First Data Corp. has bought Huntington Bancshares Inc.'s Florida merchant processing business, picking up around 4,000 merchant accounts and advancing its goal of signing around 75,000 new merchants for third quarter, the companies said Thursday.
The move was not surprising, given the companies' affiliation (they run a merchant/bank alliance, Huntington Merchant Services) and the Columbus, Ohio, banking company's known interest in getting out of Florida. In February it sold its branch network there to SunTrust Banks Inc.
Somewhat surprisingly, however, Huntington's chairman, president, and chief executive officer, Thomas E. Hoaglin, said the deal was First Data's idea. "As a result of the sale of our Florida banking operations, First Data initiated discussions regarding our Florida merchant services business," he said. "This provided an opportunity to review our entire First Data merchant services relationship."
Huntington is retaining its merchant business in the states it still serves: Michigan, Indiana, Ohio, and Kentucky.
The banking company and its processing partner also announced Thursday that First Data had increased its ownership share of Huntington Merchant Services, which is one of several alliances that First Data has with banks. Under the setup, First Data handles the processing and Huntington manages the relationships with the merchants in the portfolio.
Neither company would say how much First Data's stake had been or is now. Huntington Merchant Services was the 25th-largest merchant processor at yearend, with transaction volume of $4.28 billion in 2001, according to The Nilson Report, an Oxnard, Calif. industry newsletter.
But Huntington did say that the sale brought it a $25 million pre-tax, nonoperating gain, or $16 million after taxes, which will be realized in the third quarter.
As First Data's chief executive officer explained to analysts at last week's earnings call, buying out its merchant alliance partners is the cheapest way to add merchants. "The best ones out there are alliances we own part of today - we know the business the best because we understand the costs," CEO Charles T. Fote said. "Attrition rates are lower in alliance programs versus nonalliance merchants. We will be strong there."
Mr. Hoaglin said Huntington has extended its relationship with First Data for 10 years. "This assures our merchant clients of Huntington's continued commitment to providing them the highest level of service and attention," he said. "At the same time we have gained operating efficiencies by refocusing on the merchant service business within our core operating footprint."
First Data will probably be knocking on the doors of more of its alliance partners, hoping to increase its stakes in the partnerships or buy them outright, Mr. Fote said. Among First Data's other merchant alliance partners are J.P. Morgan Chase & Co., Wells Fargo & Co., PNC Financial Corp., SunTrust Banks Inc., and Wachovia Corp.
Also on Thursday, Huntington reported second-quarter earnings of $82.2 million, or 33 cents per common share, down 15.9% from $97.7 million, or 39 cents a share, in the first quarter but up from $2.4 million last year.
The picture looks better on an operating basis, which excludes one-time items and the impact of the sale of Huntington's Florida banking operations. Second-quarter earnings of $81.7 million were up 3% from first quarter on that basis.
Average managed loans increased 7% from the first quarter on an annual basis, to $20.7 billion, and net interest income increased 4%. Average residential mortgages grew $325.1 million, reflecting a decision to retain more of these loans on the balance sheet. Huntington said the growth reflected strong demand for mortgage refinancings. Commercial real estate loans increased $51.8 million, at a 6% annual rate. Average core deposits increased $657.4 million, to $14.7 billion.
"Given our solid momentum through the first half of the year and continuing positive trends, we remain comfortable with our previously stated 2002 earnings-per-share guidance of $1.32 to $1.36," Mr. Hoaglin said.
