Enova International, Inc. (ENVA) Q3 2015 Earnings Report, Transcript and Summary

Good afternoon, and welcome to the Enova International Third Quarter Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Monica Gould, Investor Relations for Enova. Please go ahead.

Thank you, Carey, and good afternoon, everyone. Enova released results for the third quarter of 2015 ended September 30, 2015 this afternoon after the market close. If you did not receive a copy of our earnings press release, you may obtain it from the Investor Relations section of our website at ir.enova.com. With me on today’s call are David Fisher, Chief Executive Officer and Robert Clifton, Chief Financial Officer. This call is being webcast and will be archived on the Investor Relations section of our website. Before I turn the call over to David, I’d like to note that today’s discussion will contain forward-looking statements based on the business environment as we currently see it, and as such, does include certain risks and uncertainties. Please refer to our press release and our SEC filings for more information on the specific risk factors that could cause our actual results to differ materially from the projections described in today’s discussion. Any forward-looking statements that we make on this call are based on assumptions as of today, and we undertake no obligation to update these statements as a result of new information or future events. In addition to US GAAP reporting, we report certain financial measures that do not conform to generally accepted accounting principles. We believe these non-GAAP measures enhance the understanding of our performance. Reconciliations between these GAAP and non-GAAP measures are included in the tables found in today’s press release. As noted in our earnings release, we have posted supplemental financial information on the IR portion of our website. And with that, I’d like to turn the call over to David?

Good afternoon. Thanks for joining our call today. I’m going to start giving a brief overview of the quarter, along with an update on our new business initiatives before turning the call over to Rob Clifton, our CFO, to discuss our financial results in more detail. Overall, we remain pleased with the trajectory we are on at Enova. Consistent with our strategy to diversify [Technical Difficulty] Enova for future success. Despite the growth in vast [Technical Difficulty] profitable company. For the third quarter revenue of $165.2 million, which was at the lower-end of our guidance. Revenue is generally strong across our products in the quarter. However, we did see some softness in demand for our U.S. short-term loan products. We’re not seeing increased competition in this space and believe the softness is largely macroeconomic, as the U.S. is experiencing low unemployment, rising wages, and low gas prices. Fortunately, these same factors are positive for our longer-term installment products, particularly NetCredit our near-prime product. And overall, we’re seeing positive trends with total company-wide originations, up almost 22% over the last quarter. Adjusted EBITDA of $25.2 million for the quarter did fall short of our expectations. However, most of the shortfall was the result of positive factors, particularly the acceleration in our U.S. installment loan portfolio, which grew nearly 25% sequentially in the third quarter, up from 14% sequential growth in the second quarter. When our installment loan book is growing, we need to have a lot of provision upfront, which is what we did in the quarter resulting in a hit to EBITDA. We also saw higher mix of new customers in the quarter, again, relative to loans to returning customers, loans to new customers result in higher levels of provision. While somewhat painful in the short-term, both of these developments are positive over the longer-term. The expansion of our installment loan portfolio has added significant earning power to our balance sheet, and the growth in new customer volume shows that we’re continuing to take market share. As as these customers become seasoned, our provision levels will be lower and thus our profits on those loans will be higher. The growth in our installment loan portfolio also reflects our focus on executing on our diversification strategy. Our new products continue to exceed our expectations and are poised to become meaningful contributors to our future growth and profitability. During the third quarter, recently introduced products grew to nearly half of our portfolio, led by NetCredit. NetCredit continues to grow at a very rapid pace with originations of 26% over Q2 and loan balances up 20% sequentially and 94% from last year. As a result of this growth, more than two-thirds of our loan portfolio represents installment loans and lines of credit. Importantly, less than 13% now represents domestic short-term loans. Our plan to further accelerate the growth of NetCredit by establishing loan programs with a small number of banks remains on track. These programs will focus on sub-36% APR loans and we’ll have the similar margin profile and profitability characteristics as our direct loans. The first of these programs is scheduled to launch this quarter with a multi-billion dollar commercial bank in the South that is deep expertise and national lending programs. We’re also on track to work with additional banks early next year. These relationships will enable us to expand our near-prime product into additional states with a goal of growing NetCredit’s footprints from 13 states currently to more than 40 states. We’re obviously a strong believer in the future of the near-prime market and are pleased with the recognition NetCredit has been receiving for its product innovation. Our recent report CFI – CFSI entitled a snapshot of quality and innovation among small dollar credit installment lenders highlighting NetCredit as an innovator in the industry as a result of its adoption of some of the high-quality practice – practices from the Compass Guide to Small-Dollar Credit. This comes on the heels of earlier findings from CFSI’s Test & Learn Working Group, which analyzed innovative products and features being piloted by small group of lenders. Among other findings, the report show that NetCredit’s approach to giving consumers choice in their payment amount yielded lower default. We’ve also made good progress with our two new international businesses; Brazil and China. The business we launched in Brazil in mid-2014 continued to perform very well to the point, where we are moving it out of the pilot phase and we begin to more aggressively ramp up loan growth there. But we don’t expect a meaningful financial contribution from this product until 2017. The strong economics we are seeing in our product there means that we also don’t expect it to be a significant drag in 2016. While the Brazilian economy has been a little shaky over the last year or so, we believe this represents a good entry opportunity, as building the loan book is cheaper in U.S. dollar terms and we should be better positioned to capture market share from offline lenders. As for China, last quarter we discussed our plans to apply for a national license. We submitted the application to the Chongqing regulator late in Q3 and have passed the first step of the approval process. We’re now supplying the regulator with additional information as expected and are optimistic we will be successful in obtaining the license. As I mentioned, less than 10 of these licenses have been granted. So if we are successful in getting our license there, we believe we will be in a very strong position to build a large national business in China together with our joint venture partner. On the small business side, we made significant progress during the quarter integrating a recent acquisition. As most of you know, we acquired certain assets of the business factor into Q2 because of their deep understanding of small businesses, their ethical best practices, and a customer-first mentality, as evidenced by being named the Better Business Bureau Torch Award winner from marketplace ethics and U.S. Chamber of Commerce mover in the business. Because of the values spent in shared vision, the integration has been fast and relatively seamless. This includes bringing our technology, data, and advanced analytics, as well as our marketing expertise and balance sheet to TBB’s platform and bringing their deep knowledge and small businesses to our existing headway product. We believe this combination positions us well to be successful in serving the small business marketing for the future and our small business offerings are beginning to contribute meaningfully to our results. Our small business portfolio has more than doubled in each of the last few quarters and is approaching 10% of our total portfolio. These new products and NetCredit’s continued growth led to a 40% year-over-year increase in U.S. installment loan revenue. In addition, the combination of installment loans, lines of credit, and RPAs now can provide 67% of our total revenue and 82% of our total combined loan and finance receivable balance. Looking forward, we continue to see the bulk of our growth coming from installment loans, lines of credit, and RPAs, as all of our recent new product introductions and new initiatives have involved one of those products. Turning to our UK business, we are pleased to report that the return to growth we saw in the second quarter continued into the third, the sequential growth in UK loan originations was 23%, improving on the 19% sequential growth we generated in Q2. Moreover, as announced earlier this morning, the FCA, our regulator in the UK announced findings related to our section 166 review. We believe this is an important step towards achieving full authorization in the UK. This review focus primarily on changes we put in place in 2014 to adapt to the new rules established by the FDA and as part of our honest going commitment to ensure we are meeting new regulatory requirements set by the FDA. The section 166 review was a collaborative effort between us, the FDA, and the third-party firms to audit these enhanced measures and confirm they’re performing as designed. On the whole, we believe the review was a success, finding that we had implemented appropriate standards and protocols. And factors determine that fewer than 4,000 customers, about 2% maybe experienced some detriment because they may not have met our enhanced standards. The vast majority of these loans were originated between April and August of 2014, while we’re still making changes to our products to comply with the new rules. We’re committed to making things right for those customers and we’ll be offering redress in the form of a credit or refund totaling about 1.7 million pounds. Almost all of this was reserved in Q2. To put that 1.7 million pounds in context, earlier this month the FDA announced that 15.4 million pound redressed for Dollar Financial, following on a 20 million pound redress from Cash Genie this summer and a 220 million pound redress from Wonga last year. Clearly, we think this demonstrates a long-standing commitment to compliance, as well as our ability to rapidly adapt to regulatory changes. Now, I want to turn briefly to the ongoing CFPB rulemaking process. While there’s not been a lot of additional information regarding the substance of what the CFPB will propose, the industry continues to anticipate that the proposed rules will be published late this year or early in 2016. Once we’ve had an opportunity to review and evaluate the proposed rules, we intend to communicate our assessment of the potential impact on our business to all of you. As a reminder, following publication of the proposed rules, there will be a common period followed by a CFPB response. Once final rules are published, there will also be – will be an implementation period of up to a year, expected highly and likely that the new rules would take effect before 2017. As we said before, we remain confident that our extensive expertise navigating regulatory change most recently in the U.K. as I just discussed combined with the success of our diversification efforts position us well to minimize the impact to our business from rule changes. To summarize on the quarter, we continue to execute on our recent product introductions, while building a healthy pipeline of additional growth opportunities. Our success in these areas can be attributed to the strength of our proprietary technology platform and advanced analytics, as well as our very talented employees. We plan to continue to invest in our platform and our people and as part of these efforts, we are excited to welcome Greg Zeeman, as a new Chief Operating Officer of Enova. Greg brings deep global experience and strong understanding of financial services and the banking industry, while possessing entrepreneurial drive that is core to Enova’s culture. Now, I’ll turn the call over to Rob to go over the financials in more detail. And following his remarks, we would be happy to answer any questions that you may have. Rob?

Thank you, David, and good afternoon, everyone. I will first review our financial and operating performance for Q3 and then provide our outlook for the fourth quarter of 2015. In order to provide the full context for the quarter, I want to begin my remarks with the key role new customer acquisitions played in our performance. We experienced the largest number of new customer loan originations since the fourth quarter of 2013. In fact, the dollar amount of new customer loan originations during Q3 was the highest in Enova’s history. As David commented, total combined loan originations for the company increased 21.8% from the second quarter. As a result, our total combined loan and finance receivable balance outstanding increased $82 million during the quarter to a record $482.2 million. When portfolios experience strong growth, heavier loss provisions to build allowances do create downward pressure on gross margins until the portfolio becomes more seasoned. While we are very encouraged by the strong growth in originations during the quarter, revenue came in at the low-end of our guidance, while adjusted EBITDA was below our expectations, due to the strong portfolio growth and a heavier mix of new customer originations. On a year-over-year basis, total revenue of $165.2 million in the third quarter declined 19.5% from $205.2 million in the third quarter of last year, primarily driven by regulatory changes in the United Kingdom and to a lesser extent the negative impact of currency fluctuations. On a constant currency basis, revenue declined 17.9% from a year ago. Sequentially, revenue increased to strong 13%, and we experienced sequential growth across all of our product categories, both domestically and internationally with the exception of our U.K. line of credit product, which was discontinued at the end of 2014 due to regulatory changes. Domestic revenue accounted for 81% of total revenue in the quarter and rose 6% on a year-over-year basis to $133.7 million. This performance was driven primarily by the continued growth in our installment products, which increased 40% over the prior year period led by the growth in our lower-yielding NetCredit portfolio. While new customer loan originations were also stronger for our higher-yielding CashNetUSA products, we did see weaker than expected demand from returning customers. UK loan originations continue to gain momentum, accelerating to 23% sequential growth in the third quarter, up from a 19% increase in the second quarter. Year-over-year international revenue declined 60% and accounted for 19% of our total revenue in the third quarter. The decline is primarily due to the changes in the regulatory environment in the UK that occurred after March 31, 2014. We have now lapped the sharp decline in UK originations and beginning with the fourth quarter, we expect UK loan originations to comp higher on a year-over-year basis. As mentioned earlier, we ended the quarter with total combined loans and finance receivable balance outstanding of $482 million, up 17.9% from $409 million in the third quarter of last year. Domestic loan balances were up 46% on strong growth from our NetCredit installment loan portfolio, which now accounts for over one-third of our total portfolio. International loan balances were down 42% on a year-over-year basis, due to regulatory changes in the UK to a lesser extent the strong dollar relative to the local currencies in the foreign markets we operate in contributed to the year-over-year decline in international balances. On a constant currency basis, international loan balances were down 33% year-over-year. Our UK line of credit product had a remaining portfolio balance of only $500,000 as of September 30, 2015. Excluding the UK line of credit product, our international loan balances increased nearly 8% on a sequential basis from the second quarter. Turning to gross profit margins. Third quarter gross profit margin for the total company was 60.3%, down from 64.5% in the third quarter of last year, primarily driven by the growth of NetCredit and a higher mix of new customers, which require higher loss provisions as new customers default at a higher rate than returning customers with a successful history of loan performance. Product mix also contributed to the margin decrease with greater weight attributed to the lower-yielding domestic installment product balances. Domestic gross profit dollars were up 5% on a year-over-year basis, while the gross profit margin declined slightly to 55.8% from 56.3% in the prior year quarter. Our international gross profit margin was 79.2% in the current quarter, up from 77.4% in the same quarter last year. As has been the trend over the last several quarters, the increase in international gross profit margin was driven by stricter underwriting in the UK, as a result of the regulatory changes and the continued wind down of the UK line of credit portfolio. Excluding the discontinued UK line of credit product, our international gross profit margin was 66.6% in the current quarter. We believe loan originations will continue to increase in the UK and expect gross margins to normalize in future quarters. Depending on the level of loan originations and the mix of new and returning customers, we expect our international gross profit margin to range between 65% and 75%. Turning to expenses. Total expenses declined 9.6% year-over-year, driven by lower general and administrative or G&A expenses. G&A expenses decreased $8.5 million, or 27.4% to $22.6 million in the current quarter compared to $31.2 million in the prior year quarter. This decrease was primarily due to lower incentive accruals, lower third-party legal and regulatory expenses, and lower incremental standalone expenses in the current quarter compared to corporate service costs allocated from Cash America, our former parent in the prior year quarter. Marketing expense increased 6.5% over the prior year quarter in all major markets, as we drove stronger and new customer acquisitions. We began increasing our marketing spend in the UK at the end of Q2 and continued those programs throughout the current quarter. We believe that we have increased our market share in the UK since the regulatory changes were implemented, and this increased spend positions us well as the FCA completes the authorization process over the coming months. Adjusted EBITDA, a non-GAAP measure totaled $25.2 million in the third quarter compared to $48.4 million in the prior year quarter. Our adjusted EBITDA margin decreased from 23.6% for the third quarter of last year to 15.3% for the current year quarter. Our stock-based compensation expense was $2.6 million for the third quarter compared to 87,000 in the prior year quarter, which was before the spinoff from Cash America when our long-term incentive plans were cash-based performance programs. Net income totaled $4.4 million in the quarter, or $0.13 per diluted share compared to net income of $18.5 million, or $0.56 per diluted share in the prior year quarter. Adjusted earnings, a non-GAAP measure totaled $6.2 million in the quarter, or $0.19 per share compared to $18.6 million, or $0.56 per share in the prior year quarter. We ended the quarter with cash and cash equivalents of $34.3 million and we maintain – we continue to maintain over $58 million of borrowing capacity on our credit facility. Cash provided by operations decreased to $71 million in the third quarter from $121 million in the prior year quarter. The decrease in our cash balance from the second quarter was driven by our investment in growing our loans and finance receivables portfolio. As we close out 2015 and head into 2016, we believe we have the opportunity to finance NetCredit’s portfolio growth through whole loan sales and/or asset securitizations, and we expect to complete one or more transactions during the fourth quarter. For the balance of the business, we believe our strong cash flow will continue to satisfy our working capital needs. With that, I would like to turn to our outlook for the fourth quarter of 2015. As noted in our earnings release, in the fourth of 2015, we expect total revenue to be between $160 million and $180 million and adjusted EBITDA to be between $20 million and $30 million. Our outlook reflects continued strong growth in our NetCredit portfolio of continued higher mix of new customers and no changes in the competitive landscape in the United Kingdom. With that, I’ll hand the call back over to David for his additional remarks.

Thanks, Rob, and thanks, everyone, for joining us today. We look forward to updating you on our progress next quarter and we’ll now take your questions.

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Bob Ramsey of FBR. Please go ahead.

Hey, good evening, guys.

Hey, Bob.

Hi, Bob.

Do you have the total dollar amount of originations this quarter and last?

Bob, we don’t generally disclose the total originations. But they were directionally, I would say, they were definitely up from Q2.

Okay. Talking about revenue, obviously, it sounds like it was a very strong quarter for the growth in originations and the revenue still kind of came in at the low-end of guidance. I’m just curious if your originations in growth were still lower than maybe you guys were expecting for the mid where your guidance previously had been, or whether there was a shift mix or timing issue, or kind of how to think about very strong goal in loan originations and your revenues that are kind of coming in the lower-end of what you expected?

Yep. So, Bob, most of the higher growth in what we expected was in the lower-yielding products, so that was in the NetCredit and some of the small business financing portfolios. As I mentioned, we did have some weaker returning customer originations on some of the higher-yielding products. So our expectation was that, we were going to have greater originations there. We did make up some of it with new customer originations, but overall, it’s the shift between lower-yielding and higher-yielding products.

Okay. Do you have the balance of NetCredit loans this quarter?

It’s a $165 million at the end of the quarter.

Great. And what is the yield on that portfolio?

Generally, those have ranged anywhere from 60% – the portfolio as a whole between 60% and 70%, and that stayed pretty consistent the last couple quarters, it’s just the – with a heavier mix of that portfolio for the aggregate portfolio, it has lowered the overall yield.

Okay, great. And then I know you all have been sort of pushing that product or starting to launch that product in the UK. I’m just curious, is the UK near-prime product included in that balance, or was that just the U.S. NetCredit, and then maybe you could talk a little bit about the growth in our products in the UK this quarter?

Yes, that’s just U.S. NetCredit. The near-prime product in UK is still small. We rolled out some enhancements to the product early this quarter and fourth quarter, and we’re watching that product carefully as we go into 2016.

Great. I’ll hop out and jump back in maybe later. Thank you.

Thanks.

Our next question comes from David Scharf of JMP Securities. Please go ahead.

Thank you. A few questions. Dave, I wonder if I can shift to the expense side for a moment, the marketing expenditures over $35 million was obviously a big jump from the first-half of the year, now it sounds like part of that was jumpstart in UK marketing again. But I’m wondering, should we be thinking about $35 million to $40 million a quarter, it is a go-forward run rate alternatively, as we think about lower than expected demand on the single-pay product in the U.S., perhaps you’re going to cut back. Just trying to get a sense for ultimately what kind of customer acquisition costs we should be thinking about?

Sure. So there’s definitely ramp up this quarter. I think, it was a combination of getting more aggressive in the UK, which you can see clearly paying off with that 23% sequential growth in the UK on top of the 19% sequential growth the quarter before, that’s been pretty strong growth in that business couple of quarters in a row clearly showing that we are kind of in that floor that we hit in that business in Q1. But also additional growth in the NetCredit business and we’ve launched some [indiscernible] in the NetCredit business that proved to be very successful. So we spent some more there during the quarter. I think going forward for at least the next couple of quarters and we constantly reevaluate our marketing, it’s one of the levers we can’t pull intra-quarter is we see changes and do on almost daily and weekly basis. But assuming things continue the way – look the way they did last quarter and how we’re seeing them now, I would think about marketing as a percentage of revenue kind of in line with where it was in Q3.

Okay, that’s helpful. Also on the international revenue maybe just following up on Bob’s broad question about the timing of how revenue flows through. We now have two quarters in a row, I believe 19% sequential growth last quarter over 20% sequential growth on top of that in originations in Q3. And it looks like the revenue actually declined sequentially from Q2 to Q3. Is that entirely just the last remaining runoff of the line of credit product that’s weighing on that, I mean, excluding that would have – we have seen a sequential rise in revenue?

Yes, you would have.

Got it, okay.

I mean, it makes for a tough comparison. There is growth there, in particular, on the short-term product in the – on the international side, it’s been growing at a good clip. So, I think, once we’re now that we’re kind of completely done with the UK line of credit from a contribution standpoint, I think it will be easier to see that comparison.

And as Rob mentioned earlier is, we’re growing market share in the UK. We’re adding lots of new customers. And so there’s new customers, as we’ve talked about our lower profitability initially requiring higher provision, which is why in addition to what the comment you’re making on revenue, there’s more of an impact to EBITDA as we put on that provision. But if those customers matures, again, lots of new customers as we’re going market share with that fast sequential growth in the UK. As those customers become seasoned, there’s lots of additional earning power that we expect to see in that business coming into 2016.

Got it. And along those lines just to clarify the commentary around gross margins in the UK between 65% and 75% going forward, that’s obviously consisting with sort of this quarter when you exclude the line of credit wind down. Is that just to understand, there’s still an evolution here, where you’re growing quickly in the UK, or you’re reaccelerating, you’re still going to be provisioning upfront, I would assume, gross margins going to be artificially depressed a bit, is 65% to 75% your view of sort of normalized sustainable, I don’t want to say mature, but a more normalized gross margin level over there?

Yes. And I think where we’re in the range depends a little bit on how many new customers you’re adding, how fast you’re growing. We see for now and obviously the competitive environment to change. For now, we see fairly strong margin in the UK because of the more restrictive underwriting there, basically lining to higher credit quality customers resulting in higher margins. Again, as we grow that business quickly and are adding lots of new customers, we could be for a while at the lower-end of that range potentially even slightly below foregoing the business very rapidly. But longer-term, we do see that kind of 65% to 70% as you put normalized margins there.

Okay. And then last question, I’ll hop out. Is it relates to the fourth quarter guidance, both the top line and EBITDA. Would it be fair to characterize the reduction has been heavily, heavily weighted towards just the lower than expected demand for the U.S. short-term product, or are there other factors involved that are equally weighted there?

I think today we view the fourth quarter a lot like the third quarter, where we’re seeing strong growth in NetCredit. We’re seeing positive results from some of our new initiatives. We’re seeing continued growth in the UK, and we’re not seeing and when you think about that, say, any short-term product, we’re not seeing weakening. But we’re trying to be cautious about where demand is and we’re not forecasting a substantial amount of the additional demand for that product throughout the end of the year.

Got it. Thank you very much.

Yep.

[Operator Instructions] Our next question comes from Trent Porter of Guggenheim Securities. Please go ahead.

?:

Yes, sure. Well, I think becoming authorized in the UK would certainly be – we’d certainly believe would be a positive to our full originations and being able to publish that. We are – have received full authorization from – do you think would be positive from the, let’s say, would be positive from the customer’s perspective. We also believe that some companies won’t get authorized in the UK, and will be forced to seize operations, which would benefit us from a competitive standpoint. So we are looking forward to the completion of this process. As we mentioned, we think there’s kind of next step with 166 review on the redress we provide to our customer was excellent step forward, certainly, kind of, relative to some of the other peers who had much larger redress amounts. And the FCA is doing a diligent process and we certainly are not here to rush them and we’ll take the time they need and we’ll assist them irrespective of the work.

Okay, I’m sorry, I should have picked up on that, I’m sorry. The next question is NetCredit product. I wonder if you could $165 million in receivables at the end of the quarter, I think that’s up 37% of your total receivables. What percentage of your U.S. installment receivables is now represented by NetCredit. And I wonder if you can talk a little bit about – you touched on this, but a little bit more detail the economics of the NetCredit product when fully seasoned versus the economics of your traditional installment product when fully seasoned?

Sure. I don’t have that percentage on top of my head, although it is in our disclosures. Rob might be trying to do the math, while I talk here. But with respect to the economics of the product the thing that we focus on those with all of our product is EBITDA margins, that’s the way we kind of measure the success of the project, measure project – products against each other and making sure we’re being compensated for the risk we’re taking and originate in each of those – in each of our products. And we target mid-20 EBITDA margins for all of our products. And the NetCredit product while having lower revenue per dollar originations, because there are significantly lower defaults and losses in that product and lower expenses per loan have similar EBITDA margins to our other products.

That’s helps a lot. I’m sorry.

Trent?

Yes.

Trent, it’s glad you know. So the NetCredit portfolio represents about 54% of our total installment in RPA portfolio.

Okay.

So it’s more than 50% now.

Okay, great. Okay. Thank you very much.

Yep.

Our next question comes from Henry Coffey at Sterne Agee CRT. Please go ahead.

Good afternoon and thank you for taking my call. In terms of trying to understand the redress costs, where do they show up in your numbers in the provision or elsewhere?

So of the 1.7 million pounds, or I guess, it’s a $2.6 million in U.S. dollars, most of that would be loans that went uncollectible and they would have been reserved for a charged-off. The actual cash refund portion of that is expected to be approximately $450..

$450,000.

$450,000, sorry. And that was basically set up is, it would show up as an operating expense.

And then when we look at – when I was – I was looking at the analyst supplement and the just looking at the sequential pattern, so obviously significantly better than anything reported last year, we did see a big jump up in both provision levels and net charge-offs on the short-term loan product and a big jump in provision levels on the line of credit product. The installment loan product the provision and charge-off growth was pretty much in line with what you would expect given balanced growth, as well as seasonality. So I was wondering if you could kind of breakthrough A, in terms of country with the losses – accelerating losses do they – those occur in the U.S., do they occur in the UK, and I know you talked about the new customer issue, which I’m assuming would impact provision, but not necessarily charge-offs?

Yes, the provision that some I go through here a little bit at a high level. The provision on the installment product doesn’t look like it grew percentage wise as much as you would think, because a lot of the new loans on the installment product for NetCredit products, which have lower losses, or lower provision as a percentage. A lot of the provision you were seeing added in the short-term product is a combination of the growth the 20% plus sequential growth in the UK, which is again a lot of new customers plus also a slight mix shift in the U.S. where we’re adding more new customers relative to return in customers.

And then the charge-offs were – I’m trying to add the public schedule again but…

Yes, I mean when Henry, when you look at it we were very comfortable when we look at see the charge-offs levels as a percentage of average balances really for all the portfolios they still look very reasonable and in line it’s really the growth that that has resulted in the heavier provisioning. On the short-term side on the U.S. I mean we did see with weaker demand and more the demand coming from new customers as you pointed out we did see a little bit of a spike there a little bit more delinquent versus prior year. But the other thing to keep in mind is on the international side. We were contracting the UK business a year ago. And so you – I mean you had lower balances and you had and pulling back on the balances you had some provision coming out. And then you also had tighter and stronger performance from the tighter underwriting. So it is, it does make the comparison on the international side a bit difficult. But to your point little bit of the weakness in the short-term side on the U.S. it was up a bit. But I think if we do see a stronger return on returning customers in Q4 I think that would be very positive. But typically it’s December is the kind of the make or break month.

Great. Thank you.

What the quarter looks like.

I mean Christmas and the holidays?

Yes, around the holidays yes.

Yep.

Yep. And that’s also in the UK as well.

Thank you.

All right Henry, have a good evening.

[Operator Instructions] Our next question is a follow-up from Bob Ramsey of FBR. Please go ahead.

Hi, thanks for taking a follow-up you all mentioned in your prepared remarks plans to do sale or securitization of some NetCredit loans here in the fourth quarter. And I was just hoping maybe you could give us a little more information about that transaction maybe the anticipated size. How you guys are thinking about portfolio lending versus the sale of loans in the future, whether this is part of the bank partnership that you guys described or whether we should think about those two items separately et cetera?

Yes, though it’s not part of the bank partnership although going forward looking in 2016 to the extent we acquired loans back from the bank is part of that relationship those are certainly loans that we could look to sell our securitized going forward. With respect to the fourth quarter we are pursuing a couple of different path and we’re pretty far down the road and we’re waiting to finalize economics to see the best approach for us. The good news is we have several options open, several avenues open for obtaining additional liquidity in the fourth quarter and we’ll anticipate executing on one or more of those are likely in early to mid-December.

Okay, and is it fair to assume that this is a transaction just of all the involving new originations you wouldn’t be selling seasoned loans, but just looking at the sort another piece of new production loan?

No, we would be selling loans that are on our balance sheet this isn’t just slowing and we’ve initially new origination into it. We would be taking existing loans off our balance sheet.

Okay. Any indication [indiscernible] at this point?

Not right now. No.

Okay, and then I guess just in terms directionally of the income statement we should expect to see some sort of gain on sale on the transaction in the fourth quarter, but reduction in earnings assets and your interest and fee based income?

Yes, Bob I would say it’s a little premature to be talking about kind of the implications, I would say that we’re – most of the transactions that we’re looking at would be securitizations they would more than likely those loans would stay on our balance sheet. In that the indebtedness that comes out of that transaction would be captured in an SPV and would purely recourse would be those receivables. So I would expect it to still stay on our balance sheet, if we did a loan sale lot of that’s going to depend on the structure, but I would say most of the transactions we’re evaluating our securitizations.

Got it. Okay I understand little better. Thank you.

Our next question is a follow-up from David Scharf of JMP Securities. Please go ahead.

Thanks for squeezing me and again. I’m wondering you provided some nice color on actually the exposure on the balance sheet to the U.S. short-term the single day product. I guess it’s 13% of net receivables at the end of September I know you don’t provide this type of disclosure. But to help frame for us ultimately what the current exposure is to potential CFTB real finalization. Can you give us a sense for that 13% how we ought to be thinking about that from an EBITDA perspective?

What percentage or EBITDA is generated by that 13%.

Yes, that would be very helpful if there is a ballpark just so we I mean obviously that concentration keeps declining, which I think is viewed positively, but we still want to get a sense definitely for it?

Yes. That’s not a number we breakout right away, but we have talked it once the preliminary rules come out that we will after we digested it, we will provide the street our expectations of the impact if they worked [indiscernible] in that format.

Okay. Got it. And then one last question on NetCredit you provided some color on the weighted average yield of that portfolio. I think last quarter when discussing the bank partnership. The couldn’t recall if perhaps that was a vehicle for introducing more sort of sub-36% lending. Is – are there sub-36% loans currently within the NetCredit product. And is any of that in part of sort of the fourth quarter revenue expectation?

Yes, there are about 40% of the NetCredit portfolio is sub-36% loans today. And all of the loans that will be originated as part of the bank program will be sub-36% loan. So it’s a big initiative to grow that piece of the NetCredit business.

Got it, very helpful. Thank you.

Yep.

And this would conclude our question-and-answer session. I would like to turn the conference back over to David Fisher CEO for any closing remarks.

Thank you again everybody for joining our call this after noon and thank you for the questions. We look forward to speaking with you again next quarter.

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect your lines. Have a great day.