If the best defense is a good offense, expect local community banks to take the fight to their newest Connecticut competitor, First Niagara Financial Group of Buffalo.

After it completes its deal for NewAlliance Bancshares in New Haven, the upstate New York company will bring more than $29 billion of assets to bear in its bid for market share in New England.

But First Niagara's expansion strategy could yet backfire, and allow other sizable Connecticut banks to pick up former NewAlliance customers.

"As with all new entrances, there's opportunity to try to take market share and market yourself as the local lender, as the homegrown bank," said Damon DelMonte, an analyst with KBW Inc.'s Keefe, Bruyette & Woods Inc. "I think that's going to be a challenge for First Niagara, and it's also going to be a positive for some of the in-market guys."

They include the $17.9 billion-asset Webster Financial in Waterbury and the $21.3 billion-asset People's United Financial in Bridgeport. Each is smaller by assets than First Niagara will be after buying NewAlliance, but they're no pushovers.

"They go up against the big guys every day," DelMonte said.

As of June 30, 2009, Webster and People's ranked second and third in deposit share in Connecticut, with 12.53% and 10.35%. They trailed only Bank of America in deposit share in the state, and bested Wells Fargo's Wachovia Bank and Toronto-Dominion's TD Bank. NewAlliance was fifth, with 5.12% of the state's deposits.

James Smith, Webster's chief executive, said in an interview last week that he hoped to benefit from the natural fallout that occurs when one company buys another.

"Any kind of merger creates disruption in the market," Smith said, and "customers sometimes will look around and say, 'Am I happy where I am?' "

Analysts said New England customers may have a tough time getting past the First Niagara name, and its association with New York. New Englanders have especially strong brand identification, said Collyn Bement Gilbert at Stifel, Nicolaus & Co.

"I would think it would be harder to build the First Niagara brand in Connecticut than it would in Pennsylvania or New York," Gilbert said.

Meanwhile, the New England press has been negative on the deal, which is to close in the second quarter of 2011, and some NewAlliance shareholders filed a class action against it in late August.

The outcry over the transaction is reminiscent of the controversy that ensued when the target company — then New Haven Savings Bank — announced in 2003 that it was converting to a fully public concern.

Critics predicted the bank would eventually sell to an out-of-state company, but at the time it insisted it was committed to New Haven.

So when the First Niagara deal was announced Aug. 19, community leaders called it a betrayal.

New Haven Mayor John DeStefano, perhaps the most vocal opponent of the conversion, maintained that the First Niagara deal would make it tougher for local residents to obtain loans because decisions would be made by managers in Buffalo, not New Haven. (First Niagara has said much of the decision-making would remain at the local level.)

An editorial Aug. 24 in the New Haven Register — which supported the conversion in 2004 — blasted the bank's leaders, especially NewAlliance Chief Executive Peyton Patterson and her compensation package. (Under the agreement, Patterson would receive up to $22.4 million — even if she stays on in a new role at First Niagara — because her CEO position is being terminated.)

And last week, two shareholders filed a lawsuit in Connecticut Superior Court asking a judge to block the sale. They claimed NewAlliance and its board of directors violated their fiduciary duty by conspiring to sell the company to enrich themselves.

John Carusone, president of Bank Analysis Center Inc. in Hartford, Conn., said he doubts the uproar in New Haven proper will make much of a difference in the long run. Connecticut is a big state, he said; the NewAlliance franchise stretches far beyond New Haven.

"The mayor of New Haven is an important constituent in the greater New Haven area, but NewAlliance is a southern New England regional player, and his reach is within a 50-mile radius of Yale University, and that's about it," Carusone said. "So I think that there are a variety of constituents that First Niagara has to address."

Meanwhile, Gilbert said First Niagara has proven to be a formidable competitor in Pennsylvania, where it has completed two successful acquisitions of struggling banks in less than two years.

"First Niagara has shown that when they move into a new market, they move in with a deliberate strategy and the intention to grow," Gilbert said. Mark Fitzgibbon, an analyst at Sandler O'Neill & Partners LP, said the company may be able to pick up market share by offering commercial products to existing customers of NewAlliance, which has operated more as a conventional thrift.

He pointed to North Fork Bank in Mattituck, N.Y. — on Long Island's North Fork — and Banknorth in Portland, Maine, as examples of companies that overcame concerns about how their names would play outside their primary market.

John Koelmel, First Niagara's chief executive, said in an interview last week that he had no doubt the company could pick up market share in its new turf, especially as NewAlliance is much healthier than the banks it purchased earlier.

"Being able to turn the tide as quickly as we have in other markets gives us real comfort in our ability to do it under fairly onerous circumstances," Koelmel said. "This is all excitement and energy about how we can help Peyton [Patterson] and her team take an even bigger slice of the pie from the very competition that may be sitting back and licking their chops a bit."

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