. The most important thing for us was to make sure the earnings power of the Company kept coming back and now with $17 billion of earnings, we feel confident we ought to be able to push forward.
+
+Answer_4:
+
+    And John, that $1.8 billion was the full 1%.
+
+Answer_5:
+
+    Right.
+
+Answer_6:
+
+    Right, the first two quarters all in the first half here.
+
+Answer_7:
+
+    Yes, the guidance includes the sale of the UK card business, but just to be clear, that's not going to close until probably mid this year. So that NII will be with us until it closes.
+
+Answer_8:
+
+    Yes, so, again, if you go back to 9/30, I think we told you we were using deposit betas in our modeling on interest-bearing deposits in the high 40s. And we said, hey, the first few rate hikes is going to be less and the later rate hikes, it's going to be more and that's what we are experiencing. So if you looked at our deposit betas right now, you would probably see it inching into the 50s. It's definitely moving up as we get more short-term rate hikes.
+
+Answer_9:
+
+    Well, again -- we will see what happens here. We had a rate hike a year ago and I think a number of people would have said that we would have had a pass-through, and I don't think there was a significant pass-through in the industry. We just had a rate hike in December and we are going to see how much pass-through we actually had. From a modeling perspective, in that guidance I gave you, from a modeling perspective, the pass-through rate on the next 100 basis points would be in the 50s. And again, it would be the same story. Less in the beginning, more at the end.
+
+Answer_10:
+
+    Well, I think the way to think about it, Glenn, overall is that we are doing on a customer basis. So when we -- Paul gave you the statistics earlier for the preferred rewards enrollments and things like that, so we are driving -- our priorities are to get our card used by our core customers and reward them for that who have other deeper relationships with the Company. So in a broad sense, we are getting paid through the NII line, as well as any other relationship they have, as well as the card income fee line that you see on deposit balances and other things, plus obviously the card balances.
+We've been pleased that we now have gotten through all the sales when you think about this quarter versus last year and so active accounts are moving up I think 2% or 3% or so. Year-over-year the active accounts are up, which shows the strategy is working. So while we make that investment you're talking about and that is part of the competitive dynamics, we feel good about the balances growing, so we are getting more NII from it, but importantly with our customers these are the best customers we have and so we're seeing their other aspects of relationship grow.
+
+Answer_11:
+
+    And again, strong risk-adjusted margins in that business, stable for us above 9%, charge-offs look great and as Brian said, we are standing at the higher end of the market.
+
+Answer_12:
+
+    Well, I think if you look at the page that showed the quarterly production in the Consumer section there, you can see I think it was three quarters -- last three quarters all over $20 billion in home mortgage loans and home equity loans. What you wouldn't know from the outside is, during the last year, we made a series of major changes in that business. We've consolidated internal platforms so we have one group, a fellow named Steve Boland who does a terrific job for us, delivering the product across all the businesses whether it's US trust, Merrill Lynch or the consumer business.
+In addition, we brought in servicing from third parties of our customers and we continue to do that. So even in a year where we've made tremendous transformations, you saw [$320 billion] plus. And so our view -- the team would tell me that the pipeline will be down because refinances are down and therefore expect less, but I think my view is that they should be able to continue to grow marketshare frankly because of the capacity that they were able to develop this year given those changes and still produce flow.
+That being said, it's a rate-sensitive product. So we've told you to think about the mortgage banking line as $300 million odd. It was a little higher this quarter just because of some of the dynamics, so it's a relatively modest line, but the production will be strong.
+
+Answer_13:
+
+    Look, we feel, as you point out, look, we feel really great about that business. It is performing very well. I would note the operating leverage we are getting, I would note, as you said, our discipline on risk and the reduction of VAR. So we have no complaints. We have a diversified product set that has a global geographic footprint. We have scale in every major market around the world and when you look at Global Banking and Global Markets together, I would argue that only three companies in the world can deliver what we can deliver for our clients and customers in every major market around the world.
+So there is tremendous opportunity there. We are not going to look exactly like every competitor every quarter. We have often said that when things are great, we might not be as high, but when things aren't so good, we are not going to be as low. So we feel great about it, but we think there's lots of opportunity and we would expect continued performance in that business.
+
+Answer_14:
+
+    Well, I'm not sure I understand the question. In terms of -- so let's just talk about it a bit. In terms of the allocation of capital, that's a process we go through once a year. We look at a number of different metrics, advanced approach, standardized approach, SLR. We look at internal models, economic capital and we arrive at what we think is the right amount of capital to give to our businesses based upon their business operations and risk. Remember, we've got $500 billion of operational risk capital that was assigned to us by the regulators. From my perspective, personal perspective, most of that is for businesses that we're no longer in, products that we no longer sell, risk that we no longer take. So a big chunk of that sits in all other and wouldn't really be appropriate to push it from a segment standpoint out to the businesses because they are not really using that risk capital.
+So is that what you are looking for or was there some other element of that question that I missed?
+
+Answer_15:
+
+    Look, we've made a lot of progress on CCAR. We've made -- the progress you are really seeing in the Company is lots of technical things we've done to be much better in CCAR in terms of improving how we do it, involving everybody in the Company, the qualitative aspects of it. I think from a quantitative standpoint, we've always looked like we've had enough capital. I think if you look at our stress losses relative to competitors, you can see responsible growth coming out in the Fed's models, not our models.
+So I think we feel really good quantitatively. I think we feel really good qualitatively. If you look at the stress capital buffer, that's not going to impact capital for us. We are probably -- we'd have to see how it all -- the rules -- this was a speech, so we don't really know what all the rules are going to say, but my guess is our stress capital buffer is below the minimum that would be required. So we feel like we are in a good position for CCAR 2017. We don't know what the scenario is yet. We don't know what the rules are, so there's a lot still changing, but we feel really good about the progress we've made and certainly our cushion from a quantitative standpoint.
+
+Answer_16:
+
+    I don't think you should anticipate any changes. We haven't changed since rates started rising. We feel good about the way we are. We are very focused on  our balance sheet deposits come in. That's what really drives the size of the balance sheet, deposits come in and the question is, within our risk framework, can we put those deposits to work with our customers and clients around the world. If we can, we put it to work within our risk framework. If we can't, it goes into some other place, either cash or the investment portfolio.
+
+Answer_17:
+
+    We are always balancing liquidity, earnings and capital, but we are not really sitting there every quarter figuring out what the most optimum duration is for us.
+
+Answer_18:
+
+    We are in very good shape.
+
+Answer_19:
+
+    Yes, but LCR isn't just cash. LCR includes highly -- lots of different securities go into the LCR calculation.
+
+Answer_20:
+
+    Betsy, to make it simple, the excess of cash coming in over loan growth goes half into mortgage-backed securities and half into treasuries at this point and the duration of what we do on the treasuries will be a little bit based on where we think rates are going and stuff like that. But it's driven -- just it goes into those two things because we have -- once we fund the loan balances, that's where it goes.
+
+Answer_21:
+
+    We are not trying to hold more cash than we need.
+
+Answer_22:
+
+    Yes, sure. So as I think Brian mentioned and I mentioned, we took the GSIB buffer down 50 basis points. It's at 9.5%, again compared to 10.8% on a fully phased-in basis. So that's 130 basis points of cushion at this point. We got there through things like reducing derivative notionals through riskless trade compressions. We got there by lowering level three assets, as well as overall optimization as the rules became a little bit more clear. So we've been working at this for some time. You've asked on other calls, I think other people have asked, we haven't really wanted to declare where we were, but now we've got to the end of the year. This is when the calculation really matters so we thought it was important to disclose that progress.
+I would also say that Global Markets, it's going to be up and down in any given quarter. The ending balances in the third quarter were up. They were a little bit less than the end of the fourth quarter just on client activity.
+
+Answer_23:
+
+    Well, Marty, we saw $50 billion odd of deposit growth year-over-year. Consumer business was the lion's share of that. To give you a sense, fourth quarter 2015 to fourth quarter 2016, checking balance in the Consumer business grew 12%. So the growth is strong and as you said, we expect to maintain pricing discipline in the Company. Obviously those are not interest-bearing, but on the interest-bearing side and you have seen that so far as the first rate move happened last year.
+In terms of deploying the economy, we made $20 billion more loans and we will continue to drive the economy and if we can't, we'll invest in mortgage-backed securities and things like that. So we are able to fund easily all the loan demand that we think is responsible to take on. In the fourth quarter, we saw loan growth and our commercial business picked up draws online stated at a high level and loan growth in the middle-market business was strong in the fourth quarter and we are looking for more of that in our small business. So you are exactly right. We are deploying it in the economy. There is not a lot of -- they are growing faster than loans and we believe that we can price with discipline.
+
+Answer_24:
+
+    Sure. So the hedge ineffectiveness was $168 million in the quarter, a negative obviously. And in terms of the other -- you are talking about the other income line, so --.
+
+Answer_25:
+
+    The other fee income. So that last quarter -- let me give you a sense. Last quarter, we had I think some -- that line is going to bounce around a little bit. Let me start with that. But the last quarter, we had some positive impacts in that line from loans related to our FEO portfolio. This quarter, it was negatively impacted by the UK PPI provision. That was $132 million and that's non-tax-deductible. So if you adjust for those two items, we would be around $300 million and I would say that's probably a good base for you to think about if you are modeling.
+
+Answer_26:
+
+    So thank you, Mike, for noticing the improvement because we feel really good about all the progress we've made. As you point out, earnings are up year-over-year on 15% and that's on a very significant earning base of $18 billion. We need to get our capital down. We are returning more capital to shareholders. That's going to help. We need to continue to grow. So we feel really good about the progress that we have made.
+Our return on assets metric is tracking in the right direction. Our return on tangible common equity metric is tracking in the right direction. So we will just have to wait and see. I think we get there even without a rate rise eventually, but certainly a rate rise is going to help.
+
+Answer_27:
+
+    Mike, a couple things. One is, if you look across the last three quarters, the return on tangible common equity was 10.5%, 10.28% and 9.92% and you have a fourth-quarter seasonal decline in trading. So it will pick back up in the first quarter and we look forward to that going back up. And on the efficiency, we've set the goal for $53 billion in expenses and with the rate increases, we will continue to drive that down and if you look through the year-over-year, it was down from 70 into 66 and the last couple of quarters have grown sub 65, around 65 and we will continue to move from there.
+
+Answer_28:
+
+    Well, the ATMs are coming down largely because, as you reduce branches, there's one or two and then third-party ATMs in places that aren't very efficient, so they will continue to wind down. So I wouldn't necessarily focus on that as being a separate question as we build them out. But if you think about -- on the branch, we're down -- for the year, we had 179 that closed, but we also renovated 205, put out 34 new ones. So we are continuing to invest; yet there is a steady downdraft in the total branch count. So we ended the year at 4,500, almost 4,579 so we will continue to work that count down again based on how the customer flows go. These are critical to serve the customers and so we end up as larger branches and smaller branches that are being folded in and we will continue to do that.
+
+Answer_29:
+
+    I think as you think about that number, Mike, focus on the active mobile users because that's going to be the interplay here. Active mobile users are up 16% year-over-year. On a big base, we grew active mobile users more than we grew in 2015 and deposit transactions are now 19% -- mobile deposit transactions are now 19% of all deposit transactions. That's the equivalent of 880 financial centers.
+So on the one hand, that says maybe you can optimize a little more, but, on the other hand, as I said in the lead-in, we still have a million people, almost a million people coming into the branch every day and they need that channel, they need it to transact, some of them, but a lot of them come in for advice and we want them to do that. So we need a certain footprint of financial centers.
+I think Brian alluded to the fact that we are adding financial centers all around the country, in certain markets around the country. So it's going to ebb and flow.
+
+Answer_30:
+
+    I think there was volatility this year around it just on the announced vote and things like earlier in the year. That was one of the events that I referenced. The nice thing is the balance in this business when you think about it. So it's balanced by product, it's balanced by geography. So when one thing goes -- if something else is going [well], we pick it up. So I'm not overly worried about -- we've got to get Brexit right as our Company and the industry and everything and there's a lot of discussion about that, but in terms of an impact on the trading revenue on a given day, it will ebb and flow and we will get through it. But the good news is, is the United States strengthens in the first part of the year. We have seen a good normal first quarter developing and we've seen customer activity strong, all of which bodes well. So we will get through it.
+
+Answer_31:
+
+    What I'd reflect on is that, as you came through the summer into the fall through the election, you saw -- both on the consumer side and on the commercial side, you saw increasing optimism. On the consumer side, you saw a bit of an acceleration and spending coming into the fall. So just if you think about the middle-market business, as I said earlier, the revolver utilization is on the high end of where it has been the past several years at 40% plus and that group, which is our middle-market business, our commercial real estate business, etc., added about $4 billion worth of loans in quarter four. So all that really relates to greater business confidence. So I think we feel very good where business is staying and you get the same reports from the small business side.
+So as I go out and visit these clients, they are very optimistic. They think policies will be supportive of growth in their businesses and they are facing all the things that we face. Can they find the good employees, can they find the final demand, but I think overall the optimism is very strong. And we are seeing it translate into some loan balances. I think it still will play out into early next year.
+
+Answer_32:
+
+    So we've got marketshare of around 3.5% and we are originating in prime and super prime with average FICO scores at 771 and debt to income ratio is at all-time lows. And I know this isn't necessarily completely responsive to your question, but credit statistics here are phenomenal. I think in the quarter, our net charge-off ratio was 19 basis points. So we are able to grow that. We did grow it in the quarter well and we are able to grow it within our risk tolerance.
+Now the fourth quarter was a great quarter in auto. I think we have all seen the numbers and we are expecting that growth to continue. Assuming a modestly improving economy, we are expecting that growth to continue in the first and second quarter. I guess as guidance I would give you auto growth in mid to low single digits. By the way, I've just been corrected here. Our net charge-off ratio in the fourth quarter was 35 basis points, not 19, but still well, well within our risk tolerance for that product.
+
+Answer_33:
+
+    It presents a concern and you watch it carefully, but where we keep our business, how we view this business is it's a very high credit quality business. It hasn't affected us, as Paul just said, but we see it in the industry and it's obviously a concern, but there's always some seasonality to those recoveries and those statistics reported, but overall with our high -- our FICOs are 770-ish range, so it's not really -- it doesn't really affect us.
+
+Answer_34:
+
+    You have it right.
+
+Answer_35:
+
+    You have it right. Well, actually the only thing I would add is the process itself in terms of the scenarios and things like that, but we've had plenty of cushion, so unless they change grammatically, you've got it right.
+
+Answer_36:
+
+    Yes, so we balance sheet, I think to be precise, 78% this quarter and we generally balance sheet all of the jumbos. So then the question is, for conforming, how much do we do. I don't really have that in front of me. We are starting to do more conforming, but we are certainly not doing all of it. Maybe a good guess would be around half.
+
+Answer_37:
+
+    Hey, Paul, just to think about that a second, that credit quality as mortgages is so strong that frankly it's not worth getting the guarantees and things like that. We have the liquidity to fund them and it's obviously jumbos, but even on the conforming, the credit quality of ours is at the top end and I think the charge-off ratio was 3 basis points in the fourth quarter. So economic gets better at keeping the pace for the guarantee.
+
+Answer_38:
+
+    Yes, it's finished up and we're still working through the last part of the conversion, but it's basically in-house.
+
+Answer_39:
+
+    It's still good.
+
+Answer_40:
+
+    It's still good and we still target that and you are exactly right. Rate increases will go to the bottom line.
+
+Answer_41:
+
+    That was the transfer of servicing that we just talked about on the previous question.
+
+Answer_42:
+
+    It's a good question, but we transferred servicing at the end of the quarter. When you transfer servicing, you've got to redo all the bill pay and that's just a result of not getting all those bill pays done over the quarter. By now, we are probably 90% of the way through that problem. It's just a timing issue.
+
+Answer_43:
+
+    I think 30 plus day in mortgage was actually down $40 million I think.
+
+Answer_44:
+
+    Absent that issue.
+
+Answer_45:
+
+    I don't think we have specific guidance on that. Our marketshare -- we are growing our deposits faster than the market, therefore your marketshare is growing. Where it's coming from exactly, Nancy, just for historical perspective, because you've been around this Company, this industry for a long time, I had them check something, but from 2007 to today, effectively, the deposits per branch have doubled and the checking account numbers are basically flattish and up maybe a percent or something like that. So think about the dynamics of that in terms of profitability. So we feel very good about the growth in deposits year-over-year, 12% in checking and 10% overall. So it's coming from somewhere. I just don't know where exactly.
+
+Answer_46:
+
+    The answer would be yes because --.
+
+Answer_47:
+
+    Think about it, I think Paul said earlier that mobile sales are 20%-ish, but that means 80% are not mobile, therefore they are coming through other call centers and branches. So it's an integrated business system and [Tong] and [Dean] and the team working there have done a great job of optimizing that if you look at the chart and watch the cost per deposit continues to work its way down while there's growth and then additional salespeople. So it's coming. The year-over-year rise in mobile sales is actually faster obviously, but it's still only 20% of the contribution.
+
+Answer_48:
+
+    The other thing interesting, by the way, we are using -- a statistic I really like is we have digital appointments. So people come into the branch, but they don't just walk in now. They are coming in for an appointment that they've made over their smartphone. So that really helps us from an efficiency standpoint as well. If we can get people to do that, it's better for them and it's better for us.
+
+Answer_49:
+
+    I think if you think about it, there are a couple of dimensions. Obviously that dimension is well spoken about out there. You saw yesterday I think the House passed a couple cost benefit analysis type requirements for the SEC and the commodities things. So I think there will be a body of work that will go on to balance, let's make sure we understand the pluses and minuses of a lot of this stuff.
+But, in reality, if you think about our Company, we have maintained -- we invest a lot of talent and capabilities in people, in compliance and risk in 2010, 2011 and 2012 and it's been relatively flat, but the Company has shrunk around it, so it's become a higher percentage, but it's not -- we are able to now start to optimize that and make it better and so I think if we get that, that's terrific. That will help us even do more potentially, but even if we don't, there's optimization to come now that we've crested -- all the different things that have gone on in the industry.
+So first it was the work of just collecting the bad mortgage and stuff went up, but now you are optimizing more the way we manage risk in a systems environment and stuff like that. So I look forward -- that's what helps us give confidence for the future path on costs overall.
+
+Answer_50:
+
+    Yes, sure. That's a little earnings prep talking to our head of our middle markets business, our GCB business and our small business banking. They are telling me that they are definitely seeing more interest from CEOs to have meetings. A lot of engagement around 2017 and what the environment might be. Things are feeling a lot more optimistic to those bankers and it's not just talk. Late in the quarter, we actually did see an increase in loan balances that was I wouldn't call it a spike, but there was definitely an acceleration late in the quarter, particularly in middle market and to a lesser extent in business banking.
+
+Answer_51:
+
+    Yes, so we have $500 billion of operational RWA. I think our closest competitor has 400 and then I think Citi is probably at 3 something. So we were given more by the regulators based upon the history of the bank, the acquisitions we did and the losses that were historical. But, as you know, we've exited a lot of those products. Bank of America never had a risk profile. It was more the companies that we acquired. So it's a little bit arbitrary. There are models out there for calculating operational risk capital. Those models, they are the subject of a lot of debate if you follow the Basel committee process.
+So we are focused on trying to get that number down, but it's going to take a little while and we are going to need more clarity from the regulators on how they want to calculate a company's operational risk capital, but that's something that would be very helpful to us if new models were approved that were a little bit more rational in terms of looking at historical losses versus the current operations of a company.
+
+Answer_52:
+
+    Yes, I do. The total DTA -- guys, keep me honest here -- but I think will be $19 billion, but let me give you the number that matters probably if you are thinking about the future. We are not here sitting, predicting any tax change, but what really matters, if there is US tax change in the US, is I will use 2015. In 2015, we had over $20 billion of US profits, pretax profits. That's an important number. And then the other number that's important is, at year-end, our DTAs that would be repriced if the tax rate changed equaled approximately $7 billion.
+
+Answer_53:
+
+    So that was the last question. Let me close by closing up 2016. We had a 13% increase in net income for the year, 15% EPS. We had a good operating leverage with 1% revenue growth and 5% expense growth and we announced today that we increased our stock repurchase program another $1.8 billion. So that closes off a good year.
+As we look forward to 2017, we will just continue to do what we told you we are doing -- focus on responsible growth and we look forward to the benefits of a faster growing economy potentially and increasing rate. So thank you for your time and we look forward to next time.
+

exam/part2_problem1/Problem_1_Conference_Call_Segments/call_37_presentation.txt

@@ -0,0 +1,56 @@
+
+Good morning. Thanks to everybody for joining us. I know it's a busy morning for all of you for the fourth-quarter 2016 results. Hopefully, everybody has had a chance to review the earnings release documents that are available on our website. Before I turn the call over to Brian and Paul, let me remind you we may make some forward-looking statements. For further information on those, please refer to our earnings release documents, our website or SEC filings. With that, let me turn it over to Brian Moynihan, our Chairman and CEO, for some opening comments before Paul Donofrio, our CFO, goes through the details. Brian?
+
+Good morning. Thank you, Lee and thank all of you for joining us to review our results today. Results this year in the fourth quarter complete a solid year of execution and driving our responsible growth strategy. We produced earnings of $17.9 billion in 2016. That is a 13% growth over 2015. In a year in which we had a series of unexpected and sizable events around the world and a rough start in the capital markets, we were able to achieve 1% growth in revenue against the backdrop of a slow growth US economy.
+Important, we focused on driving what we could control -- cost, production and risk. So how did we do on all that? We lowered our cost, improved productivity with a result in reduction of expenses by almost 5% compared to 2015. That's nearly $3 billion in expense reductions continuing a long-term trend. From the peak in 2011 of $77 billion, expenses are now down $22 billion or 29%. And the reductions coupled with the revenue growth drove 6% in operating leverage.
+An improving economy, a relentless focus on client selection and growth through responsible lending combined to result in a historical low charge-off rate of 39 basis points for our Company this quarter. We also returned more capital to shareholders through higher dividends and more share repurchases during 2016. As you may have seen in the news release this morning, we announced an additional $1.8 billion expansion to our share buyback program. So adding the $1.8 billion to the $2.5 billion left, that brings us to $4.3 billion for the first six months of 2017.
+Our repurchase resulted in a 2% reduction in share count at the end of 2016, which added to the earnings growth to produce a 15% growth in earnings per share. For the year, our return on tangible common equity was 9.5% while return on assets was 82 basis points and the efficiency ratio improved from 70% to 66%.
+From a balance sheet perspective, let me mention a few things that are noteworthy as the items continue to grow with the business while optimizing the balance sheet at the same time. Our average deposits grew $64 billion or 5% compared to fourth quarter of 2015. Our average loans grew $22 billion, or 3%, as the lending segments outgrew the legacy runoff and Paul will show you that later on.
+On regulatory capital, we ended the year at 10.8% on a fully phased in CET1 advanced basis. Importantly, after reviewing our year-end calculation and through the hard work of our teams, we are pleased to report that our method 2 GSIB capital ratio requirement has dropped 50 basis points, so our total 2019 CET1 requirement is now 9.5% instead of 10%.
+Turning to slide 3, on these charts, you can see that each business segment played a role in driving our earnings growth in 2016. The businesses are producing good efficiency ratios and returns above the firm's cost of capital. And on this page, you can see that each business is driving hard to create operating leverage in the upper right-hand corner.
+Consumer Banking, our biggest earning business, continued its strong performance through its transformation; produced more than $7 billion in after-tax earnings, growing 8%. Our Global Wealth and Investment Management business improved its earnings 8% as well, earning $2.8 billion. Our Global Banking business serving our commercial customers continues to produce strong revenue and generated $5.7 billion of earnings. And lastly, but not leastly, our Global Markets business earned $3.8 billion, the most it's earned in the past five years with a rebound in sales and trading revenue and strong expense discipline on the part of the team.
+As you know, and you can see from the slides Paul will walk through later, our business has important leadership positions across the board in the industry and we believe that they have room to grow their marketshares by focusing on deepening relationships with their existing customers, as well as winning customers from the competition.
+Turning to slide 4, let me cover a few highlights on the fourth quarter before I turn it over to Paul. Reported earnings of $4.7 billion after tax of $0.40 per diluted share, an EPS improvement of 48% from the year-ago quarter on a reported basis. We had a couple pennies of net benefit this quarter from resolution of some tax matters that were partially offset by the combination of smaller charges for revenue for debt hedge ineffectiveness, additions to our UK card PPI reserves to be prepared for sale and DBA. This improvement in year-over-year results was driven by expense reductions as we lowered costs by 6% from fourth quarter 2015 to fourth quarter 2016. Revenue from the fourth quarter 2015 to the fourth quarter of 2016 was up 2% on a reported basis. Note that this quarter had lower levels of noncore gains from equity, debt and asset sales than in past years. So it is effectively more core earnings. Provision expense was modestly lower in the aggregate from fourth quarter 2015. Our responsible growth strategy resulted in a 23% improvement in net charge-offs and we also had a lower amount of net reserves released from last year's fourth quarter.
+So overall, I am pleased with the results. The Company has produced another quarter of solid results with strong operating leverage. We reported year-over-year earnings growth in every quarter 2016 with expenses declining in every quarter and revenue growing in three out of four. Our focus on operating leverage, expense management and operating excellence continues. The fourth quarter of 2016 represents the 20th successive quarter of year-over-year non-litigation expenses going down.
+The expense reduction has been an important ability to grow earnings without the benefit of significant rate increases, but now we see rate increases in the fourth quarter of 2016, the latter part of the quarter, on both the long end and the short end. As these rate increases were late in the quarter, they didn't benefit the fourth quarter NII number that significantly, but we look forward to first quarter 2017 when we expect NII to increase, all things remaining equal, by approximately $600 million per quarter despite having two less days in that first quarter. And with loan and deposit growth, we'd expect NII to continue to improve from there throughout 2017 and beyond. And Paul will take you through these numbers in a minute.
+This dynamic bodes well as we expect growth in earnings from productivity improvements will now get the added benefits of rate increases. This quarter, investors have asked a lot of questions that they usually ask, but importantly questions about the incoming new Presidential administration. Their questions have ranged from corporate tax reform and what do we think about that, regulatory changes, economic growth and the impacts of these things and interest rate changes.
+The optimism for positive change here at Bank of America and among our customers is palpable and has driven bank stock prices higher. We will have to see how these topics play out, but that we are optimistic. But, in the interim, we will continue to operate the Company by controlling and driving what we can. We are going to drive responsible growth. In prior calls, I answered the questions you asked about the fundamentals. First, can we continue to stay this disciplined on risk? Yes, we are making progress growing our loans, growing our deposits, growing our market business and keeping the risk in check in all areas and our credit is among the best it has ever been in history.
+Can we get earnings growth in a low rate environment? Yes, the answer is yes; you are seeing our earnings growth even without a significant rise in rates and now we look forward to those rises in rates. And the question is can you keep driving expenses lower? Again, the 20th consecutive quarter of year-over-year lower operating expenses and we have room to move them lower even as we continue healthy investment across all our businesses. And can we continue to drive our returns up above our cost of capital and you are seeing that happen.
+So while we are very optimistic about the future, optimistic about new policies which could spur growth, we, at Bank of America, will continue to drive what we can control and that's a culture of what we have and we will keep doing that. With that, I will turn it over to Paul for the fourth quarter results. Paul?
+
+Thanks, Brian. Good morning, everybody. Since Brian covered the income statement highlights, I'm going to start with the balance sheet on page 5. Overall, the end-of-period assets declined $8 billion from Q3 as solid loan growth across our business segments was more than offset by lower levels of trading assets in our Global Markets business. On an ending basis, loans grew $10.9 billion from Q3 2016. This includes adding back $9.2 billion in UK card balances that were moved from loans and leases to assets of businesses held for sale pursuant to the announcement of the sale of our UK card business. Loans on a reported basis showed growth of $1.7 billion as a result of that movement. We expect to close the sale around the middle of the year subject to regulatory approvals.
+On the funding side, deposits rose $28 billion from Q3, or 9% on an annualized basis. At the same time, long-term debt fell by $8.3 billion driven by hedge and FX valuations. Global Markets trading liabilities declined in tandem with Global Markets assets. Lastly, common equity declined $3.2 billion compared to Q3 as additions from earnings were offset by a decline in AOCI and capital returned to shareholders. AOCI declined by $5.6 billion. Driving the decline was a $4.7 billion reduction in the value of AFS securities held in our investment portfolio, which reduced in value as long-term rates rose significantly during the quarter. Reflecting this, global liquidity sources declined a bit in the quarter, ending the year just below $0.5 trillion. However, we remain well compliant with fully phased-in US LCR requirements.
+We returned a total of $2.1 billion to common shareholders through a combination of dividends and share repurchases in the quarter.. Return of capital, plus the decline in AOCI, drove a 1% decline relative to Q3 2016 intangible book value per share to $16.95. However, it's up $1.33, or 9% from Q4 2015.
+Turning to regulatory metrics and focusing on the advanced approach, our CET1 transition ratio under Basel III ended the quarter at 11%. On a fully phased-in basis compared to Q3 2016, the CET1 ratio decreased 12 basis points to 10.8% and remains well above our new 2019 requirement of 9.5%. CET1 capital declined $3 billion to $163 billion driven by the negative OCI valuations. Benefit  ratio was a $12 billion decline in RWA driven by lower exposures in our Global Markets business partially offset by loan growth. We also provided our capital metrics under the standardized approach, which remained relevant for CCAR comparison. Here, our CET1 ratio is higher at 11.5%. Supplementary leverage ratios were both the parent and the bank continue to exceed US regulatory minimums that take effect in 2018.
+Turning to slide 6, on an average basis, total loans were up $22 billion, or 3% from Q4 2015. Versus Q3 2016, we saw a pickup in growth driven by holiday spending on credit cards and some late quarter growth in commercial activity. Looking at loans by business segment and in all other, year-over-year, loans in all other were down $26 billion driven by continued runoff of first and second lien mortgages while loans in our business segments were up $48 billion or 6%.
+Consumer Banking led with 8% growth. We continue to see growth in residential real estate. As the pipeline from Q3 2016 flowed through, vehicle lending was solid, home equity paydowns and runoff continued to outpace originations. In Wealth Management, we saw year-over-year growth of 7% driven by residential real estate. Global Banking loans were up 6% year-over-year and on the bottom right chart, note the $64 billion in year-over-year growth in average deposits that Brian mentioned.
+Turning to asset quality on slide 7, one can see clear evidence of our responsible growth strategy. Credit quality metrics remain strong, perhaps best symbolized by our net charge-off ratio, which hit a record low of 39 basis points this quarter. Our strong credit quality metrics are a manifestation of our overall risk management, which has been transformed since 2008 and we expect our performance to bode well as we move through economic cycles.
+Total net charge-offs of $880 million improved slightly from Q3 and are down $264 million from Q4 2015. Provision expense of $774 million declined $76 million from Q3 and $36 million from Q4 2015. A net reserve release in the quarter of $106 million was slightly higher than Q3 2016 as we released $75 million of energy reserves given improvement in asset quality and current stability in energy prices.
+The Q4 2016 total net reserve release was roughly a third the amount released in Q4 2015 as consumer real estate releases continue to moderate lower. Our allowance to loan ratio this quarter was 1.26% with a current coverage level 3 times our annual net charge-offs.
+On slide 8, we break out credit quality metrics for both our consumer and commercial portfolios. As you can see, charge-offs improved in both periods with consumer real estate driving consumer improvement and reduced energy losses driving commercial improvement. We saw improvement in most of our other credit metrics.
+Turning quickly to slide 9, net interest income on a GAAP non-FTE basis was $10.3 billion, $10.5 billion on an FTE basis. Compared to Q4 2015, NII this quarter was relatively stable after adding back the $612 million charge we incurred last year when we called some TruPS securities. Compared to Q3 2016, NII was up $91 million. NII benefited in the quarter from solid loan and deposit growth. We also saw some modest benefit in NII from higher interest rates. Partially offsetting these benefits was market-based hedge ineffectiveness totaling $169 million related to the accounting for our long-term debt and associated swaps where we have swapped interest payments from fixed to floating. This ineffectiveness is recorded in NII and will revert to zero over the remaining life of the debt. It is just a timing issue caused by accounting rules.
+While I'm not likely to give specific NII guidance in most quarters, the move in Q1 2017 is expected to be significant, so we wanted to provide some near-term perspective. As you think about Q1 2017 versus Q4 2016, the benefit from the absence of negative market-related ineffectiveness will be offset by two less days in the quarter, so you can effectively take this quarter's NII as a starting point.
+Now assuming interest rates remain at current levels and we see modest loan and deposit growth, we believe we will earn approximately $600 million in additional NII in Q1, primarily driven by the Q4 rate increases in both the long and short end. From there, we would expect continued growth in 2017 assuming modest loan and deposit growth and stable short and long-term interest rates. With respect to asset sensitivity as of 12/31, an instantaneous 100 basis point parallel increase in rates is estimated to increase NII by $3.4 billion over the subsequent 12 months.
+Turning to slide 10, non-interest expense was $13.2 billion. That's an improvement of more than $800 million or 6% from Q4 2015 and as you can see, the reductions are across the Company in virtually all line items of expense. Our productivity projects and efforts to simplify how we get our work done and how we deliver for our clients are driving these reductions.
+Q4 litigation expense was $246 million, which is fairly consistent with Q3 2016, but lower than the $400 million recorded in Q4 2015. Our employee base declined 2% from Q4 2015. However, we continue to invest in growth by adding primary sales associates across Consumer, across Wealth Management and across Global Banking. As a reminder, in Q1, similar to past years, we expect to incur roughly $1.3 billion for retirement-eligible incentives and seasonally elevated payroll tax expense. Additionally, if we were to see a normal seasonal rebound in capital markets-based activity, we would most likely see an associated increase in expense.
+Turning to the business segments and starting with Consumer Banking on slide 11, this business is generating above-average deposit growth, solid loan growth, improving customer satisfaction and strong growth in earnings. Consumer Banking earned $1.9 billion and produced a 22% return on allocated capital this quarter. I would note that pre-tax, pre-provision earnings rose more than $400 million or 12%. 7% expense and 5% NII improvement were both notable and enough to more than offset higher provision expense and prior-year divestiture gains. Revenue was up 1% compared to Q4 2015 as NII growth was partially offset by the absence of approximately $100 million of divestiture gains in Q4 2015 as we sold the last of our larger, non-core affiliate portfolios in that quarter.
+Credit quality remains good and provision was higher primarily as a result of reserve releases in the year-ago quarter. Consumer continued to lower expenses and the efficiency ratio dropped nearly 500 basis points to 53% from Q4 2015 with good pricing discipline, rate paid on the deposits remained a steady 4 basis points and the operating cost of deposits was also steady at 160 basis points.
+Turning to slide 12 and looking at key trends, first, in the upper left, the stats are a reminder of our strong competitive position. Looking a little closer at the revenue drivers compared to Q4 2015, while we report NII and noninterest revenue separately, it's important to emphasize again that our strategy is to focus on relationship deepening and growing total revenue while improving operating leverage through expense discipline. Our relationship deepening is improving NII and balance growth while holding the fee line flat as we reward customers for doing more business with us.
+We believe the overall result is more satisfied customers whose balances are more sticky over time. We continue to see strong client enrollment in our preferred rewards programs. For the year, we enrolled 1.2 million clients in preferred rewards and that's up 42% from 2015. We are seeing a 99% retention rate for customers enrolled in preferred reward. Average deposits continue their strong growth, up $54 billion, or 10% year-over-year, outpacing the industry.
+With respect to card, spending levels and new issuances were strong; however, the industry trend of increasing reward costs continues to mitigate our overall card revenue growth. By the way, this makes it even more important to hold down acquisition costs for the use of our branch network to source and fulfill customer demand. I would also emphasize that our underwriting standards in card result in a relatively higher quality new card customers that, on the one hand, have higher spending habits, but, on the other hand, receive more rewards.
+Turning to expenses, in the upper right, they declined 7% in Q4 2015 despite higher FDIC assessment charges between the two periods. Digitalization and other productivity improvements continue to help us drive down costs in our delivery network. Focusing on client balances on the left, in addition to deposit growth, client brokerage assets at $145 billion are up 18% versus Q4 2015 on strong account flows and market valuations. We also increased the number of Merrill Edge accounts by 11% versus Q4 2015. We now have more than 1.7 million households that leverage our financial solution advisors and self-directed investing platforms.
+Moving across the bottom of the page, note that the average loans are up 8% from Q4 2015 on strong mortgage and vehicle lending growth. Loan growth reflected total consumer real estate production of $22 billion, up 29% from Q4 2015 and 7% higher than Q3 2016 as the prior quarter's pipeline came through. We retained about three quarters of first mortgage production on the balance sheet this quarter. As you might imagine, the sudden rise in long-term rates caused a noticeable decline in applications to refinance, driving the overall mortgage pipeline down 43% from the end of Q3. Auto lending was up 15% from Q4 2015 with average book FICO scores remaining well above 750 and net losses of 35 basis points.
+On US consumer card, average balances grew from Q3 aided by seasonal holiday spending. And spending on our credit cards adjusted for divestitures was up 10% compared to Q4 2015.
+Okay, turning to slide 13. We remain an established leader in digital banking. With improvements like our Spanish app and contactless sign-in, we continue to see momentum in digital banking adoption. Mobile banking continues to transform how our customers bank and we expect to introduce our artificial intelligence application, Erica, this year. She will add to both the functionality and excitement around digital banking. Importantly, as adoption rises, particularly around transaction processing and self-service, we expect to see efficiency and customer satisfaction improve.
+I won't go through all the details on this slide, but mobile devices now represent 19% of all deposit transactions and represent the volume of more than 880 financial centers. Sales on digital devices continue to grow and now represent 20% of total sales. While these trends are important, and continue to transform how consumers interact with us, I would remind you that we still have nearly a million people a day walking into our financial centers across US. Many of these customers still use our branches to transact, but many also use the branch as a financial destination where they can learn more about products and services, work face-to-face with a specialized professional and generally improve their financial lives.
+Turning to slide 14, Global Wealth & Investment Management produced earnings of $634 million, which is up modestly from Q4 2015 on solid operating leverage. The business continues to undergo meaningful change as firms and clients adapt to the new fiduciary rules and other market dynamics. We remain well-positioned with market-leading brands and a wide range of investment service options ranging from fully advised to self-directed with guided investing for those who want something in between. We also have strong margins and returns, as well as resources to help us manage through market dynamics and customer trends.
+Year-over-year noninterest income declined $104 million as higher asset management fees were more than offset by lower transactional revenue. A 4% decline year-over-year in expenses drove a 170 basis point improvement in operating leverage from Q4 2015. The decline was driven by the expiration of the amortization of advisor retention rewards that were put in place at the time of the Merrill Lynch merger. Other declines were the result of work across many categories of expense more than offsetting higher litigation and FDIC costs compared to last year.
+Moving to slide 15, we continue to see overall solid client engagement. Client balances climbed to $2.5 trillion driven by market values, solid long-term AUM flows and continued loan and deposit growth. $19 billion of long-term AUM flows include clients transferring assets from AUM, clients transferring assets to AUM from IRA brokerage. Average deposits of $257 billion were up 2% from Q4 2015. Average loans of $146 billion were up 7% year-over-year. Growth remained concentrated in consumer real estate.
+Turning to slide 16, Global Banking  $1.6 billion, which was up 11% year-over-year. Global Banking continues to drive loan growth within its risk and client frameworks, continued stabilization in oil prices and improvement in exposures drove provision expense lower in Q4 2016. Investment banking fees were down 4% from Q4 2015 as strong debt underwriting activity was more than offset by lower advisory and equity issuance fees. Expenses decreased from Q4 2015 despite the addition of new commercial and business bankers and increased FDIC costs. The efficiency ratio improved to 45% in Q4. Return on allocated capital increased to 17% despite adding a couple billion dollars of allocated capital this year.
+Looking at trends on slide 17 and comparing Q4 last year, relative to Q3 2016, we saw a pickup in lending with average loans on a year-over-year basis up $19 billion, or 6%. Growth was broad-based across large corporates and middle-market borrowers and it was diversified across industries. Average deposits increased from Q4 2015, up $6 billion or 2% from both new and existing clients.
+Switching to Global Markets on slide 18, the business had another solid quarter. Given our broad product and geographic footprint, we were well-positioned to help clients address volatility around the elections and central bank policy uncertainty both in the US and abroad. We continue to invest in and enjoy leadership positions across a broad range of products. This business is another great example of our focus on improving operating leverage. Revenue grew 8% excluding net DVA while expenses declined 10%. Global Markets earned $658 million and returned 7% on allocated capital in what is typically the most seasonally challenged quarter of the year.
+For the year, the return on allocated capital was 10% as sales and trading revenue ex-DVA grew 5% while expense declined. It is worth noting that we achieved these results with a stable balance sheet, lower VAR and 7% fewer people. Continued expense discipline drove cost 10% lower year-over-year led by reductions in operating and support costs.
+Moving to trends on slide 19 and focusing on the components of our sales and trading performance, sales and trading revenue of $2.9 billion, excluding DVA, was up 11% from Q4 2015 driven by FICC. In terms of revenue, while we experienced a normal seasonal decline versus Q3, this Q4 was our second best fourth quarter in five years. Excluding net DVA and versus Q4 2015, FICC sales and trading of $2 billion increased 12%. Mortgages showed particular strength among the credit products as investors sought yield. It was a challenging market for municipals. With the exception of rates, we saw an improvement in trading of macro products, equity sales and trading was solid at $948 million, up 7% versus Q4 2015. Flows were strong in the second half of the quarter driven by changing investor sentiment after the US elections, which drove a favorable environment for derivatives as clients repositioned across industries. We were able to help many clients who were underweight equities leading up to the election add exposure.
+On slide 20, we show all other, which reported a net loss of $95 million. This quarter includes a $132 million charge to add to our PPI reserve. You will also note that this quarter includes no debt security gains. Equity investment income was only $56 million and there was little to no gains from asset sales. Given the increase in rates and our progress with respect to reducing non-core assets, this quarter's results are more reflective of future trends with respect to these two line items. All others Q4 2016 loss includes a net benefit from some tax matters of roughly $500 million, which reduced our tax rate in the quarter to 22%. Excluding those matters, the effective tax rate would have been about 31%. I would expect a similar tax rate of 31% for the average for 2017, excluding unusual items.
+Okay, let me editorialize a little bit as I finish here. We reported solid results this quarter that capped a year filled with improvement. These results show that our strategy of responsible growth is working. One can see responsible growth in our deposit growth while maintaining good pricing discipline. You can see it in the reduction in our expenses even as we continue to invest in the future of the franchise. And you can see it in the deepening of relationships with our customers and clients. Our focus on responsible growth is helping us return more capital to shareholders and today's announcement of an increase in our share repurchase authorization is another example of that.
+Responsible growth has also driven the transformation of our risk profile, which is evident in our credit risk metrics and something we believe will differentiate us through future economic cycles. And responsible growth is driving operating leverage, which is visible in each of our lines of business. Lastly, responsible growth has put us in a solid position to benefit in 2017 from higher interest rates. With that, I will open it up to Q&A.

exam/part2_problem1/Problem_1_Conference_Call_Segments/call_37_questions.txt

@@ -0,0 +1,234 @@
+Question_1:
+
+    Hi, good morning. Paul, I was wondering if you could give us a little more split on some of the drivers of the net interest income increase that you are expecting to occur between the fourth and first quarter, the $600 million. How much of that is driven by the Fed hike we saw on the short end and how much of it might be the long end in rates versus loan growth?
+
+Question_2:
+
+    Okay. And then the reason the 5.3 future sensitivity has now moved to 3.4 is you've rolled $2 billion into your base case outlook?
+
+Question_3:
+
+    Yes, okay, got it. That's helpful. And then a question for Brian on capital return and CCAR. Some of the other banks have used the de minimis exception to top off their 2016 CCAR authorizations. That leaves Bank of America standing out quite a bit on the low end of payouts versus peers. So I'm kind of wondering -- two questions -- one, how do you guys think about that de minimis -- you did well in 2016. Any reason that Bank of America couldn't think about the de minimis top-off? Are there restrictions on that or could you do that at some point this year on the de minimis?
+And then second, as you move into 2017, what are your goals to get your capital distributions closer to peer payouts and why wouldn't you be able to do that? Thanks.
+
+Question_4:
+
+    Great. And that will take you through -- just as a reminder, Paul, that will take you through the end of this CCAR period, right?
+
+Question_5:
+
+    Great, thank you.
+
+Question_6:
+
+    Hey, good morning. Maybe I'll just follow up on the NII question a little bit. Does that guidance that you provided include the sale of the UK card business and what's the impact from that?
+
+Question_7:
+
+    Sure. So when we think about going forward, what kind of deposit betas are you assuming in that $600 million per quarter and how do we think about the next rate hike? Say we get one in June, which seems to be consensus, do you still expect to have very low deposit betas there?
+
+Question_8:
+
+    And you think that can continue into the third, the next rate hike?
+
+Question_9:
+
+    Yes, understood. Okay, that's very helpful. Thanks.
+
+Question_10:
+
+    Hello there. Two quickies. One on card, one on mortgage. On cards, you had some pretty good growth and we're seeing really big growth at some of the other big banks and some of the economics of the business are being given way to support that growth. I'm just curious on how you are balancing that of customer growth versus giving up some of the economics to capture that growth.
+
+Question_11:
+
+    I guess the super ROA and ROE support it anyway for the overall Company. And then the question on mortgage was production was good, but the pipeline fell a lot. Obviously a function of what happened in rate, but can you help us think about what to expect say next year if say rates go up along the forward yield curve? How do you model that? How can you manage the expense along the way?
+
+Question_12:
+
+    Okay, thanks very much.
+
+Question_13:
+
+    Hi, good morning. So Paul, I wanted to start off with a question on the FICC business. The revenues have been remarkably resilient over the last couple of years really helped by some of the factors that you cited, whether it be strong risk discipline, balance sheet management and the reduction in VAR. But as we look ahead, what we've been hearing from a lot of folks is growing optimism around the FICC business in the coming year and what I'm wondering is whether your strong risk discipline actually precludes you from participating in a significant recovery if that materializes to the same extent as some of your peers.
+
+Question_14:
+
+    Got it. And switching over to just the capital side for a moment, you highlighted the progress you made in reducing the GSIB surcharge to 2.5. I'm wondering, as you think about how you're going to allocate capital across the different businesses, whether that positions you to reduce your firmwide targets and maybe more specifically how are you thinking about your spot capital requirement today for the firm overall?
+
+Question_15:
+
+    Well, I think the tricky part there and admittedly, it's a complex topic is thinking about how much capital you need to get through the CCAR process unscathed or maybe under the new SEB framework, like what's the minimum capital requirement that you would need over which the remainder is considered to be excess and can be returned to shareholders over time?
+
+Question_16:
+
+    All right. Thanks for taking my questions.
+
+Question_17:
+
+    Hi, good morning. A couple of questions. One is on just the balance sheet and as you think about your cash duration, just the profile that you have today in a rising rate environment over time. Do you expect to stay more static where you are today or any changes that we should be anticipating?
+
+Question_18:
+
+    Okay, and then on --.
+
+Question_19:
+
+    And then just from the cash perspective, the LCR, could you just give us a little color as to where you stand there?
+
+Question_20:
+
+    So I hear you on that and it sounds like, okay, we have some excess cash and I guess that's part of the reason I asked the question. Is there any interest in moving some of that cash into [that]?
+
+Question_21:
+
+    Sure, no, I get that.
+
+Question_22:
+
+    Yes, that's good to hear. Other question was just on the improvement in the minimum capital ratio and the RWA reduction that drove that. Could you just give us a little more color on the drivers there and do you feel like you are optimized now for what you want to take in terms of risk relative to total size balance sheet?
+
+Question_23:
+
+    Right. Okay, thank you.
+
+Question_24:
+
+    Thank you. When you think about rate sensitivity and deposit betas, you get back to really deposit flows. We continue to see increases in deposit balances and until we see any pressure of those balances being deployed back into the economy, there really shouldn't be much impact on pricing. What is -- you are looking at the core deposit balances and what are the flows you are seeing and where is the growth coming from and are you seeing any pressure in the sense of thinking of those balances being deployed back into the economy?
+
+Question_25:
+
+    And then just two unusual things out there. The hedge ineffectiveness, can you give us the actual dollar amount? It looks like the day count will typically impact you about $150 million to  and then other fee income looks artificially low. If you could just give us some color on that line item as well.
+
+Question_26:
+
+    Other fee income.
+
+Question_27:
+
+    Perfect. We were right in that range, so that got us right back to the normal level. Thank you.
+
+Question_28:
+
+    Hi, so there's certainly a lot of positives on this call, whether it's deposits, loans, expenses, etc. But the end result is still a single digit return on equity or return on tangible common equity. And I know you want it to be higher. I know it's improved, but it's still below your peers today of 13% and below your target of 10%. So can you give us a target metric for ROTCE for 2017 or when do you think you get to that double-digit range where some of your peers are?
+
+Question_29:
+
+    As a follow-up, I know I ask this each year, but you just said wait and see and that's kind of been the answer. It just seems like, from an investor standpoint, you get a free pass. Like you will get to the double-digit ROTCE when you get there and as investors, we're just going to have to wait and see. It would be nice to have that metric or more color or -- or anything else you can give along those lines.
+And maybe just for some more of that color, the efficiency ratio, I get it, you've gotten better, but it's still not where I think you want to be. It's 66% and your peers today that report it are under 60% for last year. What else can you do with efficiency, which might help improve that ROTCE to the double-digit range?
+
+Question_30:
+
+    You've come a long way with branches from 6,000 down to 4,600. Where do you think you ultimately could take that branch count and why all of a sudden are you reducing the level of ATMs?
+
+Question_31:
+
+    All right, thank you.
+
+Question_32:
+
+    Good morning. Thanks for taking my question. Brian, maybe a question for you. I noticed on slide 19 of the breakout of the Global Markets revenue mix, 40% of the revenue in the past year coming from outside the US and Canada. As we look towards what appears to be a potentially more volatile market condition in Europe relative to the Brexit negotiations, which are set to start early in 2017, how are you thinking about that and what the effect could be on your sales and trading revenue in 2017?
+
+Question_33:
+
+    Okay. And then if I can just follow up on your earlier comments about the post-election positive sentiment. Can you give a little more color as to what your borrowers and what your corporate clients are saying in terms of what their demand -- the increase in their demand could be or are they holding back a little bit waiting to see what comes out of the Beltway over the next six to nine months??
+
+Question_34:
+
+    Okay, thank you.
+
+Question_35:
+
+    Thanks. Two quick questions please. One is on the -- can you just perhaps update us on your outlook for auto credit? It's been an issue that's been a bit of a battleground, particularly on the mid and low FICO range and I know that's not where you are concentrated, but I'd love to get your perspective there.
+
+Question_36:
+
+    And does the potential decline in collateral values present any particular concern to you guys?
+
+Question_37:
+
+    And just one quick follow-up on capital return. I just want to make sure I understand all the dynamics. It seems like there's two trends that are coinciding. One, of course, is the continued increase in targeted payout ratio as a percent of your earnings and then, of course, there is the expansion in earnings themselves. Is that the right way to think about it? Is there any other dynamic to consider?
+
+Question_38:
+
+    Great. Thanks very much.
+
+Question_39:
+
+    Thank you very much and good quarter, guys. Talking about mortgage banking a little bit, you talked about that you did about $22 billion originations in the quarter. And correct me if I'm wrong, Brian, but did you mention that you portfolioed three quarters of that onto the portfolio? And if you did, what was the breakout between jumbos, just a rough estimate between jumbos and regular conforming or were they all jumbos?
+
+Question_40:
+
+    Okay.
+
+Question_41:
+
+    We are seeing a lot more people portfolio before -- what you just said because the guarantees are so expensive. Is the PHH, is that all now consolidated down into your operations? The PHH stuff from Merrill Lynch that you brought over?
+
+Question_42:
+
+    Hey, guys, thank you very much.
+
+Question_43:
+
+    Good morning. Sorry if I missed it, but did you guys comment on the $53 billion expense target that you put out there? I think it's exiting 2018 is what you said.
+
+Question_44:
+
+    Okay, so even if revenue is better than expected, but it's rate-driven, that's not going to impact expenses materially?
+
+Question_45:
+
+    Okay. And then separately credit quality overall was very good. The charge-offs and non-performers. You did flag I think it's the nonguaranteed consumer early delinquencies. I think it was about 15% Q2 and a little bit year-over-year. Just anything to flag there, especially given how quality the consumer book is?
+
+Question_46:
+
+    Oh, I apologize about that. Okay.
+
+Question_47:
+
+    Okay. Then ex that impact, I assume the early stage delinquencies -- what would the early stage delinquencies look like?
+
+Question_48:
+
+    Absent that.
+
+Question_49:
+
+    Okay, all right, that makes sense. Thank you.
+
+Question_50:
+
+    Good morning. Brian, could you just talk a little bit about your deposit marketshare? You are up the street or around the corner from a company that showed us this morning that they are getting a lot of churn in their deposit base. So are you able to track whether you are benefiting from that?
+
+Question_51:
+
+    Can you just give us an idea of -- where are you gaining more marketshare through digital, mobile? Are you gaining more through people still coming in the branch?
+
+Question_52:
+
+    All of the above?
+
+Question_53:
+
+    Okay. My follow-up question is this. We have experienced or we experienced on November 8 a sea change in the thinking about bank regulation going forward. And everybody that I've talked to seems to think, even if there are not significant changes in what's on the books, that there will be, quote, a lighter touch in regulation. And I guess I would ask if you are thinking in those terms and if so, do you think that that will have an impact on your expense numbers, number of people you need to add in compliance, etc. etc. ongoing?
+
+Question_54:
+
+    All right, thank you.
+
+Question_55:
+
+    I've got a question for Paul. You made a comment about that the end of the quarter you saw some commercial activity. I know Brian referenced already some pickup in middle markets and commercial real estate, but can you give any further color of that commercial activity that you saw in the lending side at the end of the quarter?
+
+Question_56:
+
+    Great. And another question actually, Paul, obviously the banking industry has to live by a number of regulations that are dictated by the regulators on capital, liquidity, etc. Coming back to that operational risk capital number you gave us for businesses that you have exited and no longer are operating in, is that an opinion that the Fed has just laid upon all the banks or is that actually in statutes where to change it would require a lot of work versus if it's just the Fed wants to do that to make it extra conservative, maybe a new change in the Fed could maybe give you guys some relief there?
+
+Question_57:
+
+    And then just finally I think in your K you put your DTA from last year. It might have been around $25 billion for the deferred tax asset. Do you have an estimate yet for where it will stand at the end of 2016?
+
+Question_58:
+
+    Thank you very much.
+

exam/part2_problem1/Problem_1_Conference_Call_Segments/call_38_answers.txt

@@ -0,0 +1,156 @@
+Answer_1:
+
+    Small and small. Small sell, small impact.
+
+Answer_2:
+
+    Glenn, it's Brian. I think at the end of the day, banks reflect the economy and help make the economy happen. So we've been able to grow loans 5%, 6% in the core, so the middle market segment, 7% actually year-over-year. Credit card's been picking up a little bit, home equity is strong, residential mortgage down. So if you look at it overall, we've been out -- able to outgrow the economy, but we're going to be dependent upon the economy keep growing. But what we've shown you across the last couple of years, with the discipline we have, are driving deeper penetration in our customers, working hard on our relationships even with repositioning portfolios that you can see in some of the slides and/or making sure that we maintain great discipline, we've been able to grow the mid-single digits, as we've told you, against the backdrop of an economy growing at 1.5% to 2%. If that grows faster, we'll grow faster. If that stays in that range, we should be able to continue to grow at that level.
+
+Answer_3:
+
+    No. Credit looks good across the board, and it's performing as we model and expect.
+
+Answer_4:
+
+    I think, Glenn, think about it this way, is the way people pay each other. So you -- we don't charge for it. It's just a service as part of a core DDA account, just like checks or just like an ATM card would be to withdraw. It's just more efficient for the customer, more efficient for the -- for us, too, ultimately, because the payback will be taking cash out of the system. And so year-to-date, we're up about -- even before Zelle is announced, for the first quarter, P-to-P payments at Bank of America are up 25% first quarter of '17 versus first quarter of '16. So this is growing fast and will continue to grow. And what we'll do, we'll swap out other payment forms which cost us more to execute, but it's free to the customer.
+
+Answer_5:
+
+    Well, the loan growth is embedded in our 100 basis point shock. So theoretically, it includes it. But if loan growth's a little bit better than we think, it could be better; if it's a little lower, it would be less. That's one of the variables that we have to think about when we think about NII growth.
+
+Answer_6:
+
+    John, just one of the things to keep in mind there is remember, we just capitalized or put in the run rate, for lack of a better term, $600 million-plus, fourth quarter to first quarter, and this is on top of that, too. That first benefit as you think for the year, that benefit is now locked in and moves its way through the system.
+
+Answer_7:
+
+    Sure. So in a 100 basis point rise on interest-bearing deposits, and remember, we have a large amount of noninterest-bearing deposits, but on interest-bearing deposits, we're kind of low 50-ish for that full 100 basis point rise. As you can expect, the first 25, 50 of the 100 is going to be a little bit different than the second 25 or 50, and that's about as much that I'd want to give you given the competitiveness around this topic.
+
+Answer_8:
+
+    So with respect to buffers, I wouldn't want to give an exact number for all sorts of reasons. We put a lot of thought into how we manage our capital and liability structure, including buffers. Having said that, we have 150 basis points of cushion right now on fully phased-in minimums and a lot of time between now and 2019. So maybe we'll talk more about it as we get a little closer. But right now, we feel good where we are.
+
+Answer_9:
+
+    The revenue growth assumptions were like we said. If long term, we believe we can grow faster than GDP growth and that's embedded in those assumptions. I think a way for you, Steve, to think about it is look at the Global Markets year-over-year. And what you see there is with that substantial rise in revenue, the expense growth absent -- last year, we had a credit and litigation, this year we had an expense. So you had a pretty good reversal there. Absent that, it was 2% growth. And as Paul said, it had 6% less people. Comp expenses were up a bit even though revenue was up quite a bit. So we can manage against that with the inevitable thing that if revenue grows faster, we might have a little bit more expense pressure. But I think you and I will be very happy to see that happen.
+
+Answer_10:
+
+    Look, the only thing I would add, just for the record, is when we gave that guidance around this time last year, we specifically said it was based upon the economic environment at that time, and that if things got better, we'd have to adjust. If things got worse, we'd have to adjust. Having said all that -- that's just for the record, having said all that, we're still focused and comfortable we can get to the $53 billion, approximately $53 billion for full year 2018. That's what we said.
+
+Answer_11:
+
+    The way I would think about it in Q2, provisions should roughly match net charge-offs. But remember, we're bouncing around the bottom with respect to net charge-offs in commercial. So a material credit can move the needle one way or the other. Absent that caution, we will build as we grow loan balances. But we should expect to see that offset, perhaps, by further runoff of noncore Consumer Real Estate, and we have a high energy reserve.
+
+Answer_12:
+
+    I think we have been building our capital [ ask ] year-over-year, and you should expect us continue to do that since we have both a strong cushion under CCAR. We'll see with this year's results, we don't know yet obviously. But from last year, just extrapolating. And also, our start point is higher and our run rate of earnings is now very consistent. So capital return's part of our story, and we'll continue to pursue it.
+
+Answer_13:
+
+    We've made progress every year, you've seen that. And I would remind everybody that we tapped the de minimis last year as well. So with the stability of our earnings, with the progress we're making on CCAR, as Brian said, we hope to continue to make progress.
+
+Answer_14:
+
+    Yes, I would think about the extra day as kind of being offset by the seasonality we have in Q1 for leasing.
+
+Answer_15:
+
+    Yes, approximately $150 million. And as you know, there's a lot of things that go into that modeling.
+
+Answer_16:
+
+    Look, we've seen modest growth in card balances. We think that should continue. We're adding new accounts. We added 1.2 million cards this quarter. Combined debit, credit spend was good year-over-year and really good recently. But as you point out, the card income line remains -- I think in terms of growth, remains muted by competition around customer rewards. I guess what I would point out and just remind everybody is that just focusing on the fee income line sort of ignores some of the key benefits of our strategy, which is to attract relatively higher-quality card customers and reward them for deepening their relationship with us. The strategy, we think, is driving incremental deposit growth and making them stickier, and that helps NII. And by the way, these customers have lower loss rates as well as reduced need to interact with call centers, so that helps us lower costs. In terms of the service line or service charges, they've shown some modest growth, driven by growth in new accounts, and we expect that probably to continue here.
+
+Answer_17:
+
+    You mean brokerage...
+
+Answer_18:
+
+    Yes. Well, wealth and brokerage is being driven by the long-term trend that we've been seeing with growth in AUM as transactional brokerage continues to decline. We saw that again this quarter. This quarter, we had significant growth in AUM, which offset that sort of continuing decline in brokerage. I think AUM fees were up 8% this quarter.
+
+Answer_19:
+
+    Right. I think when we started a few years ago at $70 billion operating expenses, to bring it down to this level, it was more obvious. Betsy, now it's everywhere. It's everywhere, a little bit everywhere and a lot of hard work. So headcount generally is drifting down year-over-year at around 4,000 or 5,000 people. That gets harder, but what we're doing is taking out people and putting them into the front line in the client-facing roles, and so we're seeing that shift go on. [ You're ] continuing to work our real estate portfolio down, again, through colocations in cities. So you'll see us take 3 buildings in an area and put them in 1, and you've seen some announcement in that regard. In our data centers, we're accelerating the process that you'll -- that -- to consolidate data centers, and that helps continue to knock down the number of data centers. It takes $0.5 billion investment to -- or a $0.25 billion investment to build one, to bring it in. And so you'll see that go on. And then it's everywhere we turn, every place we look, just keep working at the pieces. But at the end of the day, continue to watch the FTE headcount numbers drift down and also how we move those around from less managers to more client-facing people and less layers in the company, which we've been after. And so it is just hard work across the board using our simplify and improve and what we call organizational health going on in our company, and we're seeing the aspects of that. That -- by the way, I think last -- in '16, to give you an example, I think we invested -- got about $400 million, $500 million in savings from some ideas, but it took us an investment of a couple hundred million dollars to get that. And so even that investment rate is important to getting the sales out. And so we're not asking you to exclude, but there's severance cost in here, there's real estate repositioning costs, all of that which actually comes down as you get further and further towards the optimization level.
+
+Answer_20:
+
+    Well, first I would say, look, we've been making a lot of investments in our Global Markets business across equity, across macro. Credit has always been a traditional strength of Bank of America Merrill Lynch, a lot of very strong bankers combined with strong sales and trading effort. Corporates raised money this quarter in the capital markets. We have a strong relationship. So we saw a lot of increased activity on the primary side, which helps your sales and trading on the secondary side. That's one. Two, with spreads tightening a little bit and with clients' activity picking up as they were repositioning given the change in markets, the change in spreads, again, we have strong corporate credit trading desk. We have strong special situations in credit. We have strong mortgage. And they just saw a lot of client activity given what happened in the quarter. So when -- we've often said, when client activity picks up, you're going to see this business perform. And for us, client activity was more this quarter and it showed up in our results. And again lastly, it's a breadth of products. It's significant presence and scale in every major market around the world. So it's not just the U.S. We saw activity in emerging markets around the globe. We were there for -- when our clients needed us.
+
+Answer_21:
+
+    Sure. Particularly on the wholesale side, there are 3 types of deposits fundamentally, 25%, 40% and 100% runoff. And as we think about serving our customers and clients, we're mindful -- very mindful of their needs, but we're also focused on maintaining those -- having deposits that are of the highest quality in terms of being able to use, to lend out to customers. So that means you've got to focus on the 25% and 40% or the more of -- the deposits that are much more operational in nature, the deposits that we know our corporate and FI clients are using to run their businesses. We're focused on growing those deposits and we're focused on helping them use those deposits to pay bills and to move their money around, to do FX, all the things you might think an individual does but just on the corporate side. Those are the types of the deposits we're focused on. We're not -- we're respectful of clients who want to give us other types of deposits, but we're having conversations about them, about the value of those and therefore what they should expect in terms of the pricing.
+
+Answer_22:
+
+    Well, I think, Gerard, just to focus, we've talked to you about getting at above 100 basis points, and then with the adjustments of sort of smoothing out the first quarter a little bit from the onetime or the annual expenses that occur in the first quarter, you're getting close to that. That is not a aspirational goal which we'll stop at. I mean, I think it'll improve if the rate structure continues to move up and the economy continues to grow, we'll get above that. But the first order of business is to get above -- to get to that so that we get the returns on tangible common equity and returns on equity where we want them to be. As you're thinking about that just more broadly, remember that we have, I don't know, a balance sheet of $2.3 trillion or so. And think about $500 billion basically being completely liquid assets. That is a far different cry than we were when our balance sheet sort of the high point was $2.7 trillion and we had -- probably had $200 billion or $100 billion to $200 billion of high-quality assets or whatever the moniker we'd use back then was. And that's going to knock around your yields on your balance sheet. And so we do focus on ROA in our company, we also -- because it basically is the thing that ultimately would drive ROE. But as equity builds, that ROE can be under pressure just from increases in equity. But if you think about it, the real driver of the yield on the balance sheet has more to do with the amount of assets you're carrying which are underleveraged for purposes of liquidity and safety and soundness.
+
+Answer_23:
+
+    Sure. We have $500 billion in RWA for operational risk, which is -- if I can go on a little bit, which is 1/3 approximately of the RWA of the company under the advanced approach and more RWA than we have for our credit.
+
+Answer_24:
+
+    A couple of things. One is our capital is more than sufficient. We're very comfortable with it, with the tangible common equity ratio, Gerard. Thinking about before the crisis of 7.9% and a CET1 of 11% with a minimum of 9.5%, we're more -- we have more capital than the company needs by the different measures, whether it's a traditional market-based measure or a regulatory measure. So we're completely comfortable with that. That leads us to return more capital. You should expect our dividend payout ratio will, for the bigger companies, I think they'll be more focus of keeping that to the 30% level that's been talked about in the various rules and regulations. And if you go back 3 or 4 or 5 years ago, I spoke to that at one of our industry conferences, I think if you look across time, that level of -- if you think about that level of payout against your earnings stream, there's very low probability that you'll have real danger in the dividend -- continuing that dividend even in tough times. So our goal is never -- to keep the dividend stable and then use the excess capital to buy the stock back at around book value. We think it's a great trade.
+
+Answer_25:
+
+    I think it was -- the only way to really classify it is really across the board. I think we have strength in all of those client sets. It was just a lot of good sales and trading activity driven by client interest in repositioning their investments, but also again, driven by  of our clients. We just have a very broad and diverse product set in FICC, both from a product perspective and a geographic perspective. And that kind of footprint and that kind of diversity, when clients want to make changes, we're a natural call.
+
+Answer_26:
+
+    Okay.
+
+Answer_27:
+
+    We have been getting, in Global Markets, a double-digit return now for a number of quarters. It's been in the 10-ish, 11% range for a number of quarters. So we feel like, in Global Markets, we've made a tremendous amount of progress in improving returns. In Global Banking -- and remember, this quarter where they did 15%. But this quarter, I think we had a very strong quarter in sales and trading. Our performance in Global Markets is going to be a direct result of client activity, as we say every quarter. So when client activity is lower, our results will be lower, but through a number of different quarters now with varying amounts of client activity, I think we've been able to get at 10% or more return on equity. So that's how I'd answer it from that perspective. In Global Banking, again, those returns are somewhat dependent on client activity in Investment Banking, but there, I think the Global Banking segment is less volatile with respect to returns tied to the Investment Banking fee pool in any given quarter. We have a diverse product set across treasury service, traditional corporate banking products and Investment Banking products. And then from a client perspective, we're the full spectrum: Small, medium-sized and large global companies. So there, I would expect us to be able to main those -- maintain that return level.
+
+Answer_28:
+
+    The thing I'd add to that is if you think about what we did, we took Global Banking because we think that is an integrated business, whether it's corporate Investment Banking with both the corporate side and Investment Banking side or middle market banking, what we call Global Commercial Banking, again, with Investment Banking capital markets behind obviously less than GCIB. We split that out to show you that, that business -- many years ago, we broke Global Banking away from Global Markets to show that the [ distinctness ] in the business at Global Banking was more of an annuity stream driven by treasury services revenue, lending revenue and then Investment Banking fees, which ebb and flow based on client activity and the returns are fairly consistent, et cetera. The flip side was we also wanted to show -- I think doing this 5, 6 years ago when we first did it, and have been doing it at ever since. And we're were one of the few companies that does it. On the Global Markets side, you can see that there's actually more stability in that business than a lot of people thought. So if you look on the low end, we might make $600 million, $700 million after tax. On the high end, we made $1.3 billion this quarter, but you'll see this range. And if you look across years of quarters and look at the comparative quarters year-over-year because there's some seasonality, you'll see it's relatively stable. And so we've sort of hit that double-digit level in the worst of quarters during a year and then in the best of quarters, it will kick above it. That was, again, how Tom and the team -- Tom Montag and the team run the business. The stability we put in. And then most importantly was bringing the expense structure down dramatically 5 or 6 years ago, Tom and the team did by almost $1 billion in a quarter in operating expenses just in this markets business alone, and then maintaining it there and continuing to push it down while revenues have stabilized and come back up.
+
+Answer_29:
+
+    Are you referring to more sustainable on the net charge-off side?
+
+Answer_30:
+
+    I guess what I would -- how I would answer the question is we have been -- we changed our underwriting standards years ago. We've been focused on responsible growth now for a number of years. We've been sticking with that improved client selection, heightened credit standards. So the answer is we can't compare to a previous period in the company's history. We're just going to have to see how this develops. But we're very confident. We don't see anything today, as we look at what's going on in the marketplace, that would suggest that we're at an inflection point. It doesn't mean that I won't be talking to you about -- next quarter about having lived through an inflection point, but we're not seeing anything right now that would tell us that we should expect net charge-offs to rise in the near term. In the long term, there is some seasoning going on in the credit card portfolio that we expect and we've talked about before. But outside of that, we feel good about where our credit card quality is.
+
+Answer_31:
+
+    I'd say -- I could say consistent. And if you looked at spending, I think it actually maintains its pace through the quarter. As an indicator of their behavior, March was a stronger month than the first 2 months of the quarter. Now you can get into day counts and movements around which weekends fall, but just we didn't see any fall-off in terms of their behavior in spending, which I think is a good indicator of how they're feeling.
+
+Answer_32:
+
+    So I'm not going to take you through the math again because the math is fairly self-explanatory, but you've -- there are a lot of assumptions, or I should -- I'll call them assumptions, but there's a lot of things that go into the modeling of NII. You hit upon one of them. Obviously, we could have deposit betas that are different than what we're expecting as we're doing our modeling. The 50 basis points, obviously, is for a full 100% shock. We're talking about a 25% shock. So it's reasonable to expect that we would be lower than 50% for that first 25%. I think the question is how should we be? And we're just going to have to wait and see. We're very focused on the competitive environment. We're focused on the needs and wants of our clients. And we're focused -- we're balancing all of that against what our shareholders would want us to do. So we're just going to have to see how it develops, but there's a lot of things that go into the modeling of expected NII.
+
+Answer_33:
+
+    Yes. The sensitivity on the long end is a function of being able to reinvest as assets mature at higher or lower rates than the average we have now and what it does to the amortization of our premium on our securities portfolio. The latter is a bigger driver in the short term, the former is a bigger driver in the long term. If you think about the company right now, where long-term rates are, we've said this on other calls, we're kind of -- we used to be at equilibrium where an asset rolling off the balance sheet was being replaced by assets rolling on the balance sheet at roughly the same yield. I would say we're in a little bit more positive place right now where even where our rates are, having long-term rates have gone up here over the last 2 quarters, we're sort of in a position where an asset rolling off the balance sheet, on average, is being replaced by an asset coming on at slightly higher yield. So I don't know if that helps you.
+
+Answer_34:
+
+    Look, the bulk of the increase from Q4 to Q1, the $700 million, the bulk of it was due to rates. We just would highlight that there was meaningful improvement that was driven by the leasing seasonality. Think about that as roughly the kind of improvement we get with an extra day in a quarter. And then there was, I think, significant improvement driven by the lack of hedge ineffectiveness in the first quarter relative to what we experienced in the first quarter. But the bulk of it was driven by rates. And if you think about the rate impact, more than half of the rate impact was driven by the long end as opposed to the short end.
+
+Answer_35:
+
+    I think over the longer -- in any one quarter, it could be a little bit lumpy on what -- how company overall benefits versus the segments. But I think over time, over multiple quarters, the segments will benefit. It's just basically a function of how residual flows back to the -- to our segments.
+
+Answer_36:
+
+    Yes. I think if you look at our disclosures, you'll see that the 100 basis point rate shock at the end of the year was basically the same as rates it is right now. You're referring to what we reported at the end of Q3 being 4-point-something. And that decline in benefit we experienced as rates rose, and that went into our run rate of NII that, as Brian mentioned earlier.
+
+Answer_37:
+
+    No, I think you have to go back. If you look -- you can follow up with Lee afterwards, but if we think about what we told you in the fourth quarter, from the third to the fourth quarter, I think you may be off a quarter. From the third to the fourth quarter, what we said is you basically capitalize into the earnings run rate that $2 billion difference, is now in the earnings run rate. And that's what you're actually seeing. And that's a benefit of the lift in rates, the special on the short-term side. And so that is relatively stable now because the -- that piece went through it. So Lee can follow up with you and take you through sort of the calculation. But it's because -- the good news is it showed up in earnings this quarter as we said it would.
+
+Answer_38:
+
+    Well, because the future investment rate on the long-term rates as it comes down, as the earlier caller talked about, affects our yields on our securities portfolio going forward as we reinvest $20 billion-plus a quarter. So let's -- I'll get Lee to call you afterwards, he can take you through that.
+
+Answer_39:
+
+    Well, thank you, all of you, for your time. Just to remind you, this is a quarter where we showed our responsible growth coming through. Revenue growth of 7%, flat expenses, 700 basis points of operating leverage across our franchise, good client growth in each of the business. And our asset quality remains strong. So we look forward to talking to you next quarter. Thank you for your time and attention.
+

exam/part2_problem1/Problem_1_Conference_Call_Segments/call_38_presentation.txt

@@ -0,0 +1,94 @@
+
+Thank you. Good morning. Thanks to everybody for joining us this morning for the first quarter 2017 results. Hopefully, everybody's had a chance to review our earnings release documents that were available on our website.
+Before I turn the call over to Brian and Paul, let me remind you we may make some forward-looking statements. For further information on those, please refer to either our earnings release documents, our website or our SEC filings.
+With that, I'm pleased to turn it over to Brian Moynihan, our Chairman and CEO, for some opening comments before Paul Donofrio, our CFO, goes through the details. Take it away, Brian.
+
+Thank you, Lee, and good morning, everyone, and thank you for joining our first quarter results. 
+I'm going to begin on Slide 2, and first, this quarter is another solid example of driving responsible growth at Bank of America. My teammates continue to deliver for customers around the world, and not many companies have the resources we have to help our clients drive the global economy. 
+But with that, we understand responsibility comes with doing this, and we do it in a responsible way. Responsible growth is driving more sustainable returns for you as shareholders, also. This quarter, we produced strong revenue growth. We drove cost savings that offset higher revenue-related cost, and we managed risk well, and we returned more capital to you, our shareholders, through dividends and increased repurchase of shares, than any period since the crisis. 
+Turning to Slide 3. Our company produced earnings of $4.9 billion after tax in the first quarter of 2017. Those earnings were up 40% compared to the first quarter of last year, driven by 700 basis points of operating leverage. Revenue rose 7%, and we managed to keep overall expenses flat. 
+Our earnings per share were $0.41 per share. On a diluted basis, that was up 46%. This is the fourth quarter in a row we've exceeded $0.40 of EPS per share. We did that in quarter 1 despite $1.4 billion of annual retirement-eligible incentives and seasonally elevated payroll tax costs. And importantly, we have done this in a responsible manner, not reaching for growth outside of our established risk and customer framework, and we achieved this in an economy which continues to grow in the 1.5% to 2% range. 
+On a year-over-year basis, our average deposits were up over $58 billion. Average loans were up $21 billion, and sales and traded revenues, excluding DVA, were up 23% with better client activity. We saw $29 billion in long-term asset under management flows this quarter within our wealth management business. Asset quality remains strong with a provision expense of $835 million. Net charge-offs were down 13% from the first quarter of 2016 but were modestly up from the fourth quarter of '16 as expected from the normal seasonality, especially in consumer credit cards. 
+Regarding progress against long-term metrics, the first task the company had many years ago was to become stabilized, then it was to reduce our legacy costs and simplify the place, and then we drove towards sustainability of our results. Once results became more sustainable, we pushed towards generating return on tangible common equity above our cost of capital. We've now shown that we have a return on tangible common equity in the double digits the last 4 quarters. And keep in mind that we have been doing this while our capital continues to build. The next step is to push that towards our 12% target.
+This quarter, our return on tangible common equity was 10%, where our return on assets was 88 basis points. These are reported numbers. The efficiency ratio was 67%. These figures reflect solid progress in this quarter against our long-term targets but are even closer if you were to allocate the seasonal aspects of the retirement-eligible compensation costs and elevated payroll tax expenses across the years as just opposed to putting it all in the first quarter. 
+And even though quarter 1 is typically a good capital markets quarter for us, if you just spread those costs, you'll see that across all the quarters, the metrics this quarter would have been reflecting an efficiency ratio of nearer 62%, a return on assets nearly 100 basis points and a return on tangible common equity of 12%. So simply put, we're getting there. 
+On Slide 4, as I mentioned, the key to profit building in this environment is to drive good core customer growth and revenue while controlling our costs to drive operating leverage. We have established record for the past -- we have an established record for the past several years of producing quarterly operating leverage on a year-over-year basis. 
+This quarter, you can see on the Slide 4, that our revenue growth on a year-over-year basis across each of our business segments. We're also able to hold the expenses overall in the company flat through the careful management of cost. As you can see in this slide, that's 700 basis points of operate leverage for the total company. 
+Some of our businesses, like our consumer business, have been driving operating leverage consistently for many years in a row now. Some, like our Global Banking business, are using operating leverage to drive the company to the best line of business efficiency ratio among our businesses. Other businesses continue to have leverage opportunities that are becoming more clear. This is the case in our wealth management or our Global Markets businesses. 
+As we turn to Slide 5, you can see the line of business results. Each business improved their efficiency ratios. Each line of business reported returns well above the firm's cost of capital. 
+Consumer Banking continued its strong performance and transformation, produced $1.9 billion in after-tax earnings this quarter, growing 7%. And on a pretax, pre-provision basis, PPNR, which excludes the prior year's sizable reserve release, the PPNR was up 17% year-over-year. The efficiency ratio in this business was down 500 basis points to 53%. 
+Global Wealth and Investment Management improved earnings 4%, earning $770 million after tax, improving its profit margin to 27%. This is a new record for the business. 
+Our Global Banking business produced a record revenue quarter led by strong Investment Banking results, and that generated $1.7 billion in after-tax earnings. It remains our most efficient operating business at 44%. 
+Lastly, our Global Markets business earned $1.3 billion in after-tax earnings, generating a 15% return on its allocated capital. Improved performance in sales and trading revenue combined with strong expense discipline that drove those results. 
+Our Other category shows a loss, driven mostly by the $1 billion in first quarter FAS 123 costs and related personnel taxes, which gets allocated across the business segments throughout the year. But the reduction in losses year-over-year was driven by improved operating costs in the company and lower litigation expense. 
+As you'll see from the slides Paul will walk you through later, our businesses have important leadership positions across the board. We believe they have room to grow both market share by deepening relationships with existing customers and by winning customers from the competition. 
+Overall, I'm pleased with the results this quarter. We grew the top line, we grew the bottom line, and we did it the right way, all while making significant investments in people, technology and more capabilities for our customers. And all that will bode well for future growth. 
+While many of you might focus on rates and our leverage to rising rates, note that the $1.5 billion in year-over-year revenue growth is split 40% for NII, which is driven by rates and by also the growth in loan and deposit balances, and the other 60% was driven through noninterest revenue. 
+As you know, we remain focused on things we know we can control and drive. We maintained our discipline on both expenses and pricing. Our rates paid has remained steady at 9 basis points on deposits while, at the same time, we have grown those deposits 5% year-over-year or $58 billion. 
+On lending activity, there's been a lot of discussion regarding a slowdown. In our core middle market business, representing a broad base of American companies, our business loans grew 7% year-over-year. In our smallest -- smaller business segments, business banking and small business, we were up 3%. And small business had the best production quarter in its history. 
+We assisted our markets clients with their financing needs, which also put capital in the system for economic growth. All this growth occurred in a sub-2% GDP growth environment. Our clients stand ready, they're engaged, and they're ready to grow faster as the economy continues to grow and improve. 
+Now let me turn it over to Paul to talk -- go through the other details about the quarter. Paul?
+
+Thanks, Brian. I will start with the balance sheet on Page 6. Overall, end-of-period assets increased $60 billion from Q4. The growth was fairly evenly split between 2 elements: First, we saw higher trading-related assets in Global Markets business with incremental customer activity following a seasonal slowdown at the end of Q4; secondly, we had higher cash levels driven by seasonal deposit growth, primarily from tax refunds. 
+Deposits rose $55 billion or 5% from Q1 '16 and are up $11 billion from Q4. Q1 deposit growth was primarily driven by customer tax refunds in our consumer business. Loans on an end-of-period basis were steady with Q4 as solid commercial growth was offset by seasonal declines in credit card and runoff of legacy noncore loans. 
+Lastly, common equity increased $1.3 billion compared to Q4 as $4.4 billion in net income available to common was reduced by $3 billion and capital returned to shareholders through dividends and net share repurchases. 
+Global liquidity sources increased in the quarter, driven by higher deposit flows and bank funding. We remain well compliant with fully phased-in U.S. LCR requirements. Book value per share rose 5% from Q1 '16 to $24.36. 
+Turning to regulatory metrics and focusing on the advanced approach. Our CET1 transition ratio under Basel III ended the quarter at 11%. On a fully phased-in basis compared to Q4 the CET1 ratio improved 20 basis points to 11% and remains well above our 2019 requirement of 9.5%. 
+CET1 capital increased $1.6 billion to $164 billion, driven by earnings and the utilization of deferred tax assets offset by return of capital. The ratio also benefited from an $11 billion -- excuse me, a $14 billion decline in RWA, driven by lower exposure in our Global Markets business, lower card exposure and legacy asset runoff. 
+We also provide our capital metrics under the standardized approach, which remains relevant for CCAR comparison purposes. Here, our CET1 ratio is 10 basis points higher at 11.6%. Supplementing leverage ratios both for parent and bank continued to exceed U.S. regulatory minimums that take effect in 2018. 
+Turning to Slide 7 and on an average basis. Total loans were up $21 billion or 2% from Q1 '16. Loan growth in our business segments was primarily offset by continued runoff in noncore Consumer Real Estate loans in All Other. Year-over-year loans in All Other were down $23 billion. On the other hand, loans in our business segments were up $44 billion or 6%. 
+Consumer Banking led with 8% growth. We continue to see good growth in residential mortgages although our originations slowed in Q1 '17, given the increase in mortgage rates in Q4 and Q1. We saw growth in credit card and vehicle loans. Home equity pay-downs continue to outpace originations. 
+In wealth management, we saw a year-over-year growth of 7%, driven by residential mortgages. Global Banking loans were up 4% year-over-year. Loans in our commercial business grew 6% year-over-year despite a slight reduction in commercial real estate. We think these growth rates are responsible, given the economy grew around 2% year-over-year. 
+Middle market revolver utilization rates have now climbed back to record levels. On the bottom of the chart, note the $58 billion, 5% year-over-year growth in average deposits, which is driven by 10% growth in Consumer Banking. 
+Turning to asset quality on Slide 8. The stability of our asset quality and loss trends reflects many years now of disciplined client selection and strong underwriting practices that are foundational to our responsible growth and through-the-cycle performance. 
+Credit quality remains strong. Total net charge-offs of $934 million or 42 basis points on average loans increased slightly from Q4 due to expected seasonality in our credit card products but were down 13% from Q1 '16. Provision expense of $835 million rose $61 million from Q4 but was down $162 million from Q1 '16. 
+Net reserve releases in the quarter of $99 million was fairly consistent with Q4 and the year-ago quarter. Note that Q1 '16 included a significant increase in reserves in Global Banking for energy exposures. That was mostly offset by releases in consumer reserves in that quarter. 
+Our reserve coverage ratios -- excuse me, our reserve coverage remains strong with an allowance-to-loan ratio of 125 basis points and a coverage level 3x our annualized charge-offs. NPLs and reservable criticized exposure both declined notably. 
+On Slide 9, we break out credit quality metrics for both our consumer and commercial portfolios. On the consumer chart, you can see the impact of the seasonal increase in credit card losses. Note that delinquency trends remain low and improved modestly from Q4. Commercial losses continue to be low. 
+Turning to Slide 10. Net interest income on a GAAP non-FTE basis was $11.1 billion, $11.3 billion on an FTE basis. NII improved $730 million from Q4, primarily due to higher rates. The net interest yield increased 16 basis points to 2.39% from Q4 as loan yields improved 17% while the rates we paid on deposits was flat at 9 basis points. 
+Q4 and Q1 increases in long-end interest rates resulted in slower prepaids and less premium amortization on our securities portfolio this quarter. Increases in the short end in terms of interest rates caused our variable rate assets to reprice higher while we maintain good pricing discipline on deposits. We also benefited from normal seasonality in Q1 in our leasing business. 
+And in addition, we benefited from less unfavorable hedge ineffectiveness as compared to Q4. But one can think of the reduction in the hedge ineffectiveness as roughly offset by 2 fewer days in the quarter. 
+Now as Brian mentioned, we remain disciplined around deposit pricing given the investment we have made in customer relationships through Preferred Rewards and other deepening activities. 
+So your natural next question is what should shareholders expect for Q2 with respect to NII given the March rate hike by the Fed? Based on our models and assumptions, we believe NII should continue to improve, but the improvement is expected to be much more modest than Q4 to Q1 driven by a number of factors, most notably, the increase in long-term rates in Q1 -- in Q4 and Q1 drove a significant portion of the Q1 improvement. 
+In terms of Q2, think about it this way. Given where we are today, with the Fed funds rate hike in March and the long end down since the end of the first quarter, I would focus you on our asset sensitivity disclosures. 
+As of 3/31, an instantaneous 100 basis point parallel increase in rates is estimated to increase NII by $3.3 billion over the subsequent 12 months, which is consistent with our position at year end. Nearly 3/4 or $2.5 billion of this modeling is driven by our sensitivity to short-end rates. Given a 1-month LIBOR rise of about 25 basis points with the March hike and the long end down, we should focus on the $2.5 billion short-end benefit. Dividing that by 4 gets you a quarterly run rate of roughly $600 million for a 100 basis point shock. Assuming it's only 25 basis points instead of 100 would get you to approximately $150 million benefit in the quarter. 
+From there, we would expect continued modest growth in NII in the second half of 2017 assuming modest growth in loans and deposits and rates at least above where they are today. 
+Turning to Slide 11. Noninterest expense was $14.8 billion. We were able to hold expense flat compared to Q1 '16 despite 9% growth in noninterest income and several other expense headwinds. The efficiency ratio improved 400 basis points year-over-year. And if you allocate Q1's $1.4 billion of incentive for retirement-eligible employees and the seasonally elevated payroll tax across all 4 quarters, then the efficiency ratio would be 62%. 
+Our company-wide simplification efforts and the $110 million in lower litigation costs offset a number of higher expenses year-over-year, including: $150 million of higher incentives for annual retirement-eligible employees and seasonally elevated payroll taxes; $190 million of higher incentives associated with the revenue growth across wealth management, Global Banking and Global Markets; and $160 million of higher expenses due to changes in our share price with respect to accounting for employee stock-based awards. The year-over-year swing is caused by the share price decline in Q1 '16 compared to an increase in Q1 '17. We also had $100 million in higher quarterly costs for FDIC assessments. Finally, note that employees are down 2% from Q1 '16, and we continue to add client-facing associates. 
+Turning to the business segments and starting with Consumer Banking on Slide 12. Consumer Banking had another solid quarter. This segment produced $1.9 billion in earnings, growing 7% year-over-year and returning 21% on allocated capital. Note that, that 21% return is on $37 billion of allocated capital, which is an increase of $3 billion this quarter given growth in their loans and deposits. 
+On a pretax pre-provision basis, which adjusts for the sizable release of reserves in Q1 '16, earnings rose $559 million or 17%. Year-over-year, average loans grew 8%, average deposits grew 10% and Merrill Edge brokerage assets grew 21%. That drove revenue growth of 5% led by a 9% increase in NII from Q1 '16. 
+Note that the rate paid on deposits in this business declined 1% -- excuse me, declined 1 basis point year-over-year to 3 basis points as a result of disciplined pricing. Noninterest income included improvements in service charges and a small increase in card income that was more than offset by a decline in mortgage banking income. The decline in mortgage banking income was due to both lower volumes from less refinancings as well as our strategy of holding more of our production on our balance sheet versus selling it to the agencies. 
+Through continued efforts to drive down costs, the efficiency ratio improved nearly 500 basis points to 53%. Cost reductions also helped drive the cost of deposits down 10 basis points from Q1 '16. Consumer Banking credit quality remains solid, with the net charge-off ratio declining 4 basis points to 121 basis points. 
+Turning to Slide 13 and looking at key trends. First, as usual, in the upper left, the stats are a reminder of our strong competitive position; second, as we point out each quarter, while we report NII and noninterest income separately, our strategy remains focused on relationship deepening and growing total revenue while improving operating leverage through expense discipline. 
+So as you review the top boxes on this page, note that we drove 8% operating leverage this quarter. Also, note that our relationship deepening is improving NII and balance growth while holding the fee lines flat as we reward customers for doing more business with us. 
+Average deposits continued their strong growth, up $57 billion or 10% year-over-year, outpacing the industry. Importantly, 50% of these deposits are checking accounts, and we estimate that 89% of these checking accounts are the primary accounts of households. This means these are operational accounts used to pay mortgages and car payments and other bills. So outflows chasing rates is less likely in our view. We also believe these deposit accounts offer clients significant value in terms of transparency, convenience and safety, which also means they are less likely to move their relationships. 
+With respect to card, spending levels and new issuances were solid. However, the industry's trend of increasing rewards continues to mitigate our overall card revenue growth. Digitalization and other productivity improvements, as well as lower fraud costs, continue to lead expenses lower. 
+Expenses declined 3% from Q1 '16 despite increases in the FDIC assessment rate and charges. Focusing on client balances on the bottom left, you can see the success we continue to have growing deposits, loans and brokerage assets. 
+Merrill Edge continues to attract customers who want a self-service investment option as accounts are up 11% from Q1 '16. We now have more than 1.7 million households that leverage our financial solution advisers and self-directed investment platform. This quarter also included the successful rollout of Merrill Edge Guided Investing for clients who want some advice from our CAO office but don't desire a fully advised relationship. 
+With respect to loans, residential mortgages continued to lead our growth. As expected, the sudden rise in long-term rates in late 2016 caused a noticeable decline in mortgage production from Q1. While mortgage originations was down, we continue to hold more of our loans on the balance sheet. In Q1, we retained about 80% of first-mortgage production on the balance sheet. We believe retaining these mortgages will provide better economics over time, plus retention deepens our relationship with these customers. 
+Consumer vehicle lending remains solid, up 12% year-over-year, and we continue to remain focused on prime and superprime borrowers. Our net charge-offs at 38 basis points remain not only low, but also lowest among peers. U.S. consumer card average balances grew 3% year-over-year, and spending on our credit cards was up 8% compared to Q1 '16. 
+Turning to Slide 14. We remain a leader in digital banking and we continue to see momentum in digital banking adoption. Given the rollout of Zelle this quarter, Bank of America customers can now use their online app to transfer money, request money and split bills person-to-person with more ease than before. While still in its infancy, customers sent $8 billion in payments through our person-to-person apps in Q1, which is up 25% year-over-year. 
+Importantly, as digital banking adoption rises, particularly around transaction processing and self-service, we expect to see continued improved efficiency and customer satisfaction. Mobile devices now account for 1 out of every 5 deposit transactions and represent the volume of nearly 1,000 financial centers. Sales on digital devices continue to grow and now represent 22% of total sales. 
+Still, with all the digital activity, we have not forgotten and remain focused on the 800,000 people walking into our financial centers across the U.S. on a daily basis. Many of these customers still use our branches to transact, but many others use our branches as financial destinations, where they can learn more about products and services, work face to face with a specialized professional and generally improve their financial lives. We want to encourage that, and that's why we have an extensive branch refurbishing underway. By the way, that's also helping increase customer satisfaction. 
+We're also building new centers in markets where we have never had financial centers but where we have presence across Global Banking, wealth management or both. These markets include MSAs like Denver, Minneapolis and Indianapolis. 
+In addition, we are testing smart centers, which utilize video-assist -- video-assisted ATMs and other very [ useful ] conferencing capabilities in regions where it makes sense. 
+Turning to Slide 15. Let's review Global Wealth and Investment Management, which produced earnings of $770 million and record pretax operating margin of 27% while returning 22% on allocated capital. These solid results were produced in a period of change for the industry as firms and clients anticipate new fiduciary standards and other market dynamics, such as the shift between active and passive investing. 
+Net interest income rose 3%, driven by loan growth. Year-over-year, noninterest income also rose 3% as 8% higher asset management fees were partially offset by lower transactional revenue. Year-over-year, while total revenue grew 3%, expenses grew 2%, creating an important but modest operating leverage. Also note the $29 billion of long-term AUM flows this quarter, reflecting strong client activity as well as the continuing shift from IRA brokerage to AUM. 
+Moving to Slide 16. We continue to see overall solid client engagement. Client balances climbed to nearly $2.6 trillion, driven by higher market values, solid long-term AUM flows and continued loan growth. Average deposits of $257 billion were flat compared to Q4 while ending deposits were down, primarily reflecting some movement to investment assets. Average loans of $148 billion were up 7% year-over-year. Loan growth remains concentrated in Consumer Real Estate. 
+Turning to Slide 17. Global Banking had record revenue this quarter, up 11% year-over-year led by Investment Banking activity. Revenue growth, coupled with expense management, improved the efficiency ratio 500 basis points to 44%. 
+In addition, provision expense of $17 million in Q1 '17 was more closely aligned with charge-offs while Q1 '16 included approximately $500 million in reserve increases for energy exposure. This resulted in a 58% year-over-year improvement in earnings to $1.7 billion. 
+Global Banking continues to drive loan growth within its risk and client frameworks, albeit at a slower pace. Total Investment Banking fees for the company were $1.6 billion, which was up 37% from Q1 '16. By comparison, overall industry fee pools were up 19% year-over-year. 
+A number of items to note given the strong performance. First, this was a record Q1 in terms of revenue from IB fees. Client underwriting activity in the capital markets was quite strong. We also earned record M&A fees this quarter with involvement in 6 of the top 10 completed transactions. 
+Debt underwriting was up 38% year-over-year led by strong performance in leveraged finance. Equity underwriting was up 65% year-over-year. Expenses decreased from Q1 '16 despite higher revenue-related incentives, higher FDIC insurance costs and costs associated with adding 340 new relationship managers over the past couple of years. 
+Return on allocated capital increased 18% -- excuse me, increased to 18% despite adding $3 billion of allocated capital this quarter. 
+Looking at trends on Slide 18 and comparing to Q1 last year. Average loans were up $14 billion or 4%. Growth was driven by our commercial bank, where lending was up 6% despite subdued real estate lending. As Brian said, we feel good about this growth rate given 2% GDP environment. We stand ready to support clients who want to borrow directly from us or tap the capital markets. One of the benefits of our universal banking model is our ability to deliver for clients across a complete product set and geographies. 
+Average deposits increased 2% from Q1 '16. As expected, we saw a seasonal decline in deposits from Q4. We remain mindful of the LCR rules as we grow deposits. 
+Switching to Global Markets on Slide 19. The business had a strong quarter, which once again benefited from the breadth of our product and geographic footprint with leadership positions in a number of areas. This quarter saw strong issuer activity and tighter spreads across credit products, which played well to our strength in mortgage and corporate credit. The business improved operating leverage with revenue, excluding DVA, growing 27%, while expenses increased modestly after adjusting for litigation recovery in Q1 '16. 
+Global Markets earned $1.3 billion and returned 15% on allocated capital. This includes a reduction of capital of $2 billion given the great work the team has done optimizing the balance sheet and reducing RWA in the past year. It is worth noting that we achieved these results with a lower VaR and 6% fewer people than last year. With respect to expenses, Q1 '16 litigation included a sizable litigation recovery. Excluding litigation, year-over-year expenses were up 2% while revenue grew 19%. 
+Moving to trends on Slide 20 and focusing on the components of our sales and trading performance. Sales and trading revenue of $4 billion, excluding net DVA, was up 23% from Q1 '16. Excluding net DVA and versus Q1 '16, FICC sales and trading of $2.9 billion increased 29%. Within FICC, the year-over-year improvement was driven by improved client activity in corporate credit and mortgage products. Equity sales and trading was up 7% year-over-year to $1.1 billion despite weaker cash equity volumes. We saw increased activity in Europe and Asia across all products. We also are beginning to see the benefits of deploying additional balance sheet to meet the financing needs of clients. 
+On Slide 21, we show All Other, which reported a net loss of $834 million. This was an improvement from Q1 '16, driven by lower litigation and mortgage servicing costs. The only other thing worth pointing out here is a reminder that this is where we book the annual retirement-eligible incentive and elevated Q1 payroll tax before they get allocated out to the line of business throughout the year. 
+The effective tax rate for the quarter was 26% and included approximately $200 million of tax benefit from the deductions on deliveries of share-based awards exceeding the related compensation costs. A recent change in accounting rules requires booking this difference to the tax income expense instead of directly to equity. The effective tax rate would have been 29.4% excluding this benefit, which is in line with our expectation of approximately 30% for the rest of the year. 
+Okay. A few points -- a few summary points as I wrap up. This quarter shows the value of our businesses as rates begin to rise and as we experience increased capital markets activity. For years, we have stayed focused on growing responsibly, including staying within our risk and client frameworks and making our growth more sustainable by simplifying the company and improving efficiency. 
+In Q1, consistent with this strategy, we stuck to our strong underwriting standards while growing loans and trading assets. Asset quality remains strong and net charge-offs low. We grew deposits while managing deposit rate paid. We grew AUM while helping clients adapt to a changing industry. When client activity picked up, we were ready with a breadth of capabilities to raise capital and manage risk in major markets all around the world. We continue to invest in new technology and capabilities while adding sales professionals in certain businesses. We lowered non-personnel expenses, offsetting some seasonal and other expense headwinds this quarter. We created operating leverage in each of our business segments. And we returned more capital to shareholders than in any quarter since the financial crisis. 
+These results tell us that responsible growth is working, with more to come as the economy continues to improve. Many of you have been waiting patiently for us to approach our long-term targets. I hope you noted that if one allocates annual retirement-eligible incentives and seasonally elevated payroll tax throughout the year, we are basically at our return targets this quarter. We know we have more work to do to be consistently achieving all our targets, but we have more confidence than ever that responsible growth will get us there. 
+With that, we'll open it up to Q&A.

exam/part2_problem1/Problem_1_Conference_Call_Segments/call_38_questions.txt

@@ -0,0 +1,148 @@
+Question_1:
+
+    First, a very quickie. Did you mention what NPLs you sold during the quarter? And if there was any P&L impact?
+
+Question_2:
+
+    No problem. I'm curious, I think we've all taken note of the responsible growth, what you've done, heard your comments on it relative to the economy. I'm curious, as we watch the industry loan growth come down for a bunch of different reasons, can B of A continue on this path? I don't want to say irregardless of what the industry backdrop is, but can it buck the trend of the declining loan growth that we're seeing in most other places?
+
+Question_3:
+
+    Okay. Maybe on the credit front. As you've mentioned, credit's awesome in most places, and I saw criticized credit came down with energy improving. Are there any areas that are criticized credits increasing, like something like retail?
+
+Question_4:
+
+    Okay, last little one. Zelle -- you mentioned the increase in Zelle activity. Do you make money on that? Or is that mostly a customer retention tool?
+
+Question_5:
+
+    Paul, just a clarification regarding the second quarter framework you provided for net interest income. Does the $150 million potential bump, based on the disclosures, include the benefit of loan growth? Or was that just the rate impact? And could it be a little better if loan growth continues?
+
+Question_6:
+
+    Got it, got it. So that's incremental to the 1Q print. Okay. And then can you remind us what kind of deposit repricing beta you assume in the disclosures, Paul?
+
+Question_7:
+
+    Okay, and a separate question on capital. With the CET1 at 11% now versus the 2019 requirement of 9.5%, what kind of buffers are you thinking of holding? And what level of CET1 feels right -- like, the right target for you, longer term?
+
+Question_8:
+
+    So just wanted to kick things off with a question on the 2018 expense target of $53 billion that you guys had outlined on previous calls. Can you just remind us what the revenue growth assumptions were underlying that target? And just given some of the acceleration that we've seen in fee income growth and the higher incentive comp, is that still an achievable target in your view?
+
+Question_9:
+
+    Got it, and then just one question on the provision outlook. Just given the continued favorable credit and delinquency trends, how should we be thinking about the trajectory in the near term? Is a run rate of, I guess, around $850 million, plus or minus, a reasonable target?
+
+Question_10:
+
+    And just one final question on capital return, just touching on John's last question. How should we be thinking about the capital return trajectory given the 150 basis points of excess? And I'm also wondering whether some of the recent rhetoric from the regulators suggesting a disinclination of sorts to have a qualitative CCAR failure, whether that informs your approach at all in terms of future payouts.
+
+Question_11:
+
+    Just first clarification, just coming back to the NII commentary, does the $150 million also incorporate the extra day you get in the second quarter? Because that's usually pretty meaningful for you guys.
+
+Question_12:
+
+    Okay. So you've got -- you're saying you got a benefit in the first and that kind of washes to the second. So really, your net is the $150 million?
+
+Question_13:
+
+    Understood. Okay, great. So on the consumer fee side, I wanted to just ask, we saw kind of a little bit of a positive turn in both card income and also in the brokerage line, which is the first time in a while we've seen both of those move the right way. Any better line of sight at this point on just the trends getting better underneath the surface? Whether it's the rewards competition or the fee capture pressures in brokerage kind of starting to get into the run rate, and we can kind of expect to see growth from here?
+
+Question_14:
+
+    And can you just touch on brokerage?
+
+Question_15:
+
+    Wealth and brokerage.
+
+Question_16:
+
+    A couple of questions. One on the expense discussion earlier. On Page 4, you highlighted very clearly the strong operating leverage that you've got year-over-year from the various industries, various segments that you run. The question I have is, where should we expect the next leg of improvement on expenses could come from? Because one of the questions I've gotten from people today is this is fantastic operating leverage, but where are the levers to take it further?
+
+Question_17:
+
+    Okay. So that speaks to why you can continue the revenue growth but yet still bring these expenses down. Got it. Two other quick ones. One on fixed income. You mentioned that credit was a source of strength this quarter. Others have highlighted credit as a weakness. So maybe you could speak to what you're seeing in your client base that drove such a strong credit quarter in FICC.
+
+Question_18:
+
+    Okay. And then lastly, you mentioned on the call during the prepared remarks that you "remain mindful of the LCR rules as we grow deposits". Could you elaborate on your thoughts behind that?
+
+Question_19:
+
+    Brian, when you look out longer term, I mean, if you turn back the clock when the industry, before the financial crisis, typically earned 120 on assets -- or 130 basis points on assets, kind of a more normal interest rate environment, what do you see for the long -- and I know ROE is what you focus on, and we all do. But from an ROA standpoint, when everything's going right for Bank of America, your expenses are where you want them to be, the margins are where you want them to be, what kind of ROA do you think this company is capable of producing?
+
+Question_20:
+
+    Right. Okay. And speaking of the lever on the equity, can you remind us what the risk-weighted assets are now for the operational risk for you guys?
+
+Question_21:
+
+    Very good. And then coming back to the combined payout ratio that you guys are striving for, within that, what should we envision for -- once you get your capital levels to the point where you're very comfortable with, is the dividend payout ratio of 30% to 40% a reasonable expectation down the road when things more normalize?
+
+Question_22:
+
+    Got it. But something, Paul, just circling back to your comments about the FICC -- the strength in FICC, the client activity was strong, can you give us some color on the clients? Was it primarily investment clients or hedge -- or pension funds, hedge funds? What type of clients did you see that strength in the activity?
+
+Question_23:
+
+    Brian, thank you for batting clean-up and not Lead-off. It made it a lot easier for all of us today.
+
+Question_24:
+
+    A couple of questions. First, can you comment on the sustainability, broadly, of your returns in your markets and banking businesses? 15% return on allocated equity in markets, 18% banking despite the fact that you increased your capital allocation there. Obviously, if you can sustain those kinds of returns, it goes a long way towards helping you hit your 12% ROTCE targets on a sustainable basis. So just can you comment broadly on how confident you are to -- in your ability to, say, hit sort of mid-teen returns in those businesses?
+
+Question_25:
+
+    Okay, that's helpful. Yes?
+
+Question_26:
+
+    Yes, no. That's helpful. So I mean, obviously one of the things that's been helpful for returns in banking is a very benign credit environment. Commercial charge-offs were 10 basis points this quarter, it hasn't really moved much in recent quarters. But how do you -- how should we think about more of a sustainable level? And is there anything there that makes you think that you could start to see some sort of inflection or some sort of an uptick in terms of credit costs?
+
+Question_27:
+
+    Yes, exactly. On commercial.
+
+Question_28:
+
+    Great. Yes, I just had a quick question. I remember you saying that both the business -- or the commercial customers and consumer customers were optimistic still. But did you see a change in that optimism over the course of the quarter? I mean, did it end lower at the end of the quarter given what was going on with D.C. and everything else? Or was it fairly consistent?
+
+Question_29:
+
+    I just wanted to follow-up on the net interest income one more time. I mean, it feels like the 2Q expectation is a little bit less, certainly versus what I would have thought. And I guess I'm trying to figure out if it's just some conservatism on the deposit repricing assumption. You talk about 50%, but it's been really insignificant so far for the Fed hikes. So I'm trying to gauge, is it conservatism on that? Is it the fact that 10-year has obviously come in a fair amount? Or some combination of both, maybe?
+
+Question_30:
+
+    Okay, understood. And then just the impact of long-term rates. I mean, obviously, the comment you made on rate leverages for higher rates and your 75% lever on the short end, as we think about the decline here in long rates, if it holds, how [ frame ] kind of the drag on that. And I think it bleeds in over time, obviously, not all at once.
+
+Question_31:
+
+    Yes, no. That's very clear and very helpful.
+
+Question_32:
+
+    Two technical issues on the kind of net interest margin, NII. When you look at the big benefit in net interest margin, it seems like you had several things, like the hedge ineffectiveness and leasing, that pushed the margin up. And even though you can have NII growth, your margin may even kind of just flatten out. Was there kind of a bias towards the margin just being a little bit higher, given some of those moving pieces this particular quarter?
+
+Question_33:
+
+    And I was just focusing on the margin in the sense that just like it was rounded up because the things that are going to help next quarter are going to help NII, which may not help the margin. But then the second question was when you look at your transfer pricing mechanism, was curious because it doesn't seem like a lot of banks would have the benefit from rates showing up in corporate other. Is your mechanism, where it's still spreads some of that -- because that will matter on operating leverage for the business segments. So are the segments going to benefit as rates go up more than corporate? It does seem like it's spread out more than other banks.
+
+Question_34:
+
+    It is. It just seems like you've got a good methodology to push it to the segments, which is helping operating leverage in each of those segments as you're getting that benefit
+
+Question_35:
+
+    Another NII question, actually. I'm just trying to understand the mechanics of how your guidance in 4Q for a $6 billion uplift in NII, a 400 basis point shock, has come down to about $3.3 billion there. If I understand correctly, the long end has increased, so that reduces your guidance going forward. Is that the way to think about it?
+
+Question_36:
+
+    What I've got difficulty understanding is why a past movement in your long rates should affect your future guidance going forward. So if I think about it hypothetically, let's say the yield curve did actually go up by 100 basis point shock in the fourth quarter, then your guidance going forward would actually be 0, based on the way you view it. Is that the way to think about it? Or am I missing it?
+
+Question_37:
+
+    No, absolutely. I can see that. Just trying to see how that moves depending on the shape of the -- the shift in the curve.
+

exam/part2_problem1/Problem_1_Conference_Call_Segments/call_39_answers.txt

@@ -0,0 +1,205 @@
+Answer_1:
+
+    I think it's a little bit of both. So we did make a decision to invest more on our equities business this quarter. That's going to go up and down depending on client activity in every quarter. We could always change our mind, but generally we made a decision to add more balance sheet [to] equities because we see an opportunity there and because our customers would like us to do that.
+In terms of how we add that balance sheet, that definitely can change one quarter to another. This quarter it was a lot of synthetic which tends to happen when you have clients overseas who have some demand. Next quarter it could be more plain old PB and that does change the mix of NII when that happens. But it's based upon client demand, not necessarily how we want to manage one part of our P&L versus another.
+
+Answer_2:
+
+    Yeah, look, you're -- we are watching it closely. I guess I would point out that Bank of America and the industry really haven't increased, as you point, out deposit rates on traditional bank accounts. I think we believe we deliver a lot of value to depositors: transparency, convenience, safety, mobile banking, online banking, nationwide network, rewards, advice and counsel. There's some real value to having a relationship with us.
+And I think this value plus the fact that there has been a lack of market pressure so far has allowed us on traditional accounts to leave rates relatively flat. We are starting to see some rate increases on some account types in GWIM and in Global Banking. And if you look at our models they anticipate that we are going to have to start raising eventually based upon historical experience.
+But the bottom line is we are going to balance our customer needs and the competitive environment with our shareholder interest and do the right thing. So we will just have to wait and see.
+
+Answer_3:
+
+    Glenn, I would just that when you dig into the supplement and other materials and look at the consumer business, even the GWIM business, you have to focus on the core checking balances in consumer on a $650 billion deposit base or $320 billion.
+And so, that is 10 years of hard work of driving core operating accounts to the consumer with our core checking balances in and the primary account as we call it running near 90% up from the 60%s and 70%s many years ago. And those are zero interest and they will remain zero interest because that's the nature of the beast.
+So where you will see other areas like CDs year over year down again 10%, and so we have been driving this business to be core, core and core and that's what's happening. In GWIM you are seeing the pieces that we are functionally investment equivalent move faster. But we feel good about it and we feel good about how we are driving both the value to the consumer for the total of our services relative to interest rate paid on certain types of deposits and frankly relative to non-interest-bearing deposits.
+
+Answer_4:
+
+    No, I think we want to get out of the game of putting size parameters on it. I have given you all the inputs; I can run through them again if you like. But look, we feel good about where we are, that we had some transient things this quarter. There are a lot of variables that go into this. One of the biggest ones is, by the way, predicting people's behaviors, predicting customers. So I wouldn't want to give you a number. Again, if you want I would be happy to go through all the different ins and outs again if you want, but .
+
+Answer_5:
+
+    Look, again, I won't give you a number, but we had a significant improvement in NII from the short end. But the long end also did significantly impact us relative to what we were expecting. Because, as you know, we have a securities portfolio and as rates change there, customer behavior changes and we can amortize more or less of that premium.
+
+Answer_6:
+
+    Sure. We feel good about our goal. I will remind everybody that some time ago now we said that our full-year 2018 expense would be approximately $53 billion. A lot has changed since then, good, bad or whatever, a lot of things have changed. But we are still very confident in that goal. To get there we feel like we need to run in a normal quarter at around kind of $13 billion and then you have got the first quarter that has $1 billion or so more in retirement eligible and FICA.
+If you look at our expenses this quarter we reported [$13.7 billion]. Last year we reported [$13.5 billion]. If you back out the data center and the elevated severance we would be at [$13.3 billion]. So we think we've made pretty good progress year over year and we just have to continue to make that type of progress over the next few quarters and we will get there.
+
+Answer_7:
+
+    Effectively, John, it's about a $100 million step down over the next couple quarters, which has been very consistent with what we've been doing over the past several quarters. We used to have the major drops as we got it position, but it's going to be a $100 million-ish year-over-year step down from the prior year and so you will see that kind of play out we think.
+
+Answer_8:
+
+    I would make it -- Jim, I'd look more to the broader aspects of your question. Some of the statistics that I talked about earlier. What has been driving this has been, at the end of the day, to get ourselves positioned as the core transaction -- on the transaction side of the consumer business there's a core transaction provider to every household.
+And we have -- our checking account numbers are growing now slightly -- couple hundred thousand net new checking accounts this quarter type of numbers -- but have been falling from 37 million and small business consumer combined down to about 34 million-ish. And so, we had run off a lot of stuff that were extra checking accounts and things like that starting 10 years ago frankly.
+And so, that's what plays to your benefit here because, at the end of the day, as rates continue to rise, if they continue to rise, the value of the consumer deposit franchise, as you know being around this industry for a long time, is going to be driven by the advantage in the checking balances. And then from the other balances will help but they will be more rate sensitive.
+So it comes more from the operating business than it does from any strategy on actual pricing. Because those are free balances and will remain free. So the question is how do you gain share? And what you see is, if you think about it year over year, our consumer business grew about $60 billion in deposits, round number, half of that was in checking account balances, one half of that.
+And that is driven by the innovation I talked about, 1 billion digital interactions this quarter, 22.9 million active digital mobile customers, 30 million odd active digital customers, more and more capabilities there and becoming more and more embedded in everything the consumer does. And that then means you are gaining share against people who don't have all those capabilities in our minds.
+And so, as you think about it, that's what's going to drive a lot of deposit value. And if you look at some of the rates and volumes charts, even if you get to the interesting things when you look about the Corporation overall, year over year our deposit costs on interest-bearing, [not on] interest-bearing, we are up $100 million. $60 million of that was in the US and $40 million of it is on 10% of the interest-bearing deposits outside the US. So there is not even that much movement on the interest-bearing part.
+So we feel good about the franchise and where we need to price because it's more investment oriented say in the GWIM business, we've priced to maintain those balances. Half of what went out of GWIM this quarter was us putting people into the market based on our allocation methodology. So irrespective of the rate that went into the market as opposed to into other cash equivalent. So it really comes from all the different advantages we've been driving at to drive this franchise for 10 years.
+
+Answer_9:
+
+    All of them would be helpful in the sense that there's a good amount of work that's gone in by all the industry groups, all the individual companies and the administration to come up with a list of things that -- our belief is we want responsible, clear, transparent and regulation that helps maintain the safety and soundness and capabilities of this industry, there is no question.
+But in areas where things have gotten too far you've got to bring them back a little bit and that laundry list is really there to provide it. So while some are more important to our franchise than maybe other people's franchises and vice versa, at the end of the day a careful revisiting of some of these things to ensure that we maintain the safety and soundness while getting good regulation is critical. And I think hopefully the ball is moving forward on that.
+
+Answer_10:
+
+    Sure. So let's start with NCOs. Charge-offs this quarter were 2.87%. They were at 2.66% last quarter -- last year I should say. Both of those numbers -- and that delta is completely within our expectation and modeling for the portfolio, well within our risk parameters.
+As you think about what's going on here we've got a portfolio, we've got a back book that is in great shape that's getting smaller every day and we've got a front book that we are growing that is seasoning. So that's what's driving up the NCOs in a natural way very gradually.
+We also have a little different phenomenon going on this year. Obviously there is some seasonality as you go throughout the year. So as you think about the future next couple of quarters we have got seasonality, which is going to be -- all else equal if the year is normal it is going to be lowering the net charge-off rate, but you've got some seasoning that's going to be increasing it. So we will just have to see how that plays out over the next couple quarters. What was the second part of your question?
+
+Answer_11:
+
+    Sure. I mean a couple of things. One, tend to think of it as opposed to the margin as put just the dollars that we are producing there and we've got modest growth in the number of cards outstanding. We have got good growth in debit and credit card spend.
+And just focusing on the margin I think overlooks some key benefits of our strategy to attract relatively higher quality card customers and reward them for deepening their overall relationship with us. That strategy is driving incremental deposit growth and making those deposits a little bit stickier, so that helps NII. It also, if you think about these customers, they have lower loss rates and they tend to reduce their interaction with the call center.
+We also have a model that has lower acquisition costs in terms of those new cards. So that's how we think about it. If you just want to focus in on the risk-adjusted margin, that's going to, I think, perform well in line with the industry and probably drift a little bit lower. But we are more focused on total revenue.
+
+Answer_12:
+
+    Look, absent some change in the world and the economic situation, we don't see a reason why that necessarily changes materially. I don't want to give you guidance, but that's kind of our view.
+In terms of releases, we are building -- I just pointed out we are growing loans, we are growing card. Things are seasoning, that's seasoning. So, we may have some releases, but I would more think of those releases as potentially offsetting some of that growth.
+
+Answer_13:
+
+    Well, I think, Betsy, to be careful there, you have to go back to the broadest context which is the 6,100 to 45. We got after this relatively early and so we've got it down a level. We don't know where it goes from here because it will be based on customer behavior demand.
+But if you go back, if you think about it, over the last several years we've been adding branches in places like Denver and we will continue to build out there. We have been refurbishing branches heavily across the whole franchise. That's all in this run rate you see. And that will continue and in the expectation I'm talking about.
+So we'll -- I think we drifted down 15, 17 branches linked quarter, 100 odd year over year. That will continue to happen. But I think what you would expect is the efficiency of that system continues to improve dramatically. So let me give you an example.
+In Chicago we had one of these old big branches, and what we have done is created a call center in there and we have 70 teammates going to work in the call environment just to use up the physical space to keep the branch open as opposed to closing the branch. So if you think about it from the scheme, because the telephony capabilities that exist today you could actually distribute phone calls down to individual people based on the number coming in and things like that local calls.
+So we have done that in three or four markets. We continue to use up the excess capacity. So you wouldn't see a branch decline there, but you would see 80% of its real estate goes for a different purpose. So it's a very complex thing and I don't like to get caught by numbers. I'd say that you've seen us manage it well and we'd expect to continue to manage it well in the future. But we are not good to get ahead of the customer and create any disruption to the growth we are seeing in the core channel.
+
+Answer_14:
+
+    I think you've seen us start to make improvements and changes have gone through and the overall advanced RWA op risk being a portion of that, the change has been more in other areas quite frankly. We will expect to see further. But you have to be careful.
+At some point standardized then backs into your constraint. And so this will be a toggle between -- for a long time advanced was our need and over the years now it's coming down and so standardized at some point will counter veil the improvement overall and then we will go to work on standardized quite frankly.
+So expect us to continue to work on optimization of the balance sheet. Really at the end of the day opening up the difference between our GAAP capital levels for lack of a better term and our regulatory capital levels. So we are down -- RWA on an advanced base down $30 billion odd this quarter. Expect that to continue to improve, but be careful that at some point it hits the other side.
+And then where we have so much excess capital is just kind of an interesting exercise. But in a world where we actually start returning that capital through our earnings we are going to have to continue to optimize both sides of that equation.
+
+Answer_15:
+
+    We've always been clear that -- in the guidance still relative to large banks is out there sort of 30% of earnings to dividends and 70% to share buybacks. We think that the shares are a tremendous value and we will continue to do that. And with $17 billion over the next 12 months we can make some headway. So think about 30/70 split for us and in the large bank category I think that's a responsible place to be. Right now we are moving up towards that but we are not quite there.
+
+Answer_16:
+
+    Well, the first thing I would point out is that we have a goal to get our ROA up, we have a goal on our return on tangible common equity -- 1% on ROA, we are making a lot of progress. Return on tangible common equity we want to get to 12%, we are at 11.2% this quarter. And we have been making steady progress and if we stay focused on operating leverage and doing the right things for our customers we know we are going to get there.
+I would make a point to what Brian was talking about earlier about our excess capital. So if you just look at the 11.2% return on tangible common equity we had this quarter, and you -- if we ran the Company at 10% capital instead of 11.5%, that would still be above our regulatory minimum, we would have a 50 basis point buffer. That would have increased that return on tangible common equity to 12.6%.
+So we are at our goal right now from an operating standpoint if we could just continue to make progress on the amount of excess capital we have at the Company. In terms of ROE, look, we've got a lot of goodwill. We could tomorrow just write off all that goodwill -- nothing would change at the Company. Your ROE would just go up to your return on tangible common equity.
+
+Answer_17:
+
+    I think -- every time I say this can't go up because we are starting some inflection point where you have got penetration, it continues to go up. So I think we ask 30 million odd checking holders, so think about the delta between those two being available, for lack of a better term. You've got 34 million digital users and so you still have some digital only users who don't use the mobile phone just because they do it which means they come through the website instead of an app, for example.
+And so, each year we think it's not going to -- you are starting to hit a possible inflection point it goes up 10% or 15% year over year. And so I think there's headroom ahead of us. So I think of us having 30% more that we could get just easily and we are growing the customer base and we will drive it. And as you see norms change you will see that penetration continue to increase.
+The important thing isn't necessarily only the 22.9 million users. The important thing is how people use it. And so, just take the P2P payments, even though we do 18 billion this quarter, even though it's been a product we've had for a while, even though we are going to re-launch it and we will see [whether the sale of that] will drive it, it's still 3%.
+And even though all the wallets, whether it's Apple or Samsung or Android, etc., all those are out there, they are still 1.5% of payments. And so at the end of the day we've got a lot of work within the customer base in how they use all the form factors to get more efficient and more effective for them on top of what you think is more penetration so to speak.
+So, we've got a long way to go on penetration, only 22% of the sales are done, so we will continue to drive that. But importantly for the team -- [Tom] and Dean and the team is to drive that usage up. And that's where we are starting to see some good pickup, but there's a lot of room to go there.
+
+Answer_18:
+
+    It's Zelle, not Gazelle, but -- I don't want to violate anybody else's trademark here, but it's still pretty early. The nice thing is that the industry has built a network among all of us that allows us to operate very easily among us all the companies. And so I think the better time to talk about it would be in six months or so after we've gotten everybody up and operating and driving it through.
+But previous to this we were already driving it and it was up double-digits year over year. And so, this ought to -- just awareness and with the students signing up for accounts from now to the fall you will see a lot of embedding this in our marketing and our capabilities. So maybe next quarter we will have a better read.
+
+Answer_19:
+
+    We didn't disclose the amount. It was meaningful, not a huge amount but it was meaningful. And again I would remind everybody that over time it's just going to reverse itself.
+
+Answer_20:
+
+    No, I don't think so.
+
+Answer_21:
+
+    Matt, at the highest level, remember -- if we go back and think about where we started the quarter, where we ended it, we took out about half of what we thought the increase was going to be due to the card. The rest of it, all the factors, Paul has talked about ins and outs chewed up the other half of the projected increase. So that will give you a sense of dimension.
+
+Answer_22:
+
+    Sure. Let me just run you through the whole picture, okay, if you want to build any models. On the revenue side it's primarily interest income, think about $10 billion of receivables at 9%. Plus you've got a little small amount of card income, I think that was around $30 million in the second quarter. The efficiency ratio for that business is around 40%.
+If you look in our supplement you can see I think the net charge-off ratio has been running a little bit less than 2%, call it $40 million, $45 million per quarter. I think that probably gives you just about everything you need to model it. I would remind you that when we sold it we did get a 12 and 15 basis point improvement in our CET ratio on an advanced and standardized perspective respectively.
+
+Answer_23:
+
+    Well, if you take that the 9.5% is the place we are at, we have 50 basis points or so of cushion on that at all times. And so, that gives you a sense where we are and we are running at 11.5% and that difference is available. So you would expect more. Assuming that we have a 2% growth environment and continue to grow and there is no big recession that comes, we continue to ask for more capital return.
+I think to keep you focused in the near-term, we've got $17 billion plus that we've got to take out in the next four quarters, which is a pretty healthy chunk. And then we will go through next year's CCAR process and you'd expect us, like the industry, to keep stepping that up to start to work against that excess.
+Against that, when Paul talked about the last question, the UK card, remember the thing that people have to think about is not only does it give you current capital benefit, but also in the stress the losses and stuff are out of the system. So you can also pick that up. So I would say simply pointing to the next 12 months we are going to return more capital we earned in 2016, to give you a framework, and we would expect to ask -- as we earn more in 2017 we would expect to ask more for the next ask and keep driving that forward.
+And everything contributes -- [it's] better asset quality, better earnings and better modeling and everything else. So, our CCAR losses continue to come down and we continue to drive to responsible growth. So just think about that as a framework to say more in the future, but we've got a nice pickup just coming in the next four quarters.
+
+Answer_24:
+
+    You are asking me what have you done for me lately. We are getting to $53 billion first, Steven, and then we will move from there. But the idea is if you think about an expense base of a financial services firm, and Bank of America in particular, about two-thirds of the costs are people costs. The cost of salaries and wages, incentives, etc., healthcare costs rising at 6%, 7%, 8%, 9% a year.
+And so, our job is to figure out how to pay our teammates fairly and more for more productivity and what they do to drive for you US shareholders. And if you just lock in a growth rate on just that part of the expense base, you are locking 2% growth. So what we do through all these initiatives is figure out a way we can turn that into being on a core basis year over year sort of flattish.
+And so, whether the $53 billion keeps coming down or stays flat while revenue keeps going up, that will produce further operating leverage. And so, we haven't told -- we haven't made projections past the $53 billion. More just because we've got a lot of initiatives coming in.
+But you should expect that we will be just as disciplined and thoughtful about how we both invest and invest to take out expense that we have been so far. And I think that will redound to our benefit in terms of keeping those expenses relatively flat as revenues grow in the future.
+
+Answer_25:
+
+    I would say -- let's see what happens. I don't think it will change our thinking. We have accommodated customers' larger balances in some of the areas and some cash IRAs and things that get a little bit different, but just out of necessity.
+But the overall trend of driving towards the model products and driving towards the effectiveness and offsetting demands for lower and lower cost structure the customer pays in fees to get higher and higher service and the capabilities from us is what's driving this. The fiduciary rule is only a part of it. And so, I don't expect to change our course.
+
+Answer_26:
+
+    It's changed a little bit. We are a little bit more sensitive on the long end now that -- since rates went down. The asset sensitivity on the short end hasn't changed that much.
+
+Answer_27:
+
+    It's like -- it's actually -- it's like two-thirds/one-third.
+
+Answer_28:
+
+    Just to back up, the first half of the year when you think about the rate environment it's really changed on the short end. Just to give a sense how it works, we got a $1.5 billion -- $1.4 billion to $1.5 billion pickup in first-half NII versus last year and so that gives you a sense. It really is driven 60%-70%, depending on the quarter, by the short end.
+
+Answer_29:
+
+    I think that's an important point. Again, we picked up that $1.5 billion and you haven't seen the sensitivity change much. So that tells you what is embedded in the pass-throughs in the first half of the year.
+
+Answer_30:
+
+    We don't think about M&A in the context of our capital strategy. We are organically growing this Company, including open up in markets, investing in bankers, investing in branches, investing in things. And the capability -- and investing in cash management capabilities. We've built out the lot in Asia, Tom Montag and the team driving our global franchise -- we just don't need the distraction.
+
+Answer_31:
+
+    I think, depending on the business, at the end of the day, if you go across eight businesses -- in the relationship business it's been just deploying more and more relationship management teammates and being able to pay for that while bringing expenses down across the board.
+So that's whether it's US trust or Merrill Lynch, the preferred business in Consumer, the business banking, global commercial bank, [global] corporate investment banking and driving that -- always had great products, we just literally had to add more sales teams. Behind that has also been the deployment in technology to help those sales teams. We are using artificial intelligence to prioritize their work in terms of targeting their efforts.
+And then if you look in both the markets business separate from the commercial side of it in the true markets business and you look in the mass-market consumer business, what we call retail, you see the nice thing about the retail business and mass-market is we are now growing and making money in a business which it was a little bit tricky. And that's largely because the electronification, digitization has been driving it.
+And if you go to markets, the team in equities and fixed income has done a great job of repositioning that business and it's gaining share. So in each case it's investments in people, technology, better customer experience. And that all sounds like you say it all the time, but it has been a relentless focus in just driving that and investing behind that at all times taking out some of the extraneous costs including credit costs through very disciplined client selection and credit underwriting capability.
+
+Answer_32:
+
+    I think, Marty, across all the years since the crisis there has been ebbs and flows in customers' views about where they want to invest and the cash portion of our balance has come up and down. But I think the consumer and the investor are very bullish on America and they continue to invest in it.
+Consumers through their spending and activity do and investors on the personal side through their investments. And you've seen those investments in equities and risk products continue to rise almost without fail. And then when there's real market disruption concern you see it pull back a little bit. But basically without fail there has been a steady investment and that's why we've hit assets under management levels of record levels at this point.
+
+Answer_33:
+
+    Well, the business pre-crisis that came out of some of the other firms, and etc., was driven by a basic view of generating more and more mortgages as opposed to customers and penetration of customers and giving mortgages to the customers. And so one of the ways -- the major way it did it, 75% of its production was bought from third parties, either its correspondence or brokers or brokers or whatever the methodology. All that is gone.
+And so, if you had that size of production that was bought in the secondary market through wholesale trades of the production you would have to go off balance sheet because you wouldn't have the capacity. During 2004 to 2008 we generated $2 trillion of mortgages or something like that. So you had to go off balance sheet.
+Now where we are now where quarterly production runs $13 billion, $15 billion, and this huge deposit franchise that needs to be invested, you can put those mortgages on the balance sheet. The odd thing would be in the past we were sending them off and then buying back mortgage-backed securities. The answer is we just retain the mortgages and frankly the credit quality in ours, it's not worth paying the insurance.
+But it really came to focusing on what we call direct to consumer where our market share continues to be solid and really saying we are in this business. It's always been a tough business, it's priced on a commodity basis, it's on your screen every day, and the MSR assets always had interesting issues of how you could hedge them and make them work.
+Our goal as a Company was to take all that volatility and up and down out and just focus then on getting mortgages to historic customers of high credit quality. And then why wouldn't we keep them, because, at the end of the day, we've got to invest our deposits somewhere and these are great investments.
+
+Answer_34:
+
+    They're our customers; it's not like we're -- as Brian said, we are not buying somebody else's underwriting. These are our customers. We know these customers. We have [been underwriting] these loans and why pay the insurance?
+
+Answer_35:
+
+    I agree, it's a different market and I think a better one because of it.
+
+Answer_36:
+
+    We feel good about loan growth. Unless the economy changes significantly we wouldn't expect much change from the past few quarters. We did see a little bit of disintermediation this quarter in commercial. That could slow growth in the future. But having said that, we haven't changed our medium-term outlook on our ability to grow loans.
+We expect total loan growth at the Company to be low-single-digits and we expect to grow mid-single-digits in our lines of business once -- that obviously excludes the headwind from loans in All Other, the mortgage runoff and now UK card is gone.
+So with respect to each segment, we are anticipating modest growth in consumer led by mortgage. We would also expect to grow card and auto, although auto growth has probably slowed a little bit. But we still expect a little bit of growth. That growth is going to be partially offset by continued runoff of home equity loans.
+In commercial, again, while things have slowed a little bit, our outlook still remains favorable led by middle market. You saw middle-market loans grow 5% year over year. And I would note that growth in any quarter in commercial can bounce around a bit because you've got acquisition financing thrown into the mix. All of that I think is consistent with responsible growth.
+
+Answer_37:
+
+    We have a tremendous customer base that is underserved in the investment management area. And so, we are going to continue to grow our financial advisor team to serve that customer base, whether it is the teams that work in the branches, the teams that work in the Merrill office, the team that work in US trust and we have been after that and growing that. And so, you should expect that number to continue to go up with Terry Laughlin, Andy Sieg, Keith Banks and the team are driving it.
+And so, that's -- it's through unit of production for lack of a better term. It's your team that really has the core customer interface and will drive that. Meanwhile on the nonfinancial advisor side you saw the assets in Edge up 21%, so that means that we are also facing off against the customers who choose to go about it a different way.
+
+Answer_38:
+
+    All right, I think, operator, that's all the calls. So I want to thank everyone for joining us again this quarter. I think if you think about this quarter it's a quarter which shows you what responsible growth is all about: solid earnings growth, very solid operating leverage.
+Each business grew first half of this year versus first half of last year and did it the right way, did it while maintaining great risk and did it while we invested heavily in technology and invested in our people. So we look forward to next quarter and talk to you soon.
+

exam/part2_problem1/Problem_1_Conference_Call_Segments/call_39_presentation.txt

@@ -0,0 +1,101 @@
+
+Good morning. Thanks for joining us this morning to discuss the second-quarter 2017 results. Hopefully everybody has had a chance to review the earnings release documents that are available on the Bank of America website.
+Before I turn the call over to Brian and Paul let me remind you that we may make some forward-looking statements. For further information on those, please refer to either our earnings release documents, our website or our SEC filings.
+With that I am pleased to turn it over to Brian Moynihan, our Chairman and CEO, for some opening comments before Paul Donofrio, our CFO, goes through the details. Over to you, Brian.
+
+Good morning and thank you for joining us for our second-quarter results. This quarter represents another solid example of driving responsible growth here at Bank of America, where staying the course and executing against our responsible growth mantra has allowed us to market share and grow revenue.
+That mantra drives the way we manage our cost effectively while at the same time making continuing large investments in people and technology for the long-term value of this franchise. That mantra allows us to manage risk well whether its credit, market, operational or reputational risk. That mantra also drives an appropriate pace of growth in a modest GDP environment while holding credit costs down.
+All this has resulted in significant operating leverage leading to strong earnings growth and supports our plan to deliver more capital back to shareholders. Through the first six months of 2017, we have more than doubled the amount of net share repurchases and dividends to shareholders compared to the first half of 2016.
+As a reminder, with successful CCAR results behind us, we announced plans on June 28 to deliver $17 billion in capital back to shareholders over the next 12 months through higher dividends and net share repurchases. For the quarter we produced net income of $5.3 billion after tax, growing 10% compared to last year's second quarter. Now that was driven by continued strong operating leverage across the franchise.
+Our efficiency ratio touched 60% this quarter. In addition to the net income improvement, a 2% reduction in diluted shares resulted in a 12% improvement in diluted EPS. Year-over-year net interest income improvement of nearly $900 million drove revenue growth proving the value of this deposit rich franchise. We continue to also make progress on our returns and our return on tangible common equity moved above 11% for the first time despite increasing capital levels.
+As we look at the next slide on first-half line of business results, I'm going to let Paul talk about the details of the quarter in a minute, but I wanted to highlight basically two things. First, the momentum the businesses have comparing the first half of this year versus the first half of last year. And second, to focus a bit on our consumer business as it reached $2 billion in after-tax earnings this quarter.
+So as a broad statement, each business segment grew earnings and capital and it had its reported returns well above our cost capital. Consumer Banking produced $3.9 billion in after-tax earnings for the first half of the year, growing 14% from 2016. This was achieved with good revenue improvement in controlling costs and driving operating leverage while maintaining great credit quality.
+Our Global Wealth & Investment Management business recorded first-half earnings of $1.6 billion, up 9% year over year with a 27% profit margin. Both of these are records for this business. Our GWIM business has seen assets under management flows of $57 billion for the first six months of the year. This is strong performance considering the industry is navigating many changes both from the customer side and the regulatory side.
+While we have been growing and having strong margins we've been investing. The Merrill Lynch One platform, our Merrill Edge platform and other many investments are providing great transparency for clients allowing us to lower our cost.
+Our Global Banking business serving commercial customers in commercial lending and treasury services and investment banking has produced first-half profits of $3.5 billion after-tax. Earnings are up 36% from last year with strong operating leverage on an operating basis and lower credit costs. And even though this is our most efficient business at 43%, we continue to make investments in both technology and people.
+This quarter, for example -- this year we have rolled out our cash pro customer interface for mobile devices making that -- cash management services more convenient for our clients. And over the last few years we have embarked to increase our local market coverage by just simply hiring more bankers. We have hired nearly 400 bankers over the last couple years and we continue to hire more and we will hire 200 more by the end of next year.
+And finally, when you look at our Global Markets business, it earned $2.1 billion in the first half and generated 12% return on its capital. We grew our sales and trading revenue, excluding DVA, in the first half of 2017 versus the first half of the prior year, in this case 2016 -- for the first time in five years the first half grew faster than the previous year's first half. This growth combined with continued expense discipline drove that improvement.
+So in general, all our businesses continue to improve. And now I want to focus a second on our consumer business and you can see that on slide 4. So given the $2 billion in earnings milestone, I want to talk about and focus on the multi-year effort this business has gone through.
+This change really began around 2009 when we had more than 6,000 financial centers, 100,000 associates and about one-third less deposits. And at the time we had some digital banking capabilities but nothing near what we have now. The team has worked hard over an extended period to produce the results you see today.
+Not only have they significantly reduced headcount, we've done that while adding more and more sales and relationship teammates. We have not only reduced financial centers but we invested and refurbished many and added others in markets we didn't previously serve. And we've continuously invested heavily in technology to drive innovation to keep up with customer behavior changes. And all during this our customer experience continues to improve.
+As you go to slide 4 you can see some of the trended results just for the last four years. In 2014, due to all the changes that you're all familiar with, the revenue had declined in this business because of regulatory changes and to focusing more on our direct business to our consumers as opposed to some of the indirect businesses.
+As you can see also from the crisis forward, we had focused on underwriting prime and super prime customers. And you can see that in the change in total net charge-offs that occurred prior to 2014 and remains in good stead over the last four years. At the same time, while those credit costs have come down, our risk-adjusted revenue has been improving.
+Also you can see our expenses on the lower right hand side continue to drive tremendous operating leverage leading to that net income growth. Today's business operates at a 52% efficiency ratio and, with continuing to drive the customer behavior changes, continued investments for further cost improvements, we expect that to go lower.
+Continuing on slide 5, you can see some of the other changes in the business that have enabled us to make this change happen. How do we make this happen? We do it by optimizing and driving technology enhancements for our customers, for our teammates and ultimately for the benefit of you, our shareholders.
+This sustained level of investments is also validated by the top-tier rankings by third parties, whether it is in digital banking or mortgage banking fulfillment operations of Merrill Edge, and we continue to enhance these offerings. This quarter we launched new capabilities for car shopping and financing those cars through mobile and added new person-to-person features through our partnership with Zelle. We have also rolled out small business capabilities to respond faster to the needs of the small businesses we serve across America.
+We can't emphasize enough the positive impacts all these investments, especially mobile and digital, have made in our improvement as mobile banking users you can see have grown to 23 million at the end of the second quarter. Rapid adoption in digital is shown in the charts you can see on the interactions in the lower part of the page. This quarter we broke through the 1 billion interactions digitally with our customers. That is 1 billion in a single quarter.
+When you look at deposit transactions you can see that 21% of all the deposits are made through mobile devices today. That's equivalent of what 1,000 financial centers does. That's important for client satisfaction, but it's also important because those cost 1/10 of what it costs to do it over the counter.
+Once customer got used to transacting we're now using devices in a broader sense. You can see in the quarter 370,000 appointments were set up on a mobile device to come to the branch. When they come to the financial center we are in better shape to serve them because we know what they are coming for we know what they need. In addition, sales on digital devices are up to 22% of all our account and loan sales.
+So then we switch to the payment side. Payment volumes have been increasing over this time period, but electronification of those payments shows increased adoption of mobile banking and other digital payment methods. You can see in the lower part of the page on the left-hand side while payments have grown 4% overall, digital has grown at an 8% pace while non-digital is relatively flat.
+Our latest push that we made a lot of discussion about with all of you has been person-to-person. This is an important payment stream that we are driving. It's already sizable, but it still only accounts for 3% of the total payments in our consumer business this quarter. It's still in early adoption but P2P customers sent $18 billion in payments through our platform in quarter two. This is up 20% year over year.
+So people focus on all the digital activity, but at the same time we have 800,000 customers a day come into our financial centers. These financial centers serve those customers well, not only helping them transact when they need to, but more importantly to help answer their financial needs and by serving them with the products and capabilities that we have with a face-to-face specialized professional.
+We will continue to invest in that branch structure and it's all in the run rate you see today. We have now built or refurbished 290 centers over the past 12 months and expect to have completed more than 1,500 by the year-end 2019. In addition, we have upgraded all our ATMs or plan to upgrade all ATMs and will finish that by the end of 2019 as well. That's 16,000 new ATMs over three or four years. All that has led to customer satisfaction levels which have reached the highest level in our history.
+So at the end of the day our consumer business is an sample of driving responsible growth, growing with no excuses, doing it [in] the right way [with] the customer, doing it [while] managing risk well, and importantly doing it on a sustainable and best basis, investing in the future while producing great returns in the current. With that I want to turn it over to Paul for some more details about the quarter.
+
+Thanks, Brian. Good morning, everybody. I am starting on slide 6. As Brian said, we earned $5.3 billion or $0.46 per diluted share with EPS increasing 12% versus Q2 2016. Revenue of $22.8 billion in 7% higher than Q2 2016 and expenses of $13.7 billion was 2% higher than Q2 2016.
+The quarter included a few noteworthy items. First, we completed the sale of our UK consumer card business during the quarter resulting in a small after-tax gain. The transaction added roughly 12 basis points to our advanced CET1 ratio through both additions to CET1 and reductions in RWA.
+A pretax gain of roughly $800 million recorded in All Other reflects a number of factors ,including a premium on credit card receivables sold and the monetization of goodwill. It also reflects the recognition in other income of currency hedging gains and transaction losses from currency fluctuations that were previously recorded in OCI.
+Lastly, we recorded tax expense associated with the currency hedging gains which drove our effective tax rate higher in Q2. After-tax the gain added about $100 million to earnings. The sale completes the transformation of our consumer credit card business from a multi-country multi-brand business to a single brand business serving core retail customers in the United States. As usual we also note DVA for you; this quarter net DVA was a negative $159 million which was similar to Q2 2016.
+We also recorded a couple of charges in expense that are worth mentioning. The first is a $300 million impairment charge related to a few data centers we are in the process of selling. The second is severance costs which were approximately $100 million higher than Q2 2016. Provision expense was $726 million compared to $976 million in Q2 2016 as net charge-offs of $908 million improved versus Q1 and year over year. And as Brian mentioned, ROA and ROTC approached our financial targets, improving both on a year-over-year basis and on a linked-quarter basis.
+Turning to the balance sheet on slide 7, overall end of period assets increased a modest $7 billion from Q1 despite the sale of assets totaling $11 billion associated with the UK card business. We increased assets associated with our trading business as we continue to invest in our clients, particularly in our equities business. These increases in assets were offset by a decline in cash driven by seasonal deposit outflows associated with tax payments and a shift from deposits to AUM and brokerage in our Wealth Management business.
+When looking at deposits on the year-over-year basis, they are up $47 billion 4% from Q2 2016 driven entirely by our Consumer Banking business. Loans on an end of period basis were up $11 million from Q1 as broad-based growth across consumer and commercial loans was modestly offset by the runoff of legacy noncore loans. It's worth noting that this loan growth excludes UK card. These card loans were moved from assets of business held for sale when we announced the transaction in Q4 2016.
+On the liability side, long-term debt increased $2.5 billion during the quarter to $224 billion  this quarter and we remain compliant with fully phased in US LCR requirements.
+The asset composition of our global liquidity sources is materially the same as high quality liquid assets as defined under the US LCR rule. However, HQLA for the purposes of calculating LCR are reported not at their fair market value, but at a lower value which incorporates regulatory haircuts and exclusion of excess liquidity held in certain subsidiaries. Therefore the HQLA on a net basis when reported will be lower than our current GLS number.
+Common equity increased $2.8 billion compared to Q1. This increase was driven by $4.9 billion of net income available to common and improved OCI of $700 million offset by common dividends and net share repurchases totaling $2.8 billion in the quarter. Tangible book value per share of $17.78 increased 6% versus Q2 2016.
+Turning to regulatory metrics and focusing on the advanced approach, our CET1 transition ratio under Basel III ended the quarter at 11.6%. On a fully phased in basis compared to Q1, the CET1 ratio improved 50 basis points to 11.5% and remains well above our 2019 requirement of 9.5%.
+CET1 increased $4.4 billion to $168.7 billion driven by earnings, utilization of deferred tax assets and less goodwill deductions given the UK card sale. These improvements in CET1 were partially offset by return of capital. The CET1 ratio also benefitted from a $34 billion decline in RWA driven by continued optimization work, including model improvements, as well as the sale of UK card.
+We also provide our capital metrics under the standardized approach. While our RWA reduction was lower under the standardized approach our CET1 ratio still improved 40 basis points to 12%. Supplementary leverage ratios for both parent and bank continue to exceed US regulatory minimums that take effect in 2018.
+Turning to slide 8, on an average basis total loans were up $15 billion or 2% from Q2 2016. Note that the sale of UK card lowered average loans by $2.9 billion, so you may want to adjust for that when studying growth trends. As usual, loan growth was reduced by the continued runoff of noncore consumer real estate loans in All Other.
+Year-over-year loans in All Other were down $24 billion. On the other hand, loans in our business segments were up $39 billion, or 5%. Consumer Banking led with 8% growth. We continue to see good growth in residential mortgages; we also saw good growth in credit card and vehicle loans. Home equity originations are up nicely but continue to be outpaced by pay downs.
+In Wealth Management we saw year-over-year growth of 7% driven by residential mortgages as well as structured lending. Global Banking loans were up 3% year over year. There was a lot of capital markets activity this quarter and this may have impacted more than usual loan growth among larger corporates as a number of funded bridge loans were paid off and as borrowers substituted bonds for loans in a flattening curve environment.
+On the bottom right note that we grew average deposits by $44 billion, or 4% year over year. This growth was driven by our consumer segment which grew deposits by 9% year over year.
+Turning to asset quality on slide 9. As I have emphasized before, the stability of our asset quality and loss trends reflects years of disciplined client selection and strengthened underwriting standards along with an improving economy. While there is room in the industry for other strategies, we remain focused on responsible growth. Credit quality continues to be solid with net charge-offs, NPLs, delinquencies and reservable criticized exposure all improving from Q1.
+Total net charge-offs were $908 million or 40 basis points of average loans, decreasing $26 million from Q1. Provision expense of $726 million declined $109 million from Q1 and was down $250 million from Q2 2016, driven by lower losses in consumer real estate and improvements across most of our commercial portfolio, particularly energy. Our reserve coverage remains strong with an allowance to loans coverage ratio of 120 basis points and a coverage level three times our annual net charge-offs.
+Turning to slide 10, we break out credit quality metrics for both our consumer and commercial portfolios. Asset quality metrics in consumer real estate continue to improve. While net charge-offs were down overall, there are a few small items to bring to your attention.
+Within consumer we had a small recovery on the sale of a legacy consumer portfolio. And note that one-third of the quarterly UK card losses went away with the June 1 sale. While US card losses increased from seasoning, they remain low. Consumer NPLs of $5.3 billion are at the lowest level since Q2 2008. NPLs came down from Q1 levels and keep in mind that 43% of our consumer NPLs are current on their payments. Commercial losses were up modestly from Q1 driven by a couple of names.
+Turning to slide 11, net interest income on a GAAP non-FTE basis was $11 billion, $11.2 billion on an FTE basis. Compared to Q2 2016, which has the same day count and seasonal factors, NII is up $868 million or 9% driven by an improving spread between our asset yields and deposit pricing in an environment where both short end rates and long end rates increased.
+We also benefited from loan growth and excess deposits deployed in security balances. Compared to Q1 2017, NII was relatively flat as the benefit from an increase in short end rates was offset by a number of factors, including lower long end rates in the quarter.
+First, we increased client financing activities and balances in our equities business to support clients and drive growth. Some of the products we used to accomplish this created interest expense with no interest income. Instead they drove trading account profits recorded in non-interest income.
+Second, the UK card sale closed June 1. That was earlier than we expected and so the quarter's comparisons to previous ones are negatively impacted by one-third of UK cards interest income.
+Third, we saw a decline in leasing interest from the seasonality we see in Q1, but that was offset by one additional day in interest in Q2 versus Q1.
+And then lastly, we experienced some negative debt hedging effectiveness. As a reminder, accounting rules require us to measure changes in the value of our debt differently than changes in the value of swaps we use to hedge, creating temporary ineffectiveness that will revert to zero over the remaining life.
+As a general comment on deposit pricing, overall we held pricing relatively stable in Q2; however, we did increase pricing for some commercial and wealth management clients late in the quarter and this will impact Q3 NII. While holding pricing relatively steady we were able to grow deposits 9% year over year in our consumer segment.
+Looking forward to Q3, please keep three additional things in mind. First, with respect to rates, the most recent June short end rate hike should benefit Q3 NII subject to continued stability in industry deposit pricing. But, the Q2 decline in long end rates will have a negative lag effect in Q3 with respect to the write-off of premium associated with prepayment of mortgage-backed securities.
+Second, we will benefit from one additional day of interest. And third, going forward we will also feel the effects of the full quarter loss of interest income from UK card equating to about $225 million. Having said all that, we would expect NII to be up compared to Q2 if the forward curve is realized and if we have some loan and deposit growth.
+With respect to asset sensitivity, as of 6/30 an instantaneous 100 basis point parallel increase in rates is estimated to increase NII by $3.2 billion over the subsequent 12 months, which is broadly in line with our position at the end of the first quarter and continues to be predominantly driven by our sensitivity to short end rates.
+Turning to slide 12, non-interest expense was $13.7 billion. As I mentioned earlier, Q2 included roughly $400 million in higher costs from the combination of impairment costs associated with the sale of a few data centers and higher severance costs. Otherwise litigation and other operating costs were lower.
+We feel good about our expense progress this quarter especially in light of our continued investments in sales professionals and new technology. Also remember we have $100 million in higher quarterly costs from FDIC assessments compared to Q2 2016. The efficiency ratio hit our 60% target this quarter, improving 300 basis points year over year.
+With respect to associate levels, on a full-time equivalent basis, we are down modestly from the prior quarter. Please note that we have changed our disclosure on employees from FTE to headcount this quarter. By the way, that was a SIM idea from one of our associates. FTE is much more complicated to calculate and less relevant today given our shift from part-time associates.
+As you can see, the headcount is down more than 4,000 from Q2 2016. Half of that decrease is driven by UK card and half by Consumer Banking optimization. Note the continuing shift from non-client facing associates to primary sales professionals which now make up 21% of our headcount. Compared to Q1 2017 the release of associates from the sale of UK card was offset by bringing on 1,500 summer interns and hiring 1,000 primary sales professionals.
+Just a quick observation on these interns. We selected these 1,500 students from 133,000 applications as we continue to be an employer of choice. From a diversity perspective, 42% of these interns are female and 53% are ethnically diverse.
+Turning to the business segments and starting with Consumer Banking on slide 13. Consumer Banking recorded their highest earnings in a decade. Earnings were $2 billion growing 21% year over year and returning 22% on allocated capital. The business created 900 basis points of operating leverage, holding expenses flat while growing revenue 9%.
+Year over year average loans grew 8%, average deposits grew 9%, and Merrill Edge brokerage assets grew 21%. An improvement in NII drove the 9% revenue growth which was driven by an increase in the value of deposits given the rise in short end rates as well as solid loan growth.
+Note that the rate paid on deposits in this business remains low at 4 basis points as we remain very disciplined on pricing. Non-interest income included improvement in service charges and a small increase in card income that was more than offset by a decline in mortgage banking income.
+Through combined efforts to drive costs down, the efficiency ratio improved nearly 500 basis points to 52%. Cost of deposits fell below 160 basis points in the quarter. Consumer Banking credit quality remains strong with a net charge-off ratio of 121 basis points.
+Turning to slide 14 and looking at key trends, our strategy remains focused on relationship deepening and growing total revenue while improving operating leverage through expense discipline. The concept of total revenue is important as you evaluate NII and fee movements.
+Mortgage banking income was lower driven by our strategy of holding more of our originations on our balance sheet instead of selling to the agencies. We believe retaining these mortgages on our balance sheet provides better economics over time. In Q2 we retained about 90% of our mortgage production on balance sheet.
+Also note that our relationship deepening preferred rewards program is improving NII and balance growth while holding fee lines flat as we reward customers for doing more business with us. Spending levels on debit and credit cards were up 6% year over year and new issuance of credit cards was solid at $1.3 million. Spending levels on cards drives revenue but are largely offset by rewards given back to customers.
+Focusing on client balances on the bottom left, you can see that the success -- we continue to have growing deposits, loans and brokerage assets. At the bottom right you can see deposits broken out. Our 9% year-over-year average deposit growth continues to outpace the industry while the rate paid remains low and stable. Importantly 50% of these deposits are checking accounts and we estimate 90% of these checking accounts are the primary accounts of households.
+With respect to loans, residential mortgage continues to lead our growth while we also saw growth in card and auto. Client brokered assets are up 21% year over year driven by strong client flows as well as market performance, new accounts grew 10% from Q2 2016.
+The digitalization efforts that Brian discussed earlier and other productivity improvements continue to drive expenses lower. Expenses were stable compared to Q2 2016 despite strong revenue growth and increases in the FDIC assessment rate and charges. We continue to remain focused on prime and super prime borrowers with average book FICO scores of at least 760.
+Turning to slide 15, let's review Global Wealth & Investment Management which produced record earnings of $804 million, a pretax margin of 28% and a return on allocated capital of 23%. The industry continues to evolve as firms and clients anticipate new fiduciary requirements and other market dynamics such as the shift between active and passive investing. At the same time the financial markets continue to provide a tailwind to client activity and balances.
+We saw $28 billion of AUM flow this quarter continuing the strength of $29 billion in Q1. Net interest income rose 14% driven by an increase in the value of deposits given the rise in short end rates as well as an increase in loans. Year-over-year noninterest income improved 3%. However, note that in Q2 2016, non-interest income included a $60 million gain from the sale of cash management capabilities as we transition from proprietary products to open architecture.
+Adjusting for that prior period gain noninterest income improved 5% -- as 10% higher asset management fees were partially offset by lower transactional revenue. Year-over-year expenses were up 3% from revenue-related incentives as well as higher FDIC costs. Revenue growth outpaced revenue-related expense producing solid operating leverage.
+Moving to slide 16, we continue to see overall solid client engagement. Client balances now exceed $2.6 trillion driven by higher market values, solid AUM flows and continued loan growth. Average deposits of $295 billion  were down $12 billion from Q1 reflecting both normal seasonality from tax payments as well as client shifts to investment in AUM and brokerage. Average loans of $151 billion were up 7% year over year. Loan growth remained concentrated in consumer real estate as well as structured lending.
+Turning to slide 17, Global Banking earned $1.8 billion in Q2. Earnings increased 19% from Q2 2016 driven by good results across investment banking and treasury services. Return on allocated capital was up year over year to 18% despite an increase in capital allocated to this business.
+A number of results to note given the strong performance: record revenue in the quarter, record advisory fees, record first-half revenue and net income and year to date we remain ranked number three in investment banking with fees of $3.1 billion. Year-over-year revenue growth of 7% coupled with flat expenses drove operating leverage of 600 basis points.
+Provision expense of $15 million in Q2 2017 is down $184 million driven by improvements across most of the portfolio, particularly energy. Global Banking loan growth was 3% year over year. The pace of loan growth remains good, but has slowed driven by both capital markets disintermediation as well as reduced demand from clients as they look for more certainty of economic growth.
+With respect to disintermediation, clients are using bond issuance to pay down loans and pay off funded bridges. Global Banking held expenses relatively flat compared to Q2 2016 as savings offset higher technology investment.
+Looking at trends on slide 18 and comparing to Q2 last year, average loans were up $11 billion or 3%. With the exception of CRE, loan growth was fairly broad-based with C&I loans up 5% in middle-market lending. Average deposits were stable relative to Q2 2016. NII growth drove the 7% year-over-year revenue increase.
+NII increased $286 million from Q2 2016 driven by an increase in the value of deposits, given the rise in short-term rates as well as increase in loans partially offset by modest spread compression on loans. Total investment banking fees of $1.5 billion were up 9% from Q2 2016, finishing strong in the last few weeks of the quarter. As I mentioned, record M&A fees drove the increase. Within debt capital markets we saw a solid increase in investment grade fees while leverage finance declined.
+Switching to Global Markets on slide 19, the business had a solid quarter earning $830 million or $928 million if one excludes net DVA. Global Markets generated a 10% return on allocated capital. Earnings were down relative to Q2 2016 which, if you remember, was uncharacteristically strong given a rebound from a weak Q1 2016 and the Brexit vote.
+Just to complete the picture, remember Q3 last year was also atypically stronger than Q2 2016. 2017 has followed a more typical seasonal pattern so far this year. While Q2 was solid, sales and trading, excluding DVA, declined 9% from Q2 2016. But comparing the first-half results of 2017 to 2016, sales and trading ex-DVA increased 6%. This is the first time in the past five years that first-half performance is up year over year. With respect to expenses, Q2 2017 was 3% higher than Q2 2016 driven by increased technology investment.
+Moving to trends on slide 20 and focusing on the components of our sales and trading performance, sales and trading revenue of $3.4 billion, excluding net DVA, was down 9% from Q2 2016, finishing ahead of our mid-quarter expectations. Excluding net DVA and versus Q2 2016, fixed sales and trading of $2.3 billion decreased 14%.
+Within FICC, the year-over-year decline was driven by stronger rates in emerging markets. In Q2 2016 equity sales and trading was up 3% year over year to $1.1 billion benefiting from growth in client financing activity offset by slower secondary market revenue.
+On slide 21 we show All Other, which reported a net loss of $183 million. This includes the $100 million after-tax gain associated with the sale of UK card. Revenue here also includes a roughly $800 million pretax gain from the UK card transaction which was almost entirely offset by related tax expense recorded here as well.
+Non-interest expense includes the data center impairment charge I mentioned earlier, which was mostly offset by lower personnel and other operating costs. When comparing expenses and earnings to Q1 2017, remember Q1 2017 includes seasonal retirement eligible incentives and elevated payroll tax expense of $1.4 billion.
+The effective tax rate for the quarter was 37.1%, which includes approximately $700 million of tax expense recorded in conjunction with the sale of UK card. We continue to expect an effective tax rate of approximately 30% for the rest of the year absent unusual items.
+Okay, a few summary points to wrap up. Again this quarter, we created operating leverage by managing expenses while improving revenue. For years we have been focused on growing responsibly including staying within our risk and client frameworks as well as simplifying the Company to improve operational efficiency, all aimed at making our growth more sustainable.
+In Q2 consistent with this strategy, we stuck to our strong underwriting standards while growing loans and investing in our clients in global markets. Asset quality remains strong as net charge-offs, NPLs, delinquencies and commercial reservable criticized exposure all declined.
+Several of the businesses set new records for revenue or earnings as we grow with our clients and manage costs well. Importantly, we continue to invest in new technology and capabilities while adding sales professionals in certain businesses. And we significantly increased the amount of capital we returned to shareholders and announced plans to increase that even more.
+These results tell us that responsible growth is working and that we are well-positioned to continue to invest in and grow with our customers and clients as the economy continues to improve. With that, we will open it up to Q&A.

exam/part2_problem1/Problem_1_Conference_Call_Segments/call_39_questions.txt

@@ -0,0 +1,169 @@
+Question_1:
+
+    Hi, thanks. I appreciate all the detail on the net interest income discussion. One piece of it on the repo borrowings part of it, financing -- the equity financing side. I'm curious if you think of that as a little episodic and you just go with the flow. Or is it more a permanent part of the strategy where you are using your strong balance sheet to help grow? The tag along to that is if it is more permanent why do it through repo? Is that more expensive?
+
+Question_2:
+
+    Got it. I appreciate that. And the tagalong for net interest income guidance is, as you mentioned, very low deposit beta on the consumer side, just 2 basis points up in the quarter. Is there a point in time where you expect that to accelerate over the next couple hikes? I know we all kind of ask the same thing each quarter, but it's amazingly low.
+
+Question_3:
+
+    Great, thanks both. I appreciate it.
+
+Question_4:
+
+    Hi, good morning, guys. Just to follow up on the NII, Paul, it sounds like when you net a few positives and negatives in terms of your NII outlook for next quarter you are expecting a modest increase in the third quarter as of now. Could you put any size parameters on that?
+
+Question_5:
+
+    No, that's fine. Maybe you could just remind us how much the Fed hike itself -- what your estimate of how much that helps the June hike. And then also just how much the lower 10-year hurt in the second quarter? How should we think about the 10-year impact going forward? So the short and the long end impacts would be helpful. Thanks.
+
+Question_6:
+
+    Okay. And then just on expenses could you help us think through the expense trajectory for the back half of the year? And more importantly, your current thoughts on the target for the $53 billion next year. And how some of the -- maybe the tech consolidation you did this quarter, how does that impact either the timing or just confidence level on delivering expense saves?
+
+Question_7:
+
+    Okay thanks, guys.
+
+Question_8:
+
+    Great, thanks. Good morning. Maybe getting back to the deposit question. You guys are growing 9% in the consumer book better than the industry, despite holding low obviously reflecting your mix. How far do you think -- A, I guess can you give your sense of what you think is driving that market share? And is this something where you are willing to test the patience of your customers to lag deposit rates until growth slows more materially? How do we think about what your decision-making process is in terms of rates in the consumer book?
+
+Question_9:
+
+    All right, well, thanks for that. Maybe, Brian, a follow-up on regulation. Obviously the treasury report seemed pretty favorable for the industry. You are not really leverage constrained. Is there any aspect of the recommendations that you would find most helpful to your business?
+
+Question_10:
+
+    Okay, thanks.
+
+Question_11:
+
+    Thanks, good morning. If I can ask questions on the card business, first of all I noticed that the card losses were up first to second. They are typically down. I am just wondering if you can help us understand just where we are in the seasoning of the portfolio, also noting that the risk-adjusted margin continues to slip as well. So what do you think about card losses going forward and when do we see that bottoming of the card margin? Thanks.
+
+Question_12:
+
+    Just on the risk-adjusted -- the card risk-adjusted margin.
+
+Question_13:
+
+    Understood. And if I can just ask one big picture one, all the points you made earlier, all the credit metrics are going the right way otherwise, NPAs, inflows, etc. Coming back into this point about where card is going and then just not seeing anything else, you guys have been at 40 basis points of losses. Any reason to see that changing really? And then do you still have some room for release as well given that?
+
+Question_14:
+
+    Understood. Thanks a lot.
+
+Question_15:
+
+    Hi, good morning. Brian, two questions. One on the consumer banking efficiency ratio. You mentioned that there still is room for that to fall from the 52%, which is obviously very efficient as it stands right now today. And you indicated all various opportunities to drive incremental revenues at a much improved expense ratio with all the digital that you outlined earlier.
+But could you speak to how the branch network could also impact those numbers? I mean, your branch has been coming down about 3% the last couple of years. Is that the kind of pace that you think you are going to continue? Or does the digital improvements enable you to move even faster there?
+
+Question_16:
+
+    Okay, thanks for that. And then separately, you've spoken before about the op risk RWA burden that you guys have. We had some questions come in on how you are thinking improvements there could help you given that it's not directly in the CCAR stress test. But maybe you could give us a sense as to how you think any changes could help you given that it's not a constraining factor.
+
+Question_17:
+
+    And then just lastly, you had a nice increase in the dividend. Could you just speak to how you are thinking about dividend payout ratios? Do you feel like you are where you should be given the business model? Or is there more room and if there is more room what the drivers are to affect that change?
+
+Question_18:
+
+    Thank you.
+
+Question_19:
+
+    Thank you, good morning, guys. In looking at your ROE, your returns on allocated capital in the Consumer and the Wealth Management businesses are very strong, well over 20%. Global Bank is 18%, Global Markets about 10%. Can you share with us how you are going to get the 8% ROE up let's say above your cost of capital let's say 10%? Is it going to be more coming from the Global Markets area or management of the capital or somewhere else?
+
+Question_20:
+
+    Very good. And then coming back to the mobile users, I think you guys pointed out you had just shy of 23 million mobile users. What percentage of your customer base are mobile users? And where do you see that number going to in the next two to three years?
+
+Question_21:
+
+    Brian, you mentioned Gazelle. Any early read on what you are seeing there and when do you expect to have a broad launch of that product if you haven't done it already?
+
+Question_22:
+
+    Very good. Thank you.
+
+Question_23:
+
+    Good morning, just a couple of quick follow-ups. Did you guys disclose the debt hedge ineffectiveness drag that was in net interest income this quarter?
+
+Question_24:
+
+    Okay, does that show up in the 10-Q or -- I can't remember where we got that from.
+
+Question_25:
+
+    Okay, and then just separately the expenses related to the UK card business that go away, how much is that?
+
+Question_26:
+
+    Okay, that's helpful. Thank you.
+
+Question_27:
+
+    Hi, good morning. So Brian, I appreciate the helpful commentary you've given on capital ratios and the continued effort to optimize your RWAs. And just given the significant capital cushion that you are operating with today, I'm just wondering how you are thinking about the payout trajectory over the next couple of years.
+And maybe just to help us frame it from an ROE perspective, because you did note that your excess capital continues to be a drag on returns, what do you believe is a reasonable spot capital target for you to manage to through the cycle?
+
+Question_28:
+
+    Got it. And then just on some of the expense initiatives, Brian, that you outlined. I'm getting quite a few questions on how we should think about it from a timing perspective. I know that you have the $53 billion expense target that's out there, but just given some of the efficiency opportunities that you identified, should we expect that progress to continue beyond 2018?
+
+Question_29:
+
+    Thanks, Brian. And just one more quick one for me just on the DoL fiduciary rule. You had outlined your strategy previously for stopping or no longer engaging in retirement brokerage activities. But just given the potential for that rule to be repealed, I'm wondering if your thinking has evolved around that?
+
+Question_30:
+
+    Thanks for taking my questions.
+
+Question_31:
+
+    Hi, good morning. First wanted to follow-up on the net interest income. The 100 basis point -- the benefit of $3.2 billion you get from a 100 basis point parallel shift in the yield curve, you mentioned it's primarily sensitive to the short end. I think last quarter you gave sort of a 75/25 split between short and long and is that still a good rule of thumb to use?
+
+Question_32:
+
+    Okay, so a little bit more skewed to the long end than the disclosure in 1Q?
+
+Question_33:
+
+    Okay, got it. Moving on -- just to discuss capital deployment strategies a little bit. You've talked about your excess capital position, obviously you upped your returns in the CCAR cycle and you will keep going forward with that.
+But is it too early to talk about acquisitions as part of the capital strategy? And how would you think about M&A in terms of opportunities whether from a product strategy, geographic segmentation standpoint? How do you think about M&A in the context of your capital strategy?
+
+Question_34:
+
+    Okay, all right, fair enough. Thanks a lot.
+
+Question_35:
+
+    Thanks, I've got three bigger picture kind of questions. First, Brian, you've turned the corner on the customer growth and business growth. That was one of my main concerns after so many years of having to deal with the overhang issues to be able to re-energize and get that -- business segments growing again. What are the couple of things that you could say have helped go through that inflection point as quick as you've been able to do that?
+
+Question_36:
+
+    Paul, one of the -- sort of the second question to look at, we've talked about the core, core, core and that the Company has taken actions to try to drive that. But really we've had an historical shift in the liquidity premium coming out of the financial crisis and just having rates at zero.
+So hasn't a lot of this shift been related to just the environment more than really Company actions? And what we are seeing has been the derisking. Now that GWIM deposits are starting to move out, is that the first sign of the rerisking or are the customers willing to take a little bit more risk and drop that liquidity premium? So I'm kind of watching for that first sign of the customer behavior beginning to change.
+
+Question_37:
+
+    It just seemed like there's a little bit of a change sitting there. You will see it ripple into some of the other business maybe later. But a third question was with what's going on in the mortgage business, you are retaining 90% of loans. In the past, I don't know the number, but I bet you were securitizing before the financial crisis probably 90% of the loans.
+How do you look at that business different? That is such a paradigm shift that you really are now a portfolio lender much more than you are a securitization. Are there any other dynamics that we should look at separately?
+
+Question_38:
+
+    And it's not just you all, I mean it has been across the industry where you are seeing much more in retention than you are seeing in securitization. So I just didn't know if there was any operational or other issues that gives you more flexibility on pricing or product development. It's a very different market than what it used to be when we were in it before.
+
+Question_39:
+
+    Great, thanks. I just had a question first on the lending environment overall. Could you give an update of the pipelines? And I know last quarter you said middle market revolver, you were at record levels there. Were you able to increase utilization rates there? Just give a sense of where your clients are if optimism is waning?
+
+Question_40:
+
+    Okay great. And then just a question on wealth and investment management. You did see the financial advisors increase 2 percentage points quarter on quarter. Is that a trend now that you think you can -- or back into a hiring phase where you can actually grow the number of financial advisors? Because productivity also increased as well. So there was no drag from hiring those advisors.
+
+Question_41:
+
+    Okay great. Thanks for taking my questions.
+

exam/part2_problem1/Problem_1_Conference_Call_Segments/call_3_answers.txt

@@ -0,0 +1,106 @@
+Answer_1:
+
+    In terms of the economics, we have a great operations team that's working on how do we serve customers reliably and faster. So, certainly, that is reflected in our transportation costs. Also, from a productivity standpoint, we're just -- as we add capacity, we're just getting closer and closer to customers with larger selection, which is certainly helpful from a productivity standpoint.
+So those are some of the dynamics that you need to think about when you think about our transportation cost. The team has done a great job over the years of becoming even more reliable and faster and more productive. And, again, they will be working on ways to make that even better over time.
+
+Answer_2:
+
+    In terms of the fresh business, we started doing a pilot several years ago in Seattle. We did a number of -- the team has done a great job inventing on behalf of customers. It's a very good customer experience. The challenge that we've had over the past several years is how to make it economically viable. And so that's -- the team has done a lot of different experiments and invented well on behalf of customers to see what works. And we took a lot of that knowledge, which enabled us to launch fresh in L.A. And it's very early there; we're still in the trial period. It's a good customer experience and we like what we see so far, but it's very, very early.
+So it's something that we will continue to work on, both from a customer experience and from an economic standpoint. There's not much more I can add to that right now, so you'll have to stay tuned and see where that ends up.
+
+Answer_3:
+
+    In terms of the third-party unit growth, it was 40% this quarter, which compares to the 40% last year in Q2. So, again, it is flat as a percentage of total units.
+One thing to keep in mind, though, is our digital units are growing at a faster rate than physical, and those digital units are primarily first-party units. So if you take out -- digital units out in both periods, we are actually up approximately 300 basis points. So our physical seller business is growing very nicely. It's growing at a faster rate than retail and it's doing very well. And so very pleased to see that.
+
+Answer_4:
+
+    In terms of FCs, we have announced to date five net new facilities in the US. We've also announced some in International. It's still early, as we did in prior -- last few years. We gave you updates as we went along, and so we can update you a little bit later in the year to see how that progresses, but we certainly are adding new capacity and that's reflected in the guidance that you see in Q3 as we get ready for our Q4 seasonal quarter.
+In terms of growth in International media, what you are seeing there is, on a local currency growth basis, you see a 7% growth that's consistent with what you've seen in the last couple of quarters. We are at the very early stages. We are excited about what we are seeing so far in digital, but we are in that early stage of transformation from physical to digital within International. And so you see from the release that we have launched a lot of new things related to digital over the past 90 days and even prior to that. So we are very excited about those launches and excited about the transformation.
+We are also excited, if you look at our total International business, we've got a lot of opportunities to invest in. I talked about the conversion from physical to digital. We also have selection still to add within existing categories, new categories, new geographies. So we are very excited about the opportunity that we have there.
+
+Answer_5:
+
+    In terms of China, we are investing heavily in China, and we have been for some number of years. We have a good customer experience there. We continue to look at ways to make that even better. We are adding selection across many categories right now. It's a very interesting geography.
+And so we will continue to work on that experience for customers. You should expect to see us to be in investment mode for some time, but it's a very sizable segment, very interesting long-term growth opportunity, and we will continue to work on making that better for customers and for investors over time.
+In terms of AWS, the business is growing very, very strongly. We've got a great team that's innovating on behalf of customers, launching new services, becoming more productive, which allows us to be able to lower prices. We've had many price reductions since we started with AWS, and we share that very visibly. And so we are very excited about that business. Even though we are off to a very good start, it's a very big opportunity and we continue to invest in that business and we are very excited to do it. We think it's a great long-term opportunity and we have a great team working on it.
+
+Answer_6:
+
+    Yes, just to make sure I have your question, we are seeing -- when you look at our, for example, our North America growth, particularly EGM, we are seeing very good growth across many different categories. But a few callouts -- we are seeing very good growth in apparel, specifically, and also consumables.
+And so the team has done a very nice job. Both teams have done a very nice job from a customer experience standpoint and been growing very nicely, and that is something that we are seeing and it does help with frequency to the site as well.
+
+Answer_7:
+
+    Sure. In terms of Kindle, you are right. We now have Kindle stores, if you will, established in all of the Amazon domains that we have around the world. And recently we announced Kindle Fire HD; it's available to customers in over 170 countries. We introduced Kindle Paperwhite and Kindle Fire HD in China. That's both online on our website, and also in a number of off-line retail locations.
+So, again, there's a lot of advancement in terms of the Kindle. But again, it's very early. I'm very encouraged by the opportunity that we have there for customers and our ability to try to capitalize on that from a digital content standpoint.
+In terms of AWS, the business is expanding and it's an incredible opportunity globally. We recognize that. The team recognizes that, and we will continue to work on that on behalf of customers.
+
+Answer_8:
+
+    Sure. In terms of the way we are looking at them certainly is based on the free cash flow potential. And we have -- we are in some really interesting great businesses that have a lot of potential from a free cash flow generation standpoint, with good, high ROICs, which is exciting.
+From a margin standpoint, always challenging to predict where that will come out in terms of absolute numbers, but what we will do is we want to make sure that we try to maximize free cash flow. That's something that we've always said.
+So our strategy hasn't changed; our outlook hasn't changed in that regard. Frequently, we would be asked historically, is double-digit operating margins possible? And I still think it's possible. But, also, if it means -- if a good, high-single-digit operating margin gets us to better, higher free cash flow over time, that's fine, too.
+So again, our goal is to -- we don't focus on individual margins. Our goal is to make sure that we generate free cash flow, large amounts of free cash flow, and use that capital efficiently. And so those are goals that we have. And we certainly think that opportunity is there in each of the businesses that we operate in.
+
+Answer_9:
+
+    Sure. In terms of Prime, we recognize it over the life of the subscription. And then in terms of third-party versus first-party, certainly we have had some shift within digital media. But again, digital media is primarily a first-party business and happens to be one portion of our business.
+But you are absolutely right. In terms of our third-party business, which from a unit perspective is 40% of our total units this quarter, we recognize the share of that revenue; the rev share, if you will, as revenue, whereas the other parts of our business, largely, we are recognizing that first-party revenue, and so we are recognizing the full amount of revenue in the current period.
+
+Answer_10:
+
+    In terms of Spain, we are very excited about what we see. It is growing very fast. We are in investment mode and it's an exciting geography for us. We are very optimistic over time it will be a great geography for us. So we are very happy to serve customers in Spain and we continue to, as we have done in other geographies, that we will continue to serve customers and continue to expand selection and get service levels even better over time. So we are very excited about that.
+In terms of Brazil, we do have a Kindle Store and we have devices at physical retailers. So from a Kindle perspective, that's what we are doing in Brazil.
+
+Answer_11:
+
+    In terms of North America total growth, we saw an acceleration from last quarter from 26% to 30%. We saw an acceleration in both North America media as well as North America EGM.
+Within EGM, it was very broad in terms of growth. We saw very strong growth across many different categories, and so I'm very pleased with that. I called out a couple that were notable in terms of apparel, as well as in consumables. Certainly, those are getting larger and still growing very fast, which is why I called those out.
+In terms of competitiveness, it has been very competitive. It is today; it has been since our inception. We have many different competitors online. We have many competitors off-line. As you go to your home or office, you pass our competitors every day. That's an environment where we are used to dealing in. It's something that's not new. It's something that we see in all of our geographies across many different categories.
+
+Answer_12:
+
+    If you take a look at L.A., it's just, again, very excited and it's very early. So I think on that one, you will just have to stay tuned.
+But in terms of as we get closer and closer to customers with fulfillment, we have seen growth due to that. And it has manifested its way in a few different ways, but most notably you see it in Prime. We have -- because of our fulfillment logistics capability, we have been able to offer Prime broadly, and we just have selection that's just closer and closer to customers. And if you look back over the last several years, there has been different reasons why we have grown the way we've grown in terms of adding new selection and making sure that we have really sharp pricing.
+But certainly, Prime, which includes speeded delivery, has certainly been a notable -- has had a notable impact. And we are very pleased with the Prime program. Customers like it. We see very strong growth in Prime subscribers. We see very good retention of Prime members. So it's a great program for us and certainly, again, delivery speed is certainly impacting that program, our overall growth.
+
+Answer_13:
+
+    In terms of media growth, not a lot of call-outs, except probably the obvious is digital units growing very fast relative to physical units, and we are excited to see that. And because of where we are, we are further penetrated in North America. You are seeing a bigger impact on our growth rate than you are in International, and we certainly see that. But not a lot of other call-outs there.
+But, again, we are very pleased, and certainly customers are responding to many things, including selection and great prices and everything else within those digital offerings. But, also, they are responding to unique selection that we have. And if you take a look at our release, you will see the specific numbers related to some of the exclusives we have and, certainly, that is having an impact. So there's many, many different things that are working for us in that space as part of our overall ecosystem for digital that we are pleased with.
+In terms of our device plan, we are very pleased with the devices we have to offer customers. We think we have a great offering, both in terms of Kindle and Kindle Fire. In terms of our future roadmap, we have a long-standing practice of not talking about what that will be prior to announcement.
+
+Answer_14:
+
+    In terms of tech and content, we are spending in a number of different areas, but there's a few that I would like to highlight. One is certainly -- keep in mind that the infrastructure related to our very fast-growing Web services business is included in tech and content. So, certainly, as we ramp up that business and it is becoming more sizable and growing very fast, you are seeing that impacting that line item.
+We are also investing very heavily in digital, and that is across many different parts of our digital offerings there. That's also included. Any of the tech teams that are working on customer experience across Amazon as we grow, so as we support both our seller businesses and our retail businesses, they are included in that line item. So certainly, that's what you are seeing there.
+In terms of fresh, we are not breaking out the financials. But keep in mind that fresh was designed as a pilot and, certainly, the economics have improved over time through invention on behalf of the team there as well as operating efficiencies. So again, that was set up as a test, which has enabled us to launch L.A.
+
+Answer_15:
+
+    In terms of some of the dynamics, we are very excited about our digital business. We are inventing -- you see a lot of different inventions, both on the hardware side as well as on the software side from a device standpoint. You are also seeing a lot of invention around the content side. And we think, for example, Prime instant video, which combines video and our Prime membership, is very compelling, and we are investing heavily in content. It's still very early there, but we are finding that customers, certainly existing Prime members, are more and more streaming content. We are having new Prime members come to Amazon largely because of video in terms of one segment of that population that's coming from new Prime members; it's because of Prime instant video, and we can see that based on the free trials and the conversion of those free trials related to Prime instant video. So that's certainly one portion of our growth in Prime memberships which we find exciting.
+For us, we will offer exclusive content on the book side; it's very interesting. So again, we are inventing -- across a lot of different areas. And, yes, there are a lot of different dynamics, but we think we are well suited for both device software and content side of those businesses.
+
+Answer_16:
+
+    In terms of the International piece, what I was referring to was as in investment mode for some time. I was referring to China specifically. We have a lot of opportunity to grow. We'll still continue to invest in International, but my comment was specifically around China.
+And then your question around Quidsi?
+
+Answer_17:
+
+    Hello? Just to follow up, the Quidsi question, I think, was around the founders leaving. We will position with them leaving. I missed the last part of that, but we are fortunate to have the founders with us for a number of years. They did a great job while they were here and we have a great team at Quidsi. We are pleased with that business and the retail team works very closely with the Quidsi business and we are excited to have that as part of Amazon team.
+
+Answer_18:
+
+    In terms of Germany, there's not a lot I can add to there. We are certainly serving customers. Those results are reflected in our overall total results that you see today for Q2 as well as our International results.
+In terms of Kiva, we certainly -- we have a great team there, love the technology. We don't have any announcements in terms of rollouts, but we are ahead of schedule from what we had set out at the time of purchase, which we are happy about. So we'll have to stay tuned on the actual rollout, but we are very encouraged by what we see there.
+
+Answer_19:
+
+    We are working through it. I wouldn't say that that's complete, but we are working through it.
+
+Answer_20:
+
+    Thank you for joining us on the call today and for your questions. A replay will be available on our investor relations website at least through the end of the quarter. We appreciate your interest in Amazon.com and look forward to talking with you again next quarter.
+

exam/part2_problem1/Problem_1_Conference_Call_Segments/call_3_presentation.txt

@@ -0,0 +1,30 @@
+
+Hello, and welcome to our Q2 2013 financial results conference call. Joining us today is Tom Szkutak, our CFO, who will be available for questions after our prepared remarks.
+The following discussion and responses to your questions reflect management's views as of today, July 25, 2013, only, and will include forward-looking statements. Actual results may differ materially. Additional information about factors that could potentially impact our financial results is included in today's press release and our filings with the SEC, including our most recent annual report on Form 10-K. As you listen to today's conference call, we encourage you to have our press release in front of you, which includes our financial results as well as metrics and commentary on the quarter.
+During this call, we will discuss certain non-GAAP financial measures in our press release, slides accompanying this webcast and our filings with the SEC, each of which is posted on our IR website. You'll find additional disclosures regarding these non-GAAP measures, including reconciliations of these measures with comparable GAAP measures.
+Finally, unless otherwise stated, all comparisons in this call will be against our results for the comparable period of 2012.
+Now I will turn the call over to Tom.
+
+Thanks, Sean. I will begin with comments on our second-quarter financial results.
+Trailing 12-month operating cash flow increased 41% to $4.53 billion. Trailing 12-month free cash flow decreased 76% to $265 million.
+Trailing 12-month capital expenditures were $4.27 billion. This amount includes $1.4 billion in purchases of our previously leased corporate office space as well as property for development of additional corporate office space located in Seattle, Washington, which we purchased in the fourth quarter 2012. The increase in capital expenditures reflects additional investments in support of continued business growth, consistent of investments in technology infrastructure, including Amazon Web Services, and additional capacity to support our fulfillment operations.
+Return on invested capital was 2%, down from 11%. ROIC is TTM free cash flow divided by average total assets minus current facilities excluding the current portion of long-term debt over five quarter ends. The combination of common stock and stock-based awards outstanding was 474 million shares compared with 468 million shares.
+Worldwide revenue grew 22% to $15.7 billion or 25% excluding the $392 million unfavorable impact from year-over-year changes in foreign exchange rates. We are grateful to our customers who continue to take advantage of our low prices, vast selection and shipping offers.
+Media revenue increased to $4.4 billion, up 7% or 11% excluding foreign-exchange. EGM revenue increased to $10.42 billion, up 28% or 30% excluding foreign exchange. Worldwide EGM increased to 66% of worldwide sales, up from 64%.
+Worldwide paid unit growth was 29%. Active customer accounts exceeded $215 million. Worldwide active seller accounts were more than 2 million. Seller units represented 40% of paid units.
+Now I will discuss operating expenses excluding stock-based compensation. Cost of sales was $11.2 billion, or 71.4% of revenue, compared with 73.9%. Fulfillment, marketing, tech and content and G&A combined was $4.09 billion or 26% of sales, up approximately 275 basis points year over year. Fulfillment was $1.76 billion or 11.2% of revenue compared with 10.1%. Tech and content was $1.43 billion or 9.1% of revenue compared with 7.6%. Marketing was $651 million or 4.1% of revenue, consistent with the prior period.
+Now I will talk about our segment results, and consistent with prior periods we do not allocate the segments, our stock-based compensation or other operating expense line items. In the North America segment, revenue grew 30% to $9.49 billion. Media revenue grew 16% to $2.17 billion. EGM revenue grew 31% to $6.48 billion, representing 68% of North America revenues, up from 67%. North America segment operating income increased 19% to $409 million, a 4.3% operating margin.
+In the International segment, revenue grew 13% to $6.21 billion. Adjusting for the $391 million year-over-year unfavorable foreign-exchange impact, revenue growth was 20%.
+Media revenue decreased 1% to $2.22 billion or grew 7% excluding foreign exchange. In EGM, revenue grew 22% to $3.94 billion, or 29% excluding foreign-exchange. EGM now represents 63% of International revenues, up from 59%.
+International segment operating income was zero, down from $16 million in the prior-year period. Excluding the unfavorable impact from foreign exchange, International segment operating income increased 11%.
+CSOI increased 14% to $409 million or 2.6% of revenue, down approximately 20 basis points year over year. Excluding the unfavorable impact from foreign exchange, CSOI increased 19%.
+Unlike CSOI, our GAAP operating income includes stock-based compensation expense and other operating expense. GAAP operating income decreased 26% to $79 million, or 0.5% of net sales.
+Our income tax expense was $13 million. GAAP net loss was $7 million or $0.02 per diluted share compared with net income of $7 million and $0.01 per diluted share.
+Turning to the balance sheet, cash and marketable securities increased $2.49 billion year over year to $7.46 billion. Inventory increased 24% to $5.42 billion and inventory turns were 9.4, down from 10.1 turns a year ago as we expanded selection, improved in-stock levels and introduced new product categories.
+Accounts payable increased 27% to $8.99 billion and accounts payable days increased to 73 from 68 in the prior year.
+I will conclude my portion of today's call with guidance. Incorporated into our guidance are the order trends that we've seen to date and what we believe today to be appropriately conservative assumptions. Our results are inherently unpredictable and may be materially affected by many factors, including a high level of uncertainty surrounding exchange rate fluctuations as well as the global economy and consumer spending. It's not possible to accurately predict demand and, therefore, our actual results could differ materially from our guidance. As we've described in more detail in our public filings, issues such as settling inter-company balances and foreign currencies among our subsidiaries, unfavorable resolution of legal matters and changes to our effective tax rate can all have a material effect on guidance. Our guidance further assumes that we don't conclude any additional business acquisitions, investments, restructurings or legal settlements; record any further revisions of stock-based compensation estimates; and that foreign-exchange rates remain approximately where they have been recently.
+For Q3 2013, we expect net sales of between $15.45 billion and $17.15 billion, a growth between 12% and 24%. This guidance anticipates approximately 300 basis points of unfavorable impact from foreign exchange rates. GAAP operating loss to be between $440 million and $65 million compared to $28 million in third quarter 2012. This includes approximately $340 million of stock-based compensation and amortization of intangible assets. We anticipate consolidated segment operating income or loss, which excludes stock-based compensation and other operating expense, to be between a $100 million loss and $275 million in income compared to $232 million of income in third quarter 2012.
+We remain heads-down focused on driving a better customer experience through price, selection and convenience. We believe putting customers first is the only reliable way to create lasting value for shareholders.
+Thanks, and with that, Sean, let's move to questions.
+
+Great, thanks, Tom. Let's move onto the Q&A portion of the call. Operator, will you please remind our listeners how to initiate a question?