Discover Financial Services (NYSE: DFS) (the “Company”) today
announced, as required under the New York Stock Exchange (the
“NYSE”) Listed Company Manual, that it received a notice (the “NYSE
Notice”) from the NYSE on November 19, 2024 that the Company is not
in compliance with Section 802.01E of the NYSE Listed Company
Manual as a result of its failure to timely file its Quarterly
Report on Form 10-Q for the fiscal quarter ended September 30, 2024
with the U.S. Securities and Exchange Commission (the “SEC”) prior
to November 18, 2024, the end of the extension period provided by
Rule 12b-25 under the Securities Exchange Act of 1934, as amended.
The NYSE Notice has no immediate effect on the listing of the
Company’s common stock on the NYSE.
On July 19, 2023, the Company disclosed that beginning around
mid-2007, the Company incorrectly classified certain credit card
accounts into its highest merchant and merchant acquirer pricing
tier (the “card product misclassification”). Based on information
available as of June 30, 2023, the Company recognized a liability
of $365 million that was accounted for as the correction of an
error. The Company determined that the revenue impact was not
material to the consolidated financial statements of the Company
for any of the impacted periods. While it was therefore determined
that it was not necessary for the Company to restate any previously
issued interim or annual financial statements, the cumulative
misstatement was deemed material to the three and six months ended
June 30, 2023 condensed consolidated financial statements, and
therefore the Company determined that adjustment of the full $365
million only through 2023 earnings was not appropriate. Therefore,
the $365 million liability (the “Initial Liability”) was recorded
as of June 30, 2023 with offsetting adjustments to merchant
discount and interchange revenue and retained earnings, along with
consequential impacts to deferred tax accruals. Comparable
corrections were made for all prior periods presented in the
Company’s Quarterly Reports on Form 10-Q for the fiscal quarters
ended June 30, 2023 and September 30, 2023 and subsequently in the
Company’s Annual Report on Form 10-K for the fiscal year ended
December 31, 2023.
On February 19, 2024, Discover and Capital One Financial
Corporation (“Capital One”) jointly announced that they entered
into an agreement and plan of merger pursuant to which the
companies will combine in an all-stock transaction (the
“Merger”).
In the Company’s Quarterly Report on Form 10-Q for the fiscal
quarter ended March 31, 2024, the Company disclosed that it had
determined to increase its liability to $1.2 billion (the
“Liability Increase”) through a charge to other expense for the
three months ended March 31, 2024, to reflect the total amount the
Company then expected was probable to be disbursed in relation to
the card product misclassification. The Company determined the
Liability Increase was appropriate based on its experience through
that date with remediation efforts, discussions through the first
quarter of 2024 with its regulators, Board of Directors and other
stakeholders, the pending Merger, which was approved by the
Company’s Board of Directors during the quarter, and a desire to
advance resolution of the matter more quickly to mitigate further
risk.
As part of the review of the Company’s historical financial
statements by the Staff of the SEC (the “Staff”) undertaken in
connection with the Staff’s review of the Registration Statement on
Form S-4 filed by Capital One in connection with the Merger (and
the preliminary joint proxy statement/prospectus contained therein)
(the “Registration Statement”), the Staff provided comments to the
Company relating to the Company’s accounting approach for the card
product misclassification. The Company has responded to these
comments and has engaged in several verbal discussions with the
Staff. The Staff has indicated that it disagrees with the Company’s
application of revenue recognition guidance issued by the Financial
Accounting Standards Board in connection with the Company’s
recording of the Initial Liability.
The Staff has, however, indicated that it would not object to an
approach whereby the Company determined the cumulative revenue
error related to the card product misclassification to be the
maximum amount agreed to be paid by the Company in restitution in
respect of the card product misclassification (excluding interest
and legal expenses) (the “Alternative Approach”). This amount is
approximately $1,047 million.
On November 25, 2024, the Audit Committee of the Board of
Directors of the Company (the “Audit Committee”), acting on the
recommendation of management, and after discussion with Deloitte
& Touche LLP (“Deloitte”), the Company’s independent registered
public accounting firm, concluded that (i) the Company’s audited
financial statements as of December 31, 2023 and 2022 and for each
of the three years in the period ended December 31, 2023 included
in the Company’s Annual Report on Form 10-K filed with the SEC for
the fiscal year ended December 31, 2023 and (ii) the Company’s
unaudited condensed consolidated financial statements included in
the Company's Quarterly Reports on Form 10-Q previously filed with
the SEC for the fiscal quarters ended March 31, 2023, June 30,
2023, September 30, 2023, March 31, 2024 and June 30, 2024
(collectively, the “Prior Periods”), should no longer be relied
upon and should be restated to reflect the Alternative Approach. In
addition, the Audit Committee concluded that management’s report on
the effectiveness of internal control over financial reporting as
of December 31, 2023 and Deloitte’s report on the consolidated
financial statements as of December 31, 2023 and 2022 and for each
of the three years in the period ended December 31, 2023 as well as
Deloitte’s report on the effectiveness of internal control over
financial reporting as of December 31, 2023, should no longer be
relied upon.
In order to implement the Alternative Approach in the Restated
Financial Statements (as defined below), approximately $600 million
of the Liability Increase will be reallocated from being recorded
as other expense in the fiscal quarter ended March 31, 2024 to a
revenue error correction in prior periods. In addition, $124
million of the Liability Increase representing interest that the
Company committed to pay as part of its counterparty restitution
plan will also be reallocated from the fiscal quarter ended March
31, 2024 to the third and fourth quarters of 2023. Cumulative
historical earnings, capital and the aggregate amount of the
counterparty restitution liability will not be affected by
application of the Alternative Approach. However, separate work
being done to validate the remediation methodology with a
third-party consultant has resulted in the identification of
approximately $60 million of incremental overcharges, which will be
reflected in the Restated Financial Statements.
As a result, the Company expects the Restated Financial
Statements to reflect the following approximate impacts: as of
December 31, 2023, (i) an increase in assets of $190 million, (ii)
an increase in accrued expenses and other liabilities of $783
million, and (iii) a decrease in retained earnings of $593 million.
For the years ended December 31, 2023 and 2022, pre-tax income
would be reduced by approximately $190 million to $3,636 million
and $77 million to $5,641 million, respectively. For the third
quarter of 2024, pre-tax income would decrease by approximately $6
million to $1,282 million while pre-tax income for the nine months
ended September 30, 2024 would increase by approximately $700
million to $4,462 million (as compared to the pre-tax income
reported in the financial information with respect to the quarter
ended September 30, 2024 in the exhibits furnished with the
Company’s Current Report on Form 8-K filed with the SEC on October
16, 2024).
Amendments to the Company’s Annual Report on Form 10-K for the
fiscal year ended December 31, 2023 (the “Form 10-K/A”), and the
Company’s Quarterly Reports on Form 10-Q for the fiscal quarters
ended March 31, 2024 and June 30, 2024 (the “Form 10-Q/As” and
together with the Form 10-K/A, the “Restated Financial
Statements”), are expected to be filed prior to or concurrently
with the filing of the Company’s Quarterly Report on Form 10-Q for
the fiscal quarter ended September 30, 2024 in order to reflect the
Alternative Approach and the other modifications described above to
the Prior Periods.
The Company is working expeditiously to file the Restated
Financial Statements as soon as reasonably practicable. The Company
currently expects to complete the filings prior to year-end,
however there can be no assurance of the actual timing.
The Company expects that Capital One will file a pre-effective
amendment to the Registration Statement promptly following the
Company’s filing of the Restated Financial Statements, and that as
soon as practicable following the effectiveness of the Registration
Statement and the mailing of the definitive joint proxy
statement/prospectus contained therein to each company’s
stockholders, each company will hold its respective special meeting
of stockholders for purposes of obtaining the requisite stockholder
approvals of the Merger.
About Discover
Discover Financial Services (NYSE: DFS) is a digital banking and
payment services company with one of the most recognized brands in
U.S. financial services. Since its inception in 1986, the company
has become one of the largest card issuers in the United States.
The Company issues the Discover® card, America's cash rewards
pioneer, and offers personal loans, home loans, checking and
savings accounts and certificates of deposit through its banking
business. It operates the Discover Global Network® comprised of
Discover Network, with millions of merchants and cash access
locations; PULSE®, one of the nation's leading ATM/debit networks;
and Diners Club International®, a global payments network with
acceptance around the world. For more information, visit
www.discover.com/company.
Cautionary Note Regarding Forward Looking Statements:
This communication contains forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of
1995. Such statements, which speak to our expected business and
financial performance, among other matters, contain words such as
"believe," "expect," "anticipate," "intend," "plan," "aim," "will,"
"may," "should," "could," "would," "likely," "forecast," and
similar expressions. Other forward-looking statements may include,
without limitation, statements with respect to the restatement of
the Company’s financial statements. Such statements are based on
the current beliefs and expectations of the Company’s management
and are subject to significant risks and uncertainties. Actual
results may differ materially from those set forth in the
forward-looking statements. These forward-looking statements speak
only as of the date of this communication and there is no
undertaking to update or revise them as more information becomes
available. Actual future events could also differ materially due to
numerous factors that involve substantial known and unknown risks
and uncertainties including, among other things, risks relating to
the final impact of the restatements on the Company’s financial
statements; the impact of the restatements on the Company’s
evaluation of the effectiveness of its internal control over
financial reporting and disclosure controls and procedures; delays
in the preparation of the consolidated financial statements and/or
the declaration of effectiveness of the Registration Statement; the
risk that additional information will come to light that alters the
scope or magnitude of the restatement; the risks and uncertainties
set forth under “Risk Factors” and elsewhere in the Company’s
reports on Form 10-K and Form 10-Q; and the other risks and
uncertainties discussed in any subsequent reports that the Company
files with the SEC from time to time. Although the Company has
attempted to identify those material factors that could cause
actual results or events to differ from those described in such
forward-looking statements, there may be other factors that could
cause actual results or events to differ from those anticipated,
estimated or intended. Given these uncertainties, investors are
cautioned not to place undue reliance on forward-looking
statements.
Important Information About the Merger and Where to Find
It
Capital One has filed the Registration Statement with the SEC to
register the shares of Capital One’s common stock that will be
issued to the Company’s stockholders in connection with the Merger.
The Registration Statement includes a preliminary joint proxy
statement of Capital One and the Company that also constitutes a
preliminary prospectus of Capital One. The definitive joint proxy
statement/prospectus will be sent to the stockholders of each of
the Company and Capital One in connection with the Merger.
INVESTORS AND SECURITY HOLDERS ARE URGED TO READ THE
REGISTRATION STATEMENT AND JOINT PROXY STATEMENT/PROSPECTUS WHEN
THEY BECOME AVAILABLE (AND ANY OTHER DOCUMENTS FILED WITH THE SEC
IN CONNECTION WITH THE MERGER OR INCORPORATED BY REFERENCE INTO THE
JOINT PROXY STATEMENT/PROSPECTUS) BECAUSE SUCH DOCUMENTS WILL
CONTAIN IMPORTANT INFORMATION REGARDING THE MERGER AND RELATED
MATTERS. Investors and security holders may obtain free copies
of these documents and other documents filed with the SEC by the
Company or Capital One through the website maintained by the SEC at
http://www.sec.gov or by contacting the investor relations
department of the Company or Capital One at:
Discover Financial
Services
Capital One
Financial Corporation
2500 Lake Cook Road
1680 Capital One Drive
Riverwoods, IL 60015
McLean, VA 22102
Attention: Investor Relations
Attention: Investor Relations
investorrelations@discover.com
investorrelations@capitalone.com
(224) 405-4555
(703) 720-1000
Before making any voting or investment decision, investors
and security holders of the Company and Capital One are urged to
read carefully the entire Registration Statement and joint proxy
statement/prospectus, including any amendments thereto, because
they contain important information about the Merger. Free copies of
these documents may be obtained as described above.
Participants in Solicitation
The Company, Capital One and certain of their directors and
executive officers may be deemed participants in the solicitation
of proxies from the stockholders of each of the Company and Capital
One in connection with the Merger. Information regarding the
directors and executive officers of the Company and Capital One and
other persons who may be deemed participants in the solicitation of
the stockholders of the Company or of Capital One in connection
with the Merger will be included in the joint proxy
statement/prospectus related to the Merger, which will be filed by
Capital One with the SEC. Information about the directors and
executive officers of the Company and their ownership of the
Company common stock can also be found in the Company’s definitive
proxy statement in connection with its 2024 annual meeting of
stockholders, as filed with the SEC on March 15, 2024, as
supplemented by the Company’s proxy statement supplement, as filed
with the SEC on April 2, 2024, and other documents subsequently
filed by the Company with the SEC. Information about the directors
and executive officers of Capital One and their ownership of
Capital One common stock can also be found in Capital One’s
definitive proxy statement in connection with its 2024 annual
meeting of stockholders, as filed with the SEC on March 20, 2024,
and other documents subsequently filed by Capital One with the SEC.
Additional information regarding the interests of such participants
will be included in the joint proxy statement/prospectus and other
relevant documents regarding the Merger filed with the SEC when
they become available.
View source
version on businesswire.com: https://www.businesswire.com/news/home/20241125018559/en/
Investor Contact: Erin Stieber, 224-405-4555
investorrelations@discover.com
Media Contact: Matthew Towson, 224-405-5649
matthewtowson@discover.com
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