People's United Financial Inc. in Bridgeport, Conn., has been fanning expectations of a bank acquisition for years.

Monday's deal, however, wasn't it.

Rather, consider the $738 million it agreed to pay for the New York equipment financing company Financial Federal Corp. a primer.

"We're still looking to do bank acquisitions," said Jared Shaw, the senior vice president who heads mergers and acquisitions and investor relations for People's. "This isn't the deployment of capital that people are waiting for."

Financial Federal, which has $1.5 billion of assets, offers loans and leases nationwide for heavy equipment used mainly in the construction, refuse and transportation industries.

Shaw called the company a good match for People's, which already has an equipment financing division with about $1.2 billion of assets. "We feel we understand this market really well," he said.

He also said Financial Federal stands to benefit from the government's economic stimulus spending, because of its lending for road and bridge infrastructure.

Other than in transportation, People's has little overlap with the industries targeted by Financial Federal, but both finance only "mission critical" equipment, which can be sold when any loans go bad, Shaw said.

Analysts said the deal offers impressive financial benefits. The $20.8 billion-asset People's expects to boost its already fat capital cushion with the transaction, besides adding immediate earnings power. But while they called the deal attractive, the analysts also cautioned that it comes with some risk.

Mark Fitzgibbon, the head of research at Sandler O'Neill & Partners LP, said equipment finance would swell to 17% of the People's loan portfolio, a high level compared with less than 5% for most other regional banking companies. He also said 44% of Financial Federal's portfolio is in construction, a sector that has been under pressure, and "nonperformers have been rising fairly quickly." Its overall nonperforming assets to total loans climbed to 5.68% on Sept. 30, from 0.75% two years earlier.

However, chargeoffs have remained low, which suggests strong underwriting, Fitzgibbon said. The deal is "manageable and digestible," he said. "I like the earnings accretion."

People's said buying Financial Federal would be significantly accretive to earnings next year, with an internal rate of return in excess of 20%. The tangible common equity ratio would increase 40 basis points, to about 19%.

Shaw said the company still has about $2.5 billion of excess capital to deploy. In scouting for deals, its focus is on healthy commercial banks in the Northeast corridor, from Maine to Washington, but it would consider going farther afield for an attractive failed bank.

"This isn't the last deal we're looking at," Shaw said.

Because Financial Federal depended on the volatile capital markets for financing, it had to operate with heavy overcapitalization, according to Shaw. So one benefit for the seller is access to a stable deposit base.

Henry J. Coffey, an analyst at Sterne, Agee & Leach Inc. who covers Financial Federal, said the company had mulled over the idea of buying a bank itself.

"They talked about it in the past, but never really went down the path," Coffey said. "They didn't have any liquidity challenges, but they were certainly looking for a future way to improve funding costs and funding stability."

He said People's would be getting an excellent business.

"This company is dedicated to a specific niche and has mastered it," Coffey said. "Nobody is more disciplined and more willing to let a deal go if they don't think it's good for the bottom line than the guys at Financial Federal."

The deal is expected to close in the first quarter.

Financial Federal would operate as a separate subsidiary, with its key management staying on, including Paul R. Sinsheimer, its chief executive. People's agreed to pay $11.27 in cash and one share of its stock for each Financial Federal share. The price equates to $27.74 a share based on Friday's closing price for People's, the company said.

Richard D. Weiss, an analyst at Janney Montgomery Scott LLC, calculated the price as 160% of the seller's tangible book value. The deal is not the "blockbuster" investors have been anticipating, but it is still appealing and its relative smallness minimizes the risk, he said. It is small enough that it does not even require a shareholder vote. And since Financial Federal comes with "abundant" capital, "People's has lots of firepower left" to do more buying, Weiss said.

People's stock slipped 2.7% on the news Monday, to close at $16.03. Financial Federal's jumped 29.5%, to $26.61.

Philip Sherringham, the CEO of People's, said in a press release that Financial Federal would add experienced lenders in new markets across the country and that his company can grab market share as competitors pull back.

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