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Premium Finance Deal Aids Strategy at BB&T, Mellon

Branch Banking and Trust Co.'s plan to buy a U.S. insurance premium finance business and its Canadian affiliate will bulk up an important part of its specialized lending unit and allow the seller, Mellon Financial Corp., to prune away one more noncore part of its business, the companies say.

Branch Banking and Trust, the principal subsidiary of BB&T Corp. in Winston-Salem, N.C., said it expects to close its deal for Afco Credit Corp. and its Canadian affiliate, Cafo Inc., in the first quarter. The two companies provide financing for insurance covering midsize and large clients. BB&T, the ninth-largest U.S. banking company, already has a business, Prime Rate Premium Finance Corp., that caters to smaller clients.

"Our strategic objective is to grow our specialized lending niche companies, both organically and through selected acquisitions," said Clarke Starnes, BB&T's manager of specialized lending. "This allows us to achieve greater scale and market share."

Premium financing lets insurance customers borrow in order to pay a large premium, then make installment loan payments that are easier to manage than a lump sum would be. This leaves the customer's cash and working capital free for other purposes.

The Afco-Cafo deal will not significantly improve the ability of BB&T, which has $116.4 billion of assets, to land large insurance customers, Mr. Starnes said. This is because premium financing has been readily available to BB&T Insurance customers through third parties, he said.

"BB&T Insurance Services, like any insurance brokerage agency, can obtain a loan through Prime Rate Premium Finance Corp. or other premium finance companies," he said.

As for Mellon, it has been executing a strategy to focus on asset management and servicing and has divested unrelated businesses as part of this process, said Ron Sommer, a spokesman for the company.

"In the course of committing ourselves to those businesses, we've gotten out of most traditional types of lending operations," said Mr. Sommer. "Our approach to credit now is that we are reluctant to extend credit unless a client has a business relationship that involves one of our fee-based businesses."

Mellon, which is based in Pittsburgh, has $870 billion of assets under management; it focuses on institutional and corporate clients, as well as high-net-worth individuals. The bank's loan portfolio fell last year by $181 million, or 3%, as it designated $565 million of large corporate real estate loans as held for sale.

Mellon had owned Afco and Cafo since 1993. The deal price was not disclosed, but Mr. Starnes did say that Afco and Cafo combine to originate about $5 billion of loans a year. Prime Rate Premium Finance, meanwhile, originates about half a billion dollars a year, he said.

The deal, which requires regulatory approval, would vault BB&T from ninth-largest U.S. provider of insurance premium financing to second-largest, the company said. It would also give BB&T entry into Canada - as the largest insurance premium lender, the North Carolina company said.

Afco and Cafo are to operate separately from Prime Rate Premium Finance, the parent company said, and the acquired companies are to keep their brand names within BB&T's specialized lending division.

Afco, which was founded 50 years ago, has been around since the dawn of the insurance premium financing industry, Mr. Starnes noted. Its clients include conglomerates, midsize corporations, municipalities, professional practices, sole practitioners, groups, and associations.

Mr. Garmhausen, who covered mutual funds for American Banker from 1997 to 1999, is a freelance writer in Brooklyn, N.Y.

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