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The Bank of New York Mellon (NYSE:BK)

Q3 2013 Earnings Call

October 16, 2013 8:00 am ET

Executives

Andy Clark

Gerald L. Hassell - Chairman, Chief Executive Officer, Member of Executive Committee and President of the Mellon Bank NA

Thomas P. Gibbons - Vice Chairman and Chief Financial Officer

Timothy F. Keaney - Vice Chairman and Chief Executive Officer of Investment Services

Analysts

Betsy Graseck - Morgan Stanley, Research Division

Alexander Blostein - Goldman Sachs Group Inc., Research Division

Howard Chen - Crédit Suisse AG, Research Division

Luke Montgomery - Sanford C. Bernstein & Co., LLC., Research Division

Cynthia Mayer - BofA Merrill Lynch, Research Division

Kenneth M. Usdin - Jefferies LLC, Research Division

Glenn Schorr - ISI Group Inc., Research Division

Gerard S. Cassidy - RBC Capital Markets, LLC, Research Division

Operator

Good morning, ladies and gentlemen, and welcome to the Third Quarter 2013 Earnings Conference Call hosted by BNY Mellon. [Operator Instructions] Please note that this conference call 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 Mr. Andy Clark. Mr. Clark, you may begin.

Andy Clark

Thanks, Shirley, and welcome, everyone. With us today are Gerald Hassell, our Chairman and CEO; Todd Gibbons, our CFO, as well as our executive management team.

Before we begin, let me remind you that our remarks today may include forward-looking statements. Actual results may differ materially from those indicated or implied by the forward-looking statements as a result of various factors. These factors include those identified in the cautionary statement in the press release and those identified in our documents filed with the SEC that are available on our website. Forward-looking statements in this call speak only as of today, October 16, 2013, and we will not update forward-looking statements. Our press release and earnings review are available on our website, and we will be using the earnings review to discuss our results.

Now I'd like to turn the call over to Gerald. Gerald?

Gerald L. Hassell

Thanks, Andy. Good morning, everyone, and thanks for joining us. As you saw from our release, for the third quarter, we reported earnings of $0.82 per share. Now this includes the benefit related to our recent favorable tax ruling, and after netting out this benefit, we had earnings of $0.60 per share.

Now looking at how our business model performed, we believe we earned about $0.58 per share on a core operating basis. And Todd will take you through those numbers and how we get there.

For the quarter, I see 3 key takeaways. First, we had strong year-over-year core fee revenue growth, reflecting our focus on driving organic growth, our ability to deliver enhanced solutions sets across our entire company and improved market conditions for most of our businesses. Second, we continue to exceed the goals of our operational excellence initiatives while making targeted investments to drive future growth. And finally, our businesses continue to be a strong generator of capital. And in fact, we generated more than $1 billion of capital this quarter.

For the quarter, we had total revenues of $3.8 billion, which is up 3% over the third quarter of 2012. Investment Management business performance continues to be strong and resulted in the 16th consecutive quarter of net long-term inflows. Net long-term inflows were $32 billion in the quarter, for a total in excess of $100 billion over the last 12 months. We continue to have particular strength in the liability-driven investments, but we also enjoyed nice flows into more active asset classes which have a higher fee realization. Our success in attracting new assets helped drive our -- drive a 13% increase in assets under management year-over-year to a record $1.53 trillion. This organic growth, along with higher equity values, helped mitigate the pressure from higher money market fee waivers, and Todd will talk to that in a few moments.

I would also note that Investment Management continues to invest in its franchise, including the wealth management sales force expansion, enhancements to the U.S. retail distribution platforms, and leveraging our Investment Services businesses, particularly in the Asia-Pacific region, to deliver solutions our clients need.

In Investment Services, we had a nice year-over-year fee growth in most of our businesses. This growth was driven by new business, increased volumes and improved equity values. We're continuing to see increased interest and dialogue around our Pershing or advisory services technology platform, and that services advisors and wealth managers globally. We see that as a long-term trend that we're well positioned to capitalize on. We have both scale and a leading technology platform to deliver what the market is looking for.

Global Collateral Services also contributed to the Investment Services growth, as changes in the regulatory marketplace have created new business opportunities, particularly in collateral segregation and optimization. Investment Services also benefited from better foreign exchange results. Certainly, increased market volumes and volatility contributed to this growth. However, the enhancements we've made to our electronic trading platforms also contributed to our improved performance.

On the expense front, we remain ahead of our operational excellence initiative targets. Our team has been focused on reengineering our processes and creating a simplified, end-state operating platform. We have also leveraged our procurement function and reduced our real estate footprints to reduce costs. These savings have provided us with the flexibility to make targeted investments for future growth and help absorb the impact of regulatory costs, which are not insignificant.

On the capital front, they said [ph] we generated over $1 billion of new Basel III Tier 1 common capital, and we achieved an excellent return on tangible common equity of 21%. The supplemental leverage ratio remains a focus for us and the market in general, and we're certainly supportive of strong leverage ratio standards and good liquidity management. However, we've been meeting with policymakers to provide an opportunity for them to understand how the proposed SLR affects the market, and we hope to see final rule which does not create a disincentive to hold strong liquidity positions.

In sum, it was a quarter with solid fee growth, good progress in our operational excellence initiatives and a continuation of our strong capital generation.

So with that, let me turn it over to Todd to go through the numbers.

Thomas P. Gibbons

Thanks, Gerald, and good morning, everyone. My comments will follow the quarterly earnings review and will start on Page 2. As Gerald noted, EPS was $0.82. That's $0.60 after excluding the benefit of that recent tax court decision. The $0.60 include the benefit of approximately $0.02 related to the sale of a property at one of our equity investments, so we see it as a $0.58 quarter.

Looking at the numbers on a year-over-year basis, total revenue was $3.8 billion. That's up 3%. In our Investment Services businesses, we enjoyed growth in asset servicing, issuer and clearing. Investment management and performance fees continued their upward momentum. FX revenues, again, up strongly year-over-year. NIR increased, and expenses were up 4% on a non-GAAP basis.

Turning to Page 4, where we call out some business metrics that help explain our underlying performance. You can see that AUM of $1.53 trillion was up 13% year-over-year and 7% sequentially. That was driven by net new business as well as the higher market values.

During the quarter, we had net long-term inflows of $32 billion, benefiting from -- as Gerald said, from the strength in our liability-driven investments, but we also saw some movement into alternative investments, as well as active equity and index funds. Short-term inflows were $13 billion. Assets under custody and administration were up 4% year-over-year to $27.4 trillion, primarily reflecting the impact of improved market values and net new business. Linked-quarter, AUC/A was up 5% due to improved market values and also the impact of currency rates.

Many of our key metrics showed good growth on a year-over-year basis. Most clearing metrics were up. Our estimated DARTS volume and average long-term mutual fund assets continued the recent strong growth trend. Average loans and deposits in wealth management and investment services were again up nicely, and the market value securities on loans was also up. We saw the declines -- we did see some declines in a number of sponsored DR programs, also in the average tri-party repo balances.

Looking at our fees on Page 6. Asset servicing fees were up 2% year-over-year, and they were down 2% sequentially. The year-over-year increase primary reflects higher market values, some organic growth and net new business, and that was partially offset by lower securities lending revenue, and the securities lending revenue was down largely because of narrower spreads. The sequential decrease primarily resulted from a seasonal decrease in sec lending revenue, lower activity, as well as lower expense reimbursements in the third quarter.

We had an estimated $110 billion in new AUC/A wins, for an estimated total of $700 billion in wins over the last 12 months. Issuer services fees were up 4% year-over-year and 10% sequentially. Year-over-year increase primarily reflects higher Depositary Receipts revenue, and that was partially offset by lower corporate trust fees, primarily related to lower money market mutual fund balances and higher money market fund fee waivers. The sequential increase reflects seasonally higher DR revenue, and that was offset a bit by lower expense reimbursements, which we noted on our second quarter earnings call.

Clearing fees were up 10% year-over-year, and they're down 2% sequentially. The year-over-year increase was driven by higher mutual fund and asset-based fees and volumes, and that was partially offset by higher money market fee waivers. The sequential decline was primarily driven by seasonally lower clearance revenue, reflecting a seasonal decrease in DARTS and higher money market fee waivers.

Investment Management and performance fees were up 5% year-over-year and down 3% sequentially. The year-over-year increase was primarily driven by higher equity market values and net new business, and that was partially offset by the average impact of the stronger U.S. dollar. The sequential decrease primarily reflects seasonally lower performance fees, partially offset by net new business and higher market values. Comparison to both prior periods were negatively impacted by higher money market fee waivers.

Now in terms of money market fee waivers, the aggregate corporate impact EPS this quarter was approximately $0.06, and that's as high as we've seen it. From a revenue perspective, the incremental drag was $41 million on a year-over-year basis, and it was $23 million sequentially. If you exclude the impact of fee waivers, year-over-year fee growth would have been approximately 4.5%. From a business line perspective, the drag was fairly evenly split between Investment Management and Investment Services.

In FX and other trading, total revenue was down 12% year-over-year and 23% sequentially. Let's look at the underlying components there. FX revenue was $154 million. That's up 27% year-over-year. It's down 14% sequentially. The year-over-year increase primarily reflects stronger volumes, as well as higher volatility. The sequential decrease was primarily driven by lower volatility, while volumes increased a bit. As Gerald noted, we've made some enhancements to our electronic trading platforms, and they have contributed to the improved volumes and results.

Other trading revenue was down $55 million over the year-ago quarter and $22 million over the second quarter. Both decreases primarily reflect lower fixed income and derivatives trading revenue. The year-over-year decrease also reflects a loss on inventory positions, driven by higher interest rates.

Investment and other income totaled $135 million in the quarter. That compares with $124 million 1 year ago and $260 million -- excuse me, $269 million in the second quarter. The year-over-year increase primarily reflects higher equity investment revenue, which was partially offset by lower seed capital gains. The sequential decrease primarily reflects the gain related to our equity investment in ConvergEx that was recorded in the second quarter.

To provide some more color here, equity investment income included $36 million of revenue from the equity investment, as we shared in the profit of a piece of real estate they sold, so they sold a piece of real estate and that was our equity share of it. This favorably impacted our EPS by about $0.02. The asset-related gain item that you see here included $32 million related to the pretax gain on the sale of Newton's private banking business. There was really no positive line impact here on the transaction, as the business had an extremely low tax basis, so the tax gain wiped out the pretax benefit.

Turning to Page 8 of the earnings review, you'll see that NIR on an FTE, fully taxable-equivalent, basis was up $22 million versus the year-ago quarter and $16 million sequentially. Both increases were primarily driven by lower premium amortization on investment securities, as well as a larger balance sheet with more interest-earning assets. The year-over-year increase also reflects a change in the mix of earning assets, including a decrease in the size of the investment securities portfolio.

During the quarter, we reduced the size of the portfolio, which led to $22 million of security gains. We also transferred agency mortgage-backed securities with an amortized cost basis of $7.3 billion from available for sale to held to maturity. We expect that both of these actions will help reduce our capital sensitivity to other comprehensive income in the event of a rise in long-term interest rates. As our asset liability management strategy continues to limit our overall exposure to long-term rates, we would expect to be relatively defensive in our reinvestment in the near-term where -- resulting in a modest negative impact to net interest income. The net interest margin for the quarter was 1.16%. That's compared with 1.20% in the year-ago quarter and 1.15% in the prior quarter.

Turning to Page 9, total noninterest expense x amortization of intangible assets and M&I, litigation and restructuring charges were up 4% year-over-year and down 1% sequentially. The year-over-year increase primarily resulted from higher staff expense, driven by the annual employee merit increase of 2%, which was effective on July 1, as well as higher incentive and employee benefit expenses.

Turning to Page 10, we're pleased with the performance of our operational excellence initiatives and expect to beat our targets for the year. Our efforts during the quarter resulted in $170 million in quarterly gross run rate savings, as the $20 million in incremental savings came with about $11 million of program costs. Among the areas that we continue to be focused on include reducing costs through our enhanced procurement process, continuing to work on reducing our expensive real estate here in New York and, as Gerald mentioned, we've already -- we're already generating some savings and see more opportunities to enhance our technology and operations.

At a conference next month, Brian Shea, our Head of Client Service Delivery and Client Technology Solutions, and Suresh Kumar, our Chief Information Officer, will outline our efforts, progress and potential in these areas.

Offsetting some of these benefits, we've seen increased costs related to the regulatory environment. These costs continue to grow as we've strengthened our compliance, risk and control functions and work to make us an even more resilient company.

As we've mentioned, we're also investing in our brand, as well as other revenue-producing initiatives such as building the separately-managed account business in APAC, increasing Dreyfus' share of the U.S. retail market, building our global collateral services capabilities, enhancing our global market capabilities, and expanding our wealth management franchise, all important investments in our growth.

As you can see on Page 11, we generated $1.1 billion in gross Basel III Tier 1 common during the quarter, and our estimated Basel III Tier 1 common equity ratio has increased substantially. We purchased 122 million shares of -- of our shares in the third quarter. That's less than what we've done in the earlier quarters, largely driven by defensive positioning given the ongoing uncertainty about interest rates and the potential impact on AOCI and, ultimately, capital. As mentioned earlier, we've muted the potential impact to the AOCI through actions in the third quarter. And that, and in addition to our significant capital generation during the quarter, has positioned us to increase our purchases in Q4.

At September 30, 2013, our estimated Basel III Tier 1 common equity ratio, this is under the standardized approach, was 10.1%, and that compares to 9.30% at the end of June. Now we've calculated these ratios on a fully phased-in basis, so the 80-basis-point sequential increase primarily reflects the benefit of capital generation. And if we looked at it under the advanced approach, also on a fully phased-in basis, we are at a very healthy 11.1%.

Our estimated supplementary leverage ratio during the quarter did rise and is now approximately 4.3%, a little less than anticipated because of the spike in the balance sheet that we saw at quarter end. Frankly, we permitted this spike because we have significant capacity and plenty of time to take the steps to ultimately comply with the SLR. Some of those steps just happen naturally through the normalization of monetary policy, and we'd see some decline in deposits.

As previously mentioned, we have many levers to pull, if necessary, to improve the ratio with only a limited impact on our business. For the time being, we see no reason for immediate actions given the uncertainty around the final definition and the fact that it won't take effect for 5 years.

Page 12 details the composition of our investment securities portfolio. You can see that at quarter end, we had a net unrealized gain on the portfolio of $723 million. That's a little increase from $656 million at the end of the prior quarter, and it was driven primarily by lower credit spreads on foreign securities.

Moving to our loan book on Page 13. The provision for credit losses was $2 million. That compares to a credit in the year-ago quarter of $5 million and a credit of $19 million in the prior quarter. The effective tax rate for the quarter on an operating basis, and that's excluding the U.S. tax court's reconsideration, was 26%, in line with our previous guidance.

Now a few factors to include in your thinking about the current quarter, the fourth quarter. We expect a significant seasonal decline in our high-margin DR fees. A portion of that should be replaced with the lower-margin Investment Management performance fees, and I should be down somewhat due to our defensive investing. In the fourth quarter, we typically see higher business development and marketing expenses. Also, I want to remind you that preferred dividends will have an impact of approximately $0.02 because of the recent issuance. The quarterly provision should be somewhere around 0. We expect the tax rate to come in, in a range of 26%. And based on market conditions, we believe we're much better positioned and expect to execute on our buyback plans, which should be in a range similar to the second quarter.

To recap, all in all, a good revenue quarter in our Investment Services and Investment Management businesses. We continue to execute on the operational excellence initiatives, and we strengthened our balance sheet and improved our capital position.

So with that, let me turn it back to Gerald.

Gerald L. Hassell

Great. Thanks, Todd, and I think we can now open it up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from Betsy Graseck from Morgan Stanley.

Betsy Graseck - Morgan Stanley, Research Division

Okay, so 2 questions. One is on the outlook for NII. Todd, you mentioned during this quarter that you were shortening the duration of the portfolio. And it's -- obviously, it didn't come through in the NIM, in part given the premium amortization reduction. But could you help us understand kind of pace or rate of change we should expect in the NIM given the actions you've taken on the portfolio?

Thomas P. Gibbons

Yes. I think, in the fourth quarter, you're likely to see NIR, given those actions and the rate of the amortization premium -- premium of the -- amortization of the premium. I would expect it to be somewhere in the range of what we saw in the second quarter, Betsy.

Betsy Graseck - Morgan Stanley, Research Division

And so what's the duration of the securities portfolio right now? And what's the targeted duration? Maybe you could speak to the entire portfolio, not just the AFS or the HTM bucket separately.

Thomas P. Gibbons

Yes. The -- it's a little over 2. And we target the duration of the AFS to be in the 2 range. So we're pretty close to where we want to be.

Betsy Graseck - Morgan Stanley, Research Division

Okay. And was it higher last quarter? Because I know you were trying to shorten duration.

Thomas P. Gibbons

Yes, it had gotten a bit higher when we saw the extension that came late in the second quarter, so we did sell out some securities. And then we just let some -- we didn't add aggressively to the portfolio in the third quarter, and that's why it's down, so we just let some securities burn off, a natural duration burn off.

Betsy Graseck - Morgan Stanley, Research Division

Okay. And that's the AFS book, not the HTM book?

Thomas P. Gibbons

It includes both, but more directed to the AFS book.

Betsy Graseck - Morgan Stanley, Research Division

Got it. Okay. Helpful. And then just second thing is on the buybacks. So I know you indicated that given market conditions, you'd be more likely to buy back more this quarter. I mean, obviously, your capital ratio is up significantly with earnings and the benefit of the court decision. But I guess I'm just honing in on your comment that market conditions may get more -- probably going to buy back stock this quarter. Are you just talking about seasonal weakness in the third quarter is what kept you from doing more buyback in 3Q?

Gerald L. Hassell

Well, we're a little defensive around the AOCI issue, too, Betsy. And so until we got the portfolio better positioned so we had less volatility to our capital account, that made us a bit defensive, and then we had the good things at the end of the quarter play themselves out. And we're just in a much stronger position.

Operator

Next question comes from Alex Blostein with Goldman Sachs.

Alexander Blostein - Goldman Sachs Group Inc., Research Division

So just picking up on the last question. As you guys approach this year's CCAR exam, it feels like there's a lot more elements that you have to balance around and weigh in on. So maybe you can just talk broadly about how do you expect to approach this year's stress tests, and when it comes to the capital returns, should we still expect you guys to return more capital next year versus this year, either from the amount basis or as a percentage of earnings?

Gerald L. Hassell

Well, Alex, we don't know what the stress test is yet. We -- our understanding is we'll get the instructions around November 1, what the actual environment would look like. But obviously, we've grown our capital, our ratios have improved, so we are well positioned to approach the stress test. But I think it's too early to say, and obviously, I wouldn't -- I can't -- there's no way I can talk about what our future actions would be, but we're certainly in as good a position as we were last year.

Thomas P. Gibbons

Yes, just to add to that, Alex. I think we feel very good about the strength of our capital and liquidity going into the stress test. We think the earnings are very solid. So we feel pretty good about our position. We'll wait to see what the parameters are at the stress test and then layer into it what capital actions we think are appropriate.

Alexander Blostein - Goldman Sachs Group Inc., Research Division

Great. And then on the core kind of asset services side of the business, I know that you mentioned there are some seasonal changes 2Q to 3Q. But I guess, if you look at it broadly, pretty good growth in assets under custody. And if you look at the servicing fees, even excluding securities lending, they were down sequentially, and the fee rate is also kind of down. So just -- can you help us just flesh out a little bit more, and is there any changes you see on the pricing front or is it just a seasonally slower activity quarter for you guys? I think that would be helpful.

Gerald L. Hassell

Okay. Lots of questions in there, Alex. Maybe I can start and then turn it over to Tim. On a year-over-year basis, you can see that our assets under custody and administration are up about 4%, and our fees are also up about 4%. The third quarter was a bit of an anomaly, both in our AUM, and Curtis can talk to that, and AUC, because we saw a quarter where the dollar was stronger for most of the quarter and then weaker at quarter end. We saw fixed income prices down for most of the quarter, but then strengthening at quarter end, and, as you know, we're largely a fixed income shop. So I don't think -- I think you'll, from time to time, see these kind of anomalies on a quarter-to-quarter basis, so it's not necessarily reflective of the -- of what you might see in the fees. And -- well, Tim, why don't you do a little more -- do a deeper dive on the fees.

Timothy F. Keaney

Yes, Alex, it's Tim. There are 3 things I'd point to worth mentioning on this call. One is we saw a pretty significant drop from second quarter to third quarter in out of pockets. These are the things that would come from our subcustody network and CSDs largely to support growth in handling corporate action activity in our network. The second thing, which we expected to see a seasonal drop in overall activity, I would say, across the board, whether you look at middle-office outsourcing, transfer agency or accounting, we saw an across-the-board drop in activity, a bit more, frankly, than I would have expected to see. And then we also saw redemptions. I didn't quite expect to see the level of redemptions that we saw third quarter over second quarter. I think if you would put all those things aside, I would have expected to see us flat to maybe up just slightly. And on your pricing question, it's still way hot at the high end, which is why we keep repricing the low end of our book. But the story I would maybe draw your attention to is around expenses. Both Gerald and Todd talked about this. You see expenses down for the quarter 3%. If you adjusted for the seasonality of DRs, you would have seen that our coverage ratio, so fees to expenses, actually improved by 0.5 points, despite increased fee waivers and soft sec lending. And then year-on-year, you see the expense story is, well, we continue to be very, very disciplined, and our operational expense initiatives are paying off. So a bit of an anomaly on the quarter-to-quarter drop, but we're razor-focused on operational excellence initiatives, and they're showing up in these results.

Alexander Blostein - Goldman Sachs Group Inc., Research Division

Got it. That's very helpful. And then could you just clarify the seasonal benefit in DR business this quarter, like how much was in that $322 million number?

Gerald L. Hassell

Todd, you want to have it?

Thomas P. Gibbons

Yes. It's about -- sequentially, it's about $70 million. And the -- and just to give you a heads-up into the fourth quarter, that fourth quarter tends to be our weakest, so it can be even larger than that.

Operator

Our next question comes from Howard Chen with Crédit Suisse.

Howard Chen - Crédit Suisse AG, Research Division

First, with the government shutdown and looming default, I was just hoping you could discuss 2 aspects of it: one, recent client behavior across the businesses; and two, what have you all been doing operationally prepare, maybe including from a balance sheet management perspective, or is it an important part of the tri-party repo market?

Gerald L. Hassell

Sure. Howard, it's Gerald. Obviously, we're taking this very seriously, and we have a variety of contingency plans in place with a variety of different scenarios because we're not quite sure what may come out of Washington. And that being said, I think we're as well prepared as anyone going into this. Client activity, not surprisingly, we've seen some various money market funds and various clients get more defensive and put more into cash, so our balance sheet's up about $10 billion since quarter end. We are prepared to handle that. We've talked to clients about utilizing our balance sheet, at least on a short-term basis, to accommodate their needs. And so we're sort of acting business as usual as it relates to clients -- client activity. As every day goes by, more people are getting more defensive and liquefying more. No real impact on tri-party, per se. The market has been deleveraging for quite a period of time, and you're seeing what's happening in our tri-party balances. They've come down a little bit, but generally, holding pretty steady. So that's about it.

Howard Chen - Crédit Suisse AG, Research Division

Great. And my follow-up is in the core Investment Management franchise. Flows have been excellent. You had another strong quarter of equity market tailwind. I guess we would have thought you might see a little bit more revenue growth in the core management fees from last quarter. I was hoping you could -- as you look deeper into the data, was that -- what do you see? And then could we get sort of a check on what investment performance is like for those strategy that generate year-end incentive fees?

Timothy F. Keaney

Yes, absolutely. I think what Todd talked about earlier around assets under custody and some of the dynamics actually played out for us as well. So AUM, quarter-over-quarter, up 7%. Almost 3% of that came from the movement in FX. So a weaker dollar means our non-U.S. revenues -- non-U.S. AUM, I should say, were boosted by weak dollar, really, right at the end of the quarter. So we didn't -- we charge management fees primarily on an average FX rate. And the 7% number is actually a spot AUM comparison. So we didn't get, in this quarter, the benefit of the weaker dollar and what it does to the AUM or nondollar assets. Just to remind you, about 46% of our revenues are non-U.S. So it's pretty meaningful to know what's happening on the FX front. And then the remaining portion of the story really is about the AUM growth that we had in short-term assets and, more importantly, the overall impact from fee waivers. So this is the second-worst quarter we've had in terms of fee waivers. Very low fed funds rates and short-term market rates significantly depressed the management fee revenues in our business there. And so, I think that is really the -- those 2 really tell the story. I would tell you that the -- sort of the organic activities are pretty promising. We have, as you've pointed out, we've had good AUM growth. Todd and Gerald mentioned that, that has come from some of the lower-fee LDI-oriented products over the past several quarters. But in the third quarter, we actually began to see some of the confidence that I think the market was feeling earlier in the third quarter show up in our growth. We had good growth in active equity. We actually have been positioning our platform around a number of alternative and absolute return products. They actually had great AUM growth in the quarter. Some of that came later in the quarter, and so the revenue impact is not felt in the quarter. You may get new revenues in the quarter, but not out of earnings as much as the revenue yet. And in fact, so we look very closely at forward revenue streams from our asset growth. But third quarter is seasonally a low quarter. Generally, clients put money to work in the first quarter and it remains reasonably strong in the second, the third quarter is lighter, and then the fourth quarter is not usually as strong as the first quarter, but picks back up. We actually, this year, have a very different seasonal. Our third quarter was quite strong in terms of what forward revenue from new mandates. Additionally, last thing I'll say is that our one not-funded pie client is also growing. The forward revenues from wins that have not yet funded for various reasons just haven't happened yet, or some of them are triggered based on market outcomes, has grown by over 20%. So I think the organic AUM story is more promising, both in an AUM basis and a revenue basis going forward. Performance across the platform, as you can imagine from our size, was over $1.5 trillion in assets under management. We have a number of strategies, quite large strategies that drive revenue. There are an array of investment performance outcomes. We continue to see pretty strong performance in some of the larger categories that I've just gone through. Our LDI team continues to have exceptional performance and has done a great job for those clients. That's why Insight, most specifically, has won a number of awards this year for the great work they've done. Our -- if I had to characterize our overall platform, we have a firm that I think is more built around equity and fixed income management that is more conservative in nature. So we don't have big momentum strategies, sharp increases in the market all at once. Again, this is a very blunt statement. But generally, we lag in those types of markets and then do better as valuation analysis and finding value in markets becomes more important. Again, we have a big index business that follows the market, and so it's important to understand the mix of assets that we have on our platform.

Operator

Our next question comes from Luke Montgomery with Sanford Bernstein.

Luke Montgomery - Sanford C. Bernstein & Co., LLC., Research Division

So thinking about top line growth AUC, AUM -- actually, AUC. I was wondering if you might comment on the decision of one of your clients to appoint a shadow servicer, whether you think that could be an increasing trend going forward? And if so, what underpins that demand, and do you think there's a meaningful opportunity in it for BNY Mellon?

Gerald L. Hassell

Yes, Tim, why don't you take that one.

Timothy F. Keaney

Luke, Tim Keaney. Yes, we're watching the situation very carefully. This is a large hedge fund that's appointed us for their middle office. The reason why this is an interesting space for us, Luke, which we're watching very carefully, is the regulators are putting more and more pressure on clients that outsource activity to make sure that they lower the risk of their operations. That's happening in Europe first. It's also gaining traction here. And there are some companies that will look to provide or have shadow providers for contingency purposes. So that's what's happening. This is the first major hedge fund to do that. I think there's a lot of interest, and people are watching to see how this plays out between now and next May, June. I suspect we'll keep that on our radar screen. So it's unique. But I think it's a function of risk management and risk tolerances and the fact that the regulators are putting a lot of pressure on those that outsource activities to make sure that they've got good risk management plans.

Luke Montgomery - Sanford C. Bernstein & Co., LLC., Research Division

Great. And then just switching gears a little bit, a question on your philosophy for managing the securities portfolio. I think we often focus on top line revenue and yield, but I think there's an argument that the fixed income markets are relatively efficient and that the higher yields in the credit product are simply compensation for risk. And it also seems like most of the value in your balance sheet comes from the deposits. So I know these securities are mostly A-rated, but given what happened in 2008 and 2009, what's the justification for continuing to hold private-label MBS, CLOs, et cetera. I'm not making a judgment, but I would like to understand the philosophy better. It's something you guys debate internally or not?

Timothy F. Keaney

Yes, Luke, we don't buy private label. Well, it's -- there's no production of it anymore. But we don't buy private-label MBS, and these are remnants from what we owned back in 2008. So if you look at the quality of our securities portfolio, it's primarily agencies, treasuries and other top-rated sovereigns. So it's extremely low risk. The legacy assets that we've chosen to continue to hold, we actually like their interest rate characteristics a lot because as rates have moved up, those things have performed very nicely, and they've held their value. So they were so depressed back in 2008 and '09. We elected -- we reviewed the portfolio very carefully. We sold about 30% of the portfolio, we retained the other securities and we're letting them burn off and act as a very nice interest rate hedge, and they've performed exactly as we hoped they would.

Gerald L. Hassell

I would just add to it. It is our philosophy to run a very conservative investment portfolio. Our clients entrust their most precious assets with us as a custodian or as a trust organization or as an investment manager. We don't want to do anything that has the appearance that we don't have the capital strength and liquidity to be able to manage through any crisis or any cycle. And so our posture is to run a very conservative investment portfolio, short duration, high quality.

Timothy F. Keaney

And that spills over into our loan book as well. So it's a very clean, high-quality loan book. Our philosophy is not a lot different than what you just said, to be a buyer of securities, we don't think it's creating too [indiscernible]. And perhaps if we were an originator, we might think of it otherwise.

Operator

The next question comes from Cynthia Mayer with Bank of America.

Cynthia Mayer - BofA Merrill Lynch, Research Division

Apologies if you covered this, but it looks like in terms of the AUC, in the earnings release, you mentioned the increase attributed to higher market values and FX. And I'm just wondering, does this mean you didn't have net wins in the quarter? And just in general, how's your win-loss trend?

Gerald L. Hassell

Tim, why don't you take that.

Timothy F. Keaney

Okay. Pardon me. Yes, Cynthia, we had 3 things happen. We've -- obviously, currency and the market helped a lot in the 5% linked. We did have some new business convert during the quarter, about $145 billion. It didn't all convert in the beginning of the quarter, but I -- one point I made to an earlier question was around redemptions. We did see an awful lot of redemptions in the market that basically ate away what we did convert during the quarter. But just more broadly, to your point, it is a competitive environment. Pipeline in asset servicing year-on-year has grown substantially. It's up about a 30%. We pay very close attention to our win rate. That's been pretty steady on the last 4 quarters, a little over 50%. So I don't know if that directly answers your questions, but that's what I'd -- the way I'd describe it.

Cynthia Mayer - BofA Merrill Lynch, Research Division

Yes, it does. And then you mentioned -- I think you mentioned core EPS at about $0.58. So I'm just wondering if you could just go through the -- what you exclude there and how you think about that versus the adjusted.

Timothy F. Keaney

Yes, there's really only -- it's a pretty clean quarter. We had a little bit of unusual gains on the asset gains, and one of them was related to equity accounting. One of our minority interest sold a building, and the gain on that sales -- our percentage of that, our pro rata portion of that is in the P&L. That was about $0.02. The rest of it is pretty straightforward.

Operator

The next question comes from Ken Usdin with Jefferies.

Kenneth M. Usdin - Jefferies LLC, Research Division

First, just a couple of quick clean-up things. Can you tell us either what the premium amortization amount was or, at minimum, what the delta was sequentially?

Thomas P. Gibbons

Yes, the delta was about $25 million, Ken.

Kenneth M. Usdin - Jefferies LLC, Research Division

Is that a substantial reduction of what the overall carry is of it?

Thomas P. Gibbons

Yes, I mean, the way I look at it, that was probably a little more than 20% reduction in the amortization that we had seen in the previous quarter.

Kenneth M. Usdin - Jefferies LLC, Research Division

All right, that's helpful. And the accounting accretion was 55?

Thomas P. Gibbons

That's right, and that was about flat.

Kenneth M. Usdin - Jefferies LLC, Research Division

That was flat. Okay. And then my bigger-picture question is, you guys are doing a really good job on the cost containment and are obviously well ahead of the original plan that you guys had laid out. But I just wanted to ask you guys, just conceptually and structurally, where are we from here in terms of incremental cost reduction? And what initiatives are going on, given that we're still in this kind of so-so revenue environment, to either reduce or control the rate of expense growth from here, given that you're already kind of a low of your original plan, so to speak?

Gerald L. Hassell

Yes, Ken, it's Gerald. Obviously, we have a philosophy of continuous improvement in our operations and technology areas. We talked, in terms of the opening comments, that we are working very diligently and very focused on simplifying our operating platforms and models. We think there's more upside to be had from that. We're finishing out sort of what I call the lifted shift in terms of labor movements. We're pretty -- we're towards the end of that. But we do see a lot of upside still to be had in continuous improvement in the operating and technology areas. So you'll hear more about that as time goes on.

Operator

Your next question comes from Glenn Schorr with ISI.

Glenn Schorr - ISI Group Inc., Research Division

So I heard your comments loud and clear on leverage ratio before. But I'm curious, is it about 1/3 of the balance sheet is sitting in deposits with banks or deposits with the Fed? Is that one of the big primary sources of your confidence that if and when you need to adjust, you can adjust? And then just a follow-on to that is, is how else did the leverage ratio focus make its way -- impact from a business standpoint? Because from a balance sheet standpoint, it looks like you have the flexibility.

Thomas P. Gibbons

Yes. I mean, I think there's a number of things that we can do. We actually, on that big balance sheet right now, we've consolidated some asset management funds, which the accounting is likely to change, and we'd be able to deconsolidate that before these go into effect. The other thing, as you've pointed out as well, that a lot of those are central bank deposits and cash. And we would think, Glenn, just in the normal course, we are sitting on an awful lot of balance sheets -- awful lot of balances because of the very unusual interest rate scenario that we're in right now. And we would expect at least $50 billion or so of that to be reduced just in a more normalized interest rate world. And then we are -- even if we continue to pay out at the same levels that we pay out, we're also creating quite a bit of capital. And we can also manage the balance sheet more tightly in a number of places, including we make some loans out of the holding company. We don't need to do that. So there's tens and even twenties of billions of dollars of things that we can do outside of just the normalization. So we don't see any business model action that we need to take. We think that during the normal course, it will work through it. It's also -- and we don't know what the final rules are going to be, so there is some possibility they could change in our favor or not, and we will adjust to them as we need to.

Glenn Schorr - ISI Group Inc., Research Division

Okay. I appreciate that. I agree with that. Last one is just on LDI. I mean, it seems like Insight is doing great, looking at $93 billion total inflows for the year-to-date so far. I'm just curious what percentage is LDI? What's the average fee rate? What are the type of clients that they're landing? Because those are pretty long-dated mandates, right?

Thomas P. Gibbons

Yes, they are. I mean, I think it's a very important trend to understand and -- in the big debate about the great rotation, that this -- in the top of everybody's mind, I think it really is important to understand the accounting changes that have happened in the pension industry, and that will start to also take place for public funds after June of next year, where volatility in pension plans is less welcome. And so there are a lot of pension plans globally, both corporate and public, that are focused on being able to manage against their liability stream. And Insight is the world leader in being able to help those plans with that. The fees as well as the mandates -- because the liability is fixed income in nature, a lot of the fees are oriented more towards fixed income-type fees that are lower fees in general on an absolute basis, but as you pointed out, the size of the mandates are very large. So as rates go up, actually, it becomes easier for pension plans to address their managing against their liability and as they become more funded. So again, I would tell you that we're very excited about the business. One of our initiatives is to -- we've actually invested in helping Insight grow its business in the U.S. and in Asia. They have been primarily focused in the U.K. and also growing in Europe. And so really excited about what they're doing there. And I would also say, is their products extend. When you have the ability to evaluate liability streams and hedge them very effectively and manage portfolio through assets that are outperforming liability, those are a lot of the same skills that are broadly needed by a larger group of clients in the absolute return space, where we think a lot of clients are growing, everyone from wealth clients to other institutions that are just simply looking for less volatility, but still trying to get some return on their investment portfolio. So very excited about it and think they have a great future, as many of our other investment firms do as well.

Gerald L. Hassell

Shirley, we have time for one more question.

Operator

Your final question, then, comes from Gerard Cassidy with RBC.

Gerard S. Cassidy - RBC Capital Markets, LLC, Research Division

Can you guys come back to the planning that you're doing with the government problems that we're having and tell us, do you guys own many short-term T-bills that may be maturing in the next 15 to 30 days?

Gerald L. Hassell

Yes. Todd can talk to the -- our ownership.

Thomas P. Gibbons

Yes, we have very few, but we do have a little bit that mature within this year, probably in the $60 million range or so.

Gerard S. Cassidy - RBC Capital Markets, LLC, Research Division

Okay. And then second, over the years, you guys have done a number of acquisitions. Obviously, you haven't done anything materially recently. Do you get the sense, aside from market conditions as maybe the reason nothing has happened in the custody world in terms of acquisitions, but do you get a sense that the regulators are more or less supportive of banks your size going out and making sizable acquisitions?

Gerald L. Hassell

Well, let me put it this way, Gerard. I think we have so much opportunity internally to invest in our existing businesses that our operations and technology platforms is not a high priority. And we think we can get a much better return on investments in our own businesses and our own products and services, that we have so much on our plate right now and so much in motion right now that I think is a much better return to our shareholders, even considering what you're suggesting. So I don't want to comment on the regulatory part. It's really a matter of our choice to invest in ourselves.

Thomas P. Gibbons

So we have -- Gerard, we have done a couple of small things and we have done something at asset management, where we closed on our German JV, where we had a partial ownership of it, and then we owned all of it. And we took Pershing international a little bit more, too, in some of the -- in our strategy. So we've done some fill-in things, but I don't think we believe we need to do anything major, certainly not in the asset servicing space.

Gerald L. Hassell

Thank you very much, everyone, for dialing in. We really appreciate it, and you can contact Andy Clark for further follow-ups.

Operator

Thank you. For any additional questions or comments, you may contact Mr. Andy Clark at (212) 635-1803. Thank you, ladies and gentlemen. This concludes today's conference call. Thank you for your participation.

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