John T. Greene
Executive Vice President, Chief Financial Officer at Discover Financial Services
Thank you, John, and good morning, everyone. I'll start with our summary financial results on Slide 4.
In the quarter, we reported net income of $388 million, down from just over $1 billion in the prior-year quarter. There are three broad trends to call out. First, we grew revenue 13%, reflecting 15% loan growth, partially offset by modest NIM compression. Second, provision expense grew by $1 billion. Charge-offs increased but landed at the low end of our expected range. Strong loan growth and higher delinquency drove the increase to our reserve balance. Finally, expenses increased 19% year-over-year, reflecting investments in compliance and risk management, a reserve for customer remediation and higher marketing expense to support our national cashback debit campaign. We'll get into the details of these topics on the following pages.
Turning to Slide 5. Our net interest margin ended the quarter at 10.98%, down 29 basis points from the prior year and up 3 basis points sequentially. The decline from the prior-year quarter was driven by higher funding costs and higher interest charge-offs, which were partially offset by higher prime rates and increases in revolving balances. For the full year, net interest margin was 11.07%, up 3 basis points from the prior year. This margin performance reflects the improvement in our funding mix over the past several years and a reduced level of balance transfer and promotional balances as we tightened underwriting. Receivable growth remained robust. Card increased 13% year-over-year due to contributions from the prior-year new account growth and a lower payment rate. The payment rate declined about 110 basis points from the sequential quarter and is now 100 basis points above 2019 levels. Overall, new account growth declined 9% as a result of credit actions. Sales were up 3% compared to the prior-year quarter. Personal loans were up 23% driven by continued strength in originations and lower payment rate versus the prior year. Student loans were flat year-over-year. As we prepare for a potential sale of this portfolio, we will cease accepting applications for new loans on February 1.
Our deposit business delivered outstanding performance in a challenging year. Average deposits were up 21% year-over-year and 4% sequentially. Our direct-to-consumer balances grew $3 billion in the period and $14 billion in the year.
Looking at other revenue on Slide 6. Non-interest income increased $74 million, or 11%. This was primarily driven by an increase in loan fee income, higher transaction processing revenue from our PULSE business, and higher net discount and interchange revenue. Our rewards rate was 137 basis points in the period and 140 basis points for the full year 2023, a decrease of 1 basis point on a full-year basis. The decline reflects lower cashback match from slowing new account growth and our active management of our 5% categories.
Moving to expenses on Slide 7. Total operating expenses were up $280 million, or 19% year-over-year, and up 22% from the prior quarter. Looking at our major expense categories, compensation costs increased $73 million, or 13% from higher headcount. Marketing expenses increased $59 million, or 19%. Professional fees were up driven by continued investment in compliance and risk management capabilities, while other expense reflects a reserve for customer remediation.
Moving to credit performance on Slide 8. Total charge-offs were 4.11%, 198 basis points higher than the prior year and up 59 basis points from the prior quarter. In card, as anticipated, delinquency formation is slowing as more recent vintages season. We added a slide detailing some of the drivers of our credit performance in the appendix to the earnings presentation.
Turning to the allowance for credit losses on Slide 9. This quarter, we increased our reserves by $618 million and our reserve rate increased by 17 basis points to just over 7.2%. The increase in reserves was driven by receivable growth and higher near-term loss content from higher delinquencies. Under CECL, reserve levels increase as you approach peak losses. We expect our losses to rise through the midyear and then plateau through the back half with some seasonal variation. In terms of our macroeconomic outlook, our view of unemployment was relatively unchanged, while household net worth projections increased slightly. These changes provided a small benefit to reserves.
Looking at Slide 10. Our Common Equity Tier 1 for the period was 11.3%. The sequential decline of 30 basis points was driven largely by asset growth. We declared a quarterly cash dividend of $0.70 per share of common stock.
Concluding on Slide 11 with our perspective on 2024. Please exclude the impact of a potential student loan portfolio sale. We expect end-of-period loan growth to be relatively flat, while average loan growth will be up modestly year-over-year. We expect full-year net interest margin to be 10.5% to 10.8%. We're currently anticipating core rate cuts of 25 basis points in 2023. This is two more rate cuts than in our forecast in December. Each cut reduces NIM by approximately 5 basis points subject to a deposit beta. We expect total operating expenses to increase by a mid-single-digit percent. This contemplates our expectation for compliance-related costs to be approximately $500 million this year. Total expenses may increase the incremental resources where remediation is required. We expect net charge-offs in the range of 4.9% to 5.3%.
Finally, regarding capital return. We will participate in this year's CCAR process and believe the results should help inform our view of capital management for 2024. Importantly, our capital management priorities have not changed and remain centered on supporting organic growth and returning capital to shareholders.
To summarize, we continue to generate solid financial results. For 2024, we will continue to advance our compliance and risk management capabilities and [Speech Overlap] actions to drive sustainable long-term value creation.
With that, I'll turn the call back to our operator to open the line for Q&A.
