Discover Financial Services said Thursday its fiscal fourth-quarter profits fell 16% as new restrictions on credit card rates led to a decline in interest income.

The Riverwoods, Ill., credit card company said its earnings from continuing operations for the three months ended Nov. 30 were $371 million, or 63 cents a share, compared with $444 million, or 92 cents, a year earlier.

Although Discover shares had fallen by more than 8%, to $15.07, by midday Thursday, executives remained upbeat about the results.

"It's clearly a negative day for financials, but beyond that I actually feel good about our results," David Nelms, Discover's chief executive, said in an interview Thursday afternoon. "Our results came in a bit better than we expected … and we remain profitable, which is not true for most other credit card companies right now, and that's with a high level of chargeoffs. And so ultimately as chargeoffs return to more normal levels after the crisis, that bodes well for Discover."

Without naming names, Nelms claimed that Discover has maintained its relatively low chargeoffs without using some of the tactics other issuers have tried. "A few of our competitors have made some changes on re-age policies and payment holidays, and some of those things can have a very big impact in the short term on your loan-loss rates," he said. "So when you see sudden changes from competitors usually there's something like that going on. We have not made any significant changes on any of those kinds of policies, so our results are more reflective of our credit."

Discover's managed credit card chargeoffs climbed 295 basis points from a year earlier, to 8.43%, but that rate beat Nelms' earlier forecast of 8.5% to 9%. The company said it expects to post annualized writeoffs of 8.4% to 8.9% for the current quarter.

"We believe we will report the lowest full-year chargeoff rate of our major competitors," Nelms told analysts on a conference call Thursday morning. However, "we have not yet seen sustained improvement in the U.S. economy, plus our fourth-quarter delinquencies were somewhat higher, which leads us to conclude that we may be approaching, but likely have not yet reached a peak loan-loss rate."

Credit card defaults tend to follow the U.S. unemployment rate, which topped 10% in the quarter, making it harder for customers to keep up with payments. Consumer spending was little changed in November, and a Discover poll released Dec. 2 found that two-thirds of shoppers expect to spend less on holiday gifts this year.

The company's net yield on credit cards fell 53 basis points from the previous quarter, to 9.37%, as Discover implemented changes mandated by the Credit Card Accountability, Responsibility and Disclosure Act, which allows customers to reject rate increases on existing balances.

Roy Guthrie, Discover's chief financial officer, told analysts on the conference call that the decline in the net yield on the card portfolio was "largely attributable to the absence of default repricing as we began to implement changes required by the CARD Act," and that he expected that downward pressure to continue throughout the year. However, Discover has "taken a series of management actions that will serve to offset these impacts," including raising the interest rates offered with new accounts, lowering promotional rate balances and raising the fees on balance transfer offers.

Scott Valentin, an analyst at FBR Capital Markets Inc., said he was surprised by the lower yields as card issuers including Discover raised rates before the law took effect.

"Our biggest concern was that credit card yields came down," he said. "Relative to expectations, it was a little disappointing."

Discover's quarterly results included a $285 million gain from the final installment of a legal settlement with Visa Inc. and MasterCard Inc. Discover agreed in October 2008 to accept $2.75 billion to resolve the antitrust case it brought against the two networks.

Nelms also said in the interview that he was pleased with the growth in its direct deposit business. Deposit balances originated through direct-to-consumer and affinity relationships increased by $2.4 billion from the previous quarter, to $12.6 billion. "That could become our largest single funding source by the end of the year," he said.

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