David J. Turner
Senior Executive Vice President Chief Financial Officer at Regions Financial
Thank you, John. Let's start with the balance sheet. Average loans increased 2% sequentially, average business loans increased 2% compared to the prior quarter, reflecting high quality broad-based growth across the utilities, retail trade and financial services industries. Approximately 87% of this growth was again driven by existing clients accessing and expanding their credit lines to rebuild inventories and expand their businesses.
Average consumer loans increased 1% as growth in mortgage and EnerBank was partially offset by continued paydowns in home equity and run-off exit portfolios. Looking-forward, we continue to expect 2023 ending loan growth of approximately 4%. From a deposit standpoint, our deposit base remains a strength and competitive advantage with balances continuing to largely performed as expected. Previously, we indicated the combination of rapidly rising interest rates and normalization of surge deposits would likely lead to $3 billion to $5 billion of deposit declines by mid-year before we would began to generate net deposit growth.
While the events in March created turmoil in the banking industry, we continue to believe that range is appropriate. However, we may be at the higher-end of the range as we approach mid-year. The preponderance of deposit outflows this quarter occurred prior to early March and we're in line with our expectations. Approximately $2 billion of the $3 billion outflow came from corporate deposits, reflecting normal seasonal activity. The other $1 billion came from a continuation of rates seeking behavior among certain wealth and higher balance consumer clients. The same characteristics that contribute to our deposit advantage in a rising rate environment are also helpful in a time of systemic volatility. As John noted, our focus on attracting and retaining a diverse and granular deposit base with high primacy drives loyalty and trust and then still funding stability.
So let's shift to net interest income and margin. Net interest income continued to expand with market interest rates in the first quarter, reflecting our asset-sensitive profile and funding stability. Net interest income grew 1% linked quarter to a record $1.4 billion, and net interest margin increased 23 basis points to 4.22%. As the Federal Reserve nears the end of its tightening cycle, net interest income was supported by elevated floating-rate loan and cash yields at higher market interest rates and fixed-rate asset turnover from the maturity of low-yielding loans and securities generated through the pandemic.
At this stage in the rate cycle, we expect accelerating deposit costs through repricing and remixing. Importantly, recent trends remain within our expectation. The cycle-to-date, deposit beta is 19% and our guidance for 2023 is unchanged, a 35% full cycle beta by year end. We remain confident that our deposit composition will provide a meaningful competitive advantage for Regions when compared to the broader industry.
Net interest income is projected to grow between 12% and 14% in 2023, when compared to 2022. The midpoint of the range is supported by the March 31st market forward yield curve, which projects nearly 75 basis points of rate cuts in 2023, a stable Fed Funds level would push net interest income to the upper-end of the range.
The balance sheet hedging program is an important source of our earnings stability in today's uncertain environment. Hedges added today, create a well-protected net interest margin profile through 2025. Forward-starting receive-fixed swaps will become effective in the latter half of 2023 and '24, and generally have a term of three years. Activity in the first quarter focused on extending that protection beyond 2025.
In addition to forward-starting swaps, we added a $1.5 billion collar strategy selling rate caps to pay for rate floors to limit exposure to extreme market rate movements. The resulting balance sheet is constructed to support a net interest margin range of 3.6% to 4% over the coming years even if interest rates move back towards 1%. If rates remain elevated, our net interest margin is projected to remain above the high end of the range until deposits fully reprice.
So let's take a look at fee revenue and expense. Adjusted non-interest income declined 3% from the prior quarter as modest increases in service charges and wealth management income were offset by declines in other categories, primarily capital markets and card and ATM fees. Service charges increased slightly as seasonally higher treasury management fees offset declines in overdraft fees. Excluding the impact of CVA and DVA, capital markets increased 4% sequentially as growth in real-estate capital markets, loan syndications and debt and securities underwriting more than offset declines in M&A fees and commercial swaps. We did have a negative $33 million CVA and DVA adjustment, reflecting lower long-term interest rates, volatility in credit spreads, as well as a refinement in our valuation methodology. Card and ATM fees were negatively impacted by a $5 million increase in reserves, driven by higher reward redemption rates. With respect to our outlook and incorporating first quarter results, we expect full year 2023 adjusted total revenue to be up to 6% to 8% compared to 2022.
Let's move on to non-interest expense. Adjusted non-interest expenses increased 1% compared to the prior quarter. Salaries and benefits increased 2%, primarily due to merit and a seasonal increase in payroll taxes. FDIC insurance assessment reflects the previously announced industry-wide increase in the assessment rate schedules. In contrast to the prior two years, we expect first half 2023 adjusted expenses to be higher than the second half of the year. And we continue to expect full year 2023 adjusted non-interest expenses to be up 4.5% to 5.5%. We now expect to generate positive adjusted operating leverage of approximately 2%.
From an asset quality standpoint, overall credit performance continues to normalize as expected. Net charge-offs were 35 basis points in the quarter. Non-performing loans and business services criticized loans increased, while total delinquencies decreased. Provision expense was $135 million, while the allowance for credit loss ratio remained unchanged at 1.63%.
The amount of the allowance increased due primarily to economic changes and normalizing credit from historically low levels, partially offset by a reduction associated with the elimination of the accounting for troubled debt restructured loans. It is worth noting the outcome of the most recent shared national credit exam as reflected in our results.
I'll take a few minutes to speak to our commercial real-estate portfolio. Since 2008, we have deliberately limited our exposure to this space. At quarter-end, our exposure totaled 15% of loans excluding owner-occupied and it is highly diverse. This total includes $8.4 billion of investor real-estate, and $6.7 billion of unsecured exposure of which the vast majority, as well as real-estate investment trust. Our REIT clients generally have low leverage and strong access to liquidity with 68% classified as investment-grade.
Importantly, total office represents just 1.8% of total loans at $1.8 billion. Of note, 83% consists of Class-A properties with 62% located within the Sunbelt. The office portfolio was originated with an approximate weighted-average loan-to-value of 58%. And we have stressed the portfolio to include a 25% discount using the Green Street Commercial Property Price Index with a weighted-average resulting loan-to-value of the book, approximating 77%. It is also noteworthy that 37% of our secured office portfolio is single-tenant. While we are carefully monitoring conditions, we believe our portfolio will be able to weather the weakness in the industry.
Including first quarter results, we now expect our full year 2023 net charge-off ratio to be approximately 35 basis points. Given the recent economic uncertainty and market volatility, we may see a pickup in the pace of normalization towards our through the cycle annual charge-off range of 35 basis points to 45 basis points over time.
From a capital standpoint, we ended the quarter with a common equity Tier-1 ratio at an estimated 9.8%, reflecting solid capital generation through earnings partially offset by continued loan growth and approximately $100 million or 7 basis points related to the phase-in of CECL into regulatory capital. Given current macroeconomic conditions and regulatory uncertainty, we anticipate managing capital levels path or modestly above 10% over the near term.
So in closing, we delivered solid results in the first quarter despite volatile conditions. We have balance and diversity on both sides of the balance sheet and are well-positioned to withstand an array of economic conditions. We are in some of the strongest markets in the country, and while we remain vigilant to indicators of potential market contraction, we will continue to be a source of stability to our customers. Pre-tax, pre-provision income remains strong. Expenses are well-controlled. Credit remains broadly stable, and capital and liquidity levels remain robust.
With that, we'll move to the Q&A portion of the call.
