Manuel Henriquez - Co-founder, Chairman and Chief Executive Officer Jessica Baron - VP of Finance and Chief Financial Officer.

Troy Ward - KBW Aaron Deer - Sandler O'Neill & Partners Greg Nelson - Wells Fargo Christopher Nolan - MLV & Company.

Good afternoon and welcome to the Hercules Technology Growth Capital Fourth Quarter and Full-Year 2014 Financial Results Call. My name is Patrick and I’ll be your conference operator today. At this time, all participants are in a listen-only mode. At the end of the prepared remarks, there will be a question-and-answer period.

Instructions for asking questions will be explained at that time. I would like to remind everyone that today’s call is being recorded. Please note that this call is the property of Hercules Technology Growth Capital and that any unauthorized broadcast of this call in any form in strictly prohibited. I’ll now turn the call over to Jessica Baron.

You may go ahead, Mrs. Baron. .

Thank you, good afternoon everyone and welcome to Hercules Conference Call for the Fourth quarter and Full-Year of 2014. With us on the call today from Hercules are Manuel Henriquez, Hercules Co-Founder, Chairman and CEO; and myself, VP of Finance and Chief Financial Officer.

Hercules Fourth Quarter and Full-Year 2014 results were released just today after the market closed within our 10-K and can be accessed from the 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 passcode 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 SEC may differ from those contained herein due to timing delays between the date of this release and in the confirmation and the final audit results.

In addition, the statements contained in this release are not purely historically and 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 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, www.htgc.com.

And with that, I’ll turn the call over to Manuel Henriquez, Hercules’ Co-Founder, Chairman and CEO.

Manuel?.

Well, good afternoon everyone and thank you very much, Jessica and thank you all for joining us today. I have come to understand here that EDGAR is apparently backed up with a lot of filings here. So my understanding is our 8-K may not be out yet, although it's been filed almost an hour ago and our 10-K is filed.

So in order to help everybody, my understanding is we’ve placed the earnings release on our website to make the process easier until EDGAR releases the document. Apparently a lot of people are filing late here and apparently we are probably one of them.

So my apologies to everybody, but the 10-K is out and the earnings release is available on our website and hopefully within next five or 10 minutes or so, the EDGAR’s logjams should clear through and you'll see the 8-K filing as well.

So with that said, I'm extremely pleased to report another outstanding quarter and a year for Hercules on multiple fronts. 2014 was a very, very interesting year for Hercules itself.

And so in the fourth quarter itself represented a lot of challenges that I’ll be talking about that Hercules was able to navigate and show its resiliency in order to achieve the performance that we did in the fourth quarter.

So on our financial results, we continue to demonstrate strong leadership position within the venture capital lending marketplace.

The strength of our brand and reputation amongst the specialty finance of the largest specialty finance BDC focus on venture lending once again has proven itself within the venture capital community and the private equity community, financing the high growth, innovative, disruptive technology in life sciences companies and select public companies.

We continue to see unprecedented deal flow in demand of capital from our venture capital partners as well as from our innovative entrepreneurs who continue to build and create successful companies out there.

2014 was a watershed year for Hercules in providing resolve in our ability to execute with over $900 million of new commitments completed during fiscal 2014. During the year, we saw unprecedented transactions and repayments of loans. Nearly half a billion dollars, $500 million of loans were repaid during fiscal 2014 that occurred.

We as a company were successfully able to absorb all of that early payoff and originate corresponding balances of new loans that we were able to finish the year with a net portfolio growth of the year-over-year at over a billion dollars in total investments.

That speaks to the ability of this organization to grow and have the brand awareness that it has out there to attract high-quality deal flow that we’ve done in the past.

This is truly a testament to Hercules’ resilience and tenacity as it demonstrates this organization’s ability to deliver outstanding results and as I said originated over $900 million of commitments in 2014.

And equally impressive is to originate and fund over $600 million of that $900 million of commitment that were converted into new funded assets for the benefit of our investors and growth in our portfolio.

To put things in perspective, in my nearly 28 years in this business I’ve never witnessed a portfolio turnover of over 50% in a preceding 12-month period of time. That truly speaks to our access to high-quality deals and our reputation to be able to replace and absorb such a tremendous amount of transactions during a fiscal 12-month period of time.

In addition in Q1 2015, I'm very proud to announce another major accomplishment in our founding of Hercules since 2003. In the first quarter of 2015, we recently surpassed the $5 billion mark in milestones of new commitments to over 300 companies who have chosen Hercules as their financial partner.

Our reputation as a strong financial partner and relationship with many of the leading venture capital firms and entrepreneurs continue to drive high quality deal flow.

I'm deeply grateful to these amazing entrepreneurs, the venture capitalists, and financial sponsors for entrusting Hercules as one of their key financial capital providers and partners. Again thank you everyone for making this possible.

Now as of today's agenda, I will cover the following matters; a brief summary of our key operating performance and results for Q4 in 2014; an overview of the current market conditions including the venture capital activities, IPO, M&A and competitive environment; and our perspective and outlook for investments in the first quarter of 2015 and the remainder of 2015.

I’ll then turn the call over to our CFO, Jessica Baron who will go through in greater detail the financial results which I’ll be summarizing. Here are some of the financial highlights on Hercules’s outstanding accomplishment and operating performance during the fourth quarter of 2014 and the fiscal year 2014.

Let me start by saying that the fourth quarter was probably if not one of the most important and most memorable quarters I have witnessed since founding Hercules 11 years ago. We finished 2014 with a spillover of taxable income of approximately $17 million or $0.27.

This will ensure our near-term continuation of our dividend coverage as we continue to build our portfolio over fiscal 2015. During the fourth quarter, Distributable Net NOI or DNOI of $18.6 million or $0.29 per share. Total investment assets at a fair value had approximately $1 billion in value, up 12% year-over-year.

We also finished the year with record realized gains of over $20 million in realized gains in the quarter representing $0.33 per share of which $7.1 million of the 20 million were realized in the fourth quarter alone.

On total debt and equity and capital commitments, as I said earlier over $900 million representing a 28% year-over-year growth was executed in 2014. Of that $900 million a third or approximately $317 million came in, in the fourth quarter alone representing an astonishing 153% growth for quarter over quarter.

Equally as impressive was the record of fundings that I said earlier of over $600 million and to be precise approximately $621 million of new fundings took place in fiscal 2014 representing up 26% year-over-year. Of the $621 million that was funded in fiscal 2014, nearly $210 million of that occurred in the fourth quarter alone.

And that represented a 165% increase quarter over quarter. As you could see the fourth quarter for Hercules was a tremendous fourth quarter for ourselves and we had anticipated a very healthy fourth quarter but not to these levels. Driving our core investment yield during the year was unprecedented levels of early prepayments.

These repayments served to increase any unamortized fees as well as trigger prepayment penalties that may be realized upon the repayment of these loans that occurred early. During fiscal 2014, we had approximately $358 million of early prepayments that took place of which a $147 million alone occurred in the fourth quarter.

Add to these early repayments are normal expected schedule principle amortization of approximately $136 million in 2014. And you’ll see the $500 million of early debt repayments that occurred during the year. Unprecedented to see a 50% turnover in our portfolio in an organization to be able to replace that loan volume as it occurs.

It is important to note that Hercules has always broken out its core yield which purposely exclude the impact of early fees prepayment and income acceleration attributed to those payoffs occurring.

We also have chosen to break out and show our overall effective yield which includes the benefits and impact of these early prepayment and fee and income accelerations attributed to early payoffs.

I am not aware of other BDCs who disclose the differences and their yields between yields that are impacted by one-time events and the need to break out as we feel important to do of what the normalized core yield of our portfolio is.

You’ll see a much greater example of that in our investor presentation on our website that actually shows you graphically the trailing eight quarters, our effective yield as well as the core investor yields available to you on our website to show you the importance and significance of that.

Given these unprecedented level of early payoffs and repayments, these repayments clearly help drive upwards our expected core loan portfolio yields, which have remained consistent for nearly 8 quarters at 12% to 13%.

While those effective yields were certainly enhanced by these early payoffs, this led to our effective yields leading up to the 50% to 60% overall yields that you see now disclosed over the last few quarters in arrears.

Our net investment income for the fourth quarter was approximately $16 million or $0.25 per share which includes additional expenses associated with the conversion of our convertible debt extinguishment that occurred in the fourth quarter.

In addition in the fourth quarter, we also recognized higher interest expense and fees associated with the recently announced second new securitization completed during the fourth quarter.

In addition to that, we also incurred higher interest expense associated with our 10-year notes that were issued in the mid-third quarter which now were outstanding for the full quarter in 2014 in the fourth quarter that incurred higher interest expense.

As well, we also had higher SG&A related to the activities in the fourth quarter as well as new hires that we did.

Instead of compensation with the achievements occurred in the fourth quarter and continuation of strategic and corporate initiatives and activities, both related to evaluating certain potential acquisition targets and ongoing strategic developments that we’re working on to enhance and increase shareholder value in the coming years.

Thanks to our continued focus and accessing to the broader use of leverage on our balance sheet, it is critically important for Hercules to continue to access the debt capital markets. It is unfortunate that we’re unable to specifically time the capital raise of our debt point of view with our need for capital deployments.

It is very typical that we may experience anywhere between one to three quarters of interest rate expense drag until such time as we find the proper investment opportunities to convert that interest expense into interest earnings as we convert those new funds raised in our bond offerings into interest earning assets.

With that said, we finished the year with a very strong and very liquid balance sheet with over $370 million of liquidity available on our balance sheet that we intend and anticipate putting to work over the next two to three quarters in fiscal 2015.

As a testament to that commitment, we already have or finished the year with nearly $339 million of unfunded commitments, an unprecedented level in our entire history which we’ve not seen and the unfunded commitment of $339 million represents over a third of our existing portfolio if it were to fully fund.

Now I would like to caution everybody as we typically do in Hercules, although the unfunded commitment number is quite impressive at $339 million, many of those commitments are contingent upon financial and performance milestones that must be achieved by the underlying portfolio company in order to invest or make available to itself those unfunded commitments.

We expect approximately $100 million or so of those unfunded commitments to convert into funded assets over the next quarter or so in Q1 and spill over to Q2 2015. Now let me speak to the financial performance of the company specifically.

And also let me turn my attention to our investor loan portfolio and yield especially given the activities that occurred in the fourth quarter and in 2014 as it relates to yields and yields on a go-forward basis.

I apologize that I am being repetitive here, but I think it's extremely important that we continue to provide what I believe is to be the appropriate insight and transparency to our investors to understand why the Hercules business model remains and continues to be as successful as it is.

Let me take a moment to discuss the importance and the impact of early prepayments and their financial contributions to our invested portfolio in yields in 2014, what we expect to occur in 2015 and the significance and importance of 2016.

By turning over nearly half of our investor portfolio or $500 million and subsequently rebuilding our investor portfolio back to nearly a $1 billion at the end of 2014, ostensibly what we’ve achieved is that we effectively have lowered the aggregate composite age of our portfolio.

Speaking in layman terms what that means is we now have a very young portfolio. And because that investment portfolio is young, it will then experience a period of 12 to 15 months where it will then use its interest-only period that these companies have afforded themselves.

And because they have a long 12 to 15 month interest-only period as well as usually a 3% to 4% prepayment penalty, we actually now are forecasting that 2015 will experience a dramatic and materially lower early prepayments.

So rather than expecting to see nearly $500 million in prepayments in fiscal 2015, we are actually forecasting only $20 million to $30 million in early prepayments to occur in 2015.

The significance of this is that we’ll then experience a convergence or of our effective yields to then match our core interest yield as those yields will no longer be impacted accretively or favorably by any short-term yield or income acceleration attributed to prepayment and fee acceleration.

However this phenomena will then return back to a more normal state where in 2016, we then expect to start seeing a more normalized rate of early prepayments and payoff back to a $50 million to $75 million level.

What this means is that during fiscal 2015, we’ll take the advantage of this liquidity that we’ve in our portfolio and work diligently assuming we find the right quality of credits in the marketplace that we expect to rebuild our portfolio by the end of 2015 to a balance of anywhere between $1.3 billion to $1.5 billion at the end of 2015 subject of course to market conditions and early prepayments remaining modest to I guess insignificant at a $20 million to $30 million level.

This is very important. Because of that, as I said earlier we expect those yields to then normalize back into the 12% to 13% range given the fact that we are not experiencing or do not expect to experience much in early prepayments. As I indicated during our Q3 earnings call, we remain extremely focused in maintaining a high credit portfolio.

We believe strongly in preserving our historical credit track record and maintaining our credit discipline despite in otherwise competitive environment and not reach down the capital structure to buy yields at the cost of foregoing credit and staying senior on the credit stack.

I am proud to say that after 11 years since founding Hercules, our cumulative net GAAP losses since inception are a mere $12 million representing an annual loss rate of just two basis points.

That's outstanding when compared to $4.9 billion of commitments through the fourth quarter and now $5 billion of which have been occurred through the first quarter of 2015. Our business continues to evolve, as we become ever more competitive in the marketplace that we do.

Many have tried to emulate the Hercules success and few have been able to prove what we’ve been able to consistently do on a quarterly basis. I do not concern myself on quarter-by-quarter performances.

I concern myself on looking at the annual performance of the company and maintaining a high credit discipline and focus on quality earnings because on a quarter-by-quarter basis time has proven time and again that we’re more than able to make that up in the preceding 12-month to 15-month period of time as we have done many times in the past.

Unlike many of our new venture, lender, competitors desperate for asset and yields similar to Hercules and attempting to emulate our credit success and performance, Hercules has chosen not to pursue new investment opportunities that will require us to stretch on credit terms or structures or reach down the balance sheet as I said earlier in order to take yield to preserve yields.

We’re more than happy to see yield compressions take place by maintaining a high credit book and a high earnings quality book.

We view the short-term tactics currently being undertaken by many of these competitors and entrants as increasingly overall enhancing or increasing systemic credit risk and credit portfolios and that's not something that Hercules believes is prudent or will do.

With that said, we finished 2014 with a taxable earnings spillover of $0.27 per share representing $17 million.

This affords Hercules the flexibility to maintain its variable dividend policy and to focus on quality credit underwriting as it grows it portfolio in a way through fiscal 2016 to occur as we then start seeing early prepayments to once again commence and start seeing a back to gross yield enhancements to historical levels.

We’ll continue to defend our leadership position. We’ll continue to selectively underwrite quality, lower yield of credit if and when those companies merit and are worthy of underwriting to that standard.

We’ll not compromise our philosophy on this issue and over the past 11 years that tenet of strong credit underwriting culture and discipline has served us well and served us to maintain our leadership position.

We have no intent to allow credit to hurt this company’s organization and we will not allow competitive environments to manipulate or focus us on areas that we do not think are prudent to pursue. Now turning my attention to the income statement and the activities in the fourth quarter in NII specifically.

As we always do, we talk openly about our financial performance. NII in the fourth-quarter declined to $0.25 per share. That was driven in no small part by the robust quarter originations of the fourth quarter. The fourth quarter saw increase in interest expense associated with the 10-year bonds being outstanding for the full quarter.

You saw interest expense increase attributed to the issuance of our new securitization to further enhance our liquidity as we convert our unfunded commitments to new asset growth.

And it was also precipitated by an increase and instead of bonus accruals regarding the activities in the fourth quarter made possible by our fine, outstanding origination team and organization that supported this organization to do that.

Now as we’ve said in the past, we look to these expenses and we expect to continue to see expense growth in fiscal 2015. We indicated in the third quarter that we expect to see SG&A expense to begin to rise in 2015 by at least a million dollars a quarter and even higher attributed to directly correlated to that of new originations occurring.

Because of that, we’ve taken great efforts to realign our incentive compensation programs for our origination team which I’ll discuss in my outlook for 2015 more specifically.

When you surmise all of the expenses that incurred in the fourth quarter and you'll see purposely the table that we included for our investors to easily reconcile the differences in changing quarter.

Between the third and fourth quarter, you will see that that summary table represents approximately $0.05 to $0.06 in earnings differential attributed to the higher expense and loan activities in the fourth quarter over the third quarter. Now turning my attention to exits and liquidity events from our portfolio.

Our commitment to maintaining a high quality loan portfolio continues to be exemplified by the number of exits and liquidity events in our portfolio companies. In the fourth quarter, we had approximately eight portfolio companies complete M&A transactions, two companies complete IPOs in the fourth quarter.

For the year 2014, we completed 20 liquidity events, eight of which were IPOs alone in 2014. Subsequent to quarter [indiscernible] year end, we saw three portfolio companies complete their IPOs, Box, Zosano, and InnoTech, all successfully completed their IPOs in the first quarter of 2015 and two additional companies had filed under the JOBS Act.

One of those companies previously filing under JOBS Act, ViewRay have now availed itself with an S-1 filing registration statement as well. Exiting the year, we finished the year with a 124 warrant positions and 42 equity positions.

As we say in each and all of our calls, although we’re experiencing the nice exit events in our portfolio, we however still anticipate that nearly 50% of our warrants will never monetize in any value. Although we believe that number is conservative, we think it's prudent for investors not to factor greater than a 50% monetization in our portfolio.

If in fact it goes beyond that, it will be highly accretive for all of us, but we believe in being cautious and guiding towards a much more conservative outlook to the warrant monetization. Most of you by now know that in the Q1, we’ve one of the most largest IPOs in our history be completed.

We are extremely proud of the accomplishments and success of Box’s IPO is a powerful example of the potential additional upside embedded in our existing 124 warrant and 42 equity portfolio positions in our portfolio. The Box IPO could potentially represent our single largest gain in the company's history.

Depending on the price of the shares upon exit, you could eventually see evaluations that could range from as high as $17 to $20 million based on today's value if and when those prices are sustained upon the eventuality of an exit within the 6 to 7 month timeframe from now. Now let me turn my attention to the venture capital industry.

The venture capital industry saw a tremendous growth in capital investments. The Q3 trend continued in Q4 and frankly surpassed to any level which I was forecasting we're expecting. We saw nearly $33 billion of venture capital activities going in the fourth quarter to fund the growth of additional companies, an unprecedented level.

The $33 billion that the venture capitalists raised was then quickly deployed into a $52 billion investment, my mistake -- during the fourth quarter $14 billion of those investments occurred bringing the total annual to $52 billion.

That $52 billion exceeds the annual total level of investments not seen in the past eight years and represents an unprecedented pace of venture capital investments. I however believe that that pace is not sustainable and nor should we expect that pace to be sustainable.

Hercules continues to believe that the venture industries should modulate back into the mid-30s and maybe early $40 billion levels of activities and not in the $50 billion level. With that said information technology was the biggest winner.

We saw a nearly 7% increase in deal flow quarter-over-quarter representing 32% of the capital invested into technology companies, followed by 27% invested into financial services and the balance of course into life sciences and other sectors. Liquidity remained very strong.

The liquidity events were 21 companies going public in the fourth quarter raising over $3 billion and a 105 companies in total in fiscal 2014 going public surpassing any level seen since 2007, an outstanding achievement. The M&A market remained equally robust.

114 companies completed M&A events during the quarter and 513 of those occurred in fiscal 2014 representing $86 billion a year. Now turning my attention to the outlook of Q1 2015 and the remaining outlook for 2015.

Given our unprecedented levels of loan prepayments that took place in 2014 and as I said a minute ago, we do not expect to see those levels in 2015. We are forecasting normalized early payoffs between $20 million to $30 million in 2015 per quarter equating to approximately a $120 million or so of early payoffs to take place.

Because of the newness of the portfolio, the average composite age of portfolio now being younger. We then now expect normal amortization to also step back from the $40 million run rate back to a more normalized run rate of between $25 million and $30 million, or normal principal amortization that should take place.

Together between expected early payoffs and normal amortization, we expect that number to equate to about $200 million to $250 million in fiscal 2015, a far cry from the $500 million that we saw in 2014. Again because of this, we are now in a very fortuitous position to have taxable earnings spillover of the $17 million or $0.27.

This affords us the flexibility to continue to sustain our dividend in fiscal 2015 as we rebuild our portfolio to that necessary run rate to cover what we think should be the dividend rate of $0.31 equate to approximately $1.3 billion to $1.5 billion in outstanding assets.

As I indicated earlier having effectively rebuilt our portfolio with lower composite age, please expect to see lower amortization. I want to stress that as well as attribute that lower amortization and early or lesser early payouts occurring, our effective yields will converge to our core yields in that base area of 12% to 13%.

I've already spoken at length about this issue and I'm happy to answer additional questions in Q&A regarding this matter. Now as I turn to my final comments, one of the most important things that we saw at the end of 2014 was the necessity to realign our incentive compensation programs.

We made significant changes in our incentive compensation program at the end of 2014 to effectively take place in 2015 to; one, ensure a better alignment of risk reward with our origination team, but also to ensure that we are balancing new asset originations with the expected yields that we’re looking to originate as well as create a high-reward high-retention incentive compensation program for our important origination team.

This new incentive origination program will be materially impacted solely and purposely upon the successful closing of assets which means that the compensation incentive program will only rise if and when our portfolio begins to grow, a much closer alignment with our shareholders and what we believe with the appropriate levels, a desire to achieve our targeted yields and earnings growth with our investors, our shareholders and our employees.

With that, we are very confident in our ability to complete our execution of our business in 2015. We see a very robust and very vibrant market in 2015. Believe it or not, we welcome the consolidation that's now begun in the venture-lending platforms.

Over the course of last two or three weeks, we’ve seen major announcements with existing venture lenders who are now, have been being acquired and others who are being sold and others who are contemplating selling or merging with other providers. We are actively evaluating some of these transactions in the marketplace ourselves.

We remain open to evaluating certain acquisition opportunities, but remain very diligent and prudent and selective in what we consider to be a quality credit book and what we consider to be the appropriate prices.

Because of that, we expect 2015 to continue the endeavors of evaluating many of these opportunities and we continue to expect further consolidation of the venture lending industry itself.

Although 2014 was an extraordinary and transformative year for Hercules, I am even more excited about our future and more excited about our outlook and our discipline in growing our organization. We remain actively interested in growing all facets of our organization.

We’re increasing all levels of employees in the organization, from our origination team to our accounting team to our senior management team levels. Look for 2015 to be a transformative year for Hercules as we build our portfolio and continue to generate the returns that our investors expect from the Hercules platform.

With that, I'll turn the call over to Jessica. .

Thanks Manuel and thanks everyone for listening today. I would like to remind everyone that we filed our 10-K as well as you can view our press release on our website at www.htgc.com. I’ll now briefly discuss our financial results for the fourth quarter of 2014.

Turning to operating results, we delivered total investment income of revenues of $36.9 million, an increase of 11.1% when compared to the fourth quarter of 2013.

This year-over-year increase was driven by approximately $45 million increased in weighted average loans outstanding during the quarter as well as yields increased on the portfolio and a tremendous amount of early payoffs as Manuel mentioned during the fourth quarter of 2014.

Our core yield during the fourth quarter was 13% which excludes the effect of fee accelerations that occurred from early payoffs and one-time events. The all-in effective yields on our debt investments during the fourth quarter was 16%, down approximately 70 basis points relative to the previous quarter.

The slight decrease is primarily due to the mix of portfolio companies that paid us off early in Q4 versus Q3. This is a function of the [vintage] of the early repayments, the contractual prepayment penalty and the balance of unamortized fees for each investment at payoff.

Interest expense and loan fees were approximately $9.3 million during the fourth quarter of 2014 as compared to $9 million during the fourth quarter of 2013.

The slight increase is attributable to us securing additional capital to invest in our portfolio, specifically the $103 million of 10-year bonds we issued in July of 14 and the 2014 $129.3 million securitization which was offset by the elimination of convertible notes which happened over the course of 2014 as well as paying of $34.8 million of SBA debentures earlier in the year.

The weighted average cost of debt increased to 6.7% in the fourth quarter of 2014 versus 6.4% during the fourth quarter of 2013. The increase is primarily attributed to the acceleration of the amortization triggered by $23.2 million of convertible note redemptions which happened in the fourth quarter of 2014.

Operating expenses for the fourth quarter was $11.2 million as compared to $5.3 million in the fourth quarter of 2013. The increase was primarily due to an increase in variable comp expense and stock-based compensation, and due to an increase in general and administrative expenses attributed to various corporate initiatives.

The fourth quarter net investment income was $15.9 million compared to $18.9 million in the fourth quarter of 2013 representing a decrease of approximately 15.9%. Net investment income per share was $0.25 for the fourth quarter of 2014 as compared to $0.31 for the same quarter ended 2013.

We recorded approximately $1.2 million of net unrealized depreciation on our investments during the quarter. Of this $1.2 million of depreciation, $6.9 million of depreciation was due to net collateral based impairments on our debt equity and warrant investments in nine companies.

And $12.3 million of appreciation was due to market yield adjustments and fair value determination. And approximately $6.6 million of depreciation was related to a reversal of the prior period appreciation due to loan pay-offs and sales of warrant and equity investments.

We recorded $10.3 million of gross realized gains primarily from the sale of warrant and equity investments in four portfolio companies. These gains were offset by gross realized losses of approximately $3.2 million resulting from the liquidation of warrant investments in six portfolio companies.

We ended Q4 2014 with total investment assets including warrants and equity at a cost basis of approximately $1.04 billion. This was net up by $23 million from our investment portfolio balance of $1.01 billion as of September 30 of 2014.

This increase was primarily driven by our strong originations and funding activities of new investments totaling approximately $207.8 million and debt equity and warrant investments offset by approximately a $177 million of principal payments and proceeds from the sales of investments and an additional $7.3 million of net changes distributable to conversion liquidations and fees.

The debt portfolio net company count increased by one from 93 to 94 since September 30th. This is a net change due to 10 companies paying us off offset by an addition of debt investments to 11 companies during the quarter.

A reminder that debt investment amortization typically commences 9 to 12 months after the interest-only period we’ve on our term loans. And then amortization is scheduled to occur over 36 to 42 month timeframe. Apart from early repayments, we currently have scheduled amortization of $30 million.

This will meter back and forth as a result of the interest-only periods we’ve in our various investments. With respect to the credit quality, our loan portfolio credit quality remains very solid.

The weighted average loan rating on our portfolio was 2.24 as of December 31 2014 reflecting a slight degradation from 2.07 reported at the end of the third quarter.

We’ve four investments on non-accrual at the end of the quarter with a cost basis of 3% of the debt investment portfolio and 1% as a percentage of the total investment portfolio at fair value.

Regarding liquidity at the end of the fourth quarter, we had approximately $377.1 million in available liquidity which included $227.1 million in cash and a $150 million of credit facility availability.

As of December 31st, our debt to equity leverage ratio including our SBA debentures was 95.1%, [indiscernible] 81% as of September 30 of 2014 primarily due to the addition of the $129.3 million of 2021 asset-backed notes. As a reminder, our $190.2 million of SBA debentures are excluded for regulatory leverage calculation purposes.

The exemption effectively allows us to leverage beyond a one-to-one debt-to-equity ratio of 1.29 to 1, which means that at the end of the fourth quarter we had additional capacity to add $222.8 million of leverage to our balance sheet. Our net leverage which is calculated based on total debt minus cash is approximately 60.6% at the end of December.

Our net asset value at December 31 was $658.9 million or $10.18 per share compared to approximately $656.2 million or $10.22 per share as of the end of the third quarter. The per share decrease is primarily due to the issuance of approximately 500,000 shares related to the settlement of convertible notes in the fourth quarter.

Finally as previously noted, we will be distributing a dividend of $0.31 per share to our shareholders and this payment is scheduled to occur on March 19.

In closing as Manuel mentioned, we’re optimistic to what we're seeing in the venture debt marketplace and we will be continuing to remain cautious and apply our steady approach to onboarding assets in the first quarter of 2015 as well as for the full year.

We remain committed to our strategy of controlled growth and we intend to continue to apply our stringent underwriting standards which has resulted in our stellar first 10-year performance and our historically low historical loss rates. So with that operator, we’re now ready to open the call for questions. .

Question-and:.

[Operator Instructions]. Our first question comes from Troy Ward with KBW. Your line is open. .

I just really want to focus -- I am sure all the expense stuff is out there in the documents. I want to focus on the growth and the yields. So Manuel, as you think about the growth rate that you just laid out for 2015 just kind of help us understand in that type of market where you are able to get that size of growth is going to be a robust market.

And then how can how can you compare that growth that you expect which is several hundred million dollars versus the yields and how you expect to keep yields relatively stable obviously minus the amortization you know of fees won't be in there.

It will be more of a core rate, but just help us understand how you can grow and keep the yields in this environment?.

Sure, all you’ll see in our investment presentations available on our website, we have sustained what we call core yields in that 12% to 13% range now for over 8 quarters. So I'm not actually quite concerned about that.

The concern that has to be discussed is the loss of the prepayment fees and income acceleration upon early payoffs represent nearly almost 300 basis points of our historical effective yields. And so I actually have little to no concern that sustaining a 12% to 13% core yield is a challenge.

We’ve significant deal flow and let me put things in perspective. Let's assume that the $600 million in fundings that took place in 2014 and the early payoffs did not occur. If that were to repeat itself in 2015, which we think will be a very aggressive assumption to do so you would actually see our portfolio end the year at about $1.6 billion.

So we are actually forecasting a more modest but significant growth in a level of being up $1.32 billion to $1.5 billion which is adding $300 million to $500 million of net new loan balances in 2015. We actually think that is also although a challenge, it’s achievable for us to execute on and deliver. .

Okay and then a follow-up on the asset side. You’ve talked in the past about you know your traditional asset does not include as much senior as may be that you will be taking down whether it's a revolver or just more true senior in the transactions.

Is that going to continue to put pressure on yields in any way?.

Well let me be specific. You saw a bit of a yield compression took place on our core yield for the last trailing eight quarters. And specifically to that question, you saw that -- and you actually don't see this, we do.

Of the 900 and plus million dollars in loan balance that we have outstanding today at the end of the fourth quarter, approximately $40 million to $50 million of that was asset-based lending revolvers that exist.

But more interesting enough is of the $339 million of unfunded commitment, it is in the magnitude of about a $100 million to a $125 million additional in that unfunded commitment that represents revolvers that do in fact have a lower yield. So we set out to broaden our financial offering in the beginning of the second quarter of 2016.

And you saw us finish the year with about $40 million to $50 million in those revolvers outstanding today.

So that's not going to materially impact the overall yields and we do not expect that ABL revolver business to really ever be greater than a $100 million to $200 million of our loan book, but our loan boo will be growing during that period of time.

So said differently, we expect to see that the revolver portion of our credit book should be anywhere between 10% to 15% at any one point in time of when it reaches maturity. .

[Operator Instructions]. Our next question comes from Aaron Deer with Sandler O'Neill & Partners. Your line is open. .

It sounds like you’ve got some pretty aggressive hiring plans for the coming year and it appears just kind of where do things stand today in terms of your frontline producers quantity wise versus where they stood a year ago?.

There are up and if you may remember in the third quarter, we indicated that we expect they will hire anywhere between 8 to 12 people for origination platform at that time starting in Q3 and rolling all the way through Q4 of 2015. Hiring, we conduct hiring like we do our investments. They take a long time.

We go through a very methodical process of identifying candidates. We care only about trying to hire the best of the best that's out there and as such we’re going to be purposeful in doing that.

And because hiring tends to lead originations, our historical norm has been that a new hire takes anywhere between 6 to 9 months in order to start showing accretive contributions. So expenses will always lead hiring for that 6 to 9 month period of time. So we’re probably not even a third of the way through on the hiring side.

We’re maybe a quarter to a third there, [if] that. And we continue to be actively interviewing a significant number of people. .

Okay and then it sounds like you did quite a bit of a change with the incentive comp program.

Can you talk about what kind of changes if any were made to the kind of the credit risk side of that and what kind of you know controls are in place to make sure that people are being thoughtful about what they are bringing to you?.

Well I think that the credit environment and our credit history speak for themselves with only two basis points loss rates and only $12 million in net losses. So I'm not necessarily concerned that anything from a historical perspective on credit needed to be changed.

However we felt very strongly that we wanted to ensure that our deal teams were not dis-incentivized by looking at stronger quality credit than they have lower yields. So we recalibrated that if we in fact engage in originating a lower-yielding assets, but a high credit quality that they should be incentivized.

Our old plan if you will didn't quite encourage looking at really strong, very strong credits that had lower yields.

And so we made sure that we created greater level of alignment on looking at hearing of our incentive compensation programs that are tied to yield specific and asset quality and credit outcomes that we think better serve the individuals themselves and our shareholders. .

Okay, and what was the average loan size of the new originations in the fourth quarter?.

We’re migrating upward on that range. If you see on our investor deck, the aggregate loan balance average is about $10 million on a simple arithmetic point of view.

But in reality, that number of the denominator is being a little bit skewing that number lower and so I think you are seeing averages now in probably the $15 million level is what I would say is the average and life sciences tend to oscillate in the $15 million to $20 million level. .

Okay and then you sounded pretty positive on the growth outlook here.

Any particular sectors or industry segments where you’ve got the strongest pipeline building?.

Well I mean, we are seeing growth in all of our sectors right now. However we’re not liking a lot of the opportunities that we are seeing is what our problem is. Look, there is a lot of terrific companies out there that we feel are pretty horrifically overvalued. What we’ve been expecting for the public technology companies did come to fruition.

We have seen most technology companies see valuations on a trailing 12-month period are down maybe 30% or 50% and in some cases greater. And so you are seeing now selectively some of the public companies have gotten beat up on valuations beginning to produce nice quarterly earnings.

The problem is that in the private side of the equation, those valuations that were trailing or drastically behind public valuations have not quite adjusted. And so I think it's up little bit concerning that now the so-called billionaire club is now up to 73 companies with private valuations in excess of a $1 billion.

And although like fundamentally these companies are pretty good companies, I'm having difficulties to look at these valuations and how can they sustain these valuations.

So when you look at that that broad spectrum we’re still seeing very robust opportunities in the life sciences, specifically in the biotechnology area that continues to be a very strong area for us for growth. The portfolio though is down slightly in life sciences as in overall percentages, but we are seeing a growing interest in our tech portfolio.

But I think that tech will really start kicking in, in the second half of 2015 as those valuations recalibrate. And you'll see the tech portfolio really starting kicking in the second half of 2015. .

Our next question comes from Greg Nelson with Wells Fargo. Your line is open. .

So just first off, you obviously were talking about how you expect the yield to compress down.

With that on top of you know higher cost debt and the new comp structure and SG&A going up by a million, are we kind of looking at the scenario where to get earnings back to that dividend level we now need the portfolio to be $1.3 billion to $1.5 billion?.

Absolutely I want no ambiguity whatsoever on that. Because I'm expecting little to no contributions on early payoffs to accelerate fee income and drive yield, I have to model and run the business with the expectation that our core yields becomes a new base and that new base is that 12% to 13% level.

So working backwards using simple arithmetic what does the portfolio need to be to equate to a $0.31 earnings run rate and that's about a $1.3 billion to $1.5 billion subject to that core yield being above that 12% range. Anything above 12% becomes accretive to the overall, it makes the aggregate number slightly lower.

But I feel comfortable seeing the portfolio being in that $1.3 billion to $1.5 billion level at which point you are now looking at you know a very consistent $0.31 in EPS earnings. And here is the interesting fact.

By rebuilding the portfolio up to that $1.3 billion $1.5 billion level in 2015 and by the time the portfolio starts maturing, you will start seeing early payoffs once again occur in 2016.

And so what it means is, if you have a portfolio now generating sustained earnings at $0.31, that means any early pay off income that occurs will become additive and could lead to special dividend. .

Right and then I guess just kind of on the early prepayments kind of falling, obviously you’ve had a couple of good realizations here early in the quarter.

But with everything kind of trending downwards, do you expect, you know not as many realize gains just as a function of less liquidity or events during 2015?.

I'm sorry, I think the issue with trending downward, what's trending downward?.

Repayment activity and amortization?.

So they are not correlated. There’s absolutely no connection between early payoffs and liquidity events because liquidity events have to do with portfolios.

They were onboarded 3 to 5 years ago and so the average age of the warrant portfolio now is achieving nearly 7.5 years average or 6 to 7 years average and duration which means that's a typical unlocking period for companies to achieve liquidity event from venture capitalists.

So we are actually not forecasting much significantly lower realized gains in 2015. I think that barring any unforeseen credit situations, we think that 2015 should probably represent another $20 million or greater in realized gains in 2015 with over a 124 warrant positions and over 40 plus equity positions. So they are not correlated whatsoever. .

Alright, then just a quick one. Kind of going back to the previous question on valuations in the space a little bit.

Would you be able to comment on you know the loan to enterprise value in your portfolio and how that's kind of trended and how you are maintaining your discipline?.

Sure, you know unlike any other player especially [indiscernible] market lenders who typically see LTVs, loan-to-value ranging between 50% to 70% loan-to-value. The Hercules portfolio has indicated or seen in our securitization document tend to trend much tighter than that. We typically see a loan-to-value in our portfolio is usually sub-20% to 25%.

So we’ve a significant amount of equity cushion or buffer underneath our companies, which means that the propensity for credit losses are similarly mitigated by the amount of capital injected in these companies by the venture capitalists, and the interest and willingness of both parties to restructure the credit of the companies to ensure a successful outcome.

So we on a LTV basis, it's safe to assume that we’ve less than 25% LTV and right now, I got to be honest.

If you use the V, being the last round valuations of some of these companies, when you are looking at you know companies now being valued at $600 million to $700 million each and over a $1 billion in some cases and while I have a $10 million to $15 million loan, you can quickly extrapolate, they look at LTVs are sometimes under 10% that's out there.

.

Yeah absolutely and then just a quick one on you know, obviously over the past couple of quarters you’ve been talking about going into the low-risk venture ABL. You know just kind of curious on you know how you are pursuing that initiative still.

Obviously, it's lower yielding and you know in this time where you are kind of compressing down, you know lightning up on that side relative to the more traditional stuff.

Does that makes sense?.

Absolutely. I don't equivocate on strategies just because of one quarter or two quarters. It's just going on. I fundamentally and strongly believe in the ABL asset base aspect of our business.

It enhances our term loans and it offers a competing product with the commercial banks out there that's proven to be well received in the venture community and well-received by our companies.

As I had said of the $950 million at the end of the year of loan balance on a cost basis, somewhere in neighborhood of $40 million to $50 million of that is ABL outstandings. And then on the $339 million of unfunded commitment, somewhere in the neighborhood of a $100 million or so of that is on unfunded or undrawn ABL that's formula based in nature.

So we strongly remain committed to that business. We think it’s a very important element of the business, but it will not materially move the needle in our business. Even if I put on a $100 million that's going to represent 10% of the aggregate of the portfolio at an effective yield of 7% or 8%. Yeah, you could do the math.

It just doesn’t materially move the needle. .

Your next question comes from Christopher Nolan with MLV & Company. Your line is open. .

With the projected growth in the portfolio in 2015, where do you anticipate your debt-to-equity ratio winding up?.

Well if you look at it right now, you'll see that the debt-to-equity ratio on a pure GAAP basis excluding the cash on hand is somewhere in the neighbor of around 95%. And Hercules, because it has an exemptive order from the SEC to exclude all SBIC leverage, you can go up to approximately I think 1.29 on a leverage basis.

Now we’ve said over and over in our history, that we think that optimal leverage point of the organization is somewhere in the neighbor of about one extra, sorry 1.1 to 1.2 on the most optimal level.

And so I don’t think that we’re going to go much beyond I guess 1.10 if that were to be base, but I want to back off on the 95% leverage because you’ve to take into account our $200 million or so of cash that we’ve at the end of the year. So when you look on a net leverage basis, I am at only net leverage of 61% today.

So I’ve an abundance of room to grow, so we’ve -- if we wanted to optimize our balance sheet, we can literally tap under the $200 million of debt to grow our portfolio coupled with our 200 plus million dollars of cash.

You are looking at nearly $400 million that we can actually use to grow our portfolio without having to access the debt or equity capital markets. .

Okay, and just so it’s a broader question. A couple of quarters ago, you were discussing about a more cautious outlook on the venture capital sector in general, talking about how new entrants are coming in and driving down yield.

The tone of this call seems to be a bit different where the compression and yield is more likely just because of general portfolio dynamics.

Are you still seeing that pricing pressure in the market?.

If I give the impression that somehow competition had ebbed, I didn’t mean to do that. I would not say the competition has ebbed whatsoever.

I think what I did say is that I am seeing a lot of our competitors who have jumped into the asset class have begun to realize that; A, it’s very difficult to do; B, it’s actually very costly to do; and C, mostly likely they didn’t have any good experience in knowing how do this asset class.

And therefore are either vacating the asset class or are now going through a period of consolidation. You saw City National being acquired by RBC and you saw this morning the announcement that Square 1, one of the smaller venture lender banks is being acquired by PacWest.

We’re aware of two of our competitors that are up for sale right now, they are also going through some credit challenges. So we’re actually beginning to see a more favorable environment going into the second half of 2015 that we saw in the earlier part of 2014. So believe it or not, I am actually more optimistic.

I think that the Hercules platform and the resiliency of the platform and our access to multiple different layers of capital afford us the opportunity to really go on and build our portfolio while others can’t. .

Great, Manuel. The last question is in your references to looking at potentially lower yielding investments.

Should we read into that, that you are looking at doing larger loans, banking large companies?.

Insightful question on your part. I think that the answer to that question is kind of, I know that's not a very good technical term. But what I would say is that we’re being asked by many well-established companies who for some reason or other do not want to continue to maintain a banking relationship.

They prefer to have simply an operating account relationship with some of these banks and are asking us to consider doing larger transactions. We historically have said no to those transactions, but we’re entertaining very, very selectively in a very, very tight credit profile.

Certain transactions that would be outside of our normal wheelhouse as a way of experimenting on look at some larger credit exposures. I would not say that that's going to be an overwhelming amount of our transactions in 2015.

And we may end up not pulling the trigger on some of those deals, but we’re certainly evaluating transactions in that larger end of the range. .

This ends our Q&A session for today. I’ll turn it back to management for closing remarks. .

Well thank you operator and thank you all for joining us today. I certainly appreciate your continued interest and belief in Hercules. I think it’s absolutely important to know that we believe strongly in sustaining our dividend. The taxable earnings spillover will help us achieve that.

With that, we’ll be attending conferences and meeting with investors over the coming weeks and quarters. Please feel free to contact our Investor Relations department and schedule a meeting. And with that, thank you very much for joining us today. .

Ladies and gentlemen, thank you participating in today’s program. This concludes the program. You may all disconnect..