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Five Star Bank eyes expansion upstate

As the parent of Five Star Bank prepares to absorb eight Central and Western New York branches from First Niagara Financial Group, executives are already looking ahead to additional opportunities in Buffalo, Rochester and Elmira.

Speaking to nearly 50 shareholders and employees Thursday, Financial Institutions President and CEO Peter G. Humphrey said the purchase of four First Niagara offices and four HSBC Bank USA offices significantly strengthens the Warsaw-based bank's market share in key areas while adding a 15th county to its franchise.

That deal, which includes $375 million in deposits, is expected to close in two stages in the second and third quarters.

In particular, Humphrey said Five Star's market share in Chemung County will leap from less than 4 percent to nearly 20 percent. He said boosting its presence in that county, which includes Elmira, was a key focus of the bank in the months-long negotiations over which branches it would buy.

Also, Five Star will go from no presence to a 23.8 percent market share in Orleans County, where it is gaining offices in Medina and Albion. Its market share in Genesee County will increase from 11.7 percent to 16.3 percent, while its Seneca County position rises from 20.8 percent to 26.6 percent. And it gains a branch in Monroe County, nudging its position from 1.1 percent to 1.5 percent.

Five Star, which serves a mostly rural or suburban market, already has a "dominant market share" in much of its region, ranking No. 1 or No. 2 in six of its current 14 counties in the middle of its franchise.

But more significant, Humphrey said, is the future potential for growth in Buffalo and Rochester.

A gain of just 1 percentage point in share in Buffalo equates to $240 million in deposits, while a similar gain in Rochester means another $111 million -- small compared with M&T Bank Corp. or Bank of America Corp. but a big jump for a bank with $1.97 billion in deposits.

"We will continue to have significant growth opportunities in the Greater Buffalo and Greater Rochester markets," Humphrey said. "I believe that we will continue to capture additional market share in those two large markets over the next several years."

The bank is also keeping an eye out for opportunities to open new offices in certain markets, particularly given First Niagara's plans to close 35 overlapping branches that it doesn't need, Humphrey said in an interview later. Such empty buildings provide a lower-cost way to enter a community without building from scratch.

"There will be some real estate that will become available," Humphrey said. "We should be able to take advantage, if we want to, of those opportunities."

Five Star currently operates 50 branches and 70 ATMs, including three branches in Erie County.

In March 2011, the bank raised $43 million in a stock offering that could have raised four times as much based on investor demand. The bank used some of the money to repay its remaining $25 million government investment under the Troubled Assets Relief Program and then redeemed $16.7 million in subordinated debt in August, which helped its profit margin.

Those efforts also put the bank in position to jump on the branch purchase when it came up, Humphrey said.

"You don't have disruption of this kind in this marketplace [often]," he said following the meeting. "We want to be opportunistic, and we think we're in a great position to do that."