Earnings Call Transcript - TFIN Q2 2023

Unidentified Company Representative, Company Representative

Good morning. It’s 9:30 here and a beautiful day in Texas. We are looking forward to discussing our Second Quarter Earnings with you. I’d like to open today by thanking you for attending the call and sharing your feedback with us to help us continue shaping and developing this communications process. We appreciate it and keep the suggestions coming. Also, you will notice Melissa is back with us at the table today and she has a lot of great things to talk about in TriumphPay. With that, let’s get to business. In our results, the second quarter continued to present a challenging freight environment. However, there is a lot to be excited about at TFIN when the analysis moves beyond headline. 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 forward-looking statement. For details, please refer to the Safe Harbor statement in our shareholder letter published last evening. All comments made today 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

Good morning. Thank you for joining us. I hope the letter published yesterday afternoon was helpful. I have a few comments before turning this call over to investors for questions and they are as follows. How you view this quarter entirely depends on your horizon. If your investment horizon is short, then our earnings are not welcome news. There is a freight recession and all of us who are exposed to the freight market faced the same headwind and that problem is compounded by the fact that our funding costs are going up. This is true of almost every bank and it will continue to be true until the Fed changes direction. Those factors combined to bring our earnings down relative to prior periods. Now on the other hand, if you have a long-term horizon, then there are definitely things to celebrate. I believe that our results from this quarter answer the question of whether TriumphPay will become the payments network for trucking. I also believe it demonstrates that we can grow profitably in our Payments segment despite a very difficult market. When the market turns, whether it takes two months or two years, we will be poised to profit from that. With that introduction, we will turn the call over for questions.

Operator, Operator

Our first question comes from Tom Wendler from Stephens. Tom, please go ahead.

Tom Wendler, Analyst

Good morning, everyone.

Aaron Graft, CEO

Good morning.

Tom Wendler, Analyst

I wanted to start out by providing some insight into the supply chain financing within TPay. Given that this is more of a closed-loop business, is it a shorter-term opportunity or a longer-term aspect of TPay’s growth?

Aaron Graft, CEO

Yeah. Great question and I attempted to address that in the letter. So a couple of different ways to look at it. In the short-term, it is certainly an opportunity for us to generate revenue for the payments network. Beyond that, it’s one of the few financing opportunities that you will ever see where the payment you are already handling, we are being paid a fee to handle the payment irrespective of whether we provide balance sheet liquidity and so it is an extremely efficient form of finance. As we go forward, I think supply chain finance will be with us for some time and will contribute materially to revenue alongside the fee income growth we generate inside the payments network. As the payments network scales beyond our own balance sheet, I think you will see the opportunity to do supply chain finance both exist on our balance sheet and be syndicated out to other capital providers for the network. So it’s with us for the short-term and I think a piece of it will exist with us for the long-term.

Melissa Forman, Executive

And I think, Aaron, I would just add to that. We had provided supply chain finance before with our QuickPay opportunities, and with the state that the market is in right now being recessionary, we are just answering the call for our customers. So we will be there to meet them where they need us to help them get through this recessionary period.

Tom Wendler, Analyst

That’s great color. Thank you. And then one more for me, we saw a step-up in broker deposits last quarter. Can you just speak to the term of these deposits and how you are thinking about the funding profile of the company now that the supply chain financing will likely drive increased balances at TPay?

Brad Voss, CFO

The question about brokered funding. If you dig under that just a little bit, you will see that, that corresponded with a pretty considerably decrease in our use of Federal Home Loan Bank advances. We took out several hundred million of Home Loan Bank advances in March in the wake of the Silicon Valley failure and the related issues in the Banking sector overall out of an abundance of caution. But if you look at those two funding sources, they are very comparable in cost and we will sometimes use them interchangeably, each has its own advantages. But the brokered CDs have the advantage of being fully insured, FDIC insured deposits. So, all else equal, we would gravitate there. And the term, as you asked is, generally pretty much a ladder between about one month and about a year. So those will be kind of a rolling form of our funding base. And I think that over time, you will see some form of wholesale funding be a part of our funding strategy, because it does provide a lot of flexibility to us going forward.

Melissa Forman, Executive

I think I would add to your question about how it impacts TPay. So TPay is already self-funding. So we are using our own deposits to be able to leverage for our supply chain financing and are able to contribute some of that now back to the banks. So there is plenty of room to grow and our supply chain financing with our own deposits at this point.

Tom Wendler, Analyst

All right. I appreciate the color. Thanks for answering my questions.

Operator, Operator

Our next question comes from Joe Yanchunis from Raymond James. Joe, you may unmute and ask your questions.

Joe Yanchunis, Analyst

Good morning.

Aaron Graft, CEO

Good morning, Joe.

Joe Yanchunis, Analyst

So TPay announced several big customer wins in the quarter and then in the shareholder letter you called out some incremental volume coming from some mid-tier brokers? Assuming a stack market, how much payment and audit volume do you expect that you will add from these customers that are currently live anyway I think on your payments network?

Aaron Graft, CEO

Yeah. There’s two things, Joe. First of all, from a revenue standpoint, I think we disclosed that at the end of last quarter, the run rate was $38 million. As we sit here today, revenue is just under $43 million. So a pretty dramatic step up on an annualized basis. Some of that’s tied to the supply chain financing initiative that does not include all of the revenue that comes from those wins. And for what’s contracted and going live, it’s roughly $9 billion in payment volume that should come on in the next few quarters. We would hope by the end of the year some of that may spill over into the first quarter of next year. So a significant amount of volume.

Joe Yanchunis, Analyst

And how much audit volume.

Melissa Forman, Executive

I would say that the majority of that would also be in the audit network as well. What I would point out is that, regardless of whether they are on our audit product or have their own internal solution, they will be contributing to the network as a fully conforming broker, so full network broker.

Joe Yanchunis, Analyst

Got it. What I am trying to understand is that during the quarter, the interchange fee saw a significant increase and I recognize that the customer mix and the payment versus audit mix can affect that number. Are the recent customer wins anticipated to positively influence that fee?

Melissa Forman, Executive

Yes. They are.

Aaron Graft, CEO

And just so we are clear on that. As Melissa said, yes, definitely, they are. What you should understand and I think we have talked about this in the past, but I just want to reiterate it, when someone goes live and we announced them, especially a Tier 1 broker, especially someone in the top 10, the full monetization of that relationship may take up to a year, because they have multiple divisions. It doesn’t just switch on like a light switch day one. So the things you have seen us announce that incremental revenue will come on over the next two quarters, three quarters, four quarters and it may even come on beyond that, because what we have also found is the longer we go with someone as a part of the network, the more things we find that we can help them with, which increases our revenue per customer.

Joe Yanchunis, Analyst

Understood. And then lastly for me, the Corporate segment expenses had a pretty noticeable increase in the quarter. Can you provide more color on the increase to remind us of the composition of that segment?

Brad Voss, CFO

Sure, Joe. The composition of that Corporate segment is really everything that supports the enterprise as a whole. That would include the executive team, that would include our technology, finance, human resources, those sorts of activities. The growth that you are seeing in that segment over the last year or so is largely driven by our investments in technology, both people and hardware and software to support our growing transportation efforts.

Aaron Graft, CEO

And one thing I want to, Brad said the executive team, that would include Brad and me that would not include Melissa, Tim or Todd, each of whom would be allocated to the segments that they lead along with their teams and their specific technology teams. All of those live inside the segments.

Joe Yanchunis, Analyst

Perfect and thanks for taking my questions. I will hop back in the queue.

Operator, Operator

Our next question comes from Hal Goetsch from B. Riley. Hal, you may now ask your question.

Hal Goetsch, Analyst

Hey. Good morning, everybody.

Aaron Graft, CEO

Good morning, Hal.

Hal Goetsch, Analyst

Hey. My question is, could you just give us a feel for long-term impacts of adding Highway and your investment in Trax? I mean it seems to me that you are assembling all the function is routed, all the flat participants we want to have in a payment audit and in fraud protection network. And as of right now, it’s hard to see those pieces come together from just our knowledge, wanted to get your perspective on that, those approved in new announcements in the last 90 days? Thanks.

Aaron Graft, CEO

Sure. So let’s start with our shipper strategy. That’s a $250 billion mark. There are some legacy players in that market who are banks that have been in that market for a long time. Our strategy is threefold. Number one, go find companies who are operating in that space who have developed more advanced technology than the legacy players. Partner with them and invest in equip them to go compete against the legacy players by giving them access not just to the payment capacity of a bank, but to the payments network itself. And there’s a big distinction between those two things. It’s one thing to have access to the Fed rails and be able to make payments and 4,000 other banks can do that. There is no other bank in the United States of America, who’s paid 280,000 truckers in the last few years or in the last quarter we paid 127,000 truckers. And what happens is you take that audit functionality and you complement that with our Payments data and it allows these tech first freight audit and pay providers to go aggregate market share, they win, we win. So that’s that part of the strategy and it should generate a significant amount of float over time, it generates a significant amount of data, and it also expands the reach of the network, because a day will come even in an environment like this where supply chain finance opportunities will exist for shippers. They may want to extend their days to pay, whether we hold that on our balance sheet or that gets pushed out to the capital markets, we can facilitate that transaction because we understand it. So that’s a very powerful way for us to go to market, not altogether different than having a merchant acquirer or go out and expand the Visa network for them. You could look at a freight audit and pay company in that way. Turning to Highway, because I think I heard you ask about that. If you take what I just said, we paid 127,000 carriers in the last quarter. We paid 280,000 carriers inception to-date, 160,000-plus have registered on TriumphPay, we know a lot about the active carrier universe. We know more about the active carrier universe than any one broker or shipper could possibly know. And when you take that Payments data we have, the audit data we have and you have a 360-degree view of the market or maybe we don’t have 360 degrees yet, but it certainly grows every time we add one of these large players and you license that data to someone like Highway who has built a profile that tells you how much equipment a certain carrier presumably has you can very quickly see carriers that are hauling 5 times to 10 times the amount of loads that they should be able to haul. With that data, you can start to make decisions, risk decisions, if you are in the business of procuring capacity, you have to think long and hard what loads am I willing to give to a carrier who apparently is hauling more freight than they have equipment to haul. They are likely engaged in double brokering, which could ultimately lead to fraud and it could ultimately lead to a service standard that’s below shipper expectations. And so that’s just a feature of the network, and as the network grows, these feature sets that we can deliver make the network more powerful, more efficient and more inviting for new participants to join. That’s our strategy.

Hal Goetsch, Analyst

If you could envision integrating all that functionality and attracting new participants, what do you think the take rate or your pricing power might look like?

Aaron Graft, CEO

I would be cautious about providing specific details, but let's discuss how we currently monetize the network. Right now, we are approaching a revenue run rate of nearly $43 million. Comparing that to where we were two quarters ago, this figure does not even account for what we have in the pipeline, indicating significant growth. The first way we monetize the network is by charging brokers a fee for audit and payment services; they outsource those transactions to us. Additionally, there are features like indexing that we are rolling out, which could be very valuable to others in the network. These services come with subscription fees or per-invoice charges, and we are moving towards a more standardized pricing format, as some customers signed up years ago under different terms. The second monetization method is supply chain finance, where extending payment terms by seven days can enhance working capital for our freight brokers. We also assist them in managing their accounts receivable, as every freight broker has a shipper above them. Some of this financial activity can generate higher yields on our balance sheet, while other portions will transition to capital markets. TriumphPay's role will evolve into facilitating data transfer for balance sheet decisions, similar to the function Visa performs. This presents additional fee opportunities through syndication and interchange fees. Finally, regarding data, we prioritize protecting our customers' information, but if they request to license their data back in a valuable format, we will do so at a cost. To summarize in terms of transaction revenue, a network transaction in this market should generate about $5 when considering both sides of the payment process. However, this perspective may be too narrow, as there are numerous possibilities for what the network can achieve. Melissa, I'm sure I've missed some points; what would you like to add?

Melissa Forman, Executive

When we think about fraud, it's our responsibility to discover new ways to leverage our data to provide value to our customers. Highway is an example of this approach. You can't solely rely on a basis point calculation based on our payment volume to determine our potential revenue. The same applies to our audit volume. As we pointed out last quarter, we managed $37 billion in freight, but due to rate compression and employee compression, we are now at $35 billion, despite a more than 6% increase in transaction volume. If you only consider basis points per dollar paid, you overlook much of the revenue potential that we have identified and are starting to bring into the network.

Hal Goetsch, Analyst

Okay. Thank you.

Operator, Operator

All right. Our next question comes from Gary Tenner from D.A. Davidson.

Gary Tenner, Analyst

Thanks. Good morning. Aaron, you have made some comments in the release last night regarding kind of some pricing issues in terms of the ability of factors to kind scale pricing beyond the standard $3 per invoice price. So I guess my first question is, is Triumph Business Capital doing that at this point?

Aaron Graft, CEO

Yeah. I think Tim should take that question.

Tim Valdez, Executive

Yeah. So there’s a lot of opportunities for us. Historically, what has happened is that the Factoring market is on a very flat discount rate and it creates some diversity or some division when you come into a very volatile economic environment. And so today what we are looking at is a variety of different initiatives within the product mix to enhance earnings as we run into those challenges within the environment.

Aaron Graft, CEO

And Gary, we have been discussing this internally, and while there's no perfect measure, I believe it's directionally correct to say that $1.68 a mile was where the market was last quarter. Most small carriers, but not all, will need $2 per mile to break even. When we mention the freight recession, there are various perspectives to consider. Currently, we are approximately 17% below where many carriers can break even. Established carriers without debt can navigate through markets like this. Since July 1st, there have been some factors pushing rates back up, but they still haven't reached the 17% increase needed. There are catalysts that might change this situation. As a company, we must decide whether to increase costs at a time when many customers are struggling to break even. In some instances, we will if the customers are unprofitable or not aligning with our expectations, but there are others where we believe this freight recession won't last forever. In those cases, we should work with them during this period and then adjust our rates once the market stabilizes to a level where customers can cover their costs. Right now, we are simply in a low point.

Gary Tenner, Analyst

Perfect. So the follow-up to that, though, was, because I have always thought about the flat rate, right? So if rates that factors charge or the discount rate increases at – if I have to try to push that through. Is there a competitive race to the bottom potentially by factors when funding costs can go back the other way down the road or is this an element that we have seen before when funding costs are higher, like have we said we have seen this before or is this a departure of behavior by factors than what we have seen in past cycles?

Aaron Graft, CEO

We – well, if you ask people in the Factoring industry, like Tim, who have been in a long time, they would say we are on a long race to the bottom. I mean, technology has driven discounts down. Think about it this way, when in the old days, 15 years ago, discount per invoice for a small owner operator was 4.9%.

Gary Tenner, Analyst

Yeah.

Aaron Graft, CEO

That’s a 60% APR, which includes handling the entire back office. Looking at Triumph as a whole, our average discount is 1.4%, which is about half of a credit card swipe. What's occurred is that scale and technology within the industry, particularly among the top 20 factoring companies, have reduced yields. Consequently, operating costs have also decreased. However, if we analyze the yield in our factoring segment over time, it shows a downward trend. Eventually, it will reach a point where it cannot decline further. We don’t aim to be the factor that pushes it lower. Our objective isn’t to aggressively become the largest factor in the United States. Rather, we want to operate efficiently at our current size, serve great customers, provide excellent customer service, and enhance the factoring industry, which is how we truly succeed. The factoring industry has yet to react to the most significant rate cycle in 40 years. Many are maintaining their fees, waiting to see how things unfold, particularly since this rate cycle coincided with a freight recession, making pricing adjustments challenging. Nonetheless, in its worst quarter in a long time, our factoring segment’s pre-tax pre-provision return on assets was still over 2.7%. It remains a solid business, led by a great leader, and we need to adapt to what the market does next.

Gary Tenner, Analyst

My questions are leading to the point that, as you mentioned, we are nearing the bottom of long-term rates from a pricing perspective in the Factoring segment. This should encourage factors to increasingly transition to the TriumphPay platform and engage in that business because they could reduce costs on the other side.

Aaron Graft, CEO

Yeah. Tim, you should speak to that.

Tim Valdez, Executive

Yeah. Correct. One of the…

Gary Tenner, Analyst

Use ourselves.

Tim Valdez, Executive

There are a couple of advantages. First, we become very efficient at processing documentation quickly from the time it’s submitted by a carrier. This allows us to provide funding outside of normal business hours and enables us to fund more efficiently and quickly throughout the process. When a client uses our Factoring service, they automatically utilize TriumphPay Audit along with all its functionalities, including potential payment options. Consequently, there are numerous benefits for us overall with TPay being integrated within our client base.

Gary Tenner, Analyst

Okay. If I could ask one more question, that was a lot. But Aaron, you also mentioned that there’s a path to achieving EBITDA breakeven a little earlier than the previously expected timeline of exiting 2024. As this momentum builds with the broker ads and Triumph, I think investors are starting to look toward 2025. It may be a bit premature, but if you reach that EBITDA breakeven and it continues to improve, even by the end of 2024 or earlier, do you have any insight on what that could imply for EBITDA margins in 2025?

Aaron Graft, CEO

If I attempted to answer that question, my colleagues would likely disagree with me. However, here’s our perspective. Over the long term, our Factoring business typically operates at a 50% efficiency ratio. While this quarter did not reflect that, historically, that has been the case. I believe TriumphPay, due to its technology integrations, will surpass the efficiency ratio of our Factoring business. In fact, if it doesn't, we should reconsider our approach. TriumphPay should also assist other Factoring companies in improving their efficiency ratios. This raises the question of how much market potential is available for us. We serve five of the top ten and two of the top five companies and have a strong pipeline behind that. Furthermore, there are initiatives that Melissa and her team are pursuing now that we hadn’t even envisioned with our previous scale. While investors seek to understand Triumph's long-term positioning, our Banking segment, which often doesn’t receive enough attention, outperforms on a spread basis compared to most other banks, excluding Factoring and Payments. Historically, Triumph Factoring has provided a pre-tax, pre-provision return on assets of 2% to 4%, and often exceeds the performance of the highest banks in the U.S. due to the nature of our business. TriumphPay should operate more efficiently at scale than our Factoring business, though its revenue potential may be less as it relies more on fees than on balance sheets, which is favorable from an investment standpoint. When combining a high-performing bank, a Factoring company that is more profitable than most other banking divisions, and a Payments Technology business with margins comparable to a payment network, it creates a highly effective consolidated enterprise. We have dedicated years and invested hundreds of millions of our own funds to develop this, and we can see it coming to fruition. While we have not reached that point yet, we are progressing faster than many anticipated, even in a market that is down over 30%. Once we achieve that stage, integrating those three components, from my perspective—though I acknowledge my bias—it will present a compelling consolidated entity.

Gary Tenner, Analyst

Thank you.

Operator, Operator

Our next question comes from Jared Shaw from Wells Fargo. Jared, you may go ahead.

Jared Shaw, Analyst

Hey. Good morning. Thank you.

Aaron Graft, CEO

Good morning.

Jared Shaw, Analyst

Maybe – yeah. Can we go through some of the dynamics of margin and the expectation around margin? More looking at the broker deposits, looking at the, like you said, the core bank beta has been growth great. But maybe walk through some of the dynamics of margin and where we should expect to see that going over the next few quarters?

Tim Valdez, Executive

Sure, Jared. Just as a reminder and I know that we have talked about this before, but as a reminder, our margin over time will be dominated by our asset mix. To the extent that our Factoring operation is a greater portion than it is now, which at some point, I would expect to see a rebound in that, then you will see margin expansion regardless of what else is happening in the economy and what else is happening on our balance sheet. In the near-term, assuming kind of a status quo freight market and based on what we see our balance sheet now, I would expect net interest margins to be roughly flat for the next two quarters or three quarters. The forces that would impact of that, as I just mentioned, our mix of Factoring. And then the other big one is how well we are able to keep attrition in our community bank core deposit franchise at Bay and we have done a pretty good job of that so far. But those are kind of the forces that are at play, because any attrition in the community bank deposit franchise will be backfilled by wholesale funding, which, as you know, is more expensive. So, we do have probably $40 million a month or so of fixed rate loan principal payments coming in that have the opportunity to be reinvested at higher rates. So that creates a little bit of upward pressure on the margin and then any repricing of our deposits would go the other way. But on balance, I would expect a pretty flat margin over the next couple of quarters.

Brad Voss, CFO

And if you don’t mind, I will just elaborate a little further with respect to the core bank. So with respect to lending yields, we may see lending yields drift higher because of the rate environment, but we may also see them drift a little higher because of mix. So the focus is on rotating out of lower yielding lending products into higher lending yielding products and any new origination we are doing we are doing at yields that are very attractive even if we have to fund them with more expensive wholesale sources. As it pertains to the core deposit mix, we have different buckets of deposits. So Brad alluded to those core community bank deposits, which are highly granular, very stable. We continue to reprice those only on an exception basis and so the betas on those deposits have been very, very low. We also have large commercial deposits that are associated with our commercial finance businesses and in particular, the mortgage warehouse has seen the most significant drop in balances associated with rates. Those are deposits that very rate sensitive and those deposits were responsible for more than half of what you saw in the point-to-point deposit reduction over the last quarter. We are earning some of those deposits back. But keep in mind, when we gain those deposits or lose those deposits, those are already pretty high rate high cost deposits. So that isn’t going to have a really big effect on the overall cost of funds. If you are replacing a mortgage warehouse deposit with the wholesale funding source, it doesn’t affect you that much. Conversely gaining a bunch of new mortgage warehouse deposits that are going to help us that much with respect to our overall cost of funds.

Tim Valdez, Executive

One other thing I meant to add here, that I would throw in, if you look at our overall cost of funds for the quarter, it was about 1.23%. As we sit at the end of the quarter, our spot rates on that are probably 10 basis points or 15 basis points higher than that as we roll over some older less expensive funding. So there will be a little bit of a drift on the cost of fund side. I would expect that to rise, but I would also expect asset yields to drift a little bit higher as well.

Jared Shaw, Analyst

Yeah. Thanks. And then any color on the charge-off that was identified but not related to TFS?

Aaron Graft, CEO

That was a legacy mail carrier. A few quarters ago, we acquired a factoring business associated with one of our large clients. As we examined that business, we found that the trucking companies working with the U.S. Postal Service were in an over-advanced position, which we didn't detect until we took ownership. We have been addressing those issues, and much of it has been resolved. Covenant Logistics is a strong partner, and we have agreed to collaborate to make the best of the situation. A significant portion of that charge-off was indemnified by them according to an agreement from several years ago. The only outstanding issue is a receivable from the United States Postal Service related to postal fleet services, which is about $19.5 million. I am confident that they owe us this money, and we will collect it as needed. We would like the government to expedite this process, though that is beyond our control. Once this is resolved, Triumph will no longer be exposed to USPS matters, specifically related to trucking. We are dealing with one remaining issue and hope to conclude this soon.

Jared Shaw, Analyst

So that lawsuit, or I guess, is it a lawsuit or just a request for payment from a post office, that’s still fully outstanding? And is this a charge-off or write-down associated with that or is it a totally separate from that previously discussed.

Aaron Graft, CEO

Yeah. It is neither reserved, nor charged off. It is identified and we have spoken about it in prior letters. I think it’s identified in the Q as well. It is a matter of litigation between us and the United States Postal Service.

Brad Voss, CFO

Yes, that $19 million is included in our past due figures and the classified asset numbers you see. However, as Aaron mentioned, we have not set aside any reserves for it because we are confident that we will be able to collect it.

Jared Shaw, Analyst

Okay. And there’s no update on expected timing on that, though.

Aaron Graft, CEO

The only update I have for you is litigation is never fast. So, no, there is not unfortunately.

Jared Shaw, Analyst

Okay. Okay. All right. That’s it for me. Thanks.

Operator, Operator

Our next question comes from Michael Perito from KBW. Michael?

Michael Perito, Analyst

Hey. Good morning, everyone. Thanks for taking my questions.

Aaron Graft, CEO

Hi.

Michael Perito, Analyst

I wanted to mention a couple of things briefly. I think you have covered a lot already, so I appreciate the insights provided. Regarding expenses, the guidance to keep them flat for the rest of the year, except for maybe a project here or there that could increase, what does that suggest about pipeline closure? As you pointed out, Aaron, when a larger client signs on, there is a ramp-up period, and revenues may not come in right away. Does that assumption factor in the onboarding of additional clients, or could that number increase if you close more deals in the second half of the year compared to the first half?

Brad Voss, CFO

If we close clients of the type that we closed in this quarter, I think you could expect to see a similar bump, I think we called out about $1.3 million in additional expenses this quarter that were related to those client successes. Those are the type of expenses I am happy to see. Beyond that, I would expect things to remain flat.

Aaron Graft, CEO

And I believe everything that is in the pipeline that we to close is in the expense guidance we gave. So if we deviate from that expense guidance, that would be new wins that are not currently in the pipeline.

Michael Perito, Analyst

Got it. And then just, secondly, in the release you spent some time, Aaron, speaking about how your second largest credit exposure is the equipment finance portfolio and it sounds like you guys over the last few quarters have maybe made some changes or tweaks, I guess, for lack of a better way of putting it, how you underwrite those loans for the environment as it’s deteriorated. But just wondering if you can maybe spend an additional minute talking about the credit performance of that book, maybe vintages from 12 months to 18 months ago and how that has been and what your expectations are there as we think about how maybe this freight recession lasting for a bit longer here, just I would love some additional color?

Todd Ritterbusch, Executive

Sure.

Aaron Graft, CEO

Todd.

Todd Ritterbusch, Executive

As I consider our equipment financing strategy regarding credit, our approach has always been to maintain consistency throughout the market cycle and not to react to fluctuations in asset prices. When we saw a rise in asset prices, our instinct was to increase down payment requirements, ensuring that we remained within what we deem to be safe, long-term loan values. We are still committed to that approach. This enables us to assist carriers who may be experiencing cash flow issues while still having equity in their equipment, allowing us to explore options to extend and reduce their payments, particularly as the freight recession unfolds. Fortunately, we have collateral coverage that supports this strategy, and we focus on building long-term relationships. The carriers we finance are not the same as all those who utilize our factoring services; most of our factoring clients wouldn’t meet the criteria for equipment financing with us. Those who do have typically navigated market cycles alongside our equipment finance leadership team, and they are adept at handling these scenarios, which gives us confidence in maintaining those relationships. Should we reach a point where we need to liquidate equipment, being within collateral values is beneficial. However, our established relationships benefit us further, as we have connections with other buyers who can assist in the liquidation process, whether that involves complete disposal if a carrier ceases operations or a gradual scaling down of their operations. This is our strategy for managing through the freight recession.

Michael Perito, Analyst

Got it. Lastly, I apologize if I missed this earlier, Aaron. I joined a few minutes late. Regarding the buybacks and new authorization, I'm assuming the scope is limited in terms of bank valuations. It seems like you have an attractive valuation today. But to Gary’s point, are you not ready to share your outlook for 2025 yet? If we look that far ahead, it seems like TPay earnings will begin to ramp up, and the valuation could appear much more appealing based on your expectations. I'm curious about your plans for buybacks after the ASR you did in February as we move forward.

Aaron Graft, CEO

Our appetite remains the same as we have previously stated. We believe in the long-term value of what we are creating. We are building something unique that will be difficult to compete with at a larger scale. The way we manage this for the future involves three main uses of capital. First, it's a safeguard against uncertainty. A solid plan can be disrupted by a recession, which might force us to dilute our holdings and give away future value. We are committed to preventing that. Looking at the regulatory minimums, we hold nearly $200 million more in capital than required. The second purpose for maintaining capital is to acquire or invest in companies that will accelerate TriumphPay's goal of becoming the payments network. Last quarter, we invested in Trax, and there are other companies on our radar. These companies are currently dealing with freight challenges, and their valuations are significantly different now compared to if we had been active in 2021 and 2022. Thus, we are actively assessing opportunities to expand our network. Finally, we do have the option to buy back our shares, although timing is never perfect. This quarter, we chose not to buy back any shares. We have a plan in place to trade outside the designated windows if market conditions cause our share prices to drop, as we don't want to miss that chance. This is a consideration for the Board. Our goal is to grow revenue and profitability rather than expand our balance sheet. In the long run, this suggests that buying back shares is beneficial. While we did not buy back shares this quarter, that doesn't indicate we won't in the next. We continually evaluate the opportunities related to the three areas I mentioned and make decisions as a Board based on that.

Michael Perito, Analyst

All right. Thank you, guys. I appreciate you taking my questions.

Operator, Operator

There are no further questions on this line at this time. We will now move over to the phone line for further Q&A. Thank you.

Unidentified Company Representative, Company Representative

Thank you, Operator. At this time, there are no questions. I’d like to turn it back to the presenters for closing remarks. Thank you.

Aaron Graft, CEO

Thank you for joining us this morning. We hope to see you soon. Have a great day.