John T. Greene
Executive Vice President, Chief Financial Officer at Discover Financial Services
Thank you, Roger, and good morning, everyone.
I'm going to open by addressing the financial implications of the card misclassification. We have established a liability on our balance sheet of $365 million to accrue for estimated compensation owed to merchant and acquirers. In establishing the liability, we adjusted retained earnings by $255 million net of tax, $11 million was taken this quarter, and is reflected in discount and interchange revenue. The first half of 2023 impact was $22 million.
With that, I'll transition to our financial summary results on Slide 4. From this, you can see that the financial performance of the business remained solid. In the quarter, we reported net income of $901 million, which was 18% lower year-over-year. Our results reflect strong revenue growth partially offset by a provision increase driven by receivable growth and higher expenses. The trends for the quarter were robust loan growth, a low efficiency ratio even as we invested in compliance management and technology, and strong capital and liquidity positions. Further details are reflected on Slide 5.
Net interest income was up $567 million year-over-year or 22%. Our net interest margin ended the quarter at 11.06%, up 12 basis points from the prior year and down 28 basis points sequentially. The benefits from higher prime rates were offset by higher funding cost and increased promotional balances. Receivable growth was robust. Card increased 19% year-over-year, reflecting a lower payment rate versus the prior year and modest sales growth. The card payment rate remained stable quarter-over-quarter and about 200 basis points over 2019 levels. Sales volume grew 3% in the quarter. Through mid-July, growth continued to slow and was up about 1%.
Turning to our non-card products, personal loans were up 27%, driven by strength in originations over the past year. We continue to experience strong consumer demand, whilst staying disciplined in our underwriting. Deposit growth in the quarter was solid, with average consumer deposits up 20% year-over-year and 4% sequentially. Our direct-to-consumer balances grew $2 billion and consumer deposits made up 66% of our total funding mix. We continue to target 70 plus percent of funding from deposits.
Looking at other revenue on Slide 6. Non-interest income increased $98 million or 16%. This was partially due to a $42 million loss on our equity investments in the prior year quarter compared to a $1 million gain this quarter. Adjusting for these, our non-interest income was up 9%, primarily driven by loan fee income. Moving to expenses on Slide 7. Total operating expenses were up $181 million or 15% year-over-year and up 2% from the prior quarter, primarily driven by our investments in our compliance management systems. These investments impacted several of our expense line items. Looking at the -- our major expense categories, compensation costs were up $73 million or 14%, primarily due to increased headcount. Marketing expense increased $14 million or 6%, as we prudently invested for growth, particularly in our deposits and personal loan products. Our commitment to disciplined cost management has not changed and we continue to target an efficiency ratio in the high-30s.
Moving to credit performance on Slide 8. Total net charge-offs were 3.22%, a 142 basis points higher than the prior year and up 50 basis points from the prior quarter. Consistent with our expectation, we are seeing credit normalization across all of our lending products. Looking ahead, in card, we continue to expect the seasoning of new account vintages and normalization of older vintages to result in higher losses through the back half of this year and into 2024.
Turning to the allowance for credit losses on Slide 9. This quarter, we increased our reserve by $373 million, driven by our double-digit loan growth. Our reserve rate remained flat at 6.8%. Our outlook on the macroeconomy has improved modestly. We continue to monitor economic conditions. We'll make adjustments to our expectations as needed.
Looking at Slide 10. Our capital position remains robust. Our common equity tier 1 for the period was 11.7%, well ahead of regulatory requirements. The cumulative impact of the correction to the financial statements related to the card misclassification reduced our CET1 ratio by approximately 20 basis points. In the quarter, we repurchased 6.8 million shares of common stock and declared a quarterly common dividend of $0.70 per share. As Roger indicated, we are reviewing our compliance, risk management and corporate governances and are in discussions with our regulators on these topics. While this is ongoing, we have decided to pause share repurchases.
Concluding on Slide 11 with our outlook. There has been no change to our loan growth expectations to be in the low to mid-teens. We are updating our NIM expectations to be around 11% for the full year, reflecting a combination of slightly lower asset yields, driven by promotional mix and higher funding cost. We are raising our guidance for operating expenses to be up low double digits. As previously indicated, we are seeing upward pressure on expenses from the build-out of our compliance management systems, and we are lowering our expected range of net charge-offs to 3.4% to 3.6% based on our current delinquencies and roll rates.
To wrap up, our business model continues to generate solid financial results, and our capital funding and liquidity positions remain strong. We continue to invest in actions that drive sustainable, long-term performance, enable us to achieve excellence in all parts of our business.
With that, I'll turn the call back to our operator, Todd, to open the line for Q&A.
