Earnings Call Transcript - TFIN Q1 2024

Operator, Operator

Good morning. It's 9:30 in Dallas, so let's get started. We know you likely have numerous demands vying for your attention during this busy time of the quarter. So we'd like to open by thanking you for your interest in Triumph Financial and for joining us this morning to discuss our first quarter results. With that, let's get to business. Aaron's letter last evening covered a lot, both about the quarter's results and the opportunities we see that create future shareholder value through prudent and timely investments today. Reiterating as closing, we are impacted by the soft freight market, but excited about the long-term momentum we see. As referenced last evening we published our quarterly shareholder letter. That letter and our quarterly results will form the basis of our call today. However, before we get started, I would like to remind you that this conversation may include forward-looking statements. Those statements are subject to risks and uncertainties that could cause actual and anticipated results to differ. The company undertakes no obligation to publicly revise any of these forward-looking statements. For details, please refer to the Safe Harbor statement in our shareholder letter published last evening. All comments made during today's call are subject to that Safe Harbor statement. With that, I'd like to turn the call over to Aaron for a welcome and to kick off our Q&A. Aaron?

Aaron Graft, CEO

Thanks, Luke, and good morning, everyone. Thank you for joining us. Since I wrote such a long letter, I feel like I owe it to you to give a short opening. So I just have a few things to point out for you. First, our earnings were weaker than they've been historically and they're going to remain under pressure as long as this freight recession continues. Second, there was credit noise in the quarter, but not all of that noise was a bad thing. Credit may be a headwind for us for the time being, but we are proactively managing through it. Finally, TriumphPay took more ground this quarter. We welcomed well-known names to the network. We increased volumes on an absolute basis in spite of the weakest quarter in truckload freight in my memory. Finally, I think some investors will hopefully find value in the transaction and value map we included in this letter. It dimensions the market size and the revenue opportunity and it puts into writing what I have believed for several years. We have a lot of growth in front of us. So at this point, let's turn the call over for questions.

Operator, Operator

We will now move on to the Q&A session. Our first question will be from Joe Yanchunis of Raymond James.

Joseph Yanchunis, Analyst

Hi there. Are you able to hear me?

Melissa Forman, CFO

Yes.

Aaron Graft, CEO

Good morning.

Joseph Yanchunis, Analyst

Good morning. So in your shareholder letter you referenced that the pipeline for TPay was full. And you stated your confidence in TPay touching 50% of brokered freight by year end. Given that backdrop, can you provide some color on how much incremental payment volume currently contracted to come online over the balance of the year?

Melissa Forman, CFO

Yeah, Joe, what I would tell you is that we are looking at the pipeline in terms of both payment volume and audit volume, right, the non-payment volume, and that's because that's what creates the network transaction, right, and that's what's most important to drive revenue. So to give you the look into what we think we'll see in 2024 is, we have a pipeline of $5 billion to $10 billion of additional volume that we'll be adding. And that's a combination of audit volume and payment volume, but all of which will be attributed to the network.

Joseph Yanchunis, Analyst

I appreciate that. And kind of sticking with TPay, congrats on winning the Apex business. That seems like a big deal for the network. So all else equal, if all contracted broker and factoring volume were on the network today, what would be the level of conforming transactions for the network and what would be the kind of financial implications of that?

Aaron Graft, CEO

Great question. If every factor and every broker were connected to the network, you would be looking at the $110 billion of brokered freight that we mention in our letter. We estimate that about 65% of this freight is typically transacted from a broker and then purchased by a factor. A couple of years ago, we achieved our first conforming transaction, which we now refer to as a network transaction, and after a year, we reached $1 billion. Remarkably, in what I consider the weakest quarter for freight, we achieved $1 billion again this quarter, reflecting a 40% growth compared to previous quarters. Following the math of 65% of $110 billion gives us around $70 billion, and if we break that down quarterly, it amounts to around $16 billion to $17 billion. While there are opportunities to include shippers in this discussion, let's focus on brokered freight. This volume suggests a potential of $17 billion, which could be divided by 1,700, the current average invoice amount. If we had nearly 100% adoption of network transactions, pricing would likely increase as participants could completely reengineer their back offices. This would lead to significant efficiencies, including instant purchasing and automatic cash applications. This describes the current opportunity within the total market. We're currently at $1 billion a quarter, indicating substantial growth potential ahead.

Joseph Yanchunis, Analyst

Okay. I was actually more referring to what is currently contracted to come online. So if you just assume the Apex business is now fully up and running and all the other, that $5 billion to $10 billion of additional volume is currently live on the system, sorry, I wasn't talking about the entire addressable market just.

Aaron Graft, CEO

I'm sorry, I can't do that math for you live right now, but we can make some assumptions and you'll see growth. All the brokers coming onto the platform pay, and we've just added a top-five factor. Apex is a significant player in the industry, so I can't provide quarter-over-quarter growth. I'll stick with my previous response. I've shared the overall market context and how we continue to add participants. Importantly, this revenue won't materialize this year; it will come in next year and beyond. That's about all the information I can provide at this time.

Joseph Yanchunis, Analyst

All right. Thank you very much. I appreciate it. I'll hop back in the queue.

Operator, Operator

Our next question will be from Thomas Wendler of Stephens.

Thomas Wendler, Analyst

Hey, good morning, everyone.

Aaron Graft, CEO

Good morning.

Thomas Wendler, Analyst

Just given the industry headwinds, is supply chain financing something we could see clients lean on? Just looking for some color around what we should be expecting for growth there if industry pressures continue?

Aaron Graft, CEO

There's no doubt that everyone is feeling the pressure. The only group that might not feel it as much are shippers, who are experiencing decreased contract rates and are working to minimize their freight costs. These are smart individuals who think about both immediate negotiations and long-term outcomes, yet there is still a focus on short-term savings. Consequently, freight brokers, carriers, and factors are all feeling the pinch, and Triumph is no exception. In an environment where capital is no longer easily accessible, the time value of money comes into play for those seeking liquidity. We have outlined various ways we can use our balance sheet to enhance liquidity in this transactional flow. I can't specify the exact growth or how we will support shippers with extended standard pays or increase factoring or supply chain finance for brokers, as each discussion is unique. However, we do receive numerous requests to engage in the value chain we described in our letter and to inject liquidity into it. So, I definitely see this as an opportunity.

Thomas Wendler, Analyst

Thank you. And then, as you said in your comments about all the provisioning this quarter was bad, we saw some pretty strong growth in C&D. Can you give me some color around new production? And then how are you thinking about growth in construction moving forward?

Todd Ritterbusch, CFO

The growth that you saw in C&D was related to one relationship that we have. It's a long-term relationship. It's a great relationship. They came to us with an opportunity that offered terrific risk-adjusted returns and so we jumped at that opportunity. More broadly, when we think about construction and development, we're going to be selective. It's going to be those sorts of opportunities that are with existing clients and will probably be much smaller than what you saw in the first quarter.

Thomas Wendler, Analyst

All right. Thank you for answering my question.

Operator, Operator

Our next question will be from Tim Switzer of KBW.

Tim Switzer, Analyst

Hey, good morning. Thank you for taking my question.

Aaron Graft, CEO

Good morning, Tim.

Tim Switzer, Analyst

The press release, hey, thank you. The press release is great, Aaron, where you're outlining the path to over potentially $1 billion in revenue for Triumph over the long-term, and we try to think about the long-term earnings implication of that. Historically, you guys have kind of talked about like a 50% EBITDA margin for TPay. What's the overall margin we could maybe assume on that $1 billion over the long-term? And what's like the ROE, ROA profile there?

Aaron Graft, CEO

That's an excellent question. I understand there may be some eagerness to dive deeper into this. We recognize that networks typically achieve EBITDA margins that are higher than most other sectors. This is true for transportation as well, although there isn't currently a financial network in this space, aside from the one we are developing. Historically, we've stated that we believe this will ultimately settle between a 50% and 70% EBITDA margin. A key aspect of this relates to our revenue model. We've outlined how we engage with a single load of freight at various points, including the shipper, broker, factor, carrier, and vendor levels. Eventually, we will engage with the value chain at numerous points, leading us to realize that not all of this activity will appear on our balance sheet. We won't be expanding our balance sheet excessively. Right now, we are leveraging our balance sheet as a strategic advantage, which no other fintech competitor can match. However, there will come a time when we can syndicate that risk into broader capital markets, which would seek exposure to that opportunity. When that happens, and when you assess the capital efficiency of our business and the fees generated from it, alongside the float we create, we anticipate that we will gravitate toward the higher end of the EBITDA margin range we've discussed. This process won't be completed by next quarter, next year, or even in two years. We are undertaking a unique initiative. The positive aspect is that there aren't many established players in our way as we move forward. Achieving a $1 billion revenue opportunity is feasible; I realize it's 20 times our current position, but we can see our role within the transactions. We notice growing interest in what we are doing, and we recognize that for analysts and investors, it is essential to grow our valuation while positioning our EBITDA margin to resemble that of a SaaS business, which is more capital-efficient and less reliant on the balance sheet. This vision lies a few years ahead. I hope this addresses your question and provides a clearer picture of our outlook and strategy as we near maturity.

Tim Switzer, Analyst

Okay, great. Yeah, I appreciate that. I understand the difficulty of talking about some of these longer-term projects and what it looks like ultimately. But you also mentioned about half of that $1 billion of future revenues from revenue streams you haven't necessarily capped yet. I know some of these are expanding to the shipper market, some data-related products, could you talk about maybe the potential timelines of when we could get more color on these? When you can maybe start to roll some of these newer ones out? And which new products would you be most excited about?

Aaron Graft, CEO

Yes, that's an excellent question. Starting last quarter, we introduced LoadPay, which is not a fuel card. It's a virtual wallet that enables our customers and the fuel cards they use to exchange value at any time, day or night, even on holidays. Regarding data, the transportation sector itself represents at least a $1 billion market, possibly more depending on how you assess it, including load boards and real-time data products, among others. There are numerous players and many intelligent companies in that space. We believe we have a unique value proposition regarding data because we have paid more truckers than anyone else globally. This gives us insights into truckers that others may not see. As we move forward, particularly in 2025, we'll discuss our initiatives to add value to the industry, such as enhancing fraud protection for our customers, streamlining processes, and helping them find carriers. These ideas are part of our long-term vision, but for now, we have other priorities to focus on. You also mentioned the shipper market; we make payments for approximately 50 shippers, including some large Fortune 1000 companies. The necessary data for a factor to purchase invoices from carriers is identical to what brokers need to get paid, and it's also the same data that shippers require for payment. We hold that data in a structured format. Our goal is to leverage this structured data within the shipper market, as all loads originate there. The U.S. companies need to procure over $300 billion in transportation services. Therefore, in 2025, we will begin discussing our strategies regarding shippers, data, and other initiatives. We will provide more clarity about our roadmap and I am confident that we can develop TriumphPay into a revenue-generating entity exceeding $1 billion at very high margins.

Operator, Operator

Our next question comes from Hal Goetsch of B. Riley.

Hal Goetsch, Analyst

Thank you. I've got two questions. One on the factoring business. The business is down quite substantially, over probably 40% double-digit negative comps now for two years, and a big part of that is just invoice price that's probably dominated as invoice prices are down from $2,500 to $1,800, and that would suggest, say, the volume is down, the overall volume is down low-double-digit, but you said this is the worst you've ever seen, is it the worst and the longest you've seen now? Because this appears to be near a low, wanted to get your thoughts on that trajectory. Thanks.

Tim Valdez, CFO

I've never seen anything like this in my 25 years in the business. The duration of this slowdown is unprecedented. As mentioned in the letter, it's a unique situation. We have observed a normalization of rates and closely monitor how fuel affects our carriers and their average invoice amounts. Typically, when fuel prices rise week-over-week, there’s a lag in invoice adjustments. If invoices don't respond quickly, it indicates a lack of pricing power for that carrier. In the first quarter, we noticed that our small carrier segment has stabilized, and their average invoice cannot decrease any further because we are already at breakeven or even below in some cases. The weakness we observed was mainly in the contract rates and the narrowing margin between contract and spot rates. Before we see any changes, these factors also need to normalize.

Hal Goetsch, Analyst

Okay. And one follow-up question on the deposit franchise. Do you think we've seen the peak in deposit cost increases that we've seen the bulk of the surge and can you also just comment on how you use the broker deposits from time to time? It seems to fluctuate a little bit. Thanks.

Todd Ritterbusch, CFO

Sure. I'll answer the deposit question. So I don't think that we've seen the peak in deposit costs. As long as you see rates available in the marketplace, on promotions above 5% and we're carrying a cost of deposits that is much, much lower than that, there will be upward pressure on our deposit costs. We do anticipate that when rates do begin to come down, we'll be able to capitalize on that and bring our rates down in line to a large extent. But for the time being, we do expect rates to continue to creep higher in our core deposit franchise. Brad, do you want to address the other question?

Brad Voss, CFO

Sure. Hal, you did notice that our broker deposit levels have fluctuated quite a bit over time, and I think that will continue to happen. We view broker deposits as part of a portfolio of non-core funding options that we use, and we really use the one that is the most economically advantageous at any time. If you look at our overall wholesale funding portfolio, the cost of that over the last couple of quarters is actually just a touch below where we can sell money overnight to the Fed, and we actively manage those costs and that composition, so. As you see that composition change among federal home loan bank advances and brokered funding, it changes because the economics associated with those are moving back and forth.

Hal Goetsch, Analyst

Thank you.

Operator, Operator

Our next question comes from Frank Schiraldi with Piper Sandler.

Frank Schiraldi, Analyst

Good morning. Just wanted to go back to something Melissa said about the pickup in volume. Just want to make sure I heard correctly on the, I think you said $5 billion to $10 billion in volume pickup, and was that over 12 months? And did you say that was all network volume? Just trying to clarify those numbers.

Melissa Forman, CFO

Yeah, Frank, thank you for clarifying that question. So the $5 billion to $10 billion would be based on an annualized rate. So that's the contracts and the implementations, integrations we have in our queue. Some may roll over into the first quarter of '25, as those implementations start taking place, but that is the total annualized volume that you'd see. So you would not expect to pick that up total volume in 2024. Does that make sense?

Frank Schiraldi, Analyst

Sure. So that's annualized volume, but is that all network, or is that just the total?

Melissa Forman, CFO

The majority, yeah, the majority of that would be network volume. There are ways in which we can add volume to the network, that is all sides of the transaction, right from the pre-purchase all the way down to the cash application. So some of that volume will live on one side of the network transaction, some will be on both.

Frank Schiraldi, Analyst

Okay. To follow up on that, when considering revenues for 2025, I believe the factoring fees have remained relatively stable, primarily because you haven't been charging these factors network fees. Do you think the plan is to potentially start this in Q4 of 2024, depending on your penetration level for network transactions, which appears to be quite strong? Is that still a reasonable timeline, or will it rely on the health of the freight economy at that time? Also, could you remind us of the potential immediate benefits from this?

Melissa Forman, CFO

That's a great question. When we initially set the pricing for the network, we had around 150,000 to 167,000 transactions quarterly, which accounted for about 3% of our total payment volume at that time. This quarter, we've seen significant growth, with over 600,000 network transactions representing $1 billion in payments and 16% of our payment volume. The pricing for our factoring clients was established based on the volume from Q4 of 2022. Given the current market conditions, we decided to allow some flexibility regarding the payment term increases in Q4 of last year. We will continue to monitor the market closely and ensure we are adding value, enabling factors to utilize that data and adapt to the current market pressures they are facing, especially with margin compression. When the timing is right, we will be able to implement that pricing increase, which will encompass all the network volume at that time. Aaron has additional insights to share.

Aaron Graft, CEO

No, I think that is a great answer. I want to reiterate something Melissa said, and I see her with her team and in the market. During these earnings calls, we discuss how to monetize our services and the dollar transaction value, which is a valid question and something we owe to our investors. I want you to understand how we approach our business. We start by considering how much value our services provide to our factoring customers. If we prioritize monetization over value creation, we cannot build long-term partnerships. The best partnerships and networks focus more on adding value to their members than on how quickly they can extract their share. I appreciate that Melissa has a long-term perspective, as does our entire enterprise. What drives this is if 60% to 70% of a factor's payments are available as network transactions. This change impacts their staffing models, operational processes, and cash application methods, reducing potential friction by several dollars, if not $10, per invoice, which is entirely reasonable for us to be compensated for. Right now, we are focused on value creation, primarily by increasing network density and pushing more transactions. Our technology continues to improve, and we maintain our long-term projections that a conforming transaction or a network transaction generates around $5 in total revenue while eliminating $20 of friction between the payor and the payee, typically the broker and the factor. The value proposition increases with density. Most networks fail because they become overly focused on monetization rather than building density. I want our investors to know that I am more concerned about network density and the value we provide to our customers than the pricing we will set in 2025. I believe it will increase. However, reaching our long-term goals will depend on whether we can assure our customers, and if Melissa can assure them, that we are providing significantly more value than what we charge. If we achieve that, we will set our prices accordingly.

Melissa Forman, CFO

Yes, and if I could just add Aaron, I think what is most important for us, again, growing that network density, making sure that the payments network in general is valuable to all of our constituents, but in this market right now, my primary job is to make sure that my clients, Tim, as a factoring customer, all of my other factoring clients, my broker clients, my shipper clients, that I'm giving them the data they need and the efficiencies they need to help their trucking companies, their clients thrive. And that is what is heavy on our hearts that we take and make a priority every day, is how do I help this industry thrive? Not just how do I make my quarter numbers look good.

Frank Schiraldi, Analyst

Great. Thank you.

Operator, Operator

Our next question will be from Gary Tenner from D.A. Davidson.

Gary Tenner, Analyst

Thanks. Good morning.

Aaron Graft, CEO

Hey, Gary.

Gary Tenner, Analyst

Hey, I wanted to ask about the revenue chart that you've got on page four of the shareholder letter by customer cohort, if we were to look at that based on payment volume or transaction volume versus revenue dollars, how might that look different over the last couple of years as your customers ramp and then stabilize?

Aaron Graft, CEO

I want to ensure I comprehend the question correctly. There's a ramp involved; the revenue from new customers doesn't come all at once. So, the revenue figures don't provide a complete picture for the 2023 and 2024 cohort regarding the overall revenue potential. If we consider the sources of these revenue dollars, the discussions and efforts that Melissa and the team are undertaking include generating revenue from our contractual agreements for handling audits and payments. Additionally, we earn from the timing difference between when we initiate payments and when they are actually made, and we also generate revenue by injecting liquidity into transactions using our balance sheet. The chart is intended to demonstrate that, if we examine the pre-2019 cohort, we perceived TriumphPay mainly as a balance sheet solution, and the revenue volatility was linked to invoice sizes, similar to our factoring business. Looking at the more recent cohorts, we still see some volatility related to invoice sizes, and seasonality remains significant for TriumphPay. However, this volatility is lessened because we are now engaged in contractual year-long arrangements to facilitate a certain expected number of transactions at a fixed price. Consequently, we see a reduction in volatility, which aligns with our expectations for a network. I believe that addresses the question, but I'm happy to provide more details if needed. Gary, just let me know.

Gary Tenner, Analyst

No, that helps, Aaron. I appreciate it. And then sort of an unrelated question, just from a capital perspective. I mean, finished the quarter still pretty close to 12% on CET1, I think down maybe 10 basis points versus year-end. Any updated thoughts, especially with the stock having come in a little bit in terms of deployment of capital? I know you've talked about trying to keep some in reserve if there's kind of an acquisition opportunity that comes about, that could help propel the business, but just update how you're thinking about it.

Aaron Graft, CEO

Sure. So, I think that broadly, I'm going to take your question as an invitation to answer just how we think long-term. So, if you look at the business and our businesses, the community bank can stand alone, right? The community bank is mature got, the team, the balance sheet, all that's in place, and it can grow. We haven't historically been growing it, because we didn't think the risk opportunity made sense. And we have a tremendous deposit franchise. I think something a lot of people miss. If you look at the factoring business, that is a mature business. It's a business that we have intentionally restricted growth on because we wanted to honor the commitment that we don't want to be the largest factoring company in America, that's not our goal. We want to see the factoring industry update and become and stay relevant in the 21st century, and we want to help that. But our factoring business, this is the worst quarter I remember, and it was still a pre-tax 2.5% or better ROA, so that business can stand alone. TriumphPay is not at a place to stand alone. It's not going to be at a place to stand alone in 2024, in 2025, and I don't even think delivering a few percentage points of EBITDA margin to the positive means that it can stand alone because it requires investments. And so we've got two options, right, how do you access the capital required to go make the investments for TriumphPay to go win at the scale that we are telling you we believe we can win? Well, one option is to fund it much the way that a venture capital-backed or PE-backed firm would fund it, and allow it to run with a lot of losses and hope that you scale it up over time and then you hit an inflection point in the curve three to five years from now. And you can do that. But I think that would dilute our investors, the people who've been with us since the beginning and made the long-term bet that we could just take retained earnings and build this without creating that kind of dilution. We believe that the value of TriumphPay belongs to our current investors. So we choose to take our near-term profitability, which we could make this place a lot more profitable if we cared how much in any given quarter or in any given year, but we choose to take that profitability and we choose to invest it into something that we think has a multiple attached to it from a growth perspective and a valuation perspective, that helps us all win. So when I think about $190 million in excess capital, I think about it through that grid. What helps TriumphPay win the most? Is it buying back our shares? It might be. I don't know that you'll see us in the market right now. But over the long term, do I think our shares are going to appreciate? Absolutely. What I think about right now is I want to be prepared to ride out the rest of this recession. I don't care if it's three months, six months, nine months, 12 months. I want to ride it out in a position to be able to act when no one else can act. That's number one. And number two, I believe that the longer this goes and the more market penetration we create, the more opportunities we will have to do some accretive M&A to the network. And I want to be prepared for that. So I don't think about it of managing our capital ratio to a certain specific percentage in any given quarter. I think about it as what helps us get to this long-term goal of where we're going. And if that makes us look, I don't know if sloppy is the right word, but overcapitalize in a given season, or if that makes us look not optimized for earnings in a given season, I'm okay with that. And I think anyone who invests here should be okay with that, because our eyes are on the long-term prize, and that is getting TriumphPay to something far more than just barely EBITDA margin positive, but something that's truly transformative. So hopefully, directionally answers your question. But I want investors to know how we think, and that is how we think.

Gary Tenner, Analyst

Thank you, Aaron.

Operator, Operator

Our next question will be from Frank Schiraldi from Piper Sandler.

Frank Schiraldi, Analyst

Yeah, just as a follow-up on the freight recession and just thinking through that, you need to see some capacity come out of the system to sort of level set and create a recovery here. Just based on what you're seeing in your book, in terms of the capacity you're seeing leave the system, what is sort of the best guess in terms of where we need to get to, how much capacity needs to leave the system, and what you're seeing as a trend line, like where does that match up in your mind? Do you think it's more of a 2025 event? Is there a lot more work to do there? Just anything on that front?

Aaron Graft, CEO

Tim can share experiences from the factoring business, while Melissa can provide insights from TriumphPay. Generally speaking, we require 15% or more of capacity to exit the system. However, not all capacity is equal, so we must be cautious with these numbers. A significant portion of the authorities, around 96%, are quite small and may not exit the system; they might choose to park their trucks and drive for Uber temporarily for better earnings. The unwinding process is not as swift as many assume. In 2008, for instance, that acceleration was apparent due to the overall economic downturn. Currently, the world is functioning normally, yet it’s the truckers who are experiencing hardships, and this situation doesn't receive much attention except from those who are involved daily. My contacts in freight brokerage have reported similar challenges, and we can see it ourselves. Relying solely on tonnage-driven hopes for recovery, expecting an increase in freight, seems misguided. We don’t foresee that happening. We aren't economists; the forecasts we provide in the shareholder letter are not the basis for every decision but give you insight into our thought process. I find it difficult to envision a significant improvement in freight conditions in 2024, though I sincerely hope to be proven wrong. Regardless, we will continue our current approach.

Frank Schiraldi, Analyst

The collapse of the Francis Scott Bridge in Baltimore and the closure of the port is quite significant and troubling. What effect might this have on the freight recession? It seems likely to increase stress in the short term; could it also lead to more capacity being removed from the system? I'm interested in your perspective on how this situation affects the freight recession and your operations.

Aaron Graft, CEO

It doesn't have a significant impact on the freight recession. They will reroute that freight to other ports, which means trucks need to be repositioned. However, it is just a temporary regional issue. We often see similar disruptions during hurricane season when freight is affected in specific areas. There isn't a solution to improve the market conditions aside from addressing low freight prices. Capital tends to flow towards areas where risk-adjusted returns are favorable. It just requires more time for the market to recognize that adding more capacity won't yield rewards, leading capital to seek opportunities elsewhere, which is the only solution. Some minor regional fluctuations or storm impacts might be happening, and while we are seeing some positive trends in April, we don’t consider them statistically significant. We simply need capacity to exit the system, which is currently occurring, though we all wish it would happen more quickly.

Frank Schiraldi, Analyst

Okay, if there are no further questions, I wanted to ask one more about credit. In terms of the noise we've seen this quarter, some of the provisioning was related to growth in construction. Regarding your perspective, where do you see the most concerns? Is it within the equipment finance sector, or due to its size, is it more about commercial real estate? I'd like to hear your thoughts on potential stress points in the portfolio and the trends moving forward on the credit side.

Brad Voss, CFO

I'll take that one. So I would say generally, transportation is the focus, but within transportation, equipment finance is definitely the focus. So when you think about what's going to happen in equipment finance going forward, first, I would say don't use the first quarter loss as a proxy for what's going to happen every quarter. That was an anomalous situation that probably won't repeat itself. As we look forward, we think the losses are contained, and they're contained for a couple of reasons. First of all, even 24 months into this recession, most of our clients are continuing to pay as agreed. For that small minority that's not paying as agreed, we've got good collateral positions that we're shoring up further as we're offering payment relief in its various forms and so that contains it. But I think the most important thing is the team that we have in place. So we've talked before about how they've served the industry through the cycles and handled those cycles. I can tell you, working with them every day, they are doing a terrific job on a customer-by-customer basis. They have great relationships, they have great outlets for equipment, and that gives me a great confidence. It's a real competitive advantage for us.

Frank Schiraldi, Analyst

Okay. And on the commercial real estate side, I mean, I know you guys have very low LTV, so I'm sure that makes you feel pretty good about potential loss there. But just seeing some of that stress, we're seeing industry-wide, is it reasonable to think, we'll see some deterioration in terms of criticized classifieds, maybe non-performers, while not seeing maybe ultimate losses, is that reasonable?

Brad Voss, CFO

I'd say it's possible. It's not necessarily our forecast in commercial real estate. So you nailed it. Like, we've historically drawn a lot of comfort from our loan-to-value positions, but more recently, we focused on price discovery. So as we begin to look at these properties and see what they're valued at today, not what we thought they were valued at a year or two or three years ago, we're increasingly comfortable and reaffirm that we're fine with those. The modifications we've made have been for the purpose of making sure that those properties continue to cash flow and their owners have a reason to stay in those properties and that's what's happened? That's why those modifications haven't required further modification. You also noted that we didn't put more modifications on this quarter. We don't expect a lot more. If we have to put on a few more, it will just be for the purpose of adjusting the rate primarily to something that's sustainable for those properties over the longer term. And for that reason, they wouldn't necessarily become non-performing assets.

Frank Schiraldi, Analyst

Okay, great. I appreciate all the color. Thanks.

Aaron Graft, CEO

For sure.

Operator, Operator

There are no further questions at this time. Thank you.

Aaron Graft, CEO

Well, thank you all for joining us. Hope you enjoy the rest of your week and we look forward to speaking to you again soon. Thank you.