Ever since becoming E-Loan Inc.’s chief executive in 1998, Christian A. Larsen has been one of the industry’s most visible public-policy advocates, specifically in the area of customer privacy.
That may have won E-Loan some points in the marketing world, but it wasn’t enough to keep profits up when refinancings tapered off. So last year the company focused on revamping its capital markets operations to get its funding costs under control.
The results: fourth-quarter earnings that exceeded analysts expectations, and Mr. Larsen’s decision to hand over the CEO job to Mark Lefanowicz, the architect behind the revamping.
In an interview Thursday, Mr. Larsen, who will stay on as chairman of the company he co-founded, credited Mr. Lefanowicz for helping the Pleasanton, Calif., lender “learn how to play with the big boys.”
“He’s really brought a very refreshing and very constructive tactical approach to some of these complicated areas,” including loan sales, hedging, and warehouse financing, Mr. Larsen said.
In the same interview Mr. Lefanowicz credited Mr. Larsen with deciding about a year ago that personnel changes were needed to advance his idea of a consumer-friendly online lender.
“I think he figured out that there were certain strengths the management team didn’t have that he needed to upgrade,” Mr. Lefanowicz said.
A director since 2002, Mr. Lefanowicz joined E-Loan’s executive team in January 2004, when he was named chief operating officer. (He added the president’s title in June.) He said his accomplishments include using his capital-markets relationships and expertise to find cheaper warehouse financing.
Under his direction E-Loan has been holding loans longer to capitalize on the interest income and the higher prices Wall Street will pay at the end of each quarter.
He said he has also expanded the stable of buyers invited to bid for the company’s loans. Another move has been to set aside Community Reinvestment Act-eligible loans from E-Loan’s regular sales so they can be sold to banks that need them for the credit, he said.
Mr. Lefanowicz said he has helped recruit employees to E-Loan’s capital markets team, though it has not grown in head count. “In size no, but in quality yes.”
On a conference call Thursday to discuss fourth-quarter earnings, Mr. Larsen said revenue per home equity line of credit rose about 25%, “while we retained aggressive pricing to the consumer.”
Revenue per first mortgage loan increased about 5%; loan sizes for both were little changed.
George Sutton, an analyst at Craig-Hallum Capital Group LLC, said E-Loan’s approach has been gaining traction with consumers, as reflected by the increasing percentage of applicants who close on loans and data on customer satisfaction.
“I expect Chris to remain very focused on the strategy,” Mr. Sutton said.
Mr. Lefanowicz said Mr. Larsen will be free now to concentrate on “new vision opportunities.”
Mr. Larsen emerged as a political player during his campaign for a voter’s initiative to create a California financial privacy law, which helped lead to a state law. He then appeared in ads in Washington publications opposing changes to federal privacy rules.
“As founder as the company,” he said on the conference call, “I’m excited to continue to serve the company as an active chairman, and to help Mark and the company to remain as focused as ever on our pro-consumer values.”
Asked if he might go into politics as a career, Mr. Larsen said: “That’s never going to happen. Those are the worst jobs to have.”
Mr. Lefanowicz, who previously was CEO of Bay View Franchise Mortgage Acceptance Co., took on his executive responsibilities at E-Loan after the departure of Joseph Kennedy. Mr. Kennedy had been president and chief operating officer for five years; his term ended when E-Loan’s 2003 fourth-quarter earnings plunged to near break-even as refinancings slowed.
E-Loan said net income in last year’s fourth quarter jumped to $1.04 million, or 2 cents a share, from $190,000 a year earlier. Analysts had been expecting another break-even quarter.
Revenue for the three months rose 36%, to $36.2 million, including increases of 53% in home equity, 8% in auto lending, 45% in prime mortgage refinancings, and 10% in nonprime and purchase mortgage lending.
Last year E-Loan had a pretax profit of 1 cent. This year it forecasts 13 cents, which would top the analysts’ estimate by 4 cents. It also projected a 22% increase in revenue. Shares of E-Loan, which had fallen this week, surged 14% Thursday.
The flattening yield curve hit the company’s fourth-quarter loan volumes in several ways. Home equity lending was lower than in the third quarter, and auto loans were down quarter to quarter and year over year.
But as short-term rates rose and long-term rates surprisingly fell, and as spreads between home equity lines of credit and first mortgages shrunk, E-Loan found relief from an old friend: prime refinancings. They were 29% higher than in the third quarter.
Mr. Larsen said borrowers were still looking to tap equity out of their homes. “This is a very different conclusion” than in the third quarter, when home equity lines of credit “were clearly favored by consumers,” he said.
Efforts to stabilize revenue were evident in the full-year results. Prime refinancings brought in 27% of revenue, against 47% in 2003, the height of the refi boom.
On the home equity side, changes to capital markets activities helped offset the quarterly volume decline.
Executives said rising short-term rates hurt auto lending’s per-loan revenues and volumes more than expected, though auto revenue rose 8% from a year earlier.
E-Loan disclosed during the conference call that the company is stepping up advertising efforts. It will unveil a television campaign next quarter and has hired Merkley + Partners, a New York firm that has been a driving force behind JetBlue’s branding.
Marketing expenses over all are expected to rise 22%, or $9 million, this year. Executives said on the call that this increase is in line with their forecast for a $30 million revenue growth expected from the heavier marketing.
E-Loan is also working out deals with realty firms, which are said to be a key in a purchase mortgage market. E-Loan executives were not specific, but Mr. Sutton called realty relationships a “golden goose” that E-Loan has “never really had access to.”
E-Loan said it has signed agreements with two real estate brokerages, one in the Midwest and one in the Southeast, each with about 350 agents.
Mr. Lefanowicz said they were not exclusive relationships. “Twenty percent of their business would be awesome in terms of what it could potentially do for us,” he said.
