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: Thank you, Aaron.
Operator: Our next question will be from Frank Shiraldi from Piper Sandler.
Frank Shiraldi: 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: And Tim could give you anecdotes in the factoring business, and Melissa could talk to you about what she sees in TriumphPay. I think, speaking in generalities, we need 15% or more capacity to leave the system. Now, not all capacity is created equal. That’s where you’ve got to be careful with these statistics. 96% of these authorities out there are very, very small, and they may not leave the system. They may just park the truck and go drive for Uber for a season because they make more money doing that. This unwinding does not happen nearly as quickly as people think, right. Especially — and you might — in ’08, maybe you saw that because the whole world was melting down. What’s happening is like the rest of the world is just trucking along just fine.
It’s the truckers who are feeling the pain right now. And nobody’s paying attention to that very much except those of us who live it every day. My friends at the freight brokers who’ve already reported, they’re feeling it, right? And we know it. We live it, we see it. I think you need some capacity to leave the system to hope that it’s just going to be tonnage-driven, that more freights going to come through, I think is folly. We don’t see that happening. And so we’re not economists. We give you the predictions we give you in the shareholder letter, not that they inform how we make every decision. We only give you those because you understand the grid through which we think. And I struggle to see how you’re going to see a material improvement in freight in 2024.
And I desperately hope I’m wrong. But either way, we’re going to keep doing what we’ve been doing.
Frank Shiraldi: And then something as significant and terrible as the collapse of the Francis Scott Bridge in Baltimore and closing of that port, I mean, what sort of impact does that have on the freight recession? Is that — does that create more — certainly creates more stress, I would think, in the near term, does that create more capacity coming out of the system? Does that accelerate that? Just your thoughts on how that impacts the freight recession and how it impacts yourselves.
Aaron Graft: It does not have a meaningful impact on the freight recession. They’re going to reroute that freight to other ports. You’ve got to reposition the trucks to go to those other ports. But that — yeah, it’s a regional temporary distortion. We see that in hurricane season, that freight gets out of whack in certain regions. I don’t know that there is any solution to cure the market, low freight prices other than low freight prices. Capital, and this is the beauty of capitalism, finds its way to where risk-adjusted returns are appropriate. It just needs some more time to understand that additional allocation of capacity into this market will not get rewarded and that capital will find its way to go somewhere else. That’s the only solution.
One short — I mean, any regional blips or storm seasons, that’s why I said like we’re seeing some things trend in April up, but we don’t think that’s statistically significant. We just need the capacity to leave the system and that is happening. We just all wish it would happen faster.
Frank Shiraldi: Okay and if there’s no other question, just wanted to see if I could slip in one more on credit. Just in terms of the noise in the quarter. And to your point, some of the provisioning was due to the growth in construction. But in terms of where you guys are seeing the most or have the most concerns, is it the equipment finance book, or given the size of that, is it elsewhere, is it the commercial real estate book? Just your thoughts on stress — potential stress points in the portfolio and trends from here on the credit front.
