Dealer Webcast Transcript Kickoff Episode 1 - Pandemic Impact Questions Recorded on 5/20/20

OPENING REMARKS: Jason Cagle

Welcome to BB&T, SunTrust now Truist’s Commercial Community Bank Industry Specialty Update Series. My name is Jason Cagle and I am pleased to introduce our auto dealer COVID-19 discussion. Our Commercial Community Bank brings together the power of high local touch led by our Region Presidents along with deep industry expertise across several industry verticals including Senior Care Finance, Government Contracting, Association Services, and the focus of this webinar series – Auto Dealer. This series will focus on the impact of the COVID-19 virus on the auto industry…from the consumer who buys the cars…to the dealers who sell them, but also look out over the horizon and provide our thoughts around how this crisis may impact further industry consolidation. We will break this up into several small bite sized episodes of approximately 10 minutes featuring three of our Truist leaders who spend all day every day focused on the space. In today’s episode, we’re going to provide high-level thoughts. First, let me introduce our speakers:

Bill Jones  Bill has over three decades of direct experience in the auto finance industry.  He has been President of Regional Acceptance Corporation since 2007, and the Head of BB&T now Truist Dealer Retail Services since 2015 where he leads our teams focused on dealer indirect lending, or consumer auto loans.

James Taylor  James Taylor who goes by “JT” also has over three decades of auto experience serving the industry as a manufacturer, distributor, retailer, and now in the finance world.  He and his team at SunTrust Robinson Humphrey advise our clients on Mergers & Acquisitions and strategic planning for auto dealers nationwide

David Stevens  David is nearly a 40 year veteran of the banking industry which started in the auto dealer business  Prior to joining SunTrust now Truist, David ran the dealer business for another large financial institution where he was instrumental in their merger integration which makes him uniquely qualified as the current leader of the BB&T/SunTrust auto dealer finance practice integration which consists of bankers 100% dedicated to serving auto dealers distributed across our footprint.

Q&A SECTION: Moderated by Jason Cagle

[Jason Cagle]: As I think about this conversation today, really, there are no auto dealers if you don’t have consumers who want cars. This question is for Bill Jones. Given 15% unemployment and massive economic upheaval, with so many Americans impacted, where do you think the consumer will come out on the other side of this?

[Bill Jones]: While there’s been an unprecedented level of financial stimulus from the Federal government, as well as significantly high level of forbearance from lenders, it’s really hard to imagine a scenario where average consumer credit scores – namely FICO scores - don’t drop. I believe that is already occurring. The primary driver will be both the significant rise in unemployment and reduced hours for U.S. workers both lowering personal incomes and consumer’s ability to repay existing debts. Generally the lowering of an individual’s income translates into higher delinquency on average, which will drive average consumer scores down in the short-term. The stimulus coupled with substantial loan forbearance efforts from lenders is and will continue to mitigate the downside risks. By how much? That’s a great question. There are a lot of economists that have widely varying opinions so we’ll have to work our way through it to find out. Another complicating factor during down economic cycles relates to tightening of credit risk tolerance and its

[-Internal-]

corresponding impact on access to credit in general. In uncertain times lenders generally tighten credit policy to ensure that portfolio risk is managed prudently through the economic cycles, so I think a combination of declining scores and reduced access to credit creates some challenges in the short-term.

[Jason Cagle]: That makes sense. Driving is a necessity for many Americans. Not everyone lives in a major metro and has public transportation. For a while people thorugh that ride-sharing was going to take over and nobody would own a car, but what do Americans do given that driving is a necessity if you’re outside of a major metro and what do you think the short-and-long-term impact will be?

[Bill Jones]: I think owning a vehicle should continue to be within the reach of most consumers. Generally what may have been a near prime scoring consumer in the past may move down to a non-prime scoring status. But access to credit can be acquired there. It may involve a set of higher-interest rate national lenders, but its there, and that may happen across the risk spectrum. Those who are unable to secure financing may be forced to drive an existing vehicle a little longer, serving to decrease the national scrappage rate, and that occurs from time to time, but in general cars are more reliable so that shouldn’t be an insurmountable problem. From a consumer perspective, prices on used cars are already dropping considerably, making vehicle ownership more affordable. Given the higher level of vehicle supply that’s projected to be in the markets over the course of the year, coupled with a lower level of demand and the reality that consumers can make decisions to buy smaller, less expensive vehicles, for instance cars vs. trucks, the negative factors that we talked about above are considerably offset in terms of preventing consumers from vehicle ownership. So all in all, while there might be some challenges in the short-term, vehicle ownership should remain in the reach of most consumers.

[Jason Cagle]: In many ways, owning a car is part of the American dream. Let’s pivot to David. Auto Dealers have been through many downturns, but many states are now preventing them from opening their doors. It’s really unprecedented with the shelter-in-place orders, and it’s hard to sell cars when you can’t open your doors and have folks come into the showroom. What have you done to help Dealer clients through this and navigate these class 5 rapids that they’ve never seen before? Share with me a little bit about the internal programs to help Dealers get through this time.

[David Stevens]: It is certainly a challenging time. All of our Auto Dealer related businesses were quick to react to the COVID-19 economic and health crisis. Our purpose as a company is to “inspire and build better lives and communities” and we certainly understand how critical our Dealer clients are to the communities they live and do business in. Our Dealer clients run extremely complex businesses and are very experienced at managing through challenging economic cycles and crises. We knew that had contingency plans they would put in place, but we also knew none of us have experienced anything like this before. Dealers would need short term and long-term assistance to help ensure they have the capital and liquidity to weather this storm. What we did out of the gate was immediately offer all of our Dealer clients COVID-19 relief programs to help them manage and improve short term cash flow. The first program we rolled out was a Floorplan financing offer that allows 90-day floor plan interest deferral relief and 90-day principal curtailment deferral relief. In addition, we also extended used car aged flooring eligibility and lowered the minimum Black Book value allowed on floored used cars and we extended payment requirements on sold units to 14 days after the sale. All of those helped with short-term cash flow. On the term loan side, we offered 90-day term loan principal and interest deferral relief. The majority of Dealers took advantage of these short-term programs to help boost cash flow and liquidity, and as an insurance policy.

[Jason Cagle]: One thing that’s been all over the news is something called the Paycheck Protection Program. Did dealers take advantage of this or were they eligible?

[David Stevens]: That was an important tool for all of our Dealer clients. In addition to the COVID-19 programs that the bank deployed, we were also an active player in the SBAs Paycheck Protection Program (PPP). Our teammates worked tirelessly to help all of our clients – including our Dealer clients – that applied for a PPP loan. Throughout this crisis our

[-Internal-]

Leadership, Relationship Managers and Internal Partners have been in almost constant communication with our Dealers to make sure they were doing all they could to assist them.

[Jason Cagle]: Bill and David, I appreciate you grounding us in the now and what’s really been happening. I’d like to lean back in the chair for a minute, shift to JT, and look out over the horizon. JT, how do you think everything that Bill and David just walked us through is going to impact the overall M&A market, and do you see a shift over time in Blue Sky values as a result of the pandemic?

[JT Taylor]: There are a number of different factors that we can look at and we’re paying attention to at STRH. The immediate impact we believe that over the next 12 months dealership M&A activity will be sharply curtailed, perhaps by more than 50% from what was forecasted to be a very robust year for dealership M&A. By example, the 6 public auto retailers alone were estimated to have pipelines of executable acquisitions as great as $2 billion in enterprise value – that’s a lot of stores - and most of that has evaporated. Every year since 2013, about 500 of the auto retail franchises, there’s 32k in the U.S., has changed hands. If we see more than 250 in 2020, it will be a surprise. Two limiting factors for M&A will be the difficulty in estimating potential cash flows from the acquisition, which will add risk to any purchase and changes in financing terms. Lenders are still comfortable with the franchised dealer business model, but the uncertainty over predicting cash flows has limited leverage against blue sky and changed the financing terms being offered for real estate and working capital loans. When banks get comfortable again, and they will, with more predictable economics, they will begin to lend more robustly against intangibles like blue sky. In the meantime, buyers should expect to put more equity into their purchases. Now this of course will change the expected returns on equity and may lead to lower offers for the selling dealers. Blue sky values will be lower over the next year just because of the interruption to business anticipated cash flows will be lower. The intrinsic value of a franchise or brand isn’t likely to change much during that time, i.e. the multiple of adjusted cash flows that a brand demands won’t change in the short term as the underlying values of the brands have yet to be affected. We are paying close attention to the fiscal health of the manufacturers. Their ability to maintain a consumer-centric cadence to their product development is really important. If COVID-19 has damaged an automaker’s ability to fund their product portfolios and the requisite R&D, they may be at risk for market share losses and nothing changes brand values more than loss of market share. When you couple what’s going on with COVID-19 with the push to develop advanced technologies in green drivetrains and active safety, manufacturers have to make some tough choices on their budgets. Frankly, manufacturer consolidation and cooperative investment are inevitable but history has shown they are very risky.

[Jason Cagle]: It is great to hear that you think long-term valuations will look through this near-term volatility and choppiness, but I gotta think there are some other things that effect Blue Sky value. I think some of our family owned dealers probably are now thinking, “Do I want to ride out another downturn in the future, or if I can get through this one, now may be the time to think about monetizing the value.” So, what else should they be thinking about that might impact Blue Sky value coming out of this?

[JT Taylor]: The practical things about Blue Sky value are somewhat the same. Blue sky value can also be impacted by factors like the management team in a dealership, it’s location, business reputation, any required capital expenditures that have been deferred, digital retailing and marketing capabilities are important now, potential used vehicle and parts & service performance is always important. If any of these factors have been adversely affected by the Pandemic permanently, then blue sky for that store is going to be lower. Your point about the severity of the crisis causing us to anticipate that there’s going to be some mindsets that might change is accurate. We think there will be some assets that come to market that weren’t available before because, frankly, some seasoned owners who have successfully weathered 9/11, the Great Recession, and now a pandemic, may be fatigued and definitely considering an exit. On some of these assets, you can throw out any financial analysis because due to their historical and legacy value, it’s just not appropriate, but they are valuable. Our team at STRH is looking forward to advising dealers who currently hold these stores and are considering all their options.

[-Internal-]

CLOSING REMARKS: Jason Cagle

We appreciate you listening to the first part of our series BB&T/SunTrust, now Truist and the impact of COVID on the auto dealer industry. If you want to hear more details on any of these topics we’ve covered, please join us for our next couple of episodes where we will dedicate the entire episode to a conversation with each of these three gentlemen.

DISCLOSURES: Note: visible on screen

SunTrust Robinson Humphrey is a trade name for certain corporate and investment banking services of Truist Financial Corporation and its subsidiaries. Securities underwriting and M&A advisory services are provided by SunTrust Robinson Humphrey, Inc., member FINRA and SIPC. | Lending, financial risk management, and treasury and payment solutions are offered by Truist Bank. | Deposit products are offered by Truist Bank, Member FDIC. © 2020, Truist Financial Corporation.

The information being furnished by JT Taylor, Managing Director of Automotive at SunTrust Robinson Humphrey, is for informational purposes only and does not constitute a commitment to lend money, underwrite any proposed transaction, purchase securities or other assets, provide financing, arrange financing, or provide any other services. SunTrust Robinson Humphrey® is a registered trade name for certain corporate and investment banking services of Truist Financial Corporation and its subsidiaries. Securities and strategic advisory services are provided by SunTrust Robinson Humphrey, Inc., member of FINRA and SIPC. All rights reserved.

[-Internal-]