John T. Greene
Executive Vice President, Chief Financial Officer at Discover Financial Services
Thank you, Roger, and good morning, everyone. I'll start with our financial summary results on Slide 4. Our performance this quarter was characterized by strong revenue growth, continued credit normalization, a slight change to our outlook on the macro economic environment resulting in a reserve increase and a year-over-year increase in expenses.
Let's review the details starting on Slide 5. Net interest income was up $653 million year-over-year or 26%. Our net interest margin continued to expand benefiting from higher prime rates, partially offset by higher funding costs and increased promotional balances. NIM ended the quarter at 11.3%, up 49 basis points from the prior year and 7 basis points sequentially. Receivable growth was driven by card, which increased 22% year-over-year, reflecting stable sales growth, modest new account growth and payment rate moderation. Sales increased 9% in the period, slightly higher than the 8% growth we experienced in the prior quarter and down from the 16% growth we experienced in 2022. Sales growth so far in April is a modest 2.5%, but this is coming off a very high comp of 22% in April of last year. New card account growth decelerated reflecting the tightening of underwriting standards over the past several months, but grew by 3% from the prior year.
The impact of slowing sales growth on receivable expansion was offset by decreases in payment rates. The card payment rate decreased 80 basis points in the quarter and is currently slightly over 200 basis points above the pre-pandemic level.
Turning to our non-card products, personal loans were up 21%, driven by higher originations over the past year and lower payment rates. We continued to experience strong consumer demand, while staying disciplined in our underwriting of this product. Organic student loan receivables grew by 3%, largely driven by a reduction in the payment rate.
In terms of funding mix, consumer deposit balances were up 17% year-over-year and 7% sequentially. As Roger highlighted, we achieved record quarterly deposit growth. Deposits now make up 66% of our total funding mix, with over 90% insured, and we continue to target 70% to 80% deposit funding over the medium term. Outside of deposits, our funding channels remain open and at attractive costs. As an example, in early April, we issued $1.25 billion of card ABS fixed rate notes. This offering was upsized, and our spread was 9 basis points tighter than our November securitization. Additionally, we recently received a ratings upgrade by Moody's for our bank subsidiary and our banking holding company. Moody's cited a number of reasons to support this upgrade including our prudent underwriting, conservative risk management and resiliency in an economic downturn.
Looking at other revenue on Slide 6. Non-interest income increased $198 million or 47%. This was partially due to a $162 million loss on our equity investments in the prior year quarter compared to an $18 million loss this quarter. Adjusting for these, our non-interest income was up 9%, primarily driven by loan fee income and higher net discount and interchange revenue.
Moving to expenses on Slide 7. Total operating expenses were up $253 million or 22% year-over-year and down 7% from the prior quarter. Compensation costs were up primarily due to increased headcount and wage inflation. Marketing expenses increased $49 million or 26% as we continued to prudently invest for growth in our card and consumer banking products. Professional fees increased $55 million or 31%, driven by investments in technology and increases in consulting activities that support our consumer compliance initiatives. Even with these increases, our efficiency ratio was 37%, and we generated about 700 basis points of operating leverage in the period.
Moving to credit performance on Slide 8. Total net charge-offs were 2.72%, 111 basis points higher than the prior year and up 59 basis points from the prior quarter. In the card portfolio, the net charge-off rate of 3.1% was 126 basis points higher than the prior year and 73 basis points higher sequentially. Consistent with our commentary back in January, we expect the seasoning of new account vintages from the past two years and normalization of older vintages to a more typical loss rate. These trends remain consistent with our expectations.
Turning to the discussion of our allowance on Slide 9. This quarter, we increased our allowance by $385 million, and our reserve rate increased by 25 basis points to 6.8%. This increase in reserve rate was driven by two factors. About 10 basis points reflects the runoff of seasonal transactor balances that we typically experienced in the fourth quarter. The remaining portion was largely driven by deterioration in our expectations of the macroeconomic environment. We increased our expectations for the 2023 year-end employment rate to the mid point of our 4.5% to 5% range. This change reflects the potential for a reduction in lending impacting economic growth. We will continue to monitor the macroeconomic conditions and make adjustments to our expectations.
Looking at Slide 10. Our common equity tier 1 for the period was 12.3%, and we repurchased $1.2 billion of common stock during the quarter. The net unrealized loss on our AFS securities portfolio at the end of the quarter was $45 million. The impact on our regulatory capital, if our OCI opt-outs were not allowed, would have been about 20 basis points. Our capital position remains robust and well ahead of regulatory requirements. We continue to prioritize investments in strong organic growth and returning excess capital to shareholders. Included in our press release was the announcement that our Board of Directors approved a new $2.7 billion share repurchase program for the five quarters ending June 2024 and increased our common stock dividend by 17% to $0.70 per share.
Including on Slide 11 with outlook, following the strong first quarter performance, we are raising our expectations for loan growth this year to be low- to mid-teens. There is no change to our NIM forecast. We are maintaining our guidance for operating expenses to be less than 10%. However, we do see risk of upward pressure on this from collection and customer service expense related to growth in our lending and deposit accounts and professional service support and continued investment in technology. We are tightening our expected range of net charge-offs to 3.5% to 3.8% based on our current delinquencies and roll rates. This represents a reduction to the top end of the range by 10 basis points.
Finally, as mentioned, our Board of Directors approved a new share repurchase authorization. We have returned substantial excess capital over the past two years and we anticipate moving towards a more standard cadence of share buybacks over the second half of this year.
To conclude, our first quarter results have given us significant momentum into this year and we're well positioned to deliver on our financial objectives.
With that, I will turn the call back to our operator to open the line for Q&A.
