Berkshire Hills Bancorp, Inc. (BHLB) CEO Nitin Mhatre on Q1 2021 Results - Earnings Call Transcript

Berkshire Hills Bancorp, Inc. (NYSE:BHLB) Q1 2021 Earnings Conference Call April 29, 2021 10:00 AM ET

Corporate Participants

Kevin Conn - Head of Investor Relations and Corporate Development

Nitin Mhatre - Chief Executive Officer

Subhadeep Basu - Senior Executive Vice President and Chief Financial Officer

Shaun Dwyer - Chief Operating Officer

Conference Call Participants

Laurie Hunsicker - Compass Point

Mark Fitzgibbon - Piper Sandler

Operator

Good morning, and welcome to the Berkshire Hills Bancorp First Quarter Earnings Release Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note, this event is being recorded.

I would now like to turn the conference over to Kevin Conn, Head of Investor Relations and Corporate Development. Please go ahead.

Kevin Conn

Thank you, Jason. Good morning and thank you for joining Berkshire Bank's first quarter earnings call. My name is Kevin Conn and I'm the Head of Investor Relations and Corporate Development at Berkshire Bank. I started in this role about a month ago after spending over 23 years as an institutional investor at Sanford Bernstein, MFS Investments and Hudson Executive Capital.

Our news release is available on the Investor Relations section of our website, berkshirebank.com, and will be furnished to the SEC. Supplemental investor information is provided in an information presentation at our website at ir.berkshirebank.com, and we will refer to this in our remarks.

Our remarks will include forward-looking statements and actual results could differ materially from those statements. For details, please see our earnings release and most recent SEC reports on Forms 10-K and 10-Q. In addition, certain non-GAAP financial measures will be discussed in this conference call. References to non-GAAP measures are only provided to assist you in understanding our results and performance trends and should not be relied on as financial measures of actual results or future projections. A comparison and reconciliation to GAAP measures is included in our news release.

On the call today, we have Nitin Mhatre, President and Chief Executive Officer of Berkshire Hills Bancorp; Shaun Dwyer, Chief Operating Officer; Subhadeep Basu, our Chief Financial Officer; and our Chief Risk Officer, Greg Lindenmuth, is on the call to answer any credit-related questions.

At this time, I'll turn the call over to our CEO, Nitin Mhatre.

Nitin Mhatre

Thank you, Kevin.

Good morning, everyone, and welcome to Berkshire's first quarter earnings call. For those of you who are new to our story or new to me, let me first share some of my background prior to joining Berkshire Bank. I've worked in banking for 25 years in very large and midsized organizations and have had the opportunity to turn around, transform and grow business units over that time. I believe that my experience positions me well to work with my team at Berkshire Bank to significantly improve financial performance and stakeholder value.

I must say I'm deeply humbled by and grateful for the warm welcome and support that I've received from my Berkshire colleagues and the Board of Directors and also from various partners and well wishers across the industry, including many of you on the call. Thank you so much.

I'm confident that with new leadership, our new strategic plan in the making, which I'll address later and the collective resolve of the organization to maximize value for all stakeholders, we will fulfill our promise while meaningfully improving financial performance of this community-dedicated institution.

Before I provide the highlights of the quarter, I'd like to share some of my early observations as I complete three months today as Berkshire's CEO. First, I want to salute what I know to be exceptionally good about the organization, starting with its score, a strong, 175-year history of being a purpose-driven, community-dedicated bank that truly cares about its customers, bankers and the communities. And we have some remarkably talented bankers who know our markets really well, have built strong relationships with the customers and communities in those markets and have non-customer facing bankers who are passionate about delivering high-quality experience to all our customers.

Building from that strong core, we clearly have opportunities for improvement, beginning with developing a clearer strategic imperative, specifically identifying the businesses, markets and products we will invest in to growth. We need to double down on what we are best at and most passionate about and what drives our economic engine because there, and nowhere else, is where we'll allocate capital and key resources as we drive for economic profit.

As we consider our strategic choices, there is much to be done right away. One, we need to significantly improve channels and processes to jump start our revenue engine. Our current levels of originations and relationship deepening are not commensurate with our potential. Two, we need to accelerate our roadmap to digitize customer journeys from loan originations through servicing to integrating state-of-the-art platforms that are built as platform as a service.

Three, we need to reorient all of our programs to be singularly focused on delivering exceptional customer experience and driving to industry-leading customer satisfaction and Net Promoter Scores, all of which I believe will ultimately lead to improved shareholder value.

With that, let's turn to our earnings presentation, beginning on Slide three and a few important quarterly highlights. First, and driving home the points I just communicated, is a new leadership team at the helm infusing energy into the culture, executing on near-term priorities and building together a transformational strategy. I'll touch on our new executive leadership in a few minutes and where we are in our strategic journey towards the end of my prepared remarks.

Second is the improving income and strengthening balance sheet. Some of these highlights that you see on the slide include GAAP EPS of $0.26 compared to a loss of $0.40 in the year-ago period.

Core or adjusted EPS was $0.32 in the first quarter. Non-interest bearing deposits were up 37% year-over-year, while the cost of funds were down to 48 basis points versus 111 basis points in Q1 '20. Loan balances were down due to paydowns and portfolio runoff exceeding new originations. We are rebuilding our organic growth muscle by improving originations and building our pipeline with quality opportunities, as Shaun will highlight later.

The third highlight is the strides we've made in strength in credit and asset quality. Overall trends in credit and asset quality were highly encouraging. Loan modifications were down by 86% from their peak at second quarter of last year and by 39% quarter-over-quarter. Non-performing assets were up modestly year-over-year but improved on a sequential basis, down 14% quarter-over-quarter.

Net charge-offs declined by 5% and 42% year-over-year and quarter-over-quarter, respectively. During the quarter, we also completed a comprehensive, bottoms-up credit review of our COVID-sensitive portfolios, along with a thorough external validation of critical segment of the Firestone portfolio.

Fourth highlight is our laser focus on enhancing customer experience, especially through our digital channels. While we have ways to go, we're gaining traction and drove some early improvements in the first quarter. For example, online banking and mobile banking users increased by 11% and 14% year-over-year and our mobile app rating increased significantly to about 4.5 stars on iOS and Android platforms. Digital deposit account openings as a percentage of total accounts opened grew from below 2% in Q1 '20 to over 7% this quarter.

Like I said earlier, we have ways to go but are certainly headed in the right direction on this front. Finally, we're focused on our capital levels and sustaining our financial flexibility to invest for growth and returns.

Capital levels remained very strong with 1Q '21 common equity Tier one ratio of 14%. As part of our transformational plan, we'll sharpen our focus on capital allocations and fund those businesses with the highest potential for return on equity in excess of cost of capital.

As you saw in our 8-K release last night, we also plan to return capital to shareholders in the form of share buybacks. Over time, we expect to deploy capital through profitable balance sheet growth. However, given our capital levels, the Board and I believe that returning capital to shareholders via share buyback is a prudent course of action. I'm pleased to report that the Board has authorized a share buyback of up to 2.5 million shares equal to about 5% of outstanding shares.

With that, please turn to Slide four to review some of the organizational highlights. I'm excited to introduce Subhadeep Basu, who joined as our new CFO in March. Prior to joining Berkshire Bank, he worked at Bank of America, Citigroup and most recently, at State Street. Over his 23 years of banking experience, Subhadeep earned increasing roles of responsibility across finance functions. A key executive leader and a partner, he will play an important role in our strategic transformation and driving improved financial performance.

Next is Kevin Conn, who you heard from earlier in the call and who joined as our new Head of Investor Relations and Corporate Development. Kevin has served on the buy side for over 23 years and will play an important role as we strengthen our Investor Relations program. In addition, we've hired several senior leaders or promoted new, high-potential candidates to key roles. Selected examples of the ongoing talent infusion includes Stela Gega-McConaghy, who joined us from State Street as the new Head of FP&A and Angela Dixon, who joined as our new Chief Diversity Officer, leading our D&I initiatives. Previously, Angela was the President of Dixon Consulting, a management consulting firm focused on diversity, equity and inclusion.

Additionally, we're making a few changes in the Board. As you may have seen in our proxy, the Board has nominated two new directors, as set forth in a cooperation agreement between Berkshire and HoldCo Asset Management, under which we agreed to nominate Misha Zaitzeff from HoldCo; and a new independent Director, Deborah Bailey, selected by Berkshire.

Misha is the Co-Founder and Managing Director of HoldCo's General Partners and has served on numerous corporate boards, oversight committees and creditor committees. Deborah Bailey has a distinguished career in both public and private sectors. She currently sits on the FINRA Board of Governors. Her prior government regulatory experience with the OCC and Federal Reserve Bank Board includes a role as the Deputy Director of Banking, Supervision and Regulation, where she was a direct report to Federal Reserve Chairman, Ben Bernanke. She has also held positions as the Managing Director at KPMG and Deloitte & Touche. We're grateful that Misha and Deborah have agreed to serve on our Board and look forward to their contributions.

I also wanted to share that David Brunelle has been promoted to Vice Chair of the Board. David has served on our Board for three years and has over 20 years of business experience in financial services. In addition, he is current Chair of our Audit Committee and member of our Governance and Nominating Committee.

Finally, I'd like to express my sincere thanks to Neil Mahoney and Jeff Templeton, who are retiring as of May 20, 2021. Both Neil and Jeff have been on our Board since 2005, and we're deeply grateful for their contributions to Berkshire Bank. We wish them well always.

With that, I'll turn it over to Subhadeep to review the financials in more detail.

Subhadeep Basu

Thank you, Nitin. I'm excited to be part of the team here at Berkshire Bank.

Now if you turn to Slide five. I'd like to share high-level P&L with you on both a GAAP and an adjusted basis. As a reminder, the adjusted basis excludes $3.5 million of expenses pertaining to primarily our branch-consolidation activities. Our GAAP revenues were up 10% year-over-year and 2% quarter-over-quarter as strength in fee revenues offset weaker net interest income.

GAAP non-interest expenses were up about 10% year-over-year and 9% quarter-over-quarter on higher legal and advisory fees and $3.5 million of restructuring expenses that was driven primarily by branch consolidation. Credit provision expenses dropped to $6.5 million, down 35% versus the fourth quarter and down 81% year-over-year due to improved economic forecast and reduced net charge-offs.

Our tax position was 22% of pre-tax income this quarter. Adjusted revenues were down marginally year-over-year, primarily due to weaker net interest income. It was up 6% quarter-over-quarter with strength in fee income, offset by weaker net interest income. Adjusted expenses were up about 5% quarter-over-quarter and year-over-year, driven primarily by higher legal and advisory fees. Adjusted EPS was $0.32 in the quarter versus $0.28 in the last quarter, and adjusted return on tangible common equity was 6.44% versus 5.5%.

Turning to Slide six. Let me address changes in our earning assets. Earning assets were up modestly on both a year-over-year and quarter-over-quarter basis with a mix shift from loans into investment securities. Loans, excluding held for sale were down 16% year-over-year and 8% versus the fourth quarter. Mortgage balances were down 34% year-over-year and 12% quarter-over-quarter, primarily driven by prepayments.

Our consumer loan book was down 21% year-over-year and 13% quarter-over-quarter, driven by lower home equity loan originations and strategic loan runoff from our indirect auto loan book. The commercial and industrial loan book was down quarter-over-quarter, primarily due to PPP forgiveness that accounted for approximately $190 million decline in commercial and industrial loan balances.

Our commercial real estate balances were down due to market conditions resulting in weaker loan demand. Our loan book will also be impacted by the planned sale of the eight Mid-Atlantic branches around midyear 2021, which have about $300 million in loans. Our total investment book was up 67% year-over-year and 20% quarter-over-quarter in response to the growth in deposits and weaker loan demand.

Our longer-term investment portfolio was up 26% year-over-year and 12% quarter-over-quarter. It is highly liquid with over 80% of the portfolio consisting of agency mortgage products and [salary notes] [ph].

Our short-term investment book was also up significantly, driven by deposit growth and muted demand for loans. We plan to redeploy that liquidity primarily for paying down high-cost borrowings, enhancing investment book yields and supporting loan growth.

Slide seven shows our average liabilities. Given the growth in deposits, we have a unique opportunity to shift our funding from wholesale to lower-cost deposits. Higher cost funding from FHLB borrowings and brokered CDs are down significantly. The combination of the above have enabled us to significantly lower our cost of funds from 48 basis points -- to 48 basis points from 111 basis points a year ago, a 59% reduction in funding costs.

Slide eight shows our net interest margin trends. Net interest income and net interest margin dropped from the first to second quarter of 2020 as interest rates declined. Over the last three quarters, net interest margin has been stable and net interest income has been down modestly.

Wholesale funding, which includes FHLB borrowings and brokered deposits, is down 57% since year-end 2019 and 26% since year-end 2020. Higher cost borrowings are down $379 million from year-end 2019 or 46% and broker CDs are down $777 million or 64%.

Moving on to Slide nine. Slide nine shows our adjusted fee revenues. We had broad-based fee revenue growth in the first quarter, up 70% year-over-year and up 34% quarter-over-quarter. Loan fees were up on strength in SB originations, asset-based lending originations and also on swap fees related to CRE loans.

I'd note that loan fees include $1.5 million of PPP referral fees, which will not recur after the second quarter. It also includes adjustments for our swap contracts and MSR valuations. Wealth management fees were up 7% and insurance revenue was up 3% year-over-year. Both businesses are seasonal and are subject to fee cyclicality with higher fee revenues typically in the first quarter of the year.

On Slide 10, we show our adjusted expenses. They were up 5% on both a quarter-over-quarter and year-over-year basis. Professional services fees were above our usual quarterly run rate on higher legal and advisory expenses. We expect those expenses to moderate during the course of the year. Excluding professional services expenses, all of the total expenses were down 1% year-over-year.

Loan processing expenses were lower due to lower loan volumes. As discussed earlier, our $3.5 million of restructuring expenses were primarily attributable to our branch-consolidation activities.

Slide 11 is a summary of our asset quality metrics, which show encouraging signs. Loan modifications have dropped to $214 million, which is down 86% from the peak in the second quarter of last year.

Non-accrual loans are up modestly year-over-year but down 14% versus the fourth quarter and net charge-offs are down 42% versus the fourth quarter. We are cautiously optimistic about our credit exposures. We expect credit provisions and charge-offs to trend toward pre-pandemic levels over the next year or so.

Slide 12 shows our exposure and credit metrics for COVID-sensitive segments including hospitality, Firestone, restaurants and nursing-assisted living loan books. Quarter-over-quarter, our loan balances are down, our criticized assets are down and our COVID-related loan deferrals and non-accruals are also down significantly. The sequential quarter trends are very encouraging.

Slide 13 and 14 include more granular details on our COVID-sensitive loan portfolios. Again, overall trends are encouraging and deferrals across these portfolios have declined quarter-over-quarter with declines ranging between 25% and 71%.

Slide 15 shows detail on our capital and liquidity positions. Our capital levels remain very strong. Our [executed] [ph] common equity Tier-1 capital ratio ended the first quarter at about 14%. As of fourth quarter of 2020, our common equity Tier-1 ratio was about 230 basis points higher than our peer median ratios. Our capital structure is also very robust with high-quality common equity Tier-1 capital accounting for 98% of Tier-1 capital and 88% of total capital.

As Nitin alluded to earlier, we are singularly focused on instilling discipline around effective capital deployment and earning returns that maximize franchise and shareholder value. The share buybacks discussed earlier is one of the key steps toward that goal. Also, with the deposit-to-loan ratio of 75%, we are well positioned to fund future loan growth.

In summary, this was an encouraging quarter wherein we had revenue growth, primarily driven by increased fee income; a steady downward trend in funding costs; improved asset quality trends, including in COVID-sensitive segments; lower credit provisions; and strong capital and liquidity positions. We also continue to see muted demand for loans.

I'd like to close with comments on our outlook. First, the most recent Moody's economic forecast points to a significant recovery in the U.S., specifically, a 6.5% GDP growth in 2021. Vaccinations have also progressed at a rapid rate with about 30% of the U.S. population vaccinated. Massachusetts, Connecticut and New York, states where our footprint is concentrated, have vaccination rates that are higher than the national average.

While we are upbeat about the economic forecasts and vaccination progress, weaker loan trends seen in recent quarters are expected to persist for us and likely for the industry. It's still early in the year, but we expect modest decline in loan balances for the remainder of the year, both driven by the time to economic recovery and ramp-up of origination pipeline, run-off of the PPP loans and certain loan book balances.

We estimate about $450 million of PPP-related loan runoff between first quarter 2021 and year-end. The estimated impact of PPP on NII for first quarter of '21 was $6.6 million. We expect core NII for the remainder of the year to be flat to down modestly. We expect net interest margin to modestly improve over the course of the year. We expect organic deposits to be flat to up modestly during the course of 2021. On wholesale funding, we expect to further beat our maturing wholesale funds during the course of 2021 and further lower our cost of funds.

Based on current economic forecast and our portfolio composition, we expect a meaningful, improved credit environment over time and the credit provision expenses will trend toward pre-pandemic levels in 2022.

We also expect that we'll get to day one CECL reserves to loan ratio in 2022. I caution that our credits can be lumpy, so we don't expect a straight line on provision expenses or charge-offs. We expect fees to return to normal levels in the second quarter from the high level in first quarter but remain stable to up modestly off that lower base. On a run rate basis, we expect second quarter expenses to moderate.

Consistent with our previous guidance, we expect to trend below $70 million in expenses by end of year. However, in light of Nitin's earlier comments and in addition to expenses, we are focused on optimizing efficiency ratios. And we expect our tax rate for 2021 to be around 15% to 16%.

With that, I'll hand over to Shaun.

Shaun Dwyer

Thank you, Subhadeep and it's been a pleasure collaborating with you since your arrival.

I'd like to begin by sharing some of our key operational highlights from the first quarter, which are collectively positioning the company toward a bright and innovative future.

I'm on Slide 16. We have several ongoing initiatives aimed at transforming our community bank model, including the continued optimization of our branch network. We remain laser focused on executing our previously announced branch-optimization initiatives to strengthen our franchise. This includes the consolidation of 16 branches, nine of which were completed in the first quarter. The majority of the remaining branches are targeted for consolidation by mid-year and we expect to maintain our strong history of deposit retention.

The sale of our eight Mid-Atlantic branches in New Jersey and Pennsylvania is on track and scheduled to be completed by mid-year, pending necessary regulatory approvals. The branch sale is expected to include more than $600 million in deposits and $300 million in loans. Effective optimization of our branch network allows us to meet changing customer needs, reinvesting those savings into the right blend of personalized service and the latest digital technology to enable a seamless customer experience.

The combination of our branch-optimization efforts, the 16 plant consolidations plus the sale of the eight Mid-Atlantic branches will reduce our overall branch footprint by 18%, bringing our branch count to 106.

Moving on to Slide 17. We will continue to evaluate our banking channels supported by our MyBanker team, which provides highly personalized service, digital offerings and financial advisement. Our MyBankers have a track record of customer and portfolio growth and continue to be instrumental in retaining our client base and deposits post consolidation.

As a result, we expect our MyBanker program to be an area of growth and a proven alternative to traditional brick-and-mortar channels. Recently, there has been several significant bank merger announcements in our markets. These transactions create disruption in the market and opportunities for all our bankers to begin forging new relationships and strengthen existing ones.

In mid-June, we will open a commercial office in Providence, Rhode Island, and that will serve as a hub for lending activities in support of our Eastern Connecticut and Rhode Island markets. As I noted above, we will continue to meet changing customer needs, including increased digital adoption by accelerating and executing our digital transformation road map. This will allow us to create a full omni-channel customer experience that combines the personalized service of traditional banks with value-added digital offerings. We've already completed a number of technology infrastructure projects aimed at improving operational efficiency and the customer experience.

This includes the launch of our best-in-class digital account-opening platform We're excited to provide customers with a frictionless experience, allowing them to open an account in just over two minutes, which is 4x faster than the industry average.

During the last quarter, we saw additional progress from our initiatives, including a remarkable increase in our mobile app rating, increasing significantly to about a 4.5-star rating in the Apple App Store and Google Android platform. We expect to make additional enhancements to our mobile app to better serve our customers in the upcoming quarter. This progress builds on the existing infrastructure investments made in our consumer eBanking experience, enterprisewide eSignature and additional sales force API integration.

We'll continue to periodically keep you updated on the progress and impact of these initiatives. Now while loan demand is muted based on excess liquidity in the market, we are seeing our share of potential deals, as outlined on Slide 18 of our presentation. Our overall pipelines are increasing toward prepandemic levels. Our teams are active in our communities, and we continue to be selective to maintain our credit and pricing discipline in a competitive market.

Commercial originations are up quarter-over-quarter, as are residential mortgages. Our ABL Group has had a strong start to the year, bolstered by key new hires. We also made additions to our business banking and private banking teams to strengthen our position and ability to support our Boston area customers. We produced solid benefits for our communities, customers and shareholders during the quarter. With over 8,000 applications processed successfully, we were able to save approximately 100,000 jobs on the payrolls of small and medium-sized businesses through the PPP program.

Our efforts not only helped us generate additional income for the bank but was instrumental in supporting thousands of small businesses on our main street. Now since the start of the PPP program last year, we have assisted our markets with nearly $1 billion in PPP loans. On the socially responsible front, we were added to the Bloomberg Gender Equality Index in 2020 and were named a Best Place to Work for LGBTQ Equality by the Human Rights Campaign. These accolades demonstrate the collective actions of all of our team members and will help enable us to become the leading, socially responsible, omni-channel community bank.

With that, I'll turn it over to Nitin.

Nitin Mhatre

Thank you, Shaun.

Before we open it up to questions, I want to provide a quick update on where we are in terms of our new strategic plan. I'm on Slide 19. Since the day I arrived, we've been working on a transformational, strategic plan that will significantly improve Berkshire's financial performance, while building on our core values and purpose. We are building this plan organically with inputs and commitments from senior leaders of the bank. We have internally branded this as Berkshire's exciting strategic transformation, or BEST.

At a high level, BEST has three foundational pillars: optimize, digitize and enhance. The first pillar, optimize, will drive efficiencies across our channels, geographies, processes, business segments and optimize our balance sheet. The second pillar, digitize, will deliver personalized online experiences across customer journeys for customers and consumers and businesses alike.

We believe our efforts will result in a highly differentiated omni-channel experience and delivered top-quartile customer satisfaction levels and Net Promoter Score. The third pillar is enhance, through which we will enhance engagement, experience and value proposition for our bankers and customers, including improved customer segmentation and relationship deepening, which will lead to growth in balances and wallet share over time. Overall, BEST plan is focused on transformation through organic growth, whereby we'll focus on getting better before we get bigger.

We believe that with successful launch and execution of BEST, we will become the leading, socially responsible, omni-channel community bank in the markets we serve. So what does that ultimately mean? What it means is through the execution of this program, we'll deliver the return on equity in excess of our cost of capital in approximately three years. And over that period, we'll improve our efficiency ratio by over 10%. We will be in the top quartile of customer satisfaction and Net Promoter Score in the markets that we serve. And we will be in the top quartile of ESG indexes nationally.

We look forward to sharing more details of our strategy at our virtual strategy update call scheduled for May 18, and we'll provide more details in the coming weeks.

In closing, having worked with the leadership team over the last three months, I can assure you that we're moving forward with a sense of urgency, collective resolve, passion and confidence to prove that Berkshire, with its purpose-driven, community-dedicated culture, now enabled by our BEST program, is ready to transform our performance to enhance returns for all our stakeholders.

Thank you. And with that, I'd like to open up the floor for questions. Jason?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Laurie Hunsicker from Compass Point.

Laurie Hunsicker

Love seeing the buyback. I appreciate all the details in the press release and the deck and the details on credit. But just wondered, maybe Subhadeep, if you can help us a little bit. You said core net interest income, flat to down. And I'm just trying to walk through this very high level, like, if I'm looking at your net interest income currently of $75.1 million there was 6.6 of PPP. And obviously, you'll have PPP for the rest of this year. But assuming that's out, assuming that the accretion income, which was $1.5 million, normalizes to below $1 million, assuming the sale to ISDC completes, maybe that's another $2 million out, and then you've got some of these higher-risk, higher-yielding loan books running down like Firestone, which is great they're running down, but that comes out. So I'm suddenly sitting at an adjusted NII core of $65 million, $66 million. So potentially, I'm missing something. And so if you can just step us through maybe just a little bit more details around NII, around net interest margin, how we should think about that, maybe even from a cleanup standpoint as we fast forward several quarters, that would be really helpful.

Subhadeep Basu

Sure, Laurie. Thanks, and let me just jump in here and, obviously, happy taking more questions around that. So obviously, as you pointed out, that's a key component of our P&L. So as we pointed out and I pointed out earlier in my prepared remarks, $6.5 million PPP impact. Having said that, and we have around $450 million in PPP loans that are trailing off the balance sheet as well as our sale of Mid-Atlantic branches around $300 million in assets, right? So my remark focused around core NII, which is ex-PPP, which we're expecting to be around sort of flat to modestly down to the end of the year. Where we're expecting sort of the ins and outs as part of this is we're expecting deposit growth in sort of profitable deposits. We're expecting to be down wholesale funding and lower our cost of deposits. And obviously, there is a pipeline that Shaun referred to in terms of growth in loans on the different books that we are focusing on. I think combination of that is where -- based on which our guidance was around flat, core NII to be flat towards the end of the year.

Laurie Hunsicker

Okay. So, sorry, just to fine-tune this a little bit more. If I'm looking at this, thinking $65 million, $66 million of NII a quarter, is that right? Or am I missing something larger? Can you just help me think about that a little bit?

Subhadeep Basu

Yes. So without getting into sort of a lot of details and happy to take you offline in terms of where our head is at, we're probably looking at around between $66 million to $68 million of NII fourth quarter.

Laurie Hunsicker

Okay. Great. That's helpful. And then the sale to ISDC, I had in my notes originally that was closing on or about April 23, and it looks like that's delayed as -- is there any reason that's delayed or how should we be thinking about that?

Nitin Mhatre

No. So I think discussions are ongoing and our expected closure date is in the second quarter. But Shaun, if you want to add more color to that.

Shaun Dwyer

Yes, our internal projections, we had it at midyear to give some time for necessary regulatory approvals but all things are moving forward appropriately.

Operator

The next question comes from Mark Fitzgibbon from Piper Sandler.

Mark Fitzgibbon

I wondered, first, Nitin, you may want to hold off answering this until your May 18 call. But I guess I was just curious, under your new three-year plan is the balance sheet likely to be bigger or smaller than it is today, would you guess?

Nitin Mhatre

Yes. I think I weaved that into my comments. It's going to get better before we get bigger as I described it. So I think in the initial part of it, we're going to rebalance the balance sheet and then it will start growing. So you'll see the exact cadence of it when we connect on May 18.

Mark Fitzgibbon

Okay. And I know that you closed those nine branches, and obviously, you're closing -- or selling the New Jersey branches shortly. I guess I was curious, are you also considering selling other geographies?

Nitin Mhatre

Yes. I'll let Shaun go first and then share my comments as well.

Shaun Dwyer

So Mark, I think with the speed of digital adoption taking pace, I think you have to continuously be looking at branch optimization. So we do go through a very thorough process. Can't comment on specific geographies, but we will continue to look at all of our branches. And obviously, with the most recent reductions, we're reducing the branch footprint by about 18%.

Mark Fitzgibbon

Okay. And then, assuming moderate or shrinkage of the balance sheet, you'll continue to create capital. Should we think about this buyback program as the first in a line of potentially many programs as a means for absorbing excess capital?

Nitin Mhatre

Yes. Mark, I think, just an outset, I would say we're obviously pleased to reinstate our share buyback program, per GAAP, I think it was about 18 months. We absolutely think it's a step in the right direction as we continue to look for ways to deploy capital that maximize the shareholder value. And like you said, that will be an ongoing process. So we'll keep you updated as and when we consider future actions.

Mark Fitzgibbon

Okay. And then, lastly, just to clarify on the tax rate. I think the guidance you gave was 15% to 16% for the rest of this year. Should we expect that, over time, the tax credit business will shrink and the effective rate will drift upward?

Subhadeep Basu

Mark, this is Subhadeep. No, I think we're going to continue with our tax credit program and the sort of the increase in tax rate that you saw was because of sort of the timing of our tax credits that goes on and off our income statement. So you're going to see the impact of additional tax credits going into the rest of the year and beyond.

Operator

There are no more questions in the queue. This concludes our question-and-answer session. I would like to turn the conference back over to Nitin Mhatre for any closing remarks.

Nitin Mhatre

Thank you all for joining us today and your interest in Berkshire. I hope you'll be able to join us on May 18 as we detail our plans to transform Berkshire. In the meantime, have a great day and be well. Jason, you can close the call now. Thank you.

Operator

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.