Hercules Capital, Inc. (HTGC) Q2 2015 Earnings Report, Transcript and Summary

Good day ladies and gentlemen and welcome to the Hercules Technology Growth Capital Second Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder this conference call is being recorded. I would like to now introduce your host for today’s conference Senior Director of Investor Relations, Mike Hara. Mr. Hara you may begin your conference.

Thank you Candice, good afternoon everyone and welcome to Hercules conference call for the second quarter 2015. With us on the call today from Hercules are Manuel Henriquez, Founder, Chairman and CEO; Mark Harris, Chief Financial Officer, and Andrew Olson, Vice President of Finance and Senior Controller. Hercules second quarter 2015 financial results were released just after today’s market close and can be accessed from Hercules Investor Relations section at www.htgc.com. We’ve arranged for a replay of the call at Hercules webpage or by using the telephone number and pass code provided in today’s earnings release. During the course of this call, we may make forward-looking statements based on current expectations. Actual financial results filed with the Securities and Exchange Commission may differ from those contained herein due to timing delays between the date of this release and in the confirmation and final audit results. In addition, the statements contained in this release that are - and purely historical are forward-looking statements. These forward-looking statements are not guarantees of future performance and are subject to uncertainties and other factors that could cause actual results to differ materially from those expressed in the forward-looking statements, including without limitation the risks and uncertainties, including the uncertainties surrounding the current market turbulence and other factors we that are identified from time-to-time in our filings with the Securities and Exchange Commission. Although, we believe that the assumptions on which these forward-looking statements are based are reasonable, any of those assumptions can prove to be inaccurate and as a result, the forward-looking statements based on those assumptions also can be incorrect. You should not place undue reliance on these forward-looking statements. The forward-looking statements contained in this release are made as of the date hereof, and Hercules assumes no obligation to update the forward-looking statements or subsequent events. To obtain copies of related SEC filings, please visit sec.gov or visit our website, htgc.com. And with that, I’ll turn the call over to Manuel Henriquez, Hercules’ Founder, Chairman and CEO.

Thank you, Michael. Good afternoon everyone and thank you all for joining us on the call today. I will first start off the call by welcoming our new CFO, Mark Harris, who I believe represents an outstanding addition to our senior management team, gives an extensive experience and background in distressed lending, Asian capital markets and also as a former CFO. Welcome Mark and we look forward to working with you and growing the organization. Let me now turn my attention to Q2. Q2 was a very solid quarter for Hercules. On many fronts, we achieved growing NII of $0.23 per share, expanding our investment portfolio, expanding both our core and effective yields as well as expanding our senior management team and Board of Directors. In Q2, 2015 Hercules reached another significant milestone of achieving just under $5.5 billion of capital commitments to venture growth stage companies since inceptions of December 2003 representing over 325 companies who have chosen Hercules as a financial partner. I cannot emphasize the significance and importance of that distinction and I’m deeply grateful for the selection of all those companies and choosing Hercules as their partner along with the venture capitalist and entrepreneurs. So thank you very much for that. We are deeply grateful for the continuation of the vision and support of this entrepreneur and venture capital community that has led to the following financial performance that we will discuss on this call. We executed all fronts, working on growing our DNOI and NII back to historical levels of $0.31 per share. We expect to accomplish this over the next three to four quarters subject of course to market conditions and remaining cadence of originations and expected yields to increase during that period of time, both of which will lead to closing on the gap between our dividend and our current NII as we continue to grow our portfolio. Now for some of our highlights before I turn the call over to Mark and Andrew, our VP of Finance, to provide you summary of financial performance. First, both Hercules and venture capital community were extremely busy during the second quarter of 2015. Hercules in turn originated nearly $245 million of new debt and equity commitments during Q2. Another very strong performance, as to the first half of 2015 I am proud to say that we accomplished nearly $500 million to be approximately $516 million of debt in equity new investments for the first half of 2015 putting us on pace to potentially exceed all of 2014 if we continue this level of performance. The venture capitalist in turn were very, very busy. The venture capitalist invested nearly $21.5 billion in the first half versus $34 billion in 2014. The venture capitalist invested $35.9 billion in the first half versus $57 billion all invested in all of 2014. In Q2, 2015 alone the venture capitalist invested $19 billion to over 1000 transactions or deals representing nearly a 15% increase quarter-over-quarter a very, very impressive number and a number that was actually higher than I was anticipating the venture capital activity to do. But what’s most impressive was that this was the sixth consecutive quarter of more than $10 billion invested by the venture capitalist in a single quarter and the highest quarter investment activity since 2000. The venture capitalist continue to very focused on growing their investment portfolio and we are excited to participate in this new wave of investment activity being pursued by the venture capitalist. Why? Because as the venture capital community continues to invest in these companies, all of these companies become viable candidates and potential prospects for Hercules to convert as potential future portfolio companies and continue to grow our investment portfolio. It is a very critical component to continue to see investment capital activities taking place in the market as that is a primary source of deal for Hercules and a continued source of funding for our portfolio companies to service our own debt. With that said, Hercules continues a very focused and disciplined growth in our portfolio throughout 2015. We are still focused on growing our portfolio to a total of $1.3 billion to $1.5 billion and as you see in this call, we are now approaching the lower end of that growth curve of $1.3 billion and it’s only the first half of the year. We’ve achieved $85 million of loan net portfolio growth during the second quarter presenting an 8% increase. For the first half of 2015, we achieved an impressive $219 million of net portfolio growth representing 23% growth on a year-to-date basis and 23% as compared to Q4 of 2014, well on our way to achieving the 30% to 50% portfolio growth. At the end of Q2, our loan investment portfolio represented $1.17 billion. I want to highlight that number because we have noticed that some analyst and investors have erroneously taken our total investment portfolio percentage - result and tried to multiple it by an effective interest rate yield. We would like to make - draw the attention to our investors and our analyst to please focus on the loan investment portfolio when calculating your effective yield and our future income that we drive for that portfolio. We are confidently on track to continue to track to the bottom end of that growth of $1.3 billion with nearly $1.17 billon of loan portfolio achieved to date. With the ample liquidity we have in our balance sheet and the ability to expand our leverage on our balance sheet further, up to the 1.1 times multiple we feel that we have ample liquidity to continue to execute and deliver the results and our portfolio growth. However, we remain very cautious and selectively investing in companies as we approach a title liquidity position as we want to ensure that we select the best of the companies that we find out there that offer the most attractive yield in the best loan to value as we underwrite to continue that portfolio growth. Thirdly, Q2 represented a very strong and beginning to see our core effective yield, and our effective overall yields begin to rise. Although we had anticipated slight drop in our core yields in Q2, we in turn experienced a slight increase in our overall yield including our core yield, that is mixture in a combination of the asset mix between the deemphasizing slightly our asset based lending or ABL revolver type financing with new loans that were originated during the quarter. Normal and early repayments remain relatively flat, and as we expected. Contributing to our core yields and our effective yields as follows. Our core yields during the quarter rose from 12.8% in Q1 to 13.2%. We have been expecting to see core yield trough around 12.6% to 12.7% and in turn they rose. Our effective yields in turn also rose and in fact our effective yields during the quarter rose by a 100 basis points. The effective yield ended at 13.8% up from 12.9% in Q1, a trend that we expect to continue to see throughout the second half of 2015. However, I would caution I expect Q3 effective yield to raise modestly from the 13.8 level but begin to rise in Q4 to 14 plus levels in Q4 as we expect to see an increase and early repayment activities begin to take place from our portfolio as our portfolio begins to mature in Q4 and beyond. I am delighted to see much of the work that we have made and much of the investments that we made in our infrastructure and organization once again begin to take hold. I know many investors were concerned about the dip in Q4 and Q1, but as I indicated in our call previously these are purposeful investments that we have made to ensure that our platform is well positioned for growth in the coming years as we then accelerate growth later on in 2016 and beyond as we grow investor portfolio overall. In an effort to do that we made the conscious decision to make the investments necessary that we believe will lead to this growth which I’m happy to say are beginning to take shape and begin to pay dividends on our performance. That has manifested itself with the growth in DNOI and NII as you see in Q2, at $0.27 and $0.23 respectively. NII for Q2 was $16.8 million or equivalent to $0.23 per share up 29% over Q1 NII. Conversely DNOI representing $19 million or $0.27 a share was also up a respective 21% over Q1, a very strong indication that our investment is beginning to bear fruit and we expect to see a continuation in growth in both NII and DNOI throughout 2014 as we worked to close the gap by the end of the year or sometime in Q1 or we should expect to see DNOI and NII start matching our dividend rate at $0.31 per share. I expect operating expenses to begin to level off in the second half of 15 as both the majority of our investments have already been put in place for the operating expenses and infrastructure. Yes, we may see gradual increases in variable compensation directly correlated and attributed to continued portfolio growth. I remain committed as I said earlier, I remain committed to covering our dividend through DNOI and NII. And I am confident in our team’s capabilities as we continue to grow the portfolio and also beginning to see an additional increase in effective yields that would further help drive and close the GAAP as our effective yields begin to raise generating additional interest income that would help further close the GAAP. This is why we have given a perspective target of 3 to 4 quarters because if effective yields raise sooner than we expect that actually may make the NII close the GAAP sooner meaning occurring by Q4. Now for today’s agenda, a brief summary of the key operating metrics and highlights in Q2 and overview of the current market conditions including venture capital activities M&A and IPO events. And our perspective and outlook for the investment activities for Q3 and then I will turn the call over to Mark Harris our CFO along with Andrew to cover our financial performance of the company in Q2. I want to take this moment to say thank you Andrew for stepping up as our ancient CFO, you’ve done a masterful job and a great job and you continue to do outstanding workmanship, so thank you for that commitment and your support as a team player. Now key highlights for Hercules’ outstanding accomplishments and performance during the quarter. As most of you have been with us for long time, I’m proud to announce that we completed our 40th consecutive quarterly dividend of $0.31 per share representing nearly $11 in distribution to our shareholders since our IPO in June of 2005. Our total investment assets have increased to $1.24 billion representing a 7% increase quarter-over-quarter. Again, I want to emphasize the total investment portfolio at $1.24 billion includes both equity and warrants in that composition and $1.17 billion of that is interest earning loan assets. With that said we ended with quarter with an extremely strong liquidity position of nearly $216 million of liquidity available to us on balance sheet today. This liquidity will afford us the ability continue to grow the portfolio and we have access as Mark will cover in his presentation additional assets for - additional leverage in our portfolio to grow the portfolio beyond that $216 million liquidity. You can surely expect over the next two to three quarters that we will continue to convert debt liquidity if an when we believe that the quality of the assets that we want to invest in and the yields and structures are favorable for we deem to be an appropriate investments. We continue to lower our overall cost of leverage or funds and most of you have shown in this quarter that we begun this process by redeeming $20 million of our $84.5 million April 2019 due April 2019 baby bonds of 7%. We experience subdued and below normal unscheduled early principal repayments, total principal repayments through the quarter represented $78 million of which $47 million of that was basically anticipated early repayment, in short flat to Q1 and as we expected. I want to emphasize again, we do expect to begin to see a gradual increase in early repayment activities primarily focused on the fourth quarter that will help further lead effective yield growth in our portfolio. The reason for that occurrence is as our portfolio begins to mature from that overall weighted composite age, we expect the portfolio once it starts achieving an 18 month or greater maturity that you would intend to see higher level of early repayment activities to take place. This is a very nice showing on the performance of our team and continue to pick the right companies as we focus on growing the portfolio and not seeing these early repayment activities take place. Now as to our portfolio companies and their performance on achieving liquidity events on their own, we have seen six portfolio companies currently file for IPO offerings. Subsequent to quarter end Neos Therapeutic and ViewRay both have completed their public offerings. Also during the quarter, one of our oldest investments Atrenta also completed definitive agreement to be acquired by Synopsys, all which culminates into additional realized gains that on a year-to-date basis equates to approximately $2 million of realized gains that also further serve to continue to provide future dividend coverage and or potential future spill of dividend coverage and this will be distributed to our shareholders in the form of those capital gains. As I indicated at the beginning of the call, Mark Harris has officially begun as our CFO and his effective date was August 1 and finally as we indicated in press release, I’m proud to say that our diligent efforts and our Board’s governance committee has been working diligently on expanding our board. I’m proud to say that we now have general diversification on our board with Ms. Susanne Lyons recently joining our board as well as Mr. Rod Ferguson and Joe Hoffman most recently joining our boards. That makes the totality of our board now of seven board members, six of which are independent board members. I felt that this is a critical step and the future growth of our company of having a widely diversified board with extensive experience in the categories and areas of our investment activities. Now turning my attention to the venture capital marketplace and specifically the activities in IPO. Deal flow continues to be very robust, I am proud to say and happy to say that Hercules continues to enjoy a very robust pipeline, at quarter end we had nearly $1.3 billion of transactions which are defined as companies looking for financing and we are in a process of vetting those opportunities by connecting new dealers and engaging in discussions with those companies. This gives us high level of comfort and our capabilities to execute and continue to deliver the results for our shareholders. However, we have remained very, very conservative in our outlook as we are very selective in deploying our liquidity capital to the right companies. We will not compromise credit, we will not compromise yields and we say to our [indiscernible] and our historical credit performance and that is remain selective, be cautious of growth, be slow and steady and not worry about necessarily quarterly growth, but worry about long-term portfolio of value creations for our shareholders. We remain committed to that endeavour and I feel comfortable that we will achieve our goals with that discipline in place. Our leadership and market reputations is self evident, with nearly $250 million of new commitments executed in Q2 alone is a testament to our firm’s ability to attract and work with venture capital entrepreneur communities and also seeing venture growth stage companies seeking the support and backing of Hercules. I am deeply grateful to the hard work of our origination team, without that team this continued growth and perseverance would not have been made possible. However, I want to make sure that we look towards the second half of the year and we look to changes that we expect to occur. We are seeing evidence that Q3 is becoming or returning I should say to historical normalized levels. What I mean by that is that Q3 typically is our slowest period of time, for last two years that has not been the case. However, we are seeing evidence today that Q3 is beginning to normalize itself back to historical levels and Q3 typically represents around 15% of our historical origination activities. I am happy to see that it allows us to continue to be very selective and be prepared for a very strong and expected Q4 2015. I’m expecting the fourth quarter of 2015 to be a very strong quarter and also end up being a backend weighted quarter, our new commitments and originations. We are extremely well positioned to take advantage of that and infact I would say we are better positioned than most of competitors with our ability to have dry powered and additional access to liquidity to grow the portfolio. With that said, the compatible landscape remains strong, it by no means has [ebbed] (Ph) meaningfully, it remains strong, but becoming rational. What I mean by that is, those players with capital are beginning to exercise prudent judgment and becoming selective. We are beginning to see evidence that silly price deals and light covenant structure deals are being to go away. It think that we need one more quarter to have that shaken out and those of capital will be able to take advantage of the well positioned portfolio opportunities in the fourth quarter and the first quarter of 2016. We are purposely positioning ourselves for that expectation in the marketplace. The increased liquidity in the market does have and has continued to lead to our biggest competitor of being Equity Capital, not other debt financings. Many of the companies are experiencing disproportionally high valuations driven no part by no short order by the increased liquidity in the market and everyone trying to position their portfolios to find the available next available exit event from M&A or IPO event. Equity capital is now by far our biggest competitor in the marketplace today. We are seeing that also in our portfolio by seeing increase in valuations on many of our private companies who received higher valuations. In one perspective we welcome that, it solidifies our portfolio position with our companies, it strengthens our own deposition and amortization from our companies, but it does lead to higher valuations that give us some bit of a concern as the market is approaching fair profit levels and valuations out there. However, by remaining disciplined and staying focused and adhering to our historical underwriting standards and criteria, we feel that more than able and prepared to navigate those water as indicative in our 11 year history and historical credit performance that speaks for itself. I’ve recently been other in modes meeting with many investors. I was struck by many facts and misunderstandings that I learned on the road with our investors. Two items in particular stood out the most. One that Hercules had early stage investors, which is not true and the second the Hercules loan book is not asset sensitive, which is also not true. So let me opine on both of those opinions and helps set the record straight for our investors and our analysts to better understand the Hercules portfolio make up and why we are well positioned for what we are. First and foremost, despite some of our competitors may say Hercules generally does not invest in early stage companies and in fact our portfolio is probably less than 2% focused on early stage companies. In fact, our portfolio is extremely well positioned to be venture growth stage companies. These are companies that will be pursuing IPOs or M&A events anywhere between 36 to 24 months and in some cases, less than that. Our performance and our liquidity events speak for itself on our portfolio and I call your attention to our investment portfolio and all of our companies listed in our website. The other items what’s much more striking and that is the misconception despite our 10-Qs disclosing our asset sensitivity on our portfolio. Hercules made a conscious effort beginning in 2007 to change its construct and moving it’s portfolio to variable loan pricing. And in fact nearly 97% of Hercules portfolio is index of primarily or LIBOR rates has floating. As you will see both in our press release and our 10-Q, a 100 basis points movement for example in prime rate will lead to nearly $10 million net investment income increased presenting nearly $0.14 that would drop straight to the bottom line. Our entire liability structure with the extension of $50 million of our bank line are all fixed rate in nature, well positioning for any future rate increases and allowing us to have a highly creative growth in investment income on behalf of our shareholders. I am very proud about that composition, we worked diligently over the last seven years to position the portfolio to make sure that we’re asset sensitive. I want to make sure that is addressed unequivocally. As to the venture capital support. Venture capital companies continue to experience good exit events. Those exit events have been manifested in portfolios of Hercules with six companies filing for IPOs, one completed M&A event and two completed IPO events. Venture capital fund raising also remains quite strong and frankly in astonishing levels, the venture capitalists raised $13.5 billion in Q2 versus $8 billion in Q1 for a total rate of nearly $20 billion in the first half of the year. Venture capital allocations also tend to emulate the Hercules portfolio. This is a financial service that saw a 30% increase quarter-over-quarter in investment activities. Information and technology however was down to 28% signaling some of the concern that venture capitalists may have in some hardware investment activities. Consumer services gaming on the other hand experienced a very strong 20% increase, while health care experienced 20% decrease and energy utilities a 1% decrease in investment activities. In terms of exits, 27 venture capital companies went public raising $2.6 billion, 91 companies achieving M&A events or exits rate for security nearly $10 billion of valuations. And as I said earlier, six of our companies are registration, two completed IPOs, one completed M&A events and we have realized gains or losses for the year of nearly $2 million for future distributions. Now and finally turning my attention for the remainder of 2013 Q3. Q2, as evidenced delivered a very strong performance. We are firing off on all key indicators. The key indicators that we've looked to and monitor all give us confidence in our continued selectivity to grow the portfolio and continue to drive NII and DNOI forward. This gives us ample confidence in covering our dividend. Loan growth in Q3 is expected to be between $30 million to $50 million as which are more selective and as we see a return to more normalized levels or Q3 slow down in investment activities. As we have indicated historically in the past Q3 typically is our slowest period of time, because primarily that our venture capital partners are typically on vacation and thereby underlying portfolio companies are usually unable to hold board meetings and therefore approve and close financings that are pending. Loan origination and funding activities continue to be backend loaded in the quarter. I think that it’s now become the new norm and we are adjusting our own models and our own forecast to take into account that loans are funding later in the quarter, thereby not adding the lot accretion into income, because the loans remain outstanding for a much shorter period of time during the quarter because of the backend loaded nature in the quarter. We would ask and call investors to take that into consideration and begin to effectively look at and use weighted average loan balance into a quarter as suppose to nearly only using the ending loan balance during the quarter. Why I say that? It is very typical that early repayment and amortization typically are front end loaded, while new loans being funded are backend loaded. Hence yielding our lower intra quarter weighted portfolio yield balance. We expect during Q3 that our core yields to stabilize between the 12.5% to 13% range while our effective yields would modulate between the mid 2012 to mid 2013 levels. As we approach Q4, and again repetitive to what I said earlier, we expect our effective yields begins rise to low to mid 14% levels that will have a contribution effect on the positive to help and growing our NII even further. However, it is very difficult for us to actually forecast exactly, where that the number may be and that could lead to a one penny swing and NII nearly on effective yield occurring in the quarter late or early in quarter. As I turn my attention to operating expenses, which we are scrutinizing quite heavily we would expect to see that our operating expenses should begin to flatten out in Q3 and Q4. We are hiring slower than I would anticipate, however, we remain focused on expanding our origination team and business development team by additional eight to 12 investor professionals. However, that process like our investment activity may take anywhere between 12 to 15 months, we hired and invest under same criteria, we are highly selective and we rather go slow than rush. Now turning my attention to dividend coverage and NII. We remain very confident in our ability to cover our dividend, both from continued growth and organic DNOI and NII as evidenced in Q2 2015 as we indicated or shown growing to $0.23 per share. However, many investors also during the road show seem to have forgotten that we have a earnings spill over of nearly $16.7 million representing $0.23 a share that any event that we will run short on covering our dividend through NII or DNOI we have literally $0.23 in additional coverage just by earnings spill over well and before any additional contributions or help from capital gains in our portfolio. We remain very focused and believe confidently that we will grow and close the gap in our DNOI or NII to our dividend coverage some time in next three to four quarters. As we turn our attention, we generated nearly $0.43 in NII for the first half on 2015. As I said a minute ago we also have $16.7 million of earnings spill over representing $0.23 a share. Let’s not forget as we continue to harvest portfolio gains as we have done and expect and continue to do. We already have $2 million of realized gains net in our portfolio representing $0.03 in potential dividend coverage if and when needed or better yet representing future dividend spill over or carry over for future years to our shareholders or supplement our dividend in the future. Add to that our eventual and potential realized gain from our Box Holdings and to be conservative, let’s assume that that gain represents anywhere between $15 million to $20 million in net gains. That gives us an additional $0.18 to $0.28 in additional dividend coverage which I hope not to rely on, but we have as a fall back if we need to if for some reason DNOI and NII grows less rapidly than I expected to. I do not expect that to occur. I do believe that DNOI and NII will continue to grow on a very consistent cadence for the next three quarters at an average rate of $0.02 per quarter on NII. That of course is contingent upon the continued market condition remain favourable and our deployment of capital and continued realization of realized early payout activities leading to effective yields to increase. Because of this, you can actually begin to model out the possibility of a earnings spill over in fiscal 2014 to 2015 directly correlated to the realization of gains. That should give our investors a confidence that we have had internally our dividend coverage and our ability to continue to grow and cover dividend with confidence. We continue to be very disciplined in credit, I have to emphasize again we will not rush to underwrite, we do not underwrite, simply to try to make quarterly numbers. We remain disciplined in our credit approach and our tenacity on ensuring that historical credit underwriting standards remain in place. I’m proud to say that since inception nearly 11 years, our cumulative net GAAP losses are just under $10 million for the entire 11 year period time that represents a loss rate of less than two basis points, on nearly $4.4 billion, $4.5 billion of commitments that speaks to our discipline and our focus on prudently growing our investment portfolio and continuing to add value for our shareholders. On liquidity, nothing of whole entire discussion will be complete without a crisp understanding of our liquidity position. We have nearly $216 million of dry powder to convert into interest earnings loans. Let’s for example assume the $1.1 billion of loans that we have add to the $216 million gets deployed you are looking at nearly $1.3 plus billion dollars of investment loans earning income at 13%, 13.5%, 14% yields, when you do that math you will see the confidence that we have in ourselves and to continue to execute and grow NII and dividend. With that, we are focused on prudent growth, we have additional liquidity, we can leverage our portfolio if we so choose to do so. We have the ability with these executive order from the SEC to actually leverage our portfolio to 125 to 1, our comfort zone as we’ve indicated in many calls in the past is approximately 1.1 maximum leverage that we feel comfortable at this point and going up to. With that leverage capabilities, we have more than a bundles of capital to our portfolio. Mark during his overview will provide you much deeper insight into that. Mark at this point, I turn the call over to you.

Thank you, Manuel and good afternoon, ladies and gentlemen. I’ll briefly discuss our financial results for the second quarter of 2015 and add some context to the reported numbers. Investment income increased to $38.1 million in the second quarter versus $32.5 million in the first quarter of 2015, an increase of 17% quarter-on-quarter. Our loan portfolio grew on a cost basis to $1.170 billion in the second compared to $1.085 billion in the first or an increase of approximately 8%. Further, our weighted average loans outstanding during the quarter grew by $101.7 million in the second quarter compared to $80.9 million in the first quarter. Core yields which exclude the effect of fee accelerations that occurred from early payoffs and one time events increased to 13.2% in the second quarter compared to 12.8% in the first quarter, an increase of approximately 3%. This increase is mainly attributable to the expiration of commitments in the second quarter. We expect our core yield to stabilize at a range of 12.7% to 13.2% on a going forward basis. The GAAP effective yields increased to 13.8% in the second quarter from 12.9% in the first quarter, an increase of approximately 85 basis points. This increase is primarily related to the acceleration of interest and fees pertaining to early loan pay downs and payoffs which were $47.3 million in the second quarter compared to $46.5 million in the first quarter of 2015. We expect the second half of 2015 to pick up, as our loan portfolio ages which we’ll discuss shortly. But most of this will take place in the fourth quarter. Interest expenses excluding fees fell by 4% to $7.6 million in the second quarter compared to $7.9 million in the first quarter of 2015, a decrease of approximately $300,000. This was largely due to the retirement of the $20 million of our 2019 baby bonds at the end of April which saved us approximately $230,000 in interest charges in the second quarter. Further our 2012 asset backed notes that were paid off in the second quarter had another approximately $120,000 of savings compared to that on the first quarter. I do want to point out that we drew down $50 million on our Wells Forgo facility, but there was no meaningful impact on our interest expense in the second quarter as we drew down at the end of that quarter. I would like to point out that the Wells Forgo facility has an interest rate of LIBOR plus 325 basis points with no-floor on LIBOR thus we would expect a quarterly interest charge of approximately $450,000 going forward pertaining to this draw down act front LIBOR. [Indiscernible] events reduce our weighted average cost of capital, we’ve begun the process to look at our financing options, mostly to finance out our 2019 7% baby bonds, which will all be callable at the end of September. In the event, we retire those bonds, there would be a non-cash charge of $3.4 million due to acceleration of debt issuance costs pertaining to this financing, that were previously capitalized. Future interest rate hikes are always on our agenda, we monitor that closely and we believe we have a very well position balance sheet in the event of future interest rate movements. As Manuel stated first, we always keep an eye on the Federal Reserve minutes and discussions as well as other market trends and information. But any increase in interest rate should not have a material impact on our interest expense as 92% of our debt are fixed interest rates of facilities. Second 97% of our loans are variable interest rate loans with floors that’s a 50 basis points increase in the prime rate, which most of our loan agreements are based would be accretive to our interest income by approximately $5 million of an annualized basis. Our weighted average cost of debt was 6.1% in the second quarter which is the same as the previous quarter. Fees were flat as weighted average cost of debt remain constant between periods due to paydown of 2012 asset backed notes and related acceleration of fee expenses in the first quarter compared to that of the paydown of the 2019 7% baby bonds in the second quarter and the related acceleration of fee expenses. Backing out acceleration of non-cash fee expenses we were at 5.5% in both the first and second quarter. However, with our average to reduce our weighted average cost of debt we would like to see this fall below 5% and has target our efforts to financing alternatives as we discussed earlier on this call. Net interest margin increased to $29 million in the second quarter from $23.1 million in the first quarter or an increase of 25%. Net interest margin as a percentage of average yielding assets excluding equity further improved from 8.2% in the first quarter to 10.2% in the second quarter. Much of this increase was taking our previous liquidity drag and putting it to work on new loan origination opportunities. Operational expenses excluding interest and fees increased in the second quarter to $12.2 million from $10.1 million in the first quarter or an increase of 20% quarter-on-quarter. G&A went up to $4.1 million in the second quarter from $3.6 million in the first quarter or an increase of 12%. This increase was mainly stemming from external legal, consulting and recruiting fees in the second quarter, which we do not expect to continue on the longer-term. Employee compensation increased to $8.1 million from $6.5 million or an increase of 25%. This increase is consistent with our continued portfolio growth as we increased our variable compensation accrual for the same accordingly. Net investment income increased $16.8 million in the second quarter versus $13 million in the first quarter or an increase of 29%. On the per share basis, net investment income increased to $0.23 per share in the second quarter from $0.20 per share in the first quarter or an increase of 15%. Non-GAAP excluding the two step method came in at $0.24 share in the second quarter. This once again demonstrates the positive performance we continued to maintain throughout the first half of the year with a net loan portfolio growth of $218.6 million on the cost basis. Debt funding in the second quarter was $160.2 million taking up to $367.2 million for the first half of 2015. Debt commitments in the second quarter were $239 million taking us to $508.5 million for the first half of 2015. Further, much of our origination in the first quarter happen towards the tail end. For example, $74 million was funded in the last 15 days, so the first quarter didn’t get the full benefit of those investments. Realized gains were $2.1 million in 2015 or $0.3 per share as well. We did have unrealized depreciation of investments of $12.8 million in the second quarter compared to an appreciation of $5.6 million in the first quarter. Remind you that 92% of our overall investments are in loan portfolios and of that our impaired loan portfolios which accounts approximately 10% of that amount on a cost basis has appreciated by $7.4 million. The other 90% of those loans on a cost basis had appreciated by $1.5 million. Our equity which comprises of 6% had depreciation of about $5.7 million, 63% of the depreciation were in public shares, where $2.1 million were in the private shares. And last warrants which account for only 2% of the overall portfolio had deprecation of $1.2 million. Overall our loan portfolio increased to 96 companies in the second quarter from 91 companies at the end of the first quarter an increase of 5%. We added nine new companies to our debt portfolio now we also had four companies pay off their debt in the second quarter. Our average contractual terms are still between 36 and 42 months, however, with pre-payments IPO and M&A activity we still experience on most an average tenure between 22 and 24 months with pre-payments usually beginning on average in the 19 month. The weighted average age of our portfolio at the end of the second quarter is young given the velocity of pre-payments we have experienced in 2014. As such, we would expect to see retention in our portfolio over the next couple of quarter leading to loan growth and while it’s spoken to. With respect to credit quality we remains solid with the weighted average loan rating improvements slightly in the quarter to 2.25 in Q2 versus 2.26 in Q1. The number of our non-accrual loans did increase by one compared to the previous quarter, however, one of our non-accruals also show signs of improvement which we are monitoring very closely. Liquidity went from $321.8 million in the first quarter to $216.4 million in the second quarter. Cash fell by 55.8% to $116 million at the end of the second quarter largely from $20 million payment on the 2019, 7% baby bonds as well as $22 million dividend payments and loan origination activities. Our credit facility availability fell from a $150 million in the first quarter to $100 million in the second quarter as we drew down $50 million on our Wells Fargo facility as previously discussed. Our debt equity ratio remains strong, regulatory leverage which is excluding SBA as we have an exempt of relief from the SEC was 60.5% at the end of June versus 55.6% at the end of March. Total leverage including the SBA was 86% at the end of Q2 versus 80.5% at the end of Q1. And total net leverage without cash including the SBA was 70.4% at the end of Q2 and 58% at the end of Q1. Based on our net regulatory leverage ratio we have the ability to add another $294 million of debt without breaching our debt equity ratio requirements. Net assets did fall by $19.6 million to $743 million at the end of the second quarter primarily due to the dividend payout in the quarter of $22 million. NAV per share was $10.26 versus $10.47 last quarter. Last, we are pleased to be declaring our 40th consecutive dividend of $0.31 per share that will be paid on August 24 as approved by the Board of Directors with the record date of August 17. Based on our current projections, we expect our 2015 dividends to be covered through a combination of our operational performance and the spill over of $16.7 million we have from 2014. With that report, I will now turn the call over to begin our Q&A period.

[Operator Instructions] Our first question comes from John Hecht from Jefferies. Sir you may begin.

Thanks very much and congratulations on a good quarter and thanks for taking my questions. Real quickly, we're aware that you guys are very sensitive on an asset-sensitivity level. But I'm wondering, and forgive me if you commented on this, Mark, but what happens if rates, as rates go up toward that 100 basis point increase? For instance, what happens when rates are up 50 basis points? Are you guys still accretive in that zone?

Yes the answer as I said in my previous remarks, if it goes up 50 basis points it would be approximately $5 million accretion overall. We talked about I mean while it was 100 basis points, remember as interest rates go up, obviously it impacts anything that is variable. While on our own debt side we are pretty fixed, so that don’t really go into impact that as I said 90 plus percent is fixed rate loans. But almost all 97% are variable rate loans in terms of the investments that we give therefore any interest rate movement on the upside definitely would be accretive to the overall P&L.

Okay. I did catch that. Thanks for reminding me and clarifying that. You have one new NPA. Which one is it or which company is it and what's the NPA as a percentage of cost now?

Our overall non-performing assets or non-accruals are limited to I think three companies right now and Andrew can you give that number please.

On non-accrual compared to total loans is 3.9% and as $46.1 million…

In aggregate.

Okay. That's very helpful. And then, Manuel, you talked about your biggest competitor now is equity and you've been talking for a couple quarters about some markets being a little bit bubbly or frothy. With that in mind, are there any sectors you're keeping away from simply because of valuation?

Well look at, it remains a very lofty market, the SaaS, some SaaS models, software as a service models remain pretty well priced out there. I think we have seen a little bit of a run up in valuations at some of the life sciences portfolio companies, we have seen a life sciences give up a little bit of reselling, which we think is an appropriate kind of pressure relief on that sector, so I think that factor still has good growth opportunities there. But we tend to avoid where a lot of people call the unicorns, we tend to focus on high quality, high duration sustained companies in value not just momentum investments. So I think that the overall venture capital marketplace although is seeing some pretty hefty valuation, I don’t think that valuation necessarily know please yet, so I think that there is still some room for growth out there and we certainly welcome some of these valuation increase that are happening, some of the portfolio companies are benefited from that and also benefiting for the ability to raise, equity capital higher valuations that serve to amortize our debt. So the ecosystem is quite healthy and we like that.

Great. Thanks very much, guys.

Okay. And our next question comes from Chris York from JMP Securities. Sir, you may being.

Good afternoon, guys, and thanks for taking my questions. So, Manuel, could you help me understand the guidance a little bit in regards to timing for covering the dividend? Because, given your comments on the yields potentially expanding to 14% in Q4 and then commitments still on pace for record levels at year end and then in addition to your expenses flattening out, it seems like the timing could be conservative by potentially a quarter or two.

That’s exactly right. I mean it’s available in the head. I don’t want to come out and be overly aggressive to say the dividend we covered in three quarters. There is a possibility that could happen, but there is a lot of - there has to be perfect alignment of the planet and I don’t feel that, that level of aggressiveness is prudent or wanted so I would rather differ to a window that’s happening in three or four quarter, but there is not question with the same portfolio growth, and any spike and effect of yields, you actually close the gaps, you are absolutely right.

Okay. And then switching gears a little bit; could you comment on how you are viewing the SECs consideration of treating unfunded commitments as debt for BDCs?

Sure. We’ve found a great and continued positive dialogue with the SEC. I would say that the staff of the SEC has been very willing to engage and what I consider to be very good substantive discussions, I think that the SEC is prudently and frankly appropriately reviewing the unfunded commitment category, I think there are some potential players that may have been a little more abusive of that practice if you will. However, one of the most important things to do unlike lower than our market lending is that venture capital lending specifically has earmarks of very hardened and stead fast mile stones, that these companies must achieve. Not only that and is often the case not withstanding that even a cheaper milestone that we have in discretion to evaluate in due diligence and decide whether or not we want to fund into that situation as well. So discursion remains very much in our capabilities and that’s something that we worked really diligent with the SEC staff to kind of help orientate them and understand our particular asset class in this area. I think that the staff is hopefully provide some open public outcome or outlook on this issue in Q3, but at this point we’ve had what I consider to be very constructive and very meaningful conversation of the SEC staff on this front. We are also proactively taking steps to adjust how we ourselves underwrite and historically have used un-funded commitments to also when negate that and whittle that number down fairly quickly here between now and year-end, where the un-funded commitment situation will be, I don’t want to say necessarily insignificant but will be dramatically lower than it is today. And we’ve made conscious efforts and continue to make conscious efforts to make changes to our own business model to accommodate those potential changes, you actually see many mandates down the road.

Great. Yes, that's all very helpful. I did notice that unfunded commitments did come down here in Q2; essentially, the lowest level since Q1 of 2014. And then, also in your press release that you did note the unavailable commitments due to milestones.

Yes. It’s a very, very important distinction and discerning that caveat there where these un-funded commitment are not contractual obligations until its times are earn and performance by the company and then we agree to release on diligence. So there, in essence are almost meaningless for that content. However, we strongly do believe that when an un-funded commitment is readily available to the company that is something that we will need to reserve for and look after as we’ve done historically and in fact we now included in our investor presentation deck, an historical chart that gives I think the trailing eight quarters of what that un-funded commitment look like and you will see it’s about 13% or so of our portfolio. And that’s where we've historically have managed the business to and you will see that’s self-evidence in our presentation.

Great. Thanks for that additional color. And then, you've invested in the platform over the last couple of quarters to build out the infrastructure at Hercules. Given this investment in the business and recent changes in conditions at some other competitors, I was wondering if you could give us an update on thoughts of acquisitions.

You are putting me in the spot a little bit. we have said from time-to-time, we remain very acquisitive, we are looking at and continue to look at portfolios, teams, and companies to acquire and we remain actively looking at those I mean its hard for me to go beyond this other than, yes we’re interested, yes we are evaluating opportunities and that’s I think the extent that I think I’ m comfortable with one of the most difficult things for us to encounter is that when we super pose our credit screens on targets, we find that valuations and fair value impairment are more lighter than we would deemed to appropriate. We are very much credit shop and we are very diligent when it comes with that and lot of targets tend to break down on yield and credit.

Got it. Yes, I know that you're potentially limited if you're looking at something to comment. But, let's see, maybe philosophically. So, how are you thinking about the culture at Hercules and fit when considering, I guess, maybe new hires and then, down the line, potentially acquisitions?

Well I think it we got to bifurcate the question into buying assets and buying a team, and they are both materially different. The softer nature i.e. buying a team is a much more comprehensive process, cultural fit as we all know for many acquisitions are very tough to asses and handicap, it is not untypical you may see 25% to 35% of the workforce just a attrition, naturally upon a change of control, certain teams that we are looking at we would like to obviously have a good retention program in place. All of these acquisition that we are evaluating are potentially be a creative and offer a winding of our platform, but honestly until we are closer until we have more definitive agreements all these acquisitions have a complete different colors and look and feel for themselves in doing that. Obviously in asset acquisition, our portfolio acquisition is much easier the kind of dial-in and we are evaluating some of those as well.

Great. That's it for me. Thanks very much.

Thanks Chris.

And our next question comes from Greg Mason with KBW. Sir you may began.

Great. Thanks, Manuel. Just to follow up on Chris' questions, still on the unfunded commitments. I think it's a big issue that people still - we can't still fully get our head around. So, if we think about in your press release you talked about $216 million of available liquidity to make new loans, but you've got $160 million of the unfunded commitments. Is the way the Commission is looking at it, would that $160 million of unfunded commitments essentially sop up a huge part of that $216 million of liquidity? Or is the calculus different than that?

Well, I’ll begin, ill have Mark jump in here as well. First and foremost I am not going to pretend to speak for the commission or how they are feeling and how they are visioning things I think that commission will eventually put out a public paper on their view on this issue, we would welcome that strongly, but I think that the part of your question that you addressing fundamental flaw that people don’t seem to remember. Hercules does not do seven year bullets or five year bullets, so the cash flows that we get on a quarterly basis are quite tremendous as you see in Q2, so it’s not untypical that we are seeing $50 million to $100 million of cash flows just coming in by loan amortization, which could range anywhere between $30 million to $40 million of quarter as that unexpected early repayments that could be anywhere between $40 million to $70 million a quarter and that’s give us $110 million in normalized cash flow to come in, and yes those cash flows you can point to a sources of funding in to help for the backstop any of those funding commitments. Secondly a lot of unfunded commitments we are working to whittle down and we would naturally begin to drop meaningfully between Q3 and Q4 just both naturally and how we are restructuring a lot of our deals. So, we think that this situation if nothing is done will automatically correct itself on it’s own by Q4, but we are working clearly with this staff and helping them understand our business model and working collaboratively would find a good balance in language that hopefully the staff will put out on this issue, but clearly yes the liquidity - looking at liquidity is a way of I think I’ll used the word mopping up or dampening down on those unfunded commitment, absolutely Mark anything you want to add?

Yes, I mean I also would add, one of the comment that you made is we have $216 million of liquidity and I also mentioned that we have $294 million of ability to increase if we should so choose, the other comment that I would make in the aggregate numbers that you’re referring to, $85 million of that are revolvers, which typically are not drawn down, so it’s very much a pro forma. And the last comment I would make since I have had direct discussions with the Securities and Exchange Commission is I think they are realizing by just going out there with the broad stroke of BDC may not be the right way to do it, because you do have small middle market lenders versus venture debt lenders and we all are very different in terms of our unfunded commitments. So as we start to work through that we are still optimistic that there may be a distinction of the SEC would come out with an official ruling that is hopefully softer than what we are reading about in the papers right now.

Okay, great. I appreciate those comments. On the $150 million of 7% notes that are still outstanding, those are callable now. You called a little bit of them. What is your thought process in terms of, now that you've got an investment-grade rating from S&P, going out and doing more of kind of an institutional bond deal and essentially refinancing those out for, hopefully, meaningfully lower coupons? Are you thinking about that? And what do you think that could potentially look like?

Sure. Let me try to answer the question obviously again in the previous part of my call I mentioned that we are up at 5.5% backing out non-cash fees in terms of our cost of debt it dropped out below 5% we have already began the process to look at other financing opportunities in the capital markets to do what you just discussed but I do want to clarify for you that not all of those bonds are callable right now only at the end of September well all of the 2019, 7% baby bonds be callable. So I don’t want to give the impression that we can do that as of today.

And Greg one thing I would add as we have been kind of - seeing the markets and evaluating the market in a different options as a hypothetical you can presume for example that if we were to go out in the market and we place the loans, the $150 million of the 2019 bonds at 7% you can actually if you wanted to go straight, use 4.5% or 4.6% coupon rate for example that would translate into 2.5% to 2.4% savings on that $150 million. So you are looking at some real impact to our bottom line that could be as much as $7 million. The interest rate savings towards shareholders and our investors but more importantly which is something that we really do want to do we will do that is highly accretive but more importantly it allows us to have better competitive position by having overall weighted cost of funds that will be in the sub 5% level that gives us the ability to have a wider NIMs and wider net interest margin for the benefit of our shareholders that we intend to do in the markets. So you are obviously right. We do expect the cash in institutional market here shortly.

Great. Great commentary. Thanks. I appreciate it, Manuel. .

You’re welcome.

And our next question comes from Robert Dodd with Raymond James. Sir you may begin.

Hi guys.

Hi Robert.

One just clarification first. Just to be clear, the $1.3 billion to $1.5 billion target for the end of year, that is a target for the loan book, right? Not the total portfolio.

Yes when we look at those numbers, we focus primarily on interest earning assets and yes it is most of the loan book and we are out $1.17 billion today, so we are well within strike distance and just getting to that point but yes it is in reference to the interest earning loan book which is basically only $130 million away from that target on the low end of the range.

Right, got it. And then if could, on the prepayment acceleration that you're expecting in kind of Q4, starting in Q3, can you give us any color on the source of that? Obviously, you're primary competition you say right now is equity. So, just is there so much VC equity floating around that you expect more equity injections and that's going to result in a pay-down? Or is it M&A activity? M&A activity I would expect to flow into realized gains potentially. So, I mean different sources generate different other incomes for you as well.

There are many factors, two of which you just highlighted that are correct that point to the early repayment activities occurring, Q4 typically is a strongest quarter ever for typically venture lenders and certainly the continuation of IPO monetization and M&A monetization will certainly contribute to that acceleration. However, there is a more fundamental of process that is underway and that is venture portfolios typically only have a duration of 22 to 24 months even though we may underwrite 36 or 42 months the average tenure of the outstandings are typically 22 to 24 months of our loan portfolios As the portfolio begins to mature and our capacity age of portfolio that we grew in the second half of 2014 and it grew in the first half of 2015, is relatively young, its called composite age. The static age of the portfolio. So as an example, we’ll pursue that static of the portfolio is around 13 months or so. As you notch every other quarter under your belt, and it get older, go for 13 to then 16 months to 19 months and if that cross over plan which is that 19 month mark more or less as Mike said earlier, you start seeing the acceleration of prepayment activity just because you reached the natural tender of the portfolio at 22 to 24 months and because of that, and this is how dieseled we are at Hercules and how much we look at our portfolio. We can actually tell you that we could see an increase in that monetization or exit event taking place in a portfolio of natural recycling itself as it close that month 19 and beyond that point.

Okay. Got it. Thank you.

You’re welcome.

Okay. We have a question from Fin O'Shea with Wells Fargo Securities. Sir? Mr. O'Shea, your line is open. Fin O’Shea: Sorry about that, guys. I had myself on mute. Following the Silicon Valley Bank quarter it looked at first like those guys were going to retrench a bit. But, from what we're hearing, they seem to be saying that the provisions were a couple idiosyncratic one-off types. So, if you can give us an update on what you're seeing from activity from the bank side.

Well, I cannot tie in what a bank does and doesn’t do. I think that the bank competitive environment remains no different than it was for the last quarter in the last few quarter. I think that the banks remain competitive I think that the regulatory environment and the bank is increasing that is actually a favorable outcome for our landscape and I think that some of the banks have already spoken about the increase of regulatory activity and increasing reserve requirement in their own business models that may be adversely impacting them. As to the credit issue, I can’t speak to specific looking by banks, there are fine institutions, they are very good players, they know what they are doing and I think that they are probably right, it’s probably indigenous to unique credits. We are not seeing any broad system and credit concerns in our portfolio right now. And so I think that would be agreeing with Silicon Valley bank is probably just isolated in to random variables, random credits [Author ID1: at Mon Aug 10 18:14:00 2015 ]. But we are not seeing this as a systemic issues in our portfolio as of yet either. Fin O’Shea: Okay, great. Thank you. And then just a smaller question. If you could provide a bit more color on what we'll see from here in terms of SG&A and comp. I think you said we'll see some scale from here, but with a bit higher of a variable expense.

I think that our SG&A is pretty much begun to plateau. I don’t think it’s going to materially move, M&A one direction up or down and I think that comp is not going to more variable related meaning it’s co related to portfolio increases that’s going on and you will see that increase in the variable comp but I do not expect any more material increases in overall OpEx excluding interest spread obviously. Interest expense will go up, we indicated that earlier that about $500,000, 450 as such will start going up just attributed to the Wells Forgo borrowing at $50 million but beyond that and also need to highlight again any event that we end up doing the retirement of our 2019, $150 million baby bond that that would lead to a significant interest savings ones, when that is done, that will further lower your overall OpEx from you include interest expense. Fin O’Shea: Okay. Very well. Thank you.

Thanks, Fin.

Okay. We have a question from Hugh Miller with Macquarie Group.

Thanks for taking my questions.

Hi,

Hi. So, I guess one other, not to bash the subject, but with regard to the unfunded commitments. Obviously it seems as though you're going to try and take a strategy of maybe adjusting the terminology and the language in which you're underwriting those commitments. Do you think that that -- is there a risk at all that that could put you at maybe a competitive disadvantage by not having kind of a formal mandate for an unfunded commitment with or without milestones or just with milestones relative to maybe some non-BDC competitors?

Well, I think as we said in these - I think comes to mind is rising [indiscernible] boats in these context so I don’t think that we are any different anybody else, I think we are taking the more proactive approach and working diligently with our companies and also with the SEG staff I’m working on a language and changing some of our business practice I think ministry as a whole we’ll probably end of confirming to similar changes as we address this issue. At the end of the day the whole senior security definition and asset covered ratio is very much of fluid issue as you know there is bill on the floor of consideration by Congress that actually could ameliorate so whole entire discussion by raising of the overall asset coverage ratio, limits as well, that said, we’re not waiting for that we have taken a proactive approach to adjust that issue we do not think it will have an impact whatsoever in our business and a some of our competitors want to go do of that issue let [indiscernible] I don’t think its something that we’re going to get concerned about because on how we underwrite we don’t get cut up with what other are doing, we do what we do and we will take it is right underwriting things to do and if the SEC staff makes decision important point for them or we are going with the staff and finally have solution with them together. It’s something of that as an institution I believe it is very important that we need work with our regulators and also listen to them, but [indiscernible] we had feedback for them as well.

That's helpful. And then a follow-up question. Just if I take a look at the 10-Q, it looks as though exposure to kind of the energy technology names has increased over the past six months. Can you just give us a sense of what you're seeing there for opportunity and what you think the risk-reward is relative to other areas?

Absolutely, I think it’s a great question. There is absolutely no question that we have actually truly like and are seeing very, very attractive investment opportunities and the renewals area. We are not necessarily interested and looking at Cleantech solutions there are falls of fuel dependant, most of our investments are much more disruptive and enabling, solutions in that area and I think that we are one of the few players that I am aware right now that has an active interest and growing in that area, but we are now looking to have much exposure to volatility on all prices or false of fuels much more focused on improving the environment, reducing contaminants, getting lower cost of operations are like for example of eclectic vehicles or buses as an example. So our strategy in the energy area is much more enabling disruptive then its petroleum base in focus.

Okay, thank you so much.

Okay, we have a question from Christopher Nolan with MLV & Company.

Hi Chris.

Hi guys. All my question have been asked and answered. Thank you very much.

You are right Chris, thank you.

Okay, so next we have Aaron Deer with Sandler O'Neill.

Hi.

Hi, guys. Just following up on the capital question. You had previously kind of hinted at the idea that a capital raise and equity raise could be possible before the end of the year. I guess, given some of the uncertainty surrounding the unfunded commitment treatment and your forecast, is it possible we could be seeing a common raise before year end or is that more likely pushed out further into 2016 or beyond?

It is certainly not my interest to do a capital and stock raises these level whatsoever and it that means that one of the strategy that we do is slow down originations and it stop around $1.3 billion, $1.350 billion and it something that we will definitely do borrowing any kind of force capital raise. We do not like the issue acuity of these levels we are internally manage, we are directly lying with shareholders on one of the largest shareholders and I actually do not want to see unnecessary dilution and so I think that we are going to be prudent and very unwilling to do equity raise at these prices unless we are absolutely forcibly which I don’t think will be but that is our, so I don’t think and equity raise and this year and these prices is absolutely on the table, no.

That's great. And then, one for you, Mark. You guys don't seem too worried about credit. But I was just wondering if you could give some color behind the increase in the grade-5 loans in the quarter. And of the $7.5 million loan impairment how much of that was credit-related?

So a lot of that, they wanted credit that was put into non-accrual and five rated category was attributed to a change in strategy going on in the company that we are not going to get into specifically because these companies are private and when the change of strategy takes place often times you are waiting for the financing strategy to then follow however because of fair value churning often times we are forced into a fair value of choice where we need to make sure that loan is properly reflected from a value, we actually believe two of the credit and the non-accruals will begin to show change positive change taken place as early as Q3 and possibly as late as Q4. And one of the credits in particular is - I should say very strong signs of improvement and the other one is in a last couple of weeks showing much better outlook and so I think that we are going to take it month by month and continue to look for positive affirmation and ultimately positive equity infusion into these companies that will then give us the much more solid confidence to Mark and James.

Okay, good stuff. Thanks for taking my questions.

Thank you.

[Operator Instructions] And we have a question from Doug Harter with Credit Suisse.

Thanks. Manuel, historically you've been very conservative around the use of your warehouse lines. Can you talk about, as growth happens in the back half of the year here, your willingness to use those lines?

There is absolutely no question, it is very interesting issue for me, [indiscernible] for me and investors want me to over leveraged and other quarters being conservative about leverage and so there is never really good balance and what we are saying is because we believe and the portfolio and the availability of good opportunities that beginning to use our bank lines especially with the capital markets that are open and willing and coupled with our institutional investment grade rating our confidence in securing additional bank financing with bond or additional bank is pretty much there and so one of these we will do because we have the ability to leverage up to 125 to 1 we feel confident and willing to go up to the 1.1 leverage level but that probably we will not have it until late Q4 maybe early Q1 for example, it is going to be a subject when we feel that the quality of the assets that we like and the yields of the assets that we like, we will target the portfolios of that level. As we go to that level, you can see pro forma portfolio is near $1.4 billion level that the 1.1 leverage line. And so that kind of gives you can indication that when you look at a portfolio that goes up to the 1.1 leverage point again just slightly 1.4 billion and you multiply that anywhere to that 13% or 14% yield or yield you want to use, you will see the level of accretion that drops to the bottom line for our shareholders in terms of NII growth and that is something that we have in purposely growing quietly into that and that when you see I said earlier that we think the cadence of earnings growth is going to be probably $0.02 per quarter growth and you can add $0.01 to that plus or minus on increase in portfolio fundings or effective yields going up. Now $0.01 can also weigh between just those two factors, effective yield or portfolio growth that drive further that earnings growth in the company and that will be driven by leverage because we don’t want to issue equity at these prices.

So I guess, following up on that, understandable that you don't want to issue equity at these levels. I guess, how do you balance kind of the near-term opportunities versus potentially starting to dial back growth a little bit sooner and sort of allow that opportunity to sort of spread out the growth over potentially a longer period of time?

That we do have interest in doing, we want to get to that core portfolio of $13 billion, $14 billion, $15 billion at that point we have the optionality to decide what we want to do, there is absolutely no question that a prudent thing to do expensive stocks of these prices led the earnings catch up and let the stock catch up to the earnings and therefore grow the portfolio $1.3 million, $1.4 billion and you are weighing quarter two or more. I mean it is really a function of seeing a good stock appreciation return back come with dividends and really beginning to show the investor community that this platform is as strong as it historically has been and it will continue to be. And that means that we have to grow and start below it, I won’t have fall with that, these would be throwing up very strong earnings at that point.

Great. That makes sense. Thanks, Manuel.

You’re welcome. End of Q&A

I’m not showing any further questions. Mr. Manuel, please proceed with any further remarks.

Well, Candice, thank you very much. Thank you everybody for joining us for the today, as well as you know typically after these earnings call we participate and attend various investor conference from the various banks that follow-ups, we will be attending conferences here shortly in Boston and some in New York. And if you would like to have participation or attend one of those meetings please let Michael Hara, our Investor Relations department know. We happy to schedule if we have available time. And again, thank you shareholders, thank you analysts, and we look forward to our next earnings calls. Thank you very much everybody.