John T. Greene
Executive Vice President & Chief Financial Officer at Discover Financial Services
Thank you, Michael, and good morning, everyone. I'll start with our summary financial results on Slide 5. In the quarter we reported net income of $308 million, which was down 68% from the prior year quarter. Impacting our operating results was a $799 million increase to our reserve for remediation related to the card misclassification issue. The decision to increase the reserve was based upon among other factors the company's experience to-date with remediation efforts, regulatory dialog, and our pending merger with Capital One. As Michael indicated, we believe this action is aligned with our compliance and risk management objectives and will significantly help advance the resolution of this issue. Our core financial performance remains strong.
Key highlights for the quarter include double-digit revenue expansion from loan growth, a resilient net interest margin, strong consumer deposit growth, and credit performance consistent with our view that losses will peak and plateau in mid to late 2024. Excluding the card misclassification remediation reserve increase, we would have reported net income of approximately $915 million, EPS of about $3.50 per share, and an efficiency ratio under 36%. These figures indicate a strong start to 2024. Let us review the details beginning on Slide 6. Our net interest margin ended the quarter at 11.03%, down 31 basis points from the prior year and up 5 basis points sequentially. On a quarter-over-quarter basis, expanding loan yields from a lower card promotional balance mix and payment rate moderation were partially offset by higher net funding costs. Receivable growth is slowing from its peak in the first quarter of 2023, but continues to be strong.
Card receivables increased 11% year-over-year due to a lower payment rate and contribution from prior year new account growth. The payment rate declined about 20 basis points from the sequential quarter and is now about 70 basis points above 2019 levels. Discover card sales were down 1% compared to the prior year quarter. Sales slowed across categories with the largest decline occurring in the everyday category; which includes supermarkets, gas, and wholesale clubs. While we continue to add new accounts, in general we are seeing card members spend less particularly among lower income households, which are most impacted by the cumulative effects of inflation. Based on trends in the period, we expect sales to be flat to slightly negative this year. Personal loans were up 21% driven by continued strength in originations and lower payment rates versus the prior year.
We are seeing strong uptake on our offering as higher interest rates in card can make debt consolidation more appealing for some consumers. Approximately 50% of our first quarter originations and personal loans were utilized for debt consolidation with disbursements primarily made directly to creditors. Student loans were flat year-over-year. As previously announced, we stopped accepting applications for new student loans on February 1. We formally launched the sales process in mid-March and several dozen potential buyers have provided an initial indication of interest. We continue to anticipate strong demand and still target a closing date late in the third or fourth quarter. Average deposits were up 18% year-over-year and 4% sequentially. Our direct-to-consumer balances grew $3 billion in the period. We have started to decrease pricing on our deposit products ahead of any potential moves in reference rates.
This is consistent with our practice of leading the industry on pricing in the down part of the cycle and this action contributed to our strong NIM performance in the quarter. Looking at other revenue on Slide 7. Non-interest income increased $113 million or 19%. This was primarily driven by higher net discount and interchange revenue, an increase in loan fee income, and higher transaction processing revenue from our PULSE business. PULSE continued to grow at a healthy clip as debit volume increased by $13.8 billion or 21% year-over-year. Our rewards rate was 139 basis points in the period, a decrease of 2 basis points versus the prior year quarter. The decline reflects lower cashback match from slowing new account growth and the active management of our 5% categories. Prior to reviewing expenses, I would like to briefly comment on the CFPB late fee proposal. We continue to closely monitor the legal process around the proposal.
If the rule were to be implemented, on an annualized basis we estimate a pre-tax reduction of around $600 million or approximately 4% of revenues. Moving to expenses on Slide 8. Total operating expenses were up $926 million or 67% year-over-year. As mentioned, the predominant driver of this growth was the increase to our remediation reserve. Absent this, our expenses would have increased 9% year-over-year. Looking at our major expense categories. Compensation costs increased $46 million or 7% due to an increase in business technology resources and severance related to organizational changes, including the wind-down of our student loan business. Professional fees were up $60 million or 26% driven by continued investments in compliance and risk management initiatives, higher recovery fees, and merger related expenses.
Information processing increased due to technology investments. Our expectation for compliance and risk management expenses for the year, excluding remediation related cost, remains in the $500 million range with an upside bias. Moving to credit performance on Slide 9. Total net charge-offs were 4.92%, 220 basis points higher than the prior year and up 81 basis points from the prior quarter. In card, as we anticipated, delinquency formation is improving as more recent vintages season. The 30-plus day delinquency rate was down 4 basis points versus the prior quarter. From a vintage perspective, our 2023 card vintage is performing relatively in line with our 2022 vintage. Both vintages remain profitable and above our return thresholds. This performance has been contemplated in our full-year net charge-off guidance. We executed some incremental tightening during the first quarter, which will influence our new account growth for the year.
Personal loan net charge-offs were 4.02%, 208 basis points higher than the prior year and up 63 basis points from the prior quarter. We expect losses in this product to trend higher in the near term before plateauing beginning late this year or into 2025. Turning to the allowance for credit losses on Slide 10. Our credit reserve balances declined $25 million from the prior quarter and our reserve rate increased by 9 basis points to 7.32%. The reserve rate increase was primarily driven by the reduction of seasonal transactor balances in the quarter. Given our expectation for total company losses to peak and plateau in mid to late 2024, we believe the credit reserve rate is likely at or near peak levels assuming a stable macroeconomic environment and no significant unexpected changes in portfolio performance.
Looking at Slide 11. Our common equity Tier 1 for the period was 10.9%, down 40 basis points sequentially. Impacts from the increase in expenses and the CECL phase-in were offset by lower receivables and core earnings generation. We declared a quarterly cash dividend of $0.70 per share of common stock. Concluding on Slide 12. We have made the following updates to our 2024 outlook. We're increasing our loan growth expectations to up low single digits. This primarily reflects our expectation of further decline in the payment rates offsetting our view of flat to slightly negative sales growth this year and a modest contribution from new accounts. We are increasing our net interest margin range to 10.7% to 11%. This change was driven by two factors. First, the forward curve now reflects an expectation of two rate cuts this year versus our prior forecast of four cuts. And second, we have been proactive in lowering our deposit rates.
Our cumulative deposit beta is now about 70% and we think there will be further opportunities to manage our deposit cost over the course of this year. We still expect our core operating expenses to be up mid-single digits excluding card misclassification related cost and merger expenses. Our core operating expense trends are in line with our expectations and we believe the actions we took in the first quarter have substantially derisked the probability of further increases to the remediation reserve. We are tightening our net charge-off range to 4.9% to 5.2% based largely on current delinquency trends. Our base case remains at the lower end of the range. Finally given the merger agreement, we have suspended share repurchases through closing and agreed not to increase the dividend. To summarize: we continue to generate solid results and our financial performance underscores our steady stewardship of the organization as we move towards resolving compliance items and consummating our planned merger.
This concludes our remarks. I'll turn the call back over to our operator.
