Stock investment is not the only way to profit from mergers. In fact, venture capitalists may be among the biggest winners as the industry consolidates.

These investors strike private deals with small banks to finance expansion plans, then reap the returns.

As bigger banks buy one another, more branches are available through divestitures and community banks are eager purchasers, said Steven Stein, co-manager of Financial Stocks, a limited partnership that makes equity investments in closely held banks, thrifts, and finance companies.

Smaller banks are also looking for capital from the Cincinnati partnership to step up marketing in hopes of capturing disenfranchised customers, he said.

"There is a very good deal flow," said Mr. Stein who manages the partnership with his brother, John, a former executive with Bankers Trust.

Mr. Stein said the partnership had participated in deals-usually involving several million dollars of financing-"from California to Florida and many places in between."

He declined to discuss current deals, put did say past efforts included helping a small bank in Boston dig in when a larger bank significantly reduced its presence. The effort included branch purchases and money for a marketing campaign to appeal to the area's Irish population.

Financial Stocks also helped finance the consolidation of 12 Colorado community banks under one charter.

The partnership has several deals pending, and this month bulked up through a private placement arranged by McDonald & Company Securities.

The placement raised $60 million to replenish a fund that was started a couple of years ago with $40 million, Mr. Stein said.

The money came from individuals with net worths in excess of $5 million and required a five-year commitment.

The wealthy investors are perceived as more savvy than average stock buyers and are therefore allowed to do business with the partnership, which does little or no reporting to the Securities and Exchange Commission or other regulators.

Returns result from private stock or convertible debt that the partnership uses to structure its deals.

Mr. Stein would not discuss Financial Stocks' performance except to indicate it was on par with, if not above, the 25% return that investors in these partnerships typically expect.

Times are indeed good for private investors, just as they are for buyers of publicly issued bank stocks, said Robert S. Patten, a banking analyst with Lehman Brothers.

He sees consolidation picking up, especially in the Southeast, where banks have been slower to combine than financial institutions in other parts of the country.

The southern banks felt less pressure because on their own, they produced solid growth and profits, Mr. Patten said.

But "continuing pressure to increase top-line revenue growth" could drive more consolidation by institutions like First American Corp., First Tennessee Corp., and National Commerce Bancorp, he said.

In addition to banks in the region buying each other, Mr. Patten said, midwestern banks will increasingly be looking at institutions in the Southeast, where growth prospects are better.

National City Corp. and Fifth Third Bancorp may be among the institutions moving in, Mr. Patten said.

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