John Greene
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. The takeaway of the quarter is largely about strong asset growth and net interest margin expansion, partially offset by growth-based provisioning. Asset growth combined with a NIM rate improvement, increased revenue 7% sequentially and 27% year-over-year.
Similar to last quarter, asset growth also drove an increase in our reserves of $313 million. This increase has our reserve coverage ratio relatively flat at 6.6%. In the prior year, we released $39 million of reserves. So while our reported net income was down 3% year-over-year, adjusting for the reserve change, our net income would have been 23% higher on a year-over-year basis.
Let's review the details starting on Slide 5. Net interest income was up $584 million year-over-year or 24%. Our net interest margin expanded, benefiting from the higher prime rate partially offset by higher funding costs and increased promotional balances. NIM ended the quarter at 11.27%, up 46 basis points from the prior year and 22 basis points sequentially.
For the full year, NIM was 11.04%, up 28 basis points from the prior year. Receivable growth was driven by card which increased 21% year-over-year, reflecting continued strong sales, new account growth, and payment rate moderation. Sales increased 8% in the period, a deceleration from the 15% growth we experienced in the prior quarter and the 20% in the first half of the year.
New card accounts grew by 17% from last year's fourth quarter. Similar to the prior quarter, the sales growth decline was mitigated by a decrease in the payment rate, which fell 150 basis points in the quarter. We expect payment rates to continue to decline through 2023, but at a more moderate pace.
Turning to our non-card products. Organic student loans increased 4% as a result of peak season originations. Personal loans were up 15%. We continue to stay disciplined in our approach to marketing, underwriting, and pricing of this product. Our attractive value proposition has positioned us well in the market that is experiencing strong consumer demand and some improvement in competitive conditions.
In terms of funding mix, our customer deposit balances were up 10% year-over-year and 5% sequentially. Deposit pricing continues to be in line with what we expected in a rising rate environment. Recently, we have seen some moderation in the pace of pricing changes.
Looking at other revenue on Slide 6. Non-interest income increased $212 million or 47%. This was partially due to a $138 million loss on our equity investments in the prior year quarter, compared to a $6 million loss this quarter. Adjusting for these, our non-interest income was up 14%. This increase was primarily driven by two items.
First, loan fee income was up $51 million or 39%, driven by volume. And second, we had higher net discount and interchange revenue, which was up $23 million or 7% reflecting strong sales and a favorable sales mix, partially offset by higher rewards costs.
Moving to expenses on Slide 7. Total operating expenses were up $183 million or 14% year-over-year and up 8% from the prior quarter. Compensation costs were up primarily due to increased headcount and wage inflation. Marketing expenses increased $42 million or 15% as we continue to prudently invest for growth in our card in consumer banking products.
Premise and equipment expense was elevated this quarter due to a onetime write-off related to the exit of our Phoenix servicing location. Adjusting for this, premise and equipment would have been flat to the prior year quarter. With this recent action, we have resized or exited three of our four major call center locations, and we'll continue to evaluate our footprint going forward.
Moving to credit performance on Slide 8. Total net charge-offs were 2.13%, 76 basis points higher than the prior year and up 42 basis points from the prior quarter. In the card portfolio, the net charge-off rate of 2.37% was 87 basis points higher than the prior year and 45 basis points higher sequentially.
As expected, portfolio loss rates are normalizing, reflecting seasoning of new account vintages from the past two years, normalization of older vintages, and mild deterioration and low credit bands, largely inflation-driven. These trends are within our expected risk tolerances and are consistent with our historical approach to underwriting and credit management. Among our core prime revolver segment, we don't see evidence of broader stress given the robust labor market. I'll cover our 2023 view in a moment.
Turning to the discussions of our allowance on Slide 9. This quarter, we increased our allowance by $313 million driven by the increase in receivable balances. Our reserve rate declined slightly to 6.6%. Adjusting for the elevated level of transactor balances in the fourth quarter, our reserve rate would have been near sequentially flat.
Under the CECL accounting standard, we are required to contemplate life of loan losses and adjust our reserve levels accordingly. For us, the changes to employment conditions pose the most significant risk to our forecast. For the year-end 2022 reserve, our baseline assumption was unemployment in 2023 between 4.5% and 6.5% and with alternative scenarios above 6%.
Looking at Slide 10. Our common equity Tier 1 for the period was 13.3%. Our longer-term target remains at 10.5%. We expect to make progress against this target over the next four to six quarters. Yesterday, we announced a quarterly common dividend of $0.60 per share. And in the fourth quarter of 2022, we repurchased $602 million of common stock.
Concluding on Slide 11 with our outlook. Momentum is strong, which should help to generate double-digit revenue growth and positive operating leverage. We expect end-of-period loan growth to be in the low double digits with average loan growth somewhat higher. This is driven by three factors: our prior year growth in new accounts, moderation in the payment rate, and sales volume trends.
Through mid-January, sales are up 13%, but we expect deceleration to the high single digits over the course of the year. We expect net interest margin to be modestly higher than the full year 2022 levels. More specifically, we expect NIM to be above the fourth quarter levels in the first half of the year driven by continued loan re-pricing benefits and decline in the second half. We are looking for total operating expenses to increase less than 10%.
Salary and benefit expense will increase due to hiring in the second half of 2022. Additionally, we expect marketing to be above our full year 2022 level. We expect net charge-offs will average between 3.5% and 3.9% for the full year. The low end of the range is more in line with our base case, while the high end is more consistent with a weaker employment scenario.
Lastly, we have $2.8 billion of remaining capacity under the $4.2 billion share repurchase program that expires in June of this year. We expect to repurchase around $2.2 billion of shares in the first half of 2023. We'll provide an update on future share repurchase authorizations after we complete our stress-testing process and review recommendations with our Board.
In summary, receivable growth continued to benefit from new account acquisition, payment rate moderation and positive sales. NIM continues to benefit from prime rate increases with funding costs consistent with expectations and credit is performing in line with our approach through-the-cycle underwriting process and conservative credit management. Our perspective for 2023 reflects our focus on advancing our strategic priorities generating high returns and capital while remaining disciplined in our credit and expense management.
With that, I'll turn the call back over to our operator to open the line for Q&A.
