Discover Financial Services (DFS) earned $621 million for its third quarter ended Aug. 31, up 3% from the same period a year earlier, the company said Thursday.

The Riverwoods, Ill.-based credit card issuer said expenses related to a recent settlement with regulators over its credit card practices offset improved performance in its business.

Discover said losses from problem loans continued to decline. Net principal chargeoffs fell 33%, to $308 million, from a year earlier and chargeoff rate for the quarter was 2.12%, down from the 3.43% the company reported a year ago.

As a result of loan growth, the company increased its loan-loss reserve by 26% to $126 million, from $100 million in the third quarter of 2011.

Revenue during the quarter rose roughly 11%, to $2 billion, from a year earlier, but expenses rose 29%, to $826, primarily as a result of legal fees.

"Our business segments demonstrated solid performance during the quarter," David Nelms, Discover's chief executive, said in a news release. "Card sales and receivables grew in a challenging environment while credit quality continued to improve."

The issuer said Friday its Discover Bank subsidiary will return $200 million to cardholders who purchased credit card protection products from the company via telephone unknowingly over a roughly three-and-a-half-year period beginning in December 2007. The settlement was part of an agreement with the Consumer Financial Protection Bureau and the Federal Deposit Insurance Corp.

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