Fourth quarter income from continuing operations was $371 million, down 16% from the fourth quarter of 2008.
After-tax income related to the Visa/MasterCard antitrust litigation settlement included in continuing after-tax earnings was approximately $285 million and $535 million in the fourth quarter of 2009 and 2008, respectively.
Full year income from continuing operations was $1.3 billion, up 22% from last year. Income from continuing operations for full year 2009 and 2008 included $1.2 billion and $535 million (after-tax), respectively, related to the litigation settlement.
Fourth Quarter Highlights
* Managed1 loans remained at approximately $51 billion. The student loan portfolio grew $513 million in the quarter while credit card loans decreased $670 million.
* The fourth-quarter managed net charge-off rate rose to 8.43% and the over 30 days delinquency rate rose to 5.31%.
* Discover Card sales volume declined 1% from the prior year to $22 billion.
* Third-Party Payments segment volume was $33 billion, a 2% decrease from the prior year.
* Deposit balances originated through direct-to-consumer and affinity relationships were $12.6 billion, an increase of $2.4 billion from the prior quarter.
* Discover Bank issued $700 million of subordinated notes, increasing the company's total regulatory capital.
"Discover's results this quarter reflect stronger than expected credit performance and our on-going investments to strengthen the Discover franchise," said David Nelms, Discover's chairman and chief executive officer. "We were very pleased with the stability of our sales volume, our expanded merchant acceptance and the continued growth of our direct-to-consumer banking business. For the full year we were profitable even excluding the antitrust settlement proceeds, and are closing out 2009 with strong capital levels and a strong foundation that positions us well for future growth."
Segment Results (Managed Basis):
Pretax income was $575 million in the fourth quarter of 2009 as compared to $646 million for the fourth quarter of 2008.
Managed loans ended the quarter at $51 billion, essentially flat compared to the prior year, as lower cardmember payments and growth in both student and personal loans were largely offset by lower balance transfer activity and sales volume. Sales volume declined 1% compared to the prior year, reflecting lower gas prices and a general decline in consumer spending. Balance transfer volume declined 66% from the prior year as the company reduced its marketing of promotional rate balance transfer offers.
Net yield on loan receivables was 9.37%, an increase of 82 basis points from the prior year and a decrease of 53 basis points from the prior quarter. The net yield increased from the prior year as the rate on credit card balances declined less than the cost of funds, primarily due to higher interest rates on standard balances and a reduction in promotional rate balances. The net yield decreased from the prior quarter reflecting the impact of a decline in higher rate balances related to the implementation of the CARD Act, an increase in lower rate student loan balances and an increase in the liquidity reserve.
The managed net charge-off rate increased to 8.43% for the fourth quarter of 2009, up 295 basis points and 4 basis points from the prior year and the prior quarter, respectively. The over 30 days delinquency rate on managed loans was 5.31%, up 75 basis points from the prior year and 21 basis points from the prior quarter. The increase in both the net charge-off rate and delinquency rate was due to higher levels of consumer bankruptcies and unemployment partially offset by a higher mix of student loans. The managed net charge-off rate for the first quarter of 2010 is expected to be between 8.4% and 8.9%.
Provision for loan losses decreased $117 million, or 11%, from the prior year due to a lower reserve build, partially offset by higher net charge-offs. The allowance for loan losses increased $383 million from the prior year, but decreased $75 million from the prior quarter. The increase from the prior year reflects a 199 basis point increase in the reserve rate, partially offset by a $1.6 billion decrease in on-balance sheet loans primarily related to securitization activity. The decrease from the prior quarter reflects a $1.9 billion decline in the level of on-balance sheet loans in the quarter as a result of securitization activities partially offset by a 25 basis point increase in the reserve rate.
Other income includes $472 million and $864 million in litigation settlement proceeds in the fourth quarter of 2009 and 2008, respectively. Excluding the settlement proceeds, other income increased $82 million from the prior year, primarily due to the revaluation of the interest-only strip receivable. The fourth quarter 2009 includes a $38 million unfavorable revaluation of the interest-only strip receivable compared to a $116 million unfavorable revaluation in the fourth quarter 2008.
Expenses were down $18 million, or 3% from the prior year, reflecting the impact of cost containment initiatives, partially offset by costs associated with the global expansion initiative of $13 million and a $9 million charge related to a facility closure. The fourth quarter of 2008 included a $39 million benefit due to curtailment of the company's pension plan.
Pretax income of $24 million in the quarter was up $3 million from the prior year. Revenues were up $6 million reflecting an increase in transactions on the PULSE network, lower incentive payments and higher fee revenues. Expenses were up $2 million including a higher level of international marketing investments, partially offset by the impact of cost containment initiatives.
Third-Party Payments dollar volume for the fourth quarter of $33 billion was down 2% from the prior year. However, the number of transactions on the PULSE network increased 5% to 677 million, due to increased transactions from new and existing clients, partially offset by the loss of volume from one large financial institution.
Capital Markets Activity
During the quarter, the company's wholly-owned subsidiary, Discover Bank, raised approximately $700 million through a subordinated debt issuance, increasing tier 2 regulatory capital. In addition, the company's securitization trust issued $1.3 billion of asset-backed securities through the TALF program.
The company's board declared a cash dividend of $0.02 per share of common stock, payable on Jan. 21, 2010, to stockholders of record at the close of business on Dec. 31, 2009.
Adoption of Statement of Financial Accounting Standards No. 166 and 167
The company adopted Statement of Financial Accounting Standards No. 166 and 167 on Dec. 1, 2009, which requires the consolidation of its credit card securitization trusts. At adoption, the company added approximately $21.1 billion of assets, including a $2.1 billion addition to loan loss reserves, and approximately $22.4 billion of liabilities to its balance sheet. The net impact of the new accounting is a reduction to stockholders' equity of $1.3 billion. The company estimates its pro-forma total and tier 1 regulatory capital ratios after adoption would be 16.0% and 13.3%, respectively.