Equipment Finance

# Executive Summary * The Equipment Finance industry's profitability is under significant pressure from elevated interest rates, which are compressing net interest margins and dampening end-user demand. * A slowing economy is translating into tangible credit quality deterioration, forcing lenders to increase loss provisions and, in some cases, exit specific lending segments. * Technology and digital transformation are no longer optional, serving as the primary long-term differentiator for both operational efficiency and product value. * The competitive landscape is actively being reshaped by a wave of mergers and acquisitions as firms pursue scale and specialization to navigate market pressures. * A clear bifurcation is emerging between manufacturers facing cyclical revenue declines and specialized financial firms that are capturing growth through niche expertise. * The outlook for 2026 is cautiously optimistic, contingent on interest rate stabilization and the avoidance of a severe recession, with projected market growth in the low-to-mid single digits. ## Key Trends & Outlook The Equipment Finance industry's performance in late 2025 is being dictated by the persistent pressure of elevated interest rates on funding costs and profitability. This dynamic directly compresses Net Interest Margins (NIMs), the core profit engine for lenders. A clear divergence has emerged between banks that can effectively manage deposit costs to protect or even expand their NIMs and those more exposed to higher-cost wholesale funding. Simultaneously, higher borrowing costs for end-users are tempering demand for new equipment, particularly in capital-intensive sectors. The market is closely watching for potential rate cuts in 2026, which could provide relief but also introduce new margin management challenges. Pathward Financial, Inc. (CASH) exemplifies the potential for strong performance in this environment, reporting an industry-leading Net Interest Margin of 7.43% in Q3 2025, showcasing the benefits of a specialized commercial finance business. The risk of an economic slowdown has transitioned from theoretical to actual, with a noticeable increase in loan delinquencies and charge-offs. This is forcing finance providers to increase their provisions for credit losses, which directly impacts bottom-line earnings. In response, many are tightening underwriting standards and strategically de-risking their portfolios. This trend is exemplified by Midland States Bancorp, Inc. (MSBI), which has ceased new originations in its equipment leasing segment as part of a broader effort to improve its credit profile after experiencing significant charge-offs. The most significant opportunity lies in leveraging technology to gain a competitive edge. Companies like Deere & Company (DE) and Willis Lease Finance Corporation (WLFC) are using proprietary technology to deliver superior value and build durable moats, enabling them to command better pricing and efficiency. Beyond credit risk, the primary threat is competitive pressure, which is driving a wave of mergers and acquisitions. Firms like First Financial Bancorp. (FFBC) are actively acquiring competitors to build the scale necessary to invest in technology and compete effectively in a crowded market. ## Competitive Landscape The Equipment Finance market is fragmented yet highly competitive, featuring three primary strategic models: large manufacturers with captive finance arms, diversified regional banks, and specialized non-bank lenders. This structure reflects diverse approaches to serving the fundamental need for business investment in equipment. Some of the largest players are global equipment manufacturers that provide in-house financing to facilitate the sale of their own products. This integrated approach ties their financial performance directly to the cyclicality of their end-markets, as seen with players in the agriculture and construction sectors. Their key advantage lies in a built-in customer base, strong brand loyalty, and the ability to integrate technology from the equipment directly into the financing and service offering. However, they are highly susceptible to the cyclical downturns of their specific end-markets. Deere & Company (DE) is a prime example, with its Financial Services segment explicitly designed to support the sale of its agricultural and construction equipment, making its performance directly tied to the health of those markets. Another significant group consists of regional banks that leverage their low-cost deposit base to operate specialized national lending platforms, including equipment finance. Their key advantage is access to cheaper funding than non-bank competitors, the ability to cross-sell other banking products, and portfolio diversification across geographies and asset classes. However, they are subject to broad banking regulations and intense competition for both loans and deposits. First Financial Bancorp. (FFBC) operates its Summit Funding Group for equipment finance as a national platform, funded by its regional banking footprint, and uses mergers and acquisitions to acquire both core banking scale and specialized finance capabilities. Finally, a number of highly successful firms compete by focusing intensely on a single equipment niche, such as aircraft engines or renewable energy. These specialists command higher margins by offering deep domain expertise that larger, more generalized lenders cannot match. Their key advantage is higher margins, less direct competition, and strong customer relationships due to specialized knowledge. Willis Lease Finance Corporation (WLFC) focuses solely on commercial aircraft engines, a high-value, complex asset class, with its entire business model, from leasing to MRO services, built around this single niche. The primary competitive battleground is shifting towards technology and scale, which is fueling the ongoing trend of consolidation across the banking and specialty finance segments. ## Financial Performance Revenue growth is sharply bifurcated across the industry, with performance heavily influenced by end-market exposure and business model. This divergence makes industry-wide averages misleading. Cyclical manufacturers are experiencing significant revenue declines as their core markets soften. In contrast, specialized lessors and well-positioned financial firms are achieving strong growth by capitalizing on specific, resilient niches and effective balance sheet management. The contrast is stark between Deere & Company (DE), which reported a 22% year-over-year revenue decline in H1 FY25 due to the agricultural downturn, and Willis Lease Finance Corporation (WLFC), which grew revenue by over 29% in Q2 2025 by serving the robust demand in the aviation aftermarket. {{chart_0}} Margin performance is also diverging based on funding models and specialization. Net Interest Margins (NIMs) range significantly across the sector. The primary driver of profitability is the ability to manage funding costs in a high-rate environment. Companies with unique, high-yield asset origination capabilities and a stable funding base are achieving outsized margins. The broader banking sector is fighting to maintain margins by aggressively managing deposit costs. Pathward Financial, Inc. (CASH) exemplifies the high-end of profitability with a 7.43% NIM in Q3 FY25, a direct result of its focus on specialized, higher-yielding commercial finance assets. {{chart_1}} Capital allocation in the Equipment Finance industry demonstrates a dual focus on strategic mergers and acquisitions for growth and returning capital to shareholders. In a competitive market, companies are using capital to either buy growth and scale or, if organic opportunities are limited, reward shareholders. The choice depends on their strategic position and valuation. The drive for scale is clear in First Financial Bancorp.'s (FFBC) strategy, which has allocated hundreds of millions to acquire competitors like Westfield Bank and BankFinancial. In contrast, global players like ORIX Corporation (ORIX) are demonstrating confidence through significant capital return programs, such as its JPY 100 billion share buyback program for FY26. {{chart_2}} Balance sheets across the industry are generally healthy, with a strong emphasis on maintaining robust liquidity. After recent regional banking turmoil, regulators and investors have placed a premium on balance sheet strength. As a result, most firms are maintaining significant liquidity buffers, often through access to Federal Home Loan Bank (FHLB) advances and other wholesale funding sources, to ensure they can meet obligations and fund new growth. 1st Source Corporation (SRCE) provides a representative example, reporting total net available liquidity of $3.48 billion at September 30, 2025, equivalent to approximately 50% of its total deposits, showcasing a conservative and resilient liquidity position. {{chart_3}}