John T. Greene
Executive Vice President and Chief Financial Officer at Discover Financial Services
Thank you, Roger, and good morning, everyone. I'll start with our financial summary results on Slide 5. As Roger indicated, we reported net income of $1.1 billion, which was 35% lower year-over-year. However, I'd like to call out two items. The first is that in the second quarter of last year, we had a $729 million unrealized gain on our equity investments compared to a $42 million loss this quarter. Adjusting for these, our earnings would have been $4.07 per share in the current quarter. Second, the provision for credit losses increased from the prior year, due to a $110 million reserve build in the current quarter compared to a $321 million reserve release in the prior year. The current quarter reserve build was primarily driven by higher loan receivables. Excluding the impact of these two items, our profit before tax and reserves would have been up 38% year-over-year.
Moving to Slide 6. Net interest income was up $311 million, or 14%, driven by higher average receivables and improved net interest margin. NIM was 10.94%, up 26 basis points from the prior year and 9 basis points sequentially. On both a year-over-year and sequential basis, the increase in net interest margin reflects the higher prime rate and favorable funding mix, partially offset by increased promotional balances and higher funding costs.
Receivable growth was driven by card, which increased 15% year-over-year from strong sales and robust new account growth last year and into this year. In the quarter, the payment rate increased 40 basis points and remains more than 500 basis points above the pre-pandemic level. We continue to expect that the normalization in payment rate will be modest this year and will continue through the back half of 2023.
Organic student loans increased 4%, reflecting solid growth in originations. Personal loans were up 4%, reflecting a return to growth. We view this as a validation of our approach to marketing, underwriting and pricing of this product over the past several quarters, and we believe we are competitively positioned to grow, particularly relative to some non-bank originators.
In terms of funding mix, our customer deposit balances were flat year-over-year and up 1% sequentially. Increases in our savings balances offset the run-off in higher-cost CDs. Our strong asset growth may cause deposits to vary as a proportion of our funding mix, but we continue to target 70% to 80% deposit funding over the medium term.
Looking at other revenue on Slide 7. Excluding the impacts of equity investments detailed earlier, non-interest income increased $105 million, or 19%. This was driven by higher net discount and interchange revenue, which was up $51 million, or 15%, reflecting strong sales and favorable sales mix, partially offset by higher rewards.
Sales were up 18% year-over-year with growth across most categories. For the first half of the year, our sales growth was 20%. We estimate that inflation contributed between 200 basis points and 300 basis points to this figure. Strong sales also drove higher rewards expense compared to the prior year. Our rewards rate increased 6 basis points year-over-year, reflecting two factors. Our standard 5% category aligning with customer needs included gas this quarter. Second, the substantial growth in new accounts over the past year increased the cost of our cashback match. However, on a sequential basis, the reward rate was up 1 basis point and up 3 basis points through the first half of the year. This is consistent with our expectations of 2 basis points to 4 basis points of annual rewards cost increases. Loan fee income was up $37 million, or 35%, primarily driven by an increase in late fee instances.
Moving to expenses on Slide 8. Total operating expenses were flat year-over-year and up 8% from the prior quarter. Compensation costs were up slightly year-over-year, primarily due to increased headcount and higher average salaries. Like many organizations, we are seeing salary and wage pressure, which will likely continue through the balance of this year and into next year.
Marketing expenses increased $79 million, or 45%, as we continue to invest for growth in our card and consumer banking products. We grew new card accounts by 39% from last year's second quarter. This speaks to the strength of our brand, the relevance of our value proposition and the benefits of our investments in targeting analytics.
As Roger discussed, we closely track economic and competitive conditions, and we remain disciplined about our through-the-cycle approach to underwriting. This approach contributes to our confidence about investing in brand and acquisition.
Moving to credit performance on Slide 9. Net charge-offs remain low and were in line with expectations for continued credit normalization. Total net charge-offs were 1.8%, 32 basis points lower than the prior year and up 19 basis points from the prior quarter. Total net charge-off dollars were down $27 million from the prior year and up $61 million sequentially. In the card portfolio, the net charge-off rate increased 17 basis points sequentially, or $50 million.
Looking at our receivables, we are not seeing evidence of emerging credit stress at this point. Our delinquencies are virtually unchanged from the first quarter. And while we expect some increases in delinquencies over the back half, this is consistent with our outlook for steady credit normalization into 2023.
Turning to the discussion of our allowance on Slide 10. This past quarter, we increased our loans by $110 million, largely due to higher receivable balances. Our reserve rate continued to decline, however, dropping 31 basis points to 6.8%. As a reminder, our reserves are based on our expectation of life of loan losses. On the macroeconomic view, we believe the balance of risk has shifted to include the potential for an economic slowdown resulting from Fed policy actions. For us, the most significant driver of loss is changes to employment conditions.
As Roger mentioned, current labor -- the current labor market conditions remain healthy. And as example, the number of job openings still exceeds the number of unemployed people, and the unemployment rate remains low, but unemployment claims have started to creep up. As part of our reserving process, we consider the prospects of higher unemployment and a range of macroeconomic scenarios.
Looking at Slide 11. Our common equity Tier 1 for the period was 14.2%, well above our 10.5% target. The strength of our capital position is underscored by the recent CCAR's regulatory stress test. Based on the CCAR's results, our preliminary stress capital buffer should decrease by 110 basis points, which effectively lowers our minimum required CET1 ratio to 7%, the lowest possible ratio. We repurchased 600 -- $601 million of common stock during the quarter and declared a quarterly common dividend of $0.60 per share.
Concluding on Slide 12. As we look into the back half of this year, our prospectus for 2022 remains favorable. We are improving some elements of our expectations. We are revising our view on loan growth to low teens. Continued strong sales and new account acquisitions through the second quarter support our confidence in this outlook. There is no change to our view on NIM. We continue to see 5 basis points to 15 basis points of upside for the full year relative to the first quarter level of 10.85%. Our expectations for expenses remain at mid-single-digit growth versus last year. We still expect marketing cost to come in above 2019 levels with non-marketing expenses to increase by low-single-digits.
We are improving our credit outlook. We now expect net charge-offs to be between 1.9% and 2.1% for the full year, and we intend to return to share repurchases at an appropriate time in the future.
In summary, loan growth accelerated as we benefited from robust sales and strong account acquisition. Credit performance remained solid, reflecting our disciplined approach to underwriting and credit management. We manage operating expenses, while investing in new account acquisition, brand and digital capabilities, and our balance sheet and capital position are strong. The results demonstrate the resiliency of our integrated digital banking and payments model. And I'm confident that we are well positioned for continued profitable growth through a range of economic conditions.
With that, I'll turn the call back to our operator, Katie, to open the line for Q&A.