A deal largely credited with signaling interest in bank acquisitions hit a snag Tuesday as local and state officials announced plans to challenge the sale.

The city of New Haven, Conn., is asking federal and state regulators to block the proposed $1.5 billion sale of NewAlliance Bancshares Inc. in New Haven to First Niagara Financial Group in Buffalo, N.Y., claiming the transaction would not meet the "needs or convenience" of the community.

At a press conference Tuesday, New Haven Mayor John DeStefano and Attorney General — soon-to-be U.S. senator — Richard Blumenthal demanded more details about the proposed sale, while indicating that they would like concessions from First Niagara.

"We want answers that we can take to the bank — money-backed assurances that adequate community lending and jobs will be protected," said Blumenthal.

Local officials have raised concerns that the sale would lead to job losses, and limit access to credit, particularly in low-income communities, if loan decisions are made in Buffalo. But industry observers said it is difficult to persuade regulators to block a sale based solely on such arguments.

"It's pretty standard operating procedure that regulators review buyer behavior regarding lending practices and consumer fairness and credit allocation," said John Carusone, president of the Bank Analysis Center in Hartford, Conn. "But it's unusual for a transaction to be denied for those reasons, unless they're really good and valid and unequivocal issues that can be identified."

Carusone said the burden of proof is on opponents, and can be tough to achieve. "Certainly there is precedent for the transactions being denied, but it is atypical and an uphill battle," he said.

DeStefano and Blumenthal used Tuesday's conference to call on regulators to hold public hearings in New Haven to discuss the deal.

In a letter to the Federal Reserve Board, the city said it based its opposition on evidence from the $20.8 billion-asset First Niagara's past acquisitions, as well as the company's Community Reinvestment Act rating, which evaluates a bank's lending activity in low- and moderate-income communities.

"We anticipate that the proposed merger will lead to a reduction in critical community banking services including community-level lending and financial education," the letter said.

Chris Low, the chief economist at First Horizon National Corp.'s FTN Financial, said objections over CRA ratings rarely prevent acquisitions from gaining regulatory approval. "Especially at this point where the regulators are actually almost encouraging mergers because there are so many banks that are not necessarily in trouble but in not in the best of shape either," Low said.

According to data from the Federal Financial Institutions Examination Council, First Niagara received a rating of "satisfactory" on its most recent CRA examination, in March 2007. NewAlliance got a rating of "outstanding" on its most recent exam, in Oct. 2009.

In September, Blumenthal said he would investigate the deal. He sent letters to the companies this week asking for more data on jobs and local lending.

"My main concern is jobs," Blumenthal said Tuesday. "Will this merger mean more loans to local businesses creating more jobs — or will it bring layoffs and fewer loans? Will it power economic growth and expand employment or restrain and reduce it?"

Randall Guynn, a lawyer at Davis Polk in New York, said that in addition to CRA ratings, the Fed will consider, among other things, a buyer's capital strength, managerial resources and whether the merger would serve the needs of the community. "I think job losses alone would not be something that the Fed would say would be fatal in terms of denying an application," he said.

Representatives from the office of George Jepson, who is set to succeed Blumenthal, also attended the press conference, a sign that the incoming attorney general is willing to continue the effort.

In a press release issued after the press conference, First Niagara said team leaders in New Haven will make local decisions on credit and banking, as well as philanthropy and corporate citizenship.

"We are confident that the combination ... will be beneficial to employees, customers, shareholders and the communities we serve," the release said.

A lawyer for New Haven said the city is looking to join in a lawsuit filed by NewAlliance investors asking a judge to block the deal.

The lawsuit, filed in Connecticut Superior Court in September, claims that the $8.8 billion-asset NewAlliance and its board violated their fiduciary duty by conspiring to sell and enrich themselves.

"We think that given the city's interest in the potential loss of capital and loss of jobs that the city should be heard," said Robert Solomon, the supervising lawyer at the Yale Law Clinic, which is representing New Haven.

In New Haven, this is round two in the battle for keeping a community bank there. City officials opposed the creation of NewAlliance Bancshares in 2004, when the former New Haven Savings Bank held its second-step conversion. The challenge led to a settlement in which NewAlliance agreed to set aside funds to create a community development bank.

Michael Reed, a partner at DLA Piper in Washington, said the Fed, which must approve the sale, along with the Office of the Comptroller of the Currency, is more likely to back a resolution between the parties than hold a public hearing.

That is "sort of typically how it works," Reed said. "That's what the public comment period is for, to have these folks have their voice and let the merging organizations try and address them."

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