net investment income during the quarter, driven in part by year-to-date net debt investment portfolio growth of $127.8 million and elevated revenue on unscheduled early principal repayments of $572.1 million during the quarter. Robust portfolio originations and elevated portfolio prepayment activity in Q2 provided for strong top-line financial results while maintaining a prudent leverage profile, conservative balance sheet, and ample liquidity. After quarter end, we further strengthen our liquidity position by issuing $325 million of institutional 6.3% unsecured notes, which will be used to repay upcoming secured and unsecured indebtedness, fund originations, and other general corporate purposes. Lastly, solid contributions from both the BDC and our wholly owned RIA managed private credit fund business continues to provide us with significant capital flexibility and investment capacity. Hercules Advisor delivered another quarterly dividend of $2.1 million to HTGC, which when combined with the expense reimbursement of $4.9 million resulted in $7 million in NII contribution to the BDC for the quarter, a 26% increase from a year ago. It was another exceptional quarter for the Hercules platform. With that as a backdrop, let me take you through the results in greater detail across four key areas. The income statement, changes in net asset value, leverage and liquidity, and finally, our financial outlook. Beginning with the income statement, total investment income in Q2 was a record $149.1 million, an increase of 5.4% quarter-over-quarter and 8.5% year-over-year, supported by first-half net portfolio growth and elevated prepayment-related revenue. Core investment income, a non-GAAP measure which excludes the benefit of accelerated prepayment revenue, was $134.4 million, generally consistent with a record $134.9 million in Q1, but up 7.8% on a year-over-year basis. Net investment income was a record $92.9 million, or $0.50 per share in Q2, an increase of 5.5% quarter-over-quarter and 4.7% year-over-year, resulting in 125% coverage of our quarterly-based shareholder distribution. and core yields were 13.4% and 12% respectively, compared to 12.8% and 12.2% in the prior quarter. The increase in effective yield was driven by the elevated level of prepayment-related revenue during the quarter. Core yields for the quarter were in line with expectations and are anticipated to normalize as the portfolio rebalances the record net originations. And as of quarter end, approximately 75% of our prime-based loans were at the contractual floor, and thus the impact of any future rate reductions will continue to be muted. Second quarter gross operating expenses were $61.1 million compared to $58.1 million in the prior quarter. Net of cost recharges to the RIA, our net operating expenses were $56.2 million. The increase in operating expenses were largely driven by increased variable compensation tied to record originations as well as higher excise tax reserves on increased investment income. Interest expense and fees were relatively stable at $31.1 million compared to $30.8 million in Q1. Our weighted average cost of debt increased modestly to 5.2% on the growth of the investment portfolio year-to-date. SG&A increased to $30 million, aligned with continued growth of the business, with increases predominantly tied to variable originator compensation and excise tax expense. Net of costs recharged to the RIA, the SG&A expenses were $25.1 million. Our OAE, or NII, over average assets or average equity was 16.8% for the second quarter compared to 16.9% in Q1. Our OAE, or NII, increased to 8.3% compared to 8.1% in Q1. Now switching to focus on net asset value, unrealized, and realized activity. During the quarter, our NAV per share increased by $0.25 to $12.15 per share, or up 2.1% on net realized and unrealized appreciation of investments, this reflecting a reversal or normalization of the broad-based market volatility we experienced in the first quarter. Our $29.6 million of net unrealized appreciation during the quarter was driven by approximately $16.3 million of appreciation on publicly and privately held equity and investment funds, $13.4 million on debt investments, and $10.7 million on warrants, partially offset by approximately $10.8 million of reversals due to realizations. Hercules had net realized gains of $7.7 million in Q2, comprised of gross realized gains of $8.8 million on equity investments, partially offset by $1.1 million of losses on legacy warrant and equity investments. Moving on to leverage and liquidity, while delivering on record new originations, we maintained a conservative and liquid balance sheet. Gap and regulatory leverage decreased to 103.9% and 88.5% respectively, compared to 115.4% and 99.7% in the prior. Setting out leverage with cash on balance sheet, our gap and regulatory leverage were 101.8% and 86.5%. We ended the quarter with $652.9 million of available liquidity in the BDC, Inclusive of capital raised by funds managed by our RIA, the Hercules platform had more than $1 billion of available liquidity as of quarter. Strong liquidity, together with our conservative leverage, positions us very well to support our existing portfolio companies and source new opportunities. As previously mentioned, subsequent to quarter close, Hercules Capital issued $325 million of five-year institutional unsecured notes due in 2031. We did not utilize the ATM during the quarter, consistent with the reduced need for incremental capital given the record level of prepayment activity and the resulting improvement in our leverage position. Our intent is to remain disciplined and thoughtful about how and when we use the ATM, given our long-term focus on maximizing shareholder value and the numerous non-diluted capital sources that we have access to. Overall, the current market volatility has created a very favorable capital deployment environment for Hercules, and we want to ensure that we are well positioned to opportunistically take advantage of that for the long-term benefit of our shareholders and stakeholders. We will continue to maintain a nimble capital structure, allowing us to compete aggressively on quality transactions, which we believe is prudent in the current environment. And finally, let's address our outlook. For the third quarter, we expect our core yield to be in the range of 11.8 and 12 percent, reflecting the continued but increasingly muted impact of the 2025 rate reductions and the current portfolio turnover. As a reminder, 98 percent of our debt portfolio is floating with a floor, and today, approximately At least 75% of our prime-based loans is at the contractual floor. Although very difficult to predict, and following the record $572 million of prepayment activity in the second quarter, we expect prepayment activity to normalize through a range of $200 to $300 million in the third quarter. We expect our third quarter interest expense to be broadly stable or up slightly compared to the second quarter, reflecting the benefit of our reduced leverage following the record level of prepayment activity, partially offset by any incremental funding of new origination. It grows SG&A expenses of $25 to $26 million and the RIA expense allocation of approximately $4.7 million. Finally, we expect a quarterly dividend from the RIA of approximately $2 to $2.5 million per quarter. In closing, Hercules delivered another strong quarter in Q2-2026 marked by record total investment income and net investment income alongside meaningful reduction in leverage driven by portfolio repayment activity. Our balance sheet, liquidity position, and credit discipline continues to position us well, scale our platform, and capitalize on opportunities throughout the remainder of the year. I will now turn the call over to the operator to begin the Q&A part of the call.

Thank you. at this time if you would like to ask a question please press star 1 on your telephone keypad if you wish to remove yourself from the queue you may do so by pressing star 2 we remind you to please pick up your handset and please limit yourself to one question and one follow-up question we'll take our first question from Crispin love with Piper Sandler please go ahead your line is now look better thank you uh good afternoon everyone um first can you discuss the deployment backdrop appetite for venture debt seems to be very strong uh based on your comments so just curious on the outlook outlook going forward there and then just relatedly uh looking at the third quarter

would you expect a seasonal slowdown in the third quarter for deployment um especially in august just just given the seasonal factors yeah thanks christen uh so i would just reiterate what i said the prepared remarks we do expect q3 as it typically is to be seasonally lower than our other quarters in terms of capital deployment having said that we still expect a pretty robust q3 in terms of new originations if we've just seen over 21 years that q3 is typically sort of the low point on a quarterly basis and we expect that to generally be consistent this year from a broader perspective the market right now is is very robust our team is evaluating looking at screening a record number of companies our pipeline is as strong as i can recall seeing it i would say that there's a mixture however of quality within the pipeline and our teams are laser focused right now on making sure we are funding only the deals that we think meet the quality that we're looking for from a new business perspective all right great thank you i appreciate the added color there and then just on the prepayments in the query you called out m&a which makes sense but on the the balance sheet cashes driver um was that cash from recent equity rounds or just idle cash on the balance sheet uh just curious on the reasoning from the borrower's

perspective to pay down some of those bonds?

Sure. So, about 60 percent of all of our prepayments in Q2 came from a combination of either M&A or balance sheet cash. The vast majority of the ones that came from balance sheet cash were directly attributable to companies that raised new rounds of equity financing and just chose to retire the debt as a result of those capital raises. great uh thank you that's helpful um that's it for me thank you we'll now move on to finian o'shea with wells fargo securities please go ahead okay hey everyone good afternoon um seeing if you could expand on the the next phase for growth the growth plans like like how it will look um

i guess for one versus your historical pace but also the nature of it will it be more like you know you spend more to build out um origination into new parts of the field or is it more um you know growing the ria and and and keep building on the the gna um ratio that seth mentioned sure i'll i'll start and then seth can can jump in to the extent that he has some some perspective as well so i think the growth from from hercules will come from both the bdc and our private credit funds business as everyone on the call knows from 2004 through

2020 the totality of our business was done out of htgc in 2021 we launched hercules advisor As we made reference to in the prepared remarks, Hercules Advisor is now managing approximately $2 billion of committed equity and debt capital. So that is actually growing right now at a faster pace than the public BDC. But our expectation is that we will continue to be able to grow both of those legs of the stool to the overall Hercules platform. The other, I think, key thing in terms of how we're thinking about growth is we're not going to have strategy drift. we know what we're good at and we're going to stick to what we're good at we do think that there's a lot of growth opportunity for us within the part of the market that we have specialized in for the last 21 22 years and so our teams are looking aggressively at some new product initiatives we are looking aggressively at some new geographies that we think are interesting and the expanded platform capabilities that we have now allow us to stay with these companies for longer periods of time. So 10 years ago, prior to us having Hercules Advisor, when these companies got to a certain point from a scale, from a maturity perspective, they would generally refinance us out with larger structured facilities. We now have the capabilities to stay with these companies longer, which is why you're seeing more of our commitments, more of our fundings go to our portfolio companies, which we think is a key differentiator of our business. And then, Seth?

Yeah, I think you've covered the growth very well, Scott. So I'll leave that as is, but I would say that our objective then is to really do that while continuing to utilize the resources that we already have by being more efficient in the use of those resources, by adding more tools and technology to that equation, and making sure that that scaling continues up.

Appreciate that. But for follow-up on the portfolio grades, a little bit of a bump in the grade three, I think you measure that on the sort of, you know, funding, equity funding, liquidity timeline. Can you hit on any, like, you know, how maybe stressful that is perhaps? and if a lot of your sponsor, private equity sponsor versus VC is found in that category.

So really not any material movement in either direction. If you look quarter over quarter, the rated three bucket went up about $130 million, so pretty immaterial on a $4.5 billion investment portfolio. We generally move loans down to a rated three category. if one of two conditions exist. First, if we start to see some underperformance relative to original expectations, but not material underperformance. And secondly, company could be performing in line with expectations, but if they are in the market or approaching an equity capital raise, we proactively downgrade it to a three. The majority of the downgrades in Q2 were the latter category. So companies that we know are now in the market looking to raise equity capital, We proactively move them down, and then once the capital raises are complete, we would expect those companies, barring performance, continues to remain solid to move back up into the Rated 2 category. I think the key thing that we always speak to with respect to weighted average credit rating is the percentage of the portfolio in the Rated 4 and Rated 5 bucket. Historically, that number has been somewhere between 1 and 5%. As of the end of Q2, it's less than 2% of the portfolio, which is consistent with where it was for the entirety of 2025, including Q4 of 2025. It's up slightly from where it was in Q1, but as I referenced in my prepared remarks, the one new loan that went on non-accrual last quarter, which was part of that 4-5 bucket, was resolved at the end of the quarter. The result of that was a positive IRR on the investment realized, and about a million-dollar recovery above and beyond our Q2 fair value month.

Awesome. Very helpful. Thank you.

Thanks, Ben.

Thank you. We'll move on now to Chris Muller with Citizens Capital Markets. Please go ahead. Your line is now open.

Thank you, guys. Nice to be on with you today, and congrats on a really strong quarter here. So I just wanted to ask a high-level question. So, AI has been the hot area of tech recently, and at 86% of deal flow, I think you guys said that explains why. But you guys have a unique insight into a broad swath of emerging tech here. So, I guess, is there anything outside of AI that maybe has gone a little bit under the radar that you guys are interested or looking at going forward?

Yeah, so the answer is absolutely yes. We just we tend not to speak to those things in the public forum because obviously we don't want others to kind of follow us from an industry and sector perspective. What I would say, though, is maybe a couple of high-level comments. So the venture capital investment activity numbers for the first half of this year are incredibly impressive, right? $412 billion of VC investment activity through the first two quarters of the year. We did note that 86% of that is going into AI-specific investments. Having said that, if you look at the 14% that's not going into AI, that number is still incredibly healthy and incredibly robust relative to historical periods. So we look at the aggregate data, which is strong. We obviously are focused on and we're watching the fact that it's somewhat concentrated in AI, but we are also very excited about the fact that the non-AI investments are also approaching record levels, which gives us kind of confidence and conviction. I think if you look at our SOI, you will see some very specific targeted sector activity on both the life sciences side and on the technology side, which will kind of give you an indication of where we're seeing some very attractive opportunities that are benefiting from what's happening in the ecosystem from an ai perspective but don't have the same risk with a pure play ai investment and then i would just sort of conclude chris that the key for us from an asset perspective is diversification we do not want to have a portfolio on the asset side that is highly concentrated in any particular area we're currently managing the business to be equally focused with 50-50 target allocation between tech and life sciences. And within each of those two verticals, there's significant sector level or subsector level diversification as well.

Got it. It's very helpful. And definitely not asking you guys to give away the secret sauce here. I guess, quick follow-up. Is your comments on the quality of the pipeline, is that maybe choppiness, if that's the right word?

Is that concentrated in ai or is that more broadly across the board you know look the pipeline is is very robust um our teams have i have never been busier in terms of the number of deals we're looking at and screening and evaluating i think our observation is that there's just a larger number of companies right now that are in the market that are looking to raise debt capital that we don't think meet the type of quality new underwritings that we're looking for so The pipeline is robust. It's strong. The number of companies we're screening are at record levels, but there's definitely an increased level of companies that we think are going to have trouble raising debt capital.

Got it. Very helpful, and thanks for taking the questions again.

Sure.

Thank you. We'll move on now to Jason Stewart with Compass Point.

Your line is now open. all right thank you um question on core yields um if you could give us some color on incremental uh core yields and incremental originations and whether you know that is an output or a function of your view your discipline approach or is it um perhaps related to other factors you know market factors sure i'll i'll touch on it and then andrew can add some color if he has if he has some perspective on it.

So core yields in Q2 were 12%. That was largely consistent with our public guidance from the Q1 call. The vast majority of that degradation between Q1 and Q2, where it went from 12.2 to 12%, just came from the first full quarter impact from the December rate cut. We did give some guidance in Andrew's prepared remarks that we expect core yields to be in a range of 11.8 to 12% in Q3. Nearly 100% of that is just coming from the portfolio mix shifting. So the payoffs that we experienced in Q2, which was $550 million plus, were largely at higher yielding vintages. So there's been no change in terms of underwriting and onboarding yields, but you're just replacing some higher yielding legacy assets with some newer assets that are in our target Yeah, the only thing I would add is, you know, a lot of it is just the portfolio churn.

We've had, you know, record originations, record prepayments. I think the good point on the things to note there is, you know, generally we're starting, when we originate an asset, we're starting at the interest rate floor. So, we maintain upside on the investments with some downside protection as we're originating new assets. So, you know, we generally think yields have been in line with expectations, and we kind of expect them to moderate, but we do think that there's potential upside, you know, as we look on a go-forward basis.

Okay. Thank you. It's helpful. And then one more on pretainment activity. So, the 60%, I think we've touched on already. The 40%, I'm assuming that's refinanced away. And maybe could you talk about, just a second, is historically, you know, how has that mix looked? And then maybe as we think about the second half of this year, you know, is that a consistent mix going forward as we're trying to think about prepayment activity?

Yeah, so the 60% that came from M&A and balance sheet cash is actually high. Typically, the majority of our refinancings in a particular quarter will come from either bank or non-bank refinancings. in this quarter where the numbers were higher than normal on the prepayment side, the majority came from M&A and balance sheet cash, which for us is a signal of portfolio strength, which is something that obviously gives us confidence. The 40% was actually on a percentage basis lower than we typically see.

A nearly even split, to the best of my recollection, between bank and non-bank refinancings, and I think nothing particular of note in those numbers that I would highlight otherwise okay thanks a lot thank you we'll move on now to christopher nolan with ladenberg thalman the line is now open please go ahead hey scott on comments about increased competition from banks um i would think that the banks have to allocate more capital against loans to venture companies so are the banks sort of competing by with the uh cash management business the same way that Silicon Valley Bank used to do in the old days?

Yeah, look, I mean, I can't speak to what the banks are thinking internally. I'll just tell you that we definitely observed over the last quarter or so that the banks pretty broadly are being very aggressive in new originations. I think what we would note is that we've seen that in the past, so it's not a surprise. But what we've always seen is that the banks will come and go. So there will be some regulatory pressure. there will be some market or credit issues and then we'll see the banks pull back right now we're just in a little bit of an environment where the banks are across the board being very aggressive a lot of that could have to do with the fact that a lot of these companies are raising record levels of of new equity and obviously those deposits are meaningful for the banks so there could be some correlation with that but our expectation is that that aggressiveness doesn't last long term Great.

As a follow-up for Seth, by the way, congrats on that to President Seth, and congrats, Andrew, again. Your comments on AI, what are you doing to make sure that you're not training the AI model in proprietary Hercules processes or giving away confidential client information? How are you avoiding that?

Yeah, that's a good question. Thanks, Chris. So, yeah, we're making sure that we're applying the right governance and control around that, meaning we're very specific on what we allow to go into the AI machine. We're very specific on where we let that data reside. And so we have very careful controls. I know that we can't be 1,000 percent sure of every instance of utilization, which is why we have limits on what we're allowing people to put into there. We're making sure that our proprietary information, that of our borrowers, is not going into an environment that can be used by anyone else, that can be learned by the AI tool, and so we have careful controls around that.

Okay. Thank you. That's it for me.

Thank you. We'll now move on to John Hecht with Jeffries. Please go ahead. Your line is open.

Hey, guys. Afternoon. Thanks for taking my questions. You know, first one is, you know, you touched on the competitive environment. Clearly, you're continuing to take share. But maybe at the unit level, like loan-to-value and spreads and other terms, you know, how is that trending?

Yeah, so no real change, John, quarter over quarter. So still targeting LTVs to be sub-20%, still targeting debt-to-equity ratios to be sub-30%, and spreads largely in line with our previous guidance, and that gives us confidence in that range that Andrew spoke to from a core yield perspective of roughly 11.8% to 12% for the portfolio in Q3.

All right, and then as you look at your pipeline, any shifts in, like, your focuses on subsectors, you know, that's, I guess, worthy of calling out?

So the answer is definitely yes. But again, I'm a little bit hesitant to speak to kind of specific focal points or avoidance areas for us in the market. There are definitely a handful of sectors right now that we are very bullish on, and our teams are aggressively trying to deploy capital in those areas. And then there's a handful of sectors that we think are going to have some headwinds here that we're avoiding. So we evaluate our portfolio diversification and our mix on a quarterly basis. We sit down with our teams. we talked through what we're seeing what we're hearing from our portfolio companies one of the benefits of having a six billion dollar asset base and investments in 136 different companies is that we get a lot of market data and information and we try to utilize the information we're getting from our cfos and our ceos and our chief medical officers and our chief technology officers and we use that sort of in the internal discussions to help us frame where we want to target investment activity and as you would expect us to do we're doing that on a real-time basis every quarter perfect thanks very much thank you we'll move on now to melissa weddell with ubs

your line is open uh good afternoon thanks for taking my questions today i wanted to revisit the point about portfolios portfolio companies being able to raise incredible amounts of capital in this environment just want to understand that better and how you're thinking about where that strength is coming from and how sustainable it is going forward sure so what we're seeing is strength both both in terms of dollars and the number of companies we've been tracking for for several several years the number of companies in our portfolio that raise capital on a quarterly

basis and then the dollars that they raise what we like to see is strength in terms of both numbers So it's not overly concentrated in just a small number of large raises. And what we also like to see is a mix and a balance between life sciences and tech. And that's exactly what we saw in Q2. So in Q2, we had 29 companies. So that's a substantial percentage of our total debt portfolio raise new capital. And that number was $5.7 billion, which is the strongest quarter we've experienced since we've been tracking that data. that comes on the heels of the same thing that we saw in q1 where we had 31 companies raise about 3.6 billion of new capital we saw a healthy mix in q2 between technology and life sciences if you look at the 5.7 billion that was raised about 60 percent of that was in technology companies and about 40 percent of that was in life sciences companies appreciate that um following

on that theme i would think that there is some tension between an environment where additional equity capital can be raised and the opportunity to also originate more debt on top of that it sounds like that's not a that's not a concern for you you're expecting particularly strong second half with seasonal, you know, matter and 3Q, I'm just trying to sort of square the circle on the tension between equity capital and debt capital, particularly in the venture space. Can you help me understand how you think about that? Appreciate it.

Sure, sure. So we actually don't view it as tension, and I think the data supports our view on this. I noted that capital raising across our portfolio in the first half of the year was at record levels, both in terms of the number of companies and the dollars being raised. And then I would also point you to the fact that we just announced for the first half of the year record commitments of $2.74 billion and record fundings of $1.35 billion. In terms of why that's the case, I would sort of speak to the fact that growth stage lending or venture debt is not designed to replace equity capital. It's designed to supplement equity capital. So when it's done right and when it's done in a disciplined manner, when we see a lot of equity capital activity, we generally see that correlate with higher funding and commitment activity on the Hercule's portfolio side of things.

I appreciate you taking my questions.

Sure.

Thank you. We'll move on now to Paul Johnson with KBW. Your line is now open. Please go ahead.

Yeah, thanks, Gideon. Thanks for taking my questions. Most of them have been asked. I'm just assuming, I mean, with the more moderating level of prepayment sort of activity that you've guided to next quarter, you know, but still it seems like a relatively robust investment environment that we probably should still expect to see some moderation in the level of prepayment income next quarter or is there a lot of sight or anything that you know would potentially kind of offset some of the declines you know normalization and prepayment levels within the portfolio yeah thanks paul I can take it.

I think overall, yeah, we would expect that prepayment income to moderate kind of more to what I would say historical averages as we move to Q3. So Q3, we kind of expect to be overall, you know, kind of a quieter period from just given the historical kind of downtrend.

For Q3, sorry, our guidance for Q3 prepayments is 200 to 300 million.

That's based on everything that we know as of today and so that's roughly half of what it was in q2 got it and then um uh in terms of the capital structure um and you said you'd like to continue to kind of maintain a nimble capital structure and you've had a few different um you know unsecured bond offerings this year should we expect you guys to continue to just kind of be in the market uh as you have been here recently or you know with the most recent issuance here um you know do you expect that to you know potentially take a i guess you know more of a breather into next year as you start

to address some of the other near-term maturity yeah i think you'd expect us to be opportunistic you know to the extent we see opportunities where we can find attractive pricing in the market we would be active, although we have, you know, sufficient liquidity to kind of manage through any shorter or mid-term timeframe that we need to. But, yeah, we would expect to be in the market when it makes sense and is attractive on a, on a, on a broad way.

That would be helpful for me.

Thank you. I'm showing no further questions. I would now like to turn the call back to Scott Bluestein for any closing remarks.

Scott Bluestein, Thank you, Leo. And thanks to everyone for joining our call today. We We look forward to reporting our progress on our Q3 2026 earnings call. Our scale, institutionalized lending platform, and our ability to capitalize on a rapidly changing competitive and macro environment continues to drive our business forward and our operating performance to record levels. Our continued success is attributable to the tremendous dedication, efforts, and capabilities of our 120 employees and the trust that our venture capital and private equity partners place with us every day. We're thankful to the many companies, management teams, and investors that continue to make Hercules their partner of choice. Thank you, and have a great rest of the day.

This does conclude today's Hercules Capital Second Quarter 2026 Financial Results Conference You may now disconnect your line and have a wonderful day.

Mm-hmm