Famed investor Warren Buffett has become the second largest owner of First Empire State Corp. after converting preferred stock in the Buffalo bank into a half-million common shares worth $125 million.

The conversion represents a solid vote of confidence by "one of the savviest investors in the world," said Brett Erensel, an analyst with UBS Securities. By contrast, Mr. Buffett last year unloaded a large position in the preferred stock of Salomon Brothers Inc.

With his latest move, Mr. Buffett immediately racked up a large gain. National Indemnity Co., a unit of Berkshire Hathaway Inc., the investment firm Mr. Buffett heads, tallied an $84.7 million gain on its 1991 investment of $40 million.

First Empire's stock price edged down 50 cents to $246, but bank analysts said the dip was technical and will probably be short-lived.

National Indemnity owns a 7.41% stake in First Empire after converting its 9% convertible preferred stock to 506,930 shares of common stock

First Empire's largest stakeholder, with 23.3%, is an investment group led by the company's chairman, Robert G. Wilmers.

The new stake was disclosed in a stock acquisition statement, or 13D, with the Securities and Exchange Commission. Mr. Buffett and his firm are well known investors in various banks, including Wells Fargo & Co. and SunTrust Banks Inc.

Mr. Erensel of UBS expressed no concern about Tuesday's slight dip in First Empire's stock price.

The movement was "the result of supply and demand because there is more common stock outstanding after his conversion," he said. "More supply tends to press the price of anything."

"The stock will bounce back," he said.

It remains to be seen, of course, whether Mr. Buffett will hold, reduce, or add to his stake in First Empire.

Mr. Buffett's largest bank holding is Wells Fargo, the San Francisco banking company. As of March 31, he owned 14% of the company's stock, a stake valued at $1.5 billion, according to Tuesday's SEC filings. That holding represents 7% of Berkshire's overall investments.

The Omaha-based investor has several times added to his Wells Fargo stake. At the end of 1994, Berkshire owned 13.3% of Wells Fargo.

On the other hand, he has recently reduced his ownership in Pittsburgh's PNC Bank Corp.

In other news of banking stocks, Wheat First Butcher Singer, the Richmond, Va., brokerage firm, downgraded Integra Financial Corp., Pittsburgh, to "hold" from "buy" and Capital One Financial Corp, Richmond, to "hold" from "outperform." Both moves were based on valuation.

Shares of Integra Financial, which will soon merge with National City Corp., Cleveland, closed at $72.75, down 50 cents, while Capital One shares closed at $27.65, down 87.5 cents.

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