ENTERPRISE FINANCIAL SERVICES CORP Forward Looking Statements
This Quarterly Report on Form 10-Q contains information and statements that are considered "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements are based on management's current expectations and beliefs concerning future developments and their potential effects on the Company, and include, without limitation, statements about the Company's plans, strategies, goals, objectives, expectations, or consequences of statements about the future performance, operations, products and services of the Company and its subsidiaries, as well as statements about the Company's expectations regarding revenue and asset growth, financial performance and profitability, loan and deposit growth, yields and returns, loan diversification and credit management, products and services, shareholder value creation and the impact of acquisitions. Forward-looking statements are typically identified with the use of terms such as "may," "might," "will," "would," "should," "expect," "plan," "anticipate," "believe," "estimate," "predict," "potential," "could," "continue," "intend," and the negative and other variations of these terms and similar words and expressions, although some forward-looking statements may be expressed differently. Forward-looking statements are inherently subject to risks and uncertainties and our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. You should be aware that our actual results could differ materially from those contained in the forward-looking statements. While there is no assurance that any list of risks and uncertainties or risk factors is complete, important factors that could cause actual results to differ materially from those in the forward-looking statements include the following, without limitation: our ability to efficiently integrate acquisitions into our operations, retain the customers of these businesses and grow the acquired operations; credit risk; changes in the appraised valuation of real estate securing impaired loans; our ability to recover our investment in loans; fluctuations in the fair value of collateral underlying loans; outcomes of litigation and other contingencies; exposure to general and local economic and market conditions, including risk of recession, high unemployment rates, higher inflation and its impacts (includingU.S. federal government measures to address higher inflation),U.S. fiscal debt, budget and tax matters, and any slowdown in global economic growth; risks associated with rapid increases or decreases in prevailing interest rates; changes in business prospects that could impact goodwill estimates and assumptions; consolidation within the banking industry; competition from banks and other financial institutions; the ability to attract and retain relationship officers and other key personnel; burdens imposed by federal and state regulation; changes in legislative or regulatory requirements, as well as current, pending or future legislation or regulation that could have a negative effect on our revenue and businesses, including rules and regulations relating to bank products and financial services; changes in accounting policies and practices or accounting standards; changes in the method of determining LIBOR and the phase-out of LIBOR; natural disasters; terrorist activities, war and geopolitical matters (including the war inUkraine and the imposition of additional sanctions and export controls in connection therewith), or pandemics, including the COVID-19 pandemic, and their effects on economic and business environments in which we operate, including the ongoing disruption to the financial market and other economic activity caused by the COVID-19 pandemic; and other risks discussed under the caption "Risk Factors" under Part I, Item 1A of our 2022 Annual Report on Form 10-K, and other reports filed with theSEC , all of which could cause the Company's actual results to differ from those set forth in the forward-looking statements. The Company cautions that the preceding list is not exhaustive of all possible risk factors and other factors could also adversely affect the Company's results. Readers are cautioned not to place undue reliance on our forward-looking statements, which reflect management's analysis and expectations only as of the date of such statements. Forward-looking statements speak only as of the date they are made, and the Company does not intend, and undertakes no obligation, to publicly revise or update forward-looking statements after the date of this report, whether as a result of new information, future events or otherwise, except as required by federal securities law. You should understand that it is not possible to predict or identify all risk factors. Readers should carefully review all disclosures we file from time to time with theSEC which are available on our website at www.enterprisebank.com under "Investor Relations." 27 --------------------------------------------------------------------------------
Introduction
The following discussion describes the significant changes to the financial condition of the Company that have occurred during the first three months of 2023 compared to the financial condition as ofDecember 31, 2022 . In addition, this discussion summarizes the significant factors affecting the results of operations of the Company for the three months endedMarch 31, 2023 , compared to the linked fourth quarter ("linked quarter") in 2022 and the results of operations, liquidity and cash flows for the three months endedMarch 31, 2023 compared to the same period in 2022 ("prior year quarter"). In light of the nature of the Company's business, which is not seasonal, the Company's management believes that the comparison to the linked quarter is the most relevant to understand the financial results from management's perspective. For purposes of the Quarterly Report on Form 10-Q, the Company is presenting a comparison to the corresponding year-to-date period in 2022. This discussion should be read in conjunction with the accompanying condensed consolidated financial statements included in this report and our Annual Report on Form 10-K for the year endedDecember 31, 2022 .
Critical Accounting Policies and Estimates
The Company's critical accounting policies are considered important to the understanding of the Company's financial condition and results of operations. These accounting policies require management's most difficult, subjective and complex judgments about matters that are inherently uncertain. Because these estimates and judgments are based on current circumstances, they may change over time or prove to be inaccurate based on actual experience. If different assumptions or conditions were to prevail, and depending upon the severity of such changes, the possibility of a materially different financial condition and/or results of operations could reasonably be expected. A full description of our critical accounting policies and the impact and any associated risks related to those policies on our business operations are discussed throughout "Management's Discussion and Analysis of Financial Condition and Results of Operations," where such policies affect our reported and expected financial results. For a detailed discussion on the application of these and other accounting policies, see the Company's Annual Report on Form 10-K for the year endedDecember 31, 2022 . The Company has prepared the consolidated financial information in this report in accordance with GAAP. The Company makes estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period. Such estimates include the valuation of loans, goodwill, intangible assets, and other long-lived assets, along with assumptions used in the calculation of income taxes, among others. These estimates and assumptions are based on management's best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis using loss experience and other factors, including the current economic environment, which management believes to be reasonable under the circumstances. We adjust such estimates and assumptions when facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in estimates resulting from continuing changes in the economic environment will be reflected in the financial statement in future periods. There can be no assurances that actual results will not differ from those estimates. 28 --------------------------------------------------------------------------------
Allowance for Credit Losses
Utilizing the CECL methodology, the Company maintains separate allowances for funded loans, unfunded loans, and held-to-maturity securities, collectively the ACL. The ACL is a valuation account to adjust the cost basis to the amount expected to be collected, based on management's estimate of experience, current conditions, and reasonable and supportable forecasts. For purposes of determining the allowance for funded and unfunded loans, the portfolios are segregated into pools that share similar risk characteristics and are then further segregated by credit grades. Loans that do not share similar risk characteristics are evaluated on an individual basis and are not included in the collective evaluation. The Company estimates the amount of the allowance based on loan loss experience, adjusted for current and forecasted economic conditions, including unemployment, changes in GDP, and commercial and residential real estate prices. The Company's forecast of economic conditions uses internal and external information and considers a weighted average of a baseline, upside, and downside scenarios. Because economic conditions can change and are difficult to predict, the anticipated amount of estimated loan defaults and losses, and therefore the adequacy of the allowance, could change significantly and have a direct impact on the Company's credit costs. The Company's allowance for credit losses on loans was$138.3 million atMarch 31, 2023 based on the weighting of the different economic scenarios. As a hypothetical example, if the Company had only used the upside scenario, the allowance would have decreased$24.2 million . Conversely, the allowance would have increased$43.2 million using only the downside scenario. 29 --------------------------------------------------------------------------------
Executive Summary
Below are highlights of the Company's financial performance for the periods
indicated.
Three months ended
March 31, December 31, March 31,
(in thousands, except per share data) 2023 2022 2022
EARNINGS
Total interest income$ 169,033 $ 156,737 $ 106,581 Total interest expense 29,504 17,902 5,416 Net interest income 139,529 138,835 101,165 Provision (benefit) for credit losses 4,183 2,123 (4,068) Net interest income after provision (benefit) for credit losses 135,346 136,712 105,233 Total noninterest income 16,898 16,873 18,641 Total noninterest expense 80,983 77,149 62,800 Income before income tax expense 71,261 76,436 61,074 Income tax expense 15,523 16,435 13,381 Net income$ 55,738 $ 60,001 $ 47,693 Preferred stock dividends 938 937 1,229
Net income available to common shareholders
Basic earnings per share$ 1.47 $ 1.59 $ 1.23 Diluted earnings per share$ 1.46 $ 1.58 $ 1.23 Return on average assets 1.72 % 1.83 % 1.42 % Return on average common equity 14.85 % 16.52 % 12.87 % Return on average tangible common equity1 19.93 % 22.62 % 17.49 % Net interest margin (tax equivalent) 4.71 % 4.66 % 3.28 % Efficiency ratio 51.77 % 49.55 % 52.42 % Core efficiency ratio1 50.47 % 48.10 % 50.60 % Book value per common share$ 40.76 $ 38.93 $ 37.35 Tangible book value per common share1$ 30.55
ASSET QUALITY Net charge-offs (recoveries)$ (264) $ 2,075 $ 1,521 Nonperforming loans 11,972 9,981 21,160 Classified assets 110,384 99,122 93,199 Nonperforming loans to total loans 0.12 % 0.10 % 0.23 % Nonperforming assets to total assets 0.09 % 0.08 % 0.17 % ACL on loans to total loans 1.38 % 1.41 % 1.54 % Net charge-offs (recoveries) to average loans (annualized) (0.01) % 0.09 % 0.07 %
1 A non-GAAP measure. A reconciliation has been included in this section under the caption "Use of Non-GAAP Financial Measures."
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--------------------------------------------------------------------------------Financial results and other notable items include:
•PPNR1 of$75.0 million in the first quarter 2023 decreased$3.6 million from the linked quarter PPNR of$78.6 million and increased$18.0 million from$57.0 million in the prior year period. The decrease from the linked quarter was primarily due to a seasonal increase in noninterest expense, partially offset by an increase in net interest income. The increase compared to the prior year quarter was primarily due to an increase in net interest income, partially offset by an increase in noninterest expense.
1 PPNR is a non-GAAP measure. Refer to discussion and reconciliation of these measures in the accompanying financial tables.
•Net interest income of$139.5 million for the first quarter 2023 increased$0.7 million and$38.4 million from the linked and prior year quarters, respectively. The NIM was 4.71% for the first quarter 2023, compared to 4.66% and 3.28% for the linked and prior year quarters, respectively. Net interest income and NIM benefited from higher average loan and investment balances and expanding yields on earning assets, partially offset by higher deposit costs and a decline in average interest-earning cash. •Noninterest income of$16.9 million for the first quarter 2023 was stable compared to the linked quarter and decreased$1.7 million from the prior year quarter. The decline from the prior year quarter was primarily due to a decrease in customer swap fee income, card services revenue and tax credit income. Lower transaction volumes led to the decrease in customer swap fee income and tax credit income, and the Durbin Amendment cap on debit card income has limited card services revenue sinceJuly 1, 2022 .
Balance sheet highlights:
•Loans - Total loans increased$274.8 million , or 11.4%, to$10.0 billion atMarch 31, 2023 , compared to$9.7 billion atDecember 31, 2022 . Average loans totaled$9.8 billion for the quarter endedMarch 31, 2023 compared to$9.4 billion in the fourth quarter 2022. •Deposits - Total deposits increased$325.5 million , to$11.2 billion atMarch 31, 2023 from$10.8 billion atDecember 31, 2022 . Total estimated insured deposits, which includes collateralized deposits, reciprocal deposits and accounts that qualify for pass through insurance, totaled$7.7 billion atMarch 31, 2023 , compared to$4.9 billion atDecember 31,2022 . Average deposits totaled$10.9 billion for the quarter endedMarch 31, 2023 , compared to$11.0 billion for the fourth quarter 2022. Noninterest deposit accounts represented 37.6% of total deposits and the loan to deposit ratio was 89.8% atMarch 31, 2023 . •Asset quality - The allowance for credit losses on loans to total loans was 1.38% atMarch 31, 2023 , compared to 1.41% atDecember 31, 2022 . Nonperforming assets to total assets was 0.09% atMarch 31, 2023 compared to 0.08% atDecember 31, 2022 . A provision for credit losses of$4.2 million was recorded in the first quarter of 2023, compared to$2.1 million in the linked quarter and a provision benefit of$4.1 million in the comparable prior year period. The provision for credit losses of$4.2 million recorded in the first quarter 2023 was primarily related to the credit impairment of an investment security in subordinated debt of a failed bank and loan growth, partially offset by a decrease in the reserve for unfunded commitments. •Shareholders' equity - Total shareholders' equity was$1.59 billion atMarch 31, 2023 , compared to$1.52 billion atDecember 31, 2022 , and the tangible common equity to tangible assets ratio2 was 8.8% atMarch 31, 2023 compared to 8.4% atDecember 31, 2022 . The Company and the Bank's regulatory capital ratios exceeded the "well-capitalized" level atMarch 31, 2023 . The Company's Board of Directors approved a quarterly dividend of$0.25 per common share, payable onJune 30, 2023 to shareholders of record as ofJune 15, 2023 . The Board of Directors also declared a cash dividend of$12.50 per share of Series A Preferred Stock (or$0.3125 per depositary share) representing a 31 -------------------------------------------------------------------------------- 5% per annum rate for the period commencing (and including)March 15, 2023 to (but excluding)June 15, 2023 . The dividend will be payable onJune 15, 2023 to shareholders of record onMay 31, 2023 . 2 Tangible common equity to tangible assets ratio is a non-GAAP measure. Refer to discussion and reconciliation of these measures in the accompanying financial tables. 32 -------------------------------------------------------------------------------- RESULTS OF OPERATIONS Net Interest Income and Net Interest Margin Average Balance Sheet The following tables present, for the periods indicated, certain information related to our average interest-earning assets and interest-bearing liabilities, as well as the corresponding interest rates earned and paid, all on a tax equivalent basis. Three months endedMarch 31 , Three months endedDecember 31 , Three months endedMarch 31, 2023 2022 2022 Average Average Average Interest Yield/ Interest Yield/ Interest Yield/ (in thousands) Average Balance Income/Expense Rate Average Balance Income/Expense Rate Average Balance Income/Expense Rate Assets Interest-earning assets: Total loans1, 2$ 9,795,045 $ 152,762 6.33 %$ 9,423,984 $ 139,432 5.87 %$ 9,005,875 $ 96,301 4.34 % Taxable securities 1,322,978 9,635 2.95 1,256,470 8,980 2.84 1,151,743 5,699 2.01 Non-taxable securities2 965,473 7,482 3.14 947,741 7,211 3.03 772,226 5,270 2.77 Total securities 2,288,451 17,117 3.03 2,204,211 16,191 2.91 1,923,969 10,969 2.31 Interest-earning deposits 106,254 1,195 4.56 367,100 3,097 3.35 1,781,272 817 0.19 Total interest-earning assets 12,189,750 171,074 5.69 11,995,295 158,720 5.25 12,711,116 108,087 3.45 Noninterest-earning assets 941,445 991,273 902,887 Total assets$ 13,131,195 $ 12,986,568 $ 13,614,003 Liabilities and Shareholders' Equity Interest-bearing liabilities: Interest-bearing demand accounts$ 2,201,910 $ 5,907 1.09 %$ 2,242,268 $ 4,136 0.73 %$ 2,505,319 $ 536 0.09 % Money market accounts 2,826,836 15,471 2.22 2,696,417 9,509 1.40 2,872,302 1,460 0.21 Savings 732,256 230 0.13 775,488 100 0.05 817,431 66 0.03 Certificates of deposit 670,521 3,053 1.85 524,938 1,017 0.77 607,133 797 0.53 Total interest-bearing deposits 6,431,523 24,661 1.56 6,239,111 14,762 0.94 6,802,185 2,859 0.17 Subordinated debentures 155,497 2,409 6.28 155,359 2,376 6.07 154,959 2,220 5.81 FHLB advances 110,928 1,332 4.87 8,864 104 4.65 50,000 195 1.58 Securities sold under agreements to repurchase 215,604 749 1.41 182,362 282 0.61 262,252 60 0.09 Other borrowed funds 53,885 353 2.66 26,993 378 5.56 22,841 82 1.46 Total interest-bearing liabilities 6,967,437 29,504 1.72 6,612,689 17,902 1.07 7,292,237 5,416 0.30 Noninterest bearing liabilities: Demand deposits 4,481,966 4,763,503 4,692,027 Other liabilities 113,341 119,784 93,518 Total liabilities 11,562,744 11,495,976 12,077,782 Shareholders' equity 1,568,451 1,490,592 1,536,221 Total liabilities & shareholders' equity$ 13,131,195 $ 12,986,568 $ 13,614,003 Net interest income$ 141,570 $ 140,818 $ 102,671 Net interest spread 3.97 % 4.18 % 3.15 % Net interest margin 4.71 % 4.66 % 3.28 %
1 Average balances include nonaccrual loans. Interest income includes loan fees of
33--------------------------------------------------------------------------------
Rate/Volume
The following table sets forth, on a tax-equivalent basis for the periods indicated, a summary of the changes in interest income and interest expense resulting from changes in yield/rates and volume.
Three months ended March 31, 2023 Three months ended March 31, 2023
compared to compared to
Three months ended December 31, 2022 Three months ended March 31, 2022
Increase (decrease) due to Increase (decrease) due to
(in thousands) Volume(1) Rate(2) Net Volume(1) Rate(2) Net
Interest earned on:
Loans(3) $ 4,538 $ 8,792 $ 13,330 9,112 47,349 56,461
Taxable securities 378 277 655 950 2,986 3,936
Non-taxable securities(3) 87 183 270 1,441 770 2,211
Interest-earning deposits (2,713) 812 (1,901) (1,493) 1,872 379
Total interest-earning assets $ 2,290 $ 10,064 Interest paid on: Interest-bearing demand accounts$ (78) $ 1,849 $ 1,771 $ (75) $ 5,446 $ 5,371 Money market accounts 454 5,507 5,961 (24) 14,035 14,011 Savings (6) 137 131 (7) 171 164 Certificates of deposit 336 1,700 2,036 91 2,165 2,256 Subordinated debentures 1 32 33 8 181 189 FHLB advances 1,223 5 1,228 419 718 1,137 Securities sold under agreements to repurchase 57 410 467 (12) 701 689 Other borrowings 237 (262) (25) 169 102 271 Total interest-bearing liabilities 2,224 9,378 11,602 569 23,519 24,088 Net interest income$ 66 $ 686 $ 752 $ 9,441 $ 29,458 $ 38,899 (1) Change in volume multiplied by yield/rate of prior period. (2) Change in yield/rate multiplied by volume of prior period. (3) Nontaxable income is presented on a tax equivalent basis. NOTE: The change in interest due to both rate and volume has been allocated to rate and volume changes in proportion to the relationship of the absolute dollar amounts of the change in each. Net interest income (on a tax equivalent basis) of$141.6 million for the quarter endedMarch 31, 2023 increased$0.8 million , from$140.8 million in the linked quarter. Compared to the prior year, net interest income increased$38.9 million , from$102.7 million in the first quarter 2022. The increase from the linked and prior year quarters reflects the benefit of higher market interest rates on the Company's asset sensitive balance sheet combined with organic growth. The effective federal funds rate for the first quarter 2023 was 4.52%, an increase of 87 basis points, compared to the linked quarter, and a 440 basis point increase over the prior year quarter. Compared to the linked quarter, interest income increased$12.4 million due to higher interest earned on a larger loan base resulting in a$13.3 million sequential expansion. This increase was partially offset by a$1.9 million decrease in interest on cash balances. Interest on loans benefited from a 46 basis point increase in yield and a$371.1 million increase in average loans compared to the linked quarter. The average interest rate of new loan originations in the first quarter 2023 was 6.53%. The yield on interest-earning cash deposits increased 121 basis points in the quarter but was offset by a$260.8 million decrease in the average balance which reduced interest income in the first quarter 2023. Compared to the prior year quarter, the increase in interest income of$63.0 million was also primarily due to higher interest earned on a larger loan base, partially offset by a decline in interest earned on cash balances. The prior year quarter included$2.9 million of interest and fee income on loans from the Paycheck Protection Program that was mostly wound down in the fourth quarter 2022. 34 -------------------------------------------------------------------------------- Compared to the linked quarter, interest expense increased$11.6 million primarily due to a$9.9 million increase in deposit interest expense and a$1.2 million increase in interest expense on FHLB borrowings. The increase in interest expense reflects a shift in the deposit mix from demand deposits and interest-bearing demand deposits to money market accounts and certificates of deposit, as well as higher rates paid on deposits and an increased use of FHLB borrowings. This deposit shift principally occurred during March following turmoil in the banking markets. The interest-bearing liability rate was 1.72% an increase of 65 basis points compared to the linked quarter. The average cost of interest-bearing deposits was 1.56%, an increase of 62 basis points over the linked quarter. The increase was primarily due to higher rates paid on commercial money market accounts, which increased 82 basis points to 2.22% in the current quarter. Compared to the prior year quarter, interest expense increased$24.1 million primarily due to an increase in the cost of interest bearing liabilities. The cost of interest bearing deposits increased 139 basis points year-over-year, while the cost of total interest bearing liabilities increased 142 basis points during the same period. The total cost of deposits, including noninterest-bearing demand accounts, was 0.92% during the first quarter 2023, compared to 0.53% and 0.10% in the linked and prior year quarters, respectively. NIM, on a tax equivalent basis, was 4.71% in the first quarter 2023, an increase of five basis points from the linked quarter and an increase of 143 basis points from the prior year quarter. Since the first quarter 2022, NIM has expanded four consecutive quarters. Noninterest Income
The following table presents a comparative summary of the major components of noninterest income for the periods indicated.
Linked quarter comparison Prior year comparison
Quarter ended Quarter ended
December 31,
(in thousands) March 31, 2023 2022 Increase (decrease) March 31, 2022 Increase (decrease)
Deposit service charges $ 4,128 $ 4,463 $ (335) (8) % $ 4,163 $ (35) (1) %
Wealth management revenue 2,516 2,423 93 4 % 2,622 (106) (4) %
Card services revenue 2,338 2,345 (7) - % 3,040 (702) (23) %
Tax credit income 1,813 2,389 (576) (24) % 2,608 (795) (30) %
Other income 6,103 5,253 850 16 % 6,208 (105) (2) %
Total noninterest income $ 16,898 $ 16,873 $ 25 - % $ 18,641 $ (1,743) (9) %
Total noninterest income for the first quarter 2023 was $16.9 million , stable
with the linked quarter and a decrease of $1.7 million from the prior year
quarter. Noninterest income in the first quarter 2023 included an increase in
other income and wealth management revenue that was offsets by a decrease in
deposit service charges and tax credit income. Other income increased primarily
due to a gain on the sale of SBA loans and a gain on the sale of investment
securities. In the first quarter 2023, SBA loans totaling $8.8 million were sold
and $28.4 million of lower-yielding investment securities were sold in January
2023 at a gain and the proceeds were reinvested at a higher yield. Other income
in the current and linked quarters also included $2.3 million and $3.2 million ,
respectively, of income from community development investments and private
equity income. Income from these investments will vary among periods. Deposit
service charges declined in the first quarter 2023 as the earnings credit rate
used by customers to offset treasury management fees increased. Tax credit
income is typically highest in the fourth quarter when transaction volumes peak.
The decrease from the prior year quarter was primarily due to decreases in tax
credit income and card services revenue. Lower transaction volumes led to the
decrease in tax credit income while the Durbin Amendment cap on
35
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debit card income has limited card services revenue since July 1, 2022 . Other
income in the prior year quarter included $1.2 million of swap fee income,
compared to $0.3 million in the first quarter 2023. Swap fee income is generated
from customer hedging activities and was higher in the prior year quarter when
market rates started to increase.
Noninterest Expense
The following table presents a comparative summary of the major components of noninterest expense for the periods indicated.
Linked quarter comparison Prior year comparison
Quarter ended Quarter ended
December 31,
(in thousands) March 31, 2023 2022 Increase (decrease) March 31, 2022 Increase (decrease)
Employee compensation and
benefits $ 42,503 $ 38,175 $ 4,328 11 % $ 35,827 $ 6,676 19 %
Occupancy 4,061 4,248 (187) (4) % 4,586 (525)
(11) %
Data processing 3,710 3,599 111 3 % 3,260 450 14 %
Professional fees 1,631 2,763 (1,132) (41) % 1,177 454 39 %
Deposit costs 12,720 13,256 (536) (4) % 4,260 8,460 199 %
Other expense 16,358 15,108 1,250 8 % 13,690 2,668 19 %
Total noninterest expense $ 80,983 $ 77,149 $ 3,834 5 % $ 62,800 $ 18,183 29 %
Efficiency ratio 51.77 % 49.55 % 2.22 % 52.42 % (0.65) %
Core efficiency ratio1 50.47 % 48.10 % 2.37 % 50.60 % (0.13) %
1 Core efficiency ratio is a non-GAAP measure. Refer to discussion and reconciliation of this measure in the accompanying financial tables.
Noninterest expense was$81.0 million for the first quarter 2023, an increase of$3.8 million from$77.1 million in the linked quarter. Employee compensation and benefits increased$4.3 million from the linked quarter primarily due to a$3.4 million increase in employer payroll taxes and 401(k) matches that are seasonally higher in the first quarter each year, and a$3.3 million increase in salaries due to annual merit increases that became effective onMarch 1, 2023 and an increase in the associate base. These increases were partially offset by a$3.8 million decline in variable compensation that is typically higher in the fourth quarter each year. Deposit costs declined slightly from the linked quarter primarily due to higher year-end settlements that occurred in the linked quarter. Deposit costs relate to certain specialized deposit businesses that are impacted by higher interest rates as well as increasing average balances. The increase in noninterest expense of$18.2 million from the prior year quarter was primarily an increase in the associate base, merit increases throughout 2022 and 2023, and an increase in variable deposit costs.
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