Discover Financial Services Inc.'s fiscal fourth quarter net earnings were down 14% from a year ago as losses stemming from card loans remain elevated.

The earnings for this quarter and the same period a year earlier were bolstered by a legal settlement.

The company also said it expected losses from souring card accounts to remain at elevated levels the next quarter.

The results, announced early Thursday, indicate that consumers remain stressed by high rates of joblessness. Delinquency rates, a key gauge of future losses, continue to rise. This suggests the U.S. is unlikely to experience a smooth economic turnaround.

Discover, along with its peers, is also coping with sweeping legislation restricting certain fees and rate increases, which will bite into income. To fight the losses, credit-card issuers are scaling back on credit and getting tougher about lending standards.

For the quarter ended Nov. 30, Discover posted net income of $370.7 million, or 63 cents a share, down from $432.3 million, or 89 cents a share, a year earlier.

The latest results include an after-tax gain of $285 million related to an antitrust settlement. This is the last payment related to this settlement. The year-ago results included an after-tax gain of $535 million from the antitrust settlement.

The company's shares traded at $16.17, down 1.5%, at the opening. The stock is within striking distance of its 52-week high of $17.35, reached in October.

Unlike most other card companies, which either issue plastic or process the transactions, Discover and bigger rival American Express Co. (AXP) do both. Therefore, in addition to the interest Discover earns on its credit-card loans, a chunk of its revenue comes from fees it charges banks and merchants, such as grocery stores or gas stations, to process card payments.

The Riverwoods, Ill., company reported rising delinquencies and charge-offs, or card loans that the company doesn't expect to collect on. Charge-offs for the fourth quarter totaled 8.43% of Discover's credit card loans, up from 8.39% in the third quarter and 5.48% a year ago. The charge-off rate for the fourth quarter, although elevated, is at the lower end of Discover's 8.5%-9% estimate for this period. The company expects credit card loan losses to be between 8.4% and 8.9% in the first quarter of 2010.

Borrowers at least a month behind on their card payments totaled 5.31%, up from 5.10% in the prior quarter and 4.56% a year earlier. The delinquency rate, a key gauge of future losses, is important for issuers because higher delinquencies force them to squirrel away capital to reserve for potential losses; ultimately, companies must write off loans if customers can't pay up.

Discover's reserve for credit losses, at $989 million, was up 7% from the third quarter but fell 11% from a year ago.

Investors have taken comfort from Discover's transformation into a bank-holding company. With that status, Discover has participated in government-led efforts aimed at stabilizing the industry. The company got $1.2 billion in March from the U.S. Treasury's Troubled Asset Relief Program in exchange for a stake in the company. It is yet to repay the government's investment.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.