Capital Southwest (CSWC) Q1 2023 Earnings Call Transcript

Capital Southwest (CSWC 0.39%)
Q1 2023 Earnings Call
Aug 02, 2022, 11:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Thank you for joining today's Capital Southwest's first quarter fiscal year 2023 earnings call. Participating on the call today are Bowen Diehl, CEO; Michael Sarner, CFO; and Chris Chris Rehberger, V.P. finance. I will now turn the call over to Chris Rehberger.

Chris Rehberger -- Treasurer and Vice President, Finance

Thank you. I'd like to remind everyone that in the course of this call, we will be making certain forward-looking statements. These statements are based on current conditions, only available information, management's expectations, assumptions, the belief. They are not guarantees of future results suggest numerous uncertainties and assumptions that could cause actual results to differ materially.

For information concerning these risks and uncertainties, the Capital Southwest publicly available filings with the SEC. The company does not undertake any obligation to update or revise any forward-looking statements, whether as a result of new information, future events, changing circumstances, or any other reason after the date of this press release, except as required by law. I will now have to call off the president, and chief executive officer, Bowen Diehl.

Bowen Diehl -- Chief Executive Officer

Thanks, Chris. And thank you to everyone for joining us for our first quarter of fiscal year 2023 earnings call. We are pleased with you this morning, and look forward to giving you an update on the performance of our company and our portfolio as we continue to diligently execute our investment strategy for stewards of your capital. Throughout our prepared remarks, we will refer to various slides in our earnings presentation, which can be found on our website at www.capitalsouthwest.com.

You'll also find our quarterly earnings release issued last evening on our website. Well, begin on [inaudible] at the earnings presentation where we have summarize some of the key performance highlights for the quarter. During the quarter, we generated pre-tax net investment income of $0.50 per share, which represented 11% growth over the $0.45 per share generated in the year ago during the quarter. The $0.50 per share more than earned our regular dividend paid during the quarter of $0.48 per share.

Total dividends for the quarter were $0.63 per share, which included a special dividend of $0.15 per share also paid out during the quarter. We are pleased to announce today that our board has declared a $0.02 per share increase in our regular dividend to $0.50 per share for the quarter ending September 30th, 2022. This increase represented 4.2% growth over the $0.48 per share paid out in the June quarter, and 16% growth over the $0.43 per share paid out in the year ago September quarter. This increase in our recurring rate regular dividend reflects the increased earnings power of our portfolio resulting from the increase in market interest rates over the past few months.

The growth and performance of our credit portfolio and the improvements in our operating leverage. During the quarter, acquisition and financing activity in the lower middle market continued to be strong. This quarter we surpassed the $1 billion threshold in total investment assets, and representing 7.5% growth over the quarter and 26% portfolio growth over the past year. Portfolio growth during the quarter was driven by a $148 million of new commitments, consisting of commitments to six new portfolio companies for $139 million, and add on commitments to eight existing portfolio companies totaling nine.

This was offset by $50 million in proceeds from three debt repayments, and one equity exit during the quarter. On the capitalization front, we raised $46.8 million of equity through our HCA program at an average price of $20.60 per share, representing an average of 123% of the prevailing than asset value per share. Our liquidity remains robust in approximately $180 million in cash and undrawn capital at the end of the quarter. We feel very good about the condition of our portfolio overall and of our company.

That said, we have remained diligent in funding a meaningful portion of our investment asset growth with accretive equity issuances on our equity ATM program. As we think it is critical that we maintain a conservative mindset to BDC leverage given the uncertainty of the economy and capital markets. On slide seven, and eight, we illustrate our continued track record of producing steady dividend growth, consistent dividend coverage, and value creation since the launch of our credit strategy. We believe the solid performance of our portfolio, as well as our companies sustained access to the capital markets, has demonstrated the strength of our investments in capitalization management strategies.

Maintenance and growth are both shareholder dividends and an 84 share remain as core tenets of our long-term investment objective of creating long-term value for our shareholders. On page nine, as a refresher, our investment strategy has remained consistent since its launch in January of 2015. We continue to focus on our core lower middle market lending strategy, where we directly originate and lead opportunities, consisting primarily of first year secured loans with smaller equity co-investment made alongside many of our loans. As of the end of the quarter, our equity investment portfolio consisted of 44 investment, with a total fair value of $89.5 million, which included $26.6 million in embedded unrealized appreciation, or approximately $0.97 per share.

Our equity portfolio, which represented approximately 9% of our total portfolio fair value over the quarter, continues to provide our shareholders participation in the attractive upside potential of these growing lower middle market businesses, which will come in the form of an [inaudible] share growth and special dividend over time. As illustrated on slide ten, our own balance sheet credit portfolio as of the end of the quarter, excluding our high 45 senior loans grew 9% to $865 million as compared to $794 million as of the end of the prior quarter. Over the past year, our credit portfolio has grown $194 million or 29% from $671 million as of June 2021. For the quarter, 100% of the new portfolio company's debt originations were first lien senior secured debt, and as of the end of the quarter, 94% of our total credit portfolio was first lien senior secured.

On slide 11 and 12, we detail the $148 million of capital invested and committed to portfolio companies during the quarter. Capital committed this quarter included $136 million on 1st lien senior secured debt, committed to six new portfolio companies, including four, in which we also invested a total of $3.1 million in equity. Finally during the quarter, we also committed $9 million in 1st thing to the secured debt to eight existing portfolio companies. Turning to slide 13, we continued our track record of successful exit with three debt repayments and one equity exit here in the quarter.

In total, these equities generated $49 million and total profits, realizing gains of $2.3 million and generating a weighted average RR of 19.6%. Since the launch of our credit strategy over seven and a half years ago, we have had 63 portfolio active., acts representing $745 million and proceed in have generated a cumulative weighted average RR of 14.8%. The market for acquisition capital continues to be active, albeit at a slower pace than we saw at the turn of calendar year 21. Not surprisingly, we have also seen a slowdown in refinancing activity.

As a result, we would expect continued solid net portfolio growth in the near term. The activity in our investment pipeline is strong in terms of volume and quality and feel opportunities, as well as the breadth of financial sponsors, other deal sources represented. We are pleased with the strong market position that our team has established in the lower middle market as a premier debt and equity capital partner, as evidenced by the broad array of relationships across the country from which our team is sourcing quality opportunities. On slide 14, we detailed some key steps for our on balance sheet portfolio as of the end of the quarter, again, excluding our 45 senior.

And so the end of the quarter, the total portfolio, fair value of weighted 85.4%, 2%, senior unsecured debt, 5.1%, the second lien senior secured debt, and 0.1% for subordinated debt, and 9.4% to equity co-investment. The credit portfolio had a weighted average yield of 9.3%, and weighted average for leverage through our security of four times, both flat from the prior quarter. Turning to slide 15, we have laid out the rating migration within our portfolio. During the quarter we had one loan with a fair value of $10 million upgraded from a two to a one.

We had three small loan positions across two portfolios company, with an aggregate fair market value of $10 million downgraded from a 2 to 3. And we had one loan position with a fair value of $693 thousand, downgraded from 3 to 4. As a reminder, all loans upon origination are initially assigned investment ratings to on a four point scale, with 1 being the highest rating, 4 being the lowest rating. With at the end of the quarter, we have 74 loans representing 95% of our investment portfolio fair value, rated one of the top two categories, one or two.

The number of one rated ones decreased from 7 to 5 this quarter, and all three of the loan repayments this quarter had a rating of one. Offset by the aforementioned portfolio companies upgraded and added to the list of one rated loans this quarter. [Inaudible] we had a total of ten loans representing approximately 5% of the portfolio fair value rated at three or four as opposed to the quarter. As illustrated on slide 15, a total investment portfolio continues to be well-diversified across the industry, with an asset mix which provides strong security for our shareholders capital.

The portfolio remains heavily weighted toward first lien senior secured debt with only 5% of the total portfolio in second lien senior secured debt. I'll also note that 90% of our credit portfolio is backed by a financial sponsor, providing for potentially meaningful financial support for these portfolio companies that need it. I will now hand the call over to Michael, to review more specifics of our financial performance for the quarter.

Michael Sarner -- Chief Financial Officer

Thanks, Bowen. Specific to our performance for the June quarter. To summarize on slide 18, we are in pre-tax net investment income of $12.6 million or $0.50 per share. We paid out $0.48 per share in regular dividend, and $0.15 per share in special dividends for the quarter.

As mentioned earlier, our board has approved an increase to the regular dividend for the September quarter to $0.50 per share from the $0.48 per share that was paid for the June quarter. Maintaining a consistent track record of meaningfully covering our dividend with pre-tax NII is important to our investment strategy. To continue to maintain our strong track record of regular dividend coverage with 105% for the last 12 months ended June 30, 2022, and 106% Q with the launch of our credit strategy in January 2015. Given the floating rate nature of our credit portfolio, rising interest rates will be a significant tailwind to our net investment income.

In fact, the index used to calculate interest on a majority of our loans reset in early July to 2.29%, up from its early April reset as 96 basis points. This significant increase quarte- over-quarter will provide an immediate step up in portfolio income in the September quarter. But that is context to continue to execute our policy of having regular dividend follow the trajectory of occurring pre-tax NII for share while maintaining our track record of strong income. For the quarter, our investment portfolio generated total investment income of $22.5 million, producing a weighted average yield on all investments of 9.1%.

All investment income was $1.5 million higher this quarter due to a higher average balance of credit investment outstanding, as well as an increase in prepayment penalties compared to the prior quarter. As at the end of the quarter, there were four loans are non-accrual with an average fair value with aggregate fair value of approximately $16 million representing 1.6% of the investment portfolio at fair value. On July one, 2022, one of the nonaccrual loans with a fair market value of approximately $13 million was restructured in the transaction that resulted resulted in Capital Southwest equities and a portion of asset write in Capital Southwest, significant participation in the company turnaround, and reinstating the remainder of our quarter and debt hold as on the new company. The transaction also resulted in a significant amount of new equity capital being invested into the company by the sponsor.

We expect that our reinstated debt will be back on issue over the coming quarters. Finally, as at the end of the year, the weighted average yield on our credit portfolio was 9.3% for the quarter. As seen on slide 19, we further improved LTM operating leverage to 2.1% as of the end of the quarter. We expect operating leverage to approach 2% or better in the coming quarters.

Showing slide 20, the company's NAV per share at the end of the June quarter decreased by $0.32 per share to $16.54, which included a $0.15 per share special dividend paid to shareholders during the quarter. This represented a 1.9% decrease quarter-over-quarter compared to $16.86 per share as at the end of the March quarter. Outside of the special dividend, the primary driver of the NAV per share increase for the quarter was investment portfolio depreciation, which consisted of $5.9 million of depreciation at high 45, most of which was mark to market float activity in the syndicated market. We also saw $5.5 million of depreciation on the on balance sheet debt portfolio, partially offset by $1.5 million of net appreciation on the equity portfolio and accretion from the issuance of common stock at a new NVA per share under the equity ATM program.

Turning to slide 21. So we mentioned earlier, we are pleased to report that our balance sheet liquidity continues to be strong with approximately $180 million in cash and undrawn leverage committed at the end of. During the quarter, we successfully completed an amendment for lender group on our ING led senior secured credit facility, which increased commitments on the credit facility by $45 million, bringing total commitments to $389. Based on our borrowing bases at the end of the quarter, we have full access to the incremental revolver capacity.

Thanks to [inaudible] continued to support our growth, and we are pleased with the flexibility the increased revolving credit facility commitments provides to our capital structure. In addition, we continue to draw debentures in our FDIC series as we originate FDIC eligible assets. As at the end of the quarter, we had drawn $18 million in debentures with an average cost of 2.4%. We intend to apply for another FCA leverage commitment shortly, as we continue to see strong origination volume in FDIC eligible investors.

As of June 30, 2022, approximately 49% of our capital structure liabilities were unsecured and at earliest debt maturity if in January 2026. Our regulatory leverage, as seen on slide 22, ended the quarter at a debt to equity ratio of 1.1 to 1. Over the past year, we've made a concerted effort to strengthen our balance sheet to ensure we are prepared for any macroeconomic headwinds that we may encounter. These efforts have included our opportunistic unsecured bond issuances at record low rates in late calendar 2021, and our continued diligence in moderating leverage through accretive share issuances on our equity ATM program.

We will continue to work toward stressing the balance sheet, ensuring adequate liquidity, and maintaining conservative leverage and public pressure throughout the economic cycle. I will now have the call back to Bowen for some final thoughts.

Bowen Diehl -- Chief Executive Officer

Thanks, Michael, and thank you everyone for joining us today. We appreciate the opportunity to provide you an update on our business in progress executing our strategy as stewards of our stakeholders capital. Our company and portfolio continue to perform well, and I continue to be impressed by the job our team has done in building a robust asset base deal origination capability as well as a flexible capital structure. After the uncertainty in the economy, we have been underwriting with the whole economic cycle mentality since day one, which we believe is positioned as well for the potential economic volatility in the coming months and years.

We continue to believe that our performance demonstrates the investment acumen and capital structure management capability of our team at Capital of Southwest, as well as the merits of a first lien senior secured strategy. We feel very good about the health and positioning of our company and portfolio, and we are excited to continue to execute our investment strategy as stewards of our stakeholders Capital. This concludes our prepared remarks. Operator We are ready to open the lined up for Q&A.

Questions & Answers:

Operator

[Operator instruction] Our first question comes from the line of Kevin Fultz from JMP Securities.

Kevin Fultz -- JMP Securities -- Analyst

Given the evolution of market conditions over the past two quarters, I'm curious if you've seen that translating into pricing on new deals that you're reviewing. And then more broadly, if you can discuss the attractiveness of deals you're seeing in the lower and upper middle market currently. 

Bowen Diehl -- Chief Executive Officer

Yeah. Thanks for the question. Yeah, I think for the comment on the strength in the market, I think we're seeing kind of four quality deals that you can underwrite, especially given the economic cycle and with reasonable leverage levels. There's still a lot of competition for those deals.

And so we haven't really seen spread widening tremendously, maybe a little bit on margin 25 to 25 basis points plus or minus. We're still seeing strong activity, and I'm still seeing kind of spreads, kind of where they are, where they've been.

Kevin Fultz -- JMP Securities -- Analyst

OK. That makes sense, Bowen. And then just a follow up from Michael. Looking at the average on slide 20, there is an $0.11 per share loss really to other corporate.

Just curious if you can identify the items that are included in that bucket.

Michael Sarner -- Chief Financial Officer

Yeah. And I think that has to do with our [inaudible] distribution to employees, our issues in the June quarter. And so there's you'll see that annually in this quarter.

Kevin Fultz -- JMP Securities -- Analyst

OK. Got it. That's it for me. Congrats on a nice quarter.

Operator

Thank you. Our next question comes from the line of Mickey Schleien from Ladenburg.

Mickey Schleien -- Ladenburg Thalmann and Company -- Analyst

Bowen, want to dig a little into credit. Any high level comments you can give us on how your borrower's revenues are trending, and how their margins are trending? I understand it's case by case, and sector by sector, but we're getting such mixed signals as to, you know, the trajectory of the economy. Any comment you can make would be helpful.

Bowen Diehl -- Chief Executive Officer

Yeah, sure. Mickey, thanks for the question. So we looked at that. If you look at our portfolio and let's take the 95% of the portfolio that are either performing kind of as expected or are ahead of expected and kind of the 5% that are underperforming.

Let's set those aside for a second, because I would say if we look at those underperformers, they're all idiosyncratic situations in the company. So let's take the 95%, and let's look at that. And when we look at that, revenues year-over-year and EBITDA year-over-year, up about 23%. If you look at the last quarter, revenue is up a little over 5%, and EBITDA is basically flat.

Which I thought that was kind of interesting. I mean, obviously different industries are different. So you take the weighted average across the portfolio. It's kind of the index that's the easiest thing to look at.

And so it's not perfect. But let's just say that some revenues were up over 5% and EBITDA was basically flat. And so I looked out through the portfolio and I said, Why is that? And it's hard to look at it and say it's necessarily the economy per se, but there are certain things like labor increases and cost of inputs, hard inputs. And so, and I look at that and I say revenues up and EBITDA is flat.

So, we certainly have seen the companies in very general comment with the pricing power to increase prices to maintain margins. And so, I'd say the quarter-over-quarter for general economic activity is kind of flat with these kind of sub issues that we're all hearing about in the economy. We looked across our portfolio and they seem to be doing a good job passing those costs on to their customers to maintain the margins, margin dollars.

Michael Sarner -- Chief Financial Officer

That's not really making up anything from a timing perspective. But I'll say we're using April and May for the estimates for all our valuations. Not that we're seeing any softening since then, but a lot of the financials are yet to come to see whether anything is occurring.

Bowen Diehl -- Chief Executive Officer

And I would say  from just commentary, we talk about these companies a lot. I would say commentary wise, I think that those stats kind of would continue through now. But Michael's right. I mean, the financials, all we see is used for valuations, back here, April, May and June quarter.

Mickey Schleien -- Ladenburg Thalmann and Company -- Analyst

Yeah, I understand. And Bowen, this may be idiosyncratic but there was one loan downgraded to a three. What was the nature of the problem there or is it something specific to that company or something broader?

Bowen Diehl -- Chief Executive Officer

What you're asking about the one small loan that was downgraded to a four?

Mickey Schleien -- Ladenburg Thalmann and Company -- Analyst

Yes. I thought there was a migration to a 3 of 10 million of fair value.

Bowen Diehl -- Chief Executive Officer

Yeah. No, that's, so there was one upgrade to a one. It was ten, and there were three loans across two portfolio companies that were downgraded to three. They were all very small loan positions.

They were definitely idiosyncratic. One has to do with getting some credit based on certain high flying stats and things that they have to achieve to basically off take their products. So it's very idiosyncratic to that company. And I should also say it's backed by a very strong funded sponsor as well.

So, we've got to think about an equity support potential equity sponsor certainly in that company.

Mickey Schleien -- Ladenburg Thalmann and Company -- Analyst

And Bowen, is there any update you can provide us on the loans that are on non-accrual in terms of progress you might be making with those credits?

Bowen Diehl -- Chief Executive Officer

So as Michael said in his remarks, I'll reiterate because it might have gotten lost. So there are $15 million in fair value on non-accrual at the end of the quarter. One of those loans was restructured on the first day of the new quarter, so July 1 of 22. And that loan had a fair value of $13 million out of $16.

And that restructuring resulted in equity raising a portion of our debt, and the sponsor putting in a very meaningful amount of equity into that business. And so and so we've got significant equity participation in the turnaround serve on the board of that company. And we feel OK about where we are and certainly very happy about the significant amount of liquidity that the company, the sponsor, put in the business and is sitting on the balance sheet currently.

Mickey Schleien -- Ladenburg Thalmann and Company -- Analyst

I understand that. That's helpful. And in terms of the unrealized appreciation of the on balance sheet debt portfolio, you have that the downgrade that you mentioned, was there also something attributed to wider credit spreads in general?

Bowen Diehl -- Chief Executive Officer

Yeah. So on the depreciation, there's two pieces, right? We mentioned the $5.5 million bond balance sheet, and that's probably a little more than half, more than half credit and less than half spread market indexes. And the other 45 pieces, two thirds market index is a, quote movement as you can imagine, and kind of one third credit issue stuff.

Mickey Schleien -- Ladenburg Thalmann and Company -- Analyst

OK. And just to wrap up in the FDIC, are you going to ask for the full $87.5 million of regulatory capital and the full two turns of leverage, or how should we expect that to work out over the next several quarters?

Bowen Diehl -- Chief Executive Officer

We will absolutely over time be drawing the entire amount, like with your face to do with during this process with the FDIC is you need to actually add a portion of the eligible assets in to go in as equity prior to asking for our commitment to draw on. So we have to go to the FDIC with further leverage commitment ,which we plan on doing. So, would probably be something in the neighborhood of $50 million for the next commitment. So, we're right now in the process of betting that 50 before we're able to to ask for the formal commitment.

Mickey Schleien -- Ladenburg Thalmann and Company -- Analyst

OK. 50 million of new debentures. Right?

Bowen Diehl -- Chief Executive Officer

59 would be the net debt. Yes. So we'll put 25 million eligible assets as our equity and then we'll draw the next 50. And as you get full as that 50 is completed, then you go back to the FDIC for another commitment as you're in each day prior to asking for it.

Yes. Mickey, you know, that's right. I mean, that's very typical for these FDIC. We've always presented it to the shareholders as kind of showing the different steps as opposed to just presenting the entire FDIC.

But it's very it's very typical to be stair step like that. And, you know, there's not really any no notable or even risk at all of really getting those commitments. But it's a step. Documentation process until he presented it that way.

Not to get confused by it being like.

Mickey Schleien -- Ladenburg Thalmann and Company -- Analyst

That's very helpful. But the transparency is really helpful, Bowen. Bowen, Have you adjusted your target leverage goals given the current market environment? Or does that remain unchanged? And if you could just remind us what those are.

Michael Sarner -- Chief Financial Officer

Yeah, I. Comment on your stop loss here in a minute. But we certainly have been looking at whatever economic volatility that we might be heading into. We previously stated our target of 1.2 to 1.3 on economic, and 1 to 1 to on regulatory.

You stated a target of 1.2 to 1.3 on economic and one 1 to 1 to on regulatory. Right now, we're targeting regulatory at 1.0, and probably economic will be something more like 1.1 to 1.2. And I think until we see how long and deep the recession, if it was to come to pass, you know, that's kind of where we'll try to target. And by doing so, we're going to need to raise equity.

We started that. We noted earlier, we raised $46 million in this previous quarter. We know that as long as we're trading meaningfully above book, I think you'll continue to see us raise meaningful equity. We haven't seen a slowdown in the portfolio, and I think Bowen,  noted earlier that even in an environment where M&A activity might slow down, repayments will slow as well.

So we will continue to see net portfolio growth. So raising equity alongside these originations and maintaining leverage in this conservative range is certainly one of our targets.

Bowen Diehl -- Chief Executive Officer

I think that's well said. I mean, we think that full cycle economics in our portfolio underwriting, and we think about full cycle economics in our BDC as well. I think. Michael Yeah, that.

Mickey Schleien -- Ladenburg Thalmann and Company -- Analyst

OK. That's great. That's it for me this morning. I appreciate your time.

Thank you.

Operator

Thank you. Our next question comes from the line of Kyle Joseph from Jefferies.

Kyle Joseph -- Jefferies -- Analyst

My questions are just one really, but two parts in terms of the margins, pretty stable quarter on quarter. I think you said rates either reset post quarter or late in the quarter. And just how do we think about  your assets resetting versus the kind of the cadence of your your liabilities resetting, recognizing that a lot of your liabilities are fixed rate. And then on raising rates, you know, how are you? How is that impacting your expectations for credit going forward? Obviously, it's a good thing we should see your net interest income go up.

But at the same time, you know, companies have a higher debt servicing cost.

Bowen Diehl -- Chief Executive Officer

So on the reliability side, those reset probably you could think about them on a monthly basis. And so there's that's probably a more of a weighted basis. You saw it go from 96 basis points to 2.29%. So from one quarter to the next, the average is probably  something in the mid one five.

In terms of the increase on the interest expense for the assets, pretty much 90%, if not more of the assets reset on that on the quarterly date. So what we're looking at, if we look at our 630 numbers, if we were using the 2.9% at the end of June, pro forma on our balance sheet, we would have had an additional $0.03 of NII. So the $0.50 that we produced probably would have been closer to $0.53. And so if that gives you a little guidepost going forward.

Michael Sarner -- Chief Financial Officer

For the second part question, you know, we've got analysis, we're tracking. Looking across the portfolio and taking the current index, the 2.29% index, and looking at the portfolio and then increasing that index up to a point where, you start seeing meaningful credit issues. You really have to get that index up into the mid 5%. So, you know, five and a half plus or minus percent on the index before you start seeing, you know, fixed charge coverage ratios across, you know, clearly a lot of portfolios still fantastic.

But you kind of take your read, you know, the number of names at a five and a half plus percent kind of LIBOR. And you start seeing your, read like names that start to make you nervous, start to move, like in a meaningful way or, you really got to have the index up to five plus percent. So I feel, you know, pretty good that that, you know, we're not going to see, I don't think we're going to see five and a half, 6% on the index. But but feel pretty good about the portfolio.

Kyle Joseph -- Jefferies -- Analyst

Got it. Really helpful. Thanks for answering my question.

Operator

Thank you. Our next question comes from the line of Robert Dodd from Raymond James.

Robert Dodd -- Raymond James -- Analyst

This has been asked and answer. And it's just one quick one. I think, Michael, in your prepared remarks, you said you expect the dividends to follow the the trajectory of pre-tax income. So you're talking about basically, If rates of upside, if earnings go up along the lines of $0.03 or whatever for next quarter and the subsequent quarters through at least the beginning of 23, that the Base dividend would be increasing at the same time.

And just for obviously, the forward curve, etc., is lower in the second half of 23 than it is in the first half of 23. So, you know, is that taken into account in terms of what path the dividend might follow? Because obviously you don't necessarily want to be cutting the dividend when rates are falling if that comes to pass, obviously.

Michael Sarner -- Chief Financial Officer

Absolutely. That is certainly the way we're looking at it. If you look at the Fed funds rate right now, it's given the range of 2.25 to 5 and it's considered neutral. And so we're looking at projecting forward.

We're not really assuming that there's going to be any increases beyond the levels that they are today. So we do believe that there is between the $0.50 dividend we announced today, and where we see earnings going just based on the 2.29, there's certainly room for another dividend increase. However, we do want to maintain and we probably say we want to maintain maybe $0.02 to $0.03 of difference between the dividend paid and pre-tax net investment income earned. So that's what we're going to focus on going forward.

We're not going to be projecting additional rates to increase. And, you know, if it was going to come back down, where we feel like the dividend that we will have set will will match the rate where it comes back to it.

Kyle Joseph -- Jefferies -- Analyst

That's it. That's helpful. That that is very helpful. Thank you.

And congrats on a really solid quarter. Thank you.

Operator

Thank you. I would now like to turn the conference back over to Bowen Diehl for closing remarks.

Bowen Diehl -- Chief Executive Officer

Well. Thanks for joining us. We appreciate the opportunity to give you an update and we look forward to talking to you in due course.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Chris Rehberger -- Treasurer and Vice President, Finance

Bowen Diehl -- Chief Executive Officer

Michael Sarner -- Chief Financial Officer

Kevin Fultz -- JMP Securities -- Analyst

Mickey Schleien -- Ladenburg Thalmann and Company -- Analyst

Kyle Joseph -- Jefferies -- Analyst

Robert Dodd -- Raymond James -- Analyst

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