Specialty finance market seeing cyclical correction w/ 1st Source Andrea Short

The specialty finance market is experiencing a correction as different credit cycles normalize after a year of uncertainty.

Specialty finance business lines follow different credit cycles based on sector, but sectors such as rental are seeing the most pressure due to an industrywide correction as “over-fleeted” clients drive higher credit stress and more nonperforming loans, 1st Source Corp. President and Chief Executive Andrea Short tells Equipment Finance News during this episode of “The Dig” podcast. 1st Source Corp. is the parent company of 1st Source Bank.

“Equipment values are holding, and so I think that that is really helping to mitigate that credit risk,” she says. “We have strong reserves, and that allows us to work with our clients through times that are tough, and so helping them deeply, helping them run their business, make decisions on locations, that type of thing that helps mitigate that credit risk.”

Meanwhile, the South Bend, Ind.-based bank expects its strongest growth in 2026 to come from its renewable energy division as companies rush to secure tax credits before they expire, Short says.

In terms of specialty finance, construction equipment represents the strongest growth opportunity, while auto rental and trucking are likely to see more moderate or limited demand, she adds.

“The strongest [specialty finance sector] is construction equipment, and it's the replacement, it's the new contracts, and it's the road building,” she says.

In contrast, the truck segment — primarily medium- and heavy-duty over-the-road trucks and trailers — is showing the greatest slowdown, driven by softer demand as well as tighter credit standards and greater selectivity in what the bank is willing to finance, Short says Still, truck represents 1st Source’s smallest portfolio, minimzing the impact of the moderation.

Adjusting risk management approach

In addition, the bank manages risk relative to how different assets hold value and by closely monitoring collateral values, equipment performance and asset locations based on years of expertise tracking resale behavior, Short says.

“That's easier to do with aircraft than it is with an excavator, but there are things we can do on all types … of equipment to really monitor where it's being used and where our collateral is actually located,” she says. “I think that we've gotten better at that as technology has improved over the years,”

Tune in to the newest episode of “The Dig” to hear from Short about how she’s taking over 1st Source Corp. and 1st Source Bank, and preserving the organization's long-standing culture amid modernization, economic forces affecting the specialty finance group and risk management.

Register here for the free Equipment Finance News webinar “Tech-driven risk management: How innovation is reshaping equipment finance” set for Tuesday, Dec. 9, at 11 a.m. ET.