Discover posts profit; applies for government funds

"It looks like they definitely took advantage of the settlement, from the money they are getting from that," said John Williams, an analyst at Macquarie Research.

"I think it was a pretty ugly quarter from a credit perspective. From a spending perspective, It looks like they definitely see some slowdown in terms of people using their credit cards," he added.

The company's provision for loan losses increased 89 percent to $1.1 billion as net charge-offs rose.

Discover's charge-off rate, a measure of bad debt write-offs, climbed to 5.48 percent in its fourth fiscal quarter from 3.85 percent a year earlier. Its 30-day delinquency rate rose to 4.56 percent from 3.58 percent a year ago.

Discover has estimated its credit losses will peak in 2009.

Managed loans increased 6 percent to $51 billion compared with last year, but Discover Card sales fell 2 percent to $22 billion.

Discover shares were up 16.2 percent at $9.97 on Thursday morning on the New York Stock Exchange. Through Wednesday, the shares had fallen 43 percent this year.

(Editing by John Wallace and Matthew Lewis)