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Hercules Announces Strong Second Quarter Financial Results with $0.32 NII per Share and a $0.31 Quarterly Dividend


Hercules Capital, Inc. (NYSE: HTGC) ("Hercules" or the "Company"), the leading specialty financing provider to innovative venture growth stage companies backed by leading venture capital firms, today announced its financial results for the second quarter ended June 30, 2016.

The Company also announced that its Board of Directors has declared a second quarter cash dividend of $0.31 per share, that will be payable on August 22, 2016, to shareholders of record as of August 15, 2016.

"I am very proud to report another outstanding and strong quarter for Hercules, which culminated in generating 103% NII coverage of our dividend," stated Manuel A. Henriquez, founder, chairman and chief executive officer of Hercules. "I am even more pleased that we have reached a significant inflection point by establishing a new base for earnings with the current combination of our debt investment portfolio balance, core yields, and unscheduled early loan repayments."

Henriquez continued, "From this new base, we will continue our slow and steady march towards our desired target of a $1.3 to $1.35 billion debt investment portfolio, with anticipated core yields of 13.2%, ± 25 basis points, subject to market conditions. Despite experiencing higher than anticipated early repayment activities late in the second quarter, we nonetheless completed a very solid first half of 2016, ending with a debt investment portfolio of $1.26 billion, on a cost basis at quarter-end, placing us well within striking distance of our targeted goal, and with the potential to even exceed our target later in the second half of 2016, given our available liquidity position of ~$255 million, assuming of course favorable market conditions."

Henriquez added, "Hercules' origination activities continued their strong pace of growth in Q2 2016 with over $203 million in new commitments, and nearly $425 million in total new commitments for the first half of 2016. This impressive performance by our origination team helped drive Hercules to another major milestone of surpassing the $6 billion mark in total new debt commitments since inception (December 2003). Equally as impressive was our team's achievement of ~$330 million of gross fundings, leading to ~$104 million of net portfolio growth in the first of half of 2016. We remain selective in deploying capital while also adhering to our proven ‘slow and steady' growth strategy, which has served us well over the course of the past 12 years, as we maintain a strong quarter ending liquidity position of ~$255 million."

Henriquez concluded, "We remain vigilant in maintaining a high quality credit loan portfolio and a highly liquid balance sheet, as we purposefully accessed both the debt and equity capital markets during the quarter, while also continuing our just-in-time accretive-to-NAV ATM equity capital markets program, raising approximately $11.3 million in net proceeds. Hercules' strong liquidity position, coupled with its available regulatory leverage capacity as well as continued access to the capital markets, continues to be important and key differentiators amongst the many other BDCs within the industry. Our ability to access multiple different sources of liquidity has afforded us a competitive advantage of maintaining a level of flexibility to grow our debt investment portfolio while many others find themselves unable to grow or gain access to either the debt or equity capital markets."

Q2 2016 Review and Operating Results

Growth of Debt Investment Portfolio

Hercules had a strong second quarter of 2016, having successfully entered into 16 new debt and equity commitments to new and existing companies totaling $203.9 million, and had gross fundings of $159.8 million.

During the quarter, Hercules realized unscheduled early principal repayments of $117.6 million, along with normal scheduled amortization of $24.1 million, or approximately $141.7 million in total debt repayments.

Net debt investment portfolio growth during the second quarter, on a cost basis, was $14.1 million.

The Company's total investment portfolio, (at cost and fair value) by category, quarter-over-quarter, are highlighted below:

(dollars in millions) Debt Equity Warrants Total Portfolio
Balances at Cost at 3/31/16 $ 1,241.8   $ 60.1   $ 42.4   $ 1,344.3  
New fundings(a) 152.1 6.1 1.6 159.8
Warrants not related to Q2 2016 fundings - - 0.1 0.1
Unscheduled paydowns(b) (117.6 ) - - (117.6 )
Principal reduction on investments (24.1 ) - - (24.1 )

Net changes attributed to conversions, liquidations, and fees

  3.7     4.0     (0.8 )   6.9  
Net activity during Q2 2016   14.1     10.1     0.9     25.1  
Balances at Cost at 6/30/16 $ 1,255.9   $ 70.2   $ 43.3   $ 1,369.4  
Balances at Value at 3/31/16 $ 1,205.7   $ 62.1   $ 23.5   $ 1,291.3  
Net activity during Q2 2016 14.1 10.1 0.9 25.1
Net change in unrealized appreciation / (depreciation)   (8.0 )   (6.3 )   0.7     (13.6 )
Balances at Value at 6/30/16 $ 1,211.8   $ 65.9   $ 25.1   $ 1,302.8  
(a)New fundings amount includes $4.9 million total new fundings associated with revolver loans during Q2 2016.
(b)Unscheduled paydowns include $8.1M paydown on revolvers during Q2 2016.

Weighted Average Debt Investment Portfolio Balance at Cost

Q2 2015       Q3 2015       Q4 2015       Q1 2016       Q2 2016
Ending Balance at Cost $ 1,170.6 $ 1,109.2 $ 1,152.3 $ 1,241.8 $ 1,255.9
Weighted Average Balance $ 1,107.0       $ 1,152.9       $ 1,107.1       $ 1,180.1       $ 1,209.0

As of June 30, 2016, 91.8% of the Company's debt investments were in a "true first-lien" senior secured position.

Effective Portfolio Yield and Stable Core Portfolio Yield ("Core Yield")

Effective Yields on our debt investment portfolio increased to 14.4% during Q2 2016, compared to 13.8% in Q2 2015, due to higher new debt investment yields and an increase in unscheduled early debt repayment fees and accelerations. Our effective portfolio yields generally include the effects of fees and income accelerations attributed to early payoffs, as well as other activities, or one-time event fees. Our effective yields are materially impacted by elevated levels of unscheduled early principal repayments, and are derived by dividing total investment income by the weighted average earning investment portfolio assets outstanding during the quarter, which excludes non-interest earning assets such as warrants and equity investments.

Core Yields were at 13.4% during Q2 2016, within our expected normalized levels of 13.2% ±25 basis points. Hercules defines Core Yield as yields which generally exclude any benefits from income related to early debt repayments attributed to the acceleration of unamortized origination fees and income as well as prepayment fees, and includes income from expired commitments.

Income Statement

Total investment income for Q2 2016 was $43.5 million, an increase of 14.2%, compared to $38.1 million in Q2 2015. The increase is primarily attributable to debt investment portfolio growth, specifically a greater weighted average principal outstanding of the Company's debt investment portfolio between the periods coupled with higher effective yields which were driven by an increase in the acceleration of interest income due to early debt repayments.

Interest expense and financing fees were $8.9 million, down 3.3% compared to $9.2 million in Q2 2015. The decrease was primarily due to lower weighted average principal balances outstanding from the $40 million pay down of our 2019 Notes in December 2015, $49.6 million reduction of our Wells Facility and the $17.4 million settlement and pay-off of our Convertible Senior Notes in Q2 2016.

The Company had a weighted average cost of borrowings comprised of interest and fees, of 5.8% in Q2 2016 versus 6.1% during Q2 2015. The decrease was primarily driven by the reductions described above.

Non-interest and fees expenses was $11.3 million versus $12.2 million for Q2 2015. The decrease was primarily due to changes in variable compensation related to origination activities and stock-based compensation, slightly offset by an increase in general and administrative expenses due to an increase in corporate legal expenses and outside consulting services. Total operating expenses, which includes financing expenses, for Q2 20

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