- The Washington Times - Thursday, March 19, 2009

CHARLOTTE, N.C. (AP) - Discover Financial Services said Thursday it managed to remain profitable during its fiscal first quarter, thanks to a payment from a lawsuit settlement, but it is nevertheless reducing its quarterly dividend.

Without the gain from the lawsuit settlement, the credit-card lender would have had a loss due to rising defaults and delinquencies. Nearly all lenders are seeing more customers stop making their monthly payments as the economy falters and unemployment surges.

The Riverwoods, Ill., company also reduced its quarterly dividend to 2 cents per share, from 6 cents per share, “out of an abundance of caution,” Chief Executive David Nelms said in a statement.

The dividend reduction will save it about $80 million a year, the company said.

Discover said it earned $120.4 million, or 25 cents per share, during the quarter ended Feb. 28. A year earlier, it earned $81.2 million, or 17 cents per share.

The company’s results were bolstered by a $475 million payment received as part of a $2.75 billion settlement of an antitrust lawsuit with Visa Inc. and MasterCard Inc. The payment boosted profit by $297 million after taxes. The lawsuit claimed MasterCard and Visa harmed Discover’s business by preventing their member banks from issuing credit cards for Discover’s network.

Analysts polled by Thomson Reuters, on average, forecast a loss of 16 cents per share for the quarter. Analysts estimates often do not include gains and charges.

“The (first quarter) results were weaker-than-expected, but expectations for credit-card companies are low,” wrote Citi Investment Research analyst Donald Fandetti in a note to clients.

Fandetti added that he maintains a “Hold” rating on the company, “due to concerns about credit deterioration as unemployment continues to rise.”

With default rates skyrocketing, credit-card companies are the latest victims of an economic crisis that began with the collapse of the U.S. housing and subprime mortgage markets and spread around the world.

Discover’s provision for loan losses more than doubled to $1.3 billion. The company’s charge-off rate, the percentage of debt it does not expect to be repaid, climbed to 6.48 percent from 5.48 percent in the fourth quarter.

Shares of Discover fell 60 cents, or 8.3 percent, to $6.64 in afternoon trading.

Discover recently became a bank holding company and last week received $1.2 billion through the U.S. Treasury’s Capital Purchase Program.

The company joins hundreds of financial-services companies _ including rival American Express Co. _ that have gotten government capital during the financial crisis.

The deal “will be be profitable for the government, as well as us,” Nelms said in an interview with The Associated Press, adding the money will help support the company’s lending efforts. “For us it’s not a bailout.”

The credit-card lender sold 1.2 million shares of its preferred stock and a 10-year warrant to buy 20.5 million of its common shares at an exercise price of $8.96 per share. The preferred stock will pay 5 percent annual dividends for the first five years, and 9 percent dividends thereafter, the company said.

During the most recent quarter, income from Discover’s third-party payments business _ which processes ATM and debit transactions and other banks’ cards _ rose sharply to $28.9 million from $15.5 million a year earlier. The boost was due to the addition of Diners Club International, which was acquired from Citigroup Inc. last year.

Discover’s third-party payments business processed $35 billion in transactions during the most recent quarter.

Average total loans during the quarter increased to $51.9 billion from $48.9 billion during the same quarter last year.

Total deposits rose 14 percent to $28 billion.

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