Ron Arrington Global President, CIT Vendor Finance

Anthony Cracchiolo President, U.S. Bancorp Equipment Finance

Brian D. Madison SVP, Manufacturer & Vendor Alliances, Key Equipment Finance

Peg Maloney SVP, Credit Operations, Key Equipment Finance

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

The topics ranged from the use of FICO scores to the nature of the environment in terms of competition. We feel compelled to reiterate that the assignment of questions was truly random with no particular logic applied to matching the question to the responding institution.

As always, we wish to thank the following industry leaders as well as their institutions for their willingness to participate in this somewhat atypical presentation: Ron Arrington at CIT Vendor Finance, Anthony Cracchiolo at U.S. Bancorp Equipment Finance, Brian Madison and Peg Maloney at Key Equipment Finance, and Paul Omohundro at Banc of America Leasing.

As always, we welcome your feedback on this presentation. Please let us know what you think by sending an e-mail to [email protected].

ISSUES…

Monitor: Would you agree or disagree that today’s environment is more competitive in the vendor finance space? If you agree, do you expect vendor finance providers to become more aggressive in pricing? Or more liberal in credit acceptance criteria? Or in other ways, such as longer terms and/or looser program structuring?

Ron Arrington: The competition has increased mostly in the enterprise markets serving large companies as they have continued to invest in equipment whereas small- and medium-sized businesses have been reluctant to do so because of the uncertainty in the economy. As the economy continues to improve, albeit at a measured pace, confidence will build with SMBs prompting investment and unleashing the pent-up demand to replace and invest in equipment. In a low growth economy, manufacturers and resellers are particularly interested in partnering with finance providers because the leasing proposition helps to increase sales. The competition for larger deals has resulted in more aggressive rates, but we are seeing more demand for services-based structures as well across many markets. During the course of 2011, the SMB market is poised to recover providing additional opportunities for a company like CIT that serves that market. Globally, we continue to see increasing demand particularly in the more robust economies such as China, Brazil, the UK and Germany.

Monitor: In terms of the way vendor programs are structured, how 
are these programs structured differently today than they would have 
been say in 2006 or 2007, before the financial crisis? What would you say has been some of the learning brought about by the financial crisis?

Anthony Cracchiolo: Today we see a much greater acceptance from all sides to participate in shared vendor programs. The financial crisis has underscored the fact that market events can affect vendor programs even with programs and segments that appear particularly stable. It’s a domino effect, if you will. A stable market may be impacted by separate but neighboring markets. Another lesson from the last few years — for all types of vendor finance organizations — is how critical it is that the quality of equipment markets and the customer base are always well understood.

Monitor: Would you please comment on the use of FICO scores as a basis of approval given the last couple of years? Did FICO scores turn out to be the reliable predictor once envisioned or has that changed or been adjusted to reflect the recent state of economic hardship?

Peg Maloney: We continue to use FICO scores as one piece of a total scoring solution. We regularly validate the predictive capacity of FICO scores. The results indicate that FICO continues to rank order performance. However, it is important to understand that loss curves for all scores both pooled and custom, will move based on overall economic conditions. For this reason, we continue to monitor and validate all our scores and associated performance. Based on the results of these validations, we adjust cut offs and expectations.

Monitor: As we start to see an up-tick in new business initiatives, do you expect new players to enter into the vendor finance market? If so, with the idea that they start from a clean slate, could you comment on the advantages they may enjoy as well as the disadvantages they may not anticipate?

Paul Omohundro: Yes, I would expect some new entrants as is usually the case as we emerge from an economic downturn. You may see some banks that are asset-heavy come into or return to the market. You may also see some of the independent leasing companies that specialize in particular industries or equipment types look to the vendor market as a growth area. Their advantage might be the ability to focus on a subset of the market and concentrate their efforts on an area where they are playing to their strengths. From a broader perspective, they may find the vendor space to be challenging. The vendor market tends to be relationship driven. For example, we have programs with some of our clients that have been in place continually over 20 years. Over the past few years, vendors have seen a lot of funding sources both enter and leave the market, in some cases with short notice, which has been disruptive for them. I think the more established vendors may be hesitant to try a new funding source that may have limited scope and may or may not have a long-term commitment to the market.

OUTLOOKS…

Monitor: Please comment on your outlook for 2011 and beyond as it relates to the vendor finance market. What are the greatest opportunities that you see and what are the greatest challenges and/or concerns?

Ron Arrington: As economic conditions and confidence continue to improve, so will investment and demand for financing as companies look to invest in equipment to support their growth initiatives and increase productivity. Manufacturers and resellers view vendor finance as a strategic part of their business and even more so as the model migrates to a services-based structure. As the sale is no longer just about the ‘box,’ being able to provide a structure that supports a service solution helps drive incremental revenue for the manufacturer or reseller. This will result in manufacturers looking for lenders that have the expertise and servicing capabilities to support this offering.

Along with this, there is the backdrop of potential new accounting rules that may potentially affect both the manufacturer and the end-user customer that the market has yet to fully understand.

Anthony Cracchiolo: We see a positive outlook with slow and steady growth for the remainder of 2011. In 2012, with a supportive government policy, we see a stronger year relative to vendor finance. The economy will naturally pick up the pace of growth in vendor markets in 2012 as compared to 2011.

Due to pent up demand for capital equipment, the potential exists for vendor financing to increase rapidly once confidence in the U.S. economy improves and businesses expand into the growing economic environment.

The greatest concern in the vendor finance space is the uncertainty of government actions and policy, which could potentially foster a climate of slow growth.

Brian Madison: Our manufacturer and vendor alliance partners indicate there is a healthy demand for new equipment and, thus, financing as a result of delayed purchases during the economic downturn. We are optimistic, as our partners are experiencing good growth and the financing program relationships benefit accordingly.

From an internal perspective, with Key’s strong capital position, our parent company is actively viewing the Key Equipment Finance Manufacturer and Vendor Alliances organization as a growth engine. Opportunities are seen across all of our core markets served: IT, healthcare, government and energy. Key Equipment Finance is well positioned for future growth because of our depth of experience and strong relationships in each of these markets.

Challenges or concerns continue to crop up relative to the sustainability of the economic recovery. Issues such as sovereign debt and budgets, oil prices due to Middle East social movements, the natural disaster in Japan and monetary policy relative to inflationary angst continue to maintain an air of uncertainty relative to the business environment.

At an industry level, pricing discipline also crops up as many competitors now have good capital positions and mandates to grow while placing quality assets on their books. As a result, we are beginning to see the best credits at pre “Great Recession” prices, which are substantially below yields from the past couple of years.

Paul Omohundro: The outlook in the vendor finance market is positive. In the near term, we are starting to see a return to normal activity levels in certain general industry markets, such as construction and transportation, which is an encouraging sign. Looking a little further out, we see the pending accounting and regulatory changes as potentially being both an opportunity and a challenge with differing impacts to end-users, vendors and funding sources. For us at Bank of America Merrill Lynch, we feel expanding our funding coverage globally is an important growth opportunity. In addition to providing us with new volume opportunities, it also helps us strengthen and deepen our relationships with our existing clients.