Discover Posts Higher Q1 Income With Litigation Payout Boost

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Discover Financial Services today reported net income of $120.4 million for the first quarter ended Feb. 28, an increase of 48.3% over $81.2 million for the same period a year ago. The results include a $297 million after-tax net income boost for the quarter from payouts related to an antitrust settlement Discover reached with Visa Inc. and MasterCard Worldwide last year. Discover CEO David Nelms told analysts during a teleconference today that the difficult economy and rising unemployment is likely to push card charge-off rates above 7.5% of managed card receivables during the second quarter of 2009. Loan-loss reserves for Discover's U.S. card segment more than doubled during the quarter to $1.3 billion from $627.1 million for the same period last year. Charge-off rates for Discover's managed card loans for the quarter jumped to 6.48% compared with 4.33% a year ago, while delinquency rates for managed loans at least 30 days past due rose to 5.25% of managed card receivables compared with 3.90% a year ago. The segment held managed loans of $50.1 billion, up 6.6% from $47 billion for the same period a year earlier. Discover card-sales volume fell 8.2%, to $21.3 billion during the quarter from $23.2 billion a year ago. Discover's third-party payment volume for the quarter rose almost 33.5%, to $35.1 billion from $26.3 billion. The increase included $6.3 billion from Diners Club International, which Discover acquired last year. Transactions processed on Discover's Pulse network increased 10.5% to $686.5 billion compared with $621.1 billion during the same quarter a year earlier. Credit card payment rates have fallen significantly, Nelms told analysts, as consumers faced the highest unemployment rates in 25 years. "We are focused on maintaining a very strong capital position," he said, noting that the company has worked with more than 1 million of its cardholders to reduce card interest rates, waive fees and establish payment plans to help offset further charge-offs.