Discover Financial Services said Tuesday that it plans to pay back $1.2 billion in federal bailout funds, even as it reported a loss for the fiscal first quarter, which ended Feb. 28.

The Riverwoods, Ill., credit card company said it will issue $350 million of subordinated debt to help it pay back the government capital it received as part of the Troubled Asset Relief Program. The debt offering is expected to be completed during its fiscal second quarter, Discover said.

The announcement came as the company reported a fiscal first-quarter loss of $122.2 million, or 22 cents per share. That compares with earnings of $118.4 million, or 25 cents per share, a year earlier.

In the most recent quarter, earnings were hurt by a $185 million addition to its loan-loss reserves. The loss rate on its credit cards rose 203 basis points from a year earlier to 8.51%. However, the delinquency rate improved to 5.05% from 5.26% a year earlier and 5.31% in the previous quarter.

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