What happened

Discover Financial Services'(DFS -0.17%) stock price sank significantly on Thursday morning following the release of its second-quarter earnings report. The credit card provider was down more than 10% at 11:16 a.m. ET, dropping to $98.30 per share. The stock price is down about 14% year to

While Discover's earnings were down, as expected, the company did beat earnings and revenue estimates.

So what

Discover Financial, the fourth-largest credit card company, posted $3.2 billion in revenue in the quarter, down 9.9% year over year, and $1.1 billion in net income, down 35% year over year. Earnings per share were $3.96, down from $5.55 a year ago, but well above estimates that were in the range of $3.75 per share.

However, Discover did post better revenue numbers in the second quarter compared to the first quarter of 2022, when revenue was $2.9 billion.

The company saw a 13% increase in net interest income due to higher interest rates and a 13% year-over-year increase in loans. Discover, unlike Visa (V 0.33%) and Mastercard (MA -0.07%), is a lender, not just a payment processor.

However, the drop in earnings was related to a 52% decrease in non-interest income, with most of it due to unrealized losses on assets from the overall decline in the stock market, and higher provision for credit losses. Provision for credit losses jumped to $549 million from $135 million the previous year due to a $110 million reserve build in the second quarter compared to a $321 million reserve release a year ago.

Now what

The reserve release a year ago was common among most banks, as they had built up high reserves during the pandemic and then released excess once things had recovered. The reserve build here in the second quarter is not unusual, given the economic environment. Net charge-offs -- debt unlikely to be recovered by the company -- actually dropped 32 basis points to 1.8%, so that is a positive sign for its credit quality.

The 30-day and 90-day loan delinquency rates both ticked up in the quarter, but are still pretty stable, given the state of the economy. Overall, the increase in loans and the rising rates are good signs for the company, despite the sell-off today. The drop may be more tied to a report that jobless claims rose to their highest level since November, sparking recession concerns.