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Discover Financial Services today reported net income of $234.15 million for the second quarter ended May 31, up 11.9% from $209.24 million for the same quarter a year earlier. The company's revenue net of interest expense was $1.51 billion, up 3.4% from $1.46 billion. Third-party transaction volume from its Pulse and Discover Network rose 33%, to $29.4 billion from $22.1 billion. Pretax income from third-party transactions rose 110%, to $16.8 million from $8 million. Discover's charge-off rate rose to 4.99% of managed receivables at the end of the quarter, up from 3.97% a year earlier. Thirty-day and 90-day delinquency rates rose to 3.81% from 2.97% and to 1.96% from 1.44%, respectively. In response to rising losses, Discover boosted its loan-loss reserves at the end of the second quarter by 30.9% to $581.5 million from $444.2 million for the same period a year earlier. At a conference with analysts today, Discover CEO David W. Nelms said he expects card losses to continue to rise during the second half of this year because of the tough economic environment. The U.S. card segment contributed pretax income of $309.1 million, down 20.3% from $387.6 million during the same quarter a year earlier. At the end of May, the segment held managed loans of $47.84 billion, up 1.9% from $46.95 billion a year earlier. Credit card sales volume during the quarter rose 1.6% to $22.46 billion from $22.1 billion at the end of the second quarter of 2007. Red Gillen, a senior analyst with Boston-based Celent, tells CardLine that Discover's earnings surpassed analysts' expectations and its third-party network results are a bright spot. "Discover's third-party payments business is an important strategic direction, and they are showing a lot of positive momentum there," he said.

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