Discover Financial Service DFS reported net income of $673 million, or $1.33 per diluted share, for the first quarter of 2013. The narrow-moat company continued to generate strong momentum across business lines, increasing book value more than 5% during the quarter, and we may moderately increase our fair value estimate as we incorporate the quarter’s results and transfer coverage to a new analyst.

In contrast to other large consumer lenders, Discover managed to achieve significant loan growth and margin expansion. The company’s loan portfolio grew 7% during the past 12 months, and the net interest margin rose 30 basis points over the same period, to 9.39%. However, expansion of relatively risky loan categories, including personal loans and private student loans, played a role in Discover’s success. The company will need to closely monitor underwriting standards to ensure this growth does not result in credit problems later.

That said, Discover has not experienced much trouble on the credit front so far. The company charged off loans at only a 2.36% rate during the first quarter, allowing it to continue releasing reserves. We expect that this benefit has nearly run its course and also believe charge-off rates will increase over the long run.

Net interchange revenue rose 9.5% from the first quarter of 2012 on increased payment volume and a slight decline in rewards, which we think is indicative of the company’s sound competitive positioning as well as its expert management. Discover also experienced a 12% annual increase in noninterest expenses, in part due to an acquisition. We do not expect expenses to continue growing at this rate, but plan to monitor operating leverage closely in the coming quarters.