Dec. 9--Two banks with Western New York operations said they will participate in a pair of federal government programs designed to bolster their capital, insure more deposits and provide some reassurance to buyers of bank-issued debt.

Financial Institutions, the parent of Warsaw-based Five Star Bank, said it received approval from the U. S. Treasury Department to sell about $37.5 million of senior preferred stock and common stock warrants to the federal government.

The investment, which had been expected, is part of Treasury's Capital Purchase Program that is devoting $250 billion to injecting more capital into healthy banks. That, in turn, is part of the $700 billion Troubled Asset Relief Program passed by Congress to revive the flagging banking industry and prevent further losses.

Under the investment program, Financial Institutions will pay the government a 5 percent annual dividend for each of the first five years of the investment and 9 percent annually after that, giving the bank an incentive to buy out the government by raising an equivalent amount of private capital on its own.

Also, Treasury will get 10-year "warrants" or "rights" to buy common shares, giving the government a chance to profit if the company's stock price increases.

Financial Institutions now has 30 days to sign the documents and close the transaction. Locally, Bank of America Corp., KeyCorp, and First Niagara Financial Group have already received money, while M&T Bank Corp., Evans Bancorp, Lake Shore Bancorp and Northwest Bancorp have applied or received approval to participate.

A total of 54 transactions have been completed so far, with another update expected today on transactions completed on Friday, Interim Assistant Treasury Secretary for Financial Stability Neel Kashkari said Monday.

"The additional capital will further enhance the company's already well-capitalized position," Peter G. Humphrey, Financial Institutions president and CEO, said in a press release late on Friday. "This low-cost capital will increase our ability to meet the needs of our customers and the communities we serve."

Cleveland-based KeyCorp also said late Friday that it, as well as its primary bank unit KeyBank, will participate in the Federal Deposit Insurance Corp.'s Temporary Liquidity Guarantee Program to expand insurance coverage to additional deposits and its new debt.

Under the program, the FDIC provides 100 percent insurance coverage for domestic non-interest-bearing transaction accounts -- with no limit on the dollar amount -- through Dec. 31, 2009. Such accounts are often used by businesses, for example. NOW accounts with interest rates of 0.50 percent or less and certain other accounts are also covered.

Also, the FDIC will guarantee the payment of newly issued senior unsecured debt of eligible insured banks, savings banks and some holding companies until June 30, 2012 or the maturity date of the debt, whichever comes first. That guarantee is paid for through insurance premiums on the new debt, and is intended to increase the availability and flow of capital by helping banks replace existing debt that is slated to mature by June 30, 2009.

KeyBank plans to issue debt under the program, and has already hired its own investment banking division as well as Credit Suisse, Morgan Stanley & Co., and UBS AG to help. Bank of America Corp., Goldman Sachs Group, J. P. Morgan Chase & Co., Wells Fargo and Citigroup are among those who have either already used the program to issue insured debt or plan to do so.

jepstein@buffnews.com

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