NEW YORK ( TheStreet) -- Discover Financial Services ( DFS) Tuesday reported an expected loss for the first quarter because of an increase to its loan loss reserves, and said it's received approval to redeem the government's $1.2 billion preferred stock investment related to the Troubled Asset Relief Program. As part of its plans to pay back the U.S. Treasury, Discover said it would issue $350 million worth of subordinated debt. It expects to complete the debt offering in the second quarter. The Treasury's investment was made in January 2009 as part of TARP's Capital Purchase Program. As for its first quarter ended Feb. 28, Discover posted a loss of $104 million, or 22 cents a share. The company said last week an increase in its loan loss reserves of $305 million on a pre-tax basis would result in a loss of 22 to 23 cents a share for the first quarter. The higher loan loss reserve number stemmed from the company's decision to bring its loss coverage up to 12 months as part of a change in its analytical process for estimating incurred losses on non-delinquent accounts. In the same period a year earlier, the company reported net income of $120 million, but this reflected an after-tax gain of $297 million from the Visa ( V)/ MasterCard ( MA) antitrust litigation settlement. Revenue net of interest expense slipped to $1.69 billion for the latest quarter from $1.72 billion last year. Sales volume rose 5% year-over-year in the quarter to $22 billion. Total loans were $50 billion, Discover said, with the company's student loan portfolio rising by $2 billion to $2.8 billion, while its credit card portfolio decreased by $3 billion to $45.8 billion. "Discover's performance this quarter reflects the emergence of a more favorable economic environment, as our Discover card sales volume has now shown four consecutive months of year-over-year growth and delinquency levels have declined," said David Nelms, the company's chairman and CEO in a press release. "We were also pleased with the continued strong growth of our direct-to-consumer deposit business." The average estimate of analysts polled by Thomson Reuters was for a profit excluding items of 12 cents a share for the three months ended in Feburary.
The company also said on March 11 that the net charge-off rate for its Direct Banking unit would increase year-over-year in the first quarter to 8.5% from 8.43%, and that it believes delinquent loan loss balances may have peaked in the fourth quarter. In its release Tuesday, Discover forecast a net charge-off rate of between 8.0% and 8.5% for the second quarter. The provision for loan losses in the latest quarter came in at $1.39 billion, compared to $1.26 billion in the quarter ended in November, and $1.48 billion in the same period a year earlier. Shares of Discover were up a little more than 3% year-to-date after closing up a dime at $15.30 ahead of the report. -- Written by Michael Baron in New York.