Net interest income increased to $1.37 billion during the fiscal third-quarter, from $1.32 billion the previous quarter, and $1.24 billion a year earlier. The fiscal third-quarter net interest margin -- the difference between the average yield on credit card loans and investments -- was 9.44%, increasing from 9.31% the previous quarter, and 9.26% a year earlier, as declining funding costs more than offset a decline in portfolio yield. Discover's credit card yield was 12.27% during the fiscal third-quarter, declining from 12.35% the previous quarter, and 12.46% in the year-earlier period. The company's average loans increased 3% sequentially, and 9% year-over-year. The company reported that its payment services pretax income rose to $49 million in the fiscal third quarter, from $47 million the previous quarter, and $38 million a year earlier, "driven by an increase in higher margin point-of-sale transactions on the PULSE network." Discover's revenue improvements were partially offset by an increase in expenses, which were up by $178 million or 29% from the prior year, "primarily due to a $94 million year-over-year increase in expenses for legal reserves," after the company agreed with the Federal Deposit Insurance Corp. and Consumer Financial Protection Bureau to issues refunds of up to $200 million to customers, related to the telemarketing of credit protection products, along with $14 million in fines. Discover's deal with eBay ( EBAY) unit PayPal will allow the online payment service's customers to make purchases at the 7 million retail locations that currently accept Discover, beginning in the second quarter of 2013. Discover said the company said that its fiscal third-quarter return on equity (ROE) was 28%, which is a very solid number for any financial institution in any market. According to Thomson Reuters Bank Insight, the company's operating ROE ranged from 24.41% to 33.42% over the previous four quarters. Earlier on Thursday Morning, Sterne Agee analyst Henry Coffey said his firm was expecting operating earnings of about a dollar a share, and was "assuming no reserve release in our estimates," but also said a reserve release "would not be surprising."