First Hawaiian, Inc. (FHB) Q2 2022 Earnings Call Transcript

First Hawaiian, Inc.  (NASDAQ: FHB) Q2 2022 earnings call dated Jul. 29, 2022

Corporate participants:

Kevin Haseyama — Senior Vice President, Strategic Planning & Investor Relations Manager

Robert Harrison — Chairman, President and Chief Executive Officer

Ralph Mesick — Vice Chairman, Chief Risk Officer, Risk Management Group and Interim Chief Financial Officer, Financ

Analysts:

Steven Alexopoulos — J.P. Morgan — Analyst

David Feaster — Raymond James — Analyst

Andrew Liesch — Piper Sandler — Analyst

Kelly Motta — KBW — Analyst

Laurie Hunsicker — Compass Point — Analyst

Presentation:

Operator

Good and thank you for standing by. Welcome to the First Hawaiian, Inc. Second Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded.

I would now like to hand the conference over to Kevin Haseyama, Investor Relations Manager. The floor is yours.

Kevin Haseyama — Senior Vice President, Strategic Planning & Investor Relations Manager

Thank you, Carmen, and thank you everyone for joining us as we review our financial results for the second quarter of 2022. With me today are Bob Harrison, Chairman, President and CEO; and Ralph Mesick, Chief Risk Officer and Interim CFO. We have prepared a slide presentation that we will refer to in our remarks today. The presentation is available for downloading and viewing on our website at fhb.com in the Investor Relations section.

During today’s call, we will be making forward-looking statements, so please refer to Slide 1 for our Safe Harbor Statement. We may also discuss certain non-GAAP financial measures. The appendix to this presentation contains reconciliations of these non-GAAP financial measurements to the most directly comparable GAAP measurements.

And now, I’ll turn the call over to Bob.

Robert Harrison — Chairman, President and Chief Executive Officer

Good morning, everyone. I’ll start by giving a brief local update. The Hawaii economy continues to benefit from the recovery in the tourism industry. In June, the statewide unemployment rate was 4.3% compared to 3.6% nationally. Total visitor arrivals were 843,000 in June, 11% below June 2019 arrivals, a strong result considering the Japanese visitors, were only 1.4% of the total compared to over 13% in June 2019. This represents significant upside when Japanese arrivals return to more normalized levels. Importantly, the spend is up more than 12% over last year, which is what everyone wants, fewer visitors with a higher spend.

While interest rates have caused a slowdown in the housing market, continued demand and lack of supply have kept prices stable. In June, single-family home sales were down 20% from last year with the median sales price of $1.1 million, was 12% higher.

Turning to Slide 2, we had a strong quarter reporting net income of $59.4 million and EPS of $0.46. Pre-provision net revenue was up $8.9 million quarter-over-quarter on higher net interest income. Our return on average tangible common equity was 18.79% and the Board maintained the dividend at $0.26. We had good growth in both loans and deposits and the balance sheet remains well positioned for rising rates and is well capitalized. During the quarter, we repurchased over 290,000 shares at an average price of $24.09 for $7 million. And finally, we successfully converted to our new core operating system, an important step on our digital transformation we started a couple of years back.

I want to make a few comments on the balance sheet and then provide more detail on loans and deposits. Turning to Slide 3, we saw a good growth and a nice rotation on the balance sheet, which remains asset sensitive. We’re highly liquid and well capitalized to support our business objectives. Total assets grew by 1.3% to $25.4 billion in the second quarter and the asset mix improved with the deployment of cash into higher yielding loans. The balance sheet remains very asset sensitive with about $5.1 billion or 39% of the loan portfolio, repricing within 90 days. It has been very responsive to the recent Fed rate hikes. Our liquidity position remains very strong with the 58.7% loan-to-deposit ratio, excess cash balances and steady cash flows from the investment portfolio.

We have ample liquidity to fund future loan growth. The investment portfolio has performed well during this period of volatile interest rates. The duration of the portfolio has remained stable at 5.6 years at the end of the second quarter and is unchanged from year-end 2021. Cash flows from the portfolio continue to run between $100 million to $125 million per month. We continued to maintain strong capital levels after dividend payments and share repurchases. The common equity Tier 1 ratio was 11.98% at quarter end and the total capital ratio was 13.14%. Net of an AOCI adjustment, the securities book was flat at roughly $8.1 billion. In the quarter, we elected to reclassify $4 billion of the portfolio to held to maturity to reduce the accounting volatility associated with the AOCI adjustments.

Turning to Slide 4, period-end loans and leases were $13.3 billion, an increase of $371 million or 2.9% from the end of Q1. Excluding PPP loans, total loans and leases increased by $434 million, 3.4% compared to the prior quarter. We experienced growth in all portfolios with the largest increases in CRE, C&I, residential, and home equity. As expected, the increase in the commercial book skewed toward our mainland markets, where the rebound of loan demand started earlier. On a year-to-date basis, total loans and leases are up $301 million or 2.3%. Excluding PPP loans, total loans and leases are up $474 million or 3.7%, in line with our full year outlook of mid to high-single digit growth, which remains unchanged.

Turning to Slide 5, deposits increased by $331 million or 1.5% to $22.6 billion at quarter end. The increase was a result of a $439 million increase in public deposits, driven by $458 million increase in operating account balances. That was partially offset by a $19 million decline in public time deposits. Non-public deposit balances declined about $108 million or less than 1%. Our cost of deposits remained low at 8 basis points, 3 basis points higher than the prior quarter. We anticipate more variability around deposit flows over the course of the year, but have a variety of options to fund loan growth, including a higher-than-normal cash balance.

Now, I’ll turn it over to Ralph to cover the income statement and balance sheet.

Ralph Mesick — Vice Chairman, Chief Risk Officer, Risk Management Group and Interim Chief Financial Officer, Financ

Thank you, Bob. Moving to Slide 6, you see that our asset-sensitive balance sheet benefited from the increase in interest rates. Net interest income increased $11.2 million over the prior quarter to $145.1 million. Excluding PPP, fees and interest, net interest income increased $13.2 million. The increase was primarily due to higher yields on securities and loans and higher average loan balances. The net interest margin increased 18 basis points to 2.6%. Since the balance of unamortized PPP fees is de minimis, it’ll have a material impact on the NIM going forward. As 39% of the loan portfolio reprices in 90 days, our balance sheet remains well positioned to benefit from rising interest rates. We expect the NIM to increase by 25 basis points to 30 basis points in the third quarter.

Turning to Slide 7, non-interest income was $44.1 million this quarter, a $2.8 million increase over the prior quarter. Activity-based revenue continued to do well. And trust and investment services income remained stable in spite of market volatility. BOLI income continued to be negatively impacted by the volatility in bond yields and equity markets. When this volatility subsides, we expect BOLI income to return to historical levels of $3 million to $3.5 million per quarter. This would put us in line with our expectation of $47 million to $48 million per quarter.

Going to Slide 8. Non-interest expense was $109.2 million, $5.1 million higher than the prior quarter. Most of this increase had been expected with a ramp-up in implementation costs ahead of the core system conversion and the start of the new system-related expenses. These increases have been built into the most recent guidance. Compensation-related expenses increased by $1.7 million, as we saw the full quarter impact of merit increases, a reduction in capitalized salaries related to the core project and the hiring of temporary help to support us through the May system conversion. Contracted services were up $1.5 million, largely due to non-recurring consulting fees. Equipment costs increased $1.8 million and the increase was primarily related to the new core services contract. Looking ahead to the second half of the year, we anticipate that expenses will be between $113 million and $114 million per quarter, slightly higher than our original outlook. The largest drivers behind this increase are higher compensation costs due to inflationary adjustments and additional post-core conversion costs.

Turning to Slide 9, I’ll make a few comments on credit. Asset quality remained strong. In Q2, net charge-offs were $2.3 million, about $300,000 lower than Q1. Our year-to-date annualized net charge-off rate is 8 basis points, lower than the rates over the last three years. NPAs and 90-day past due loans remained low at 10 basis points. That’s flat from the prior quarter. Criticized assets continued to decline, dropping from 1.29% of total loans in Q1 to 0.91% in Q2. The Bank recorded a $1 billion asset provision for the quarter. Loans 30 to 89 days past due were $54.7 million, or 41 basis points of total loans and leases at the end of Q2. The level of past dues were elevated at the end of the quarter, as we implemented some operational changes related to the conversion. By mid-July, we saw a significant improvement with nearly half of the reported past dues being cleared, bringing us back in line with the levels we saw at the end of the first quarter.

Moving to Slide 10, you see a roll forward of the allowance for the quarter by disclosure segments. The allowance for credit loss decreased $1.3 million to a $148.9 million. The level equates to 1.12% of all loans and 1.13% net of PPP loans. The reserve for unfunded commitments was $29 million. While reserve levels have decreased as we moved through the post-pandemic reopening, it remain elevated to account for the macroeconomic uncertainties.

Let me now turn the call back to Bob for closing remarks.

Robert Harrison — Chairman, President and Chief Executive Officer

Thanks, Rob. So to summarize, in spite of the volatility in the national economy, Hawaii has experienced good visitor arrivals this summer and the local economy is doing well. At the bank, we have a good outlook for the second half of 2022 and beyond, as we have a balance sheet that is well positioned for growth with good liquidity, strong capital and excellent credit quality.

Now, we’d be happy to take your questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from Steven Alexopoulos with JPMorgan. Please go ahead.

Steven Alexopoulos — J.P. Morgan — Analyst

Hi, everybody.

Robert Harrison — Chairman, President and Chief Executive Officer

Hey, Steve.

Ralph Mesick — Vice Chairman, Chief Risk Officer, Risk Management Group and Interim Chief Financial Officer, Financ

Hey, Steve.

Kevin Haseyama — Senior Vice President, Strategic Planning & Investor Relations Manager

Good morning, Steve.

Steven Alexopoulos — J.P. Morgan — Analyst

I wanted to start on the deposit side. So you guys reported strong deposit growth in the quarter in the backdrop where many other banks are showing deposits running off. Curious, was that intentional, in other words, were you out there in the market competing for deposits, or was it just flow related, just coming in from the public side?

Robert Harrison — Chairman, President and Chief Executive Officer

Yeah, maybe I’ll start and ask Ralph to add to it, Steve. So, primarily, it was the operating balances at the State of Hawaii is, we’ve had their — we’ve been their depository for quite some time and they just got money and on balance sheet with us. Their public time deposits went down over the quarter, but we did see a substantial increase in the public operating account, the DDA account. We saw a slight decrease in just all the consumer IPC deposits, but nothing more than kind of normal movement.

Steven Alexopoulos — J.P. Morgan — Analyst

Okay. That’s helpful. That’s helpful. So probably…

Ralph Mesick — Vice Chairman, Chief Risk Officer, Risk Management Group and Interim Chief Financial Officer, Financ

I don’t have a lot to add.

Steven Alexopoulos — J.P. Morgan — Analyst

Okay. So if you look at the loan to deposit ratio, it’s pretty low. How do you think about funding the loan growth for the rest of the year, do we see the loan to deposit ratio moving up or do you think you plan to hold it pretty steady?

Robert Harrison — Chairman, President and Chief Executive Officer

We think it should be moving up. We have a lot of cash on balance sheet, higher than normal. I think it’s right about $1.3 billion. Ralph?

Ralph Mesick — Vice Chairman, Chief Risk Officer, Risk Management Group and Interim Chief Financial Officer, Financ

Yeah.

Robert Harrison — Chairman, President and Chief Executive Officer

And that’s higher than we would normally and certainly higher than pre-pandemic levels. So it starts with being able to fund that rotation out of cash into loans there and then with the obviously the roll off of the investment portfolio of $100 plus million a month.

Steven Alexopoulos — J.P. Morgan — Analyst

Got you, okay. That’s helpful. And then, on the margin, I appreciate the NIM guide for the third quarter. What’s the deposit beta that you’re assuming underneath the NIM guide and do you still expect this similar through the cycle beta as the prior cycle?

Ralph Mesick — Vice Chairman, Chief Risk Officer, Risk Management Group and Interim Chief Financial Officer, Financ

Yeah, Steve, this is Ralph. Right now, we’re assuming about a 20% deposit beta.

Steven Alexopoulos — J.P. Morgan — Analyst

Okay. And any change to the through the cycle? I think it’s the last time it’d be about similar to the last cycle?

Ralph Mesick — Vice Chairman, Chief Risk Officer, Risk Management Group and Interim Chief Financial Officer, Financ

Yeah, right now, we’re looking at it probably being similar to the last cycle and a lot of that has to just do with the level of liquidity in the marketplace right now in this local market, particularly.

Steven Alexopoulos — J.P. Morgan — Analyst

Okay, that’s helpful. And just finally, any updates on the CFO search? Thanks.

Robert Harrison — Chairman, President and Chief Executive Officer

Yeah, no, and I meant to mention that, but we really appreciate Ralph continuing as Interim. We’re still working with Korn Ferry to identify the right candidate, but haven’t done that yet, but we’re working very hard with them to make that happen.

Steven Alexopoulos — J.P. Morgan — Analyst

Okay. Thanks for taking all my questions.

Robert Harrison — Chairman, President and Chief Executive Officer

Thank you.

Operator

Thank you. One moment for our next question please. We have a question from David Feaster with Raymond James. Please go ahead.

David Feaster — Raymond James — Analyst

Hey. Good morning, everybody.

Robert Harrison — Chairman, President and Chief Executive Officer

Morning, David.

Ralph Mesick — Vice Chairman, Chief Risk Officer, Risk Management Group and Interim Chief Financial Officer, Financ

Hey, Dave.

David Feaster — Raymond James — Analyst

Look, you guys are, kind of following up on the margin question, you guys are, obviously, extremely rate sensitive. We’ve had a huge amount of margin expansion continuing to benefit from higher rates, just got another 75 [Phonetic] which should continue to play through, but I guess — and look, rate sensitivity is just natural for you all just given the business model and the strength of your core deposit franchise. But as you think about managing rate sensitivity, is there any appetite over the next couple of quarters to maybe lock in some higher rates and take some sensitivity off the table? And if you did so, what would your approach to doing that be?

Ralph Mesick — Vice Chairman, Chief Risk Officer, Risk Management Group and Interim Chief Financial Officer, Financ

Yeah, Dave, I’ll start. This is Ralph. I think right now, when we think about the balance sheet, we have three levers. One being just working with the clients in the swap program, client derivatives. Second being the securities portfolio. And third being just straight on balance sheet hedging activities. I think right now, we would probably ease into any kind of a changing positioning, we wouldn’t try to time the market, and we’ve looked at doing — we’ve done a little bit of — received fixed swaps in the past quarter, and then we’ll also look at — probably looking at some of the maybe either swaps or callers.

David Feaster — Raymond James — Analyst

Okay, okay. And then, maybe just touching on asset quality, look, the macro economy is pretty volatile right now. You’ve got a conservative approach to credit and phenomenal asset quality, but I’m just curious maybe as you step back and look at a high level, is there anything that you guys are watching more closely and how do you think about credit more broadly? Is there anything that you’re seeing, any signs of concern? And then, just the pulse of your clients. What are you hearing from your clients? Are they still investing and — or are you starting to hear maybe on the margin any type of change in a bit more trepidation, just given the uncertainty?

Robert Harrison — Chairman, President and Chief Executive Officer

Yeah, Dave, let me start. This is Bob and maybe hand it off to Ralph. So we haven’t seen any indications yet, tangible evidence. As Ralph mentioned in his remarks, we saw a little blip in just collections on one consumer portfolio that’s been addressed. But generally, where we see weakness in the consumer side, we foresee it in credit cards and indirect lending, and that hasn’t happened as of yet. More broadly, we have, to answer your other question, we’ve seen a couple of projects kind of pushed the pause button on the mainland that we were looking at, but nothing here locally. What we’ve seen locally is people are continuing on to invest, but Ralph, I’ll turn it over to you, if you have any comments.

Ralph Mesick — Vice Chairman, Chief Risk Officer, Risk Management Group and Interim Chief Financial Officer, Financ

Yeah, I would just add that, we had the opportunity with the pandemic to really front-load, and I think CECL was good for that purpose. So I think we’ve embedded a lot of the expectation of stress into the reserve today. And then, when we look at the portfolio, we had the opportunity as well to really take a real deep dive. So I think we feel pretty good about what we have in the portfolio, and I would say that, where we would probably see the most stress given the current situation is going to be smaller consumer and small business loans. And again, I think as we look at the reserve, we’ve taken, I think, a pretty big overlay to support any stress we see there.

David Feaster — Raymond James — Analyst

Okay. And then just last one from me, maybe just with the core conversion completed, could you talk about some of the immediate benefits of this. You mentioned some operational changes. And then, just curious what’s next on the docket? You’ve done a phenomenal job on the tech front. Just curious whether there’s any other upcoming investments or partnerships that you might be interested and what initiatives are next up on the tech front?

Robert Harrison — Chairman, President and Chief Executive Officer

I thought we were going to get a quarter off, Dave, but we had to answer that question.

David Feaster — Raymond James — Analyst

What have you done pretty lately?

Robert Harrison — Chairman, President and Chief Executive Officer

Yes, exactly. No, we — there’s still some follow-on stuff for the core project that we’re working through. It primarily was to automate a number of our manual processes. And so, that has mostly happened and working through, as I said the bits of that. What’s next on the agenda, we have a pretty aggressive roadmap that Chris Dods, our COO, has laid out for us. And we’re going to be executing on that throughout the rest of this year and next year, and a lot of things coming. If you don’t mind, I’d rather answer that more fully next quarter when some of those are more in flight than they are today, when we’re just really getting through the last of the core conversion and picking up the pieces and candidly giving people a little bit of a break as well.

David Feaster — Raymond James — Analyst

Or are we looking at maybe more internal efficiency improvement or outward growth initiatives or is it again just, don’t want to talk about it yet?

Robert Harrison — Chairman, President and Chief Executive Officer

It’s both, clearly. We’re always trying to be more efficient in what we’re doing, but at the same time, what we’re looking at is provide more convenience for the customer and hasn’t for example with the core conversion, we were able to enhance our online account opening. And we’re going to be spending more time on that going forward and to further enhance that, but that’s one of the benefits we’ve got just with the core conversion and that’s an example of the things we’re continuing to be doing over time.

David Feaster — Raymond James — Analyst

Correct. Thanks everybody.

Operator

One moment for our next question. Our next question is from Andrew Liesch with Piper Sandler. Please go ahead.

Andrew Liesch — Piper Sandler — Analyst

Hey, good morning, everyone. Just want to follow-up on the loan growth guidance still seems intact, but how does the pipeline sits today and, I guess, what’s the makeup of the pipeline? Is it still more weighted towards commercial real estate and C&I? And then, any comments around what you’re seeing in the dealer flow in book would also be appreciated.

Robert Harrison — Chairman, President and Chief Executive Officer

Sure, Andrew. This is Bob. Maybe I’ll take that question to start off, but then ask Ralph to add additional comments. What we’re seeing — what we saw, as I mentioned in my remarks is, we saw — as we saw, heavy commercial real estate growth, most of that was on the mainland this quarter. We still see a good pipeline going forward for the quarter we’re in, more of a mix back to Hawaii, probably a little bit heavier in the mainland this quarter, but pretty strong Hawaii pipeline for the quarter end.

We’re still expecting to see some C&I growth, some of that’s dealer along with residential on HELOC. For the dealer, it’s been eking some gains up quarter-after-quarter for this year and it’s starting to see some continued recovery in that. I don’t think we’ll see broad-based volume coming out of the manufacturers to closer to year-end or maybe into 2023, to be honest. So, Ralph, anything you’d add to that?

Ralph Mesick — Vice Chairman, Chief Risk Officer, Risk Management Group and Interim Chief Financial Officer, Financ

No, not really.

Andrew Liesch — Piper Sandler — Analyst

Got you. And then, the residential in the HELOC, is that local or is that in the mainland?

Robert Harrison — Chairman, President and Chief Executive Officer

Yeah, we’re only doing those products within our geographic footprint.

Andrew Liesch — Piper Sandler — Analyst

Okay, that’s very good. All right. You’ve covered all my other questions. I’ll step back. Thanks.

Robert Harrison — Chairman, President and Chief Executive Officer

Thanks, Andrew.

Operator

Thank you. One moment for our next question please. Our next question comes from Kelly Motta with KBW.

Kelly Motta — KBW — Analyst

Hi, good morning. Thank you so much for the question. If I could circle back to NIM and the deposit side, you obviously had the big inflow of public deposits this quarter, just wondering if you could remind us of the seasonality maybe through pricing of the public deposit book as well as if you’re — what your NIM guidance assumes in terms of either maybe outflows of those to seasonality, just curious if I can get the balance sheet right-sized?

Ralph Mesick — Vice Chairman, Chief Risk Officer, Risk Management Group and Interim Chief Financial Officer, Financ

Yeah, I would say that — this is Ralph. I would say that public deposits, they’re operating accounts. They’re probably — it’s really hard to predict what the state will do, but they’re probably in a range which we would anticipate going forward and we have been working with them during the pandemic, try to get them is to put some of that money into alternative asset classes or I should say investments, short-term investments, just to help us keep some leverage off the balance sheet. So I think that’s probably going to stick. We don’t anticipate at this time getting to the public time space. And I think when you look at the balance sheet itself, given the cash position, given the securities run off and just given the level of high quality assets, we probably can fund growth and take some deposit loss and protect our margin. So, I think we feel pretty good about the NIM guidance right now.

Kelly Motta — KBW — Analyst

Okay, thanks for that. And then maybe lastly, most of my questions have been asked and answered. Just on the buyback has been back in the market this quarter. Wondering about your appetite for further share repurchases going forward. Thanks.

Robert Harrison — Chairman, President and Chief Executive Officer

Yeah, Kelly, this is Bob. So that’s something capital return to shareholders is very important to us. That’s why we always keep our strong dividend. One of the issues was, we talked about, I believe, last quarter and maybe even at the fourth quarter call is anticipating this higher loan growth and we have retained our internal guide of looking for our 12% common equity Tier 1. So we’ll probably see muted buybacks for at least a good chunk of this quarter until we get a better feel for, with the loan growth there’s going to be because we do want to make sure we retain and maintain the strong capital level. Later in the year, we’ll certainly be looking at that regularly and maybe that will change, but for now, we’re really going to be focusing on growing quality loans and supporting that with a good amount of capital.

Kelly Motta — KBW — Analyst

Got it. That’s all from me. Thanks so much.

Operator

Thank you. One moment for our next question. I have a question from Laurie Hunsicker with Compass Point. Please go ahead.

Laurie Hunsicker — Compass Point — Analyst

Hi, thanks. Good morning.

Robert Harrison — Chairman, President and Chief Executive Officer

Good morning.

Laurie Hunsicker — Compass Point — Analyst

Ralph, I have a question going back to margin, I feel like we’re all asking on margin, but the 25 basis point to 30 basis point guide, is that core ex-PPP [Phonetic], in other words, I’m looking your PPP fees, it looks like more about 3 basis points on margins. So are you thinking that as the 2.57% starting point or a 2.60% headline. How are you thinking about that?

Ralph Mesick — Vice Chairman, Chief Risk Officer, Risk Management Group and Interim Chief Financial Officer, Financ

Yeah, I think the 25 basis points would be the net of PPP. PPP is going to be a pretty small contributor going forward.

Kevin Haseyama — Senior Vice President, Strategic Planning & Investor Relations Manager

That’s off the 2.60%.

Robert Harrison — Chairman, President and Chief Executive Officer

Yeah, so that would be off the 2.60%, Laurie.

Laurie Hunsicker — Compass Point — Analyst

Right, right. And I’m aware that PPP is almost gone. Okay. Just wanted to clarify. Okay, and then on non-interest income, your guide — did that assume anything in terms of change to overdraft and NSF fees or how are you thinking about that?

Robert Harrison — Chairman, President and Chief Executive Officer

This is Bob. We think that’s going to be flat. As you’ve seen, our reported results have been down over the last couple of years and we’re not going to see much growth in that area. So we’re really not relying on that. What we see is, I think, Ralph touched on is, as market volatility dampens a bit, a return of a more normalized BOLI income for non-interest income.

Laurie Hunsicker — Compass Point — Analyst

Yeah, I appreciate that, 3% to 3.5%, that’s helpful. But so your overdraft and NSF fees, is that then something you probably are going to address in 2023 or…

Robert Harrison — Chairman, President and Chief Executive Officer

Well, that’s something that’s obviously a lot happening on that nationally and we’re following that. We’re looking at alternatives. Candidly during the core conversion isn’t the time to be changing structures like that, but we are looking at it and we haven’t made any decisions yet as far as any potential changes, but we’re certainly redoing it.

Laurie Hunsicker — Compass Point — Analyst

Got it, okay. And then on expenses, appreciate your guide there. Can you help us think about with the, obviously, you had a lot of moving parts driving your expenses higher this year, but how we should be thinking about expense growth into 2023?

Robert Harrison — Chairman, President and Chief Executive Officer

Yeah, Laurie. This is Bob again. That’s a little far out for us right now. But certainly, we are comfortable with the guide that Ralph gave of $113 million to $114 million for the next two quarters, but we’ll have to wait till later in the year to get really an outlook for 2023.

Laurie Hunsicker — Compass Point — Analyst

Okay. And then just the last question was with the warning lights starting to flash. Can you give us a refresh to some two loan categories, your office as well as leverage lending. Can you just refresh us on what those look like and remind us what’s Hawaii-based versus mainland-based?

Robert Harrison — Chairman, President and Chief Executive Officer

Sure, happy to. Total office is about $884 million, about a third of that is small balance CRE, we call that small balance being under $5 million. So very often that’s mixed use, partly owner occupied etc. The mainland exposure is $373 million, with about $150 million of that being in transactions evolving collateral pools with multiple properties. So less tenant concentration, lot of cross collateralization etc. The Hawaii exposure is $466 million and that includes a lot of that small balance loans and in Guam, we have about $45 million, all of which is small balance loans. Of that portfolio, about [Phonetic] $2.9 million is classified. So very, very small arm. Moving to — sorry.

Laurie Hunsicker — Compass Point — Analyst

Did you have an LTV on that?

Ralph Mesick — Vice Chairman, Chief Risk Officer, Risk Management Group and Interim Chief Financial Officer, Financ

We don’t think that’s really — I think the better approach is to take a look at what the level of classifieds are, and they’re really about $2.9 million.

Laurie Hunsicker — Compass Point — Analyst

Okay.

Ralph Mesick — Vice Chairman, Chief Risk Officer, Risk Management Group and Interim Chief Financial Officer, Financ

Yeah.

Robert Harrison — Chairman, President and Chief Executive Officer

Yeah. And then, we’re always looking at this and looking at the stressing the tenancy and the rollover risk, the concentration, all of that. So we’re very comfortable with that. And then, we also have, within our reserve, an overlay in the CRE space for any potential stresses that may come up, maybe seeing some of that today, but we don’t see a lot of it here within our markets. Moving over to leveraged loans, as — I mean, that’s a — there’s not a common definition for that. So we’re trying to piggyback off of, I think it’s the OCC definition which is six times debt commitments, not outstanding debt commitments to EBITDA. And using that metric, we have $39 million at quarter end and all are past rated. And just to remind you, about this time in 2019, we did sell off over $400 million of our SNF portfolio, some of which included leverage line data as well. So we really took that number down in 2019.

Laurie Hunsicker — Compass Point — Analyst

Great. Thanks for the color.

Operator

Thank you. And I’m not showing any further questions in the queue. I’m going to turn it back to Mr. Haseyama for his final thoughts.

Kevin Haseyama — Senior Vice President, Strategic Planning & Investor Relations Manager

Thanks, Carmen. We appreciate your interest in First Hawaiian, and please feel free to contact me if you have any additional questions. Thanks again for joining us and have a nice weekend.

Operator

[Operator Closing Remarks]