WHEN MELLON BANK Corp. announced two weeks ago that it was getting into the insurance premium financing business, it was exhibiting a new strategy: Use core strengths to develop niche businesses.

"We are rich in core funds at the moment, and, like many banks, trying to find ways to generate assets," said Martin G. McGuinn, the Mellon vice chairman who coordinated the insurance deal.

Mellon is paying $100 million to buy the premium-financing unit, Afco Credit Corp., from Continental Corp., a New York-based property and casualty insurer. Afco has $1.2 billion of assets, 500 employees, and 25 offices in the United States and Canada.

Deals like buying Afco are all in a day's work for Mr. McGuinn. The former Marine captain, who oversees strategic: planning and several operating divisions, said the Pittsburgh-\based bank will combine its funding' strength with its formidable processing capabilities to continue to develop new business lines.

A look at Mellon's balance sheet explains everything about the rationale behind buying Afco, Mr. McGuinn said in a recent interview. The bank's wholesale funding has dropped to 17% of assets from 41% over the past three years, even as its loan-to-deposit ratio fell to 81% from 85%.

Afco fits another of Mr. McGuinn's criteria: It is a business that can be regeared quickly for profit. Mellon expects to collapse Afco's nine data processing units to one or two by grafting them onto Mellon's computers. The processing aspect of the deal is a key reason why Afco will be run by Peter Rzasnicki, head of Mellon's computer-intensive mortgage banking unit, Mr. McGuinn said.

Bite-Sized Loans

Afco also has a client list ripe for cross-selling. It annually provides premium financing for about 185,000 customers, most of which are middle-market and small businesses.

Credit quality is a minor theme, he said, since Afco's loans are bite-sized (averaging about $19,000) and solidly collateralized by the unused portions of insurance policies. Last year, Afco's ratio of chargeoffs to average loans outstanding was a slim 0.2%.

Kristina Andersson, a bank analyst with Smith Barney, Harris Upham & Co., said the deal "passes the tests of reasonableness." It is not overly large, it offers consolidation opportunities, and -- most important -- it is projected to deliver an average 30% return on investment.

For Mr. McGuinn, the shift to buying new businesses is a refreshing change. When he took his strategy post at Mellon in 1988, he helped spin off $1 billion of problem assets and raise $525 million of equity for the recuperating company.

Today, he oversees such burgeoning areas as global cash management and mortgage banking. Just last week, Mellon closed on its major purchase of the Boston Co. He also is in charge of real estate finance, legal and corporate affairs, and economics, as well as strategic planning.

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