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.