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 $1.5 billion, which was up 70% from the prior year quarter. Our fundamental performance in the period was driven by revenue expansion from loan growth, higher net interest margin and non-interest revenue growth. Credit continues to perform in line with expectations supporting our view that losses are near peak and will plateau during the second half of 2024. There are several unusual items which impacted the quarter. These included a $869 million student loan reserve release, a gain of $26 million from the sale of our Lake Park facility and largely offsetting one another were the favorable litigation settlements and a charge for expected regulatory penalties related to the card misclassification matter. Excluding unusual items, we would have reported net income of approximately $915 million and EPS of about $3.63 per share.
Let's review the details beginning on Slide 6. Our net interest margin ended the quarter at 11.17%, up 11 basis points from the prior year and up 14 basis points sequentially. On a quarter-over-quarter basis, margin expansion was primarily driven by a lower card promotional balance mix. As anticipated, receivable growth continues to normalize from its early 2023 peak. Card receivables increased 7% year-over-year due to a lower payment rate and a smaller contribution from new accounts. The payment rate declined about 130 basis points compared to last year and is now about 90 basis points above 2019 levels.
Discover card sales were down 3% compared to the prior year spending at restaurants, which is a large category for sales volume, declined sequentially as a result of being included in the 5% promotion during the first quarter. Accounting for the influence of promotional categories, sales trends are relatively stable. We continue to see a cautious consumer evidenced by less card member spend with lower income households being most affected. Personal loans were up 13% from the prior year period. In response to market conditions, we prudently tightened underwriting over the past year, which has served to modestly reduced originations.
Student loans were down 1% year-over-year. As Michael mentioned, we have entered into an agreement to sell our student loan portfolio. We expect the transaction to be completed in four tranches by the end of 2024. The purchase price is at a premium to the principal balance and is based on a formula that varies depending on the closing timing, interest rates and other factors. In association with this development, student loans are now accounted for as held for sale. The two most notable impacts to the financial statements are that we will no longer maintain a credit reserve for student loans and future student loan net charge-offs will be recognized through operating expense rather than credit losses.
Average consumer deposits were up 15% year-over-year and 1% sequentially. Deposit balances are being managed in relation to our liquidity needs, which will benefit from the student loan sale. Our disciplined approach to deposit pricing has led to a modest reduction in average deposit rates in the second quarter consistent with our practice of leading the industry on pricing in down parts of the cycle.
Looking at other revenue on Slide 7. Non-interest income increased $313 million or 45%. Discount and interchange revenue was up $67 million as a result of lower rewards cost. Our rewards rate was 132 basis points in the period, a decrease of 10 basis points versus the prior year quarter. The decline reflects lower cashback match. Other income increased due to unusual items, including the litigation settlement and the facility sale. On an adjusted basis, non-interest revenue grew 14%.
Moving to expenses on Slide 8. Total operating expenses were up $325 million or 23% year-over-year. The most significant driver of this increase was a charge for expected regulatory penalties related to the card misclassification issue. It is important to note that actual penalties imposed are subject to further discussions and may be more or less than this amount. Adjusting for this charge, our expenses would have increased by 9% year-over-year.
Looking at our major expense categories. Compensation costs increased $70 million or 12% primarily due to an increase in business technology resources. Professional fees were up $80 million or 37% driven by higher recovery fees and investments in compliance and risk management. Our expectation for compliance and risk management expenses for the full year remains in the $500 million range with an upside bias. This figure excludes card misclassification related costs.
Moving to credit performance on Slide 9. Total net charge-offs were 4.83%, 161 basis points higher than the prior year and down 9 basis points from the prior quarter. In card, delinquency formation improvement continued. The 30 plus day delinquency rate was down 14 basis points versus the prior quarter. From a vintage perspective, our 2023 card vintage continues to perform in line with our 2022 vintage. As we look into the second half of the year, we expect there could be some variability in monthly card losses from both seasonality and various credit management actions we've taken. This does not change our broader outlook for losses to generally peak and plateau this year.
Turning to the allowance for credit losses on Slide 10. Our credit reserve balances declined $777 million from the prior quarter reflecting the student loan reserve release, partially offset by a $92 million reserve build, primarily to support loan growth. Our reserve rate was just over 7.2%, largely unchanged after adjusting for student loans.
Looking at Slide 11. Our common equity Tier 1 for the period was 11.9%, up 100 basis points bolstered by core earnings generation and the reserve release. We declared a quarterly cash dividend of $0.71 per share of common stock.
Concluding on Slide 12. We have revised our 2024 outlook and have included the impacts of the pending student loan sale. We are updating our loan growth expectations to be down low single-digits reflecting the roughly $10 billion asset sale. Absent this, year-over-year loan growth would be consistent with our prior review. We are increasing our net interest margin range to 11.1% to 11.4%. This change was driven by two factors. We now anticipate higher card yields reflecting a lower promotional balance mix and the student loan sale, which increases NIM by about 10 basis points. Our operating expense guidance is unchanged, notwithstanding the inclusion of the student loan net charge-offs in this line item. Our base case for net charge-offs remains at the low end of the 4.9% to 5.2% range. This includes the 10 basis points impact from student loans. And finally, our capital management expectations have not changed.
To summarize, we continue to generate solid financial results, remain steadfast in our efforts to resolve compliance matters and look forward to consummating our planned merger.
This concludes our remarks. I'll turn the call back over to the operator.
