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Discover Financial Services’ stock fell more than 13% in the after-hours trading Wednesday after the company reported better-than-expected quarterly earnings but disclosed a Federal Deposit Insurance Corp. probe and that it had made accounting missteps going back years.
Discovery earned $901 million, or $3.54 a share, in the second quarter, compared with $1.1 billion, or $3.93 a share, in the year-ago quarter. Revenue rose 21% to $3.9 billion, which matched expectations from analysts polled by FactSet.
The analysts expected the financial services company to report EPS of $3.67.
The company said that beginning around mid-2007 it “incorrectly” classified certain credit-card accounts into the highest merchant pricing tiers, which affected pricing for certain businesses but not cardholders.
The mistake was not material to financial statements, but it has been corrected, it said. Discover calculated a liability of $365 million to provide refunds to merchants as a result of the misclassification.
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“However, given differences in individual merchant agreements, changes in network terms, and availability of historical data, it is difficult to determine the final amount of potential refunds at this time,” it said.
An external law firm is investigating, and Discover is “in discussions” with its regulators, it said.
In addition, the company received a proposed consent order from the FDIC in connection with consumer compliance, it said. The proposed consent order does not include the card product classification matter, but “additional supervisory actions could occur,” Discover said.
Shares of Discovery ended the regular trading day up 0.1%. The stock has gained 24% so far this year, compared with an advance of 19% for the S&P 500 index.
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