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Five Star Bank focuses on growth as drama fades

WARSAW – A year ago, Five Star Bank's parent company, Financial Institutions, was embroiled in an expensive battle with an activist investor over the bank's future.

The investor, Texas-based Johnny Guerry, urged the bank to put itself up for sale, criticized the bank’s leadership and made an unsuccessful run for control of two board seats.

A year later, after Guerry's hedge fund, Clover Partners, sold its shares, the drama has faded.

But Financial Institutions has hardly sat idle:

-- Five Star opened its first-ever downtown Buffalo branch last February at Fountain Plaza, part of a more-aggressive push into the Buffalo market after KeyBank’s acquisition of First Niagara Bank.

-- The bank hired Ted Oexle, an industry veteran, as its Buffalo region president, and has staffed up its area operations, including with some former First Niagara personnel.

-- Financial Institutions in late May rolled out a $40 million "at the market" offering of stock. The bank at first launched a public offering and then withdrew it a few days later, citing "unstable conditions" in U.S. capital markets.

The Wyoming County-based bank ranked 10th in deposit market share in the Buffalo Niagara region as of a year ago – the most recent Federal Deposit Insurance Corp. data available – with 0.34 percent. But the bank has bigger designs on the market, following the Key-First Niagara deal last August.

"The markets we are serving, we believe are wide open, so to speak," said Martin K. Birmingham, the bank's president and CEO, at Wednesday's annual shareholders meeting. "They're up for grabs. And increasingly, the markets are interested in the services and approach of full-service community banks, which are creating very large and meaningful opportunities for (the bank.)"

Martin K. Birmingham, Five Star Bank's president and CEO (Photo courtesy of Five Star Bank)

The buildup to last year's annual meeting was tense. Guerry, whose hedge fund once owned 5 percent of the bank's shares, had faulted Financial Institutions over its deals for Scott Danahy Naylon, an Amherst-based insurance agency, and Courier Capital, an investment management firm with offices in Buffalo and Jamestown. In several other cases where Guerry had taken an activist position, banks he targeted ended up being sold. If Financial Institutions had been sold, its headquarters in Warsaw, a village with a population of about 3,400, would have been at risk of vanishing through consolidation.

The bank fought back. It sent a flurry of messages to shareholders defending its performance, promoting its own board candidates and questioning the two challengers’ qualifications and intentions. Even members of the Humphrey family, which was influential in the bank's rise over the decades, chose sides in the contest.

While the bank-backed candidates prevailed, victory came at a cost. Financial Institutions poured more than $2 million into the proxy fight, while Guerry estimated his side spent about $325,000.

Guerry this week said Clover sold its Financial Institutions shares as they "appreciated rapidly along with all of the bank sector," and that those sales occurred about 10 percent above the shares' current price. Clover, he said, redeployed the capital into investments the hedge fund viewed as having more favorable risk and reward scenarios.

Guerry noted that last year he had criticized the bank's capital position, "which was vigorously defended by the bank." He described the bank's recent abrupt withdrawal of an announced capital raise as "fairly humiliating."

"We have no plans for future investments in (Financial Institutions)," Guerry said. "Good luck to the shareholders."

Birmingham said the absence of pressure from Clover hasn't changed the way the bank goes about its business. "We have the sense of urgency and feel very accountable to ourselves, to our board and to our shareholders. That doesn't change for us."

Bank officials said they would speak in greater detail about the $40 million stock offering in its next earnings report, which is due next month. Kevin Klotzbach, the bank's chief financial officer, said the funds raised would go toward "general corporate purposes" and to bolster the bank's capital.

"Obviously our banking platform, Five Star Bank, is a very capital-intensive business," Birmingham said. "So as we grow, capital is a very important part of that equation. Otherwise, we're a strategic company and we consider opportunities as they come along."

Birmingham said the upheaval in the region's banking landscape caused by the Key-First Niagara deal continues, and that includes hiring.

Klotzbach said having the Fountain Plaza branch conveys to potential hires in Buffalo that "we are, in fact, going to be a bank with a secure future. I think that has been very helpful. In order to build the book of business, you have to start with a book of talent. And we've been acquiring talent regularly over the last six months."

Birmingham said the bank likes the results the Fountain Plaza location is producing. "We'll continue to thoughtfully consider other opportunities to expand our physical presence as we go forward."

The day of Financial Institutions' 2016 annual meeting, its stock closed at $27.43 per share. On Wednesday afternoon, the stock was trading at $29.55 per share, after rising as high as $34.84 in February.

Financial Institutions recorded net income of $31.9 million in 2016, up 13 percent from $28.3 million in 2015. This year, the bank's first quarter net income declined 9 percent from a year ago, to $7.9 million.

The bank has 650 employees, with 53 locations in 15 Western and Central New York counties.

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