Brian Wenzel
Executive Vice President and Chief Financial Officer at Synchrony Financial
Thanks, Brian and good morning, everyone. Synchrony's first quarter performance highlighted the continued strength of the consumer here with the power of our diversified sales platforms, compelling value propositions and prudent financial position. Consumers continue to deepen their engagement with our products. On a core basis, ending loan receivables growth of 16% was fueled by 11% stronger purchase volume along with 3% higher spend per active account. Net interest income increased 7% to $4.1 billion as the growth in loan receivables and an increase in loan receivable yields drove 15% higher interest and fees. This was partially offset by the impact of the portfolio sold during the second quarter of 2022. On a core basis, interest and fees increased 23%, reflecting the impact of credit normalization as payment behavior trends toward pre-pandemic levels. Pay rate for the first quarter when adjusting for last year portfolio sales was 16.7%, approximately 85 basis-points lower than last year and approximately 150 basis-points higher than our five year pre-pandemic historical average.
First quarter net interest margin of 15.2% declined 58 basis-points primarily reflecting the higher impact of interest rates in our funding cost, partially offset by better yield trends. Loan receivables yield climbed 97 basis-points and contributed 83 basis-points to the net interest margin. Incremental liquidity portfolio yields also contributed an additional 54 basis-points. These gains were more than offset by higher interest-bearing liability costs, which increased 219 basis points to 3.43% and reduced net interest margin by by 179 basis-points. And our mix of interest earning assets reduced net interest margin by approximately 16 basis-points as we built liquidity to fund anticipated growth. RSAs of $917 million in the first quarter were 4.10% of average loan receivables. The $187 million decline from the prior year reflected the impact of the portfolio, sold in the second quarter of 2022 and higher net charge offs, partially offset by higher net interest income. Honestly provide important in line with our partners and continue to function as designed by providing a buffer to the financial results of the company and supporting greater stability in our returns. This was highlighted in the first quarter as RSA provide a buffer to increased net charge-offs and higher funding costs, provision for credit losses was $1.3 billion for the quarter, which reflected higher net charge-offs and $285 million reserve built. To build, including consideration for the potential macroeconomic effects of industry credit contraction and the potential impact on consumers. So we do not see any related impacts in our delinquency performance today. Other income decreased $43 million, driven primarily by higher loyalty costs as well as the impact from investment gains and losses, partially offset by higher debt cancellation income. Other expenses increased 8% to $1.1 billion, primarily driven by higher employee costs, operational losses and technology investments. Our efficiency ratio for the first quarter was 35% compared to 37.2% last year. In total, Synchrony generated first quarter net earnings of $601 million or $1.35 per diluted share, delivering a return on average assets of 2.3% and return on tangible common equity of 23.2%.
Next, I'll cover our key credit trends on Slide 8. We continue to see credit metrics performing in line with or better than 2019 performance as credit normalization continues at a measured pace. Delinquency rates remain at approximately 80% of pre-pandemic levels in recent vintages continue to perform better than those of 2018 or 2019. The continued tapering of accumulating consumer savings is contributing to a slow moderation of payment behavior towards pre-pandemic levels. As we noted last quarter, the trend normalization has gradually shifted into higher credit grades balances tend to be larger. As a result, we saw penal rate declines versus prior quarter of approximately 30 basis-points while delinquencies and losses increased in line with our expectation. Our 30 plus delinquency rate was 3.81% compared to 2.78% last year, were 4.92% in the first quarter of 2019. Our 90 plus delinquency rate was 1.87% versus 1.30% in the prior year or 2.51% in the first-quarter of 2019. And our net charge off rate increased to 4.49% from 2.73% last year, still approximately 100 basis-points below our underwriting target of 5.5% to 6%.
Our allowance for credit losses as a percent of loan receivables was 10.44%, up 14 basis-points from 10.30% in the fourth quarter. The sequential increase in the reserve rate primarily reflected the impact of the additional reserve discussed earlier and seasonally lower receivables, the allowance reflects a previously announced $294 million reduction of reserves for troubled debt restructurings recorded through equity as we adopted updated accounting guidance. This guidance reduced our reserve coverage rate by approximately 30 basis-points for the quarter. In the quarter, Synchrony's management of funding, capital and liquidity remained a source of strength. We said maintaining appropriate target levels of common equity, liquidity and reserves. We generally manage our funding strategy, interest rate neutral to minimize duration risk. And the vast majority of our liquidity portfolio is in cash and short-term US treasuries largely maturing in under one year. So as depositors across the country navigate the uncertainty of several bank failures and pronounced deposit flows during mid March, Synchrony Bank was well positioned as a reliable source of stability for both our customers and our business.
Our stable direct to consumer deposit base is largely insured with no concentrations in geographic areas or high balance accounts. Our average depositor has banked with us for approximately five years and nearly 80% of our deposit balances are more than three years old. The foundation of this loyalty is Synchrony Bank's award winning platform and industry leading customer satisfaction scores. Depositors are attracted to our seamless digital first experience as well as our competitive rates. In fact, as customers sought to either balanced exposure to their banks or remix their balances to take advantage of available FDIC insurance limits during the last three weeks of March, Synchrony Bank saw a net deposit inflows of nearly $700 million as we generate double digit account growth sequentially. This contributed to first quarter deposit growth of 17% versus last year and $2.7 billion sequentially to reach $74.4 billion. At quarter end, over 91% of Synchrony Bank direct deposits were fully insured. And then looking at April trends Synchrony Bank activity has returned to more seasonal flows powered by continued growth in new accounts and deposits.
Our deposit base provides a strong foundation for our business, representing 83% of our total funding as complemented by our securitized and unsecured debt, which represented 7% and 10% of our funding respectively and increased by $1.7 billion versus the prior year. This increase include the issuance of 10 year subordinated debt, an important milestone as we continue to more fully develop our capital stack and target capital levels. Total liquidity, including undrawn credit facilities was $21.7 billion or 20.2% of our total assets, up 148 basis-points from last year as we grew deposits and pre-funded our projected loan receivables growth.
Moving on to discuss Synchrony's capital position. As we've previously elected to take the benefit of the CECL transition rules issued by the joint banking agencies, Synchrony made its annual transitional adjustment of approximately 60 basis-points for regulatory capital metrics In January and we will continue each year until January of 2025. The impact of CECL has already been recognized in our income statement and balance sheet. Further, the TDR reserve reduction mentioned earlier was recognized net of tax in equity adding approximately 25 basis-points to our capital ratios. We ended the first quarter at 12.5% CET1 under the CECL transition rules, 250 basis-points lower than last year's level of 15%. The Tier 1 capital ratio was 13.3% of the CECL transition rules, compared to 15.9% last year. The total capital ratio decreased 180 basis-points to 15.4% and the Tier 1 capital plus reserves ratio on a fully phased-in basis decreased to 22.5% compared to 24.5% last year. Synchrony continued our track record of robust capital returns in the first quarter. In total, we returned $500 million to shareholders to $400 million of share repurchases and $100 million of common stock dividends. As of quarter end, our remaining share repurchase authorization for the period ending June 2023 was $300 million. Synchrony remains well positioned to continue to return capital to shareholders as guided by our business performance, market conditions, regulatory restrictions and subject to our capital plan. We'll also continue to seek opportunities to complete our fully developed capital structure through the issuance of additional preferred stock.
Finally, please refer to Slide 12 of our presentation for more detail on our full year 2023 outlook. Overall, first quarter purchase volume came in ahead of our expectations, which when combined with slightly faster payment rate normalization than anticipated deliver stronger receivables growth for the quarter. As a result, we now expect end receivables to grow by 10% or more by year end. Although we anticipate payment rates ending the year well above pre-pandemic levels. We continue to expect net interest margin of 15% to 15.52%. This outlook reflects the benefit of favorable trends in our deposit betas and payment rate during the first quarter, balanced by anticipated impact of the broader market uncertainty. These potential impacts include holding higher liquidity levels in anticipation of growth funding needs as well as competitive dynamics within the industry that could lead to higher betas. Meanwhile, credit normalization continues on track in line with our expectations in terms of both our delinquency and loss trends. As a reminder, we expect delinquencies to continue to rise, and approach pre-pandemic levels by mid year.
Net charge-offs should follow a similar but lag progression relative to normalization in delinquencies. Lost hours will rise through 2023, but will now reach fully normalized levels, still approximately six months following the peak in delinquencies. As such, we continue to expect the net charge-off rate for the full year 2023, of 4.75% to to 5% and then our portfolio will now reach to Daniel underwriting loss target range of 5.5% to 6% until 2024. Given our unchanged outlook for net interest margin and net charge-offs, the RSA remains unchanged between 4% and 4.25% of average loan receivables. We remain committed to delivering operating efficiency for the full year with the target of approximately $1.125 billion in operating expenses per quarter. In sum, Synchrony's model is built for sustainable performance at strong risk adjusted returns, as we grow to meet the needs of our customers, our partners and our shareholders. As conditions normalize, we remain on track to achieve our long-term financial operating targets.
I'll now turn the call back over to Brian for his closing thoughts.
