May 8, 2009
Executives
Manuel Henriquez- Co-Founder, Chairman and CEO David Lund - CFO DeDe Sheel - FD Ashton Partners
Analysts
John Hecht - JMP Securities Greg Mason - Stifel Nicolaus Robert Napoli - Piper Jaffray Henry Coffey - Sterne, Agee & Leach
Operator
Welcome to the Hercules Technology Growth Capital, Q1 2008 conference call. Today's conference is being recorded.
At this time, I would like to turn the conference over to DeDe Sheel. Please go ahead.
DeDe Sheel
Thank you, operator, and good afternoon everyone. On the call today are Manuel Henriquez, Hercules Co-Founder, Chairman and CEO; and David Lund, CFO.
Our first quarter 2009 financial results were released just after today's market close. They can be accessed from the Company's website, at herculestech.com, or htgc.com.
We have arranged for a tape replay of today's call, which will be available through our website or by using the telephone numbers and pass code provided in today's earnings release. I would like to call your attention to the Safe Harbor disclosure in our earnings release regarding forward-looking information.
Today's conference call may include forward-looking statements and projections. We ask that you refer to our most recent filings with the SEC for important risk factors that could cause actual results to differ materially from these projections.
We do not take any obligations to update our forward-looking statements unless required by law. To obtain copies of our latest SEC filings, please visit sec.gov or visit our website at herculestech.com.
I would now like to turn the call over to Manuel Henriquez, Hercules Co-Founder, Chairman and CEO. Manuel?
Manuel Henriquez
Thank you, DeDe, and good afternoon everybody and thank you for joining us today on the call. Well, after very a tough first quarter of the year, we are very proud to release today our financial performance and our strong earnings we had in this quarter despite and otherwise a challenging in the ventures market.
I wanted to emphasize at the beginning of this call that the success of Hercules continues to be upon the professionals we have in this organization who continue to work extremely hard in all the challenging marketplace and I will like to strongly emphasize the achievements that we've accomplished here are squarely because of their contributions to the organization and their hard work. I am very pleased with the financial performance.
I think that it demonstrates Hercules continuous capability as an organization and our capabilities in understanding of the asset class by which we operate and invest in. Many, many people have asked us many questions regarding the venture capital marketplace, which I will elaborate during this call and currently expand upon that during our question-and-answer session at the end of this call.
But first, let me turn briefly to our operations and speak to the high level on multiple different fronts of our achievements as a company, achievements of the marketplace, our liquidity, our asset quality and our overall strategic directions and initiatives that we are contemplating and pursuing. First to our operations, revenues grew year-over-year by 31% despite and otherwise challenging market.
In addition to that net investment income or more commonly purchased NII also saw a record number at $0.35 per share. This despite and otherwise challenging market as we said earlier.
In addition to that we have seen a growing spread on our yield spreads in our underlying investments with our effective yield to maturity on our investments 15.6% and our interest margin which continued to expand to currently at 12.35% and of course will expand upon that during our financial section of this discussion with David. Continuously down the balance sheet, we have also continued to deleverage the balance sheet.
I'm very happy to say that as of today we have debt outstanding of just under $2.5 million on our Wells Fargo Facility and of course our long-term capital facilities from the SBA continue to be drawn, which is a long-term strategic partner for us and source of long-term stable source of capital for our growth. During the quarter, we also accomplished a very feat and that is -- that we repaid a $135 million line of credit to Citibank and Deutsche Bank in a period of time that was unanticipated in the marketplace being done in a five months period of time.
Beyond that, we move towards our asset quality, despite this otherwise challenging market, our asset quality remains extremely strong. I am proud to say that since starting of Hercules or I should say since the first quarter of originations, which is October 2004, we have now committed over $1.5 billion of invested capital to technology life sciences companies and I'm proud to say that as of the end of the first quarter, we have only experienced gross loan losses of only $7 million since inception, not just in calendar '08 or the first quarter of '09, but since inception, a mere $7 million and that of course is before any contribution of benefits from realized security warrants gains, which will drive at number close to zero.
Moving beyond that, let me take an opportunity to talk about the venture capital marketplace, which is clearly an important market which we operate in and we continue to see contractions occurring. Hercules had anticipated for over a year ago a significant contraction in the venture capital marketplace.
We over a year ago consciously made a decision to deemphasize an asset class or I should say an early stage focus in the venture capital marketplace, which we did over a year ago to be highly risky and highly dangerous area to be investing in. We had continually and materially deemphasized that investment area for the period time and our portfolio exposure is somewhere in the neighborhood of around 5% to 7% of early stage investments that we had in that segment of the market, as to the venture capital activity themselves.
Liquidity; we all of us know and all have come to realize that dependency in IPO is all about non-existence. However we've seen glimmer of hopes for IPOs opening up in the second quarter with two companies achieving IPO liquidity event.
However, two does not make a trend. So, no IPO activity took place in the first quarter.
However, we saw a fairly decent although not necessarily robust but encouraging liquidity via M&A. We saw approximately $3.2 million of assets being realized in the venture capital marketplace in the first quarter, attributed to M&A activities representing approximately 40 companies.
That however, is the lowest activity that we have seen in M&A since 2003. As to the investment phase on the other hand, the venture capitals invested approximately $3.9 billion of venture capital activity in the first quarter.
That is down unfortunately 50% year over year. However, its still an indication that venture capitals are supporting and investing in the companies.
Despite some naysayers out there the venture capitals are so active but they are certainly being much more cautious in their portfolio and shifting their investment focuses towards more later stage and generally technology companies. In terms of the sectors, of the $3.9 billion invested in the first quarter approximately 44% of that capital or $1.7 billion of that capital was directed towards IT or Information Technology companies.
The balance or 36% of the capital were deployed in Life Sciences during the same period of time. By stage, as I said just some moments ago the venture capitalist have made a conscious decision to shift their investment focus away from early stage companies, which represent approximately 18% of the capital invested in the first quarter.
Two more later stage or to say differently, more matured companies which represent substantially the portfolio at Hercules as the venture capitals invested approximately 55% of the $3.9 billion in later stage companies. Lastly, to make the ecosystem complete, we have venture capitals fund raising activities, that is the venture firms starting new pools of capital to direct those new pools of capital towards investments.
Surprising to ourselves we actually saw a healthier capital raising activities by the venture capital firms of $4.3 billion in Q1 to 40 new venture firms. Surprisingly to us that number is actually higher than the fourth quarter of $3.5 billion of activities or fundraising activities by the venture capitalist in the marketplace.
All this data by the way is from Dow Jones, venture source, a leading source of data of access or data source that we provide on and looking at venture capital activity. Now, let me take a moment and talk about some of the strategic directions.
Given our high liquidity, a recurring happened in the marketplace. Given our appetite on building our cash positions, we are looking at using our liquidity to pursue more towards different strategic directions and opportunities.
One of which we've indicated this morning is our interest and allocating approximately $15 million of capital to buyback some our stock clearly contingent upon certain prices and certain parameters that we which we deem to be an appropriate investment decision to pursue a stock repurchase program. We are also been actively looking at multiple different portfolios of other companies to be potentially acquire or selectively acquire through investments in those portfolios that would represents attractive underwriting under the underwriting standard if Hercules would apply to those as well as adequate yields that we would seek from our deployment of that capital.
In addition to that, we were also actively looking at other strategic initiatives that we would expand upon as those initiatives become more clear or we have more clearly identified opportunities that warrant more of the disclosures. We have consciously made a decision to maintain a high liquidity position in a low to insignificant leverage on our balance sheet for at least the next two quarters.
Despite an attractive market for potential investment opportunities, we feel strongly and we think it is prudent to maintain liquidity to insure that the stabilization in economy that we are seeing today actually manifest itself into a tangible and realizable recovery. We are certainly very encouraged by what we are seeing today.
But in few weeks doest not necessarily make a trend that is sustainable. To that end, we feel it is prudent for us to continue to maintain a high level of liquidity, maintain our capital in the SBA fully invested, and opportunistically look for portfolios or other targeted strategic acquisitions to pursue that may yield greater returns for our shareholders over the foreseeable future.
I will now turn over the call to David Lund, our CFO to discuss our financial achievements and results, our credit performance, further expand upon our credit quality and after that David and I will be happy to answer just little questions from our investors. David?
David Lund
Thank you, Manuel. As Manuel indicated, we are very pleased with our financial performance for the first quarter of 2009.
Despite the current challenging market, we believe our results for the quarter were outstanding. Today I'd like to cover in detail three aspects of Hercules performance for the quarter; continued strong NII achievements, high level of credit quality and liquidity and capital resources.
During q-and-a Manuel and I will happy to answer to any questions that I do not address here in the next section. First I will touch on Q1 operating results.
Year-over-year we had growth in investment income, NII and net interest margin as evidenced by achieving in excess of $20 million of investment income for the quarter. We feel the performance of our investment strategy is impressive in this challenging credit environment.
The effective yield on our debt investments during the quarter was 15.6%, which is higher than the preceding quarter yield of 49.9%, primarily due to higher income from acceleration of fees and interest from early loan repayments and as our team continues to renegotiate harder terms with our loan amendments. Quarter-over-quarter, we were able to reduce our cost of debt from $5.5 million $to 4.4 million by decreasing our average balance outstanding from $245 million to $194 million through the repayment of the Citibank credit facility.
We expect further reduction in our cost of debt in the second quarter due to continued reduction in the weighted average balance outstanding and a lower cost debt due to the elimination of high cost Citibank credit facility. Operating expenses decreased over the previous quarter by approximately $750,000 as a result of the reduction in force we completed during the first quarter and our ongoing efforts to manage our expenses, as evidenced by our low efficiency ratio of approximately 29% for the quarter.
These significant factors of improving effective yield, cost of debt reduction and managing operating expenses contributed in Q1 to record net investment income of $11.6 million or $0.35 per share and taxable income of approximately $10.3 million or $0.31 per share, excluding capital losses on a tax basis of approximately $270,000. Turning to credit performance; the weighted average loan rating of our portfolio moved up slightly 2.43 compared to 2.39 at the end of 2008.
This change in rating was primarily attributable to the increase in company's rated three from approximately 29% to 35% of the total portfolio. I would like to remind our listeners that our companies are downgraded to a three rating when they approach the need for additional round of financing.
As of at the end of the quarter, we have three companies that are non accrual with the combined returning value of less than $1.4 million or less than 0.3% of the fair value of our loan portfolio and less than 0.8% on a cost basis. We continue to be vigilant in monitoring our portfolio and direct our resources at mitigating losses by early identification of troubled credits.
During the quarter, we have recognized approximately $5.9 million of net unrealized depreciation. This was driven primarily by approximately $5 million depreciation in loan values related to two loans.
These valuations were adjusted in accordance with FAS 157. As we have indication before we view the current economic environment at unprecedented in terms of lack of liquidity and high uncertainty.
We believe that credit management is a top priority in weathering this capital market storm. On that note I would like to address Hercules' liquidity and capital resources.
We successfully repaid all borrowings under our $135 million Citibank credit facility on March 25th more than a month before the maturity date. We achieved that through the structure of our deals that will include early amortization of principle and through collection of early repayment on loans and managing our operating expenses.
Another factor, which contributed to the repayment of the Citibank credit facility was the liquidity we have available through our Wells Fargo facility and the SBA program. We maintain a strong relationship with these partners as evidenced by he recent amendment to the tangible net worth covenant we closed with Wells Fargo earlier this week.
Our continuing management of our credit facilities and strong performance allowed us to reduce the tangible net worth requirements from $360 million to $250 million something that we thought was important in terms of managing the credit facility. Our current liquidity position is strong.
We have $32.8 million outstanding on the Wells facility at quarter end and have since reduced this to a balance of $2.5 million today with collections of early repayments and normal interest, principle and fee collections. Our facility with Wells Fargo currently allows borrowing up to $50 million subject to advance rates and can be increased to $300 million by additional lenders to the facility.
We are currently in discussions with the potential providers but can make no assurances that will join the facility. Regarding the SBA we have a $137.1 million of available borrowings subject to SBA commitment approval of which we have drawn a $127.2 million.
During the first quarter as part of the stimulus package, leverage under the SBA program increased to $150 million. With this increase, the company will have access to approximately $23 million in additional SBA capital subject to certain credit and regulatory limitations.
The combined availability from these sources today totals up to approximate $17 million. In addition, the stimulus package allows for the addition of a second license, which could provide an additional $75 million in leverage, bringing total SBA leverage to $225 million, subject to license approval.
I would like to let investors know we are currently in the process of submitting our license requested this time. In addition, the scheduled normal principal amortization of our portfolio over the next three quarters is expected to generate between $25 million to $35 million per quarter in principal repayments.
With the maturity of working capital lines and possible early principal repayments, we may expect to receive up to an additional $5 million to $10 million in principal repayments during the course of the next three quarters. The tremendous achievement of paying of Citibank facility and securing these capital resources are our testaments to our teams' ability to manage our portfolio of companies and places us in a highly advantages position from the liquidity perspective as we look to the balance of 2009.
Finally, we are pleased to announce that our Board of Directors has authorized the cash dividend at $0.30 per share payable on June 15th for shareholders of record on May 15th. As our investors may recall effective in 2009, our Board of Directors adopted a policy there should be four quarterly distributions in an amount that approximates 90 to 95% of our taxable income.
In addition, at the end of the year, we may also pay an additional special dividend such that we may distribute approximately 98% of our annual taxable income in the year it was earned in stead of spilling over our access taxable income. In closing, we believe we are in an enviable position.
We have access to capital, good credit quality and see opportunities for continued investments while we are more focused on liquidity and growth in this market. Operator, we are now ready to open the call for questions.
Operator
Thank you. (Operator instructions).
The first question comes from John Hecht with JMP Securities.
John Hecht - JMP Securities
Good afternoon, guys. Congratulations on a very successful quarter given the current environment?
Manuel Henriquez
Thanks, John.
John Hecht - JMP Securities
On the liquidity side if I add up the numbers correctly and David I think you referred to some of this you have north of 70 million in capacity; plus your cash flow of 25 to 35 of principal payments per quarter. With that kind of capacity and now are seen attractive from the term basis lending environment, do you expect to may be get a little bit more active or you kind of continue to just -- the real opportunities out there as a percent of sales, which is very few.
How do you pursue this marketplace right now?
Manuel Henriquez
Well, a couple of clarification. The market is full of opportunities.
It doesn't necessarily make them all attractive opportunities and there needs to be a really a discrimination on credit quality in the marketplace itself. We are still seeing leverage at underlying perspective companies still being a little too high.
We still think that pricing of the underlying middle market companies is not reflective of the inherent risk that we, at least Hercules deem to exist. I know some of other BDCs out there feel the market is incredibly attractive and ripe with opportunities.
We are more cautious about that. We think there are opportunities out there.
But we do not feel that we should weigh in with both feet right now. We really feel strongly that we are going to take a more slow and steady approach and let the summer cycle through to ensure that we are in actually in a upside recovery on this economy before we start using up all our liquidity.
We feel however very strongly the fourth quarter will represent a very attractive investment opportunity as well as even a high liquidity position in our balance sheet to pursue those opportunities.
John Hecht - JMP Securities
Okay. You talked historically about potential additions to the Foothill indicate that you have been talking any potential new creditors?
Manuel Henriquez
I really have to report that truly a --- I guess a remarkable achievement was the repayment of Citibank and Deutsche Bank line one month earlier but more importantly reinforcing what Hercules has been saying all long that our ability to generate liquidity is I think grossly underestimated or misunderstood in the marketplace. We as an organization, marshalling our resources just proved that we are able to take a $135 million commitment of which we had approximately $130 million outstanding and payback in five months.
I find it to be fairly unprecedented any BDC out there can generate that kind of liquidity at such short period of time. We did that while improving credit quality, increasing or widening yield spreads, which has translated into obviously higher effective yield in higher and increasing net interest margin.
I think it's quite important. That achievement has allowed us to re-circle back lenders who were previously engaged or had expressed an interest in working with Hercules are now becoming much more involved in their due diligence are possibly joining a syndicate with adjusting Well Fargo facility, or creating a separate standalone credit facilities.
I am encouraged on that front most so than I've ever been for the last nine months to be able to make that statement. There is nothing completely done yet.
We are very encouraged by the exchange of discussions that we've been having, and we are beyond in assets due diligence, and we are frankly just down to discussing ultimate size of the deal and conditions by which the deal will be put together.
John Hecht - JMP Securities
The final question is, if I remember you had, and David might have referred to one of these one numbers as well. You had I think somewhere in the mid to high teens of spillover dividend from the last year.
Then obviously, you are trending more in the Q1 of this year. You did refer to potential special dividend in Q4 of this year.
Can you just maybe refresh us what your total carryover is now and what the timing of the last year's carry over or payments what have to be before you engage in an excise tax situation?
David Lund
Our spillover from 2008 is $0.18 per share. So, obviously, depending upon what happens through the course of 2009, we can't tell you today what will happen in terms of the dividends or something.
However, right now, we've got $0.18 of spillover from 2008.
Manuel Henriquez
John, as Dave just referred to, these spillover is something that we clear want and anticipate distributing. However, our cost to purchase and liquidity continues to be that we want to be watchful for our portfolio.
We have about I would say, 25% to 30% of our portfolio is in the midst of will be the midst of closing subsequent equity rounds of financing's, and I would feel a lot better once that financing is completed by some of our portfolio companies. Which means that, we basically crossed the chasm in 2009 with the majority or substantially all of our companies receiving rounds of financing.
We have some large events in our portfolio. There are contingent events that are outside of our control and the company's control.
We have two specific life sciences companies that are in the process of completing of what's called Phase III clinical trials. These clinical trails if successful would be very significant value unlocking event.
If those trails are for example not favorable, it means that it could be a challenging situation, so we are looking for those situation to see what happens, and we expect to have clarity on that in the June to July timeframe where they are expected to get FDA clinical trial approval. I want to be clear though.
We are not saying nor are we expecting to see losses on that. However, I need to caution people as we continue to do and be prudent, that we are in a business where our underlying portfolio companies often times have milestones that they'll need to achieve in order to garner the next round of financing or unlock the next stage of value creation they embark.
John Hecht - JMP Securities
Sp, with that, it's fair to think that, late summer, early fall, your companies will then recapitalize the venture capital community, and you'll have good visibility into the success of the FDA approvals for those companies, so we could get into more thorough discussion at that point with respect to the dividend plans?
Manuel Henriquez
Absolutely. I think that as the year progresses, the clarity on the dividend, the fifth dividend.
We were originally talking about the fifth dividend, will become much more salient. I think that we will have greater confidence or visibility as we complete the second quarter.
That is a significant milestone for some of these companies. Again, a lot of these companies are well capitalized through 2009, but they have some binary events that are outside their control, investor's control and our control.
Operator
The next question comes from Greg Mason with Stifel Nicolaus.
Greg Mason - Stifel Nicolaus
Could you talk about what percentage of your portfolio is going to need new rounds of financing in 2009?
Manuel Henriquez
I think that that number right now is hovering around the 30% to 35% for the remainder of 2009, and that's heavily weighted more so into completion of Q2 itself. We have seen acceleration however.
A lot of our companies rather than waiting for third quarter to close a new round of equity capital, they are being more cautious and closing it today, which we think is obviously the a prudent thing to do. So, on an aggregate basis, probably 30% for the remainder of the year.
A lot of that I think is more heavy weighed towards Q2.
Greg Mason - Stifel Nicolaus
Then when you discussed a strategic alternatives of buying portfolios, can you give us some color on where you are looking, is that US VC, may be expanding European VC or even potentially expanding into the middle of market?
Manuel Henriquez
We find ourselves in a very fortuitous position right now with the delevering of our balance and access to liquidity that we have, and our continued credit performance. We are looking at multiple different portfolios that maybe purchased in aggregate or we may selectively buy some of the portfolios.
I won't elaborate more than that because it wouldn't be wise for me to do that since these conversations are ongoing. I will share this that we are struggling with a lot of the credit qualities on some of these underlying portfolios that we are seeing that when you superimpose the Hercules' underwriting requirements and yields, they are falling materially short of what we would deem to be adequate investments.
We are also finding ourselves that some of these portfolios that we are evaluating have some investment opportunities that we had previously looked at, and passed on, so we are scratching our heads a little bit, when we actually passed on that to find ourselves with the possibility of acquiring portfolio through investors that we passed on for credit quality or pricing. So it is really a tricky thing.
It hinges around ultimate credit quality and yields that we are going to get. We are not interested in looking at portfolios that merely going to churn out 50% yield for example.
Our hurdle rates are, and those returns are quite higher than that, and that is making a lot of portfolios who may be okay, not very attractive targets for us to acquire because of the yield spreads that we are looking for.
Operator
Next question comes from Robert Napoli with Piper Jaffray.
Robert Napoli - Piper Jaffray
Nice job by paying back the debts. That way you did a nice show of liquidity, and I appreciate your feedback on the banks becoming more interested.
Are you seeing more numbers of banks? Are you talking to banks that you haven't talked to before?
How are they talking about pricing today? Are they getting any less strict on pricing or not?
Manuel Henriquez
To answer the first two part of your question, the old ones returned, and some new one circling. We are engaged in much more conversation.
So, it's a little bit of both, but primarily it's more of folks that we have spoken to in the past that have I think reconciled the reservations they may have had in underlying asset that we invested, mini-venture stage companies, where, there continues to be the schism or not believing that a non-cash flow positive company could actually amortize itself down and payback capital. I think we have approving the venture stage companies frankly seem to be outperforming the lower middle market companies out there, which in it by itself is an irony.
So, I think that has served us to validate the underlying collateral pool asset class with these commercial banks who are contemplating entering the warehouse credit facility in marketplace, and the Citibank, Deutsche Bank payback has not gone unnoticed.
Robert Napoli - Piper Jaffray
Now you say in your press release if I am reading this right, and I missed some of your opening comments, but no non-binding term sheets outstanding. So, are you going to, and I know you are looking at portfolios, but do you not intend to originate much at all organically for the very near-term?
Manuel Henriquez
No. I wouldn't say that.
I think that the Q1in particular was clearly tied to our positioning that we discussed in the fourth quarter, during the earnings call that we had in the first quarter, and that was, until we felt strongly and comfortably that we could fully payback the Citibank, Deutsche Bank line, we have opted to preserve capital and ensure liquidity to achieve that end. So, we have opted only to provide capital to existing portfolio companies or renew just the credit facilities to our portfolio companies and less so on embarking on new commitments.
I feel that that decision even to this day was a right one. I think that we've seen yields widened since the first quarter till today, and we are still seeing greater yield spreads going on in the marketplace today.
However, we are still seeing that the terms by which Hercules believes that credit facility should be extended to certain companies is not quite where it should be, and other BDCs out there are much more eager to originate deals at 13%, 15% yields, while we are much more cognizant of leverage and net spreads that we've achieved in our underwriting. We believe that we are going to continue to sustain our SBA portfolio on a fully invested basis, and so that will probably indicate investment activities between $10 to $15 million a quarter, and potentially de novo invested opportunities.
If we find something that's extremely attractive, that may accelerate that. However, we are not eager to be extremely active in the second quarter and lesser in the third quarter, which is historically our slowest quarter anyway.
We are positioning ourselves for the fourth quarter, which we feel strongly will be a very attractive quarter if the trends that we are seeing emerging in the marketplace continue going in the direction that they are.
Robert Napoli - Piper Jaffray
What are your target yields? When we talked about portfolio purchases, are you looking for unlevered yields totaling 20%?
Manuel Henriquez
In excess of that.
Robert Napoli - Piper Jaffray
How do you get there? What percentage by the warrant and what percentage by cash?
Manuel Henriquez
That's all cash. We are not a big believer in some of these lower middle market portfolios, equity or warrant positions that they hold.
We think that a lot of these portfolios are possibly over valued from what we are seeing in the marketplace from what we would consider to be fair value underwriting standards. I mean, some folks are carrying investments at 10 to 12 times EBITDA, when we feel that the valuation is more like five times EBITDA in an enterprise value.
So, there is a fairly horrific disconnect between what we think is prudence and valuation with what the enterprise value-to-debt coverages on some of these companies are, and that's causing us some pause evaluating or consideration in buying some of these portfolios. It doesn't make these portfolios necessarily bad.
It just doesn't achieve the returns that we think that we deserve or mitigate the risk that we think that they have in those portfolios.
Operator
(Operator instructions) Moving on to Henry Coffey with Sterne, Agee.
Henry Coffey - Sterne, Agee & Leach
Good afternoon everyone and let me add my congratulations on an absolutely amazing accomplishment frankly.
Manuel Henriquez
Thank you, Henry.
Henry Coffey - Sterne, Agee & Leach
We all get to watch banks, and I think most of us know how unstable they can be. As you look forward, and obviously you are in discussion with banks, and you've got your Wells relationship.
As you look to structure your new borrowing or your new leverage capacity, how are you viewing the role the banks are playing in the equation, and how are you viewing the role of SBA place in the equation. Is one sort of permanent debt and the other is sort of interim debt or do you think the banks will ever be able to reenter your lives as the source of a sort of permanent financing against your assets?
David Lund
I think Henry we are going to be looking for the banks do more long-term financing. For instance Wells Fargo was a two year deal with an extension to it.
Henry Coffey
You mean an automatic extension?
Ferris, Baker Watts
You mean an automatic extension?
David Lund
Yes and our election with the banks. So, we are looking for more long-term facilities with these organizations, and certainly, we want to leverage the SBA because of the increased amount of $225 million.
That gives us a considerable amount of access to capital that we can use over a course of the next seven to ten years.
Manuel Henriquez
I think that we tend to be little more conservative than we probably should be, but we needed to really highlight something that's quite important that happened earlier this week, and this is a material development. The SBA issued guidance this week on the methodologies or procedures by which to now gain access to the $450 million new leverage which is approved by the Congress in the stimulus package, and more importantly to that, we now have clarity as to the methodologies and procedures by which we need to then apply for the second SBA license for the full $225 million which David alluded to, which both are now underway on our behalf.
Meaning, Hercules will be filing the necessary paper works to achieve both of those endpoints in the near future. That clarity did not exist until earlier this week.
Henry Coffey
Are they going to allow companies to do the full three to one leverage or they are just hoping nobody asked for that?
Ferris, Baker Watts
Are they going to allow companies to do the full three to one leverage or they are just hoping nobody asked for that?
David Lund
Yes. Really I think, they've talked about three to one, but they've kind of hinted that they really going to be working on a two to one.
Manuel Henriquez
So, if you look at potential liquidity that maybe coming online for us, deducting the contributed equity capital that we to place into the SBA, we could have a total $170 million of total additional liquidity, that would come online by increasing the SBA facility to 150, and then approaching the $225 million.
Henry Coffey
Could you build a permanent business around that? That sounds like a pretty stable source of funding versus the banks.
They will be begging at your door in two years and then trying to put you out of business in other ways Citibank and Deutsche Bank did?
Ferris, Baker Watts
Could you build a permanent business around that? That sounds like a pretty stable source of funding versus the banks.
They will be begging at your door in two years and then trying to put you out of business in other ways Citibank and Deutsche Bank did?
Manuel Henriquez
In fairness to the bank, unfortunately, the contraction of banking was nothing attributed to us. We clearly are looking, and Wells Fargo has been a fantastic partner thus far and working with us.
As you saw and heard David's overview, I am extremely grateful and frankly, Wells Fargo recognize the credit quality of Hercules that, they felt very comfortable lowering the tangible net worth covenant from the high of $360 million tangible net worth covenant to now a covenant that doesn't really cause me any problems to reach $250 million before any risk to the covenant being tripped exist. I think that is a very good sign of a partnership with Wells Fargo.
I think it reflects on the quality of the Hercules team and the credit underwriting standards that they have the confidence to lower the tangible net worth covenant.
Henry Coffey
That is obviously a major step forward and an indication from them about how active they really want you to use the money?
Ferris, Baker Watts
That is obviously a major step forward and an indication from them about how active they really want you to use the money?
Manuel Henriquez
We actually expect to grow our relation with Wells Fargo beyond the $50 million we have with them today. That is certainly part of the long-term strategies of partnership with them.
Now, really more to your point or salient to your point is, its absolutely clear that Hercules wants to grow with the SBA as a partner reflecting 10 years fixed cost of capital that is extremely stable, and one that is reliable enough that we don't have to go to the amalgamations that we went through or gyrations we went through with the existing banking crisis that we just are finally coming out of. So the SBA continues to be a fantastic partner and the SBA's staff has been very, very accommodating in working with Hercules.
Henry Coffey
Do you have the resources in the non-SBA part of your business to put the capital into the SBA part that would allow you to build that leverage or how would you get money into your SBIC?
Ferris, Baker Watts
Do you have the resources in the non-SBA part of your business to put the capital into the SBA part that would allow you to build that leverage or how would you get money into your SBIC?
Manuel Henriquez
As David said in his overview, we are currently [flugged and] not building significant liquidity. We have anywhere between $25 million to $35 million a quarter in normal cash flows that come in.
Then we anticipate clearly $5 million to $10 million of early payoff that happened during the quarter as well. By taking the position on being conservative with our balance sheet over the next four to five months, meaning, during the summer periods of time, we will have ample liquidity to more than satisfy the regulatory capital contributions, which are approximately $37 million to fund the full SBA leverage.
So, it's a non issue.
Henry Coffey
David, you mentioned and I think I missed the numbers; it was three loans on non-accruals for a total 0.8% of loans at cost?
Ferris, Baker Watts
David, you mentioned and I think I missed the numbers; it was three loans on non-accruals for a total 0.8% of loans at cost?
David Lund
That's correct.
Henry Coffey
Thank you for all that and obviously an excellent job and congratulations to everyone.
Ferris, Baker Watts
Thank you for all that and obviously an excellent job and congratulations to everyone.
Operator
We go back to Greg Mason with Stifel Nicolaus.
Greg Mason - Stifel Nicolaus
I just have a couple of quick modeling questions. Could you quantify what level of interest and fees were generated this quarter from your portfolio access looking for more of an ongoing run-rate for interest and fees?
Manuel Henriquez
Why don't we do this, why don't we actually follow that up with you after the call, and we'll that schedule for you. Obviously, we didn't bring that into this room.
So that we can prepare for the call back, you want to know specifically, how much of the interest recognized in the first quarter?
David Lund
Was from accelerated fees and interest? So we'll follow up with that Greg.
Greg Mason - Stifel Nicolaus
Number two. Did you have to give anything to Wells for the minimum net worth covenant relief?
David Lund
No. There were no fees, no give ups, no nothing.
This was just a mutual agreement that based on the performance of Hercules we were able to adjust the covenant.
Greg Mason - Stifel Nicolaus
Then what are the borrowing fees now associated with just the Wells facility going forward?
David Lund
The borrowing fees that we have were fixed. We paid 0.75 basis points at the beginning of the relationship with them.
So there are no ongoing fees except for a non-use fee.
Greg Mason - Stifel Nicolaus
The facility then is tiered and declines in the second year?
David Lund
Yes. It drops down to 0.30 for non-use fee.
Greg Mason - Stifel Nicolaus
Okay. One last question.
With the stock buyback, can you guys give us some color on what you are thinking with the stock running here lately, does that still make sense in your minds at these levels?
Manuel Henriquez
Obviously, I'm not going to give you the answer in terms of what are the parameters by which we would engage in a stock buyback, but clearly, I think that the [simpler way of] saying is that, at 30% dividend yield, 25% dividend yield or etcetera dividend yield is, we feel inadequate, it is better served to retire the stock than to continue to pay out if there is a dividend yield on that stock. So, clearly, we are not going to share what those pricing parameters are or thresholds that we'll embark on other than to say that, clearly a 30% dividend yield, a 25% dividend yield on a stock, we feel is probably an area which we don't think is deserved given our credit performance and our continued widening yield spreads and NII growth that we are seeing.
Operator
At this time there are no further questions.
Manuel Henriquez
Thank you operator. I want to remind everybody that on June, 3 in our Boston office, we will be hosting our annual shareholder meeting.
Please feel free to attend if you would like. Also, as we historically do after every earnings call, if any investor would like to have a meeting scheduled with us, Dave and I would be scheduled to be on the road over the course of the next two to four weeks subject to schedules.
If you have an interest in anyone of the cities that we plan on visiting which are Boston, Philadelphia, Baltimore or Chicago, and any other city where investors would like us to visit, we'll see if we can get it on the schedule. Again, thank you very much for everybody's participation, and thank you for continuing to be one of our shareholders, and for listening to the Hercules story.
Thank you very much.
Operator
That does conclude today's conference. Thank you for participation today.