It may be a small pond, but Natcity Investments Inc. has grown into a big fish in the Midwest and is getting bigger.

In 1995, National City Corp., one of the Midwest's top business lenders, became the first bank holding company to acquire a retail brokerage with investment banking capabilities. Indianapolis-based Raffensperger, Hughes & Co., which became the Cleveland bank's section 20 subsidiary, has since been renamed Natcity Investments, .

The brokerage quickly began leveraging business from its bank affiliate's commercial lending clients, mostly midsize businesses in Ohio, Michigan, Indiana, Kentucky, and Pennsylvania. The unit completed 240 transactions in 1996.

"Our emphasis is clearly on the Midwest," said Herbert R. Martens Jr., chairman, chief executive officer, and president of Natcity Investments.

"We're not going to go get on a plane and travel to San Francisco to solicit business. Our name is solid in the Midwest and that's where our advantage is."

Although many section 20s focus on the middle market, Natcity's business base in the Midwest is especially ripe with opportunity.

According to National City Corp. CEO David Daberko, midsize companies in the area are growing 5% annually, whereas the national average is just 1%.

"What a tremendous opportunity for somebody like us that is set up to serve that market," said Mr. Daberko.

Mr. Daberko estimates his company has banking relationships with 30% of the middle market businesses-those with annual sales of between $5 million and $500 million-in the region it serves.

Typical of its recent middle-market transactions was a $65 million, three-year trade-receivable securitization for a Cleveland steel processor and distributor, Olympic Steel Inc. Ordinarily, Olympic would not have been able to access the capital markets because of its size, its debt ratings, and the size of the financing.

Natcity Investments put together several health care deals last year, including a $60 million revenue bond issue for Jewish Hospital Health Care Services Inc. in Jefferson County, Kentucky.

National City's market "used to be just metal bangers, but it certainly has increased to a broad range of manufacturing and service capabilities," said Mr. Martens.

Competition for the growing middle market's investment banking and underwriting needs comes both from full-service regional brokerage firms such as Cleveland's McDonald & Company Investments and from section 20s of other banks-such as ABN Amro, BankAmerica Corp., and First Chicago NBD Corp.

In the face of that competition, Natcity Investments needs to grow. "It's a very small operation and if they want to be in that business line in a meaningful way, they're probably going to have to ramp it up significantly," said Bradley Vander Ploeg, an analyst with Chicago-based Everen Securities.

Natcity, which had been expanding slowly, plans to add another 80 financial consultants this year, bringing its staff to more than 330.

But that growth may be hampered by the cap on revenue a section 20 may derive from underwriting and dealing in securities-even though the Federal Reserve recently raised it to 25% from 10%.

In a comment letter to the Fed last September, Mr. Daberko urged an even higher limit, writing that the 25% figure "may be overly conservative."

"For us today, obviously it's not a problem. If we want to go out and buy a very, very large investment banking firm, we'd have to find a way to make this work," said Mr. Martens. "It would be a pain in the neck, but we could do it."

Natcity is not actively searching for a new acquisition, but it does "continue to have polite conversations with people," said Mr. Martens.

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