Discover Financial Services said net income for its fiscal third quarter, which ended Aug. 31, dropped 11% from a year earlier, to $180.1 million, or 37 cents a share.

The card company, which spun off from Morgan Stanley in July of last year, also said Thursday that its provision for loan losses surged 80% as delinquencies and chargeoffs continued to rise.

David Nelms, Discover's chief executive officer, said the consumer environment and funding costs "continue to be challenging." He also said his company's results "demonstrate the underlying quality of our customer base and reflect our disciplined loan underwriting process and multichannel funding strategy."

The results for the fiscal third quarter of last year included a loss of 9 cents a share from discontinued operations related to the Goldfish business in the United Kingdom. Discover sold that business to Barclays PLC in late March.

Discover's revenue fell 13%, to $886.3 million.

The average forecast of analysts polled by Thomson Reuters had called for the company to post earnings of 35 cents a share on $918 million of revenue.

Pretax earnings from Discover's U.S. card operation fell 36% on a surge in loan-loss provisions, which climbed 30% from the second quarter.

The managed net chargeoff rate jumped 154 basis points from a year earlier and 21 basis points from the fiscal second quarter, to 5.2%. The managed 30-day delinquency rate rose 69 basis points from a year earlier and 4 basis points from the second quarter, to 3.85%. The 90-day rate climbed 40 basis points from a year earlier but fell 8 basis points from the fiscal second quarter, to 1.88%.

Credit card sales volume rose 5% from a year earlier.

Card issuers are hurting as payments are falling, debt is rising, and declining property values prevent cash-strapped borrowers from using their homes as a piggy bank. As a result, issuers have been forced to deepen their loss reserves.

Citing the worsening economic conditions and rising unemployment, Sandler O'Neill & Partners LP said Wednesday that it expects "more pronounced credit deterioration" at Discover this year and into next year.

Discover's shares were down about 5% at midday Thursday, to $14.43.

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