| Credit Quality
Net yield on loan receivables increased to 9.37%, an increase of 82 basis points from 4Q08 and decrease of 53 basis points from 3Q09. The net yield increased on a y/y basis 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 on a sequential basis, 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% in 4Q09, up 295 basis points and 4 basis points from the prior year and the prior quarter, respectively. The 30 days or more delinquency rate on managed loans was 5.31%, up 75 basis points from 4Q08 and 21 basis points from 3Q09. According to the firms, 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.
Management expects the managed net charge off rate for 1Q10 to be between 8.4% and 8.9%.
According to one firm (William Blair), consistent with November master trust data release, Discover’s credit quality continues to show signs of stabilization and confirm that net charge offs will peak in 1Q10.
Capital Markets Activity
During 4Q09, the Company’s wholly-owned subsidiary, Discover Bank, raised approximately $700.0 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.
Adoption of Statement of Financial Accounting Standards No. 166 and 167
On December 1, 2009, the Company adopted Statement of Financial Accounting Standards No. 166 and 167, which requires the consolidation of its credit card securitization trusts. On 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.
Dividend
On January 21, 2010, the Company’s Board paid a cash dividend of $0.02 per share of common stock to stockholders of record at the close of business on December 31, 2009.
On October 22, 2009, DFS paid a cash dividend of $0.02 per share of common stock to stockholders of record at the close of business on October 1, 2009.
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