Participants:

Ron Arrington, Global President, CIT Vendor Finance

Jeff Berg, U.S. Country Manager, De Lage Landen

Brian Madison, Senior Vice President, Manufacturer & Vendor Alliances, Key Equipment Finance

Paul Omohundro, Managing Director, Global Vendor Finance, Banc of America Leasing

Tim Reese, President, Wells Fargo Financial Leasing

MONITOR: As you look back on 2012, what are some of the takeaways from this past year in the context of developing new vendor relationships, meeting goals, achieving milestones, pleasant surprises, unexpected events, etc.? And, for the pure fun of it, rate 2012 on a scale of 1 to 10, with 10 being the best year you could have ever imagined — and tell us why.

ARRINGTON: CIT Vendor Finance had a good year in 2012. We performed strongly on a number of key metrics:

• Financing and leasing assets grew to $5.4 billion.

• Volume increased — we funded a total of $3 billion for the year.

• We made investments in business development, which resulted in the signing of several new client relationships.

• Our portfolio continued to perform well with credit metrics at cyclical lows.

• We continued to outperform key macroeconomic indicators (for example GDP, CAPEX spend, etc.) in our key geographies around the world.

We have seen a more competitive environment, with uncertainties in the economic and political landscape creating pent up demand and pricing pressures in the market. Against this backdrop, CIT had a strong year.

BERG: DLL continues to benefit from our complete and integrated approach to vendor partnerships in all of our verticals. In the past year we diversified our offerings to meet customer needs — in some instances providing fully tailor-made, asset-based solutions. For example, in our Construction, Transportation and Industrial sector we look for ways to help market and re-market vendor assets throughout the value chain to optimize the use of equipment. For us, updating and differentiating existing programs is just as important as finding new ones.

Innovative and customized financing options helped DLL recognize strong lease and loan volume and 5% growth of our managed portfolio in 2012. Notably, our Food & Agriculture and Clean Technology business units grew steadily in 2012 and both are positioned for growth again in 2013. Upward trends in these business units reflect growing societal demands that we will address in a way that supports our sustainability vision and inspires the sustainability ambitions of our partners.

Because of considerable headwinds, like the fragile U.S. economy and new market realities, I would have to rate 2012 a 7. Our core capabilities and dedication to the customer continue to strengthen vendor relationships and foster trust. However, we need to be increasingly flexible to address complex challenges in the current environment and anticipate what lies ahead for our partners in the long-run.

MADISON: One of the key takeaways from last year is that the equipment leasing industry is doing relatively well considering the limited growth in the GDP. Our industry has outpaced GDP growth for the past 18 to 24 months, which I believe signals an underlying sense of optimism.

Of course, some sectors are performing better than others these days. We are seeing technology and healthcare do quite well, while markets that are more capital goods intensive are facing more pressure on demand. State and local government spending and investment growth remain robust; however, procurement rules are driving the market down and away from obtaining quality/best value services as compared to the lowest bid, which does not create a sustainable model for either municipality or supplier.

In developing vendor relationships, growing the business has been all about execution — for example, doing things correctly and consistently with the client at the forefront, while also delivering measurable value to our relationships by helping them sell more of their products and services at better margins. With this in mind, we have established a comprehensive process to launch new vendor programs and manage existing relationships. We take the time to know our clients, what drives them, the products and services they offer and how our financing options can help them build business and enhance profitability. We are becoming very good at articulating our value within their context and supporting that with the follow through and execution required to build the trust necessary for a lasting relationship.

We have been met by stiff competition in some vertical markets and find that strong relationships with our vendor partners are the key to keeping — and winning — business. A good rate will get a new vendor’s attention, but it won’t keep their business. Execution, alignment and dependability are absolute musts in today’s environment.

Rate 2012: 6 to 7 — good growth in an uncertain economic climate. Fixing the political environment is essential to ease this uncertainty.

OMOHUNDRO: Our new program originations team had a pretty good year in 2012 in both the technology and general industries segments. We also have a pretty robust pipeline going into 2013. I think a number of manufacturers are starting to see their growth stagnate in a flat economy and are looking for ways to stimulate revenue. A well-executed customer finance program is one possibility that I think is causing some of the manufacturers and distributors that haven’t historically had much interest in financing programs to take a second look. There is a lot of liquidity in the market so, as expected, we continue to see a lot of competition in new program development compared to a few years ago when some of the funders were shedding programs. We like to think our tenure in the industry, scale and global reach are differentiators for us. We have a pretty good understanding of which types of programs are a good fit and tend to focus our efforts on opportunities that we believe will be successful for both us and the vendor. We’ve had an interesting year in Europe. Our volume has held up well in spite of the economic headwinds. The competitive landscape has changed quite a bit as some established funders have retrenched or changed their coverage models while new sources have entered the market. We have pretty broad coverage in Europe and are continuing to expand,which has helped us competitively. I think we’ve made gains in market share, even though the market may be contracting a bit currently. As the European economy strengthens I think we’ll see some significant growth. Our expansion in Asia is going well. We saw some significant growth there last year and expect that trend will continue this year as well.

I’d probably rate 2012 an 8. We continue to enjoy solid relationships with our vendor partners and have had no attrition. We added some attractive new programs last year that will help drive growth this year. Our portfolio continues to perform well, and we are delivering good financial results for Bank of America Merrill Lynch. Our geographic expansion is on plan and the results are encouraging. I would like to have seen a bit more volume growth last year and we saw significant downward pressure on pricing due to significant liquidity in the market.

REESE: While I can’t say that 2012 was the best year I could have ever imagined, it was certainly the best year I can recall in my 20-plus years of managing vendor businesses. The quality of our portfolio has never been better. The quality of business received and the related approval ratios have improved significantly, and our business certainly reached record levels for production and profitability.

As for surprises, there are two that really stand out to me. The first is that while I believe most businesses in our industry had very successful years, I have not seen a deterioration of our overall risk, pricing or processing standards to gain incremental share. Instead we see a mature industry led by seasoned professionals competing on quality and service.

The other surprise is that we are seeing what I believe to be greater acceptance of vendor financing by larger customers resulting in much larger transactions being financed through vendor programs. This has driven a significant increase in our average transaction sizes and has caused a fundamental shift in our credit processes as more transactions require financial analysis and review. From a program development standpoint, this means that, as a provider, we need to be able to better handle the full spectrum of customers’ pricing and servicing needs.

MONITOR: When you consider the environment within which your organization conducts business, what would you say are some of the key areas of concern that could have a negative impact on your ability to deliver the outcomes you are forecasting for 2013? On the flip side, how would you characterize the current climate for doing business that you find encouraging enough to believe that there are better days ahead?

ARRINGTON: Some of the headwinds include the effects of sequestration, tax increases and healthcare costs causing companies to continue to hold back on investment in equipment. That said, equipment financing market is growing, albeit modestly, largely driven by enterprise consumption focusing on equipment life cycle management and productivity gains to reduce operating expense.

The outlook for the second half of this year and into next year appears more optimistic with the economic recovery, advent of new technology such as mobility and cloud solutions and a better understanding of managed services. As confidence increases, especially amongst small and medium-sized businesses, we expect equipment sales will increase from the release of pent up demand for the replacement of older equipment, as well as a desire to realize efficiencies and growth opportunities through strategic IT initiatives such as cloud computing, mobility and big data analytics. IDC expects IT spending on hardware, software and IT services to grow by 6% in the U.S., with their expectations for the U.S. economy to stabilize in the second half of the year. Gartner recently predicted a 9% increase on worldwide devices (the combined shipments of PCs, tablets and mobile phones). Barron’s noted that private investments in equipment and software jumped 12.4%, the biggest increase in five quarters — stating that conditions have rarely been better for a pickup in CAPEX. This bodes well for the equipment financing industry.

BERG: As our partners are facing bigger competitive challenges, it is our job to get out ahead of these issues and provide solutions to distinguish them from their peers. This will require DLL to think and act differently so that we can deliver the same know-how that our partners have come to expect in a way that specifically addresses their business objectives better and faster than before.

We are making the necessary adjustments to adapt to changing market dynamics — improving the effectiveness and efficiency of our business while continually sharpening customer focus.

DLL sees challenges as opportunities when you consider the tools and skill set that we bring to the table. We are a true global partner and have a proven track record of bringing customers into new markets and geographies, allowing them to leverage our network to drive growth. Because while we operate globally, we execute at the local level to ensure success of programs and products that we have developed for vendors.

Doing business in multiple channels, markets and regions, DLL has a global view of trends in asset management. We know that it is important to be more than just a bank to our customers and believe that we can offer real value in the long term by providing strategic insight beyond the initial transaction.

MADISON: The biggest concerns we’re seeing right now are due to the uncertain economic environment. The volatility of the MLFI-25 is centered on the federal government not being able to reach a spending/budget agreement. For example, not knowing exactly what the sequestration means for our industry created anxiety that caused the most recent drop, and uncertainty about the Affordable Care Act is still causing anxiety among healthcare vendors and end-users. I don’t anticipate much relief in this area in 2013.

We also continue to see aggressive competition in many markets, including healthcare, information technology and government sectors. Competition in these markets right now biases towards lowering rates or loosening risk tolerances. Neither approach is good from a sustainable business practice perspective. To offset these challenges, our approach is to establish strong competitive positions in specific niches, leverage our bank relationships and focus on delivering measurable value and service to our clients.

The pending lease accounting changes are also top of mind. I have concerns that the new framework will make lease accounting far too complex, which will push lessees to either pay cash or take out a traditional loan for new equipment.

On the flip side, I would certainly say the energy sector gives us a lot of reason to be optimistic. We are seeing new opportunity in both traditional and alternative energy sources. The recent boom in natural gas exploration and lower prices as a result, will lead to growth in the market for cogeneration projects. In addition, sustainability and environmental awareness are driving “green” initiatives.

We expect to see continued growth in technology, and despite uncertainty around healthcare reform, we anticipate continued growth in this market as the aging U.S. population creates greater demand for healthcare services.

In terms of government financing opportunities, we have seen the federal government opening up to new ideas to change the way it does business and acquire equipment. I believe this “do more with less” mindset will broaden the base of opportunities for financial solutions that are well-crafted to the government’s needs.

We also foresee a continuing need to replace critical assets that have been in service for longer periods due to the economic climate. This creates a need for financing and access to the capital markets across all industries.

OMOHUNDRO: The U.S. economy is probably our biggest concern. Our growth is obviously tied to the overall health of the economy and capital expenditure levels. There seems to be a lot of divergence among the experts as to which way the economy is headed. I’m leaning towards the pessimistic side, so I think we may have some challenges growing the business this year — I hope I’m wrong. The fiscal cliff caused many of our vendors’ clients to essentially hit the pause button on purchases, which I think we are starting to see the effects of now. Our first quarter seemed to be a bit sluggish.

It will be interesting to see how some of the proposed changes to tax and accounting will play out and the impact they may have on leasing and business overall.

Changing regulations will continue to have an impact on our business. As the requirements evolve we need to adjust our procedures and systems to ensure we are in compliance. This can create strain on our employees and at times with our vendors if we have to make adjustments to processes that impact them.

Competition in most areas is strong, so I expect we’ll continue to see pressure on margins this year, especially at the higher end of the credit spectrum. There also appears to be more willingness to stretch a bit on credit quality as funders try to grow volume and maintain spreads.

In the general industries and technology market, many of the forecasters are still indicating there is pent up demand to replace obsolete and aged equipment. If the current economic uncertainty fades and buyers feel more comfortable making decisions, we may see volume levels pick up fairly quickly in the second part of the year.

REESE: Our industry has never faced a more uncertain time when it comes to the regulatory environment we are operating in today. I have heard from an increasing number of managers and business leaders that they spend more time dealing with compliance and regulatory issues than they spend managing their businesses — and the pace of the introduction of new regulations is not slowing down. As a result, it has become necessary to build infrastructure to support these changes, and we are having to do more and more in order to get deals on our books.

Another challenge is keeping pace with the increasing demand from our customers to provide 24/7 access and the ability to conduct business on their terms. It’s important for us to continually find ways to make it easier for our customers to conduct business with us and discover technologies that will increase the productivity and service levels for all parties. With the pace of change in technology constantly bringing us closer to the customer, it’s critical that we adapt quickly.

The other area of concern is the reduced application activity for smaller businesses, which could be due to many factors including a lack of growth or new business creation for these businesses or that smaller businesses are simply holding on to existing equipment for a longer period of time. These businesses have always been a mainstay of vendor financing, as these are the customers who typically have fewer financing options and look to vendor programs to provide them with convenient and affordable financing solutions.

While it is tough to have better days than we had in 2012, I am particularly encouraged by the level of sophistication and maturity of our industry. I believe our industry has learned from the problems during the recession and will not be prone to repeating past mistakes. We all know we will face new competitors who are eager to get into the game and may be willing to sacrifice quality or price. This will undoubtedly test our resolve to maintain our positions, but we have seen these players come and go, and we will need to focus on the long term to keep our industry healthy.