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.

Long-term commercial and equipment financing success depends on rigorous cost control, outstanding client service, organic growth, and strong capital reserves, as the industry continues to evolve.

Success requires maintaining rigorous cost control alongside outstanding client service, 1st Source Corp. Chairman and Chief Executive Christopher Murphy III tells Equipment Finance News in the second of a two-part episode of “The Dig” podcast. 1st Source Corp. is the parent company of 1st Source Bank.

“Rigorous cost control and outstanding client service are very important elements of making it work over the longer term,” he says. Other essential elements include giving second chances, ensuring employees develop and master necessary skills, and resisting flashy distractions, he adds.

Murphy is stepping down as CEO of 1st Source after nearly 50 years, becoming executive chairman while Andrea Short becomes president and CEO of both the corporation and the bank on Oct. 1. Additionally, Kevin Murphy, Chris Murphy III’s son and current executive vice president and chief digital officer, will become president of the bank.

Managing growth, prioritizing relationships

Meanwhile, 1st Source has focused on organic growth rather than acquisitions, prioritizing shareholder value through disciplined cash flow analysis and long-term relationships, often passing on overpriced deals in favor of growing one customer at a time, Murphy says.

“The key is to be patient, just keep growing and be patient, and when it's time to take your foot off the gas pedal, get it off the gas pedal, and apply the brake” he says. “There's nothing wrong with that.”

Over the years, 1st Source also exited verticals that didn’t fit, including environmental equipment and aircraft financing, but preserved long-term customer relationships, often working through setbacks until clients repaid in full, Murphy says.

“We were strong enough in working through that period without the regulators coming down and telling us how to do it, so having strong capital reserves is really critical,” he says. “When I look forward, making sure that we are in this where both Andrea and Kevin come in, as well as Brett Bowers, our chief financial officer, making sure we have the right strength in our balance sheet to withstand hard hits in the economy, whether they're black swan events or otherwise, because they will come.”

Tune in to the newest episode of “The Dig” to hear Murphy discuss his leadership philosophy, relationship building, changes in equipment finance, and opportunities and challenges facing the industry in the next decade.

As digitalization and AI reshape the equipment finance industry, it remains essential for lenders to preserve and share the expertise built over years of experience.

While digitalization speeds up processes, it cannot replace the need for personal expertise in equipment finance, as success still requires understanding the equipment, its use, collateral value, cash flow patterns and business seasonality to avoid costly mistakes, 1st Source Corp. Chairman and Chief Executive Christopher Murphy III tells Equipment Finance News during this episode of “The Dig” podcast. 1st Source Corp. is parent company of 1st Source Bank.

“It's a multi-varied equation that you've got to be running with, but you’ve got to have the human element there,” he says. “You can't just let an AI tool do that, because it's not going to go out and collect it.”

Digitalization and AI accelerate decision-making but also amplify mistakes, requiring lenders to manage client concerns and closely track equipment values, depreciation trends and economic signals, Murphy says.

Anticipating these factors helps identify early warning signs and better guide customers through market shifts. It’s also important for industry veterans to prepare younger leaders for them, he says.

“It's really counseling … be more intentional about talking about it, thinking about it, looking at it, and then moving forward,” he says.

Leadership transition

Murphy, nearing 80, is transitioning leadership of publicly traded 1st Source Bank after 50 years, and he aims to continue the legacy built on long-term focus, quality earnings and a family-oriented culture through his counsel as he hands the reins to Andrea Short.

Short is the president of 1st Source Corp. and CEO of 1st Source Bank, and will become president and CEO of the corporation in addition to being chief executive at the bank, effective Oct. 1. Murphy will become executive chairman of both entities. Murphy’s son, Kevin Murphy, executive vice president and chief digital officer for the bank, will become bank president.

Evolving finance landscape

Meanwhile, as the equipment finance undergoes additional changes with new technology and evolving equipment use, experienced executives should caution future leaders against the risks of easy money, as over-leveraging and weak support from third-party financiers can leave clients vulnerable when markets shift, Murphy says.

“Don't overreact and make sure you're close to the customer, counsel them through it, and be careful when the customer is borrowing somewhere else and you've got other lenders who don't know what they're doing or are going to react in a wrong way,” he says. “It's important you know who you're financing with — not only what you're financing — so that you've got people who are experienced on the other side, experienced at working through problems.”

Tune in to the newest episode of “The Dig” to hear from Murphy about the lessons he’s learned after nearly 50 years in financial services, the growth of 1st Source Bank, preparing for succession, navigating industry changes, and challenges and opportunities facing the equipment finance and specialty finance industry.