Strength to Stability

Northland didn’t have the means to pay the fine and continue with business as normal without falling below its capital requirements. Other securities firms, eager to acquire Northland, were circling. Northland hoped to find a business partner who appreciated local ownership. Then its top officers journeyed to Mankato to meet with Taylor. Within a week, they had a deal: Taylor agreed to take a big stake in the firm if its employee-owners would put in an equal amount. They did.

“He didn’t know us from Adam,” says Northland CEO Randy Nitzsche. “He liked the concept.” Taylor and his associates hold three of the seven board seats at Northland’s parent holding company. He says the deal has worked out well for himself and for Northland.

“I liked them instantly,” Taylor adds. “They’re all engaged. Part of their income is based on how well the company does. I think that just brings a different attitude.”

But the battle with MJSK took its toll. The firm lost money in 2004. Its 2005 revenue was about $16.5 million, well below the target of $20 million. “Growth has not come as fast as we originally planned, but 2005 was somewhat of a rebuilding year and the focus was on profitability,” Nitzsche says. Last year, revenue grew nearly 10 percent to just under $18 million despite national declines of 5 percent in municipal bond sales overall and 33 percent in bond refundings.

When Northland started out, it derived nearly all of its revenue from the bond market. Nitzsche says the non-bond share has risen to about 20 percent now. He’d like to see it climb to 40 percent or more by 2010.

That won’t be easy. The distribution networks for selling bonds differ from those for selling equities, limiting the efficiencies that can be gained by scaling up the equity side of the business.

 

Full-Court Press

Northland has been attracting top talent. John Schumacher, a December hire from MJSK, specializes in sifting through junk-bond issues to identify issuers ready to rebound. His Bondhawk distressed bond fund, which he ran at MJSK for a 41-month period that ended in mid-2004, returned $1.48 to investors for every dollar they put into the fund.

In 2004, market conditions weren’t the best for starting another such fund, but the climate may be right now. Some forecasters think default rates on junk bonds, which have fallen sharply in recent years, could rise substantially this year. That would give Schumacher a much larger array of distressed situations to pick through. Is he getting set to launch another Bondhawk-style fund? Schumacher won’t comment.

In the absence of a blockbuster distressed-bond fund, Northland still has other advantages. One is that some clients prefer dealing with a smaller, locally controlled entity over larger national firms. Another is that the employee ownership has increased loyalty and reduced turnover.

In an industry roiled by volatility, Northland Securities looks like a rock of stability.