Please standby. We're about to begin. Good morning and welcome to the 2021 Third Quarter Earnings Conference Call hosted by BNY Mellon. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Please note that this conference call and webcast will be recorded and will consist of copyrighted material. You may not record or rebroadcast these materials without BNY Mellon's consent. I will now turn the call over to Marius Merz, BNY Mellon Head of Investor Relations. Please go ahead.

Thank you, operator. Good morning, everyone. And welcome to our Third Quarter earnings conference call. Today, we will reference our financial highlights presentation, which can be found on the Investor Relations page of our website at bnymellon.com. Todd Gibbons, our Chief Executive Officer, will open with his remarks. Then, Emily Portney, our Chief Financial Officer, will take you through the presentation. Following their remarks, there will be a Q&A session. Before we begin, please note that our remarks include forward-looking statements and non-GAAP measures. Information about these statements and non-GAAP measures are available in the earnings press release, financial supplement, and financial highlights presentation, all available on the Investor Relations page of our website. Forward-looking statements made on this call speak only as of today, October 19, 2021 and will not be updated. With that, I will turn it over to Todd.

Thank you, Marius. And good morning, everyone. I will touch on a few highlights before I hand it over to Emily to review our third quarter financial results, and she will give you the outlook for the remainder of the year in more detail as well. Our financial performance this quarter reflects healthy and broad-based organic growth across our businesses, as well as a supportive global markets backdrop. Now, if you refer to slide 2 of our financial highlights presentation, we reported EPS of $1.04 and generated a return on tangible common equity of 17%. Revenue was $4 billion, up 5% year-over-year, and fee revenue was up 6% year-over-year. That would have been 11% if you excluded the impact of money market fee waivers. This fee growth included almost 3% of organic growth across our franchise. During the quarter, we returned roughly $2.3 billion of capital to our shareholders, including almost $300 million of common dividends and $2 billion of buybacks. Our continued focus on innovation has led us to announce several groundbreaking new solutions this quarter that will meaningfully improve the client experience and represent exciting growth opportunities for us. Let me start with Asset Servicing. In the third quarter, we continued to see strong sales momentum. Year-to-date wins were up almost 40% versus a year ago and we are winning larger, more complex deals that expand our product offering as clients increasingly see the value we can provide across the value chain. We had a number of exciting wins this quarter. One example I'd like to highlight is the work we're doing for Oak Hill Advisors, a leading alternatives investment firm. Oak Hill was receiving fund administration services from one of our competitors and performing middle office functions in-house. Due to our deep expertise and our ability to offer them a seamless solution across multiple services, we were able to win both mandates. This mandate is a real testament to our differentiated capabilities and the strength of our Asset Servicing platform, which has seen very nice fee growth this year of 10% plus. We remain excited about our ability to scale this business and the growth opportunity ahead of us. We also continue to see good momentum in ETF Servicing where year-to-date, we have already helped clients launch more funds than during all of 2020. In our data and analytics business, our capabilities continued to resonate with our clients. This quarter, we signed two additional large asset manager clients to our next-generation data management platform, or what we call the data hub. Another large global asset manager went live, bringing the total number of clients signed up or mandated to the hub to six. We're also thrilled about an extension of our partnership with the Florida State Board of Administration as they look to leverage our ESG data analytics app into their full investment cycle for 30-plus funds, spanning about $250 billion in assets under management. Now, moving onto Pershing. Pershing had another good quarter and it was on the back of continued organic growth in accounts and new client assets. Over the last 12 months, Pershing generated over $100 billion of new assets, despite the headwind of a few client losses to consolidation that we previously mentioned. To give you just one example of our differentiated capabilities and the power of our broader, interconnected franchise: a multi-billion-dollar wealth management client recently approached Pershing for a strategic partner that could provide a broad set of integrated solutions. In a collaboration between our investment management, our wealth management and Pershing businesses, we designed a series of risk-based models and turnkey investment solutions that are more cost-effective, tax efficient, and portable for the end investors. This innovative solution combined with our leading custodial services and technology made Pershing the provider of choice. But we're not resting there. This past week we announced the launch of a new business unit within Pershing, which we're calling Pershing X. This unit will deliver the industry's leading end-to-end platform in the wealth advisory space, offering a comprehensive set of advisory capabilities and helping financial services firms solve the challenge of managing multiple and disconnected technology tools and data for their advisors, fueling our clients and therefore our growth. Today we are already the leading provider of custody and clearing services. By adding front-end capabilities, Pershing will become uniquely well-positioned with RIAs and the broader wealth tech segment to capture share in one of the fastest growing segments in financial services. I'm also thrilled to welcome Ainsley Simmons to BNY Mellon who will lead this effort for us. Ainsley has been a transformative leader in the advisory space for 20 years. She has extensive experience across wealth management and digital, and she has helped launch several successful fintechs. Pershing X is one of our most ambitious, multi-year projects. The combination of our planned investments and the talent that we've recruited, combined with the leading platform that we already have, will meaningfully enhance Pershing's future growth profile. In Treasury Services, we continue to see healthy growth in payment volumes on the back of an improving global economy and net new business. In September, we announced that Verizon has become the first corporate client to roll out BNY Mellon's innovative real-time request-for-payment functionality to its customers. We've spoken about this capability a few times in the past, and we're incredibly excited about its future. We see enormous opportunity across our client roster as more banks enable their customers to receive and pay bills via the real-time payments network. CEOs from 23 of the largest banks in the country, including myself, signed a letter committing to bring these capabilities to the market. We expect that 40% of digitally-enabled U.S. consumer accounts will eventually have this functionality by year-end. With over 15 billion bills paid annually within the U.S., many of which are still paper-based, this ecosystem is ripe for disruption. Our innovative capability is built to address it at scale, and we are uniquely positioned in the market as we don't compete with other banks in consumer banking or card issuing. As a result of our leadership in the space, we were recently recognized by The Banker as the best transaction bank in payments. It's a real honor, and we think this is just the beginning. Turning to clearing and collateral management, the business continues to benefit from the higher collateral management balances. In fact, they reached a record $5 trillion at one point this quarter. Outside the U.S., we're seeing growth as clients continue to migrate from bilateral to tri-party. Domestically, recent growth has been driven by the elevated utilization of the Fed's reverse repo facility, where we are the sole clearer. Globally, we continue to implement new capabilities that allow clients to more efficiently mobilize collateral and enable interoperability between our U.S. and international platforms as part of our Future of Collateral program. Additionally, this quarter we were the first bank to add agency MBS as collateral on overnight transactions via the Fixed Income Clearing Corporation's new general collateral sponsored repo program. This new capability expands the universe of clients that can indirectly transact with central counterparties, as well as the scope of eligible collateral. By sponsoring these transactions we help our clients reduce costs and free up capital that could not otherwise be available on a bilateral basis. The recent deadlines for Phase 5 of non-cleared margin really differentiated us in the market and validated the multiyear investments we've been making in automation and client experience. While many across the industry struggled and were ultimately unable to re-paper all their counterparty relationships in time to meet these Go-Live deadlines at the end of September, BNY Mellon was lauded for having a more streamlined process and client onboarding experience. We've digitized and automated the collateral schedule negotiation and amendment process. Once again, our automation has enabled our clients to do things better, faster and cheaper. In markets, client volumes remained very strong on the back of continued organic growth, offsetting the headwind of lower volatility. This quarter we also rolled out several enhancements to our Liquidity Direct platform that give clients additional short-term investment options. Clients can now seamlessly invest their cash in commercial paper and ultra-short-duration fixed income ETFs, and they now have the ability to select money market funds based on their ESG investing criteria and preferences leveraging our ESG data analytics app. While it's still early days, client feedback so far has been extremely positive. Pivoting to our investment and wealth management businesses. In Investment Management, we saw our sixth consecutive quarter of net inflows into long-term products. Our initial suite of eight index ETFs, including the industry's first true zero-fee ETFs in the largest equity and fixed income ETF categories, now exceeds $1 billion of AUM and is growing quickly. We recently launched our first active ETF, the BNY Mellon Ultra Short Income ETF, sub-advised by Dreyfus. On September 1, we successfully completed the transition of almost $200 billion and over 2,000 client mandates, as well as the integration of Mellon's cash capabilities to drive further investment specialization at scale. This realignment positions us to better meet clients' needs, creates greater scale, and enhances the differentiation in the value proposition of our investment firms. Not only are we pleased with the timely completion of this project, but the feedback from clients and consultants has been very encouraging, and we have experienced virtually no client attrition during this transition. In wealth management, the business continues to execute on its clear three-pronged strategy to focus on client acquisition, expand the investment and banking offering, and invest in technology to drive efficiency. Year-to-date, we've acquired about 40% more clients versus the same time period last year and the average size of our new clients is up by over 20%. The business saw another strong quarter of net inflows and continued growth across lending and deposit products, and our investment performance remains strong. In summary, we are intensely focused on driving innovation across the franchise. In fact, we were recently named among Fast Company's 100 Best Workplaces for Innovators—a testament to our forward-thinking culture and our continued investments in our people, technology, efficiency and growth. We're pleased with the continued pickup in organic growth and we're continuing to make the investments necessary to drive further growth and efficiency. With that, I'll hand it over to Emily.

Thank you, Todd, and good morning, everyone. As I walk you through the details of our results for the quarter, all comparisons will be on a year-over-year basis, unless I specify otherwise. Revenue was up 5% reflecting higher fee revenue, partially offset by lower net interest revenue and higher money market fee waivers. Fee revenue grew by 6% or 11% excluding the impact of fee waivers. This reflects the positive impact of higher market values, strong organic growth, and a favorable impact from foreign exchange, primarily the U.S. dollar. Money market fee waivers were a distribution and servicing expense of $233 million in the quarter, an improvement of $19 million compared to the prior quarter, driven by slightly higher average short-term investments. Other revenue was $129 million and included roughly $55 million of valuation gains on strategic equity investments. Net interest revenue was down 9%. Expenses increased 9% or 6%, excluding the impact of higher litigation reserves. A notable item this quarter is the impact of litigation charges, which you can see at the bottom of the slide. Provision for credit losses was a benefit of $45 million, primarily driven by an improved macroeconomic forecast, including an expectation for a continued recovery of commercial real estate prices. EPS was $1.04; higher litigation reserves negatively impacted EPS by $0.06 and the provision benefit had a $0.04 positive impact this quarter. Pretax margin was 29%. On page four, we show the trend across a few key metrics over time. On capital and liquidity on page five, our capital and liquidity ratios remained strong and well above regulatory minimums and above our internal targets. Our CET1 leverage ratio, which is our binding constraint, was 5.7%, down approximately 30 basis points sequentially, primarily driven by the return of $2.3 billion in capital to our shareholders, partially offset by earnings and 1% quarter-over-quarter reductions in average deposits. We ended the quarter with a risk-based capital ratio of 11.7%, down 90 basis points compared to the second quarter. Finally, our liquidity coverage ratio was 111%, roughly flat compared to the prior quarter. Turn to page 6 for further details on net interest revenue. NIR for the third quarter was $641 million, down less than 1%. The impact of lower interest-earning assets and continued pressure on reinvestment yields was partially offset by lower premium amortization, the benefit of a full quarter of higher IOER and lower deposit and funding costs. Turning to page 7 for some color on our balance sheet. Average deposit balances declined by 2% or approximately $6 billion sequentially. We continue to work with our clients to pursue off-balance-sheet alternatives for their excess cash. The decrease in deposits drove an approximately equal size reduction of our average cash held at central banks. The size of our securities portfolio remains flat quarter-over-quarter. Average loans increased by about 1% sequentially, and 14% year-over-year. Loan growth was primarily driven by margin loans, secured loans from global financial institutions, collateralized loans in wealth management, and growth in capital call financing. Turning to page eight, as I mentioned earlier, expenses of $2.9 billion were up 9% year-on-year; excluding the impact of the notable item I mentioned earlier, expenses were up 6%. Almost two-thirds of this increase was attributable to revenue-related expenses, and the remainder was evenly split between incremental investments and the unfavorable impact of the weaker U.S. dollar. On page 9 for a closer look at our businesses. Investment Services reported total revenue of $3 billion, up 3% year-on-year on higher fees, partially offset by lower net interest revenue and higher fee waivers. Excluding the impact of fee waivers, fee and other revenue was up 10%. Assets under custody and administration increased by 17% to $45.3 trillion, roughly half driven by growth from new and existing clients, and half driven by higher market value. In Asset Servicing, we saw strong growth despite the impact of fee waivers. That's on the back of higher market values and client activity, as well as higher FX revenue. Fee waivers impacted growth by roughly 418 basis points. In Clearing, fees were also up nicely reflecting higher market values and continued underlying fee growth, offsetting the impact of lost business and waivers. Waivers impacted fee growth by approximately 500 basis points. Encouragingly, clearing accounts were up 4% and mutual fund assets were up 23%. Net new assets in the quarter were up $7 billion; excluding the impact of the deconversions and client losses due to consolidation that we have discussed previously, net new assets in the quarter would have been roughly in line with the second quarter. In Issuer Services, fees were down and included a roughly 600 basis point impact on fee growth from waivers, the resumption of issuance activity and seasonally higher dividend payments in ADRs were offset by a decline in Corporate Trust fees. In Treasury Services, healthy fee growth on the back of improved economic activity and net new business resulting in higher payment volumes was offset by approximately 700 basis points from fee waivers. Lastly, Clearing and Collateral Management fees were up primarily driven by growth in non-U.S. collateral management balances and higher clearing volumes, partially offset by lower intraday FX revenue. Across all Investment Services, FX revenue increased by 17% driven by higher client volumes as we're winning new business and growing with existing clients. This is partially offset by lower volatility in rates. Page 10 summarizes the key drivers underneath the year-over-year revenue story for each of our Investment Services businesses. Now turning to Investment and Wealth Management on page 11. Investment and Wealth Management reported total revenue of $1 billion, up 12% year-over-year, primarily driven by higher market values, valuation gains on strategic equity investments, and the benefit of the weaker U.S. dollar, and increased performance fees, all partially offset by higher fee waivers. Excluding the impact of fee waivers, fees and other revenue was up 15%. Assets under management grew to $2.3 trillion, up 13% year-over-year, reflecting higher market values, high inflows, and the favorable impact of the weaker U.S. dollar versus the British pound. In the third quarter, net inflows totaled $14 million driven by LDI and cash strategies. As Todd highlighted, the business has now seen six consecutive quarters of net inflows into long-term products. Investment and Wealth Management revenue grew 13%, primarily driven by higher market values, equity income and gains on strategic equity investments, the benefit of the weaker U.S. dollar, and higher performance fees. FX was negatively impacting revenue growth by 650 basis points. Wealth Management grew by 10%, primarily driven by higher market value. Assets reached $307 billion, up 16% year-on-year. Page 12 shows the results of the other segments. I will conclude with a few remarks about the outlook for the remainder of the year. Our guidance on NIR based on the current forward curve remains down 14% compared to 2020. Also, using the forward curve, we expect fee waivers in the fourth quarter to be roughly in line with the third quarter. With regard to fees excluding waivers, given growth in the third quarter exceeded our expectations, and given the continued momentum across the franchise, we now expect fees ex-waivers for the full year to be up closer to 8.5%. On expenses, we continue to expect the full year to be up about 5%, excluding notable items. We also expect our effective tax rate for the year to be approximately 19%. And then lastly, with regards to buybacks, given we ended the quarter about 20 basis points above our management target for our leverage ratio, the fact that we continue to have excess deposits that we expect to recede over time, and based on our expectation for continued strong capital generation, we intend to once again return capital well in excess of 100% of earnings to our shareholders in the fourth quarter. With that, Operator, can you please open the line for questions?

Yes. As a reminder, we ask that you please limit yourself to one question and one related follow-up question. Our first question comes from the line of Steven Chubak with Wolfe Research.

Hey, good morning, Todd. Good morning, Emily. Wanted to start things off with just a question on the NIR guidance, Emily, that you just shared. I was hoping just to unpack the guide for 4Q specifically, what you're assuming in terms of deposit balance sheet growth, liquidity redeployment, and I guess, less and certainly not least, premium amortization.

Sure. So just why don't we first start with the third quarter. And the third quarter NIR was down very, very modestly. That was off the back of lower reinvestment yields, also lower interest-earning assets as we worked with our clients to manage especially excess deposits. We were able to offset that with some tweaks in the securities portfolio. And also, we did see a benefit from premium amortization coming down that was both a mixture of us reducing the size of our MBS portfolio as well as the fact that prepayment speeds did slow down quarter-to-quarter. On your full-year guidance, you rightfully pointed out it remains down 14% for the full year; in terms of what's baked into the fourth quarter, I think we have more or less hit the trough. What's baked in there: certainly we'll still have the impact of lower reinvestment yields as a headwind. We are expecting a further reduction in interest-earning assets because we will continue to work with our clients in terms of managing excess deposits. We expect deposits to go down by about $5 to $10 billion. With respect to premium amortization, based on rates, our expectation is that it will be pretty much flat fourth quarter to third quarter. And look, there's probably some upside. Based on what we're seeing in terms of volatility and moves by various central banks, there could be some upside.

That's great color, Emily. And just for a follow-up on expenses, I was hoping you could speak to the expense growth outlook. We've seen a number of upward revisions to the expense guidance over the course of the year. I just want to gauge whether the current level of expense, it's about $2.85 billion plus litigation cost, is the right jumping off point for 4Q and maybe just longer term, what level of expense inflation we should be underwriting on a more normal basis given the continued investments you cited in the business.

Sure. So, yes, expenses overall were up 6%. We're still guiding for the full-year expenses to be up 5% versus last year. When you look at the third quarter, about two-thirds is attributable to what we call revenue-related expenses, inclusive of an uptick in higher incentives. We obviously want to pay our people competitively and for the strong organic growth that we are seeing. About a third of that is split evenly between the impact of the weaker U.S. dollar as well as the incremental investment that we have pulled forward. Those are the investments in growth, in infrastructure as well as efficiency. It's worth mentioning that in the third quarter, we are starting to see an impact of a tighter labor market, both in terms of competition and in terms of cost. Also in the third quarter, there was the impact of merit increases which took effect in June. As we look out, it's certainly too early to really comment on 2022 as we are in the middle of the planning process. What I would say is that yes, the uptick you're seeing in the second half of the year is really the jumping off point for next year. There are other headwinds as well, such as inflation. We're seeing a return to more normalized travel rates, so travel and entertainment is likely to go up as we reopen offices and return to the office, which will bring some additional expenses. Of course, we will continue to also achieve and identify efficiencies. We're working through the investment spend as we speak, going through the proverbial food fight. Because as always, there's lots that we want to do, but what I would say is we are intensely focused on expense management. We will continue to be focused on expense management, but we're also going to invest through the cycle. If I were to just give some color, I would say that expenses in 2022, if I'm standing here today, will be modestly up from 2021.

Very helpful, Emily. Thanks so much for taking my questions.

Our next question comes from the line of Mike Mayo with Wells Fargo Securities.

Hi, good timing. I wanted to follow up on the 'food fight' investment spend discussion. Software costs were up 8% year-over-year. Todd, you started off talking about some fintech-like initiatives. I'm just wondering if maybe next year you want to spend more money. There's a tough trade-off that you have in delivering results and investing for what you think could be a good effort. I didn't fully understand when you were talking about payments. Maybe you could describe the total addressable market for that, how much you have and where you think you're getting, or some color around that. And then what type of spending that's going to involve. Thanks.

Okay. So Pershing X is, I think, an exciting opportunity for us. If you think about the registered investment advisor business, Pershing is really the largest correspondent clearer. We're a third-party clearer for broker-dealers in the retail space and for registered investment advisors, and that business is growing but it's not growing nearly as fast as the advisory space is growing. We are the custodian and we provide a lot of the backend services for that business, but we think there is the opportunity for us to be an integrator in that business. The advisory market's been growing in the ballpark of 15% recently, and we have a relatively small market share, so we think there's an opportunity for us to pick up market share in a fast-growing segment. That's why it's so exciting for us. In terms of the challenge that Pershing X will solve: Pershing customers have multiple technology tools and a bunch of different data sets that they're trying to integrate. Oftentimes advisors are logging into multiple systems, which reduces advisory productivity. That spans financial planning, investment modeling, even some banking activities. We have the ability to integrate our own private bank. There's really no solution out there today that can tie that all together. That's what we mean: an open-architected but end-to-end solution. We'll be integrating best-in-class services among some of our own, and it will provide a digital capability and a strong retail experience both to the advisor as well as to the investor itself. So that's our target for Pershing. I think your other question was around e-payments. This uses the clearing houses' real-time payments system. We were the first to actually connect. This is a request-for-payment from a client, for example Verizon to their customer: they send a notification to your phone that your bill is ready, here's your bill, press this and make the payment in real time, or you can even set a time when you want to make that payment to make sure you have funds in your account. As more banks connect to the real-time payment system, the capability covers a very large percentage of the market. Currently, there are about 15 billion payments made in the U.S., so it's an enormous market and we've got about 100 prospects showing significant interest in the capability we designed.

Okay. So e-payments are a big initiative and Pershing X a big market opportunity. In terms of funding these initiatives and investing in these areas specifically, you have done a lot of overhauls in the back-office and with your tech talent. What sort of spending will this take and should you be going faster or slower? How do you decide that?

We've been increasing our tech spend over the past few years. A lot of that was in infrastructure and resiliency—building sounder infrastructure to support the growth we're looking to drive. The dividend from that is we're now reinvesting in software and application development. I categorize it into three areas. One, product initiatives like Pershing X and Treasury payments; two, deep work in Data and Analytics and digitizing across the bank, including our Wealth Platform and Corporate Trust where we're using smart contracts and developing a digital network for clients; and three, ongoing infrastructure, risk management and compliance, including cyber defenses, cloud conversions, and higher regulatory reporting requirements. We're also focused on efficiency: we've inventoried manual processes we're automating to increase efficiencies and reduce risk, and we're modernizing some core applications. For example, in Treasury Services we are putting a very modern payments engine underneath our capabilities. There are a lot of opportunities, but it will come with some costs. Our intent is to increase our technology spend next year.

Alright, thank you.

Our next question comes from the line of Gerard Cassidy with RBC.

Good morning, Todd. Good morning, Emily. When I go back to the year-end 2019 pre-pandemic size of your balance sheet, you had assets about $382 billion and deposits of roughly $259 billion. Obviously today it's considerably higher. When the Fed finishes quantitative easing, assuming that's finished by next summer, can you kind of frame out for us what you think your balance sheet might look like as we go forward? Are customers going to be pulling deposits out, do you think you'll shrink down? Not that you'll ever get to that year-end 2019 level, but should we start to think about continued falling of the size of the balance sheet?

I'm happy to take that and Todd certainly can chime in. The way we think about deposit levels now: we probably still have around 10% to 15% of our deposits that are excess and they will eventually recede in a more normalized rate environment. Core deposits overall are also up given growth in various businesses. So core deposits are also higher than they were in the fourth quarter of 2019. The excess is about 10% to 15%, and we've been managing that growth very successfully, working with clients to pursue off-balance-sheet alternatives for those particular balances. If the Fed begins to taper, which we expect, that will help put some lid on the growth of deposits from here. If the Fed hikes on multiple occasions, we would probably see a decline in deposits, but core itself is higher than at the end of 2019.

If my memory serves me right, the averages at that date were a little bit lower than the snapshot you cited, so there is a significant amount of excess. It will start to recede, and that's why we are sitting on so much cash at central banks. We will probably see a little less pressure for deposit growth when the Fed starts to taper, but the excess coming off will likely be sometime thereafter.

Correct. The follow-up question: you had a very robust share repurchase amount this quarter, $2 billion, and just guidance for the fourth quarter. If I recall correctly, you have a $6 billion program that I think expires at the end of next year. If you reach the $6 billion prior to the termination, would you consider re-upping the buyback assuming your capital ratio permits it?

The answer is yes. If you think about the stress capital buffer regime, it has actually made things a little more flexible for us. The board recognizes that if we continue to produce the capital that we're likely to, and we buy back the excess capital that we've accumulated, we'll be in a position to come back to them and ask for more. So yes, we'd consider re-upping the buyback.

Our next question comes from the line of Jim Mitchell with Seaport Research.

Hey, good morning. Maybe just one on Issuer Services fees. They were flat sequentially and typically you'd have some seasonality. I think you mentioned some weakness on the Corporate Trust side. Is that just pushed out? Should we expect some rebound in 4Q? How do we think about the trajectory in that business and any more detail on the quarter would be great.

Sure. In Issuer Services you really have two businesses, Depositary Receipts and Corporate Trust. Within Depositary Receipts, we definitely saw a resumption in both issuance and dividend activity, even on top of the normal uptick we see in the third quarter. In Corporate Trust, the underlying business actually is performing well—volumes in structured products are up meaningfully, slightly offsetting a small decline in activity in units. But the third quarter for Corporate Trust had two items that impacted revenues. One was a decline in reimbursable expenses; we have reimbursable expenses that are pass-through, so that impacts revenue but not PBT. Also, there was a discontinuation of a public sector mandate that started this quarter. We'll see the full effect of that in the fourth quarter, which will probably be another $10 million or so decline.

Okay. But nothing got pushed into 4Q; it's just those issues.

Yes.

Just maybe on the payments business. I think it's an interesting push. You've already had some growth in Treasury Services. Maybe you could talk a little bit about what's been driving the accelerating growth of late. I think it's a little too early to expect much from these new initiatives. And then as we think about the new initiatives like this Verizon deal, is that a first-mover advantage? How do you defend being the intermediary between the merchants and the banks? Is it simply being first mover? And what do you think the possibility from a revenue standpoint could be from that business? Thanks.

It's a couple of things. We're effectively digitizing the collection experience. We've been in the lockbox business and now we're converting that to electronic through these requests-for-payment. It is faster and cheaper for the provider—the cost to the utility, for example, on a per-unit basis is down dramatically. You also reduce float and other items, so it's advantageous for them. We happen to have the collection relationship and we can provide the complete solution, including paper where necessary. We are not in the card or retail payments business to speak of, so we are well-positioned and we have a bit of a first-mover advantage by being into the clearing houses' real-time payments system early. How big can this grow? It could add a little to our organic growth. It's a bit early to be precise; we are excited about the Verizon relationship and it has stirred up a lot of interest, and we have a reasonable pipeline, but I prefer not to speculate on sizing at this point.

Okay. Thanks.

Our next question comes from the line of Brennan Hawken with UBS.

Good morning. Thanks for taking my questions. I'd like to explore that robust core fee revenue growth that you guys have seen. Todd, you made reference to nearly a 3% organic growth rate in the quarter, which is quite good. Is it possible to break down the year-to-date or your expectations for 2021 in the different components—how much of it came from organic versus activity and volume-related? I recall you've said in the past that half of your Servicing business is market-sensitive. Is that still the right way to calibrate when we think about market impact or pricing dynamics? Any color on the composition would be helpful.

Sure, Brennan. First, we should explain what we're describing as organic. We try to take market impact out for interest rates and equity markets. We also adjust for unusual activity, for example money market growth due to excess cash and deposit inflows. When we knock those factors out, our organic growth is around 2.5% to 3% for the year, which is much stronger than in prior years. Three years ago we were probably at or near zero. We can walk through areas where we're seeing it.

And just to be very clear: the 11% in fee growth ex-waivers that we saw this quarter year-on-year: about 3% was organic growth, about 6% of that was market impact, and the remainder was the impact of the weaker U.S. dollar. In terms of the organic growth in that 3%, it was really broad based. In Clearing, we saw continued growth in clearing accounts, mutual fund balances, and net new assets. In Treasury Services, we saw good growth in payment activity on the back of both a stronger macroeconomic backdrop and net new business, and within Treasury Services we've shifted the product mix to be higher margin. In Asset Servicing, wins are up 40% year-to-date versus last year, which speaks to the organic growth in that business. In FX, volumes were up significantly, which was driven in part by investments we've made in the FX platform. So it's really broad-based and strong.

Excellent. Thank you for all that color. Emily, a question on expenses: I know it's early to talk about 2022, but would the modest growth you cited be on a constant currency basis? You also mentioned the back half of '21 is a decent base to build off of. Is that excluding the litigation that you had? And if so, could you size that for us? When you say modest, how should we think about the level of expense inflation?

It's a bit early to comment on 2022 as we're in the planning process. The uplift in expenses you're seeing in the second half of this year on the back of investments is structural, so those items will be baked into next year. We're seeing some inflationary pressure and some return-to-office expenses, including travel and associated costs, which will likely go up. We'll look to offset with efficiencies. I wouldn't want to put an exact number on 2022 yet, but at this moment I would say expenses for next year will be modestly up versus this year. We would adjust for litigation reserves; we wouldn't consider the litigation reserves as part of the operating base.

And Brennan, we would adjust for the litigation reserves in our modeling.

Got it. And on FX, should FX be a tailwind for you guys next year, just to follow up? It was a headwind this year.

It depends on where FX moves. Right now the dollar is a little stronger, which would create an expense tailwind but would be neutral to pretax income.

Right. Fair enough. Thank you.

Our next question comes from the line of Ken Usdin with Jefferies.

Hi, good morning. Wanted to start by asking you to talk a little bit more about Asset Servicing. It has good underlying growth if we keep securities lending and fee waivers aside. The deck mentions transaction activity and higher market levels. I'm wondering how the collateral business acted versus the core Asset Servicing and what type of net new wins you saw in the quarter on both sides. Thanks.

Emily, why don't I take clearing and collateral management and you can take the rest of Asset Servicing. We saw good growth in clearing and collateral management as we have for a while now. For the first time our tri-party collateral balances exceeded $5 trillion in the quarter, so we continue to see good growth and strong profitability. Innovation is paying off there. Another contributor is margining requirements for over-the-counter derivatives to meet margin requirements; we're in Phase 5 of 6 and our teams did an excellent job onboarding a significant number of players, which is starting to add revenue. Overall, that business continues to look healthy and shows underlying organic growth.

Sure. As you think about Asset Servicing and Assets Under Custody, they're up about 17% year-on-year on a spot basis. About half of that was driven by market and the other half truly driven by growth from both existing clients and new clients, split roughly 50-50. About 30% of the growth is from investment managers, another 30% or so from broker-dealers and banks, and the remainder split between the alternatives space and asset owners. So that's where we're seeing nice uptake and the pipeline is stronger than it was at this period last year.

Great. Thank you. And a follow-up: last quarter you said you expected about a $20 million impact from a deconsolidation related to client loss. How much of that was in the third quarter and how much more should we still expect, if any?

We had originally expected about a $20 million impact from lost business due to being on the wrong side of M&A timing; the realized impact was a bit less. I would think about it as an uptick of about $15 million between the third quarter and the fourth quarter; we'll see the full impact in the fourth quarter.

Okay. Got it. Understood. All right, thank you.

Our next question comes from the line of Brian Bedell with Deutsche Bank.

Thanks very much. Good morning, folks. Most of my questions have been asked, but following up on organic growth—it's tracking very well, going from zero-ish to close to 3%. Given these initiatives and how you think about revenue following through, are you optimistic you can continue to improve on that 3% number? And one on Pershing X: technically, in that aggregator system, does that require you to disintermediate the current custodian? Are you becoming the custodian or do you sit on top of current custodians and aggregate their technology services?

Pershing X will be multi-custodial. We'll be able to provide these capabilities regardless of who the custodian is, though of course we'd like to add custodial business where appropriate. This is a long-term investment: I think it's a multi-year project, and we are investing for the future. I think before we really start to see the revenues we expect in that business it's probably two to three years out. Most of the other initiatives we talked about are more near-term.

We're in the middle of the planning process so it's probably too soon to comment specifically on organic growth next year. But we are pleased with the momentum this year and would hope to at least achieve roughly the same level of organic growth next year.

Okay. Great. And just quickly on net interest revenue and the 14% down guide, does that imply a slight downtick in NIR in 4Q versus 3Q? You said you think the trough has been hit—were you referring to 3Q or 4Q?

If you do the math, it would imply a very slight down tick of about 1% to 2% in the fourth quarter. But rates move all the time. We're seeing potential upside from central bank movements, so while it's slightly down based on the last forecast, there is potential upside and hopefully it will be flat.

Okay. Great. Thank you.

Our next question comes from Rob Wildhack with Autonomous Research.

Good morning. One more on organic growth if I can. How much of that is coming from competitive wins versus greenfield-type opportunities?

When we look at our wins, they include both new business from completely new clients as well as new business from existing clients—so launching new funds, for example, is new business with an existing client. We're always focused on retention as well. Overall it's about a 50-50 split between new versus retention of existing business.

And to add to that, we are definitely winning against competition in several areas you may be tracking. Some of the takeaways recently were wins where we had broader capabilities than competitors, including in the alternatives space. Our win-loss ratio versus competition is leaning in our favor, and we think that's due to both our capabilities and the quality of service we're delivering.

Okay, thanks. And on retention, how's the retention rate trending and what opportunities exist to improve it?

Our retention rates have been trending upwards and are very high—well in excess of 70-75%. The first thing is client service and performing well day in and day out—that gives you the right to retain business. We're also working more consultatively with clients to understand their operating models, help them get more efficient and create value. So it's about both day-to-day excellence and ensuring our capabilities and products are competitive and leading edge, coupled with a strategic partnership approach.

Thanks, Rob.

Our next question comes from Michael Brown with KBW.

All right. Thank you, operator. Emily, given most of your comments were on a year-over-year basis, given the move in the dollar and the strengthening we recently saw, what was the sequential impact to revenues and expenses in the third quarter versus the second quarter from the move in the dollar?

Off the top of my head I don't have the exact number, but the good news is we are pretty equally matched, so any benefit or headwind in revenues and expenses is pretty much equally offset. From a pretax perspective we are incredibly well hedged.

It would be in the ballpark of 1% to 2% of the expense base.

Right. Okay. And then just on the loan book—it's up 14% year-over-year, but just 1% sequentially, the lowest growth rate in the last three quarters. Any particular reason there was a bit of a slowdown this quarter, and what's the expectation going forward?

Our loan book has grown 14% year-over-year, so growth has been healthy over time. Growth in any one quarter can be lumpy. On a spot basis loans are actually up and are now $64 billion. Some of the growth we're seeing is in margin loans, collateralized lending in wealth, term loans, securities financing, and capital call facilities. We are proactively looking to grow the loan portfolio and we feel it's an area in focus, and we have capacity to do so.

Great. Thanks for that clarification. Thanks for taking my questions.

And with that, that does conclude our question-and-answer session for today. I would now like to hand the call back over to Todd with any additional or closing remarks.

No. Thank you, everyone, for your interest and obviously you can reach out to Marius in the IR team for any follow-ups. Thank you.

Thank you. This does conclude today's conference and webcast. A replay of this conference call and webcast will be available on the BNY Mellon Investor Relations website at 2:00 PM Eastern Standard Time today. Have a great day.