Discover Financial Services , the sixth-largest U.S. credit card issuer, posted lower-than-expected quarterly earnings as bad loans grew and the value of transactions with its cards declined, sending its shares down more than 8 percent.

The company, which received a $1.2 billion government bailout, said increases in its charge-off rate and credit card delinquencies reflected high unemployment and consumer bankruptcies.

There are still far too many people out of work, and it's great to see the number of consumers losing their jobs coming down, but they are still losing their jobs, Chief Executive David Nelms told Reuters in an interview. We are not out of the woods yet.

Net income for the fiscal fourth quarter, ended November 30, fell to $371 million, or 63 cents per share, from $432 million, or 89 cents per share, a year earlier, the company said on Thursday.

The latest results included an after-tax gain of $285 million related to an antitrust settlement with Visa and MasterCard .

Excluding that gain, Riverwoods, Illinois-based Discover earned 12 cents per share. On that basis, analysts had expected 14 cents, according to Thomson Reuters I/B/E/S.

This is an indication that the consumer is not recovering as quickly as the markets have anticipated, said Robert Lutts, president and chief investment officer at Cabot Money Management. We are not really rising out of the problem area. We are climbing out slowly.

Discover shares fell 8.65 percent to $15 in afternoon trading on the New York Stock Exchange, after declining as much as 10 percent in its biggest daily decline in five months.

Earnings expectations were high, said Scott Valentin, an analyst at FBR Capital Markets.

CHARGE-OFF RATE UP

Discover's charge-off rate -- loans it does not expect to be repaid -- inched up to 8.43 percent in the fourth quarter from 8.39 percent in the third quarter, but was below the company's forecast of 8.5 percent to 9 percent.

Discover said it expects a first-quarter charge-off rate of 8.4 percent to 8.9 percent.

The company's delinquency rate -- payments at least 30 days late, an indicator of future credit losses -- rose to 5.31 percent in the fourth quarter from 5.1 percent in the third quarter.

Nelms said, however, the company posted its first decline in chargeoffs -- measured in U.S. dollars- since 2007.

Provisions for losses on U.S. credit cards declined to $989 million from $1.11 billion a year earlier.

Discover also reported that the value of transactions with Discover Card, Diners Club International and the company's debit network shrank during the quarter.

Discover Card saw an increase in sales volume in October and November, Nelms said, a trend that appeared to continue during December.

You have to stabilize before you start growing. I am not still expecting a hugely robust holiday period by any means, Nelms said. I think people are going to be very conservative.

Thanks to a conservative expansion policy in recent years, Discover is less exposed to bad loans than bigger rivals such as Bank of America Corp and Citigroup Inc .

Discover was also bailed out by the U.S. government; it has not yet repaid the funds. Nelms said Discover planned to repay the money sooner than later, but would not say more.

We don't want to be rushed, Nelms said at a conference call with analysts.

Unlike banks such as JPMorgan Chase & Co and Capital One Financial Corp , Discover lacks retail branches that would give it easy access to cheap deposit funding.

It used to fund most of its operations in the asset-backed securities markets. Most recently, it has been raising money through certificates of deposit and deposits online.

(Reporting by Juan Lagorio; editing by John Wallace, Gunna Dickson and Robert MacMillan)