Brian J. Wenzel
Executive Vice President and Chief Financial Officer at Synchrony Financial
Thanks, Brian, and good morning, everyone. Synchrony delivered another strong financial performance for the second quarter, highlighting the benefits of our highly diversified business across our sales platforms, our partners, merchants, providers and customers, and underpinned by the continued health of the consumer. This quarter, we achieved the highest quarterly purchase volume as a company, exceeding $47 billion, which reflected a 12% increase compared to last year. On a core basis, which excludes the impact of our recently sold portfolios in the prior and current year quarters, purchase volume grew 16% year-over-year.
From a platform perspective, our Diversified & Value, Health and Wellness, Digital, and Home & Auto platforms each continue to generate double-digit year-over-year growth in purchase volume, reflecting strong demand for the variety of goods and services we finance, as well as the broad partner merchant and provider net we're expecting connet our customers and partners. At the platform level, Home & Auto purchase volume was 12% higher due to continued strength in home as well as higher auto-related spend, reflecting the waning effects from the pandemic period, the preference for consumers to invest in the maintenance of their existing vehicles given the supply chain issues on new and used vehicle sales and the impact of inflationary pressures on gasoline purchases and automotive parts. In diversified value, purchase volume increased 24%, driven by the strong retailer performance and higher customer engagement. The 14% year-over-year increase in digital purchase volume generally reflected the growth across the platform, wWe experienced greater customer engagement, including higher average active accounts and spend per active among our more established programs and continued momentum in our new program launches.
The 15% increase in the Health a& Wellness purchase volume was driven by a broad-based growth in active accounts and higher spend per active accounts, driven by our dental, pet and cosmetic categories. Our lifestyle platform generated purchase volume growth of 2%, reflecting strong retailer sales and growth in our music, specialty and luxury verticals, partially offset by the ongoing impact of inventory shortages in our outdoor vertical and particularly strong growth in the prior year period. Loan receivables grew 5% year-over-year to $82.7 billion or 11% on a core basis. We also continue to see sequential growth, driven by strong purchase volume and partially offset by higher payment levels.
Net interest income increased 15% to $3.8 billion, primarily reflecting the 13% increase in interest and fees due to higher average loan receivables. Payment rate for the second quarter, when normalizing for the impact of the portfolio sold during Q2, was 18.1%, approximately 20 basis points higher than last year and approximately 250 basis points higher than our historical average. The net interest margin was 15.60% in the second quarter, a year-over-year increase of 182 basis points. The primary driver of our NIM expansion was a 570 basis point increase in the mix of loan receivables relative to total interest earning assets, primarily due to the growth in average receivables and lower liquidity. This accounted for 105 basis points of the year-over-year increase in our net interest margin. In addition, the second quarter's 80 basis point improvement in loan yields contributed to a 63 basis point improvement in net interest margin, while the slight increase in interest-bearing liability costs reduced net interest margin by 1 basis point.
RSAs were $1.1 billion in the second quarter and a 5.4% of average receivables. The $121 million year-over-year increase was primarily driven by the continued strong performance of our partner programs and also included an approximate $10 million impact associated with the reinvestment of the gain on sale from portfolios sold during the second quarter. The reinvestment was in support of the growth initiatives in association with the value proposition launch. As a reminder, the RSA is designed to create mutual alignment of interest. While each agreement is unique to the partner program, we generally structure the majority of our economic arrangements such that the investment and upside opportunities are shared. So as Slide 7 demonstrates, the RSA enables our partners to sharing the profitability of our programs, while also providing economic protection to our business. In a rising credit loss environment, the level of RSA payment to our partner declined because the higher credit costs become a larger offset to the programs profitability. In addition, the minimum profitability thresholds within each RSA ensures that Synchrony achieves an appropriate risk adjusted return before any incremental program economics are shared with the partner. These minimum return threshold also provide a buffer to our business and the occasional evnet of a regulatory change, so that the profitability of the program performance is impacted by, for example, a change in fees collected. This dynamic also was demonstrated on Slide 7 due to the strength of our risk-adjusted return when the Card Act became effective in 2011.
Given the questions regarding the potential changes to late fee regulation, I thought I'd highlight two things. First, over 16% of our late fee revenue flows through our RSA agreement and would be subject to sharing with our partners. Second, greater than 95% of the late fees are covered through either repricing rates or change in law provisions, effectively change in regulation provisions, which were included in our program agreements adopted after the Card Act was implemented. This is another example of how the RSA function as alignment of interest with our partners as market conditions change.
Next, let's focus on provision for credit losses, which was $724 million for the quarter, a year-over-year increase to the impact of a reserve release last year and partially offset by lower net charge-offs. Other income increased $109 million, primarily reflecting the impact of the $120 million gain on sale from the portfolio sold during the quarter. Excluding the impacts of the gain and certain reinvestments of the portion of the proceeds, other income would have been 3% lower year-over-year, primarily due to the impact of higher loyalty costs that were partially offset by interchange revenue year-over-year.
Other expenses increased 14% to $1.1 billion due to the impact of higher employee cost, marketing spend, information processing and other expenses. Our efficiency ratio for the same quarter was 37.7% compared to 39.6% last year. Excluding the effects of the reinvestment expenses deployed from the gain on sale proceeds, the efficiency ratio would have been 36.8%, an approximate 280 basis point improvement. The increase in employee cost versus last year reflected higher headcount, driven by growth and in-sourcing, as well as higher hourly wages and other compensation adjustments. Total other expenses included $62 million of costs related to additional marketing and site strategy actions as we reinvested $120 million gain on sale through these and other growth and efficiency initiatives. As detailed in appendix of our presentation, we expect that the gain on sale and reinvestment in Q2 and the remainder of this year will net out as EPS neutral on a full year basis.
In summary, Synchrony generated net earnings of $804 million or $1.60 per diluted share for the second quarter. We also generated a return on average assets of 3.4% and return on tangible common equity of 30.3%. These strong net earnings and returns demonstrate the power and efficiency of our digitally-enabled model, combined with the compelling value of the financial products and services we offer through our financial ecosystem. Not only were we able to support the strong customer demand with a diverse range of products, but we're able to do so while maintaining cost discipline and strong risk-adjusted returns.
Next, I'll cover our key credit trends on Slide 11. At a macro level, we continue to see signs of gradual normalization across the credit spectrum of the portfolio. That said, even with this normalization, our 2021 and 2020 vintages continue to perform better than our 2019 vintages, and payment rates remain elevated versus last year as well as compared to our historical average. With regard to delinquency, our 30-plus delinquency rate was 2.74% compared to 2.11% last year, and our 90-plus delinquency rate was 1.22% compared to 1% last year. The year-over-year delinquency comparisons were primarily impacted by the prior year periods historic lows, at which point, the impacts of COVID-19 stimulus and forbearance action had the greatest impact on the portfolio. Our portfolio with strong delinquency trends have continued to drive year-over-year improvement in our net charge-off rate which was 2.73% compared to 3.57% last year, an 84 basis point improvement year-over-year, primarily reflecting the very strong consumer. Our allowance for credit losses as a percent of loan receivables was 10.65%, down 31 basis points from the 10.96% in the first quarter.
Let's focus on some key trends that continue to support our strong performance and confidence we have in our business. First, the consumer remains in a strong position. The combination of robust labor markets, wage growth and elevated savings continues to support the desire to spend and repay their financial obligations, while also managing through the impacts of the inflationary pressures. According to external data, stimulus spending segments have generally remained consistent from March through June. About two thirds of consumers have either spent a portion of stimulus or have the entire amount of stimulus they receive still saved, the remaining third of consumers has spent the entirety of the cash stimulus they received during the last two years. We're taking a look across the balance tiers, the top two tiers of the stimulus recipients those whose balance is above 2,500 hours, have seen modest balance decreases, while the lower tier balances less than 2,500 have remained flat.
During the second quarter, consumers rotated their spend within discretionary and non-discretionary categories as they manage higher cost from inflationary pressures while still fulfilling their everyday purchases. In general, we saw a slight variability across our other quarters spend volume and frequency trends. These fluctuations likely indicated that the consumer is not actively reducing total spend or frequency, but rather rotating their overall spend. So for example, in certain categories like grocery, it appears that our customers managing to ticket size and substituting items that are a greater priority, whether that means choosing a generic brand or forgoing a less desired item or treat.
In terms of gas station spend, however, average transaction values have accelerated with rising gas prices, but transaction frequency has generally held constant if not increased slightly. All this is to say we continue to see trends of a strong consumer who is moving through their day-to-day and spending money without meaningfully changing their choices or priorities. Second, the differentiating strengths of our business as well as the underlying trends within our portfolio that we have discussed today continue to demonstrate Synchrony's ability to deliver consistent risk adjusted returns to changing market conditions.
In addition to the inherent resilience that comes from the diversification of our portfolio across spend categories, financing options, distribution channels and customer demographics, Synchrony drives financial strength through our sophisticated, cycle tested underwriting. The predictive power of our credit decisioning and account management capabilities supports more stable loss performance around our target credit loss range of 5.5% to 6%, even as economic conditions change and consumer credit worthiness evolves. From 2009 peak loss rate of 10.7% during the great financial crisis, the last decades average of approximately 4.5% loss level, our portfolio has grown and involved meaningfully and even as the mix of partners and credit quality of our portfolio has shifted over that same decade, Synchrony has grown significantly and delivered resilient risk adjusted returns within a band of 8.5% to 11%. It's also important to note that we delivered these returns even as interest and fees have been coming at somewhat lower levels due to the elevated pay rates during the last two years.
Moving on to another Synchrony strength, our funding, capital and liquidity. Synchrony's balance sheet has been built to be resilient. Over time, we diversified our business in support of our ability to generate consistent risk-adjusted returns and considerable capital. This in turn has allowed us to grow and evolve our balance sheet, such that we can fund growth efficiently without having to make trade-offs with regard to what's in the best long-term interest of our business and our various stakeholders.
Let's start with a strong and stable foundation of Synchrony's funding, our deposit base. Deposits at the end of the second quarter reached $64.7 billion, an increase of $4.9 billion compared to last year. Our securitized and unsecured funding sources declined by $1.3 billion. This resulted in deposits being 84% of our funding compared to 81% last year with both securitized and unsecured funding each comprising 8% of our funding sources at quarter end. Total liquidity including undrawn credit facilities was $18.9 billion, which equated to 19.8% of our total assets, down from 23% last year.
As a reminder, before I provide the details on our capital position, it should be noted that we elected to take the benefit of the CECL transition rules issued by the joint federal banking agencies. The impact of CECL has already been recognized in our income statement and balance sheet. The annual transitional adjustment pertains strictly to our regulatory capital metrics. We ended the quarter at 15.2% CET1 under the CECL transition rules, 260 basis points lower than last year's level of 17.8%. The Tier 1 capital ratio was 16.1% on the CECL transition rules, compared to 18.7% last year. The total capital ratio decreased 270 basis points to 17.4%, and the Tier 1 capital plus reserve ratio on a fully phased-in basis decreased to 25% compared to 28% last year.
We continue to deliver robust capital returns to our shareholders. In the second quarter, we returned $809 million to shareholders through $701 million of share repurchases and $108 million of common stock dividends. When considering our existing capital position today combined with the meaningful earnings and capital generation of our business, Synchrony is particularly well positioned to execute our capital plan as guided by our business performance, market conditions and subject to our capital plan and any regulatory restrictions. As of quarter end, our total remaining share repurchase of authorization for the period ending June 2023 [Phonetic] was $2.4 billion.
Finally, let's review our full-year outlook, which is summarized on Slide 14 of our presentation and incorporates the following macroeconomic assumptions, 10 interest rate increases during 2022, qualitative tightening measures, a slowing economy resulting from these actions, continued higher inflationary conditions and no additional impacts from the pandemic, we continue to anticipate broad-based strength in purchase volume as consumer savings declines and payment rate moderates, while on a lag, we also expect purchase volume growth to moderate. Given the strong purchase volume and loan receivables growth we've achieved in the first half of this year, we expect ending loan receivables to grow in excess of 10% versus the prior year to the extent that payment rate moderates further, we would anticipate purchase volume to moderate and loan receivable growth to accelerate. We expect our net interest margin to be approximately 15.5% for the full year. As we move through the back half, net interest margin will be modestly lower to the impacts of seasonal funding to support growth. Our net interest margin outlook also reflects the anticipated impact of rising benchmark rates as well as the increase in interest and fees, driven by the primary movement and payment re-moderation. Higher interest and fees will be partially offset by the impact of reversals as credit normalizes and the impact of benchmark rates on funding. To that end, we now expect net charge-offs of approximately 3.15% for the full year, feflecting the strong credit performance we experienced in the first half.
As we move through the second half of the year, we continue to expect delinquency to rise modestly. We continue to expect reserve builds in 2022 to be generally asset-driven, absent a meaningful change in the macroeconomic environment. RSA expense will continue to reflect the impact of strong program performance and robust purchase volume growth, but should continue to moderate as net charge-offs rise. We now expect RSAs as a percent of average loan receivables to be approximately 5.25% for the full year.
In terms of other expense, we continue to expect quarterly levels to be approximately $1.05 billion. This outlook excludes the impact of the $120 million gain on sale that we are reinvesting in our business this year. As a reminder, we deployed $80 million of the gain on sale proceeds in 2Q, and expect to deploy the remaining $35 million to $40 million in the second half, such as the gain in reinvestments will be EPS neutral for the full year. We remain committed to delivering positive operating leverage to the extent that our receivables or revenue growth is not tracking ahead of expense growth for the full year, we will moderate our spending where appropriate while still prioritizing the best long-term investments. Examples of such is the opportunity might be to lower the workforce additions or reducing other discretionary spending. So to conclude, Synchrony is operating from a position of strength as we progress through 2022. We are confident in our businesses ability to continue to deliver sustainable, attractive risk-adjusted growth and resilient, peer leading range of risk-adjusted returns even if market conditions change.
I'll now turn the call back over to Brian for his closing thoughts.
