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 1% sequentially. Average business loans also increased 1%, reflecting high-quality, broad-based growth across the telecommunications, multi-family and energy industries. Loan demand remained stable during the quarter, and we had the opportunity to continue growing faster. However, as John mentioned, we are committed to appropriate risk-adjusted returns and now is not the time to stretch for growth.
We are focused on supporting existing customers, where we have a relationship and proven history. Approximately 84% of this quarter's business loan growth was driven by existing clients, accessing and expanding their credit lines. Average consumer loans increased 1% as growth in mortgage and EnerBank was partially offset by declines in home equity and run-off exit portfolios. Looking forward, we expect 2023 ending loan growth of 3% to 4%.
From a deposit standpoint, our deposit base remains a strength and a differentiating factor across the peer set, with balances continuing to largely perform as expected. Our deposits are highly operational in nature, granular in size, and generally receive more coverage through FDIC insurance than most peers. Although banking turmoil late in the first quarter introduced some additional uncertainty to the company's outlook, deposits largely performed as expected, ending the first half of the year down $4.8 billion.
As part of our practice of maintaining a diversity of funding sources, total deposits include approximately $1 billion of deposits composed of brokered CDs and wholesale market transactions. Recall, this is in addition to the brokered CDs we acquired as part of the EnerBank acquisition, which are maturing over time. Deposit declines came largely from higher balance and more rate-sensitive customers across all three businesses.
We also saw continued diversification of customer dollars across various regions offerings, such as from interest-free checking to CDs or money market deposits and movement out of deposits to offerings through our wealth management platform and, in the corporate banking segment, utilization of off-balance sheet money market mutual fund solutions. In the case of corporate clients, overall liquidity under management has remained solid, increasing almost 3% since the end of the first quarter.
Looking forward, a tightening Federal Reserve observed through increasing interest rates and reductions in the Federal Reserve's balance sheet, along with heightened competition, will likely continue to constrain deposit growth for the industry through year end. Accordingly, we expect deposits to be modestly lower over the balance of the year and we expect the continued remixing into interest-bearing categories.
So let's shift to net interest income and margin. As expected, net interest income declined by 2.5% in the second quarter. This represents the beginning of a reversion from elevated net interest income and margin levels back towards our longer-term range, mostly due to deposit and funding cost normalization. Regions' balance sheet remains asset sensitive. As the Federal Reserve nears the end of its tightening cycle, net interest income is supported by elevated floating rate loan and cash yields at higher market interest rates and fixed rate asset turnover from the maturity of lower-yielding loans and securities.
At this stage in the rate cycle, we expect deposit cost increases through a continuation of repricing and remixing trends. Importantly, recent trends remain within our expectation. The cycle-to-date deposit beta is 26%. And our guidance for 2023 is unchanged, a 35% cycle-to-date beta by year end. Longer term, deposit performance will be heavily influenced by the amount of time, monetary policy remains tight. Deposit betas could ultimately exceed the 35% in 2024, assuming higher rates for longer. Regardless, 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 using June 30 market forward interest rates or approximately one additional 25 basis point hike this year. Third quarter net interest income is expected to decline approximately 5%, driven by continued deposit and funding cost normalization and the beginning of the active hedging period for a number of previously transacted forward-starting, receive-fixed swaps.
The balance sheet hedging program is an important source of earning stability in today's uncertain environment. Hedges added to date create a well-protected net interest margin profile through 2025. While no meaningful hedging was transacted during the quarter, we continue to look for opportunities to add balance sheet protection beyond 2025 at attractive market rate levels.
Since quarter end, we have added $1 billion of forward-starting swaps and $500 million of forward-starting rate collars, near recent highs that will become effective in 2026, 2027 and 2028. 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 at or above the midpoint of the range.
Let's take a look at fee revenue and expense. Adjusted non-interest income increased 8% from the prior quarter, as increases in capital markets and card and ATM fees were partially offset by declines in other categories. Total capital markets income increased $26 million. Excluding the impact of CVA and DVA, capital markets increased 3% sequentially, driven primarily by growth in real estate capital markets, partially offset by declines in M&A fees, debt underwriting and loan syndication income. We had a negative $9 million CVA and DVA adjustment, reflecting credit spread tightening during the quarter. However, this was a $24 million improvement versus the first quarter.
Card and ATM fees increased 7%, driven by seasonally higher spend and transaction volume, as well as a first quarter $5 million rewards reserve adjustment that did not repeat. Service charges declined slightly during the quarter. As John mentioned, we introduced our Overdraft Grace feature in mid-June. Based on our experience to date, we now expect full-year service charges of approximately $575 million. With respect to outlook, we continue to expect full year 2023 adjusted total revenue to be up 6% to 8% compared to 2022.
Let's move on to non-interest expense. Adjusted non-interest expense increased 8% compared to the prior quarter and includes the previously announced elevated operating losses related to check fraud. Excluding the approximately $80 million associated with incremental check fraud incurred this quarter, adjusted non-interest expenses remained relatively stable versus the prior quarter. We have effective countermeasures in place and losses have returned to normalized levels.
Salaries and benefits decreased 2%, primarily due to lower payroll taxes and 401(k) expense, partially offset by an entire quarter of annual merit increases and higher headcount. The FDIC insurance assessment increase was driven by changes in various inputs, including normalized credit conditions and increases in average assets.
We remain committed to prudently managing expenses in order to continue funding investments in our business, including optimizing square footage. As an example, this quarter, we entered into an agreement to sell two of our largest operations centers, totaling over 450,000 sqaure feet. We will continue to refine our expense base, focusing on our largest categories, which include salaries and benefits, occupancy and vendor spend. We expect full year 2023 adjusted non-interest expenses to be up approximately 6.5% and continue to expect to generate positive adjusted operating leverage.
From an asset quality standpoint, overall credit performance continues to normalize as expected. Net charge-offs were 33 basis points in the quarter. Non-performing loans decreased, while business service criticized loans and total delinquencies increased. Provision expense was $118 million or $37 million in excess of net charge-offs. The allowance for credit loss ratio increased 2 basis points to 1.65% and the allowance as a percentage of non-performing loans increased to 332%. The allowance increased due primarily to normalizing credit, modest economic outlook changes and loan growth.
Allowance for credit losses on the office portfolio increased from 2.2% to 2.7%. Importantly, the single office loan on non-performing status is paying as agreed. Additionally, the vast majority of our office exposure is in Class A properties, located primarily within the Sun Belt. Overall, we continue to feel good about the composition of our office book and do not expect any meaningful loss in this portfolio.
While we expect net charge-offs will continue to normalize over the back half of the year, we continue to expect our full year 2023 net charge-off ratio to be approximately 35 basis points. We also expect to return to our historical through-the-cycle annual charge-off range of 35 basis points to 45 basis points in 2024.
From a capital standpoint, we ended the quarter with a common equity Tier 1 ratio at an estimated 10.1%. Although we were not required to participate in this year's supervisory capital stress test, we did receive our preliminary Stress Capital Buffer, reflecting planned capital changes, including the dividend increase John referenced. Our preliminary Stress Capital Buffer will remain at 2.5% from the fourth quarter of 2023 through the third quarter of 2024.
Additionally, we have access to sources of liquidity at June 30, totaling approximately $53 billion, including collateral we have in a ready status at the Federal Home Loan Bank, the Federal Reserve's Bank Term Funding Program, and the discount window. These sources are sufficient to cover all retail uninsured deposits plus wholesale non-operational deposits by approximately a three-to-one ratio. Given current macroeconomic conditions and regulatory uncertainty, we anticipate continuing to manage capital levels at or modestly above 10% over the near term.
And finally, we have a slide summarizing our expectations, which we have addressed throughout the prepared comments.
With that, we'll move to the Q&A portion of the call.
