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Executives

Ben Burnham

Vincent D. Foster - Chairman, Chief Executive Officer, President, Member of Credit Committee and Member of Investment Committee; General Partner, Main Street Capital II GP, LLC

Todd A. Reppert - Executive Vice Chairman, Member of Credit Committee and Member of Investment Committee

Dwayne Louis Hyzak - Chief Financial Officer, Senior Managing Director and Treasurer

Analysts

Robert J. Dodd - Raymond James & Associates, Inc., Research Division

Mickey M. Schleien - Ladenburg Thalmann & Co. Inc., Research Division

Bryce W. Rowe - Robert W. Baird & Co. Incorporated, Research Division

Main Street Capital (MAIN) Q3 2012 Earnings Call November 8, 2012 10:00 AM ET

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Main Street Capital Corporation Third Quarter Earnings Conference Call. [Operator Instructions] This conference is being recorded today, Thursday, November 8, 2012. I would now like to turn the call over to Mr. Ben Burnham with DRG&L. Please go ahead, sir.

Ben Burnham

Thank you, Camille, and good morning, everyone. Thanks for joining us for the Main Street Capital Corporation Third Quarter 2012 Earnings Conference Call. Joining me today on the call our Chairman, President and CEO Vince Foster; Executive Vice Chairman, Todd Reppert; and Chief Financial Officer, Dwayne Hyzak.

Main Street issued a press release yesterday afternoon that details the company's quarterly financial and operating results. The document is available on the Investor Relations section of the company's website at www.mainstcapital.com. If you would like to be added to the company's e-mail list to receive press releases, please call DRG&L at (713) 529-6600.

A replay of today's call will be available beginning about an hour after the completion of the call and will remain available until November 15. Information on how to access that replay is included in yesterday's press release.

We also advise you that this conference call is being broadcast live through an Internet webcast that can be accessed on the company's web page. Please note that information reported on this call speaks only as of today, November 8, 2012. And therefore, you are advised that time-sensitive information may no longer be accurate as of the time of any replay listening. Our conference call today will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on management's estimates, assumptions and projections as of the date of this call, and they are not guarantees of future performance. Actual results may differ materially from the results expressed or implied in these statements as a result of risks, uncertainties and other factors including, but not limited, to the factors set forth in the company's filings with the Securities and Exchange Commission.

During today's call, management will discuss non-GAAP financial measures. Please refer to yesterday's press release which can be found on the company's website for a reconciliation to the most directly comparable GAAP financial measures.

And now with that, I'd like to turn the call over to Vince.

Vincent D. Foster

Thanks, Ben, and thank you all for joining us today. I will comment on the performance of our investment portfolio, discuss our recently announced special dividend and our dividend outlook, highlight our origination activity and conclude by commenting on the current investment environment we're seeing.

Following my comments, Todd will cover our third quarter portfolio activity in more detail, then Dwayne will comment on our third quarter financial results, our current liquidity position and certain key portfolio statistics. After which, we will take your questions.

Our investment portfolio continued to deliver strong performance during the third quarter. Our lower middle market investments appreciated during the quarter by $19.6 million on a net basis, with 19 of our investments appreciating during the quarter and 6 depreciating. And our middle market investments appreciated by $3.9 million during the quarter. We finished the quarter with a net asset value per share of $17.49, a sequential increase of $0.60 a share over the last quarter.

Our lower middle market portfolio of companies ended the quarter with $93 million of cash on their balance sheets and averaged a very conservative net debt to EBITDA ratio of 2:1 to our debt position and 2.2:1, including all debt.

Yesterday, we announced that our board declared a special dividend of $0.35 a share, payable in mid to late January. Our board also declared regular monthly dividends for the first quarter of 2013 of $0.15 a month for each of January, February and March. The special dividend helps reduce our spillover taxable income, which is currently over $30 million or approximately $1 a share by roughly 1/3. Assuming we are able to maintain our current level of financial and operating performance, we should be postured to declare an annual special dividend at the end of both 2013 and 2014 on the remaining spillover amounts.

As we approach the end of calendar 2012, we are better able to forecast the percentage of our 2012 dividends that will be taxed at the highly favorable current tax rates on long-term capital gains. In calendar 2011, 26% of our dividends qualified for the long-term capital gain rates. We estimate that for 2012, roughly half the dividends that will be reported to our shareholders via Form 1099 will be taxed at these favorable rates. This is principally attributable to 3 previously announced portfolio company exits. We are extremely pleased to be able to deliver this level of tax efficiency to our taxpaying shareholders.

I would like to turn now to originations. In the second quarter of 2012, our middle market net originations significantly outpaced our lower middle market originations. Part of this imbalance was intentional to the cash inflow, created by 2 significant exits earlier this year and our equity follow-on offering.

In the third quarter, the second quarter relative middle market and lower middle market net originations were reversed. Net originations for the quarter totaled almost $26 million with lower middle market producing almost $24 million and middle market producing about $2 million. Impacting the lower middle market net production were partial exits where our debt was repaid but our equity remained outstanding of $17.5 million with respect to investments.

Our middle market net productivity was deliberately flat as we used the quarter to rotate existing loans into newly originated positions with more favorable characteristics.

Our lower middle market transaction pipeline is consistent with the levels we have experienced over the last few quarters. I would characterize the environment as stable in terms of transactional activity. We continue to see significant equity participation in our lower middle market investments and as of the quarter end, average of 32% fully diluted equity ownership position in these companies.

Our middle market investing activity continues to be focused on upgrading their rotation, the quality of our positions. We continue to find attractive risk-adjusted yields and acceptable structures, but have tempered our growth as yields drop and structures become more aggressive.

Our office or director group has continued to increase their ownership of our shares via our Dividend Reinvestment Plan and open market purchases, investing over $460,000 in our shares during the third quarter and over $1.4 million during the first 3 quarters of 2012.

With that, I'd like to turn the call over to Todd Reppert to cover our portfolio activity in more detail.

Todd A. Reppert

Okay. Thanks, Vince, and good morning, everyone. We are very pleased to report another strong quarter, which continues to reflect our key long-term goals for sustainable growth and earnings and dividends per share, while also generating meaningful growth in NAV per share.

Since our IPO, Main Street has grown its quarterly distributable net investment income per share of 70% and has grown its dividends per share 36% and has grown its NAV per share by approximately 30%. In addition to increasing our regular monthly dividends, our performance has allowed us to generate significant spillover taxable income, which has led to our first special dividend, as Vince discussed.

During the third quarter of 2012, our investment activity included approximately $47 million of investments in the lower middle market component of the portfolio, including investments in 3 new portfolio companies and several follow-on investments. We also received approximately $23 million in total cash prepayments and exit proceeds within the lower middle market portfolio during the quarter, primarily from several debt investments being refinanced.

During the third quarter of 2012, our investment activity also included approximately $2 million of net middle market portfolio growth, which reflects new investments, net of all repayments and exits. We have generated net realized gains in 2012 from the exit or partial exit of several portfolio company equity positions, including a $9.9 million realized gain on the recent partial exit of our Laurus Healthcare equity position subsequent to September 30.

These 2012 realized gains have contributed to the growth in our spillover income, and we have several additional portfolio companies in various stages of exit discussions that may generate additional gains in late 2012 or 2013.

I'm also pleased to report that our overall portfolio performance remains strong and the portfolio continues to improve its diversification by issuer, industry, end markets, geography and vintage. At September 30, we had investments in 136 portfolio companies that are in approximately 50 different industries across both the lower middle market and middle market components of the portfolio.

The largest portfolio company investment represents just over 2% of our assets and the majority of our portfolio investments represent less than 1% of our assets. This increasing diversity adds structural protection to our portfolio, our revenue sources and our cash flow, which translates into structural protection for our shareholders.

Our portfolio companies are generally performing well so far in 2012 with most of the portfolio experiencing growth in operating metrics, such as revenues, earnings and backlog. These operating trends are reflected in the improved lower middle market portfolio credit statistics year-to-date in 2012, minimal underperforming investments and significant portfolio appreciation during the year.

The equity component of our lower middle market investment strategy remains a significant differentiating advantage for Main Street. As a reminder, we hold lower basis equity positions in virtually all lower middle market companies, with an average fully diluted ownership of 32% in those companies. This equity strategy has been paying off in the form of meaningful dividend income received on portfolio equity investments and the realization of several large gains on exits during 2012.

The equity component of the portfolio was the primary contributor to our $22 million of total net portfolio appreciation during the quarter and the $44 million in net portfolio appreciation year-to-date. This portfolio appreciation, combined with under-distributing our net realized income and an accretive equity offering, allowed us to grow our NAV per share by $2.30 or over 15% during the first 9 months of 2012. This follows 16% growth in our NAV per share for all of 2011 and demonstrates our ability to execute on one of our key goals related to meaningful long-term growth in NAV per share.

In summary, Main Street continues to perform at a high level and deliver upon our long-term goals of sustaining and growing our earnings and dividends, as well as generating growth and our book value per share. We are pleased that this high level of corporate performance has translated into significant total returns for our shareholders.

With that, I will turn the call over to Dwayne to cover our financial results, liquidity and certain key portfolio statistics.

Dwayne Louis Hyzak

Thanks, Todd. As Vince and Todd previously mentioned, our third quarter results represent significant increases from the prior year in both total investment income and distributable net investment income and significant appreciation in our investment portfolio. Total investment income for the third quarter increased by 34% over the same period in 2011 to a total of $23 million. This increase was primarily driven by increased amounts of interest income associated with higher levels of portfolio debt investments and also included a $700,000 increase in dividend income from portfolio equity investments.

The increase in investment income in the third quarter included an increase of approximately $800,000 in investment income, associated with higher levels of accelerated prepayment activity for certain portfolio debt investments and marketable securities investments in comparison to the third quarter of 2011. The total amount of investment income in the third quarter of 2012 from such prepayment activity was approximately $1.1 million or approximately $0.04 per share.

Third quarter 2012 operating expenses, excluding noncash share-based compensation expense, increased by $600,000 over the third quarter of 2011 to a total of $6.7 million. The operating expense increase was a result of higher accrued compensation and other operating expenses related to the increases in investment income and the investment portfolio compared to the third quarter prior year and higher interest expense as a result of increased cost associated with the expansion of our credit facility subsequent to September 30, 2011.

The higher accrued compensation expense in the third quarter of 2012 was offset by the reversal of certain bonus accruals recorded in the first and second quarters of 2012, totaling approximately $300,000 associated with changes to the company's expectations related to incentive compensation pay.

The ratio of our total operating expenses, excluding interest expense as a percentage of average total assets, which we believe is a key metric in evaluating our operating efficiency, was 1.6% on an annualized basis for the third quarter of 2012 compared to 1.9% on an annualized basis for the third quarter of 2011 and 2.2% for the full year in 2011. We believe that this metric compares very favorably to other BDCs and is approximately half the same metric for the BDC industry as a whole. This low-cost, internally managed operating structure allows us to deliver a great proportion of the gross portfolio returns to our shareholders, and we estimate that our efficient cost structure generates accretion to our earnings of approximately 25% when compared to the BDC industry average cost structure.

Due to our increased total investment income and the leverage of our low cost operating structure, distributable net investment income for the third quarter of 2012 increased by 48% to $16.2 million or $0.51 per share. Our distributable net investment income for the third quarter exceeded our dividends paid by $0.075 and we estimate that our cumulative spillover taxable income is approximately $30.3 million or $0.96 per share as of September 30, 2012.

While the dollar amount of distributable net investment income increased by 48% over the prior year, the first share percentage increase was approximately 11% due to the higher average number of shares outstanding compared to the corresponding period in the prior year, primarily due to the impact of the October 2011 and June 2012 follow-on stock offerings. All other third quarter 2012 per share measures were similarly affected by the higher weighted average shares outstanding.

As Vince previously mentioned, during the third quarter of 2012, we recognized $22.1 million of net unrealized appreciation on our portfolio investments and marketable securities investments. This increase included net unrealized appreciation totaling $19.6 million in our lower middle market portfolio, resulting from appreciation on 19 portfolio companies and depreciation on 6 portfolio companies.

In addition to the appreciation in our lower middle market portfolio, our middle market investment portfolio appreciated by $3.9 million. The net change in unrealized appreciation for the third quarter also included approximately $1.6 million of accounting reversals of net unrealized appreciation related to exits and repayments of portfolio debt and equity investments and marketable securities investments during the third quarter and approximately $1.9 million of unrealized depreciation related to the SBIC debentures held by our wholly-owned subsidiaries, Main Street Capital II.

The operating results for the third quarter of 2012 resulted in a net increase in net assets from operations of $32 million or $1.01 per share or an increase of 121% compared to the corresponding period in the prior year. This increase was after a reduction for a tax provision of $4.2 million related to deferred taxes on the net unrealized appreciation on equity investments held in our taxable subsidiaries.

As a result of our increase in net assets from operations for the third quarter, our net asset value per share at quarter end increased by approximately 4% from the second quarter and by approximately 15% from prior year end to $17.49 per share.

On the capital resources front, our liquidity and overall capitalization remains strong. As of September 30, 2012, we had $19.6 million of cash and $2 million of marketable securities. And today, we have over $38 million of cash, most of which is held at our SBIC subsidiaries and continue to maintain approximately $2 million of marketable securities investments.

During the third quarter, we prepaid $16 million of SBIC debentures that were scheduled to be repaid in 2013 and 2014 and issued $5 million of new debentures. As a result of these activities, we lowered the weighted average interest rate of our SBIC debentures to 5% and extended the first repayment date for such debentures to September 2014.

We also maintained a commitment from the U.S. Small Business Administration that will allow us to borrow up to an additional $16 million of new SBIC debentures in the future to reach the $225 million SBIC leverage cap for affiliated funds.

During the third quarter, we also expanded the total commitments under our credit facility to $287.5 million and currently have approximately $190 million of unused capacity under that facility.

Since the end of the third quarter, we have further amended our credit facility to extend the final maturity to 5 years through September 2017, with the availability provided on a revolving basis for the initial 3-year period followed by 2-year term-out period.

While we continue to explore future -- explore various financing sources to support our future operational and investment activities, we remain focused on maintaining significant liquidity and matching the expected duration of our investment assets with our borrowing arrangements.

Now let me finish with a few portfolio statistics, all as of September 30. In our lower middle market portfolio, we had 57 investments, representing approximately $468 million of fair value as of September 30 or approximately 28% above the cost basis of approximately $366 million. Consistent with our investment strategy, approximately 78% of our lower middle market portfolio investments at cost were in the form of secured debt investments, and approximately 95% of those debt investments held the first lien security position.

The weighted average effective yield on our lower middle market portfolio debt investments as of September 30 was 14.7%. We hold equity positions in 88% of our lower middle market portfolio companies with an average fully diluted equity ownership of approximately 32%. The fair value of our lower middle market portfolio equity investments as of September 30 was approximately 223% of the cost of such equity investments.

As Vince previously noted, at the lower middle market portfolio level, the weighted average net senior debt-to-EBITDA ratio was 2.0:1 or 2.2:1 including portfolio company debt, which is junior in priority to Main Street's debt position.

We expect that these lower middle market portfolio level statistics on a same-store basis should generally improve over time as our companies naturally delever. This deleveraging has the additional positive impact of increasing the fair value of our equity investments in these companies.

Based upon our internal investment rating system, with a rating of 1 being the highest and 5 being the lowest, the weighted average investment rating for our lower middle market investment portfolio was 2.1 on September 30, 2012, which is consistent with the weighted average investment rating at the end of the second quarter. And during the third quarter, we had 3 portfolio companies improve their rating and no portfolio companies decrease their rating.

In our middle market portfolio, we had investments in 79 companies, representing approximately $351 million of fair value as of quarter end that we're generating a weighted average yield of approximately 8.6%. Main Street's middle market portfolio investments are primarily in the form of debt investments at approximately 88% of our middle market portfolio debt investments at cost held the first lien security position.

The weighted average revenues for the 79 companies in the middle market portfolio was approximately $518 million. The total investment portfolio fair value as of September 30, 2012, was approximately 115% of the related cost basis, and we had no portfolio investments on non-accrual status and one fully impaired portfolio investment, representing approximately 0.2% of the total investment portfolio at cost.

With that, I will now turn the call back to the operator, so we may take any questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from the line of Robert Dodd with Raymond James.

Robert J. Dodd - Raymond James & Associates, Inc., Research Division

Question, really, conceptually about what your approach is going to be to the special dividends going forward. I mean, obviously, you've disclosed the steady part [ph] the expectations that, that can be sustained for the next couple of years. My question really is if the additional realizations in the portfolio -- and you mentioned on the call that several other companies are in talks so that could certainly happen, in addition to Laurus, obviously. What the approach would be there? I mean obviously, Laurus alone the realization there is roughly, round number is $0.30, which is approximately how much your special is? So you're spillover doesn't look to me on a very round number math. And looks like, it actually could go down by the end of the year, just because you're doing too well. That's a good problem to have. So and I remember your -- but the question is if you have more realizations, would you expect a large proportion of additional realizations to be distributed in -- within the year or the year immediately following that, which they were incurred before, you realized them in.

Vincent D. Foster

Yes. Robert, it's a real big question and it's something we talk a lot about. And I think if you go back to what Todd said, we think what our shareholders really want and value is a steady dividend, one that they can count on. We have a lot of shareholders that are relying on the income for retirement, et cetera. And so I think introducing too much volatility into the dividends is kind of not really going to be appreciated. I don't think it might be that well understood. Just how these -- how the dividends are taxed is confusing. And now you introduce these new rates that we might see in January, it's going to be even more confusing. So what we want to do, if we perform -- if we continue to perform at this level, is we're at $0.45 a quarter run rate now, we want to take that up. We'd like to take it up gradually over time. You're not going to see it at the end of the year, the $0.55. But we -- it's not going to be $0.45 either. When the gains happen, they happen. We want to utilize -- we want to stay in a significant spillover position as kind of the safety net. And what's going to max out our spillover position and cause us to start having to pay special dividends is there is a statutory maximum amount of spillover you can have, which we -- I think we've discussed the offline, it's pretty complicated and the exception of the tax code. And that's really what's going to drive it. So as we get more -- as we generate more extraordinary gains, we're going to take the spillover up, and it'll last for more and more years. But we're going to be guided by the maximum spillover that we can have, which right now, it's roughly $1 a share. So I think that you can expect more the same, you can expect the spillover to increase, to last for more years and the regular dividend to increase, make kind of modestly. And at the same time, very importantly, we expect our net asset value to increase because unless all those things are happening at the same time, you're not optimizing the portfolio. So I would just kind of continue to expect more of the same.

Robert J. Dodd - Raymond James & Associates, Inc., Research Division

Okay, I appreciate that. And then a follow-up, which is completely unrelated, but I'll take my chance. What is the market environment like right now? I mean, obviously, for your approach with [ph] and control at least as BDCs classify control.

Vincent D. Foster

Well, I think the market -- again, we've said this for several years, we've got 4 independent teams in the lower middle market out originating deals and then taking them cradle to grave. We added a fourth this year. We're happy to do it. We grew at internally. And each of them have several deals they're working on in various stages of diligence. And if we close everything we had, we wouldn't have enough capital. On the other hand, we kill a lot of deals in diligence. When you're talking about lower middle market companies, it's an unaudited, closely held, tax-driven universe. And until you get in there, you really don't know what you have. And we are -- we will have 1 of our 4 teams throw [ph] all their deals, all their backlog and diligence. We might have another one closed all theirs and make it through, but we have a high fatality rate in diligence. So what drives our lower middle market activity is what we find in diligence. And we have not found a good way to predict that in advance. If we did, it would be great because it we'd save a lot of time and misery. But the good news is we're -- hold your estimate with what you're seeing, you're make it through, cradle to grave to close in terms of what you kill for diligence and when you're -- I'd say from cradle to grave, about 1/4 of stuff that we actually would want to transact on. But interestingly, that the -- what the input of transaction is about all these -- all the teams can handle at any one time. There's a continuous supply demand imbalance of the amount of businesses that need capital, that need to exit, aging on or partners that don't get along, you name it. There's no shortage of it. And we just -- we try to pick the ones that are most likely to make it through. To this point, we still kill 75% of those in diligence. So what we struggle with day to day is trying to make sure we have enough capital in place, they all make through, but they generally don't. So we're not seeing structural or pricing variables that impact the demand for our type of capital at all. And as we get bigger and work on bigger deals, we will inevitably encounter some more competition. Because as the companies are easier to understand, emergence to an audited universe and more well-known universe, et cetera, then there's competition. But we think we're a long way off from that meaningfully impacting us.

Operator

Our next question is from the line of Mickey Schleien with Ladenburg Thalmann.

Mickey M. Schleien - Ladenburg Thalmann & Co. Inc., Research Division

Just wanted to get back a little bit to the tone of the market. I'm getting the sense that despite the fact that the lower middle market tends to be somewhat insulated from broader trends and the credit markets that there is a little bit of frothiness spilling into the market in terms of covenants and multiples, and I was curious whether that was affecting the pace of your originations, either in the third quarter or on a go-forward basis.

Vincent D. Foster

Yes. Certainly, the middle market activities that we're involved in is experiencing tightening spreads, more aggressive structures. There's no question about it. There's a lot of retail inflows into loan funds to popular asset class. And the supply, demand and balance I talked about in the lower middle market kind of reverses itself in the middle market. So we're being very cautious. What we try to do is stay at the smaller end of that of the middle market, the smallest -- kind of the smallest term sizes and smallest companies that are eligible for that market, that's kind of where we hang out. But even in that lower range, you are seeing frothiness. There's no question about it. And so when you see some of the BDCs experiencing appreciation in that component of their portfolio is that's bad news on the upcoming yields that you can expect with your new origination, right? You kind of can't have it both ways. So a declining valuation environment is great for new originations and vice versa. So we're clearly seeing that. We're clearly being cautious. So we see -- no, we look for moderate growth there. We expect the bulk of our growth. We hope the bulk of our growth is in the lower middle market side of the portfolio. But that's more a function of maintenance for diligence.

Mickey M. Schleien - Ladenburg Thalmann & Co. Inc., Research Division

And if I'm understanding correctly, then you're not seeing those sort of trends yet in the lower middle market, at least among your target?

Vincent D. Foster

No. Not when we're looking at $5 million EBITDA companies with enterprise value of $25 million. I don't -- Todd or Dwayne, if you're really seeing it.

Todd A. Reppert

Well I would just say that what we are seeing is probably a higher fatality rate than normal, just because there are some investors out there that are getting a little more aggressive. And so we won't -- we'll just lose the deal versus have a tough structure or worse returns.

Mickey M. Schleien - Ladenburg Thalmann & Co. Inc., Research Division

Fair enough. Just a couple of housekeeping questions. How much PIK did you accrue this quarter?

Vincent D. Foster

The number would be less than 5%. It's between 4% and 5% of total investment income.

Mickey M. Schleien - Ladenburg Thalmann & Co. Inc., Research Division

And are you going to release the Q after the call?

Vincent D. Foster

Yes, the Q should be filed immediately after the conference call ends.

Operator

[Operator Instructions] Our next question is from the line of Dan Nicholas was with Robert W. Baird.

Bryce W. Rowe - Robert W. Baird & Co. Incorporated, Research Division

It's Bryce Rowe with Baird. Wanted to ask about the reversal of the incentive accrual. Just maybe provide a little bit more detail behind that. And then a follow-up would be what is a relatively good run rate from an expense standpoint for modeling purposes?

Vincent D. Foster

Sure. Well, I'll handle the first part of the question. I'm not sure I understood the second. But the first part is why did we do the incentive comp reversal? It's really pretty simple. As we've grown, added more people, started to recruit laterally, et cetera, we wanted -- we continue to try to tweak our incentive comp programs. Being internally managed, we don't have the 2 and 20. And in fact, '40 Act has some pretty specific limitations on the type of incentive comps that you can have, et cetera, which we can discuss offline because it really is complicated. But what we're trying to do is introduce more variability into our comp structure and try to reward. We've had significant appreciation in the portfolio. We don't want to -- we want to reward that. We don't want to reward that in cash in case the appreciation doesn't materialize. So we want to reward it in restricted stock. And when you do that, when you kind of migrate towards that change, the restricted stock that gets -- that you plan on issuing for 2012 performance gets issued in '13 and starts hitting '13 and forward years' earnings as it amortizes. And you don't need -- as you back off the cash, you don't need what you've accrued. So it's really kind of a change in mix between equity and cash because we think the equity more aligns with rewarding appreciation and exits and the cash aligns better with overperformance with respect in that investment income, which is not really impacted by gains or appreciation, et cetera. So if that makes sense, see that's really -- that's really what we're trying to do. And our [indiscernible] of our board kind of finalized, our new plan midyear. Because we didn't know we had it, we continued to accrue as if we didn't have it for the first 2 or 3 quarters. Now that we have it, we're truing up our accruals. So it's kind of a more or less a onetime deal. And again, it's tricky because when you're an internally managed '40 Act company, the incentive comp is very complicated.

Bryce W. Rowe - Robert W. Baird & Co. Incorporated, Research Division

Okay. That's helpful, Vince. So the second part of the question was what's a good run rate from an operating expense perspective here? I mean, obviously, x the interest expense, just trying to get a feel for where you think roughly we should model out expenses in our earnings forecast.

Vincent D. Foster

That sounds tailor-made for Dwayne to response.

Dwayne Louis Hyzak

Yes, great. It's a good question. And when you look at -- I think we talk a lot about the metric we evaluate, which is total operating expenses as a percentage of average assets, and we target something below 2%. And this quarter, it was abnormally low because it's a light quarter for some nonrecurring items related to year end activities, as well as the $300,000 bonus reversal. So we would still target kind of a 2% with the range being 1.9% to 2.1% as a percentage of average total assets. And if you look at it on a dollar basis, I think that would put you around the $4 million level, if you're looking at expenses other than interest expense, maybe as high as $4.25 million, but it would be in that range.

Operator

[Operator Instructions] I'm showing no further questions at this time. I'd now like to turn the call back over to management for closing remarks.

Vincent D. Foster

Great. Well, we don't really have any closing remarks. We appreciate your participation, and thank you for your continued support and we look forward to talking to you after the first of the year.

Operator

Ladies and gentlemen, this concludes Main Street Capital Corporation's Third Quarter Earnings Conference Call. You may now disconnect. Thank you for using ECT conferencing.

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