Berkshire Hills Bancorp Inc

NYSE:BHLB

Earnings Call Analysis

Berkshire Hills Bancorp's Strong Q2 and Positive Outlook for 2024

Berkshire Hills Bancorp reported strong Q2 results, with operating earnings of $23.2 million, up 11% from the previous quarter. EPS increased to $0.55, reflecting a 12% rise. The company's net interest income grew marginally to $88.5 million. Despite a 2% reduction in average deposits, loan growth remained solid at 2%, driven by commercial real estate and commercial & industrial loans. Asset quality improved, with net charge-offs at a low of 7 basis points. The company anticipates a $19 million nonoperating gain in Q3 and modestly lower net interest income between $352 million and $354 million for 2024.

Strong Performance in Q2 2024

Berkshire Hills Bancorp reported a robust second quarter of 2024, with operating earnings reaching $23.2 million, equating to $0.55 earnings per share (EPS), a notable 12% increase from the previous quarter. Operating return on the tangible common equity (ROTCE) improved to 9.65%, which reflects a solid upward trend of 92 basis points quarter-over-quarter. This improvement has instilled confidence in the bank’s performance metrics, suggesting a strategic execution that is resonating well within its operations.

Credit Quality on the Horizon

One of the standout metrics from the earnings call was the continued decline in credit costs. Net charge-offs were recorded at just 7 basis points of loans, representing the sixth consecutive quarter of declining net charge-offs. This improvement reflects a proactive approach to risk management, with the loan loss allowance closing at 1.22% of loans, slightly above prior guidance. The bank’s diversified and granular loan portfolio particularly within the commercial real estate (CRE) market signals reduced risk exposure.

Cost Management Initiatives Yield Results

Berkshire Bank is also focused on optimizing expenses, with operating expenses landing at $71.3 million—down 2% from the prior quarter and 4% year-over-year. Lower compensation and reductions in occupancy and equipment expenses have contributed to this positive trend. Notably, the bank repurchased about 600,000 shares for approximately $13 million during the quarter, demonstrating confidence in its financial health.

Revenue Streams and Future Guidance

Total operating revenue rose by 3% linked quarter to $108.6 million, driven by an increase in net interest income, which saw a modest rise to $88.5 million, and operating non-interest income surged by 16% to $20.1 million. The bank forecasts that net interest income will slightly decline for 2024, anticipating a range between $352 million and $354 million. Noninterest income is expected to fall within $75 to $77 million. The NIM is projected to stabilize around 3.20%, underscored by the expectation of moderate improvement reflecting anticipated maturity of fixed-rate assets.

Strategic Branch and Digital Investment

Berkshire Bank has also streamlined its operations by consolidating branches and updating its network. With the aim to enhance efficiency, the bank reduced its branch count from 93 to a projected 83 by Q3, alongside the launch of Berkshire One, a digital banking suite aimed at improving customer service. Positive customer feedback is reflected in rising Net Promoter Scores, which hit a record high of 60, showcasing enhanced customer engagement.

Outlook and Market Conditions

Looking ahead, the bank remains cautiously optimistic, navigating through a challenging macroeconomic landscape influenced by historical interest rate fluctuations. Berkshire has consolidated its immediate strategies, including focusing on accelerating deposit growth and maintaining strict credit management. Management acknowledged the unpredictable environment but emphasized that their disciplined approach to loan growth and cost control is expected to yield positive results. They acknowledged the anticipated $19 million nonoperating gain from their branch sale, which will significantly bolster capital reserves.

Management Insights and Future Initiatives

Nitin Mhatre, the CEO, emphasized on the call that while the operating metrics showed recent success, attention must remain on sustaining this growth trajectory. The management aims to continue building on the current momentum, notably focusing on improving asset quality across their commercial portfolios, which constituted about 66% of total loans. Through prudent relationship management and ongoing evaluation of market risks, the bank aims to enhance its competitive position in the coming years.

Earnings Call Transcript 2024-Q2

[Operator]

Good morning, ladies and gentlemen, and welcome to the Berkshire Hills Bancorp's Second Quarter 2024 Earnings Conference Call. [Operator Instructions] This call is being recorded on July 18, 2024.

I would now like to turn the conference over to Kevin Conn, Investor Relations Officer. Please go ahead.

[Kevin Conn, executive]

Good morning, and thank you for joining Berkshire Bank's second quarter earnings call. My name is Kevin Conn, Investor Relations and Corporate Development Officer. Here with me today are Nitin Mhatre, Chief Executive Officer; Sean Gray, Chief Operating Officer; Brett Brbovic, Chief Financial Officer; and Greg Lindenmuth, Chief Risk Officer.

Our remarks will include forward-looking statements and refer to non-GAAP financial measures. Actual results could differ materially from those statements. Please see our legal disclosure on Page 2 of the earnings presentation, referencing forward-looking statements and non-GAAP financial measures. A reconciliation of non-GAAP to GAAP measures is included in our news release. At this time, I'll turn the call over to Nitin. Nitin?

[Nitin Mhatre, executive]

Thank you, Kevin. Good morning, everyone, and thank you all for joining us today. I'll begin my comments on Slide 3, where you can see the highlights for the second quarter. Overall, I'm pleased to report that we had a strong quarter with solid improvement in operating earnings quarter-over-quarter. Operating EPS of $0.55 was up 12% linked quarter. Operating net income of $23.2 million was up 11% linked quarter. ROTCE was 9.65%, up 92 basis points linked quarter and operating ROA was 79 basis points up 8 basis points linked quarter.

We are encouraged by the trends in key performance metrics, especially credit and expenses. Credit costs continued to trend down with net charge-offs at 7 basis points of loans, the sixth consecutive quarter of declining net charge-offs. Loan loss allowance closed at 1.22% of loans, modestly above the upper end of our guidance range. We've updated the slides on overall CRE office and multifamily portfolios. The information on those slides highlights that our portfolio remains granular, geographically diverse and resultantly less risky. The performance of those loan books remain strong. Our expense optimization focus continues to gain traction. Operating expenses of $71.3 million were down 2% linked quarter, reflecting lower compensation, occupancy and equipment expense. Our balance sheet remains strong. Capital ratios remained robust with common equity Tier 1 ratio of 11.6% and a tangible common equity ratio of 8.2%. We repurchased about 600,000 shares in the second quarter for $13 million. Asset quality remained strong with a modest decline in nonperforming loans with net charge-offs at a low point of 7 basis points and ACL to loans at a high point of 1.22%.

Liquidity remains solid and loans-to-deposit ratio was at 96% and 92%, respectively, excluding and including New York held-for-sale balances. Average deposits were down 2% linked quarter and up 2.2% year-over-year. Deposit costs were up by 6 basis points in the quarter while reflecting a reduction in the rate of increase in deposit costs and beta. Average loan balances were up 2% linked quarter and up 5% year-over-year, reflecting solid loan growth versus a relatively soft first quarter.

We continue to make steady progress on optimizing our branch network. We had announced the sale of 10 branches in New York in March, which tightens our footprint and enhances the efficiency and profitability of our network. We remain fully committed to and invested in our remaining presence in New York. The transaction remains on track to close in the third quarter. I'd note that we also consolidated 3 additional branches in the second quarter bringing our total branch count to 93 today and projecting to 83 by the end of third quarter. We believe that we are now at about the right size for our branch network.

We launched Berkshire One, an expanded suite of digital deposit product proposition for our customers. We intend to make banking with Berkshire when, where and how you want it easier than ever. We continue to invest to digitize the client experience, which is reflected in our Net Promoter Scores that reached a record high of 60 and mobile app ratings, which averaged over 4.5 stars for iOS and Android devices, with the ladder reaching 4.8 stars for the first time.

I want to thank all of my Berkshire Bank colleagues for their continued hard work and commitment to the bank. Through this challenging environment for the banking sector, their commitment to our strategy and dedication to our customers is what continues to bring us together and truly set us apart.

We had previously announced Brett Brbovic's promotion to the CFO position after David Rosato's departure in the second quarter. Brett has been with the bank for over 12-years and has deep institutional knowledge. Brett's prior role was as Chief Accounting Officer for us and prior to Berkshire Bank, Brett worked at KPMG for about 9 years. I'd like to formally welcome Brett as our new CFO, and thank him for stepping up to guide us through our journey ahead.

I'll now turn it over to Brett to cover our financials in more detail and share our updated outlook for 2024. Brett?

[Brett Brbovic, executive]

Thank you, Nitin. I'm excited to step into the new role and energized to work with my team to help us achieve our vision to be a high-performing relationship-driven community-focused bank. With that, I'll turn to the slides.

Slide 4 shows an overview of the second quarter. As Nitin mentioned, operating earnings were $23.2 million or $0.55 per share, up $0.06 linked quarter. Net interest income of $88.5 million increased $400,000 linked quarter. Operating noninterest income was $20.1 million, up 16% linked quarter. Total operating revenue was up 3% linked quarter. Operating expenses were $71.3 million, down 2% linked quarter and down 4% year-over-year, delivering operating leverage of 5% linked quarter. Net charge-offs were $1.7 million or 7 basis points of average loans and were down 11 basis points linked quarter. Provision expense was $6.5 million, up $0.5 million linked quarter, bringing our coverage ratio to 122 basis points of loans.

Slide 5 shows our average loan balances. Average loans were up $155 million linked quarter or 2%, primarily driven by organic -- growth in CRE and C&I. The modest decline in consumer balances year-over-year reflects the continued runoff of the Upstart portfolio. We've updated a page in the appendix, which shows the data on Upstart and Firestone. The books combined are down to $124 million or 1.3% of total loans and are performing as expected.

Slide 6 shows average deposit balances. Average deposits decreased $199 million or 2% linked quarter, primarily driven by lower payroll deposits. Year-over-year deposits were up $211 million or 2%. I'd note that payroll deposits can move higher or lower depending on the day of the week [ that ] the quarter ends. Payroll deposits have generally risen over time, but we expect lower payroll deposits in the third and fourth quarter given that those quarters end on a Monday and Tuesday respectively, which are typically lower balance days for the business. Noninterest-bearing deposits as a percentage of total deposits remained at 24%, consistent with last quarter. Deposit costs were 235 basis points, up 6 basis points linked quarter. The pace of the increase in deposit cost has dropped meaningfully over the last 3 quarters. Our cumulative total deposit beta is 42% through 525 basis points of Fed tightening.

Turning to Slide 7. We show net interest income. Net interest income was up modestly linked quarter and down 5% year-over-year. Net interest margin was up 5 basis points linked quarter to 3.20% versus 3.15% in the first quarter and 3.11% in 4Q '23. While we expect continued funding cost pressure, the worst of the NIM compression is behind us, and we're seeing NIM tailwinds emerging such as fixed rate assets maturing and repricing higher. Also, our received fixed swaps will roll off in the medium term and provide another tailwind to NIM.

Slide 8 shows operating noninterest income up $2.8 million or 16% linked quarter. The growth was primarily driven by gains on SBA loan sales given higher volumes. The growth in other fee revenues year-over-year was primarily driven by the reversal of tax credit amortization under new tax credit investment accounting. The modest drop in loan-related fees linked quarter was caused by a high level of swap fees recognized in the first quarter and wealth management fees were also down linked quarter due to seasonal tax prep fees recognized in the first quarter.

Slide 9 shows expenses. Operating expenses were down 2% linked quarter to $71.3 million and down 4% year-over-year. Part of the sequential drop is due to seasonally higher payroll taxes in the first quarter, but we also had a nice drop in occupancy and equipment due to our expense initiatives. Technology expense was up linked quarter on investments in digitizing the bank's offerings. GAAP expenses of $70.9 million include an expense reversal relating to buildings sold during the quarter, which added $0.02 to GAAP earnings.

Slide 10 is a summary of asset quality metrics. Nonperforming loans were flat linked quarter and down 25% year-over-year. Net charge-offs were $1.7 million and were down $2.4 million linked quarter and down $4.1 million year-over-year. I'd note that our 10-year average net charge-offs to loans is 26 basis points. We've included a chart in the appendix with Berkshire's net charge-off rates versus the industry since 2000.

Slide 11 shows that our CRE book is well diversified in terms of geography and collateral. The credit quality of the CRE portfolio remains solid with nonaccrual loans at 13 basis points of period-end loans.

Slide 12 details our office portfolio. As noted last quarter, the weighted average loan-to-value ratios are about 60% and a majority of the portfolio is in suburban and Class A space. I want to highlight an office study published by the Kansas City Federal Reserve in April. The Fed data, which we've included in the appendix slide shows that the probability of default rises meaningfully as the square footage of the property finance increases, that is tall towers and central business districts. As you know, we have very limited exposure to Boston's financial district and 80% of our office properties financed are under 150,000 square feet, suggesting our portfolio has lower default probabilities.

Slide 13 shows details of our multifamily portfolio. The multifamily portfolio was $665 million or 7.2% of loans. The book is well diversified across our footprint and we currently do not have any nonperforming loans or net charge-offs and criticized assets are 1.2%. While current credit quality metrics are strong, we recognize that the economic uncertainties exist, and we're monitoring both new originations and existing portfolios carefully.

Slide 14 shows our available liquidity versus uninsured deposits. Coverage of uninsured deposits was 128% at the end of second quarter. As Nitin mentioned, we have strong capital [indiscernible]. Our top capital management priority is to support organic loan growth. In Q2, we did repurchase $13.4 million of stock at an average cost of $21.88. Year-to-date, we've repurchased $17.4 million of stock at an average cost of $21.94. All of our repo this year has been completed below tangible book value per share. Our tangible book value per share increased 7% year-over-year. And if you adjust to add back the AOCI bond mark on our adjusted tangible book value per share would be $25.85.

Slide 15 shows our outlook for the rest of 2024. We plan to give annual guidance in detail in January and each year and provide updated guidance on each midyear earnings call. In the third quarter, we expect to book a $19 million nonoperating gain on the brand sale. We do expect loan growth to be closer to the low end of the range provided in January and our NIM to be stable around 3.20%. We expect deposits to be lower than January guidance, largely driven by the New York branch sale and payroll balances normalized for period end. We expect net interest income to be down modestly between $352 million and $354 million. Despite a strong second quarter, we expect noninterest income to be between $75 million and $77 million. Offsetting the modest revenue weakness, we anticipate both provision expense and operating expenses to be below January guidance. We expect the provision to be between $25 million and $27 million, and we expect expenses to be between $287 million and $290 million. Taxes for the year will be closer to the high-end of the range of 20% to 22%. And with that, I'll turn it back to Nitin for further comments. Nitin?

[Nitin Mhatre, executive]

Thank you, Brett. Second quarter marks the end of our 3-year best plan. I'm proud of what our team has accomplished and how far we've come. We've streamlined the bank's footprint, channels and businesses including the sale of Berkshire Insurance Group, the sale of Mid-Atlantic and New York branches. We reactivated our organic growth muscle by restarting our loan growth engine starting 2021 and by implementing new deposit generation initiatives subsequently, including the addition of new bankers to supplement our strong existing team of bankers. We have digitized many of our services to enhance client experience and position the bank better for the future. In a difficult macroeconomic environment, we achieved the low end of our ROTCE target with 10.1% ROTCE for full year 2023. We had a few misses too. We missed our ROE target by a small amount, and we decided to run off our Upstart book midyear 2022 to derisk our balance sheet. We also outsourced facilities management and reversed scores to in-source that function about 18 months ago. We still have work to do. Our focus near term is to accelerate our deposit growth engine, tightly manage expenses and credit and expanding our digital banking offerings. The operating environment for the banking industry continues to be challenging, given historic increases in interest rates to quell inflation. As noted last quarter, the yield curve is in its longest period of inversion in recorded history. We've included a slide in the appendix, which provides historic context for the current unusual period. It highlights that the yield curve has been positively sloped for 83% of the time since 1976. The slide also sizes the potential net interest margin and net interest income increase for the industry during the periods of yield curve steepening. While no one can call interest rates, you can see from the historic data that the revenue lift for the industry could easily be $100 billion or more when the yield curve normalizes. We look forward to a more normal banking environment heading into 2025 and '26. With that, I'll turn it over to operator for questions. Operator?

[Operator]

[Operator Instructions] First question comes from Laurie Hunsicker from Seaport Research Partners.

[Laura Havener Hunsicker, analyst]

Brett, I just want to say congratulations and welcome in your new role. Can you just take us through in terms of -- in terms of noninterest income, can you just help us think a little bit about what SBA loan sales will look like. Wealth management fees obviously down a little bit. Just what that will look like? And then that the other line that was $3.3 million. Was there anything nonrecurring in that? If you could just comment on those 3 in any order that would be great?

[Brett Brbovic, executive]

I'll start with the other line, Laurie. That's driven by our tax credit amortization, the change in the accounting that we did in Q1. So if you recall, we used to have tax credit amortization as a contra fee income or contra noninterest income. So now under the new accounting, that goes away and goes all below the line. So that's why we're seeing an uplift there, plus in the first quarter, we also had a onetime adjustment for the change in accounting. So now we believe the tax credit amortization portion of that line is rightsized. For SBA...

[Laura Havener Hunsicker, analyst]

Sorry. Brett, what was the onetime adjustment there?

[Brett Brbovic, executive]

That was a -- it was a drop of about $700,000 in Q1. So it was negative noninterest income that obviously didn't reoccur in Q2.

[Laura Havener Hunsicker, analyst]

Got you. Got you. Okay. So the $3.3 million roughly is a good run rate, the $1.87 million sort of -- the one time item adjustment was a $700,000 in 1Q. Is that correct?

[Brett Brbovic, executive]

Correct.

[Laura Havener Hunsicker, analyst]

Got you. Okay. Got you. And then -- sorry, I didn't mean to cut you off. The SBA.

[Brett Brbovic, executive]

No problem. The SBA side, we really like the business. They had a good quarter. It was slightly above our kind of 8-quarter average, but they have strong momentum going forward. So we look forward to seeing the results in the next quarter.

[Laura Havener Hunsicker, analyst]

Great. And then the...

[Kevin Conn, executive]

Over the last eight quarters -- Laurie, over the last 8 quarters, it's averaged closer to $2.7 million a quarter. So they had a really good quarter. But as Brett said, they've got a really, really strong momentum. So we're optimistic about that business.

[Laura Havener Hunsicker, analyst]

That's great. That's helpful. And then just the wealth management line, I mean it's moved around any -- just any general comments with the drop between March and June is small drop, but how should we be thinking about that?

[Brett Brbovic, executive]

First quarter -- I'm sorry, Nitin.

[Nitin Mhatre, executive]

Yes. I was just going to say the drop is really corresponding to the tax prep fees in the first quarter that's seasonal. So I think that just normalizes for it. But outside of that, I think the business is moving along quite well. The assets under management or administration were up about 6% to 7% year-over-year. So we believe the momentum is there. We just have to see how that plays out in the fees and revenues.

[Laura Havener Hunsicker, analyst]

Got you. Okay. That's helpful. And then on the expense side, the $384,000 of sort of merger restructuring charge reversal, you had mentioned that was related to a building sale? Or do you have any other color on that?

[Brett Brbovic, executive]

So we had previously moved 3 buildings to held for sale, probably about a year ago. Those sales just closed this quarter, and we realized a small gain.

[Laura Havener Hunsicker, analyst]

Okay. And were those the Connecticut branches that you closed? Or was that something different?

[Brett Brbovic, executive]

No. These are other office buildings that had been previously moved held for sale.

[Laura Havener Hunsicker, analyst]

Got you. Got you. Okay. And then just in terms of merger and restructuring charges going forward at the moment, that's looking completely clean. There's nothing on the horizon. Is that right?

[Brett Brbovic, executive]

That's about right. We should see a little bit in Q3 as we close on the New York branch sales, but shouldn't be overly significant.

[Laura Havener Hunsicker, analyst]

Okay. Perfect. And then the CFO transition, were there any onetime costs associated with that in this quarter? Or will there be next quarter? How should we think about that?

[Nitin Mhatre, executive]

No, Laurie, there weren't any.

[Laura Havener Hunsicker, analyst]

Okay. Okay. Great. And then tax rate, and I appreciate the refreshed guidance here. But your tax rate of 23% this quarter seems to be over that high end of the guide. How should we think about that? Just an anomaly [indiscernible] come down?

[Brett Brbovic, executive]

Yes. We have another tax credit coming in later in the second half of this year that will help drive the tax rate down to kind of the high end of our guidance between 20% and 22%.

[Laura Havener Hunsicker, analyst]

Okay. Okay. Great. And then just 2 more for me. [ Margin ], can you just comment a little bit? I mean you obviously made some comments, but it does seem like it still might be under a little bit of pressure, just because of the funding side. Can you help us think about what that looks like from the -- relative to the 3.20% level just as we look towards next quarter?

[Brett Brbovic, executive]

Yes. We feel strongly that we'll be able to maintain the 3.20% level. Like I mentioned, we have some tailwinds coming are fixed -- or received fixed assets repricing over the next 12 months. We also have our fixed hedges rolling off over the near moderate term. So we believe those tailwinds will help maintain the 3.20% guidance.

[Laura Havener Hunsicker, analyst]

Okay. Okay. Great. And then just last question here on office. Really, really appreciate all your details here. The 8%, and I'm looking at Slide 12 here, the 8% that's maturing in 2024. Is that 8% maturing for the rest of 2024? Was that full year 2024, I guess, round numbers, that's about $40 million. Can you help us think about what that's looking like for the next 2 quarters? And any color you can give us on vacancies in that bucket or Class A, B, C. Just any other details you can provide on that?

[Nitin Mhatre, executive]

Yes. Greg, do you want to take that?

[Gregory Lindenmuth, executive]

No problem at all. Well, we started the year off the 23% of the portfolio was maturing. So we're down to 8% for the remaining part of the year. So, so far, so good. We've had some real success stories in our maturities with payoffs from sales, all getting out at par.

If you look at that class A, B, it's almost evenly split the remaining amount this year. It's $21 million in A, and roughly $18 million, $19 million in Class B. And then the buckets for the maturities are relatively balanced as well. It's -- about 60% of that remaining is in 3Q, 40% in 4Q.

[Laura Havener Hunsicker, analyst]

Okay. And then any comment on vacancies on those properties? Any color there?

[Gregory Lindenmuth, executive]

Yes, the vacant -- yes, it's very consistent with the average of the portfolio. So most are 90% occupied, our lowest being probably around 80% occupied, 1:1 cash flow. It is one of our criticized assets that we're keeping an eye on that's coming up in the third quarter.

[Operator]

Next question comes from Mark Fitzgibbon of Piper Sandler.

[Mark Fitzgibbon, analyst]

Three years ago, when you set out your targets, those 3-year targets for BEST, many of us thought they were low because they were below where your peers were. And you guys ultimately came up short of those targets. And so I guess -- I'm wondering, does that change the strategic thinking of senior management and the Board? And what are your new strategic goals? And what kind of time line are you looking at?

[Nitin Mhatre, executive]

Yes, Mark, thanks for the question. As we set out the plan, the intent was we were literally operating at the bottom of our peer group with the ROTCE and ROA and all other financial metrics. Our intent was to get to the median of the peer group over a below midterm outlook and then get to build a journey towards getting to the top quartile. I think we're roughly about [ 65th ] percentile. So we've climbed up about 35 percentile points in the relative ranking on ROTCE and ROA. And obviously, we didn't anticipate the whole inverted deal curve and March madness as we call it last year. So I think with that said, we're proud as to how far we've come from where we were. And at this point of time, I think the journey is going to be how do we continue to improve our momentum, as we talked about in my remarks, the focus is on growing deposits, managing expenses and credit. And I think you've seen it consistently over the last 4 years that expense delta year-over-year in the last 4 years has significantly outpaced the delta for the peers, which means our expenses were growing at a lower pace than the market and the peers. So I think we believe that's going to continue to be the case. We believe our initiatives that we implemented for loans have turned out well and now the deposit initiatives are kicking in. And credit has continued to be monitored tight and our Head of Commercial, which is where almost 65%, 66% of our book is, is incredibly focused on quality of relationships, quality of sponsors and leading with deposits and managing credit tightly. So I think we will have a lot of those tailwinds as we get into the next 3 years. And I think Brett mentioned in his remarks, when we give the annual guidance in January, we would also think about, do we give midterm outlook somewhere in the middle of next year when there is better clarity on the macro environment.

[Mark Fitzgibbon, analyst]

Okay. So you're not recalibrating quite yet. We're going to have to wait till year-end for that?

[Nitin Mhatre, executive]

Yes.

[Mark Fitzgibbon, analyst]

Okay. Changing gears a little bit. It looked like you grew commercial real estate about $113 million this quarter. Can you share with us what kind of the breakdown of the types of CRE you're booking and maybe what the average rates were?

[Nitin Mhatre, executive]

The average rate for the book is about -- it was closer to 8%, Mark. I think it is about 7.85% something for the overall commercial book. So closer to 8%. And again, most of these existing clients, existing and well-known sponsors, and some part of it is also the draws on the construction loans that are in the portfolio.

[Mark Fitzgibbon, analyst]

Okay. And then I was curious, has the Biden proposal to cap rent increases nationwide on multifamily up to 5% a year kind of changed how you think about multifamily long term?

[Nitin Mhatre, executive]

Not fundamentally. I think we've been prudent about it all along and especially in the last few years that I have been here, we've been consistently focused on more of the quality of the sponsors, the borrower risk rate as well as the facility. So I think really, the focus remains to be staying prudent. And in fact, even now, as you know, the market demand has somewhat subsided, but the lenders have backed away as well. So we do have potentially more swings at the plate, but we're being very prudent and judicious and leading with relationship and quality of deposits and sponsors.

[Mark Fitzgibbon, analyst]

Great. And then lastly, the NIM guidance that you gave, does that assume any rate cuts this year?

[Brett Brbovic, executive]

It assumes 1 this year in the fourth quarter.

[Operator]

Next question comes from Christopher O'Connell from KBW.

[Christopher O'Connell, analyst]

Following up on that last question. Can you just remind us how much of the loan portfolio is short-term or reprices at the short end of the curve?

[Nitin Mhatre, executive]

The rough breakout, Chris, is about 42%, I believe, of the portfolio is fixed and 58% is floating. And roughly of the floating is about -- 2/3 of that has floors as well, if that was your question.

[Christopher O'Connell, analyst]

Okay. Yes, that's helpful. And so in the event that we do get more cuts than what's in your guide, -- how much do you think each additional rate cut, what that impact has on NIM initially?

[Brett Brbovic, executive]

We remain relatively neutral right now. So it won't have much of an impact.

[Christopher O'Connell, analyst]

And do you think that eventually you would begin to benefit from the cuts over time as we get further along into 2025? And any sense of if that is the case, how long that might take to kind of materialize?

[Brett Brbovic, executive]

Yes. I think eventually, we will obviously start to see some of the benefit there, especially as the deposit costs slow. I would say probably the next 12 months or so.

[Kevin Conn, executive]

Chris, we've got $1.4 billion of CDs that are maturing over the next 12 months, and they're rolling over at sort of flat rates to where they were issued. So there's much less pressure on the CD book from a cost perspective. And as they start to roll -- they'll eventually start to roll at lower rates.

[Nitin Mhatre, executive]

And Chris, I don't know if you think you -- Chris, just to add to that, I think the -- as Brett said, the balance sheet is neutral. So we're relatively agnostic to the rate environment at the moment. But in this cycle so far, our deposit betas have been at 42% cumulative, and that's kind of where the peer averages are. But on loans, our beta has been about 47%, whereas the peer average is about 35%. So we believe it allows us to have better spreads if we continue down this path.

[Christopher O'Connell, analyst]

Okay. Great. And what is the current CD or kind of highest offering rate on deposits?

[Brett Brbovic, executive]

Currently, the highest is about 4.5% right now from a promotional perspective.

[Christopher O'Connell, analyst]

Okay. Great. And then on the expense guidance, is that inclusive of the $3.3 million more or less of the nonoperating that's been occurred so far this year?

[Brett Brbovic, executive]

No, that does not include nonoperating, the guide is for operating expenses.

[Christopher O'Connell, analyst]

All right. Great. And then on the rest of the portfolio outside of office, it seems like the run-off portfolios have been holding up pretty well. I mean is there anything else, any areas of concern, any pockets of CRE that you guys are feeling a little bit more cautious on here?

[Nitin Mhatre, executive]

No, Chris, I think as we've said, this quarter was really at 7 basis points. That's really low. I think we'll have to go back many, many quarters to find such a good quarter, but we recognize that this is -- this has episodic elements. So we remain cautiously optimistic. The trend has been good for the 6 quarters, charge-offs have gone down, but we recognize that it's not going to be 7 basis points, right, in the outer quarters. And to that extent, our teams, both on the frontline and the risk management teams continue to manage portfolios, monitor them very closely. And yes, everything that the Street worries about CRE, office, multifamily, there is heightened attention paid to those portfolios.

[Christopher O'Connell, analyst]

Got it. Any -- like anything in particular as you guys look in terms of like loan growth going forward that you guys are trying to stick away from or that you do feel a little bit better about putting money to work at?

[Nitin Mhatre, executive]

No, I think we continue to look at -- our commercial portfolio is about 66% of the book. We -- the way we're continuing down the path, we hope that becomes 70% or higher over time and to that extent, get as much of commercial originations in the portfolio as possible. And within that, trying to get as much of C&I and business banking type of loans to improve the asset mix within that as well. So that remains to be our priority.

[Operator]

Next question is a follow-up from Laurie Hunsicker from Seaport Research Partners.

[Laura Havener Hunsicker, analyst]

Brett, just a quick follow-up here. The gain on sale of the New York branch is the $19 million. How much of that is actually going to drop to the bottom line? And what's the after tax on that looking like?

[Brett Brbovic, executive]

Okay. So it should -- I mean, it obviously will reinvest, but the majority of it should drop to the bottom line. I think from an after-tax impact, it should be about $15 million, $16 million.

[Operator]

We have no further questions. I will turn the call back over to Nitin Mhatre for closing remarks.

[Nitin Mhatre, executive]

Thank you all for joining us today on our call and for your continued interest in Berkshire. Have a great day, and be well. Joanna, you can close the call now.

[Operator]

Ladies and gentlemen, this concludes your conference for today. We thank you for participating, and we ask that you please disconnect your lines.