NICHOLAS FINANCIAL INC Form 10-Q Quarterly Report Filed 2023-02-14

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q


☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED December 31, 2022


☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO .

Commission file number: 0-26680

NICHOLAS FINANCIAL, INC.

(Exact Name of Registrant as Specified in its Charter)

British Columbia, Canada

59-2506879

(State or Other Jurisdiction of
Incorporation or Organization)

(I.R.S. Employer
Identification No.)


2454 McMullen Booth Road, Building C
Clearwater, Florida		33759
(Address of Principal Executive Offices)		(Zip Code)

(727) 726-0763

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading
Symbol(s)

Name of each exchange on which registered

Common Stock

NICK

NASDAQ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 and 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the Registrant has submitted electronically, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ☐ No ☒

As of February 10, 2023, approximately 12.7 million common shares, no par value, of the Registrant were outstanding (of which 5.4 million shares were held by the Registrant’s principal operating subsidiary and pursuant to applicable law, not entitled to vote and 7.3 million shares were entitled to vote).

NICHOLAS FINANCIAL, INC.

FORM 10-Q

TABLE OF CONTENTS


		Page

Part I .	Financial Information
Item 1.	Financial Statements (Unaudited)	1
	Condensed Consolidated Balance Sheets as of December 31, 2022 and March 31, 2022	1
	Condensed Consolidated Statements of Income for the three and nine months ended December 31, 2022 and 2021	2
	Condensed Consolidated Statements of Shareholders’ Equity for the three and nine months ended December 31, 2022 and 2021	3
	Condensed Consolidated Statements of Cash Flows for the nine months ended December 31, 2022 and 2021	4
	Notes to the Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	29
Item 4.	Controls and Procedures	29

Part II .	Other Information
Item 1.	Legal Proceedings	30
Item 1A.	Risk Factors	30
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	31
Item 3.	Defaults Upon Senior Securities	31
Item 6.	Exhibits	32

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Nicholas Financial, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(In thousands)


	December 31, 2022 (Unaudited)			March 31, 2022
Assets
Cash	$	914		$	4,775
Finance receivables, net		139,719			168,600
Repossessed assets		1,041			658
Operating lease right-of-use assets		1,176			4,277
Prepaid expenses and other assets		615			1,103
Income taxes receivable		945			989
Property and equipment, net		794			1,783
Deferred income taxes		—			1,385
Total assets	$	145,204		$	183,570
Liabilities and shareholders’ equity
Credit facility, net of debt issuance costs	$	44,624		$	54,813
Note payable		-			3,244
Net long-term debt		44,624			58,057
Operating lease liabilities		2,736			4,410
Accounts payable and accrued expenses		2,264			4,717
Total liabilities		49,624			67,184
Commitments and contingencies (see Note 10)
Shareholders’ equity
Preferred stock, no par: 5,000 shares authorized; none issued		—			—
Common stock, no par: 50,000 shares authorized; 12,658 and 12,673 shares issued, respectively; and 7,290 and 7,546 shares outstanding, respectively		35,197			35,292
Treasury stock: 5,368 and 5,127 common shares, at cost, respectively		(76,794	)		(74,405	)
Retained earnings		137,177			155,499
Total shareholders’ equity		95,580			116,386
Total liabilities and shareholders’ equity	$	145,204		$	183,570

See Notes to the Condensed Consolidated Financial Statements.

Nicholas Financial, Inc. and Subsidiaries

Condensed Consolidated Statements of Income

(Unaudited)

(In thousands, except per share amounts)


	Three Months Ended December 31,						Nine Months Ended December 31,
	2022			2021			2022			2021
Revenue:
Interest and fee income on finance receivables	$	11,268		$	12,240		$	35,580		$	37,406
Net gain on equity investments		—			—			66			—
Total revenue		11,268			12,240			35,646			37,406
Expenses:
Marketing		177			389			1,086			1,338
Administrative		9,398			8,370			25,066			23,513
Provision for credit losses		10,730			1,675			23,280			3,800
Depreciation and amortization		97			104			339			276
Interest expense		1,239			2,613			2,782			4,923
Total expenses		21,641			13,151			52,553			33,850
(Loss) income before income taxes		(10,373	)		(911	)		(16,907	)		3,556
Income tax expense (benefit)		3,000			(209	)		1,415			926
Net (loss) income	$	(13,373	)	$	(702	)	$	(18,322	)	$	2,630
Net (loss) income per share:
Basic	$	(1.85	)	$	(0.09	)	$	(2.49	)	$	0.34
Diluted	$	(1.85	)	$	(0.09	)	$	(2.49	)	$	0.34

See Notes to the Condensed Consolidated Financial Statements.

Nicholas Financial, Inc. and Subsidiaries

Condensed Consolidated Statements of Shareholders’ Equity

(Unaudited)

(In thousands)


	Three Months Ended December 31, 2022
	Common Stock												Total
	Shares			Amount			Treasury Stock			Retained Earnings			Shareholders' Equity
Balance at September 30, 2022		7,309		$	35,172		$	(76,684	)	$	150,550		$	109,038
Issuance of restricted stock awards		—			—			—			—			—
Share-based compensation		—			25			—			—			25
Treasury stock		(19	)		—			(110	)		—			(110	)
Net (loss) income		—			—			—			(13,373	)		(13,373	)
Balance at December 31, 2022		7,290		$	35,197		$	(76,794	)	$	137,177		$	95,580

	Three Months Ended December 31, 2021
	Common Stock												Total
	Shares			Amount			Treasury Stock			Retained Earnings			Shareholders' Equity
Balance at September 30, 2021		7,583		$	35,151		$	(73,895	)	$	155,833		$	117,089
Issuance of restricted stock awards		5			—			—			—			—
Exercise of stock options		3			28			—			—			28
Share-based compensation		—			65			—			—			65
Treasury stock		(6	)		—			(65	)		—			(65	)
Net (loss) income		—			—			—			(702	)		(702	)
Balance at December 31, 2021		7,585		$	35,244		$	(73,960	)	$	155,131		$	116,415

	Nine Months Ended December 31, 2022
	Common Stock												Total
	Shares			Amount			Treasury Stock			Retained Earnings			Shareholders' Equity
Balance at March 31, 2022		7,546		$	35,292		$	(74,405	)	$	155,499		$	116,386
Issuance of restricted stock awards		11			—			—			—			—
Cancellation of restricted stock awards		(26	)		(175	)		—			—			(175	)
Share-based compensation		—			80			—			—			80
Treasury stock		(241	)		—			(2,389	)		—			(2,389	)
Net (loss) income		—			—			—			(18,322	)		(18,322	)
Balance at December 31, 2022		7,290		$	35,197		$	(76,794	)	$	137,177		$	95,580

	Nine Months Ended December 31, 2021
	Common Stock												Total
	Shares			Amount			Treasury Stock			Retained Earnings			Shareholders' Equity
Balance at March 31, 2021		7,708		$	35,064		$	(72,343	)	$	152,501		$	115,222
Issuance of restricted stock awards		17			—			—			—			—
Exercise of stock options		3			28			—			—			28
Share-based compensation		—			152			—			—			152
Treasury stock		(143	)		—			(1,617	)		—			(1,617	)
Net (loss) income		—			—			—			2,630			2,630
Balance at December 31, 2021		7,585		$	35,244		$	(73,960	)	$	155,131		$	116,415

See Notes to the Condensed Consolidated Financial Statements.

Nicholas Financial, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)


	Nine Months Ended December 31,
	2022			2021
Cash flows from operating activities
Net (loss) income	$	(18,322	)	$	2,630
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
Depreciation and amortization		339			276
Amortization of debt issuance costs		124			2,158
Non-cash lease expense		1,427			(146	)
Loss (Gain) on sale of property and equipment		650			(3	)
Net gain on equity investments		(66	)		—
Provision for credit losses		23,280			3,800
Amortization of dealer discounts		(4,632	)		(4,771	)
Amortization of insurance and fees commissions		(2,395	)		(1,992	)
Accretion of purchase price discount		(119	)		(71	)
Deferred income taxes		1,385			557
Cancellations of restricted stock awards		(175	)		—
Share-based compensation		80			152
Changes in operating assets and liabilities:
Prepaid expenses and other assets		(100	)		220
Accounts payable and accrued expenses		(2,453	)		(742	)
Income taxes receivable		44			(166	)
Net cash (used in) provided by operating activities		(933	)		1,902
Cash flows from investing activities
Purchase and origination of finance receivables		(61,769	)		(79,947	)
Principal payments received on finance receivables and proceeds from repossessed assets sales		74,721			87,689
Purchase of equity investments		(7,237	)		—
Proceeds from sale of equity investments		7,303			—
Purchases of property and equipment		—			(985	)
Net cash provided by investing activities		13,018			6,757
Cash flows from financing activities
Repayments on credit facility		(27,800	)		(33,300	)
Proceeds from the credit facility		17,800			—
Payment of loan originations fees		(313	)		(217	)
Repayment of PPP Loan		(3,244	)		—
Proceeds from exercise of stock options		—			28
Repurchases of treasury stock		(2,389	)		(1,617	)
Net cash used in financing activities		(15,946	)		(35,106	)
Net decrease in cash and restricted cash		(3,861	)		(26,447	)
Cash and restricted cash at the beginning of period		4,775			32,977
Cash and restricted cash at the end of period	$	914		$	6,530
Supplemental disclosures, including noncash activities:
Interest paid		2,532			3,005
Income taxes paid		24			541
Transfer of finance receivables to repossessed assets		6,446			4,682
Leased assets obtained in exchange for new operating lease liabilities		—			1,993

See Notes to the Condensed Consolidated Financial Statements.

Notes to the Condensed Consolidated Financial Statements

Note 1. Basis of Presentation

Nicholas Financial, Inc. (“Nicholas Financial – Canada” or the Company) is a Canadian holding company incorporated under the laws of British Columbia with several wholly-owned United States subsidiaries, including Nicholas Financial, Inc., a Florida corporation (“NFI”). The accompanying condensed consolidated balance sheet as of December 31, 2022, and the accompanying unaudited interim condensed consolidated financial statements of Nicholas Financial – Canada, and its wholly-owned subsidiaries (collectively, the “Company”), have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information, with the instructions to Form 10-Q pursuant to the Securities Exchange Act of 1934, as amended, and with Article 8 of Regulation S-X thereunder. Accordingly, they do not include all of the information and notes to the consolidated financial statements required by U.S. GAAP for complete consolidated financial statements, although the Company believes that the disclosures made are adequate to ensure the information is not misleading. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for interim periods are not necessarily indicative of the results that may be expected for the year ending March 31, 2023. It is suggested that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and accompanying notes thereto included in the Company’s Annual Report on Form 10-K for the year ended March 31, 2022 as filed with the Securities and Exchange Commission on June 24, 2022. The March 31, 2022 consolidated balance sheet included herein has been derived from the March 31, 2022 audited consolidated balance sheet included in the aforementioned Form 10-K.

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for credit losses on finance receivables.

Reclassifications

In certain instances, amounts reported in prior years’ consolidated financial statements have been reclassified to conform to the current financial statement presentation. Such reclassifications had no effect on previously reported net income (loss).

Note 2. Revenue Recognition

Interest income on finance receivables is recognized using the interest method. Accrual of interest income on finance receivables is suspended when a loan is contractually delinquent for 61 days or more, or the collateral is repossessed, whichever is earlier. The Company reverses the accrual of interest income when the loan is contractually delinquent 61 days or more.

The Company defines a non-performing asset as one that is 61 or more days past due, a Chapter 7 bankruptcy account, or a Chapter 13 bankruptcy account that has not been confirmed by the courts, for which the accrual of interest income is suspended. Upon confirmation of a Chapter 13 bankruptcy account (BK13), the account is immediately charged-off. Upon notification of a Chapter 7 bankruptcy, an account is monitored for collectability. In the event the debtors’ balance is reduced by the bankruptcy court, the Company records a loss equal to the amount of principal balance reduction. The remaining balance is reduced as payments are received. In the event an account is dismissed from bankruptcy, the Company will decide whether to begin repossession proceedings or to allow the customer to make regularly scheduled payments.

A dealer discount represents the difference between the finance receivable of a Contract, and the amount of money the Company actually pays for the Contract. The discount negotiated by the Company is a function of the lender, the wholesale value of the vehicle and competition in any given market. In making decisions regarding the purchase of a particular Contract the Company considers the following factors related to the borrower: place and length of residence; current and prior job status; history in making installment payments for automobiles; current income; and credit history. In addition, the Company examines its prior experience with Contracts purchased from the dealer, and the value of the automobile in relation to the purchase price and the term of the Contract.

The dealer discount is amortized as an adjustment to yield using the interest method over the life of the loan. The average dealer discount associated with new volume for the three months ended December 31, 2022 and 2021 was 6.8% and 6.8%, respectively, in relation to the total amount financed.

Unearned insurance and fee commissions consist primarily of commissions received from the sale of ancillary products. These products include automobile warranties, roadside assistance programs, accident and health insurance, credit life insurance, involuntary unemployment insurance coverage, and forced placed automobile insurance. These commissions are amortized over the life of the contract using the effective interest method.

Note 3. Earnings Per Share

The Company has granted stock compensation awards with nonforfeitable dividend rights which are considered participating securities. Earnings per share is calculated using the two-class method, as such awards are more dilutive under this method than the treasury stock method. Basic earnings per share is calculated by dividing net income allocated to common shareholders by the weighted average number of common shares outstanding during the period, which excludes the participating securities. The Company's participating securities are non-vested restricted shares which are not required to share losses, and accordingly, are not allocated losses in periods of net loss. Diluted earnings per share includes the dilutive effect of additional potential common shares from stock compensation awards. Earnings per share have been computed based on the following weighted average number of common shares outstanding:


	Three months ended December 31, (In thousands, except per share amounts)						Nine months ended December 31, (In thousands, except per share amounts)
	2022			2021			2022			2021
Numerator
Net (loss) income per consolidated statements of income	$	(13,373	)	$	(702	)	$	(18,322	)	$	2,630
Percentage allocated to shareholders *		100	%		100	%		100	%		100	%
Numerator for basic and diluted earnings per share	$	(13,373	)	$	(699	)	$	(18,322	)	$	2,617

Denominator
Denominator for basic earnings per share - weighted-average shares outstanding		7,219			7,621			7,349			7,593
Dilutive effect of stock options		—			—			—			—
Denominator for diluted earnings per share		7,219			7,621			7,349			7,593

Per share income from continuing operations
Basic	$	(1.85	)	$	(0.09	)	$	(2.49	)	$	0.34
Diluted		(1.85	)		(0.09	)		(2.49	)		0.34

* Basic weighted-average shares outstanding		7,219			7,621			7,349			7,593
Basic weighted-average shares outstanding and unvested restricted stock units expected to vest		7,219			7,658			7,349			7,630
Percentage allocated to shareholders		100	%		100	%		100	%		100	%

Note 4. Finance Receivables

Finance Receivables Portfolio, net

Finance receivables consist of Contracts and Direct Loans and are detailed as follows:


	(In thousands)
	December 31, 2022			March 31, 2022
Finance receivables	$	155,213		$	178,786
Accrued interest receivable		2,903			2,315
Unearned dealer discounts		(5,463	)		(6,894	)
Unearned insurance commissions and fees		(1,889	)		(2,446	)
Purchase price discount		(93	)		(212	)
Finance receivables, net of unearned		150,671			171,549
Allowance for credit losses		(10,952	)		(2,949	)
Finance receivables, net	$	139,719		$	168,600

Contracts and Direct Loans each comprise a portfolio segment. The following tables present selected information on the entire portfolio of the Company:


	As of December 31,
Contract Portfolio	2022			2021
Average APR		22.8	%		22.8	%
Average discount		6.8	%		7.4	%
Average term (months)		50			50
Number of active contracts		16,364			20,013


	As of December 31,
Direct Loan Portfolio	2022			2021
Average APR		30.0	%		29.8	%
Average term (months)		26			26
Number of active contracts		6,505			6,103

The Company purchases Contracts from automobile dealers at a negotiated price that is less than the original principal amount being financed by the purchaser of the automobile. The Contracts are predominantly for used vehicles. As of December 31, 2022, the average model year of vehicles collateralizing the portfolio was a 2012 vehicle.

Direct Loans typically range from $500 to $15 thousand and generally are secured by a lien on an automobile, watercraft or other permissible tangible personal property. The majority of Direct Loans was originated with current or former customers under the Company’s automobile financing program. The typical Direct Loan represents a better credit risk than the typical Contract due to the customer’s prior payment history with the Company; however, the underlying collateral is generally less valuable. In deciding whether to make a loan, the Company considered the individual’s credit history, job stability, income, and impressions created during a personal interview with a Company loan officer. Additionally, because most of the Direct Loans made by the Company were made to current or former customers, the payment history of the borrower was a significant factor in making the loan decision. As of December 31, 2022, loans made by the Company pursuant to its Direct Loan program constituted approximately 15% of the aggregate principal amount of the Company’s loan portfolio. Changes in the allowance for credit losses for both Contracts and Direct Loans are driven primarily by consideration of the composition of the portfolio, current economic conditions, the estimated net realizable value of the underlying collateral, historical loan loss experience, delinquency, non-performing assets, and bankrupt accounts when determining management’s estimate of probable credit losses and adequacy of the allowance for credit losses. If the allowance for credit losses is determined to be inadequate, then an additional charge to the provision would be recorded to maintain adequate reserves based on management’s evaluation of the risk inherent in the loan portfolio. Additionally, credit loss trends over several reporting periods are utilized in estimating losses and overall portfolio performance. Conversely, the Company identifies abnormalities in the composition of the portfolio, which would indicate the calculation was overstated and management judgment may be required to determine the allowance of credit losses for both Contracts and Direct Loans.

Each portfolio segment consists of smaller balance homogeneous loans which are collectively evaluated for impairment.

Allowance for Credit Losses

The following table sets forth a reconciliation of the changes in the allowance for credit losses on Contracts and Direct Loans for the three months ended December 31, 2022 and 2021 (in thousands):


	Three months ended December 31, 2022									Nine months ended December 31, 2022
	Contracts			Direct Loans			Consolidated			Contracts			Direct Loans			Consolidated
Balance at beginning of period	$	5,088		$	2,003		$	7,091		$	1,960		$	989		$	2,949
Provision for credit losses		9,132			1,598			10,730			19,747			3,533			23,280
Charge-offs		(7,077	)		(1,056	)		(8,133	)		(17,266	)		(2,050	)		(19,316	)
Recoveries		1,240			24			1,264			3,942			97			4,039
Balance at December 31, 2022	$	8,383		$	2,569		$	10,952		$	8,383		$	2,569		$	10,952

	Three months ended December 31, 2021									Nine months ended December 31, 2021
	Contracts			Direct Loans			Consolidated			Contracts			Direct Loans			Consolidated
Balance at beginning of period	$	3,716		$	746		$	4,462		$	6,001		$	153		$	6,154
Provision for credit losses		1,325			350			1,675			2,515			1,285			3,800
Charge-offs		(3,546	)		(245	)		(3,791	)		(9,447	)		(618	)		(10,065	)
Recoveries		1,271			13			1,284			3,697			44			3,741
Balance at December 31, 2021	$	2,766		$	864		$	3,630		$	2,766		$	864		$	3,630

The Company uses the trailing twelve-month charge-offs, and applies this calculated percentage to ending finance receivables to calculate estimated probable credit losses for purposes of determining the allowance for credit losses. The Company then takes into consideration the composition of its portfolio, current economic conditions, estimated net realizable value of the underlying collateral, historical loan loss experience, delinquency, non-performing assets, and bankrupt accounts and adjusts the above, if necessary, to determine management’s total estimate of probable credit losses and its assessment of the overall adequacy of the allowance for credit losses. By including recent trends such as delinquency, non-performing assets, and bankruptcy in its determination, management believes that the allowance for credit losses reflects the current trends of incurred losses within the portfolio and is better aligned with the portfolio’s performance indicators.

The following table is an assessment of the credit quality by creditworthiness:


	(In thousands)
	December 31, 2022						December 31, 2021
	Contracts		Direct Loans		Total		Contracts		Direct Loans		Total
Performing accounts	$	120,299	$	22,077	$	142,376	$	147,589	$	22,216	$	169,805
Non-performing accounts		11,003		1,623		12,626		5,891		329		6,220
Total		131,302		23,700		155,002		153,480		22,545		176,025
Chapter 13 bankruptcy accounts		163		48		211		142		6		148
Finance receivables	$	131,465	$	23,748	$	155,213	$	153,622	$	22,551	$	176,173

A performing account is defined as an account that is less than 61 days past due. The Company defines an automobile contract as delinquent when more than 10% of a payment contractually due by a certain date has not been paid immediately by the following due date, which date may have been extended within limits specified in the servicing agreements or as a result of a deferral. The period of delinquency is based on the number of days payments are contractually past due, as extended where applicable.

In certain circumstances, the Company will grant obligors one-month payment extensions. The only modification of terms in those circumstances is to advance the obligor’s next due date by one month and extend the maturity date of the receivable. There are no other concessions, such as a reduction in interest rate, or forgiveness of principal or of accrued interest. Accordingly, the Company considers such extensions to be insignificant delays in payments rather than troubled debt restructurings.

A non-performing account is defined as an account that is contractually delinquent for 61 days or more or is a Chapter 13 bankruptcy account for which the accrual interest income has been suspended. The Company’s charge-off policy is to charge off an account in the month the contract becomes 121 days contractually delinquent.

In the event an account is dismissed from bankruptcy, the Company will decide whether to begin repossession proceedings or to allow the customer to make regularly scheduled payments.

The following tables present certain information regarding the delinquency rates experienced by the Company with respect to Contracts and Direct Loans, excluding Chapter 13 bankruptcy accounts:


	Contracts
	(In thousands, except percentages)
	Balance Outstanding		30 – 59 days			60 – 89 days			90 – 119 days			120+			Total
December 31, 2022	$	131,302	$	16,649		$	7,351		$	3,615		$	37		$	27,652
				12.68	%		5.60	%		2.75	%		0.03	%		21.06	%

March 31, 2022	$	154,143	$	7,097		$	2,936		$	1,183		$	48		$	11,264
				4.60	%		1.90	%		0.77	%		0.03	%		7.31	%

December 31, 2021	$	153,480	$	9,886		$	4,176		$	1,662		$	53		$	15,777
				6.44	%		2.72	%		1.08	%		0.03	%		10.28	%


	Direct Loans
	Balance Outstanding		30 – 59 days			60 – 89 days			90 – 119 days			120+			Total
December 31, 2022	$	23,700	$	2,989		$	1,102		$	515		$	6		$	4,612
				12.61	%		4.65	%		2.17	%		0.03	%		19.46	%

March 31, 2022	$	24,376	$	607		$	197		$	77		$	—		$	881
				2.49	%		0.81	%		0.32	%		—			3.61	%

December 31, 2021	$	22,545	$	636		$	199		$	130		$	—		$	965
				2.82	%		0.88	%		0.58	%		—			4.28	%

Note 5. Credit Facility

Wells Fargo Line of Credit

On November 5, 2021, the Company through its subsidiaries (the "Borrowers") entered into a senior secured line of credit (the "Wells Fargo Line of Credit”) pursuant to a loan and security agreement by and among the Borrowers, Wells Fargo Bank, N.A., as agent, and the lenders that are party thereto (the “WF Credit Agreement”). The prior line of credit (the "Ares Line of Credit") pursuant to a credit agreement among the Company’s subsidiary NF Funding I, LLC, Ares Agent Services, L.P. and the lenders party thereto was paid off in connection with entering into the Wells Fargo Line of Credit.

Pursuant to the WF Credit Agreement, the lenders agreed to extend to the Borrowers a line of credit of up to $175 million. The availability of funds under the Wells Fargo Line of Credit was generally limited to an advance rate of between 80% and 85% of the value of eligible receivables, and outstanding advances under the Wells Fargo Line of Credit accrued interest at a rate equal to the Secured Overnight Financing Rate (SOFR) plus 2.25%. The commitment period for advances under the Line of Credit was three years (the expiration of that time period, the “Maturity Date”).

Pursuant to the WF Credit Agreement, the Borrowers granted a security interest in substantially all of their assets as collateral for their obligations under the Wells Fargo Line of Credit.

The WF Credit Agreement and the other loan documents contained customary events of default and negative covenants, including but not limited to those governing indebtedness, liens, fundamental changes, investments, and sales of assets.

As of December 31, 2022, the Company had aggregate outstanding indebtedness under the Wells Fargo Line of Credit of $45.0 million, compared to $55.0 million as of March 31, 2022.

Future maturities of debt as of December 31, 2022 were as follows:


(in thousands)
FY2023	$	—
FY2024		—
FY2025		45,000
FY2026		—
	$	45,000

As previously announced on Form 8-K filed on October 27, 2022, the Company received a letter from the agent of its lenders, notifying the Company that it was in default and instituting the default rate of interest effective as of August 31, 2022. In the letter, the lenders expressly reserved all rights and remedies available under the credit agreement. Among those rights and remedies was the ability of the lenders to accelerate all of the Company’s obligations under the loan. The Company subsequently announced on Form 8-K filed on December 12, 2022 that it entered into an amendment to the WF Credit Agreement. Pursuant to the amendment, the lenders waived the event of default and the default rate of interest ceased being applicable as of December 6, 2022.

The amendment furthermore reduced the maximum amount available under the WF Credit Facility from $175 million to $60 million, and also reduced the availability of funds under the credit facility from an advance rate of between 80% and 85% of the value of eligible receivables to an advance rate of 50% of the value of eligible receivables, and changed the maturity date of the WF Credit Facility from November 5, 2024 to May 31, 2023. The Company incurred overall costs associated with the restructuring in the amount of $0.3 million.

As described in Note 15. Subsequent Events, the Company refinanced the WF Credit Facility on January 18, 2023.

Note 6. RESERVED

Note 7. Income Taxes

The Company recorded an income tax expense of approximately $3.0 million for the three months ended December 31, 2022 compared to an income tax benefit of approximately $209 thousand for the three months ended December 31, 2021. The Company’s effective tax rate decreased to -29.1% for the three months ended December 31, 2022 from 22.9% for the three months ended December 31, 2021. The Company recorded an income tax expense of approximately $1.4 million for the nine months ended December 31, 2022 compared to an income tax expense of approximately $926 thousand for the nine months ended December 31, 2021. The Company’s effective tax rate decreased to -8.42% for the nine months ended December 31, 2022 from 26.0% for the nine months ended December 31, 2021. The lower effective tax rate for the three months ended December 31, 2022 and the lower effective tax rate for the nine months ended December 31, 2022 were attributed to a deferred income tax valuation allowance of $5.7 million recorded during the three months ended December 31, 2022.

The net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes are reflected in deferred income taxes. Significant components of the Company’s deferred tax assets consist of the following:


	(In thousands)
	December 31, 2022			March 31, 2022
Deferred Tax Assets:
Federal and State net operating loss carryforwards	$	2,365		$	507
Share-based compensation		14			79
Allowance for credit losses not currently deductible for tax purposes		2,998			900
Right of use liability		675			1,094
Other items		119			175
Gross deferred tax assets		6,171			2,755
Valuation allowance for deferred tax assets		(5,723	)		-
Net deferred tax assets		448			2,755

Deferred tax liabilities:
Right of use asset		290			1,061
Other items		158			309
Total deferred tax liabilities		448			1,370
Net deferred income taxes	$	-		$	1,385

Income tax expense reflects an effective U.S tax rate, which differs from the corporate tax rate for the following reasons:


	(In thousands)
	Three months ended			Nine months ended
	December 31, 2022			December 31, 2022
Income tax expense at Federal statutory rate	$	(2,178	)	$	(3,530	)
State income taxes, net of Federal benefit		(398	)		(645	)
Increase (decrease) resulting from:
Change in Valuation Allowance		5,723			5,723
Other		(147	)		(133	)
Income tax expense	$	3,000		$	1,415

As of December 31, 2022 the Company has not generated sufficient positive evidence of future earnings to support a position that it will be able to realize its net deferred tax asset. The Company has significant negative evidence to overcome in the form of cumulative pre-tax losses from continuing operations as well as projected losses for the current year. Therefore, it will continue to maintain a full valuation allowance on its U.S. federal and state net deferred tax asset. The change in the valuation allowance offset

the income tax benefit related to the pre-tax loss for the quarter ended December 31, 2022. The Company does not have any material unrecognized tax benefits as of December 31, 2022.

The Company experienced a net change in valuation allowance of $5.7 million for the three and nine months ended December 31, 2022.

Note 8. Leases

The Company maintains lease agreements related to its branch network, central business operational hub in Charlotte, NC and its corporate headquarters in Clearwater, FL. The branch lease agreements range from one to five years and generally contain options to extend from one to three years. The corporate headquarters lease agreement was renewed with a lease maturity date of January 31, 2026. The lease agreement for the operational hub in Charlotte, NC expires in February 2029. The Company expects to terminate the lease agreement for its operational hub in Charlotte, NC in the current fiscal year. All of the Company’s lease agreements are considered operating leases. None of the Company’s lease payments are dependent on a rate or index that may change after the commencement date, other than the passage of time.

The Company’s lease liability was $2.7 million and $4.4 million as of December 31, 2022 and March 31, 2022, respectively. This liability is based on the present value of the remaining minimum rental payments using a discount rate that is determined based on the Company’s incremental borrowing rate. The lease asset was $1.2 million and $4.3 million as of December 31, 2022 and March 31, 2022, respectively.

As part of the restructuring plan announced in November 2022, the Board of Directors of the Company determined to close its operating branches. Consistent with this significant reduction in footprint, the Company impaired substantially all of its operating lease right-of-use assets, which resulted in approximately $1.4 million impairment cost.

Future minimum lease payments under non-cancellable operating leases in effect as of December 31, 2022, are as follows:


in thousands
FY2023 (remaining three months)	$	234
FY2024		797
FY2025		738
FY2026		502
FY2027		346
Thereafter	$	521
Total future minimum lease payments		3,138
Present value adjustment		(402	)
Operating lease liability	$	2,736

Note 9. Fair Value Disclosures

The Company’s financial instruments consist of cash, finance receivables, repossessed assets, the line of credit, and the note payable. Each of these financial instruments are not carried at fair value.

Finance receivables, net, approximates fair value based on the price paid to acquire Contracts. The price paid reflects competitive market interest rates and purchase discounts for the Company’s chosen credit grade in the economic environment. This market is highly liquid as the Company acquires individual loans on a daily basis from dealers.

The initial terms of the Contracts generally range from 12 to 72 months. Beginning in December 2017, the maximum initial term of a Contract was reduced to 60 months. The initial terms of the Direct Loans generally range from 12 to 60 months. If liquidated outside of the normal course of business, the amount received may not be the carrying value.

Repossessed assets are valued at the lower of the finance receivable balance prior to repossession or the estimated net realizable value of the repossessed asset. The Company estimates the net realizable value using estimated auction wholesale proceeds less costs to sell plus insurance claims outstanding, if any.

Based on these market conditions, the fair value of the line of credit as of December 31, 2022 was estimated to be equal to the book value. The interest rate for the line of credit is a variable rate based on SOFR pricing options.


	(In thousands)
	Fair Value Measurement Using
Description	Level 1		Level 2		Level 3		Fair Value		Carrying Value
Cash and restricted cash:
December 31, 2022	$	914	$	-	$	-	$	914	$	914
March 31, 2022	$	4,775	$	-	$	-	$	4,775	$	4,775
Finance receivables:
December 31, 2022	$	-	$	-	$	139,719	$	139,719	$	139,719
March 31, 2022	$	-	$	-	$	168,600	$	168,600	$	168,600
Repossessed assets:
December 31, 2022	$	-	$	-	$	1,041	$	1,041	$	1,041
March 31, 2022	$	-	$	-	$	658	$	658	$	658
Credit facility:
December 31, 2022	$	-	$	-	$	45,000	$	45,000	$	45,000
March 31, 2022	$	-	$	-	$	55,000	$	55,000	$	55,000
Note Payable:
December 31, 2022	$	-	$	-	$	-	$	-	$	-
March 31, 2022	$	3,244	$	-	$	-	$	3,244	$	3,244

The Company may be required, from time to time, to measure certain assets and liabilities at fair value on a nonrecurring basis. There were none at December 31, 2022 and March 31, 2022 and there were no nonrecurring fair value measurements during the three and nine months ended December 31, 2022 and 2021.

Level 2 assets are financial assets and liabilities that do not have regular market pricing, but whose fair value can be determined based on other data values or market pricing.

At each reporting period, all assets and liabilities for which the fair value measurement is based on significant unobservable inputs are classified as Level 3. Management has determined that this level to be most appropriate for the line of credit.

Note 10. Commitments and Contingencies

The Company currently is not a party to any pending legal proceedings other than ordinary routine litigation incidental to its business, none of which, if decided adversely to the Company, would, in the opinion of management, have a material adverse effect on the Company’s financial condition or results of operations.

Note 11. Recent Accounting Pronouncements

In June 2016, the Financial Accounting Standard Board (FASB) issued the Accounting Standard Updates (ASU) 2016-13 Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. Among other things, the amendments in this ASU require the measurement of all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. Companies will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. The ASU also requires additional disclosures related to estimates and judgments used to measure all expected credit losses. The new guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022, and early adoption is permitted. The Company is currently evaluating the impact of the adoption of this ASU on the consolidated financial statements and is collecting and analyzing data that will be needed to produce historical inputs into any models created as a result of adopting this ASU. At this time, the Company believes the adoption of this ASU will likely have a material effect and is expected to increase the overall allowance for credit losses.

In March 2020, the FASB issued ASU 2020-04 Reference Rate Reform (Topic 848): Facilitating of the Effects of Reference Rate Reform on Financial Reporting, which provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions in which the reference London Interbank Offered Rate (LIBOR) or another reference rate is expected to be discontinued as a result of the Reference Rate Reform. This ASU was intended to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. This ASU was effective immediately and is

effective through December 31, 2022. The adoption of this ASU did not have a material effect on the Company's consolidated financial statements.

The Company does not believe there are any other recently issued accounting standards that have not yet been adopted that will have a material impact on the Company’s consolidated financial statements.

Note 12. Stock Plans

In May 2019, the Company’s Board of Directors (“Board”) authorized a new stock repurchase program allowing for the repurchase of up to $8.0 million of the Company’s outstanding shares of common stock in open market purchases, privately negotiated transactions, or through other structures in accordance with applicable federal securities laws. The authorization was effective immediately.

The timing and actual number of repurchases will depend on a variety of factors, including stock price, corporate and regulatory requirements and other market and economic conditions. The Company’s stock repurchase program may be suspended or discontinued at any time.

In August 2019, the Company’s Board authorized additional repurchases of up to $1.0 million of the Company’s outstanding shares.

The following table summarizes treasury share transactions under the Company's stock repurchase program:


	Three months ended December 31, (In thousands)
	2022					2021
	Number of Shares		Amount			Number of Shares		Amount
Treasury shares at the beginning of period		5,349	$	(76,684	)		5,082	$	(73,895	)
Treasury shares purchased		19		(110	)		6		(65	)
Treasury shares at the end of period		5,368	$	(76,794	)		5,088	$	(73,960	)

	Nine months ended December 31, (In thousands)
	2022					2021
	Number of Shares		Amount			Number of Shares		Amount
Treasury shares at the beginning of period		5,127	$	(74,405	)		4,945	$	(72,343	)
Treasury shares purchased		241		(2,389	)		143		(1,617	)
Treasury shares at the end of period		5,368	$	(76,794	)		5,088	$	(73,960	)

For the three months ended December 31, 2022, the Company repurchased approximately 19 thousand shares of common stock at an aggregate cost of $110 thousand and average cost per share of $5.79.

For the nine months ended December 31, 2022, the Company repurchased approximately 241 thousand shares of common stock at an aggregate cost of $2.4 million and average cost per share of $8.69.

Note 13. Note Payable

On May 27, 2020, the Company obtained a loan in the amount of approximately $3.2 million from a bank in connection with the U.S. Small Business Administration’s (“SBA”) Paycheck Protection Program (the “PPP Loan”). Pursuant to the Paycheck Protection Program, all or a portion of the PPP Loan may be forgiven if the Company uses the proceeds of the PPP Loan for its payroll costs and other expenses in accordance with the requirements of the Paycheck Protection Program. The Company used the proceeds of the PPP Loan for payroll costs and other covered expenses and sought full forgiveness of the PPP Loan. The Company submitted a forgiveness application to Fifth Third Bank, the lender, on December 7, 2020 and submitted supplemental documentation on January 16, 2021. On December 27, 2021 SBA informed the Company that no forgiveness was granted. The Company filed an appeal with SBA on January 5, 2022. On May 6, 2022 the Office of Hearing and Appeals SBA (OHA) rendered a decision to deny the appeal. The Company subsequently repaid the outstanding principal balance of $3.2 million plus accrued and unpaid interest of $65 thousand on May 23, 2022.

Note 14. Restructuring Activities

On July 18, 2022, the Company announced its plan to close eleven branches and a consolidation of workforce impacting approximately 44 employees.

The Company then announced on Form 8-K filed on November 3, 2022 a change in its operating strategy and restructuring plan with the goal of reducing operating expenses and freeing up capital. As part of this plan, the Company has shifted from a decentralized to a regionalized business model and has entered into a loan servicing agreement with Westlake Portfolio Management, LLC ("WPM").

While the Company intends to continue Contract purchase and origination activities, albeit on a much smaller scale, its servicing, collections and recovery operations will be outsourced to WPM. The Company has ceased originations of Direct Loans.

As part of this restructuring plan, the Company announced the closure of its branches and will continue operating from its corporate headquarters in Clearwater, FL and central business operational hub in Charlotte, NC. Consistent with this significant reduction in footprint, the Company reduced its workforce to approximately 18 employees as of January 2023.

The Company anticipates that execution of its evolving restructuring plan will free up capital and permit the Company to allocate excess capital to increase shareholder returns, whether by acquiring loan portfolios or businesses or by investing outside of the Company’s traditional business. The overall timeframe and structure of the Company’s restructuring remains uncertain.

Costs related to the restructuring plan are summarized as follows:


	(In thousands)
	Total Cost		Incurred to Date		Remaining cost
Branch Closures	$	3,088	$	2,565		522
Severance		555		555		—
Cease-use of contractual services		820		660		160
Professional fees		323		215		108
Other		26		17		9
Total restructuring cost	$	4,812	$	4,012	$	799

For further information refer to the disclosure under "Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Restructuring and Change in Operating Strategy."

Note 15. Subsequent Events

On January 18 , 2023, the Company through its subsidiaries entered into a Loan and Security Agreement (the “Loan Agreement”) with Westlake Capital Finance, LLC, a California limited liability company, pursuant to which the Lender is providing the Borrowers a senior secured revolving credit facility in the principal amount of up to $50 million (the “Credit Facility”).

The Lender is an affiliate of WPM, the servicer of substantially all of the Company's receivables under its automobile finance installment contracts and direct loans. We refer to the Lender and WPM collectively as “Westlake.”

The availability of funds under the Credit Facility is generally limited to an advance rate of between 70% and 85% of the value of the Borrowers’ eligible receivables. Outstanding advances under the Credit Facility will accrue interest at a rate equal to the secured overnight financing rate (SOFR) plus a specified margin, subject to a specified floor interest rate. For the quarter ending March 31, 2023, the Borrowers expect to incur interest payments between $0.7 million and $0.9 million. Unused availability under the Credit Agreement will accrue interest at a low interest rate. The commitment period for advances under the Credit Facility is two years. We refer to the expiration of that time period as the “Maturity Date.”

The Loan Agreement contains customary events of default and negative covenants, including but not limited to those governing indebtedness, liens, fundamental changes, and sales of assets. The Loan Agreement also requires the Borrowers to maintain (i) a minimum tangible net worth equal to the lower of $40 million and an amount equal to 60% of the outstanding balance of the Credit Facility and (ii) an excess spread ratio of no less than 8.0%. Pursuant to the Loan Agreement, the Borrowers granted a security interest in substantially all of their assets as collateral for their obligations under the Credit Facility. If an event of default occurs, Westlake could increase borrowing costs, restrict the Borrowers’ ability to obtain additional advances under the Credit Facility, accelerate all amounts outstanding under the Credit Facility, enforce their interest against collateral pledged under the Loan Agreement or enforce such other rights and remedies as they have under the loan documents or applicable law as secured lenders.

If the Borrowers prepay the loan and terminate the Credit Facility prior to the Maturity Date, then the Borrowers would be obligated to pay Westlake a termination fee in an amount equal to a percentage of the average outstanding principal balance of the Credit Facility during the immediately preceding 90 days. If the Borrowers were to sell their accounts receivable to a third .party prior to the Maturity Date, then the Borrowers would be obligated to pay Westlake a fee in an amount equal to a specified percentage of the proceeds of such sale.

On January 18, 2023, in connection with entering into the Loan Agreement, the Borrowers terminated the WF Credit Agreement, and the indebtedness under that agreement (consisting of a revolving line of credit in a maximum principal amount of $60 million (with an outstanding balance of approximately $43 million)) was repaid in full. The Company did not incur any termination penalties in connection with the termination of the WF Credit Agreement.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Information

This Quarterly Report on Form 10-Q contains various forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such statements are based on management’s current beliefs and assumptions, as well as information currently available to management. When used in this document, the words “anticipate”, “estimate”, “expect”, "forecast", “will”, "would", “may”, “plan,” “believe”, “intend” and similar expressions are intended to identify forward-looking statements. Although Nicholas Financial, Inc., including its subsidiaries (collectively, the “Company,” “we”, “us”, or “our”) believes that the expectations reflected or implied in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct. As a result, actual results could differ materially from those indicated in these forward-looking statements. Forward-looking statements in this Quarterly Report may include, without limitation statements about (1) the expected benefits, costs and timing of the Company’s restructuring and change in operating strategy, including its servicing arrangement with Westlake Portfolio Management, LLC (collectively with its affiliate Westlake Capital Finance, LLC, “Westlake”) (including without limitation the servicing fees, classified as administrative costs), its loan agreement with Westlake (including without limitation anticipated interest payments thereunder), and its exit and disposal activities; (2) the availability and use of excess capital (including by acquiring loan portfolios or businesses or by investing outside of the Company’s traditional business); (3) the continuing impact of COVID-19 on our customers and our business, (4) projections of revenue, income, and other items relating to our financial position and results of operations, (5) statements of our plans, objectives, strategies, goals and intentions, (6) statements regarding the capabilities, capacities, market position and expected development of our business operations, and (7) statements of expected industry and general economic trends. These statements are subject to certain risks, uncertainties and assumptions that may cause results to differ materially from those expressed or implied in forward-looking statements, including without limitation:

•

the risk that the anticipated benefits of the restructuring and change in operating strategy, including the servicing and financing arrangements with Westlake (including without limitation the expected reduction in overhead, streamlining of operations or reduction in compliance risk), do not materialize to the extent expected or at all, or do not materialize within the timeframe targeted by management;

•

the risk that the actual servicing fees paid by the Company under the Westlake servicing agreement, which the Company is classifying as administrative costs on its financial statements, exceed the range estimated;

•

the risk that the actual interest payments made by the Company under the Westlake loan agreement exceed the range estimated;

•

risks arising from the loss of control over servicing, collection or recovery processes that we have controlled in the past and potentially, termination of these services by Westlake (a failure of Westlake to perform their services under the servicing agreement in a satisfactory manner may have a significant adverse effect on our business);

•

the risk that the actual costs of the exit and disposal activities in connection with the consolidation of workforce and closure of offices exceed the Company’s estimates or that such activities are not completed on a timely basis;

•

the risk that the Company underestimates the staffing and other resources needed to operate effectively after consolidating its workforce and closing offices;

•

uncertainties surrounding the Company’s success in developing and executing on a new business plan;

•

uncertainties surrounding the Company’s ability to use any excess capital to increase shareholder returns, including without limitation, by acquiring loan portfolios or businesses or investing outside of the Company’s traditional business;

•

the ongoing impact on us, our employees, our customers and the overall economy of the COVID-19 pandemic and measures taken in response thereto;

•

the ongoing impact on us, our customers and the overall economy of the supply constraints, especially with respect to energy, caused by the COVID-19 pandemic and the Russian invasion of Ukraine and related economic sanctions;

•

availability of capital (including the ability to access bank financing);

•

recently enacted, proposed or future legislation and the manner in which it is implemented, including tax legislation initiatives or challenges to our tax positions and/or interpretations, and state sales tax rules and regulations;

•

fluctuations in the economy;

•

the degree and nature of competition and its effects on the Company’s financial results;

•

fluctuations in interest rates;

•

effectiveness of our risk management processes and procedures, including the effectiveness of the Company’s internal control over financial reporting and disclosure controls and procedures;

•

demand for consumer financing in the markets served by the Company;

•

our ability to successfully develop and commercialize new or enhanced products and services;

•

the sufficiency of our allowance for credit losses and the accuracy of the assumptions or estimates used in preparing our financial statements;

•

increases in the default rates experienced on our automobile finance installment contracts (“Contracts”) or direct loans (“Direct Loans”);

•

higher borrowing costs and adverse financial market conditions impacting our funding and liquidity;

•

regulation, supervision, examination and enforcement of our business by governmental authorities, and adverse regulatory changes in the Company’s existing and future markets, including the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and other legislative and regulatory developments, including regulations relating to privacy, information security and data protection and the impact of the Consumer Financial Protection Bureau's (the “CFPB”) regulation of our business;

•

fraudulent activity, employee misconduct or misconduct by third parties, including representatives or agents of Westlake;

•

media and public characterization of consumer installment loans;

•

failure of third parties to provide various services that are important to our operations;

•

alleged infringement of intellectual property rights of others and our ability to protect our intellectual property;

•

litigation and regulatory actions;

•

our ability to attract, retain and motivate key officers and employees;

•

use of third-party vendors and ongoing third-party business relationships, particularly our relationship with Westlake;

•

cyber-attacks or other security breaches suffered by us or Westlake;

•

disruptions in the operations of our or Westlake’s computer systems and data centers;

•

the impact of changes in accounting rules and regulations, or their interpretation or application, which could materially and adversely affect the Company’s reported consolidated financial statements or necessitate material delays or changes in the issuance of the Company’s audited consolidated financial statements;

•

uncertainties associated with management turnover and the effective succession of senior management;

•

our ability to realize our intentions regarding strategic alternatives, including the failure to achieve anticipated synergies;

the risk factors discussed under “Item 1A – Risk Factors” in our Annual Report on Form 10-K, and our other filings made with the U.S. Securities and Exchange Commission (“SEC”).

Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or expected. All forward-looking statements included in this Quarterly Report are based on information available to the Company as the date of filing of this Quarterly Report, and the Company assumes no obligation to update any such forward-looking statement. Prospective investors should also consult the risk factors described from time to time in the Company’s other filings made with the SEC, including its reports on Forms 10-K, 10-Q, 8-K and annual reports to shareholders.

Restructuring and Change in Operating Strategy

July 2022 Announcement

On July 18, 2022, the Company announced its plan to close eleven branches and a consolidation of workforce impacting approximately 44 employees.

Change in Operating Strategy

The Company announced on Form 8-K filed on November 3, 2022 a change in its operating strategy and restructuring plan with the goal of reducing operating expenses and freeing up capital. As part of this plan, the Company has shifted from a decentralized to a regionalized business model and entered into a loan servicing agreement with Westlake Portfolio Management, LLC (“WPM”, and, collectively with its affiliate, Westlake Capital Finance, LLC, “Westlake”). An affiliate of Westlake, Westlake Services, LLC, is the beneficial owner of approximately 6.8% of the Company’s common stock.

While the Company intends to continue Contract purchase and origination activities, albeit on a much smaller scale, its servicing, collections and recovery operations have been outsourced to Westlake. The Company has ceased originations of Direct Loans.

Westlake Servicing Agreement

As part of the restructuring plan, the Company entered into a loan servicing agreement (the “Servicing Agreement”) with Westlake Portfolio Management, LLC.

Pursuant to the Servicing Agreement, on December 1, 2022, Westlake began servicing all receivables held by the Company under its Contracts and Direct Loans, except for charged-off and certain other receivables. Those receivables covered by the Servicing Agreement as of the Closing Date are referred to as the “initial receivables.” The Company expects to add additional Contract receivables to the receivables pool covered under the Servicing Agreement from time to time in the future, but will no longer originate Direct Loans. All receivables remain vested in the Company.

More specifically, Westlake has agreed to manage, service, administer and make collections on the receivables, as well as perform certain other duties specified in the agreement, in accordance with servicing practices and standards used by prudent sale finance companies or lending institutions that service motor vehicle secured retail installment contracts of the same type. Westlake will maintain custody of the receivable files and lien certificates, acting as custodian for the Company.

Under the Servicing Agreement, the Company has agreed to pay Westlake a boarding fee with respect to the initial receivables, and boarding fees based on a percentage of any additional receivables to be added to the pool in the future. In addition, the Company is obligated to pay Westlake monthly servicing fees depending on the aggregate principal balance of receivables, the types of services provided by Westlake and the payment status of the various loans. The Company classifies such servicing fees as administrative costs on its financial statements. Estimates of such administrative costs applied to the initial receivables are provided below under "Exit and Disposal Activities." Estimated servicing fees for the quarter ending March 31, 2023 are between $2.7 million and $3.9 million. Collections of amounts made after accounts have been charged off are split between the Company and Westlake. The Company must also reimburse Westlake for certain expenses specified in the Servicing Agreement.

The Servicing Agreement contains representations and warranties by both parties. It allows Westlake to delegate its duties under the agreement to an affiliate or subservicer with the Company's prior written consent. If certain events specified in the Servicing Agreement occur (“Servicer Termination Events”), the Company is entitled to terminate Westlake rights and obligations and appoint a successor servicer under the agreement.

The Servicing Agreement expires upon the earliest to occur of (i) the date on which the Company sells, transfers or assigns all outstanding receivables to a third party (including to Westlake), (ii) the date on which the last receivable is repaid or otherwise terminated and (iii) 3 years from the Closing Date. If the Company terminates the Agreement other than for a Servicer Termination Event, it is obligated to pay Westlake a termination fee if the termination occurs prior to the third anniversary of the Closing Date, which fee, if payable, is expected to exceed $1 million.

Exit and Disposal Activities

As part of this restructuring plan, the Company announced the closure of its branches. Consistent with this significant reduction in footprint, the Company reduced its workforce to approximately 18 employees as of January 2023.

The expected total remaining charges to be incurred by the Company are approximately 0.8 million, all of which are expected to be cash expenditures.

Of these expected total charges, the Company estimates incurring approximately $0.5 million for lease terminations, $0.3 million for cease-use of contractual services and other restructuring costs.

The closing of branches and consolidation of the workforce is expected to be completed by March 31, 2023. The Company recorded the majority of lease terminations and employee-related charges in the third quarter of Fiscal Year 2023. The above estimates of charges and timelines could change as the Company’s plans evolve and become finalized. The Company expects significant annual operating cost savings to substantially exceed the upfront costs associated with the restructuring.

Westlake Loan Agreement

On January 18 , 2023, the Company, through its subsidiaries, entered into a Loan and Security Agreement (the “Loan Agreement”) with Westlake, pursuant to which Westlake is providing the Company a senior secured revolving credit facility in the principal amount of up to $50 million (the “Credit Facility”).

The availability of funds under the Credit Facility is generally limited to an advance rate of between 70% and 85% of the value of the Company’s eligible receivables. Outstanding advances under the Credit Facility will accrue interest at a rate equal to the secured overnight financing rate (SOFR) plus a specified margin, subject to a specified floor interest rate. For the quarter ending March 31, 2023, the Company expects to incur interest payments between $0.7 million and $0.9 million. Unused availability under the Credit Agreement will accrue interest at a low interest rate. The commitment period for advances under the Credit Facility is two years. We refer to the expiration of that time period as the “Maturity Date.”

The Loan Agreement contains customary events of default and negative covenants, including but not limited to those governing indebtedness, liens, fundamental changes, and sales of assets. The Loan Agreement also requires the Company to maintain (i) a minimum tangible net worth equal to the lower of $40 million and an amount equal to 60% of the outstanding balance of the Credit Facility and (ii) an excess spread ratio of no less than 8.0%. Pursuant to the Loan Agreement, the Company granted a security interest in substantially all of their assets as collateral for their obligations under the Credit Facility. If an event of default occurs, Westlake could increase borrowing costs, restrict the Company's ability to obtain additional advances under the Credit Facility, accelerate all amounts outstanding under the Credit Facility, enforce their interest against collateral pledged under the Loan Agreement or enforce such other rights and remedies as they have under the loan documents or applicable law as secured lenders.

If the Company prepays the loan and terminate the Credit Facility prior to the Maturity Date, then the Company would be obligated to pay Westlake a termination fee in an amount equal to a percentage of the average outstanding principal balance of the Credit Facility during the immediately preceding 90 days. If the Company were to sell its accounts receivable to a third party prior to the Maturity Date, then the Company would be obligated to pay Westlake a fee in an amount equal to a specified percentage of the proceeds of such sale.

On January 18, 2023, in connection with entering into the Loan Agreement, the Company terminated its credit agreement with Wells Fargo (the “WF Credit Agreement”), and the indebtedness under that agreement (consisting of a revolving line of credit in a maximum principal amount of $60 million (with an outstanding balance of approximately $43 million)) was repaid in full. The Company did not incur any termination penalties in connection with the termination of the WF Credit Agreement.

Litigation and Legal Matters

See “Item 1. Legal Proceedings” in Part II of this Quarterly Report below.

Critical Accounting Estimates

The Company’s critical accounting estimate (i.e., that involves a significant level of estimation uncertainty and has or is reasonably likely to have a material impact on the Company’s financial condition or results of operations) relates to the allowance for credit losses. It is based on management’s opinion of an amount that is adequate to absorb losses incurred in the existing portfolio. Because of the nature of the customers under the Company’s Contracts and Direct Loan program, the Company considers the establishment of adequate reserves for credit losses to be imperative.

The Company uses trailing twelve-month net charge-offs as a percentage of average finance receivables, and applies this calculated percentage to ending finance receivables to calculate estimated future probable credit losses for purposes of determining the allowance for credit losses. The Company then takes into consideration the composition of its portfolio, current economic conditions, estimated net realizable value of the underlying collateral, historical loan loss experience, delinquency, non-performing assets, and bankrupt accounts and adjusts the above, if necessary, to determine management’s total estimate of probable credit losses and its assessment of the overall adequacy of the allowance for credit losses. Management utilizes significant judgment in determining probable incurred losses and in identifying and evaluating qualitative factors. This approach aligns with the Company’s lending policies and underwriting standards.

If the allowance for credit losses is determined to be inadequate, then an additional charge to the provision is recorded to maintain adequate reserves based on management’s evaluation of the risk inherent in the loan portfolio. Conversely, the Company could identify abnormalities in the composition of the portfolio, which would indicate the calculation is overstated and management judgment may be required to determine the allowance of credit losses for both Contracts and Direct Loans.

Contracts are purchased from many different dealers and are all purchased on an individual Contract-by-Contract basis. Individual Contract pricing is determined by the automobile dealerships and is generally the lesser of the applicable state maximum interest rate, if any, or the maximum interest rate which the customer will accept. In most markets, competitive forces will drive down Contract rates from the maximum rate to a level where an individual competitor is willing to buy an individual Contract. The Company generally purchases Contracts on an individual basis.

The Company has detailed underwriting guidelines it utilizes to determine which Contracts to purchase. These guidelines are specific and are designed to provide reasonable assurance that the Contracts purchased have common risk characteristics.

Introduction

The Company finances primary transportation to and from work for the subprime borrower. We do not finance luxury cars, second units or recreational vehicles, which are the first payments customers tend to skip in time of economic insecurity. We finance the main and often only vehicle in the household that is needed to get our customers to and from work. The amounts we finance are much lower than most of our competitors, and therefore the payments are significantly lower, too. The combination of financing a “need” over a “want” and making that loan on comparatively affordable terms incentivizes our customers to prioritize their account with us.

For the three months ended December 31, 2022, the dilutive loss per share was $1.85 as compared to dilutive loss per share of $0.09 for the three months ended December 31, 2021. Net loss was $13.4 million for the three months ended December 31, 2022 as compared to net loss of $0.7 million for the three months ended December 31, 2021. Interest and fee income on finance receivables decreased 7.9% to $11.3 million for the three months ended December 31, 2022 as compared to $12.2 million for the three months ended December 31, 2021. Provision for credit losses increased 541.6% to $10.7 million for the three months ended December 31, 2022 as compared to $1.7 million for the three months ended December 31, 2021.

For the nine months ended December 31, 2022, the dilutive loss per share was $2.49 as compared to dilutive earnings per share of $0.34 for the nine months ended December 31, 2021. Net loss was $18.3 million for the nine months ended December 31, 2022 as compared to net income of $2.6 million for the nine months ended December 31, 2021. Interest and fee income on
finance receivables decreased 4.7% to $35.6 million for the nine months ended December 31, 2022 as compared to $37.4 million
for the nine months ended December 31, 2021. Provision for credit losses increased 513.1% to $23.3 million for the nine months
ended December 31, 2022 as compared to $3.8 million for the nine months ended December 31, 2021.

Non-GAAP financial measures

From time-to-time the Company uses certain financial measures derived on a basis other than generally accepted accounting principles (“GAAP”), primarily by excluding from a comparable GAAP measure certain items the Company does not consider to be representative of its actual operating performance. Such financial measures qualify as “non-GAAP financial measures” as defined in SEC rules. The Company uses these non-GAAP financial measures in operating its business because management believes they are less susceptible to variances in actual operating performance that can result from the excluded items and other infrequent charges. The Company may present these financial measures to investors because management believes they are useful to investors in evaluating the primary factors that drive the Company’s core operating performance and provide greater transparency into the Company’s results of operations. However, items that are excluded and other adjustments and assumptions that are made in calculating these non-GAAP financial measures are significant components to understanding and assessing the Company’s financial performance. Such non-GAAP financial measures should be evaluated in conjunction with, and are not a substitute for, the Company’s GAAP financial measures. Further, because these non-GAAP financial measures are not determined in accordance with GAAP and are, thus, susceptible to varying calculations, any non-GAAP financial measures, as presented, may not be comparable to other similarly titled measures of other companies.


	Three months ended December 31, (In thousands)						Nine months ended December 31, (In thousands)
	2022			2021			2022			2021
Portfolio Summary
Average finance receivables (1)	$	165,783		$	176,949		$	174,004		$	179,333
Average indebtedness (2)	$	52,577		$	64,824		$	59,739		$	72,002
Interest and fee income on finance receivables	$	11,268		$	12,240		$	35,580		$	37,406
Interest expense		1,239			2,613			2,782			4,923
Net interest and fee income on finance receivables	$	10,029		$	9,627		$	32,798		$	32,483
Portfolio yield (3)		27.19	%		27.67	%		27.26	%		27.81	%
Interest expense as a percentage of average finance receivables		2.99	%		5.91	%		2.13	%		3.66	%
Provision for credit losses as a percentage of average finance receivables		25.89	%		3.79	%		17.84	%		2.83	%
Net portfolio yield (3)		(1.69	)%		17.98	%		7.29	%		21.32	%
Operating expenses as a percentage of average finance receivables (4)		23.34	%		20.04	%		20.30	%		18.68	%
Pre-tax yield as a percentage of average finance receivables (5)		(25.03	)%		(2.06	)%		(13.01	)%		2.64	%
Net charge-off percentage (6)		16.57	%		5.67	%		8.79	%		4.70	%
Finance receivables							$	155,213		$	176,173
Allowance percentage (7)								7.06	%		2.06	%
Total reserves percentage (8)								10.78	%		6.00	%

Note: All three-month and nine-month of income performance indicators expressed as percentages have been annualized.

(1)

Average finance receivables represent the average of finance receivables throughout the period. (This is considered a non-GAAP financial measure).

(2)

Average indebtedness represents the average outstanding borrowings under the Credit Facility. (This is considered a non-GAAP financial measure).

(3)

Portfolio yield represents interest and fee income on finance receivables as a percentage of average finance receivables. Net portfolio yield represents (a) interest and fee income on finance receivables minus (b) interest expense minus (c) the provision for credit losses, as a percentage of average finance receivables. (This is considered a non-GAAP financial measure).

(4)

Operating expenses as presented include restructuring cost of approximately $3.2 million. Operating expenses net of restructuring cost (a non-GAAP financial measure), as a percentage of average finance receivable would have been 15.52% and 17.82% for the three and nine months ended December 31, 2022, respectively.

(5)

Pre-tax yield represents net portfolio yield minus operating expenses (marketing, salaries, employee benefits, depreciation, and administrative), as a percentage of average finance receivables. (This is considered a non-GAAP financial measure).

(6)

Net charge-off percentage represents net charge-offs (charge-offs less recoveries) divided by average finance receivables outstanding during the period. (This is considered a non-GAAP financial measure).

(7)

Allowance percentage represents the allowance for credit losses divided by finance receivables outstanding as of ending balance sheet date.

(8)

Total reserves percentage represents the allowance for credit losses, purchase price discount, and unearned dealer discounts divided by finance receivables outstanding as of ending balance sheet date.

Analysis of Credit Losses

The Company uses a trailing twelve-month charge-off analysis to calculate the allowance for credit losses and takes into consideration the composition of the portfolio, current economic conditions, estimated net realizable value of the underlying collateral, historical loan loss experience, delinquency, non-performing assets, and bankrupt accounts when determining management’s estimate of probable credit losses and adequacy of the allowance for credit losses. By including recent trends such as delinquency, non-performing assets, and bankruptcy in its determination, management believes that the allowance for credit losses reflects the current trends of incurred losses within the portfolio and is better aligned with the portfolio’s performance indicators.

Non-performing assets are defined as accounts that are contractually delinquent for 61 or more days past due or Chapter 13 bankruptcy accounts. For these accounts, the accrual of interest income is suspended, and any previously accrued interest is reversed.

Upon notification of a bankruptcy, an account is monitored for collection with other Chapter 13 accounts. In the event the debtors’ balance is reduced by the bankruptcy court, the Company will record a loss equal to the amount of principal balance reduction. The remaining balance will be reduced as payments are received by the bankruptcy court. In the event an account is dismissed from bankruptcy, the Company will decide based on several factors, whether to begin repossession proceedings or allow the customer to begin making regularly scheduled payments.

Beginning March 31, 2018, the Company allocated a specific reserve for the Chapter 13 bankruptcy accounts using a look back method to calculate the estimated losses. Based on this look back, management calculated a specific reserve of approximately $110 thousand for these accounts as of December 31, 2022.

The provision for credit losses increased to $10.7 million for the three months ended on December 31, 2022, from $8.9 million for the three months ended on September 30, 2022, and $1.7 million for the three months ended on December 31, 2021, due to a substantial increase in the net charge-off percentage. The net charge-off percentage increased to 16.57% for the three months ended on December 31, 2022, from 12.4% for the three months ended on September 30, 2022, and 5.67% for the three months ended on December 31, 2021, primarily driven by increased delinquencies and loan defaults. (See note 6 in the Portfolio Summary table in the “Introduction” above for the definition of net charge-off percentage). Management attributes these increased delinquencies and loan defaults primarily to the fact that the beneficial impact of the government’s prior COVID-19-related assistance to the Company’s customers had subsided at a time when those customers began facing increased inflationary pressures affecting their cost of living, and expects that the net charge-off percentage will remain, for the foreseeable future, at levels higher than those experienced in prior years for the same reasons.

The delinquency percentage for Contracts more than twenty-nine days past due, excluding Chapter 13 bankruptcy accounts, as of December 31, 2022 was 21.1%, an increase from 10.3% as of December 31, 2021. The delinquency percentage for Direct Loans more than twenty-nine days past due, excluding Chapter 13 bankruptcy accounts, as of December 31, 2022 was 19.5%, an increase from 4.3% as of December 31, 2021. The changes in delinquency percentage for both Contracts and Direct Loans was driven primarily by market and economic pressure and its adverse impact on consumers.

In accordance with our policies and procedures, certain borrowers qualify for, and the Company offers, one-month principal payment deferrals on Contracts and Direct Loans.

Three months ended December 31, 2022 compared to three months ended December 31, 2021

Interest and Fee Income on Finance Receivables

Interest and fee income on finance receivables, which consist predominantly of finance charge income, decreased 7.9% to $11.3 million for the three months ended December 31, 2022, from $12.2 million for the three months ended December 31, 2021. The decrease was primarily due to an increased level of charged off accounts as discussed above. The Company also reduced its originations of Contracts and discontinued originating Direct Loans pursuant to its restructuring plan.

The portfolio yield decreased to 27.2% for the three months ended December 31, 2022, compared to 27.7% for the three months ended December 31, 2021. The net portfolio yield decreased to (1.7)% for the three months ended December 31, 2022, compared to 18.0% for the three months ended December 31, 2021. The substantial erosion in net portfolio yield was primarily caused by the significant increase in the provision for credit losses, as described under “Analysis of Credit Losses” and the change in the Company's operating strategy.

As part of the Company’s restructuring and change in operating strategy disclosed above, management expects that operating expenses will decline as the Company transitions its servicing and collections activities to Westlake under the Servicing Agreement, although the effects of this decline will likely not begin materializing until the fourth quarter of fiscal year 2023. The Company estimates that administrative costs with respect to the initial pool of receivables serviced by Westlake will be as disclosed above under “Restructuring and Change in Operating Strategy—Exit and Disposal Activities.”

Operating Expenses

Operating expenses increased to $9.7 million for the three months ended December 31, 2022 compared to $8.9 million for the three months ended December 31, 2021. The increase in operating expenses was primarily attributed to restructuring cost associated with branch closures, severance expenses, impairment charges for leased assets and cease-use of contractual services, for the total of $3.2 million, and to boarding and servicing fees paid to Westlake under our servicing agreement with them and reported under administrative expense of $0.6 million. These factors more than offset the beneficial effects of the decrease in salary and wages as a result of the Company’s headcount reduction. Similarly, operating expenses as a percentage of average finance receivables, also increased to 23.3% for the three months ended December 31, 2022 from 20.0% for the three months ended December 31, 2021 as a result of the factors above and a decrease in the average receivables balance.

Provision Expense

The provision for credit losses increased to $10.7 million for the three months ended December 31, 2022 from $1.7 million for the three months ended December 31, 2021, largely due to an increase in the net charge-off percentage to 16.6% for the three months ended December 31, 2022 from 5.7% for the three months ended December 31, 2021.

Interest Expense

Interest expense was $1.2 million for the three months ended December 31, 2022 and $2.6 million for the three months ended December 31, 2021. The following table summarizes the Company’s average cost of borrowed funds:


	Three months ended December 31,						Nine months ended December 31,
	2022			2021			2022			2021
Variable interest under the line of credit facility		3.63	%		1.00	%		2.15	%		1.00	%
Credit spread under the line of credit facility		4.40	%		3.75	%		2.97	%		3.75	%
Average cost of borrowed funds		8.03	%		4.75	%		5.12	%		4.75	%

SOFR rates have increased to 4.12%, which represented the daily SOFR rate as required under the WF Credit Agreement, as of December 31, 2022 compared to 0.14% as of December 31, 2021. For further discussions regarding interest rates see “Note 5. Credit Facility”.

On October 20, 2022, the Company received a letter from the agent of its lenders notifying the Company that it was instituting the default rate of interest of 2.5% imposed effective as of August 31, 2022 in connection with an event of default that occurred by virtue of the Company's failure to comply with Section 6.3(a) of the Loan Agreement (EBITDA Ratio) for the calendar month ending August 31, 2022.

The Company subsequently announced on Form 8-K filed on December 12, 2022 that it entered into an amendment to the WF Credit Agreement. Pursuant to the amendment, the lenders waived the event of default, and the default rate of interest ceased being applicable as of December 6, 2022.

The amendment furthermore reduced the maximum amount available under the WF Credit Facility from $175 million to $60 million, reduced the availability of funds from an advance rate of between 80% and 85% of the value of eligible receivables to an advance rate of 50% of the value of eligible receivables, and changed the maturity date of the WF Credit Facility from November 5, 2024 to May 31, 2023. The Company incurred non-refundable overall costs associated with the restructuring in the amount of $0.3 million.

As described under “Westlake Loan Agreement” above and “Liquidity and Capital Resources” below, on January 18 , 2023, the Company entered into a Loan and Security Agreement (the “Loan Agreement”) with Westlake, pursuant to which Westlake is providing the Company a senior secured revolving credit facility in the principal amount of up to $50 million (the “Credit Facility”). This Credit Facility bears interest at higher rates than did the WF Credit Agreement. For the quarter ending March 31, 2023, the Company expects to incur interest payments between $0.7 million and $0.9 million.

Income Taxes

The Company established a valuation allowance for deferred tax asset in the amount of $5.7 million during the three months ended December 31, 2022, which resulted in the income tax expense of approximately $3.0 million for the three months ended December 31, 2022 compared to income tax benefit of approximately $209 thousand for the three months ended December 31, 2021. The Company’s effective tax rate decreased to -29.1% for the three months ended December 31, 2022 from 22.9% for the three months ended December 31, 2021.

Nine months ended December 31, 2022 compared to nine months ended December 31, 2021

Interest Income and Loan Portfolio

Interest and fee income on finance receivables, decreased 4.7% to $35.6 million for the nine months ended December 31, 2022 from $37.4 million for the nine months ended December 31, 2021. The decrease was partly due to a lower average discount and a 3.0% decrease in average finance receivables to $174.0 million for the nine months ended December 31, 2022 when compared to $179.3 million for the corresponding period ended December 31, 2021. The decrease in average finance receivables was primarily due to the Company's commitment to maintaining its conservative underwriting practices, which typically allows more aggressive competitors to purchase a contract from a dealer.

The portfolio yield decreased to 27.3% for the nine months ended December 31, 2022 compared to 27.8% for the nine months ended December 31, 2021. The net portfolio yield decreased to 7.3% for the nine months ended December 31, 2022 compared to 21.3% for the nine months ended December 31, 2021, respectively. The substantial erosion in net portfolio yield was primarily caused by the significant increase in the provision for credit losses, as described under “Analysis of Credit Losses” and the change in the Company's operating strategy.

Operating Expenses

Operating expenses increased to approximately $26.5 million for the nine months ended December 31, 2022 from approximately $25.1 million for the nine months ended December 31, 2021. Operating expenses as a percentage of average finance receivables increased to 20.3% for the nine months ended December 31, 2022 from 18.7% for the nine months ended December 31, 2021. The increase in operating expenses was primarily attributed to restructuring cost associated with branch closures, severance expenses, impairment charges for leased assets and cease-use of contractual services, for the total of approximately $4.0 million, and to boarding and servicing fees paid to Westlake under our servicing agreement with them and reported under administrative expense of $0.6 million. These factors more than offset the beneficial effects of the decrease in salary and wages as a result of the Company’s headcount reduction.

Provision Expense

The provision for credit losses increased to $23.3 million for the nine months ended December 31, 2022 from $3.8 million for the nine months ended December 31, 2021, largely due to an increase in the net charge-off percentage to 8.8% for the nine months ended December 31, 2022 from 4.7% for the nine months ended December 31, 2021.

Interest Expense

Interest expense was $2.8 million for the nine months ended December 31, 2022 and $4.9 million for the nine months ended December 31, 2021. The decrease in interest expense was primarily driven by a reduced amount of average indebtedness to $59.7 million from $72.0 million for the nine month ended December 31, 2022 and 2021, respectively.

Income Taxes

The Company established a valuation allowance for deferred tax asset in the amount of $5.7 million during the three months ended December 31, 2022, which resulted in income tax expense of approximately $1.4 million for the nine months ended December 31, 2022 compared to income tax expense of approximately $0.9 million for the nine months ended December 31, 2021. The Company’s effective tax rate decreased to -8.42% for the nine months ended December 31, 2022 from 26.0% for the nine months ended December 31, 2021.

Contract Procurement

As of December 31, 2022, the Company purchased Contracts in the states listed in the table below. The Contracts purchased by the Company are predominantly for used vehicles for the three-month periods ended December 31, 2022 and 2021, less than 1% were for new vehicles.

The following tables present selected information on Contracts purchased by the Company.


	As of December 31,	Three months ended December 31,				Nine months ended December 31,
	2022	2022		2021		2022		2021
State	Number of branches	Net Purchases (In thousands)				Net Purchases (In thousands)
FL	-	$	955	$	3,388	$	9,582	$	9,621
OH	-		571		2,539		6,773		8,677
GA	-		416		2,247		5,103		7,664
KY	-		175		1,003		2,796		3,802
MO	-		292		1,135		2,841		3,920
NC	-		227		1,752		3,977		4,710
IN	-		208		1,071		2,326		3,150
SC	-		575		1,376		2,893		3,587
AL	-		393		911		2,919		2,695
MI	-		35		800		549		2,103
NV	-		47		557		1,150		1,751
TN	-		288		486		1,203		1,449
IL	-		157		356		1,109		1,102
PA	-		59		622		1,139		1,354
TX	-		—		516		594		1,178
WI	-		—		312		344		832
ID	-		8		186		343		560
UT	-		8		69		102		300
AZ	-		39		154		128		210
KS	-		57		-		75		-
Total	-	$	4,511	$	19,480	$	45,947	$	58,665


	Three months ended December 31, (Purchases in thousands)						Nine months ended December 31, (Purchases in thousands)
Contracts	2022			2021			2022			2021
Purchases	$	4,511		$	19,480		$	45,947		$	58,665
Average APR		22.4	%		23.1	%		22.7	%		23.1	%
Average discount		6.8	%		6.8	%		6.6	%		6.8	%
Average term (months)		48			47			48			47
Average amount financed	$	11,778		$	11,228		$	11,765		$	10,906
Number of Contracts		383			1,735			3,913			5,389

Direct Loan Origination

The following table presents selected information on Direct Loans originated by the Company.


Direct Loans	Three months ended December 31, (Originations in thousands)						Nine months ended December 31, (Originations in thousands)
Originated	2022			2021			2022			2021
Purchases/Originations	$	1,080		$	8,505		$	15,822		$	21,282
Average APR		29.6	%		31.8	%		30.4	%		30.6	%
Average term (months)		27			24			26			25
Average amount financed	$	4,128		$	3,727		$	4,277		$	4,173
Number of loans		245			2,282			3,662			5,186

Liquidity and Capital Resources

The Company’s cash flows are summarized as follows:


	Nine months ended December 31, (In thousands)
	2022			2021
Cash provided by (used in):
Operating activities	$	(933	)	$	1,902
Investing activities		13,018			6,757
Financing activities		(15,946	)		(35,106	)
Net decrease in cash	$	(3,861	)	$	(26,447	)

The Company’s primary use of working capital for the quarter ended December 31, 2022 was funding the purchase of Contracts, which are financed substantially through cash from principal and interest payments received, and the Company’s line of credit.

Please refer to “Note 5 – Credit Facility” for disclosure on the Company’s prior credit facility with Wells Fargo under the WF Credit Agreement, which disclosure is incorporated herein by reference.

On January 18 , 2023, the Company through its subsidiaries, entered into a Loan and Security Agreement (the “Loan Agreement”) with Westlake, pursuant to which Westlake is providing the Company a senior secured revolving credit facility in the principal amount of up to $50 million (the “Credit Facility”).

The availability of funds under the Credit Facility is generally limited to an advance rate of between 70% and 85% of the value of the Company's eligible receivables. Outstanding advances under the Credit Facility will accrue interest at a rate equal to the secured overnight financing rate (SOFR) plus a specified margin, subject to a specified floor interest rate. For the quarter ending March 31, 2023, the Company expects to incur interest payments between $0.7 million and $0.9 million. Unused availability under the Credit Agreement will accrue interest at a low interest rate. The commitment period for advances under the Credit Facility is two years. We refer to the expiration of that time period as the “Maturity Date.”

The Loan Agreement contains customary events of default and negative covenants, including but not limited to those governing indebtedness, liens, fundamental changes, and sales of assets. The Loan Agreement also requires the Company to maintain (i) a minimum tangible net worth equal to the lower of $40 million and an amount equal to 60% of the outstanding balance of the Credit Facility and (ii) an excess spread ratio of no less than 8.0%. Pursuant to the Loan Agreement, the Company granted a security interest in substantially all of their assets as collateral for their obligations under the Credit Facility. If an event of default occurs, Westlake could increase borrowing costs, restrict the the Company's ability to obtain additional advances under the Credit Facility, accelerate all amounts outstanding under the Credit Facility, enforce their interest against collateral pledged under the Loan Agreement or enforce such other rights and remedies as they have under the loan documents or applicable law as secured lenders.

Maturity Date, then the Company would be obligated to pay Westlake a fee in an amount equal to a specified percentage of the proceeds of such sale.

On January 18, 2023, in connection with entering into the Loan Agreement, the Company terminated the WF Credit Agreement, and the indebtedness under that agreement (consisting of a revolving line of credit in a maximum principal amount of $60 million (with an outstanding balance of approximately $43 million)) was repaid in full. The Company did not incur any termination penalties in connection with the termination of the WF Credit Agreement.

The Company has begun its restructuring process to substantially decrease operating expenses and is developing a strategy with respect to its long-term use of cash. The related disclosure contained in “Restructuring and Change in Operating Strategy” is incorporated herein by reference.

Off-Balance Sheet Arrangements

The Company does not engage in any off-balance sheet financing arrangements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not Applicable.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

In accordance with Rule 13a-15(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), as of the end of the period covered by this Quarterly Report on Form 10-Q, the Company’s management evaluated, with the participation of the Company’s President and Chief Executive Officer and Chief Financial Officer, the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Based upon their evaluation of these disclosure controls and procedures, the President and Chief Executive Officer and the Chief Financial Officer have concluded that the disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report on Form 10-Q.

Changes in internal control over financial reporting.

No change in the Company’s internal control over financial reporting occurred during the Company’s fiscal quarter ended December 31, 2022 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting, other than the following:

In connection with its restructuring and change in operating strategy, the Company has outsourced its servicing, collection and recovery operations to a third party (Westlake) and has reduced its full-time financial reporting, accounting, compliance, and clerical personnel from 23 to 7 employees, including its Chief Financial Officer. The outsourcing of servicing, collection and recovery operations affects the initiation, authorization, recording, processing and/or reporting of transactions in the Company’s financial statements.

PART II—OTHER INFORMATION

ITEM 1. Legal Proceedings

The Company currently is not a party to any pending legal proceedings other than ordinary routine litigation incidental to its business, that, if decided adversely to the Company, would, in the opinion of management, have a material adverse effect on the Company’s financial condition or results of operations.

ITEM 1A. Risk Factors

In addition to the Risk Factor below and the other information set forth in this report, especially in the section “PART I – Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Forward Looking Statements,” you should carefully consider the factors discussed in Part I “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended March 31, 2022, which could materially affect our business, financial condition or future results. The risks described in the Form 10-K are not the only risks facing the Company. Additional risks and uncertainties not currently known to the Company or that the Company currently deems to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

As part of its restructuring and change in operating strategy, the Company has outsourced its servicing, collection and recovery operations and is substantially dependent on Westlake for generation of revenue and debt financing.

As part of the Company’s restructuring and change in operating strategy, in December 2022, Westlake began servicing all receivables held by the Company under its Contracts and Direct Loans, except for charged-off and certain other receivables. The Company expects to add additional Contract receivables to the receivables pool covered under the servicing agreement with Westlake from time to time in the future, but will no longer originate Direct Loans. As a result, the Company has significantly reduced its footprint, closing all of its branches and retaining only 18 employees as of January 2023.

In January 2023, two of the Company’s subsidiaries entered into a loan agreement with Westlake, pursuant to which Westlake is providing a senior secured revolving credit facility in the principal amount of up to $50 million. This facility replaced the Company’s prior facility with Wells Fargo.

Additional details on the servicing agreement, exit and disposal activities and loan agreement are incorporated herein by reference to “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Restructuring and Change in Operating Strategy” in this quarterly report on Form 10-Q.

•

The Company’s restructuring and change in operating strategy is subject to various risks, including without limitation: the risk that anticipated benefits of the restructuring and change in operating strategy, including the servicing and financing arrangements with Westlake (including without limitation the expected reduction in overhead, streamlining of operations or reduction in compliance risk), do not materialize to the extent expected or at all, or do not materialize within the timeframe targeted by management;

•

the risk that the actual interest payments made by the Company under the Westlake loan agreement exceed the range estimated;

•

risks arising from the loss of control over servicing, collection or recovery processes that we have controlled in the past and potentially, termination of these services by Westlake (a failure of Westlake to perform their services under the servicing agreement or the loan agreement in a satisfactory manner may have a significant adverse effect on our business);

•

the risk that the Company underestimates the staffing and other resources needed to operate effectively after consolidating its workforce and closing offices;

•

uncertainties surrounding the Company’s success in developing and executing on a new business plan;

•

The materialization of any of these risks may adversely affect our results of operations or financial position, potentially to a material extent.

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

The table below sets forth the information with respect to purchase made by or on behalf of the Company or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Exchange Act) of our shares of common stock during the three months ended December 31, 2022.


	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Approximate Dollar Value of Shares that May Yet Be Purchased Under Plans or Programs
Period	(In thousands, except for average price paid per share)
October 1, 2022 to October 31, 2022		18	$	5.75		18	$	2,669
November 1, 2022 to November 30, 2022		1		6.80		1		2,662
December 1, 2022 to December 31, 2022		-		-		-		2,662
Total		19	$	6.28		19

The timing and actual number of sharers will depend on a variety of factors, including stock price, corporate and regulatory requirements and other market and economic conditions. The Company’s stock repurchase program may be suspended or discontinued at any time.

In August 2019, the Company’s Board authorized additional repurchase of up to $1.0 million of the Company’s outstanding shares.

ITEM 3. Defaults Upon Senior Securities

None.

ITEM 6. EXHIBITS


Exhibit No.		Description

10.1+		Servicing Agreement among Nicholas Financial, Inc., Nicholas Data Services, Inc. and Westlake Portfolio Management, LLC

10.2+		Loan and Security Agreement among Nicholas Financial, Inc., Nicholas Data Services, Inc. and Westlake Capital Finance, LLC

31.1		Certification of the Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of the Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.11		Certification of the Principal Executive Officer Pursuant to 18 U.S.C. § 1350

32.21		Certification of the Principal Financial Officer Pursuant to 18 U.S.C. § 1350

101.INS		Inline XBRL Instance Document

101.SCH		Inline XBRL Taxonomy Extension Schema Document

101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		Inline XBRL Taxonomy Extension Labels Linkbase Document

101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document

104		Cover Page Interactive Data File (embedded within the Inline XBRL document)

+ Portions of this exhibit have been redacted in accordance with Item 601(b)(10)(iv) of Regulations S-K.

1 This certification accompanies the Quarterly Report on Form 10-Q and is not filed as part of it.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.

NICHOLAS FINANCIAL, INC.

(Registrant)


Date: February 14, 2023		/s/ Mike Rost
		Mike Rost
		Chief Executive Officer
		(Principal Executive Officer)


Date: February 14, 2023		/s/ Irina Nashtatik
		Irina Nashtatik
		Chief Financial Officer
		(Principal Financial Officer)

***Portions of this exhibit have been redacted in accordance with Item 601(b)(10) of Regulation S-K. The information is both not material and is the type that the registrant treats as private or confidential. Confidential information would cause competitive harm to the registrant if publicly disclosed. [***] indicates that information has been redacted. ***

NICHOLAS FINANCIAL, INC.

and

WESTLAKE PORTFOLIO MANAGEMENT, LLC,
as Servicer

___________________________

SERVICING AGREEMENT

Dated as of November 3, 2022

__________________________

TABLE OF CONTENTS

Page


ARTICLE I Definitions		3
Section 1.1	Definitions	3
Section 1.2	Accounting Terms and Determinations	10
Section 1.3	Computation of Time Periods	10
Section 1.4	Interpretation	10
ARTICLE II Boarding Matters; Access to receivable files AND LIEN CERTIFICATES		11
Section 2.1	Receivables; Boarding Fee	11
Section 2.2	Custody of Receivable Files and Lien Certificates.	11
Section 2.3	Access to and Release of Receivable Files.	13
Section 2.4	Transition Procedures	13
ARTICLE III Administration and Servicing of Receivables		14
Section 3.1	Duties of the Servicer	14
Section 3.2	Collection of Receivable Payments; Modifications of Receivables	16
Section 3.3	Realization Upon Receivables	17
Section 3.4	Insurance; GAP Waivers	17
Section 3.5	Maintenance of Security Interests in Vehicles	19
Section 3.6	Additional Servicer Covenants	19
Section 3.7	Servicing Fee; Payment of Certain Expenses by Servicer	20
Section 3.8	Servicer’s Certificate	20
Section 3.9	Customer Information	21
Section 3.10	Waiver of Liens	22
ARTICLE IV Payments		23
Section 4.1	Certain Reimbursements to the Servicer	23
Section 4.2	Payment Date Matters	23
ARTICLE V The COMPANY		24
Section 5.1	Representations of the Company	24
ARTICLE VI The Servicer		25
Section 6.1	Representations of the Servicer	25
Section 6.2	Liability of Servicer; Indemnities	26
Section 6.3	Merger or Consolidation of, or Assumption of the Obligations of the Servicer	27
Section 6.4	Limitation on Liability of Servicer and Others	27
Section 6.5	Delegation of Duties	28
Section 6.6	Servicer Not to Resign; Force Majeure Event	28
ARTICLE VII Default		29
Section 7.1	Servicer Termination Event	29
Section 7.2	Consequences of a Servicer Termination Event	29
Section 7.3	Appointment of Successor Servicer	30
Section 7.4	Waiver of Past Defaults	30
ARTICLE VIII Miscellaneous Provisions		31
Section 8.1	Term	31
Section 8.2	Amendment	31
Section 8.3	Conditions Precedent	31
Section 8.4	Notices	31
Section 8.5	Out of Pocket Expenses	31


Section 8.6	Assignment	32
Section 8.7	Limitations on Rights of Others	32
Section 8.8	Confidentiality; Securities Laws	32
Section 8.9	Severability	33
Section 8.10	Separate Counterparts	33
Section 8.11	Headings	33
Section 8.12	GOVERNING LAW	34
Section 8.13	SUBMISSION TO JURISDICTION	34
Section 8.14	COSTS	34
Section 8.15	WAIVER OF JURY TRIAL	34
Section 8.16	Independence of the Servicer	34
Section 8.17	Further Assurances	34
Section 8.18	No Joint Venture	34

	SCHEDULES

Schedule A —	Schedule of Receivables	SA-1
Schedule B —	Collection Policy	SB-1
Schedule C —	Transition Procedures	SC-1
Schedule D	Information Security Requirements	SD-1

	EXHIBITS

Exhibit A—	Form of Servicer’s Certificate	A-1

iii

This SERVICING AGREEMENT dated as of November 3, 2022 (as amended, restated, supplemented or otherwise modified from time to time, this “Agreement”), is among NICHOLAS FINANCIAL, INC., a Florida corporation (“Company’), and WESTLAKE PORTFOLIO MANAGEMENT, LLC, a California limited liability company (“Servicer”), as the servicer.

WHEREAS, the Company originates and acquires Receivables.

WHEREAS, Company desires to enter into this Agreement pursuant to which Servicer will perform the servicing duties with respect to the Receivables as described herein for an on behalf of Company.

NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, the parties hereto agree as follows:

ARTICLE I
Definitions

Section 1.1 Definitions. Whenever used in this Agreement, the following words and phrases shall have the following meanings:

“Accepted Servicing Practices” means, with respect to any Receivable, those servicing practices and standards (including collection procedures) of prudent sale finance companies or lending institutions that service motor vehicle secured retail installment contracts of the same type as the Receivable in the jurisdiction where the related Financed Vehicle is titled, which in no instance shall be less than (i) the practices and standards, requirements and restrictions established by Applicable Law or (ii) to the extent in accordance with Applicable Law, the policies and practices set forth in the Collection Policy.

“Additional Servicing Compensation” means any or all of the following, to the extent applicable: (a) General Fees, (b) custodian fees of $[***] per Receivable other than Charged Off Receivables, (c) Payment Processing Fees, (d) repossession surcharges of $[***] per repossessed Financed Vehicle, and (e) an amount corresponding to [***]% of Post Charge Off Collections.

“Additional Receivables” means Receivables that are added to the coverage of this Agreement as agreed upon by the Company and the Servicer on one or more Additional Receivables Coverage Dates.

“Additional Receivables Coverage Date” means a date agreed upon by the Company and the Servicer upon which additional Receivables will be covered by, and serviced by the Servicer pursuant to, this Agreement.

“Affiliate” means, with respect to any specified Person, any other Person controlling or controlled by or under common control with such specified Person. For the purposes of this definition, “control” when used with respect to any Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms “controlling” and “controlled” have meanings correlative to the foregoing. A Person shall not be deemed to be an Affiliate of any Person solely because such other Person has the contractual right or obligation to manage such Person unless such other Person controls such Person through equity ownership or otherwise.

“Amount Financed” means, with respect to a Receivable, the aggregate amount advanced under such Receivable toward the purchase price of the Financed Vehicle and any related costs, including amounts advanced in respect of accessories, insurance premiums, voluntary debt cancellation coverage addenda, other items customarily financed as part of motor vehicle retail installment contracts, and related costs.

“Applicable Law” means all requirements of applicable federal, State and local laws and regulations, except for requirements that do not affect the enforceability of the Receivables and that do not impose any liability on the Servicer or the Company.

“APR” of a Receivable means the annual percentage rate of finance charges or service charges, as stated in the related Contract.

“Authoritative Copy” means, with respect to any Electronic Contract, a copy of such Electronic Contract that is unique, identifiable and, except as otherwise provided in Section 9-105 of the UCC, unalterable and has no watermark or other marking that would indicate that it is a “copy” or “duplicate” or not an original or not an “authoritative” copy.

“Base Servicing Fee” means a dollar amount equal to 3.25% per annum of the Pool Balance.

“Boarding Fee” means a nonrefundable fee in the amount equal to, in the case of (i) the Initial Receivables, [***]% of the Pool Balance, not to exceed [***]Dollars ($[***]) and (ii) any Additional Receivables, [***] Dollars ($[***]) for each such Additional Receivable, excluding Charged Off Receivables.

“Business Day” means any day other than a Saturday, a Sunday, a legal holiday or other day on which commercial banking institutions located in Los Angeles, California, or any other location of any successor Servicer are authorized or obligated by law, executive order or governmental decree to be closed.

“Charged Off Receivable” means a Receivable for which all or a portion of any payment due and owing thereon is more than one hundred twenty (120) days past due on the last day of a Collection Period. A Charged Off Receivable will no longer accrue interest and the Servicer will report the charged off status to credit bureaus as applicable.

“Closing Date” means November 3, 2022, or the first Business Day thereafter on which all conditions to the effectiveness of this Agreement have been satisfied.

“Collection Account” means the collection account of the Company’s subsidiary, NF Funding I, LLC, ending in [***] maintained at Wells Fargo Bank, N.A., into which Collections will be deposited pursuant to this Agreement, whether directly or from deposit from amounts on deposit in the Westlake Account.

“Collection Period” means, with respect to (i) the First Payment Date, the period beginning on the Closing Date and ending on, and including, the last day of the related calendar month, and (ii) each subsequent Payment Date, the immediately preceding calendar month.

“Collection Policy” means the policies and procedures of the Servicer provided to the Company and described on Schedule B, as such policies and procedures may be updated by the Servicer and agreed to by the Company from time to time.

“Collection Records” means all manually prepared or computer-generated records relating to collection efforts or payment histories with respect to the Receivables.

“Collections” means, with respect to any Payment Date, all monies collected by the Servicer on or in respect of the Receivables and the Financed Vehicles during the related Collection Period, including Insurance Proceeds, Net Liquidation Proceeds, Recoveries and Post Charge Off Collections.

“Company” has the meaning set forth in the recitals.

“Company Indemnified Parties” has the meaning set forth in Section 6.2(c).

“Contract” means a motor vehicle retail installment contract executed by an Obligor for a Financed Vehicle under which an extension of credit (i.e., a Receivable) by its originator was made in the ordinary course of business to such Obligor, which is secured by such Financed Vehicle, and which, for the sake of clarity, may consist of a contract originated by the Company as a direct loan or a contract originated by a third party and subsequently purchased by the Company.

“Cram Down Loss” means, with respect to a Receivable that has not become a Charged Off Receivable, if a court of appropriate jurisdiction in a proceeding related to an Insolvency Event shall have issued an order reducing the amount owed on the Receivable or otherwise modifying or restructuring the related Scheduled Payments, an amount equal to (i) the excess of the Principal Balance of such Receivable immediately prior to such order over the Principal Balance of such Receivable as so reduced and/or (ii) if such court shall have issued an order reducing the effective rate of interest on such Receivable, the excess of the Principal Balance of

such Receivable immediately prior to such order over the net present value (using as the discount rate the higher of the APR on such Receivable or the rate of interest, if any, specified by the court in such order) of the Scheduled Payments as so modified or restructured. A “Cram Down Loss” shall be deemed to have occurred on the date of issuance of such order.

“Customer Information” means, with respect to the Receivables and the related Financed Vehicles, each Obligor’s name, address, telephone numbers and all account and other information, including payment information, regarding such Obligor, the related Receivable and Financed Vehicle and all records, data and information pertaining to the foregoing.

“Cutoff Date” means, with respect to (i) the Initial Receivables, and (ii) any Additional Receivables, the date agreed upon between the Company and the Servicer.

“Data Breach” means any actual, suspected or threatened breaches of the security or confidentiality of any Customer Information within the Servicer’s possession, control or that the Servicer is otherwise obligated to maintain under this Agreement.

“Disposition Expenses” means customary and reasonable actual out of pocket expenses incurred and paid by the Servicer to unaffiliated third parties in disposing of a repossessed Financed Vehicle (not including overhead) and may include impound fees, storage fees, transport fees, cleaning expenses, auction fees, applicable legal fees and other related costs.

“Electronic Contract” means a Contract that constitutes “electronic chattel paper” under and as defined in Section 9-102(a)(31) of the UCC.

“Exchange Act” has the meaning set forth in Section 8.8(c).

“Financed Vehicle” means an automobile, sport utility vehicle, light duty truck or van, or any other type of motor vehicle, together with all accessions thereto, securing an Obligor’s indebtedness under the related Receivable.

“First Payment Date” means the 15th day of the calendar month immediately following the month in which the Closing Date occurs, or, if such day is not a Business Day, the immediately succeeding Business Day.

“Force Majeure Event” means fire, flood, earthquake, elements of nature of acts of God, acts of war, acts of a public enemy, acts of a nation or any state, territory, province or other political division, terrorism, riots, civil disorders, rebellions or revolutions, epidemics, theft, quarantine restrictions, freight embargoes or any other similar cause beyond the reasonable control and without the fault or negligence of the Servicer.

“GAAP” means generally accepted accounting principles in effect in the United States.

“GAP Waiver” means, with respect to any Receivable, any voluntary debt cancellation coverage obtained by an Obligor pursuant to the related Contract and financed as part of such Receivable.

“General Fees” means late fees, prepayment fees, NSF fees and similar fees specified in the related Contracts collected from the Obligors pursuant to such Contracts.

“Information Security Requirements” has the meaning set forth in Section 3.9(a).

“Initial Receivables” means the Receivables covered by this Agreement as of the Closing Date.

“Insolvency Event” means, with respect to a specified Person, (i) the filing of a petition against such Person or the entry of a decree or order for relief by a court having jurisdiction in the premises in respect of such Person or any substantial part of its property in an involuntary case under any Insolvency Law, or appointing a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official for such Person or for any substantial part of its property, or ordering the winding-up or liquidation or such Person’s affairs, and such petition, decree or order shall remain unstayed and in effect for a period of 60 consecutive days; or (ii) the commencement by such Person of a voluntary case under any Insolvency Law, or the consent by such Person to the entry of an order for relief in an involuntary case under any such law, or the consent by such Person to the appointment of or taking possession by, a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official for such Person or for any substantial part of its property, or the making by such Person of any general assignment for the benefit of creditors, or the failure by such Person generally to pay its debts as such debts become due, or the taking of action by such Person in furtherance of any of the foregoing.

“Insolvency Laws” means the Bankruptcy Code and all other applicable liquidation, conservatorship, bankruptcy, moratorium, arrangement, rearrangement, receivership, insolvency, reorganization, suspension of payments, marshaling of assets and liabilities or similar debtor relief laws from time to time in effect affecting the rights of creditors generally.

“Insolvency Proceeding” means, with respect to any Person, any bankruptcy, insolvency, arrangement, rearrangement, conservatorship, moratorium, suspension of payments, readjustment of debt, reorganization, receivership, liquidation, marshaling of assets and liabilities or similar proceeding of or relating to such Person under any Insolvency Laws.

“Insurance Policy” means, with respect to a Receivable, any insurance policy benefiting the holder of such Receivable providing loss or physical damage, credit life, credit disability, theft, mechanical breakdown or similar coverage with respect to the related Financed Vehicle or Obligor.

“Insurance Proceeds” means any proceeds from claims on any Insurance Policy.

“Lien” means a security interest, lien, charge, pledge, equity or encumbrance of any kind, other than tax liens, mechanics’ liens and any liens that attach to a Financed Vehicle by operation of law as a result of any act or omission by the Servicer.

“Lien Certificate” means, with respect to a Financed Vehicle, an original certificate of title (or an electronic copy thereof), certificate of lien or other notification issued by the Registrar of Titles of the applicable State to a secured party which indicates that the lien of the secured party on the Financed Vehicle is recorded on the original certificate of title. In any jurisdiction in which the original certificate of title is required to be given to the Obligor, the term “Lien Certificate” shall mean only a certificate or notification issued to a secured party. For Financed Vehicles registered in States which issue confirmation of the lienholder’s interest electronically, the “Lien Certificate” may consist of notification of an electronic recordation, by either a third-party service provider or the relevant Registrar of Titles of the applicable State, which indicates that the lien of the secured party on the Financed Vehicle is recorded on the original certificate of title on the electronic lien and title system of the applicable State.

“Liquidation Proceeds” means, with respect to a Charged Off Receivable, all amounts (other than Insurance Proceeds) received in connection with the liquidation of such Receivable, whether through the sale or assignment of such Receivable, the sale by the Servicer or otherwise, including the sale or other disposition of the related Financed Vehicle.

“Monthly Records” means all records and data maintained by the Servicer with respect to the Receivables, including, with respect to each Receivable, (i) the account number, (ii) the originating party, (iii)

Obligor name, (iv) Obligor address, (v) Obligor home phone number, (vi) Obligor business phone number, (vii) original term, (viii) APR, (ix) Principal Balance as of the Cutoff Date, (x) current remaining term, (xi) origination date, (xii) first payment date, (xiii) final scheduled payment date, (xiv) next payment due date, (xv) date of most recent payment, (xvi) new/used classification, (xvii) collateral description, (xviii) days currently delinquent, (xix) number of contract extensions (months) to date, (xx) amount of Scheduled Payment, (xxi) past due late charges and (xxii) if applicable, repossession and payoff history.

“Net Liquidation Proceeds” means, with respect to a Charged Off Receivable, Liquidation Proceeds net of (i) reasonable and actual out-of-pocket expenses incurred by the Servicer in connection with the collection of such Charged Off Receivable and the repossession and disposition of the related Financed Vehicle (excluding overhead and expenses incurred in the normal course of business) and (ii) amounts that are required to be refunded to the related Obligor; provided, however, that the Net Liquidation Proceeds with respect to any Charged Off Receivable shall in no event be less than zero.

“Obligor” on a Receivable means the purchaser or co-purchasers of the related Financed Vehicle and any other Person who owes payments under such Receivable, including any guarantor.

“Original Pool Balance” means the aggregate Principal Balance of the Initial Receivables as of the Cutoff Date.

“Out of Pocket Expenses” means the expenses described in section 8.5 of this Agreement.

“Payment Date” means (i) the First Payment Date and (ii) with respect to each calendar month following the month in which the First Payment Date occurs, the 15th day of such calendar month, or, if such day is not a Business Day, the immediately succeeding Business Day.

“Payment Processing Fees” means processing fees charged by the Servicer to Obligors and/or incurred by the Servicer from a third party pursuant to the related Contracts electing certain payment options.

“Person” means any individual, corporation, estate, partnership, limited liability company, joint venture, association, joint stock company, trust (including any beneficiary thereof), unincorporated organization or government or any agency or political subdivision thereof.

“Pool Balance” means, as of any date of determination, the aggregate Principal Balance of the Receivables (excluding Charged Off Receivables) at the end of the preceding Collection Period.

“Post Charge Off Collections” means, with respect to any Receivable that became a Charged Off Receivable (i) prior to the date the related Financed Vehicle was repossessed, Collections and (ii) after the date the related Financed Vehicle was repossessed, Collections less all related Net Liquidation Proceeds.

“Principal Balance” means, with respect to any Receivable, as of any date, the sum of (i) the Amount Financed minus (ii) the sum of (a) that portion of all amounts received on or prior to such date and allocable to principal in accordance with the terms of such Receivable, (b) any related Cram Down Loss and (c) any reduction of the Principal Balance in accordance with Section 3.4(c).

“Receivable File” means, with respect to a Receivable, copies of (i) the related Obligor’s credit application, (ii) the Contract, (iii) the bill of sale, (iv) the Lien Certificate and such other documents, if any, that the Company keeps on file in accordance with its customary procedures indicating that the Financed Vehicle is owned by the Obligor and subject to the interest of the Company as first lienholder or secured party, or, if such Lien Certificate has not yet been received, a copy of the application, receipt or other evidence of title therefor, showing the originator or the Company as secured party, (v) the voluntary debt cancellation coverage addendum

or proof of insurance, (vi) references provided by the Obligor, (vii) any notice of intent to dispose of the Financed Vehicle with applicable proof of mailing, (viii) any notice of deficiency balance/surplus and (ix) such other documents as the Servicer shall keep on file in accordance with its customary procedures relating to a Receivable and as needed in order to accomplish its duties under this Agreement.

“Receivables” means all rights to receive payments under all indebtedness owed to Company by an Obligor under a Contract, whether constituting an account, chattel paper or general intangible, arising out of or in connection with the refinancing or loan made by Company (or a predecessor in interest to Company) with respect to a Financed Vehicle in connection therewith, and includes the right of payment of any finance charges and other obligations of such Obligor with respect thereto, but excluding any such indebtedness that as of the Closing Date (i) is a Charged Off Receivable or (ii) has not yet become a Charged Off Receivable if the related Obligor is subject to any Insolvency Proceeding, in each case which are subject to this Agreement. A schedule of the Initial Receivables as of the Closing Date appears in Schedule A, which schedule will be updated by a schedule of all Additional Receivables as of the related Additional Receivables Coverage Date.

“Recoveries” means, with respect to any Charged Off Receivable, (i) the sum of all (a) Net Liquidation Proceeds, (b) Insurance Proceeds and (c) other monies received from the related Obligor that is allocable to principal, interest, fees and expenses due under such Receivable, minus (ii) all payments required by Applicable Law to be remitted to the related Obligor.

“Recovery Expenses” means, with respect to a Charged Off Receivable, all (i) Repossession Expenses and (ii) Disposition Expenses.

“Registrar of Titles” means, with respect to any State, the governmental agency or body responsible for the registration of, and the issuance of certificates of title relating to, motor vehicles and liens thereon.

“Reimbursable Expenses” means certain expenses reimbursable to the Servicer and calculated as described in Schedule A to Exhibit A, provided that cost, expenses, losses, damages, claims and liabilities, including fees and expense of counsel and expenses of litigation, incurred by Servicer arising out of or in connection with any conduct or events described in Section 6.2(b) of this Agreement shall not constitute Reimbursable Expenses.

“Repossession Expenses” means the customary and reasonable actual out of pocket expenses (not including overhead) incurred and paid by the Servicer in repossessing the Financed Vehicle for a Receivable in default.

“Schedule of Receivables” means the schedule of Receivables attached as Schedule A, which schedule will be updated by a schedule of all Additional Receivables as of the related Additional Receivables Coverage Date.

“Scheduled Payment” means, with respect to any Collection Period for any Receivable, the amount set forth in such Receivable as required to be paid by the Obligor in such Collection Period. If after the Closing Date, the Obligor’s monthly payment obligation under a Receivable has been modified so as to differ from the amount specified in such Receivable (i) as a result of the order of a court in an insolvency proceeding involving the Obligor, (ii) pursuant to the Servicemembers Civil Relief Act or similar legislation or (iii) as a result of modifications or extensions of the Receivable permitted by Section 3.2(d), the Scheduled Payment shall refer to the Obligor’s payment obligation with respect to such Collection Period as so modified.

“Servicer” means Westlake Portfolio Management, LLC, a California limited liability company, as a party to this Agreement, its permitted successors and assigns, and each successor Servicer appointed pursuant to Section 7.3.

“Servicer Employees” has the meaning set forth in Section 3.4(d).

“Servicer Termination Event” means an event specified in Section 7.1.

“Servicer’s Certificate” means an officer’s certificate of the Servicer delivered pursuant to Section 3.8, substantially in the form of Exhibit A.

“Servicing Fee” means, with respect to any Collection Period, the sum of the following for such Collection Period: (i) the Base Servicing Fee, (ii) any Additional Servicing Compensation and (iii) all Reimbursable Expenses, in each case as defined herein and further described in Schedule A to Exhibit A and as set forth in the Servicer’s Certificate for such Collection Period, and either (a) retained by the Servicer pursuant to Section 3.2(b) or (b) paid to the Servicer pursuant to Section 4.2.

“State” means any State of the United States and the District of Columbia.

“Title Expenses” means the actual out of pocket expenses paid by the Servicer to unaffiliated third parties relating to the administration of the Lien Certificates for the Receivables.

“Transition Procedures” means the payment and servicing transition procedures described in Schedule C.

“UCC” means the Uniform Commercial Code as in effect in the relevant jurisdiction.

“United States” or “U.S.” means the United States of America.

“Westlake Account” means account [***] at Wells Fargo Bank, N.A., into which Servicer will initially deposit all Collections received directly by it.

“Westlake Account Reserve” means, (i) as of any day following a Payment Date on which a Westlake Reserve Deficit exists, the lesser of (x) an amount equal to the amount of such Westlake Reserve Deficit as reduced by the aggregate amount of Collections retained in respect of such Westlake Reserve Deficit on each preceding day, if any and (y) all Collections deposited into the Westlake Account on such day and (ii) with respect to any other day, [***]% of all Collections deposited into the Westlake Account on such day.

“Westlake Reserve Deficit” means the amount specified in Section 4.2(b).

Section 1.2 Accounting Terms and Determinations. Unless otherwise defined or specified herein, all accounting terms shall be construed herein, all accounting determinations hereunder shall be made, all financial statements required to be delivered hereunder shall be prepared and all financial records shall be maintained in accordance with GAAP.

Section 1.3 Computation of Time Periods. Unless otherwise stated in this Agreement, in the computation of a period of time from a specified date to a later specified date, the word “from” means “from and including” and the words “to” and “until” each mean “to but excluding”.

Section 1.4 Interpretation. When used in this Agreement, unless a contrary intention appears: (i) a term has the meaning assigned to it; (ii) “or” is not exclusive; (iii) “including” means including without limitation; (iv) words in the singular include the plural and words in the plural include the singular; (v) any agreement, instrument or statute defined or referred to herein or in any instrument or certificate delivered in connection herewith means such agreement, instrument or statute as from time to time amended, modified or supplemented and includes (in the case of agreements or instruments) references to all attachments thereto and instruments incorporated therein; (vi) references to a Person are also to its successors and permitted assigns; (vii) the words “hereof”, “herein” and “hereunder” and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision hereof; (viii) references contained herein to Article, Section, subsection, Schedule and Exhibit, as applicable, are references to Articles, Sections, subsections, Schedules and Exhibits in this Agreement unless otherwise specified; (ix) references to “writing” include printing, typing, lithography and other means of reproducing words in a visible form; and (x) the term “proceeds” has the meaning set forth in the applicable UCC.

ARTICLE II
Boarding Matters; Access to receivable files AND LIEN CERTIFICATES

Section 2.1 Receivables; Boarding Fee.

(a)

The Receivables subject to this Agreement will consist of the Initial Receivables and Additional Receivables added to the coverage of this Agreement on one or more Additional Receivable Coverage Dates. On each Additional Receivable Coverage Date, the Company shall deliver to the Servicer a new list identifying all Receivables subject to this Agreement, which shall be included as part of Schedule A hereto. The Receivables subject to this Agreement shall remain vested in the Company and shall be retained and maintained, in trust, by the Servicer by will of the Company in such custodial capacity only. Record title to each Receivable and each related loan shall remain in the name of the Company.

(b)

The Company shall pay to the Servicer the related Boarding Fee and accrued Out of Pocket Expenses by no later than, in the case of (i) the Initial Receivables, the First Payment Date and (ii) Additional Receivables, the related Additional Receivables Coverage Date. The Company hereby acknowledges and agrees that the Boarding Fee and accrued Out of Pocket Expenses have been fully earned and are nonrefundable once paid to the Servicer.

Section 2.2 Custody of Receivable Files and Lien Certificates.

(a)

Unless otherwise specified herein, the Servicer shall maintain (i) electronic copies or physical possession (in the capacity set forth in clause (c) below) of the instruments and documents that are part of the Receivable Files and (ii) physical possession (in the capacity set forth in clause (c) below) of such other instruments or documents added to or that modify or supplement the terms or conditions of the instruments and documents that are part of the Receivable Files and all other instruments, documents, correspondence and memoranda generated by or coming into the possession of the Servicer (including insurance premium receipts, ledger sheets, payment records, insurance claim files, correspondence and current and historical computerized data files) that are required to document or service the Receivables; provided that, at the request of the Company, the Servicer shall deliver physical possession of all such documents to the Company. Delivery of the Receivable Files to the Servicer hereunder and the servicing activities contemplated hereby shall not be deemed to convey to the Servicer any of the Company’s beneficial or legal ownership right, title and interest therein. The Servicer recognizes that the Company solely holds all beneficial and legal ownership right, title and interest in the Receivables, the Receivable Files and all rights and benefits pertaining thereto.

(b)

The Servicer shall hold or shall cause its third-party vendor DealerCenter or Dealertrack to hold the Lien Certificates in a fire rated storage vault under its exclusive custody and control in accordance with customary standards for such custody.

(c)

In holding and maintaining the Receivable Files and Lien Certificates, the Servicer shall act as agent, bailee and custodian for the Company, and the Company shall retain all right, title and interest to the Receivables Files and Lien Certificates. The Servicer shall notify the Company by written notice of any change in the location of any Receivable Files or Lien Certificates. The Servicer shall designate and identify, by a unique number, all Receivable Files as a discrete pool of accounts and shall provide that unique pool number to the Company. The Servicer shall carry out such policies and procedures in accordance with its customary actions with respect to the handling and custody of the Receivable Files and Lien Certificates, which shall at all times meet or exceed Accepted Servicing Practices, so that the integrity and physical possession of the Receivable Files and Lien Certificates will be maintained. All of the Servicer’s records pertaining to the Receivable Files and Lien Certificates shall contain an indication that such records and the Receivables which are the subject of such records are owned by the Company.

(d)

If Company suffers losses or damages as a result of the destruction or loss of any Receivable File, any instrument or document comprising part of a Receivable File or any Lien Certificate, the Servicer shall, (i) at the request of such Company, make any appropriate claim under any bond or insurance and (ii) to the extent of such Company losses or damages, pay the proceeds thereof into the Collection Account unless the Servicer has replaced the lost or destroyed items or has otherwise reimbursed such Company for such losses or damages.

(e)

The Servicer shall not deliver physical possession of, or otherwise transfer, assign, pledge, mortgage, convey or dispose of any Receivable Files or Lien Certificates to any Person other than in connection with the Servicer’s exercise of remedies against an Obligor or as directed by the Company.

(f)

The Servicer specifically acknowledges and agrees that in the event that it shall either be terminated pursuant to Section 7.1 or resigns pursuant to Section 6.6, it shall:

(i)

deliver or cause to be delivered the Receivable Files and Lien Certificates as directed by the Company; and

(ii)

maintain the Receivable Files and the Lien Certificates and continue in the performance of its duties and the enjoyment of its rights under this Agreement, until the orderly transfer of the Receivable Files and the Lien Certificates to the Company or a successor servicer, notwithstanding that such appointment and/or transfer may occur after the effective date of the termination or resignation of the Servicer designated in the written notice of termination or resignation.

Section 2.3 Access to and Release of Receivable Files.

(a)

The Servicer shall provide to representatives of the Company reasonable access to the documentation regarding the Receivables. Such access shall be afforded in each case without charge but only upon reasonable request and during normal business hours. Nothing in this Section shall affect the obligation of the Servicer to observe any Applicable Law prohibiting disclosure of information regarding the Obligors, and the failure of the Servicer to provide access as provided in this Section as a result of such obligation shall not constitute a breach of this Section. The Servicer will provide the Company and its respective representatives with copies, or otherwise allow them to make copies, of the Receivable Files, the Lien Certificates and the records of the Servicer relating to this Agreement during the term of this Agreement and for a period of five years after termination of this Agreement.

(b)

The Servicer shall review the Receivable Files to confirm the contents of each Receivable File includes all applicable items, including an original retail installment contract, an application and a Lien Certificate, and that the Obligor’s name in the Servicer’s records matches the name on the Receivable, in each case on or prior to the date hereof. Servicer acknowledges that Servicer has been provided access to all documents for each Receivable File (other than those specified in clause (ix) of the definition thereof) as may be required by Applicable Law in order for the Servicer to render the services as contemplated by this Agreement.

Section 2.4 Transition Procedures. The Company and the Servicer shall use their respective best efforts to effect the transfer of servicing contemplated by this Agreement in accordance with the Transition Procedures, with such changes as the Servicer and the Company may mutually agree, by no later than forty-five (45) Business Days following execution of this Agreement.

ARTICLE III
Administration and Servicing of Receivables

Section 3.1 Duties of the Servicer .

(a)

The Servicer is hereby authorized to act as agent for the Company and in such capacity shall manage, service, administer and make collections on the Receivables, and perform the other actions required by the Servicer under this Agreement. In performing its duties hereunder, the Servicer shall have full power and authority to do or cause to be done any and all things in connection with such servicing and administration which it may deem necessary or desirable, within the terms of this Agreement. The Servicer is authorized in its discretion, but in accordance with Accepted Servicing Practices, to waive any late payment charge or NSF fee at the time of payoff that Company has a right to collect in the ordinary course of servicing any Receivable.

(b)

The Servicer agrees that its servicing of the Receivables shall be carried out in accordance with customary and usual procedures of institutions which service motor vehicle retail installment sales contracts and, to the extent more exacting, the degree of skill and attention that the Servicer exercises from time to time with respect to all comparable motor vehicle receivables that it services for itself or others. In performing such duties, the Servicer shall substantially comply with the Collection Policy and Accepted Servicing Practices in such a manner as will, in its reasonable judgment, maximize the amount to be received by the Company. The Servicer’s duties shall include:

(i)

responding timely to inquiries, demands or complaints of Obligors, including in relation to disputes reported to a credit reporting agency, the Better Business Bureau or other non-governmental organizations, and governmental authorities regarding the Receivables, including requests for payoff amounts;

(ii)

investigating delinquencies and making reasonable efforts to collect any past due payments, including by sending past due notices to Obligors via the U.S. Postal Service, electronic mail and by initiating telephone or text message contact with Obligors;

(iii)

for Obligors that the Servicer is unable to contact using Obligor information contained in the current loan record, such as when the address is determined to be invalid (address skips) or the telephone number is determined to be invalid (telephone skips), performing activities commonly referred to as skip tracing;

(iv)

maintaining a log of communications with Obligors in default and maintaining a Receivable history of payments made and documentary evidence of the Servicer’s efforts to affect a cure of any delinquency or default and to collect the Receivable;

(v)

providing information to the Company and assisting the Company in administering and enforcing all rights and responsibilities of the Company in the Receivables, including, subject to Section 3.1(d), commencing legal proceedings to enforce the Receivables, as the Servicer deems to be reasonably necessary;

(vi)

providing accounting and oversight information to the Company, including providing billing statements to Obligors, reporting any required tax information to Obligors, monitoring the collateral, accounting for collections and furnishing daily delinquency and cash collections reports and monthly and annual statements to the Company with respect to payments and monitoring the status of Insurance Policies;

(vii)

keeping, storing and maintaining access to books, records and documents pertaining to the Receivables, including collection efforts, and making periodic reports in accordance with this Agreement; such records shall be maintained for a period of at least five years from the last activity date on the related Receivable and may not be destroyed or otherwise disposed of except as provided herein and as allowed by Applicable Law;

(viii)

complying with commercially reasonable written instructions of the Company necessary to comply with any regulatory requirements applicable to, or agreed to by, the Company or any supervisory rules agreed to or imposed on the Company and delivered to Servicer from time to time with respect to the servicing of the Receivables;

(ix)

remitting to Obligors any overpayments or surplus balances as required to be remitted pursuant to Applicable Law; and

(x)

performing the other duties specified herein.

(c)

The Servicer shall also administer and enforce all rights and responsibilities of the Company provided for in the Insurance Policies to the extent that such Insurance Policies relate to the Receivables, the Financed Vehicles or the Obligors. To the extent consistent with the standards, policies and procedures otherwise required hereby, the Servicer shall follow its customary standards, policies and procedures and shall have full power and authority, acting alone, to do any and all things in connection with such managing, servicing, administration, collection and enforcement that it may deem necessary or desirable, it being understood, however, that the Servicer shall at all times remain responsible to the Company for performance of its duties and obligations hereunder. Without limiting the generality of the foregoing, the Servicer is hereby authorized and empowered to execute and deliver any and all instruments of satisfaction or cancellation, or of partial or full release or discharge, and all other comparable instruments, with respect to the Receivables and the Financed Vehicles; provided, however, that notwithstanding the foregoing, the Servicer shall not, except pursuant to an order from a court of competent jurisdiction or as otherwise required by Applicable Law, release an Obligor from payment of any unpaid amount under any Receivable or waive the right to collect the unpaid balance of any Receivable from the Obligor, except in accordance with the Collection Policy.

(d)

In connection with realizing on the Receivables pursuant to Section 3.3, the Servicer is hereby authorized to commence, in its own name or in the name of the Company, a demand or legal proceeding to enforce a Receivable or to participate in any other legal proceeding (including an Insolvency Proceeding) relating to or involving a Receivable, an Obligor or a Financed Vehicle. If the Servicer commences or participates in such a demand or legal proceeding in its own name, the Company shall thereupon be deemed to have automatically assigned such Receivable to the Servicer solely for purposes of (and solely to the extent necessary for) commencing or participating in any such demand or proceeding as a party or claimant, and the Servicer is authorized and empowered by Company to execute and deliver in the Servicer’s name any notices, demands, claims, complaints, responses, affidavits or other documents or instruments in connection with any such demand or proceeding. The Company shall furnish the Servicer with any notices, demands, claims, complaints, responses, affidavits, communications with outside and opposing counsel, or other documents or instruments in connection with any such demand or proceeding, any limited powers of attorney and other documents which the Servicer may reasonably request and which the Servicer deems necessary or appropriate and take any other steps which the Servicer may deem necessary or appropriate to enable the Servicer to carry out its servicing and administrative duties under this Agreement.

(e)

Servicer will promptly provide notice to Company of any notices, demands, claims, complaints arising out of or in connection with any Receivable, any conduct or events described in Section 6.2(b) of this Agreement, any commencement of a lawsuit or other legal action that requests as a part thereof class action certification, and any lawsuit or other legal action brought by a governmental or regulatory authority, including any attorney general. Servicer will provide the Company reports updating the status of each pending litigation or arbitration on a quarterly basis. The reports shall contain sufficient detail to inform the Company as to the current status of each pending matter.

(f)

Notwithstanding any provision herein to the contrary, the Servicer shall not have access to or control of the Authoritative Copy of any Electronic Contract. In the event that any Receivable has been paid in full, the Servicer shall notify the Company, so that the Authoritative Copy of the related Electronic Contract can be removed from the applicable vault and returned to the related Obligor, marked as paid in full.

Section 3.2 Collection of Receivable Payments; Modifications of Receivables.

(a)

Consistent with the standards, policies and procedures required by this Agreement, including Accepted Servicing Practices, the Servicer (i) shall make reasonable efforts to collect all payments called for under the terms and provisions of the Receivables as and when the same shall become due, and shall follow such collection procedures as it follows with respect to all comparable automobile receivables that it services for itself or others and otherwise act with respect to the Receivables and the Insurance Policies in such manner as will, in the reasonable judgment of the Servicer, maximize the amount to be received by the Company with respect thereto and (ii) is authorized in its discretion to waive any prepayment charge, late payment charge or any other similar fees that may be collected in the ordinary course of servicing any Receivable.

(b)

The Servicer shall cause all collections on or in respect of the Receivables and Financed Vehicles received by it from whatever source after the related Cutoff Date to be deposited into the Westlake Account, other than amounts that are made by or on behalf of any Obligor directly into the Collection Account. The Servicer shall remit all funds in the Westlake Account representing Collections to the Collection Account within two Business Days of receipt thereof; provided that an amount equal to the Westlake Account Reserve may be retained in the Westlake Account, which shall be used solely to compensate and reimburse the Servicer for (i) [***]% of all Payment Processing Fees, [***]% of all General Fees and [***]% of all Post Charge Off Collections, (ii) all Recovery Expenses and all other Reimbursable Expenses and (iii) repayment of any applicable Westlake Reserve Deficit. The related Servicer’s Certificate will reflect all activity relating to the Receivables and this Agreement into and from the Westlake Account during each Collection Period (including the components of amounts withheld or reimbursed to the Servicer or paid from the Westlake Account Reserve).

(c)

The Servicer shall (i) allocate collections on or in respect of the Receivables between principal and interest in accordance with the terms of the related Contracts, (ii) post payments received by the Servicer to the applicable Obligor’s records within two Business Days of receipt and (iii) allocate payments to principal, interest, late fees, NSF fees and Obligor-incurred expenses in accordance with the applicable Receivables consistent with the Collection Policy and Accepted Servicing Practices.

(d)

The Servicer may grant payment extensions on, or other modifications or amendments to, a Receivable in accordance with the Collection Policy and Accepted Servicing Practices, but only if it believes in good faith that such Receivable is in default or a default on such Receivable is reasonably foreseeable and an extension, modification or amendment will improve the timeliness or amount of collections on such Receivable and will maximize the amount to be received by the Company with respect to such Receivable, and is otherwise in the best interest of the Company.

(e)

The Servicer shall use its best efforts to notify or direct Obligors to make all payments on the Receivables, whether by check, ACH deposit or by direct debit of the Obligor’s bank account, directly to the Collection Account.

(f)

The Servicer at all times will hold all Collections received in the Westlake Account or otherwise received by the Servicer in trust for the sole and exclusive benefit of the Company and shall provide to Company information on Collections through daily cash remittances, daily collections/dashboard reports, and monthly servicer reports.

(g)

The Servicer shall reasonably maintain accurate records of all communications with Obligors (including all call recordings), pursuant to the Collection Policy and Applicable Law, and shall furnish copies of the same to the Company upon request.

Section 3.3 Realization Upon Receivables.

(a)

Consistent with the standards, policies and procedures required by this Agreement, including Accepted Servicing Practices, the Servicer shall use its best efforts to repossess (or otherwise comparably convert the ownership of) and liquidate, as soon as is practicable, any Financed Vehicle securing a Receivable with respect to which the Servicer has determined that payments thereunder are not likely to be resumed, as soon as is practicable after default on such Receivable. The Servicer may, however, elect not to repossess a Financed Vehicle within such time period if, in its good faith judgment, it determines that the proceeds ultimately recoverable with respect to such Receivable would be increased by forbearance. The Servicer is authorized to follow such customary practices and procedures as it shall deem necessary or advisable, consistent with the standard of care required by Section 3.2, which practices and procedures may include the sale of the related Financed Vehicle at public or private sale, the submission of claims under an Insurance Policy and other actions by the Servicer in order to realize upon such Receivable. The foregoing is subject to the provision that, in any case in which the Financed Vehicle shall have suffered damage, the Servicer shall not expend funds in connection with any repair or towards the repossession of such Financed Vehicle unless it expects in its sole discretion that such repair and/or repossession shall increase the proceeds of liquidation of the related Receivable by an amount greater than the amount of such expenses. The Servicer, using its best efforts and good faith judgment, and in accordance with Acceptable Servicing Practices, shall make reasonable efforts to collect any deficiencies owed on a Receivable after the related Financed Vehicle has been liquidated. The Servicer shall pay on behalf of the Company any personal property taxes assessed on repossessed Financed Vehicles and shall be entitled to reimbursement of any such tax from the related Liquidation Proceeds.

(b)

The Servicer shall execute and deliver, on behalf of the Company, consistent with Accepted Servicing Practices, any and all instruments of satisfaction or cancellation, or of partial or full release or discharge, and all other comparable instruments, with respect to the Receivables and the Financed Vehicles; provided, however, that notwithstanding the foregoing, the Servicer shall not, except pursuant to a judicial order from a court of competent jurisdiction, or as otherwise required by Applicable Law, release or waive the right to collect the unpaid balance on any Receivable, except in accordance with the Collection Policy.

Section 3.4 Insurance; GAP Waivers.

(a)

The Servicer shall monitor the status of physical loss and damage insurance coverage covering the Financed Vehicles pursuant to the related Contracts in accordance with its customary servicing procedures.

(b)

The Servicer may sue to enforce or collect upon the Insurance Policies, in its own name, if possible, or as agent of the Company. If the Servicer elects to commence a legal proceeding to enforce an Insurance Policy, the act of commencement shall be deemed to be an automatic assignment of the rights of the Company under such Insurance Policy to the Servicer for purposes of collection only. If, however, in any enforcement suit or legal proceeding it is held that the Servicer may not enforce an Insurance Policy on the grounds that it is not a real party in interest or a holder entitled to enforce the Insurance Policy, the Company, at such Company’s expense, shall take such steps as the Servicer deems necessary to enforce such Insurance Policy, including bringing suit in its name or the name of Company.

(c)

The Servicer may cancel GAP Waivers for each Receivable on a pro-rata basis or on a calculation required by Applicable Law, in which case the Servicer will refund the applicable premium to the related Obligor and the Principal Balance of the related Receivable will be reduced by the amount of such refund.

(d)

The Servicer shall maintain, at its own expense, a fidelity bond and “Errors and Omissions” insurance, with broad coverage on all officers, employees or other persons under the Servicer’s direct control acting in any capacity requiring such persons to handle funds, money, documents or papers relating to the Receivables (“Servicer Employees”) and shall require any subservicer to cover its employees under a substantially similar insurance policy to the extent reasonable for the activities of such subservicer with respect to this Agreement. Any such fidelity bond and Errors and Omissions Insurance policy shall protect and insure Servicer (or any subservicer, as applicable) against losses, including forgery, theft, embezzlement, fraud, errors and omissions and negligent acts of such Servicer Employees (or the employees of such subservicer, as applicable). No provision of this Section 3.4(d) requiring such Errors and Omissions Insurance policy shall diminish or relieve Servicer from its duties and obligations as set forth in this Agreement. The foregoing requirements may be met by an Affiliate of Servicer, provided that any bond or insurance coverage maintained by such Affiliate extends to Servicer.

The Servicer shall (on behalf of itself and its Affiliates) at all times and at its sole cost and expense, also keep in full force and effect until one (1) year after termination of this Agreement, (i) comprehensive general liability insurance policies with reasonable coverage (satisfied through any combination of primary and secondary policies and including any umbrella policy) and (ii) workers compensation insurance in compliance with Applicable Law. The Servicer shall require any subservicer to carry insurance that is substantially similar in amount and scope of coverage to the extent reasonable for the activities of such subservicer with respect to this Agreement. The foregoing requirements may be met by an Affiliate of Servicer, provided that any bond or insurance coverage maintained by such Affiliate extends to Servicer.

Upon the written request of the Company, the Servicer shall cause to be delivered to the Company a certificate of insurance evidencing such required coverages.

Section 3.5 Maintenance of Security Interests in Vehicles. Consistent with the Collection Policy and Accepted Servicing Practices, the Servicer shall take such steps on behalf of the Company as are necessary to maintain perfection of the security interest created by each Receivable in the related Financed Vehicle, including obtaining the execution by the Obligors, the recording, registering, filing, re-recording, re-filing and re-registering of all security agreements, financing statements and continuation statements as are necessary to maintain the security interest granted by the Obligors under the related Receivables and the obtaining of new Lien Certificates as required by Applicable Law. The Company hereby authorizes the Servicer, and the Servicer agrees, to take any and all steps necessary to re-perfect such security interest on behalf of the Company as necessary because of the relocation of a Financed Vehicle or for any other reason.

Section 3.6 Additional Servicer Covenants . The Servicer additionally covenants as follows:

(i)

Liens in Force. The Financed Vehicle securing each Receivable shall not be released in whole or in part from the security interest granted by the Receivable, except upon payment in full of the Receivable or as otherwise contemplated herein.

(ii)

No Impairment. The Servicer shall do nothing to impair the rights of Company in the Receivables or the Insurance Policies except as otherwise expressly provided herein.

(iii)

Restrictions on Liens. The Servicer shall not (a) create, incur or suffer to exist, or agree to create, incur or suffer to exist, or consent to cause or permit in the future (upon the happening of a contingency or otherwise) the creation, incurrence or existence of any Lien or restriction on transferability of the Receivables except for any Lien in favor of the Company and the restrictions on transferability imposed by this Agreement or (b) sign or file under the UCC of any jurisdiction any financing statement which names the Servicer as a secured party, or in its capacity as the Servicer, sign any security agreement authorizing any secured party thereunder to file any such financing statement, with respect to the Receivables, except in each case any such instrument solely securing the rights and preserving any Lien of the Company.

(iv)

Compliance. The Servicer shall comply with (i) all Applicable Laws that govern the furnishing of information to consumer credit reporting agencies, as well as all Applicable Laws governing debt collection practices, including the Fair Debt Collection Practices Act, (ii) all Applicable Laws otherwise applicable to Servicer’s performance of its duties under this Agreement (whether relating to the Servicer managing, servicing, administering or making collections on Receivables or relating to any other duties it has under this Agreement), including all data privacy laws and regulations, and the Company’s privacy notice in effect for the Receivables, including its provisions on third party solicitations.

(v)

Collection Policy. The Servicer shall provide prompt written notice of all material modifications to the Collection Policy and will not implement any such change without the prior written consent of the Company unless such modification is required by Applicable Law.

(vi)

Licenses. The Servicer, at its expense, shall obtain and maintain all State and federal licenses, registrations, permits, franchises and approvals required by the laws of any jurisdiction to be held in connection with servicing of the Receivables and shall make all filings and pay all fees as may be required in connection therewith during the term of the Agreement, except where failure to be in compliance could not reasonably be expected to prevent Servicer from performing its obligations under this Agreement or to materially impair the rights or interests of the Company in the Receivables.

(vii)

Maintenance of Records. The Servicer shall maintain accounts and records as to each Receivable accurately and in sufficient detail to permit (i) the reader thereof to know at any time the status of such Receivable, including payments and recoveries made and payments owing (and the nature of each) and (ii) reconciliation between payments or recoveries on (or with respect to) each Receivable and the amounts from time to time deposited in the Westlake Account or the Collection Account in respect of such Receivable.

(viii)

Notice of Servicer Termination Events. The Servicer shall deliver to the Company, promptly after having obtained knowledge thereof, but in no event later than five days thereafter, an officer’s certificate of any event which with the giving of notice, the lapse of time or both, would become a Servicer Termination Event.

(ix)

Additional Information. The Servicer shall furnish to the Company from time to time such additional information regarding the Receivables, the Financed Vehicles and the Obligors as the Company, shall reasonably request.

(x)

Exceptions. Except as expressly provided herein, the Servicer shall not be obligated to, and shall not, take any action that Company directs it not to take on its behalf.

(xi)

Acknowledgment of Prior Liens. The Company and the Servicer hereby acknowledge that a perfected lien upon the Receivables and the Receivable Files by the Company.

Section 3.7 Servicing Fee; Payment of Certain Expenses by Servicer.

(a)

Servicing Fee. As consideration for the Servicer performing certain servicing functions in accordance with this Agreement, pursuant to Section 4.2, the Servicing Fee shall be paid to the Servicer monthly in arrears on each Payment Date out of the aggregate Westlake Account Reserve as of such Payment Date, except for the components of the Servicing Fee that may be retained by, or reimbursed to, the Servicer pursuant to Section 3.2(b).

(b)

Collection Related Fees. So long as Westlake Portfolio Management, LLC is the Servicer, Servicer will be entitled to additional consideration for performing services in accordance with this Agreement in the form of retaining as compensation amounts set forth in Section 3.2(b).

Section 3.8 Servicer’s Certificate. No later than 12:00 p.m., Pacific Time, five days before each Payment Date, the Servicer shall deliver (facsimile or electronic delivery being acceptable) to the Company a Servicer’s Certificate containing, among other things, the following information for such Payment Date and the related Collection Period: (i) the aggregate amount of (a) Collections and any deposits into and withdrawals from the Westlake Account during such Collection Period relating to the Receivables and (b) Westlake Account Reserve retained during such Collection Period, (ii) the amounts (a) of any distribution owing to the Servicer pursuant to Section 4.2 representing (A) amounts described in Section 3.2(b), (B) amounts described in Section 4.1 and (C) any other component of the Servicing Fee owing to the Servicer on the related Payment Date and (b) remitted to the Collection Account representing (a) interest and (b) principal, (iii) the number of and aggregate Principal Balance of Receivables that, as of the last day of such Collection Period, are delinquent (a) 30 days, (b) 60 days, (c) 90 days and (d) 120 days or less that are not Charged Off Receivables and have not been repossessed and sold, (iv) the total number of Receivables that became Charged Off Receivables during such Collection Period, (vi) as of the last day of such Collection Period, (a) the number and current trial balance of the Receivables and (b) the weighted average remaining term to maturity of the Receivables, (vi) all information necessary to enable the Company to reconcile the aggregate cash flows with respect to the Receivables for such Collection Period and Payment Date, (vii) the aggregate amount of (a) General Fees, Payment Processing Fees and any collection-related fees collected by the Servicer during such Collection Period and (b) other amounts collected or retained

by, or reimbursed to, the Servicer during such Collection Period pursuant to Sections 3.2(b) and 4.1, (viii) the aggregate amounts of Insurance Proceeds and Post Charge Off Collections collected by the Servicer during such Collection Period and (ix) such other information as reasonably requested from time to time by the Company. Each Receivable which became a Charged Off Receivable or which was paid in full during the related Collection Period shall be separately identified by account number.

Section 3.9 Customer Information.

(a)

Each party shall take all steps necessary and appropriate to maintain all Customer Information. The Company shall own all Customer Information. Without limiting the foregoing, the Servicer will maintain appropriate information security controls as more particularly set forth in Schedule D hereto (the “Information Security Requirements”). The Servicer will not use Customer Information except to the extent permitted by this Agreement or Applicable Law.

(b)

The Servicer shall notify the Company of each Data Breach as soon as reasonably practicable after it becomes aware thereof. In the event of a Data Breach, the Servicer shall cooperate with the Company in responding to the Data Breach and, with the consent of the Company and at the Servicer’s own expense, shall take appropriate actions to secure the Customer Information, mitigate the harm caused by such breach (including provision of a credit monitoring service and payment of fees, fines and penalties, if reasonable and customary), and provide required or appropriate notice to Obligors and/or governmental authorities.

(c)

During the term of this Agreement and for as long as the Servicer retains any Customer Information, the Company, its representatives and agents will be entitled to conduct audits of the Servicer’s relevant operations, facilities and system to confirm that the Servicer has complied with the Information Security Requirements. Any such audit shall be scheduled with reasonable prior notice and conducted during normal business hours and shall not unreasonably interfere with the Servicer’s business activities. The Servicer may require any such auditor to sign a customary confidentiality agreement. In the event that any such audit results in the discovery of material security risks to the Customer Information, the Servicer shall respond to the Company in writing with the Servicer’s plan to promptly take reasonable measures and corrective actions necessary to effectively eliminate the risk, at no cost to the Company. The Servicer shall have thirty (30) days to cure such security risk, unless the parties mutually agree in writing to a longer period of time for such cure. The Company’s right to conduct such audits, and any exercise of such right, shall not in any way diminish or affect the Servicer’s duties and liabilities under this Agreement.

(d)

Notwithstanding the foregoing, nothing herein shall be construed as to prohibit the Servicer from marketing services or products to the Obligors, subject to Applicable Law, privacy notices of the Company and as permitted by the Receivable Files.

(e)

The Company and the Servicer shall adopt and maintain reasonable procedures relating to administrative, technical and physical safeguards to (i) ensure the security and confidentiality of any Customer Information that such party receives, (ii) protect against any anticipated threats or hazards to the security or integrity of any Customer Information that such party receives, (iii) protect against the unauthorized access to or use of any Customer Information that such party has in its possession which could result in substantial harm or inconvenience to any Obligor and (iv) ensure the proper disposal of any Customer Information that such party has in its possession.

(f)

The rights and obligations of the parties under this Section shall survive the termination of this Agreement.

Section 3.10 Waiver of Liens. Except as expressly provided in Section 4.1 of this Agreement, Servicer agrees that it shall have no right of setoff or banker’s lien against, and no right to otherwise deduct from, (i) any Collections received in the Westlake Account or otherwise by the Servicer and held in trust for the Company or (ii) any funds and other property held in the Collection Account for any amount owed to it by the Company or any other Person.

ARTICLE IV
Payments

Section 4.1 Certain Reimbursements to the Servicer. The Servicer will be entitled to be reimbursed from amounts deposited into the Collection Account the amounts (i) deposited in the Collection Account but later determined by the Servicer in good faith to have resulted from mistaken deposits or postings or checks returned for insufficient funds and (ii) paid by Obligors that were deposited in the Collection Account but that do not relate to principal and interest payments due on the Receivables other than as provided for in this Agreement, in each case to the extent such amounts exceed the Westlake Account Reserve.

Section 4.2 Payment Date Matters.

(a)

On each Payment Date, if the aggregate Westlake Account Reserve for the related Collection Period exceeds the aggregate Servicing Fee as set forth on the Servicer’s Certificate delivered in respect of such Payment Date, Servicer shall remit such excess to the Collection Account on such Payment Date.

(b)

If on any Payment Date the aggregate Servicing Fee as set forth on the Servicer’s Certificate delivered in respect of such Payment Date is greater than the aggregate Westlake Account Reserve for the related Collection Period (a “Westlake Reserve Deficit”), such Westlake Reserve Deficit shall be cured in accordance with Section 3.2(b).

ARTICLE V
The COMPANY

Section 5.1 Representations of the Company. Company makes the following representations on which the Servicer is deemed to have relied in agreeing to service the Receivables, which shall survive the execution and termination of this Agreement.

(a)

Power and Authority. Company has the power and authority to execute and deliver this Agreement and to carry out its terms and their terms, respectively and the execution, delivery and performance of this Agreement have been duly authorized by it by all necessary corporate action.

ARTICLE VI
The Servicer

Section 6.1 Representations of the Servicer. The Servicer makes the following representations on which the Company is deemed to have relied in appointing the Servicer to service the Receivables, which shall survive the execution and termination of this Agreement.

(a)

Organization and Good Standing. The Servicer has been duly organized and is validly existing and in good standing as a limited liability company under the laws of the State of California, with power, authority and legal right to own its properties and to conduct its business as such properties are currently owned and such business is currently conducted, and had at all relevant times, and now has, power, authority and legal right to service the Receivables and to enter into and perform its obligations under this Agreement.

(b)

Due Qualification. The Servicer is duly qualified to do business as a foreign limited liability company, is in good standing and has obtained all necessary licenses and approvals, in all jurisdictions in which the ownership or lease of property or the conduct of its business (including the servicing of the Receivables pursuant to this Agreement) requires or shall require such qualification.

(c)

Power and Authority. The Servicer has the power and authority to execute and deliver this Agreement and to carry out its terms and their terms, respectively, and the execution, delivery and performance of this Agreement have been duly authorized by the Servicer by all necessary limited liability company action.

(d)

Binding Obligation. This Agreement shall constitute the legal, valid and binding obligation of the Servicer enforceable in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization or other similar laws affecting the enforcement of creditors’ rights generally and by equitable limitations on the availability of specific remedies, regardless of whether such enforceability is considered in a proceeding in equity or at law.

(e)

No Violation. The consummation of the transactions contemplated by, and the fulfillment of the terms of, this Agreement shall not conflict with, result in any breach of any of the terms and provisions of, or constitute (with or without notice or lapse of time) a default under, the articles of organization or operating agreement of the Servicer, or any indenture, agreement, mortgage, deed of trust or other instrument to which the Servicer is a party or by which it is bound, or result in the creation or imposition of any Lien upon any of its properties pursuant to the terms of any such indenture, agreement, mortgage, deed of trust or other instrument, other than this Agreement, or violate any law, order, rule or regulation applicable to the Servicer of any court or of any federal or State regulatory body, administrative agency or other governmental instrumentality having jurisdiction over the Servicer or any of its properties.

(f)

No Proceedings. There are no proceedings or investigations pending or, to the Servicer’s knowledge, threatened against the Servicer, before any court, regulatory body, administrative agency or other tribunal or governmental instrumentality having jurisdiction over the Servicer or its properties (i) asserting the invalidity this Agreement, (ii) seeking to prevent the consummation of any of the transactions contemplated this Agreement or (iii) seeking any determination or ruling that might materially and adversely affect the performance by the Servicer of its obligations under, or the validity or enforceability of, this Agreement.

(g)

No Consents. The Servicer is not required to obtain the consent of any other party or any consent, license, approval or authorization, or registration or declaration with, any governmental authority, bureau or agency in connection with the execution, delivery, performance, validity or enforceability of this Agreement which has not already been obtained.

(h)

Furnishing of Information. All Servicer’s Certificates, monthly reports, information, exhibits, financial statements, documents, books, records or reports furnished or to be furnished by the Servicer to the Company or any of its respective representatives in connection with this Agreement are or will be accurate, true and correct in all material respects.

(i)

Servicer’s Performance. The Servicer has the knowledge, the experience, the personnel and the systems, financial and operational capacity available to timely and adequately perform its obligations hereunder.

Section 6.2 Liability of Servicer; Indemnities.

(a)

The Servicer (in its capacity as such) shall be liable hereunder only to the extent of the obligations in this Agreement specifically undertaken by the Servicer and the representations and covenants made by the Servicer.

(b)

The Company shall defend, indemnify and hold harmless Servicer and its Affiliates, and their respective owners, officers, members, directors, managers, employees, agents and lenders (the "Servicer Indemnified Parties") from and against any and all costs, expenses, losses, damages, claims and liabilities, including reasonable fees and expenses of counsel and expenses of litigation, (i) to the extent that such cost, expense, loss, claim, damage or liability arose out of, or was imposed upon any of the Servicer Indemnified Parties by reason of any third party claims arising (A) from the breach of this Agreement by the Company, (B) from the negligence, misconduct or bad faith of the Company in the performance of its duties under this Agreement, (C) by reason of reckless disregard by the Company of its obligations and duties under this Agreement, or (D) from any Data Breach, to the extent such Data Breach arises from or relates to Company's access to Servicer's systems or data. Notwithstanding the foregoing, the Company shall not be obligated to provide any such indemnity to the extent that any such claim arises out of the negligence, misconduct or bad faith by Servicer or Servicer’s failure to comply with, or perform its obligations under, this Agreement and, as such, Company’s indemnity obligation shall be based upon its comparative degree of fault with respect to such claim.

(c)

The Servicer shall defend, indemnify and hold harmless Company and its Affiliates, and their respective owners, officers, members, directors, managers, employees, agents and lenders (the "Company Indemnified Parties") from and against any and all costs, expenses, losses, damages, claims and liabilities, including reasonable fees and expenses of counsel and expenses of litigation, (i) arising out of or resulting from the Servicer or any Affiliate thereof managing, servicing, administering or making collections on Receivables and (ii) to the extent that such cost, expense, loss, claim, damage or liability arose out of, or was imposed upon the Company Indemnified Parties by reason of any third party claims arising (A) from the breach of this Agreement by the Servicer, (B) from the negligence, misconduct or bad faith of the Servicer in the performance of its duties under this Agreement, (C) by reason of reckless disregard by the Servicer of its obligations and duties under this Agreement or (D) from any Data Breach, except to the extent such Data Breach arises from or relates to Company's access to Servicer's systems or data. Notwithstanding the foregoing, the Servicer shall not be obligated to provide any such indemnity to the extent that any such claim arises out of the negligence, misconduct or bad faith by Company or Company’s failure to comply with, or perform its obligations under, this Agreement and, as such, Servicer’s indemnity obligation shall be based upon its comparative degree of fault with respect to such claim.

(d)

Indemnification under this Section shall survive the termination or assignment of this Agreement.

(e)

Indemnification under this Section shall include reasonable fees and expenses of counsel and expenses of litigation (including costs and expenses (including reasonable fees and expenses of counsel and court costs and losses) incurred in any action, claim or suit brought to enforce Company’s right to indemnification or legal fees and expenses incurred in actions involving the Servicer). If the Servicer has made any indemnity payments pursuant to this Article and Company thereafter collects any of such amounts from others, Company shall promptly repay such amounts collected to the Servicer, without interest.

Section 6.3 Merger or Consolidation of, or Assumption of the Obligations of the Servicer. The Servicer shall not merge or consolidate with any other Person, convey, transfer or lease substantially all its assets as an entirety to another Person or permit any other Person to become the successor to its business unless, after the merger, consolidation, conveyance, transfer, lease or succession, the successor or surviving entity shall be capable of fulfilling the duties of the Servicer contained in this Agreement. Any Person (i) into which the Servicer may be merged or consolidated, (ii) resulting from any merger or consolidation to which the Servicer shall be a party, (iii) which acquires by conveyance, transfer or lease substantially all of the assets of the Servicer or (iv) succeeding to the business of the Servicer, in any of the foregoing cases shall execute an agreement of assumption to perform every obligation of the Servicer under this Agreement and, whether or not such assumption agreement is executed, shall be the successor to the Servicer under this Agreement without the execution or filing of any paper or any further act on the part of any of the parties to this Agreement, anything in this Agreement to the contrary notwithstanding; provided, however, that nothing contained herein shall be deemed to release the Servicer from any obligation. The Servicer shall provide at least ten (10) Business Days’ prior notice of any merger, consolidation or succession pursuant to this Section to the Company. Notwithstanding the foregoing, the Servicer shall not merge or consolidate with any other Person or permit any other Person to become a successor to its business, unless (a) immediately after giving effect to such transaction, no representation or warranty made pursuant to Section 6.1 shall have been breached (for purposes hereof, such representations and warranties shall speak as of the date of the consummation of such transaction) and (b) the Servicer shall have delivered to the Company an officer’s certificate and an opinion of counsel each stating that such consolidation, merger or succession and such agreement of assumption comply with this Section and that all conditions precedent, if any, provided for in this Agreement relating to such transaction have been complied with.

Section 6.4 Limitation on Liability of Servicer and Others. Neither the Servicer nor any of its members, directors or officers or employees or agents shall have any liability to the Company, except as provided under this Agreement, for any action taken or for refraining from the taking of any action pursuant to this Agreement or for errors in judgment; provided, however, that this provision shall not limit the liability of the Servicer or any such Person against any material breach of any covenants, warranties or representations made herein or any liability that would otherwise be imposed by reason of willful misfeasance in the performance of duties or by reason of gross negligence in the performance of its duties under this Agreement. Except as provided in this Agreement, the Servicer shall not be under any obligation to prosecute any legal action that shall not be incidental to its duties to service the Receivables in accordance with this Agreement; provided, however, that the Servicer shall undertake any reasonable action that it may deem necessary, or desirable in respect of this Agreement and the rights and duties of the parties to this Agreement and the interests of the Company under the Agreement in accordance with the Servicer’s standard practices, policies and procedures which the Servicer exercises with respect to the Receivable Files relating to all comparable automotive receivables that the Servicer has serviced for itself or others. In such event, the legal expenses and costs of such action and any liability resulting therefrom shall be borne by Company except to the extent such action or liability resulting therefrom relates to the willful misfeasance of the Servicer in the performance of its duties or by reason of gross negligence of the Servicer in the performance of its duties under this Agreement. The Servicer will defend any action in respect of its servicing of the Receivables at the Servicer’s expense.

Section 6.5 Delegation of Duties.

(a)

With the prior written consent of the Company, the Servicer may delegate its duties under this Agreement to an Affiliate or a subservicer. The Servicer also may at any time perform through sub-contractors approved by the Company the specific duties of (i) repossession of Financed Vehicles, (ii) tracking maintenance of required Insurance Policies and (iii) pursuing the collection of deficiency balances on certain Charged Off Receivables and may perform other specific duties through such sub-contractors in accordance with the Servicer’s customary servicing policies and procedures. No delegation or sub-contracting by the Servicer of its duties herein in the manner described in this Section shall relieve the Servicer of its responsibility with respect to such duties. The Servicer shall be responsible for the acts and omissions of such Affiliates and subservicers as if they were the acts and omissions of its employees.

(b)

References in this Agreement or any subservicing or sub-contracting agreement to actions taken, or to be taken, permitted to be taken or restrictions on actions permitted to be taken, by the Servicer in servicing the Receivables shall include actions taken, or to be taken, permitted to be taken or restrictions on actions permitted to be taken, by a subservicer on behalf of the Servicer. Each subservicing or sub-contracting agreement will be upon such terms and conditions as are not inconsistent with this Agreement and the standard of care set forth herein and as the Servicer and the related subservicer have agreed. All compensation payable to a subservicer under a subservicing or sub-contracting agreement shall be payable by the Servicer from the Servicing Fee or otherwise from its own funds.

(c)

Notwithstanding any subservicing or sub-contracting agreement or any of the provisions of this Agreement relating to agreements or any arrangements between the Servicer or a subservicer or any reference to actions taken through such entities or otherwise, the Servicer shall remain obligated and liable for the servicing and administering of the Receivables in accordance with this Agreement without diminution of such obligation or liability by virtue of such subservicing or sub-contracting agreements.

(d)

Any subservicing or sub-contracting agreement that may be entered into and any other transactions or servicing arrangements relating to or involving a subservicer shall be deemed to be between the subservicer and the Servicer alone, and the Company shall not be deemed parties thereto and shall have no obligations, duties or liabilities with respect to such subservicer.

Section 6.6 Servicer Not to Resign; Force Majeure Event.

(a)

Servicer Not to Resign. Subject to the provisions of Section 6.3, the Servicer shall not resign from the obligations and duties imposed on it by this Agreement as Servicer except upon a determination that the performance of its duties under this Agreement is no longer permissible by law. Any such determination permitting the resignation of the Servicer shall be evidenced by an opinion of counsel to such effect delivered and acceptable to the Company. No resignation of the Servicer shall become effective until a successor Servicer shall have assumed the responsibilities and obligations of the resigning Servicer.

(b)

Force Majeure Event. Notwithstanding any other provision of this Agreement, if and to the extent that Servicer’s performance of any of its obligations under this Agreement is prevented, hindered or delayed by any Force Majeure Event, and such non-performance, hindrance or delay could not have been prevented by reasonable precautions, then the Servicer will be excused for such non-performance, hindrance or delay, as applicable, of those obligations affected by the Force Majeure Event for as long as such Force Majeure Event continues.

ARTICLE VII
Default

Section 7.1 Servicer Termination Event. Each of the following shall constitute a “Servicer Termination Event”:

(a)

failure by the Servicer to deposit any proceeds or payment received, subject to the terms of this Agreement, to the Collection Account that continues unremedied for a period of five Business Days after written notice is received by the Servicer from Company, or after discovery of such failure by the Servicer;

(b)

failure by the Servicer to observe its covenants and agreements set forth in Section 6.3;

(c)

failure on the part of the Servicer duly to observe or perform any other covenants or agreements of the Servicer set forth in this Agreement, which failure (i) materially and adversely affects the Company and (ii) continues unremedied for a period of 30 days after knowledge thereof by the Servicer or after the date on which written notice of such failure, requiring the same to be remedied, shall have been given to the Servicer by the Company, whichever is earlier;

(d)

the entry of a decree or order for relief by a court or regulatory authority having jurisdiction in respect of the Servicer in an involuntary case under Insolvency Laws or appointing a receiver, liquidator, assignee, trustee, custodian, sequestrator or other similar official of the Servicer, or of any substantial part of its property or ordering the winding up or liquidation of the affairs of the Servicer and the continuance of any such decree or order unstayed and in effect for a period of 60 consecutive days or the commencement of an involuntary case under Insolvency Laws and such case is not dismissed within 60 days;

(e)

the commencement by the Servicer of a voluntary case under Insolvency Laws, or the consent by the Servicer to the appointment of or taking possession by a receiver, liquidator, assignee, trustee, custodian, sequestrator or other similar official of the Servicer or of any substantial part of its property or the making by the Servicer of an assignment for the benefit of creditors or the failure by the Servicer generally to pay its debts as such debts become due or the taking of corporate action by the Servicer in furtherance of any of the foregoing; or

(f)

any representation, warranty or statement of the Servicer made in this Agreement or any certificate, report or other writing delivered pursuant hereto shall prove to be incorrect in any material respect as of the time when the same shall have been made, and the incorrectness of such representation, warranty or statement has, individually or collectively with any and all other incorrect representations, warranties or statements, a material adverse effect on Company and, within 30 days after knowledge thereof by the Servicer or after written notice thereof shall have been given to the Servicer by Company, the circumstances or condition in respect of which such representation, warranty or statement was incorrect shall not have been eliminated or otherwise cured.

Section 7.2 Consequences of a Servicer Termination Event. If a Servicer Termination Event shall occur and be continuing, Company may, by 30 days’ notice given in writing to the Servicer, terminate all of the rights and obligations of the Servicer under this Agreement. On or after the receipt by the Servicer of such written notice or upon termination of the term of the Servicer, all authority, power, obligations and responsibilities of the Servicer under this Agreement, whether with respect to the Receivables or otherwise, automatically shall pass to, be vested in and become obligations and responsibilities of the Company (or any successor Servicer appointed pursuant to Section 7.3); provided, however, that the successor Servicer shall have no liability with respect to any

obligation which was required to be performed by the terminated Servicer prior to the date that the successor Servicer becomes the Servicer or any claim based on any alleged action or inaction of the terminated Servicer. The successor Servicer is authorized and empowered by this Agreement to, at its sole expense, execute and deliver, on behalf of the terminated Servicer, as attorney-in-fact or otherwise, any and all documents and other instruments and to do or accomplish all other acts or things necessary or appropriate to effect the purposes of such notice of termination, whether to complete the transfer and endorsement of the Receivables and related documents to show Company as lienholder or secured party on the related Lien Certificates, or otherwise. The terminated Servicer agrees to reasonably cooperate with the successor Servicer in effecting the termination of the responsibilities and rights of the terminated Servicer under this Agreement, including the transfer to the successor Servicer for administration by it of all cash amounts that shall at the time be held by the terminated Servicer for deposit, or have been deposited by the terminated Servicer, in the Westlake Account, or any other account of the terminated Servicer, or thereafter received with respect to the Receivables and the delivery to the successor Servicer of all Receivable Files, Lien Certificates, Monthly Records and Collection Records and a computer tape in readable form as of the most recent Business Day containing all information necessary to enable the successor Servicer to service the Receivables. If any Obligors are not already remitting payments directly to the Collection Account, the successor Servicer shall direct such Obligors to make all payments under the Receivables directly to the successor Servicer (and the successor Servicer shall process such payments in accordance with the first sentence of Sections 3.2(b) and (c)). The terminated Servicer shall grant the Company and the successor Servicer reasonable access to the terminated Servicer’s premises at the terminated Servicer’s expense.

Section 7.3 Appointment of Successor Servicer.

(a)

On and after the time the Servicer receives a notice of termination pursuant to Section 7.2 or upon the resignation of the Servicer pursuant to Section 6.6, the successor Servicer appointed by the Company shall be the successor in all respects to the Servicer in its capacity as servicer under this Agreement and the transactions set forth or provided for in this Agreement, and shall be subject to all the rights, responsibilities, restrictions, duties, liabilities and termination provisions relating thereto placed on the initial Servicer by the terms and provisions of this Agreement except as otherwise stated herein. The Company and such successor Servicer shall take such action, consistent with this Agreement, as shall be necessary to effectuate any such succession. If a successor Servicer is acting as Servicer hereunder, it shall be subject to termination under Section 7.2 upon the occurrence of any Servicer Termination Event applicable to it as Servicer.

(b)

The successor Servicer shall have (i) no liability with respect to any obligation which was required to be performed by the predecessor Servicer prior to the date that the successor Servicer become the Servicer or any claim based on any alleged action or inaction of the predecessor Servicer) and (ii) no liability or obligation with respect to any Servicer indemnification obligations of any prior Servicer including the original Servicer. Any successor Servicer appointed pursuant to this Section will be an established institution engaged in the business of servicing subprime automobile loans.

Section 7.4 Waiver of Past Defaults. The Company may waive any default by the Servicer in the performance of its obligations hereunder and its consequences. Upon any such waiver of a past default, such default shall cease to exist, and any Servicer Termination Event arising therefrom shall be deemed to have been remedied for every purpose of this Agreement. No such waiver shall extend to any subsequent or other default or impair any right consequent thereto.

ARTICLE VIII
Miscellaneous Provisions

Section 8.1 Term.

(a)

This Agreement shall expire upon the earliest to occur of (i) the date on which the Company sells, transfers or assigns all outstanding Receivables to a third party (including to the Servicer), (ii) the date on which the last Receivable is repaid or is otherwise terminated, and (iii) three (3) years from the date of the Closing Date.

(b)

In the event that the Company terminates this Agreement other than for a Servicer Termination Event, the Company shall pay the Servicer a fee out of the Collections equal to 1.00% of the Pool Balance if said termination is prior to the third anniversary of the Closing Date. The Company and the Servicer agree that in such an event, the Servicer’s damages would be uncertain and difficult, if not impossible, to accurately estimate. Accordingly, the Company and the Servicer agree that the foregoing fee is not a penalty, but instead is intended by the parties to be, and shall be deemed, liquidated damages and no other damages will be payable to the Servicer for termination of this Agreement. Notwithstanding the foregoing, in the event the Company terminates this Agreement due to the sale of all Receivables serviced under this Agreement to Servicer or any of Servicer’s Affiliates, the above-referenced fee shall be inapplicable.

Section 8.2 Amendment. Neither this Agreement nor any provision hereof may be amended, supplemented or modified except pursuant to an agreement or agreements in writing entered into by the Servicer and the Company, and, with respect to Section 8.6, Wells Fargo.

Section 8.3 Conditions Precedent. The effectiveness of this Agreement is subject to the fulfillment of each of the following conditions: the Company shall have transferred the Receivable Files (other than those specified in clause (ix) of the definition thereof) to the Servicer.

Section 8.4 Notices. All demands, notices and communications upon or to Company or the Servicer under this Agreement shall be in writing, personally delivered, electronically delivered, mailed by certified mail, return receipt requested, Federal Express or similar overnight courier service, and shall be deemed to have been duly given upon receipt (i) in the case of the Servicer, to Westlake Portfolio Management, LLC, 4751 Wilshire Boulevard, Suite 100, Los Angeles, California 90010, Attention: Chief Financial Officer, or in the case of electronic format to [***], [***] and [***], (ii) in the case of Company, to Nicholas Financial, Inc., 2454 McMullen Booth Road, Building C, Clearwater, Florida 33759, Attention: Chief Executive Officer and Chief Financial Officer, or in the case of electronic format to [***] and [***] or (iii) in the case of any of the foregoing entities, at such other address as provided to the other entities in clauses (i) through (ii) above.

Section 8.5 Out of Pocket Expenses. In addition to the Boarding Fee, Servicing Fees, and other Reimbursable Expenses, the Company shall pay to the Servicer on the First Payment Date an amount equal to all payments, advances, charges, costs, and expenses, including reasonable attorneys' fees, expended, or incurred by the Servicer in connection with (i) the negotiation and preparation of this Agreement, (ii) filing, recording and search fees and costs, (iii) costs or expenses required to be paid by the Servicers that are paid, incurred or advanced by the Servicer (collectively, “Out of Pocket Expenses”) on or prior to the Closing Date, provided that such Out of Pocket Expenses are supported by detailed written invoices which are provided to Company in advance of the First Payment Date. Notwithstanding the foregoing, to the extent that Collections prior to the First Payment Date are insufficient to fully reimburse Servicer for Out of Pocket Expenses, Company shall pay such amount to the Servicer on the subsequent Payment Date.

Section 8.6 Assignment. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective successors and permitted assigns (it being acknowledged by the parties that Wells Fargo Bank, N.A. (“Wells Fargo”) is a collateral assignee of the Company and its rights and benefits hereunder and, as such, Wells Fargo is a third party beneficiary and is entitled to enforce the rights and benefits of the Company hereunder. Notwithstanding anything to the contrary contained herein, except as provided in Sections 6.3 and 7.3, this Agreement may not be assigned by the Servicer without the prior written consent of the Company and Wells Fargo.

Section 8.7 Limitations on Rights of Others. The provisions of this Agreement are solely for the benefit of the parties hereto. Nothing in this Agreement, whether express or implied, shall be construed to give to any other Person any legal or equitable right, remedy or claim under or in respect of this Agreement or any covenants, conditions or provisions contained herein.

Section 8.8 Confidentiality; Securities Laws.

(a)

In performing their obligations pursuant to this Agreement, each of the Servicer, on one hand, and the Company, on the other hand, may have access to and receive disclosure of certain confidential information about the other, including the names and addresses of the Servicer’s or Company’s customers or members, marketing plans and objectives, research and test results, pricing policies and practices, computer software (including programs, source code, record layouts and report formats), know-how, processes and methods, and other information which is confidential and the property of the party disclosing the information (collectively, “Confidential Information”). The Servicer and the Company agree that the term Confidential Information shall include this Agreement, the Collection Policy, the Receivable Files and the Lien Certificates. Confidential Information of the Servicer or the Company shall not include information in the public domain or which is independently developed by the Servicer (in the case of information of the Company) or by Company (in the case of information of the Servicer). The Servicer and the Company agree that, except as set forth in Section 8.8(c), Confidential Information shall be used by each party hereto solely in the performance of its obligations under this Agreement. The Servicer and the Company shall receive Confidential Information in confidence and shall not disclose Confidential Information to any third party, except as may be permitted hereunder, or as may be necessary to perform its obligations hereunder, or as may be otherwise agreed in writing by the party hereto furnishing the information, or as required by Applicable Law or any regulatory authority, including as may be necessary for examination by State licensing authorities, under federal securities laws and the rules and regulations of the Securities and Exchange Commission or in connection with any litigation or legal proceeding relating to this Agreement or the enforcement of rights hereunder. Notwithstanding the foregoing, each party hereto may share Confidential Information with its Affiliates, and its and its Affiliates’ partners, directors, officers, managers, members, employees, investors, potential investors, financing providers, potential financing providers, assignees and potential assignees and agents, including accountants, legal counsel and other advisors (it being understood that such Person to whom such disclosure is made will be informed of the confidential nature of such Confidential Information and agree to keep such Confidential Information confidential).

(b)

Except in the circumstances set forth in Section 8.8(c), in the event that any party hereto (each, a “Restricted Party”) is requested or required (by oral questions, interrogatories, requests for information or documents, subpoena, civil investigative demand or similar process) to disclose any Confidential Information, such Restricted Party will provide the other parties hereto with prompt notice of such request(s), subject to Applicable Laws, so that such other parties may seek an appropriate protective order or other appropriate remedy and/or waive the Restricted Party’s compliance with the provisions of this Agreement. In the event that such other party does not seek such a protective order or other remedy, or such protective order or other remedy is not obtained, or such other party grants a waiver hereunder, the Restricted Party may furnish that portion (and only that portion) of the Confidential Information which the Restricted Party is legally compelled to disclose

and will exercise such efforts to obtain reasonable assurance that confidential treatment will be accorded any Confidential Information so furnished as a Restricted Party would reasonably exercise in assuring the confidentiality of any of its own confidential information.

(c)

The Servicer acknowledges and agrees that the Company’s ultimate parent company is subject to public disclosure and filing requirements under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the rules and regulations of the Securities and Exchange Commission thereunder, that it is required under such laws to file a current report on Form 8-K (the “Form 8-K”) within four business days after entering into this Agreement, that it is required to file a copy of this Agreement as an exhibit to its quarterly report on Form 10-Q for the period ending December 31, 2022, and that, notwithstanding anything to the contrary in this Agreement, the Company’s and its parents’ compliance with such requirements shall not constitute a breach of this Agreement; provided, however, that the Company will make reasonable efforts to omit from the Form 8-K and redact from the filed copy of the Agreement specific provisions or terms as permitted under federal securities laws, and agrees to provide to the Servicer, prior to filing the Form 8-K and the redacted copy of the Agreement, as applicable, the relevant document in the form in which it is proposed to be filed.

(d)

Upon request or upon any expiration or termination of this Agreement, each party hereto shall return to each other party hereto or destroy (as the latter may instruct) all of the latter’s Confidential Information in the former’s possession which is in any written or other recorded form, including data stored in any computer medium; provided, however, that each party hereto may retain the Confidential Information of any other party hereto (but subject to the requirements of this Section) to the extent that such other party needs access to such information to continue to perform any of its obligations hereunder or to broker or service the Receivables or otherwise perform obligations owed by each party hereto to the other parties hereto, as necessary for auditing purposes, or as may be required by Applicable Law.

(e)

The Servicer acknowledges that it is aware, and that it will advise its directors, officers, employees, agents, and advisors who are informed as to the matters that are the subject of this Agreement, that federal securities laws prohibit any person who has received from an issuer, such as the Company, material, non-public information concerning the matters that are the subject of this Agreement from purchasing or selling securities of such issuer or from communicating such information to any other person under circumstances in which it is reasonably foreseeable that such person is likely to purchase or sell such securities.

(f)

The rights and obligations of the parties under this Section 8.8 shall survive the termination of this Agreement.

Section 8.9 Severability. Any provision of this Agreement that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions of this Agreement, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction.

Section 8.10 Separate Counterparts. This Agreement may be executed by the parties hereto in separate counterparts, each of which when so executed and delivered shall be an original, but all such counterparts shall together constitute but one and the same instrument.

Section 8.11 Headings. The headings of the various Articles and Sections herein are for convenience of reference only and shall not define or limit any of the terms or provisions of this Agreement.

Section 8.12 GOVERNING LAW. THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH, AND THIS AGREEMENT AND ALL MATTERS ARISING OUT OF OR RELATING IN ANY WAY TO THIS AGREEMENT SHALL BE GOVERNED BY, THE LAW OF THE STATE OF DELAWARE, WITHOUT GIVING EFFECT TO ITS CONFLICT OF LAW PROVISIONS.

Section 8.13 SUBMISSION TO JURISDICTION. THE PARTIES AGREE THAT ANY AND ALL CLAIMS AND DISPUTES ARISING OUT OF OR RELATING TO THIS AGREEMENT, INCLUDING, BUT NOT LIMITED TO, FORMATION, VALIDITY, INTERPRETATION, OR ALLEGED BREACH OF THIS AGREEMENT, SHALL BE BROUGHT IN STATE COURTS LOCATED IN THE STATE AND COUNTY OF THE NON-MOVING PARTY.

Section 8.14 COSTS. THE PREVAILING PARTY IN ANY ACTION TO ENFORCE THIS AGREEMENT SHALL BE ENTITLED TO REASONABLE ATTORNEYS’ FEES AND ALL OTHER COSTS AND EXPENSES OF THE PROCEEDINGS.

Section 8.15 WAIVER OF JURY TRIAL. TO THE EXTENT PERMITTED BY APPLICABLE LAW, EACH PARTY HERETO IRREVOCABLY WAIVES ALL RIGHT OF TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM BASED ON, OR ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT OR ANY MATTER ARISING HEREUNDER.

Section 8.16 Independence of the Servicer. For all purposes of this Agreement, the Servicer shall be an independent contractor and, except as otherwise provided herein, shall not be subject to the supervision of Company with respect to the manner in which the Servicer accomplishes the performance of its obligations hereunder. Unless expressly authorized by this Agreement, the Servicer shall have no authority to act for or represent Company in any way and shall not otherwise be deemed an agent of the Company.

Section 8.17 Further Assurances. The Company and the Servicer agrees to do and perform, from time to time, any and all acts and to execute any and all further instruments required or reasonably requested by another party hereto more fully to effect the purposes of this Agreement.

Section 8.18 No Joint Venture. Nothing contained in this Agreement shall (i) constitute the Servicer and Company as members of any partnership, joint venture, association, syndicate, unincorporated business or other separate entity, (ii) be construed to impose any liability as such on any of them or (iii) be deemed to confer on any of them any express, implied or apparent authority to incur any obligation or liability on behalf of the others.

[Remainder of Page Intentionally Left Blank]

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered by their respective duly authorized officers as of the day and the year first above written.

WESTLAKE PORTFOLIO MANAGEMENT, LLC,

as Servicer


By:	/s/ Todd Laruffa
	Name:	Todd Laruffa
	Title:	Vice President

NICHOLAS FINANCIAL, INC.,

as Company


By:	/s/ Michael Rost
	Name:	Michael Rost
	Title:	CEO

Servicing Agreement

SCHEDULE A

SCHEDULE OF RECEIVABLES