Discover Financial Services (DFS) posted a 48% rise in fiscal first-quarter net income fueled by a gain related to a settlement. The company on Monday also said it slashed its dividend and squirreled away more funds to reserve for potential losses.

For the quarter ended Feb. 28, Discover posted net income of $120.4 million, or 25 cents a share, up from $81.2 million, or 17 cents a share a year earlier.

The latest results include an after tax gain of $297 million related to an antitrust settlement. Net income a year ago included a $158 million charge on discontinued operations. Excluding this charge, Discover's earnings from continuing operations fell by half compared with a year earlier.

Discover also slashed its quarterly dividend to 2 cents per share from 6 cents in efforts to shore up capital. This move will save $80 million annually.

Investors, who had driven up Discover shares by 1.5% ahead of regular trading on the New York Stock Exchange, sold off shares after the U.S. stock market opened. Discover shares recently traded at $7.11, down 13 cents or 1.8%. So far this year, its stock has lost about 26% of its value.

Unlike most of its peers, which either issue plastic or process the transactions, Discover does both.

"All of what we have now is backward looking," said Sanjay Sakhrani, an analyst at Keefe, Bruyette & Woods.

"There are a lot of things in flux from an economic standpoint," said Sakhrani. "There's risk to any consumer-loan intensive balance sheet."

The Riverwoods, Ill.-based company reported rising delinquencies and charge-offs, that is, card loans that are deemed uncollectible. Its reserve for credit losses increased $707 million, or 113%, from a year earlier. The large increase in reserve stems from higher delinquencies and $3 billion of card loans that the company brought on to its balance sheet after bonds made up of these loans matured.

The quarterly results come as little surprise in an industry that is reeling from credit losses stemming from higher unemployment and a bleak economic outlook. Cash strapped card users are increasingly falling behind payments and are also cutting back on credit card spending. The more times consumers use Discover-branded cards and the more they charge on them, the more the company earns by way of fees.

"Put simply, we are in a severe consumer-led recession and continued weak credit card spending and credit-related losses show that the industry's problems have not yet abated," said John Williams, an analyst at Macquarie Securities, in a note published Wednesday.

The company's U.S. card business earned $167 million in the first quarter, down 55% from $375 million a year earlier. Discover wrote off 6.48% of its card loans, up from 5.48% in the third quarter and 4.33% a year ago.

Investors have taken some comfort from Discover's recent transformation into a bank-holding company. Under that status, Discover can participate in government-led efforts aimed at stabilizing the industry.

The company last week got $1.2 billion from the U.S. Treasury's Troubled Asset Relief Program in exchange for a stake in the company.

-By Aparajita Saha-Bubna, Dow Jones Newswires; 617-654-6729; aparajita.saha-bubna@dowjones.com

(Kerry E. Grace contributed to this report.)