Total System Services Inc. threw a monkey wrench into an otherwise strong third-quarter earnings report Wednesday by saying it might lose Bank of America Corp.'s consumer credit card portfolio.
The announcement came as a surprise to analysts. B of A extended its contract with the Columbus, Ga., transaction processor, which is majority-owned by Synovus Financial Corp., in January. Observers had speculated that TSYS would win the consumer card processing business of MBNA Corp., which B of A is buying for $35 billion.
"A lot of people think … [an MBNA conversion] is a slam dunk, and it's not," Philip W. Tomlinson, TSYS' chief executive, said during a conference call with analysts.
"Historically, everything in the last 20 years" that B of A has acquired "has come our way," he said. "We're certainly hopeful that this will, too, but we just don't want people thinking it's a done deal, because it's far from a done deal."
For example, the Charlotte banking company purchased FleetBoston Financial Corp. last year and later moved Fleet's card processing business to TSYS, from First Data Corp.
Mr. Tomlinson said he does not expect a definitive answer from B of A until the MBNA acquisition closes, which is expected in January.
"They haven't acquired MBNA yet, so it's not official, but obviously they're trying to determine what they want to do," he said. "The biggest risk, obviously, is that MBNA wants to do it all."
TSYS processes MBNA's corporate card accounts, but the Wilmington, Del., issuer handles its consumer accounts in-house. Mr. Tomlinson said his concern was only for the consumer card business of B of A and MBNA.
In a filing last year with the Securities and Exchange Commission, TSYS said that 18.5% of its 2004 revenue came from B of A.
In January, B of A, a longtime TSYS customer, announced that the two companies had extended their processing contract by five years; it is now scheduled to run through 2014. This month Vital Processing Services, TSYS' merchant acquiring business, announced that it extended its contract with B of A's merchant services division. But Mr. Tomlinson said B of A could exit those deals by paying a termination fee.
Mr. Tomlinson's comments drove down TSYS' stock price 8.57% to $20.91 Wednesday, despite otherwise solid earnings.
TSYS' revenue rose 38.4% from the third quarter of last year, to $422 million, and net income rose 22.8%, to $48.1 million.
Kevin Fitzsimmons, an analyst at Sandler O'Neill & Partners LP, told clients in July that B of A had said it was pleased with its relationship with TSYS, and that he expected the banking company to stay with the processor.
During the Q&A portion of the earnings call, he said, "When the [MBNA] deal was first announced, I thought it was a very high probability" that B of A would move MBNA's processing to TSYS.
But Lawrence S. Berlin, an analyst for First Analysis Securities Corp., said that the B of A contract is a question mark. Once the MBNA deal is complete, it might no longer be cost-effective for B of A to outsource its card processing, he said. The business could "hit such a large scale that it can be more cost-effective to do it in-house."
Roger Smith, an analyst with Fox-Pitt, Kelton Inc., said that even though MBNA is being acquired, it would probably be in the driver's seat for credit card operations.
"I get the feeling it's MBNA's management's say," he said.
Despite the chance of losing a big customer, earnings were "rock-solid," he said. "They came in at the high end of the guidance, and they had good organic card growth.
The possibility of losing a major customer is "a little disappointing," he said. "The potential of losing B of A wasn't in my mind."
