Hello and welcome to the annual meeting of shareholders of Unity Bancorp Incorporated. Please note that today's meeting is being recorded. During the meeting, we'll have a question-and-answer session. You can submit questions or comments at any time by clicking on the Q&A tab. It is now my pleasure to turn today's meeting over to Mr. David Dallas, Chairman of the Board of Directors of Unity Bancorp. Mr. Dallas, the floor is yours.
Thank you, and good morning, ladies and gentlemen. My name is David Dallas, and I am honored to be the Chairman of the Board of Directors of Unity Bancorp. On behalf of the Board of Directors, management, and staff, I'd like to welcome all those listening to the 2024 annual meeting of shareholders of Unity Bancorp. At Unity Bancorp, our mission is to cultivate lasting relationships with our customers by providing personalized banking services that resonate within our communities. Our goal is to offer exceptional service, flexibility, and responsiveness to individuals and businesses of all sizes. In 2023, the U.S. economy grew robustly, achieving full employment despite recession predictions. Persistent inflation led the Federal Reserve to hike interest rates by 525 basis points over a 15-month period, inverting the yield curve and challenging banks and borrowers alike.
A series of bank failures, the largest since the financial crisis, underscored the importance of sound risk management. Despite these unprecedented headwinds, Unity's business model and proactive management approach has allowed us to continue to report exceptional results. Unity Bancorp is committed to supporting our local communities. As a community bank, our mission is to provide capital to individuals and small businesses, all businesses, who have been underserved by large regional banks. Thus, our motto, "Growing with you," is not just a tagline but a commitment. Moving on to our 2023 financial performance.
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Moving on to our 2023 financial performance, it was another record year with the company posting $39.7 million of net income, with a return on average assets of 1.63%. Unity continues to be recognized as a top performer in various publications, the likes of which include Bank Director, Piper Sandler, Raymond James, and BauerFinancial. Mr. Hughes will further elaborate on more of Unity's accomplishments, the year's highlights, Unity's strategic goals, and future growth of the organization later in this morning's meeting. I would now like to proceed according to today's agenda. The first item on the agenda is the recap of the proposals voted for.
As you may know, this year, the shareholders of record have been asked to cast their votes on the following three proposals: one, for the election of Unity's three nominees for director; two, the ratification of Wolf & Company, P.C.; and finally, three, for the approval of an advisory on an advisory basis of the company's executive compensation. If you have not yet voted or you wish to change your vote, you may do so by clicking on the Vote tab. Any shareholder who has already voted and does not want to change their vote need not take any further action. The next item on the agenda is the appointment of judges and the inspector of election and the announcement of a quorum present. Today's judges of election are Mr. George Boyan, Unity Bancorp's Executive Vice President and Chief Financial Officer, and Ms. Linda McDermott, Unity Bancorp's Corporate Secretary.
George, would you state your name, please?
George Boyan.
Linda?
Linda McDermott.
Thank you. Today's inspector of election is Ms. Marlene Granson-Mills, a representative of the company's stock transfer agent, Computer Share. Ms. Mills, may I please have the current tally of the total votes received and the percentage of the total outstanding shares that this tally represents?
Mr. Chairman, based on the total votes received of 8,897,830, representing 87.74% of the total outstanding shares, a quorum is determined to exist for the continuation of today's meeting.
Thank you, Ms. Mills. Now, I'd like to encourage any shareholder present to submit questions online by clicking on the Q&A tab. Please try to limit your questions to one or two each. We will try to address as many questions as possible towards the end of the meeting. If your question is not answered, please feel free to reach out through our investor relations link on the Unity Bancorp website. Also, within the virtual meeting portal, you see a link to review our 2023 annual report and our 2024 proxy report. Within our proxy report, you will find a full list of our directors and executive management team. For the record, all directors of Unity Bancorp and Unity Bancorp are present at this morning's meeting. The next item on the agenda is the report to our shareholders.
I would now like to turn the meeting over to our President and Chief Executive Officer, Mr. James Hughes. Jim?
Thank you, David. Good morning, everyone. Again, my name is Jim Hughes. I'm the CEO of Unity Bancorp. It's my honor and privilege to go over the operating results for 2023, talk about our strategy for 2024. But before we get into it, on slide one is just a brief snapshot of our Q1 results, which we released a week ago, last Friday. Net income of $9.6 million, $0.93 a share. Our performance ratios are still best in class, 1.58% ROA, return on equity of 14.49%. And the real story is our margin bouncing back at 4.09%. Not too many banks in New Jersey have a margin north of 4%. So we're very, very pleased with our results. Obviously, it's a challenging rate environment. As you look at slide two, it's higher for longer. As Dave mentioned, the Fed raised rates 525 basis points over an 18-month period.
It started in March of 2022 and ended in July of 2023, bringing the Fed funds rate from basically nothing, 0.07 basis points, to 533. So really, what that means is the incremental cost of making a loan is almost 5.5%, is the funding cost. And so these high rates are not good for borrowers, clearly, but they're not good for banks. This is the cause of two significant bank failures: Silicon Valley Bank and Signature Bank. Most banks are down significantly in profitability as a result of the conversion of the yield curve and collapsing margins. So we are faring much better than most. When rates are high, money moves out of the banking system. Customers, depositors, are well aware of the value of their deposits.
So they're taking it out of insured institutions and putting it into Treasury Direct or bringing it to Merrill Lynch or taking it from lower-yielding accounts and putting it into higher-yielding accounts. So all this is not good for banks. It's going to be, again, higher for longer. But our balance sheet has served us very, very well. We have a lot of variable-rate assets, a lot of 5/1 ARMs that have been on our books for years that are really now 1/1 ARMs. So 2023 was a very good year. But before we get into the detail in 2023, just look at slide three is our footprint. In 2023, we added two new branches to our inventory. We now have 21 branches, two in PA, 19 in New Jersey, one addition in Fort Lee, doing very, very well, and our first branch in Parsippany. Fort Lee, we're leasing.
Parsippany we have purchased. We really prefer to own rather than lease. We're going to continue our strategy of branch banking, we believe, for community banking. It's important to have a branch in your local community, even though more and more transactions are digital. It just really gets back into appropriate staffing levels and appropriate hours. But we will look forward to expanding our branch footprint in the future. On the next slide, number 4, this is really kind of a summary of our balance sheet. One of the ratios that regulators look at inappropriately is they like you to fund loans with deposits. And loan-to-deposit ratios are under a lot of stress at banks as deposits are leaving the banking system. 2022, if you recall, was an extremely good year for us for loan growth.
Almost in the month of December, we went from our loan-to-deposit ratio policies around 110. Not that it's a hard policy, but it's kind of the floor where we like to be at. And so we ended the year at 2022 at 1.18, 118% loan-to-deposit ratio. And on January 1st, we quickly changed our policy. Why are we here? We're here to make loans to small businesses. And so we stopped making loans to investment property, non-owner-occupied businesses, and focused on making loans to owner-occupied businesses in our communities. And between that and growing our deposits, by the end of 2023, we're at 112. And in the Q1, we were able to get to 109. So we'll probably open the spigot a little bit in 2024 to investment property lending. But I think 2024 is going to be very similar to 2023.
It's going to be slow loan growth, slow deposit growth, and just anticipating the change in interest rates. So staying on the slide, loans increased 3.1% in 2023, over 7% growth in commercial loans, again, lending in our communities, conservative owner-occupied businesses, 4.4% increase in residential mortgage loans, high rates, difficult to do mortgage lending in this environment. The 30-year rate's about 7%. Not a lot of inventory available for mortgage homes. So mortgage volume across the state is down well over 50%. Our volume used to be around $40 million a month. We're down to maybe $15 million-$20 million a month. But we are bringing in more realtors. We are not a refi shop. We are a purchase-money mortgage lender. So very optimistic about the mortgage division. A 20% decrease in residential construction loans. And that was by design.
During COVID, a lot of our construction projects got delayed. The town inspector couldn't show up. The supply chain issues. And a lot of our projects, which are normally 12-18 months, extended to 24 months, 30 months, even longer. And so 2023 was really a year of clearing out the old inventory. So I feel very, very comfortable that our residential construction portfolio is all current production, still doing very, very well. Probably dollar for dollar, our most profitable line of business. Consumer loans decreased. When you're lending at prime plus a half and you have money, you're going to pay down your home equity line. And that's exactly what happened. So on the deposit side, we're working very, very hard at growing deposits. It's all about deposits. I've been saying that for years. And it's a battle.
It's always about who's paying the highest rate, the Fed funds rate, almost 5.5%, Federal Home Loan Bank borrowing rate. So every deposit is valuable to us. So we're growing time deposits as appropriately as possible, increasing broker deposits. Sometimes that growth is not to fund our deposit growth, but it's better opportunity than funding from the Federal Home Loan Bank. We were fortunate enough to have increase in interest-bearing deposits. But even there, depositors are expecting more yields. And so they'll leave it there, but you have to pay them much higher than we have paid them in the past. And the decline in non-interest-bearing deposits is happening to everyone. Everybody's aware that money has value. And you can get 5.5%. Why leave it in a non-interest-bearing depository account? So more to follow. But that's it for our loan-to-deposit story for 2023.
On page 5, asset quality still is extremely strong, extremely good at the bank. Loan loss reserves, probably on the highest of our peer group in our reserve for loan loss, the total loans of 120. Our non-performing assets, 66 basis points, still well under 1%, still considered very, very strong. Most of these non-performing loans are residential loans due to divorce, somebody losing their job, very well collateralized, not expecting any losses, material losses, certainly on the work out of our non-performing portfolio. Net charge-offs, you can see over the last 2 years, even the Q1, almost negligible, 7 basis points, 9 basis points, 8 basis points. So feel very, very comfortable with our asset quality. There's an old saying, "Bad loans are made in good times." There certainly is, I think, everybody's concerned that the market's values are very, very high right now.
So we're being very, very cautious about lending in this environment. On page six is really the summary of the year, 2023. To the best of my knowledge, we're the only bank in New Jersey that actually made more money in 2023 than in 2022. It was a record year for Unity Bancorp, $39.7 million compared to $38 million the prior year. To the top line, net interest income grew over 5% from $90 million to $95 million. Well, how can that be? Our margin went down, and we only grew loans 3%. Really, the growth there was because we put on almost $400 million of mortgage volume in 2022. And so you had the full year effect of that in 2023. So on average, our average loans for the year were substantially higher than 3%. So this is going to level off in 2024.
Our provision for loan loss, 2022 to 2023, in 2022 was all due to loan growth. So we were booking additional provision to compensate for the loan volume. In 2023, our core provision was closer to $2 million. We had about $1.2 million of a provision for an AFS security that we have concerns on a small bank that is struggling due to the rate environment that has negative margin. So we'll get into the non-interest income, non-interest expense on further slides. But at the end of the day, a record year for us at $38.4 million, tremendous performance, 1.63% ROA, 16% ROE. The numbers are down compared to the prior year, not because of the earnings. The earnings are up. It's a bigger balance sheet, larger equity, margin down to 4.06%, but still very, very strong margin compared to the industry.
You can see on the next page our net interest income and how it's grown consistently over the last five years, 2023 up to $95 million. You can see how stable our margin is. Even the regulators commented that during a 525 basis point increase, how strong our margin and how resilient our balance sheet is. They were very, very pleased with that result. The next slide, non-interest income. This is where I think there's opportunity for us in 2024 to do a better job on increasing non-interest income. Gains on sale of SPA loans could be stronger. But certainly, a high-interest rate environment right now with slowing volume, slowing volume on gains and sales of mortgage loans. The losses that we incurred in net security gains in 2022 was really a write-down of valuations of bank stocks that we have at the holding company.
These are not actual losses, just valuation write-downs. I'm very confident that most of that will be returned to us when rates start declining in the future. Other income is basically wire interchange revenue. It usually comes in at around $1.5 million. The prior year, we canceled the swap for about $1.2 million, $1.3 million in the 2022 number. Non-interest expense, we spend approximately 2% on average of total assets each year, which is in line with the industry. So we invest a lot back, proportionally, primarily to comp and benefits. You really have to pay. We have quality employees up almost 8%, a lot of inflationary pressure there. We have two new branches, increased headcount. We've started to reduce headcount towards the end of 2023 into 2024. So I think we'll see better performance in terms of the slowdown of the comp and benefit line item.
FDIC insurance, pay for bank failures. There's nothing we can do there. There's really not a lot of opportunities for savings here. It's really just continue to be prudent and continue to reinvest back into the company's infrastructure, into the security, into marketing. So we are growing this organization. The next slide, it's all about book value growth. We're a high-performing bank. We made $3.84. We have a very low dividend payout ratio, close to 14%. We like to keep it around 15% or lower. We believe that you put a dollar in book value, you're going to get $1.25 back. And you look at this slide, generally speaking, the market value of a stock is going to trade right over its book value. And the points in time here in 2020, you had COVID.
The Q1, the Fed making the announcement, rates are going to be higher for longer. This too shall pass. So our plan is to build book value as quickly as we can for our shareholders. We'd like it to grow $3 a share or more per year. We're also managing our capital appropriately. When we have opportunities where we think the price of the stock is undervalued, which we think it is today, we're actively looking to buy back our stock. We bought back 150,000 shares in the Q1. We'll continue to take advantage of opportunities in the market to return shareholder value to you. So the last slide, again, I'm just very, very positive on the outlook for Unity. We have a diversified business model. A lot of banks just do commercial lending. We do commercial lending. We do commercial construction lending. We do SBA.
We do residential lending. We do for saleable portfolio. We have a residential construction division. So the sum of all those help fertilize each other's areas, brings in business, brings in relationships. So very, very positive things with our model. Our balance sheet has proven to be resilient. We are now trying to make it more liability sensitive, doing proactive things. We're doing construction loans now. They used to be prime plus 1.5, and we floated. Now it's locked in at prime plus 1.5 during the duration. So we're anticipating the downturn, and we are trying to convert our balance sheet to more liability sensitive. Strong yields. When you look at our performance, we're getting more return on our loans than our peers. And I would say not that we are overcharging. We don't. We charge what we believe is the appropriate price.
I just think a lot of banks are not charging enough for their loans. So it's a discipline. We have the benefit of having strong loan demand, and we can pick and choose our terms. I've been with the bank almost a quarter of a century. I can honestly say I have the best management team we've ever had to lead this organization. And lastly, the board and the management have a high percentage of stock ownership, over 30%. So we have skin in the game. And so we want to see this bank succeed. We want to see it high performing. But more importantly, we want to see it run safe and sound and sustainable. All these things combined bring us the best-in-class performance. So we're all very, very happy to report to you our results. Thank you for attending.
With that, I will give it back to Mr. Dallas.
Thank you, Jim. Next on the agenda, we will try to provide answers to any questions that have been submitted during this morning's meeting. Mr. Johnny Wheeler, are there any questions for us this morning?
There are no questions at this time.
Thank you. I would now like to proceed with the remainder of today's meeting by closing the polls and requesting the report of the inspector of election. Ms. Mills, may I please have the final tally on the voting for the three proposals presented today?
Mr. Chairman, the first proposal for election of directors are as follows. Dr. S. Brody, 7,249,496 voted for. The percentage voted, 91.52%. Votes withheld, 671,738. Raj Patel, 7,826,377 voted for. Percentage voted for, 98.80%. Withheld, 94,857. Donald E. Souders, Jr., 6,906,625 voted for. Percentage voted for, 87.19%. Withheld, 1,014,609. For proposal number two, the ratification of Wolf & Company, P.C. as the company's independent external auditors, voted for, 8,865,915. Percentage voted for, 99.64%. Voted against, 30,913. Proposal number three, to approve on an advisory basis the executive compensation of the company's named executive officers, voted for, 7,348,406. Percentage voted, 82.58%. Voted against, 317,636. Thank you.
Thank you, Ms. Mills. In closing, I'd like to thank those in attendance for participating in today's meeting and for your continued support of Unity Bancorp. I look forward to all of you joining us next year. There being no further business to come before today's annual meeting, I would like to entertain a motion to adjourn.
I will make a motion to adjourn.
Motion to adjourn by Mr. Tucker, second by Mr. Maricondo. All in favor?
Aye.
Aye. The 2024 annual meeting of the shareholders of Unity Bancorp is adjourned. Thank you, and I look forward to seeing you all next year.
Thank you. This concludes the meeting. You may now disconnect.