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The Bank of N.T. Butterfield & Son Limited (NYSE:NTB)
Q3 2020 Earnings Call
Oct 29, 2020, 3:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning. My name is Carey, and I will be your conference operator today. At this time, I would like to welcome everyone to the Third Quarter 2020 Earnings Call for The Bank of N.T. Butterfield & Son Limited. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the call over to Noah Fields, Butterfield's Head of Investor Relations.

Noah Fields -- Investor Relations

Thank you. Good morning, everyone, and thank you for joining us. Today, we will be reviewing Butterfield's third quarter 2020 financial results. On the call, I'm joined by Butterfield's Chairman and Chief Executive Officer, Michael Collins; and Chief Financial Officer, Michael Schrum. Following their prepared remarks, we will open the call up for a question-and-answer session. Yesterday afternoon, we issued a press release announcing our third quarter results. The press release, along with a slide presentation that we will refer to during our remarks on this call, are available on the Investor Relations section of our website at www.butterfieldgroup.com. Before I turn the call over to Michael Collins, I would like to remind everyone that today's discussions will refer to certain non-GAAP measures, which we believe are important in evaluating the company's performance. For a reconciliation of these measures to U.S. GAAP, please refer to the earnings press release and slide presentation.

Today's call on associated materials may also contain certain forward-looking statements, which are subject to risks, uncertainties and other factors that may cause actual results to differ materially from those contemplated by these statements. On Slide 25 of the presentation, we have also included a list of potential factors relevant to the implications of COVID-19 for the bank. Additional information regarding these risks can be found in our SEC filings.

I will now turn the call over to Michael Collins.

Michael W. Collins -- Chairman and Chief Executive Officer

Thank you, Noah, and thanks to everyone joining the call today. During the third quarter of 2020, we continued to strengthen our position as a leading offshore provider of banking and wealth management with franchise-level market shares in our core operating jurisdictions. Our ability to support clients with world-class financial services helps us generate capital efficiencies, which complements our solid revenues from a conservatively managed balance sheet. As you will see on slide four, Butterfield has continued to report strong results with net income of $30.5 million and core net income of $36.5 million or $0.73 per share and a core return on tangible common equity of 16.2%. The core results in the third quarter exclude $6.7 million in staff exit costs resulting from the voluntary retirement and redundancy programs that are being implemented and resulting in the reduction of around 100 full-time roles across the organization. This corresponds to 7.4% of the workforce. In light of the continued ultra-low interest rate environment and business challenges of the COVID-19 epidemic, we have made a significant adjustment to the ongoing cost base to help offset the financial impact to the bank. During the third quarter of 2020, we are pleased to complete the full Channel Islands banking integration, which was one quarter later than planned due to COVID. Overall, I'm delighted with the results of the acquisition and the transition of the business and people onto Butterfield's platform.

This now positions Butterfield to grow with a more meaningful market share in the Channel Islands. We also added two new nonexecutive directors and enhanced risk and compliance management with new executive-level hires. In addition to the new directors, I would also like to acknowledge the onboarding of new group executive committee members: Sabeth Siddique, Group Chief Risk Officer; Bri Hidalgo, Group Head of Compliance and Operational Risk; and Kevin Dallas, Group Head of Marketing and Communications. They are all strong additions to our executive management team and have already started making meaningful contribution toward the success of Butterfield. Turning now to slide five. In general, the island jurisdictions, where our businesses are located, have handled the health-related aspects of the pandemic well. Bermuda, Cayman and Channel Islands are experiencing relatively low infection levels and sporadic cases, which has allowed the local economies to open up and allowed for fairly normal domestic commerce to resume. Visitor numbers for Bermuda and Cayman are down this year with no cruise ship business and significantly lower airlift and stay-over visitors on those flights than in prior years. For context, pre-pandemic, tourism represented 17% and 25% of GDP for Bermuda and Cayman, respectively. While difficult for tourism-related businesses, the islands are doing well and are seeing visitors numbers slowly return with stringent health-related arrival protocols, contact tracing and testing to control imported and local transmission of COVID cases. At this point, the testing and tracing have been effective at maintaining low rates of transition.

On the top right of slide five, we have provided a summary of the deferral program we offered to mortgage clients in good standing, which covered a total of six months principal and interest deferrals. By the end of the second 3-month period in September, the participation rate was 34% of total qualifying borrowers. In order to better understand current customer needs and repayment capacity, we started an ongoing calling program in Bermuda, which has contacted around 500 borrowers or 20% of Bermuda mortgage holders. Of those borrowers, 92% have so far indicated that they plan to resume normal payments, while 6% have indicated that they may require potential further relief. Only 2% have stated that they do not anticipate being able to resume normal payments. As stated in the past, we will continue to work closely with customers to determine how best to help those who experience difficulty. We closely monitor all credit assets and the general credit environment and view these initial results as a positive indicator that the majority of clients should be in a position to resume payments and meet their obligations.

I will now turn the call over to Michael Schrum to provide more details on the third quarter.

Michael L. Schrum -- Group Chief Financial Officer,

Thank you, Michael. I will begin on Slide seven with a summary of net interest income and NIM. In the third quarter, NIM of 2.30% was 18 basis points lower than the prior quarter due to the lower sterling and dollar interest rates as well as the full quarter interest expense on the new $100 million subordinated debt issued in June. The added expense mainly represents the timing difference between the issuance in June 2020 and the planned redemption of existing issues in the second half of this year. The lower dollar rate environment and buyout options for MBS assets have increased the prepayment speeds in our investment portfolio, which results in an accelerated reinvestment in U.S. agency securities at lower rates. New money yields averaged 1.48% in the third quarter. Floating rate loans also trended lower with an average yield of 4.43%, down 10 basis points versus the prior quarter. During the third quarter, the blended rate for loan originations was 3.78% for $143 million of new loans, up slightly from 3.54% for $152 million of originations in the prior quarter.

Turning to Slide eight. Noninterest income was up 12.5% compared to the last quarter due to the recovery in domestic economic activity in the current quarter after the prior quarter's COVID impacts. Banking fees in the third quarter also benefited from a $1.5 million onetime loan structure change fee. The bank's contribution from fees continues to represent stable and capital-efficient earnings. For the third quarter, fees were 38.8% of total revenue. Slide nine provides a summary of core noninterest expense, which was up 3.3% in the third quarter compared to the prior quarter. Expenses increased due to the return of more normalized activity levels in the third quarter. The bank's recent cost restructure program has resulted in $6.7 million of noncore staff exit costs this quarter. The lower staff complement will reduce future expense run rates with payback from exit costs expected within one year. We continue to target a through-cycle cost/income ratio of 60%, but we do expect to remain in the mid-60s during this ultra-low part of the rate cycle. Slide 10 summarizes regulatory and leverage capital levels. The bank remains very well capitalized with capital levels significantly in excess of Basel III regulatory requirements. Tangible book value per share increased 1.2% in the third quarter and is up 10.8% over the past 12 months. We continue to view growth of tangible book value per share as a very important factor in creating long-term value for shareholders. In addition to the regular quarterly dividend of $0.44 per share, we have continued to repurchase shares during this quarter. As at the end of the third quarter, we had approximately 200,000 shares remaining in our 3.5 million share repurchase authorization from December 2019. We continue to view share buybacks as an important component of our capital management strategy, and we'll provide further updates on future authorizations once the 2021 operating plans have been finalized.

Turning now to Slide 11. Butterfield's balance sheet continues to be strong and conservatively managed with a very liquid profile. At the end of the third quarter, the loan portfolio represented only 37.4% of total assets and liquid assets were 59.6% of total assets. The bank's balance sheet has now stabilized following a few quarters of declines due to the planned deposit pricing alignment following the acquisition of ABN AMRO Channel Islands in July 2019. The bank has maintained a low-risk density with risk-weighted assets to total assets of 36.7%, down slightly from 37.1% last quarter. On Slide 12, you can see that Butterfield's asset quality remains exceptionally high with low credit risk in its investment portfolio, that is, 99% comprised of AAA-rated U.S. government-guaranteed agency securities. Nonaccrual loans were relatively stable in the third quarter at $74.8 million or 1.5% of gross loans. On Slide 13, we discuss the average cash and securities balance sheet with a summary interest rate sensitivity analysis. Butterfield's weighted average life in the AFS investment portfolio increased to 4.2 years from 3.6 years last quarter. Due to a planned deployment of excess dollar deposits from the Channel Islands acquisition and a repositioning of $350 million of floating-rate Ginnie securities to fixed-rate agency securities. Similar to last quarter, Butterfield continues to expect a potential increase in net interest income in both up and down rate scenarios. I will now turn the call back to Michael Collins.

Michael W. Collins -- Chairman and Chief Executive Officer

Thank you, Michael. We remain optimistic about the financial health and earnings prospects for Butterfield. We are encouraged by the favorable indications that are coming through the retail mortgage book calling program. We expect to have more detail and clarity in the fourth quarter. However, initial indications suggest that the bank's conservative underwriting, payment deferral programs, continued work with borrowers and a well-seasoned low LTV profile should help us manage through this period of potential credit stress. As we have discussed in the past, expense management is an aspect of our earnings that we have some control over. This quarter, we have taken decisive actions to lower the expense base of the organization. We carefully evaluated the operational, cyber, credit and compliance risk profiles across the platforms and implemented a 3-stage program, starting with simplification of business units and senior executive retirements, followed by voluntary exit programs in Bermuda and Cayman, and finally, a redundancy program across the organization. This was, obviously, difficult for the whole organization and particularly for those affected and their teams. But I am confident the program enacted during this quarter will help rightsize the expense base to reflect the current business environment with continued low interest rates and some credit uncertainty. Finally, capital management remains a key focus for us, with emphasis on the sustainable dividend, share buybacks, organic growth and retaining capacity for potential M&A. It remains our goal that Butterfield continues to deliver top quartile returns and grow long-term value across the credit and rate cycle. Thank you.

And with that, we'd be happy to take your questions. Operator?

Questions and Answers:

Operator

[Operator Instructions] The first question will be from Will Nance of Goldman Sachs.

William Alfred Nance -- Goldman Sachs Group -- Analyst

You -- maybe I'll start just on the expense base. Obviously, you've taken a number of actions to rationalize the cost base, sizable percentage of the headcount that you referenced. Can you give us a sense for what these actions are likely to mean for the expense base as we head into next year? And how much more work there is to do to continue to pull out costs?

Michael W. Collins -- Chairman and Chief Executive Officer

Sure. Thanks, Will. So as we talked about, we had three stages basically in Q3, starting with the senior departures. Then we had 49 positions took up voluntary separation, which is basically like early retirement, but people can choose to go. And then we had stage three with 51 redundancies across the organization. So total, about 100 positions corresponds to about 7.5% of our total workforce. I would caution that we are very focused on backfilling areas where we might have increased operational risk in Halifax and Bermuda and Cayman. So some of those 100 positions will have to refill a bit. So I would say -- and we've talked about this in the past. Bermuda and Cayman, the total cost all-in of an FTE is about $100,000 per head. But I would say, the annual normalized run rate from these programs would be about $7 million to $8 million a year after backfill.

William Alfred Nance -- Goldman Sachs Group -- Analyst

Got it. Okay. That's very helpful. And then maybe just separately, Michael Schrum, I think you've talked about the opportunities to deploy liquidity from the ABN deal. You mentioned the balance sheet basically is now stabilized. Could you just talk about kind of where we are on the liquidity deployment, and how much there is and how much you kind of feel comfortable deploying?

Michael L. Schrum -- Group Chief Financial Officer,

Yes. Absolutely. So obviously, we've done a lot of back-testing on the ABN book. And you'll recall, some of that was euros that we ran off and some of that was sterling and about one billion of that was in U.S. dollars. This quarter, we -- first of all, this quarter, we took some action in the investment portfolio as well. We had some floating-rate Ginnies that we flipped into fixed. So there was about $350 million of net new, if you will, from the existing AFS portfolio. So that should help the NIM a little bit going forward. On the ABN side, we would expect to ladder out about $150 million per quarter for the next four to six quarters, and then we'll review again the stickiness of deposits once we get through that next year.

William Alfred Nance -- Goldman Sachs Group -- Analyst

Got it. And then just lastly, on the strategic front, wondering if you can comment on the amount of strategic dialogue that's happening as we've kind of shifted from the freeze situation in the pandemic to more of kind of manage through type of operating environment?

Michael W. Collins -- Chairman and Chief Executive Officer

I guess I would characterize it as continuing discussions across our jurisdictions, obviously. If we saw overlap acquisition opportunities in Bermuda, pretty unlikely, but Cayman or the Channel Islands, we continue to be very interested. Obviously, we're also interested in the trust world and, specifically, we would be very interested in an acquisition in Singapore potentially to build our scale. We've got a great operation there now, but we need to run more fee income through it. So that's a focus. I would say that it's still a strange time. I mean, I think, talking to various parties, there clearly going to be opportunities, and there's going to be a point in time where, I think, more transactions will happen. But looking at the banking side, it obviously is very difficult to value credit assets. I mean we're looking at our own credit, and we think we're in a reasonable shape. But it's not like normal days. So I think banking acquisition would be more difficult than a trust acquisition today, but we are continuing to have discretions across the board.

Operator

The next question is from Alex Twerdahl of Piper Sandler.

Alexander Roberts Huxley -- Piper Sandler & Co -- Analyst

First off, just wanted to go back to some of what you were talking about earlier, on the laddering out of securities, and sort of appreciate that you're set up pretty well from an NII standpoint, no matter what happens with rate changes. But just given the current outlook for rates and kind of [big interest] environment for a while, do you think that you have enough levers to reverse NII kind of pushing margin aside? Obviously, there's a lot of moving parts there. But if you look at NII, it's been declining in the last couple of quarters. Obviously, a lot of pressures, but based on some of the things you're talking about in laddering out the securities book, etc, do you feel like we've kind of reached a bottom on NII? Or is there still some room for that to move lower?

Michael L. Schrum -- Group Chief Financial Officer,

No, it's a great question. So I think the loan yields, in particular, as I mentioned on the -- in the prepared remarks as well, our loan yields currently are below the book yields for the existing loans. Most of that is because of the places that we originate. So we've had relatively more mortgage origination in Cayman at lower rates and in sterling, which is good from an NII perspective. But obviously, it does put pressure on the loan yields. I think the investments, clearly -- we saw a seasonal peak in CPRs in July and August. We expect that to kind of moderate somewhat going into the winter. So that should slow down the prepayment speeds on the investment side with the laddering. So about 60% of the NIM impact in the investment yield for this quarter was actually due to the accelerated prepayment speeds and about 40% was due to rate and volume. So some of that will depend a little bit on where the prepayment speeds actually slowed down, in particular, buyout options. Deposits rolled into -- obviously, fixed-term deposits rolled into lower rates, which we expected, but it was -- that NIM impact was offset slightly by demand -- by the euro demand deposits rolling off in ABN and also growth in retail deposits. Both Bermuda and Cayman have had some optional redemptions from pensions during this period as part of the fiscal stimulus package, and that's resulted, obviously, in an inflow of deposits to the bank, but mostly in contractually noninterest-bearing deposits. And then finally, you had the sub-debt, which contributed about three basis points, but that was mainly a timing difference over the next couple of quarters. So I think on the cost side, we should see the deposit costs come down over the next couple of quarters. So that should help. And then with the laddering out, you're sort of fighting that reinvestment picture a little bit on the investment book. So I think it will stabilize over the near term. And then longer term, it will depend on the 10-year rate, as we've said before. I think with the 10-year being below 1%, we've seen a little bit of life of late in that. So our new money is out at [1.48%] in this quarter. So it will depend a little bit on the longer durations in the yield curve. But I think the short end will -- has kind of bottomed out, if that makes sense.

Alexander Roberts Huxley -- Piper Sandler & Co -- Analyst

Okay. Yes. Thanks for the additional color there. And then when I think about loan growth, I know you have the initiative in the Channel Islands that might take a couple of years to kind of result in some material loan growth. And then I also believe, and correct me if I'm wrong, that you guys have participated in some lending to the various jurisdictions in which you operate in order to help with their stimulus programs. Based on those facilities and what's drawn and what's expected to be drawn in the near term, can we expect some loan growth in the next couple of quarters? Or is it going to be kind of more of the same, sort of relatively flattish?

Michael L. Schrum -- Group Chief Financial Officer,

Yes. I think flattish. So I think we're very excited about being able to participate in those government programs. In total, that's about $300 million of committed across Guernsey, Jersey and Cayman Islands. Very little of that is drawn this quarter. And I think the latest news from Cayman is, they don't really expect that to draw, by public statement from the Minister of Finance there, until Q3. So they actually believe that they have enough in their checking accounts to make it through to Q3 of next year, and then we would expect a gradual draw on that facility. Jersey and Guernsey, again, they've had very little need to draw on those facilities, but we are getting a little bit of commitment fees with those facilities. And so I would say, flattish overall.

Alexander Roberts Huxley -- Piper Sandler & Co -- Analyst

Okay. And then just final question for me. Obviously, we have a big event in the United States next week with the presidential election and potential change in administration could have some tax implications, which you guys are pretty much immune from. But I'm just wondering, as you kind of think about the geographies and there might not be direct implications from a tax change, but there's often knock-on implications, is there anything in the tax language that you've heard that either excites you or concerns you at this point?

Michael W. Collins -- Chairman and Chief Executive Officer

So we've been following it pretty closely. I mean, obviously, the Democratic administration is going to install more taxes than generally Republican administration would. I would only say that we've been through these cycles in the past. The most sensitive industry is, obviously, the reinsurance industry. But they've gone through some real changes that have reduced the tax advantage of being offshore in Bermuda. And most of them really didn't change their strategies at all. So they didn't move back to the U.S. They didn't move to Dublin. They stayed in Bermuda. And I think that's because there's -- it's a broader market. So the tax advantages are really important, but they're also close to all the wholesale reinsurance and the accountants and brokers and bankers that actually understand the industry. So it's a real market that has legs that isn't completely driven by tax. I think there's going to be changes to offshore earnings for U.S. companies again, and that could have some impact. But the very large technology companies, we don't bank anyway. They may have incorporations offshore, but it's not like we have a lot of ready deposits from them really. So that flow of money may impact us marginally, but I don't think it's -- it's really not a big part of our business. So it's something to watch, and it will continue to change, but I don't see it having a huge impact.

Operator

The next question is from Michael Perito of KBW.

Michael Perito -- Keefe, Bruyette -- Analyst

I just have a few kind of clarification things I want to kind of talk to quickly here. So on the expense side, Michael, you said, I think, after some of the backfill, $7 million to $8 million per year. So to take that kind of just a step further here, I mean, is that kind of to say that we're at $84.5 million core in the third quarter here, that should step down to under $83 million early next year once all these actions are in the full run rate? Is that -- anything else that we should be thinking about? Or is that fair?

Michael L. Schrum -- Group Chief Financial Officer,

No, I think that's totally fair, Mike. As part of the voluntary separation program, we, obviously, were very careful to make sure that we didn't impact operational risk. So some of those are going to be staggered release dates. So I think as you think about the financial impact over the next couple of quarters, it's going to be a step down.

Michael Perito -- Keefe, Bruyette -- Analyst

Okay. And then I appreciate the commentary on the kind of the M&A outlook. But as we kind of take that to the next level, too, and think about the share repurchases here, I mean, it seems like based on your prepared remarks that there's some appetite for that to continue. I guess, just trying to kind of think of the magnitude of that. I mean is it fair to think that with more asset or bank-oriented M&A looking to be more challenging right now that you guys probably have a little bit more appetite to use capital on share repurchases, as a lot of these trust assumptions that you guys have made in the past haven't really had that big of an impact on your capital position?

Michael L. Schrum -- Group Chief Financial Officer,

Yes. I mean, I think that's fair in terms of the appetite. Obviously, it's always subject to market conditions, but again, I think things haven't really changed. We're focused on the sustainability of the dividend. Obviously, we're in the sort of high-50s payout ratio year-to-date. Part of that is due to procyclicality of CECL reserve builds. And I think we feel very comfortable around that. In terms of the excess -- in the absence of any accretive M&A deals that are more concrete, we would, obviously, look at our forward planning model and then say, we don't need any more capital really for -- maybe modest capital for credit migration, but not really a material amount of additional capital from retained earnings. So the high ROE would support a larger deployment into buybacks. The program that we had in place, as you recall, was a December 2019 program. So it came out of the planning session at that point. It was $3.5 million authorization, which is pretty close to exhausted, and we would expect to, obviously, look at capital again as we finalize our plans for next year. But I think your commentary is very fair.

Michael Perito -- Keefe, Bruyette -- Analyst

Okay. And then just lastly, I just -- not to get too dense here, but I just want to make sure I'm understanding the deferral trend correctly. So at the end of the quarter, about 34% of the mortgages were still taking the deferral at the conclusion of the program, and then you guys reached out to about 20% of the total customers. The vast majority have said that they're able to make the payments. So is the clarification there that the only reason they haven't made the payment here is because the payment at that time hadn't come due yet and -- but you expected them to? And so really, by the end of next quarter, that number should probably be less than 5% of mortgages that could potentially still be on deferral, is that correct? Or am I missing something?

Michael L. Schrum -- Group Chief Financial Officer,

Yes. So you'll -- that's exactly correct. So you'll recall that we had an opt-out initially for the first three months and then an opt-in. So we started off with 50% of eligible borrowers opting in and then some came off that program during the quarter, so we're down to 34%. We've, obviously, taken a look at the sort of high LTV buckets and folks who may have been slightly late in the past and called around to see what the status is and how they feel about coming off the program and just making sure that they're aware of what's happening. I think there's a handful or maybe a dozen that indicated maybe a lack of ability to come off the program. We're, obviously, working with those customers to see what's the next steps there. But that's a pretty small percentage of, certainly, the sample of folks that we've called. But again, those were in the higher-risk bucket. So we -- that's where we started.

Michael W. Collins -- Chairman and Chief Executive Officer

And I'd also make the point that in Q4 and Q1, a lot of the deferrals actually were saved. So we can see our deposits increasing. So obviously, people aren't traveling. So they took that as an opportunity to put some savings in the bank. So I think that will be helpful in the next couple of quarters. And I think we did -- we talked to 20% of our borrowers, so the 500 out of the 2,500, who we consider a higher risk. And things look pretty good. But again, I would just caution that Bermuda is going into its down winter season, and it won't bottom until sometime next year. So cautiously optimistic, but we're just going to keep a watching brief on it and stay in touch. I mean it's a small number. It's 2,500 borrowers. We know where the houses are. We know a lot of families. And so we will just continue to stay in touch and try to support them through this.

Michael Perito -- Keefe, Bruyette -- Analyst

Makes sense. And then on that point about the kind of exiting the high season here. Do you feel that the hotel operators on islands, for the most part, have enough cash to get through the winter here and, hopefully, be positioned to open up for a better season next year? Or how are they thinking about that?

Michael W. Collins -- Chairman and Chief Executive Officer

Yes. I mean I think they do. I mean, one of the bigger properties, Fairmont Southampton, has -- the biggest, has closed for renovations, which was planned pre-COVID. So that takes some hotel beds out of the market. But the smaller-, medium-sized hotels that we're involved with, actually, there's been a huge staycation market here in the last six months. The hotels were 60%, some of them, occupancy over the summer because no one was traveling and everyone spent weekends in hotels. So it was strangely sort of a boost in some sense, but obviously, going into the winter season, that's going to change a bit. But I think most of them, as far as we can tell, have enough cash to get through a number of months.

Operator

Next question comes from Timur Braziler of Wells Fargo.

Timur Felixovich Braziler -- Wells Fargo Securities -- Analyst

I just wanted to follow up on some of Mike's questions. Any deferrals out of the U.K. mortgage book?

Michael L. Schrum -- Group Chief Financial Officer,

No. So we didn't do a deferral program in the Channel Islands or the U.K. So you'll recall, there's a 3- to 5-year I-owes. We have worked with some customers, again, those with 60 LTV originations, 65 LTV originations and not really a hint of delinquency or anything in that book. So no deferral programs there.

Timur Felixovich Braziler -- Wells Fargo Securities -- Analyst

Okay. And as you think about the transition on -- of deferrals for the Bermuda and Cayman mortgages over the next quarter, how does that translate into potential loss content, although it doesn't seem like there's going to be much? And I guess, more importantly, reserve build. Reserves went up a couple of basis points, I think, this quarter. Is that a trend that's kind of expected as you gain greater clarity here? Or is the expectation that you're pretty much done reserving at this point?

Michael L. Schrum -- Group Chief Financial Officer,

Yes. I mean you're right, on the CECL side, there wasn't much for this quarter, partly driven by a slightly better GDP forecast. I think going forward, it will depend on the actual loss content. So we do have a dozen or so, I would say, in the harder bucket that we need to work with customers on more of a permanent solution for and whether that's moving straight to a sale or moving through a TDR kind of program. And that will then start to feed back into the model in terms of the PDs, effectively on the rest of the book. But it -- so far, it doesn't look like that's going to be material. But again, it's just going to be -- it will depend just on the macroeconomic forecast. If they get materially worse, that could have a negative impact, obviously. And then the actual loss content and how we work through this with customers is going to inform the PDs going forward on that book. But cautiously optimistic at this point. Again, we're in the month where people are resuming their payments and so we'll have more definite -- there's still a bit of uncertainty around it, I think. But I think indications are good, right? But it's better to have the cash.

Timur Felixovich Braziler -- Wells Fargo Securities -- Analyst

Right. And then lastly, just looking at the growth in demand deposits this quarter, anything transitory in there that you see leaving the fourth quarter? Or was that all pretty much core and is going to stay on?

Michael L. Schrum -- Group Chief Financial Officer,

Yes. Not -- I mean it's pretty much retail-driven and contraction in noninterest-bearing. It's Bermuda and Cayman, in particular. And it's really -- I think mostly comes from the deferrals -- the cash from the deferrals coming into retail savings and then also these pension programs that both Cayman and Bermuda have run where you can take a voluntary withdrawal from your pension has certainly landed in the bank. The question is, longer term, does that go into an investment portfolio or something? So I think people are being conservative around their outlook. And there's a lot of liquidity that's just coming onto the balance sheet, but it's all good retail deposits really.

Michael W. Collins -- Chairman and Chief Executive Officer

And Timur, Ascendant's BELCO, the national utility, was just sold to a Canadian utility company and about $200 million of that -- those sales proceeds are coming to Bermudian shareholders. A lot of that might go into real estate as opposed to deposits, but that's something that all the banks here are watching as a potential increase in the deposit base, at least in the short term.

Timur Felixovich Braziler -- Wells Fargo Securities -- Analyst

Got it. And sorry, actually, I have one other question, if I could just sneak it in here. On fee income, it's been a nice rebound this quarter versus the depressed level last quarter. Are we back to kind of a normalized level here? Or is the expectation that things could turn relatively worse in the fourth quarter given that it's seasonally weaker in Bermuda?

Michael L. Schrum -- Group Chief Financial Officer,

Yes. I mean -- so I would start with the merchant acquiring. Volumes on our debit cards are actually higher than they were at this time last year. So that's a net positive trend. Obviously, credit card volumes are down because there's no tourists, particularly, in Cayman. We typically get -- and then it's a $1.5 million fee this quarter that probably [Indecipherable] that's not recurring. Q4 typically is seasonally a good quarter for the bank, but that mostly is due to the Cayman tourism season. So they're gradually opening up the economy, but it will just really depend on hotel occupancy and credit card volumes in the Cayman Islands in the fourth quarter. But I think domestic activity certainly is back to pre-COVID levels both in Bermuda and Cayman.

Operator

And this concludes our question-and-answer session. I would now like to turn the conference back over to management for any closing remarks.

Michael W. Collins -- Chairman and Chief Executive Officer

Thank you, and thanks to everyone for joining today's call. We look forward to speaking with you again next quarter. Have a great day.

Operator

[Operator Closing Remarks]

Duration: 40 minutes

Call participants:

Noah Fields -- Investor Relations

Michael W. Collins -- Chairman and Chief Executive Officer

Michael L. Schrum -- Group Chief Financial Officer,

William Alfred Nance -- Goldman Sachs Group -- Analyst

Alexander Roberts Huxley -- Piper Sandler & Co -- Analyst

Michael Perito -- Keefe, Bruyette -- Analyst

Timur Felixovich Braziler -- Wells Fargo Securities -- Analyst

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