Hello, welcome to the Annual Meeting of Shareholders of Unity Bancorp, Inc. 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. Good morning, ladies and gentlemen. My name is David Dallas, and I'm 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 2023 Annual Meeting of the Shareholders of Unity Bancorp. At Unity Bank, our mission is to cultivate lasting relationships with our customers by providing personalized banking services that resonate within the communities we serve. Our goal is to offer the same level of attention, flexibility, and responsiveness to individuals and businesses of all sizes. Due to our commitment to exceptional customer service and high-quality loan and deposit products, we have expanded our branch operations to Lakewood and Fort Lee, New Jersey. We also plan on opening our first Morris County, New Jersey branch in Lake Hiawatha later this summer.
Our diverse team of bankers will focus on providing credit and treasury solutions to all members of the communities we serve. Recently, the banking industry experienced the largest bank failure since the great financial crisis. These failures, largely resulting from the challenging interest rate environment, have highlighted the importance of managing risk for banks of all sizes. We remain vigilant in our risk management practices and have positioned our balance sheet to mitigate these risks and ensure the safety and soundness of our institution. In addition, Unity Bank is committed to our mission of supporting our local communities. As a community bank, we understand the importance of providing access to financial services for individuals and small businesses who might not have access to capital.
When you bank with Unity Bank, your deposits are used to support and develop your community, whether it's helping a small business get started or helping a family buy their first home. Our focus is on building strong relationships with our customers and providing the resources they need to grow. Thus our tagline, "Grow With Us." 2022 was another record year for the bank, posting its highest annual profit of $38.5 million with a return on average assets of 1.80%. Unity Bank was also selected as a Top 25 bank in Bank Director, a national ranking of the best publicly traded banks. Mr. Hughes will further elaborate on more of Unity's accomplishments, the year's highlights, Unity's strategic growth, and the 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 for the proposals voted for. As you may know, this year our shareholders of record have been asked to cast their votes on the following proposals. Number one, for the election of Unity's four nominees for director. Secondly, for the adoption of the company's 2023 Equity Compensation Plan. If you have not 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 Bank's Corporate Secretary. Would you both please state your names? Linda?
Linda McDermott.
George?
George Boyan.
Thank you. Today's Inspector of Election is Ms. Marleen Grandeson-Mills , a representative from the company stock transfer agent, Computershare. 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 8,115,224, representing 76.74% 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 this morning's meeting. If any question is not answered, please feel free to reach out through our investor relations link on the Unity Bank website. Also, within the virtual meeting portal, you should see a link to view our 2022 annual report and 2023 proxy report. Within the proxy report you will find a full list of our directors and ex-executive management team.
Next item on the agenda is the company's report to our shareholders. I would like to now turn the meeting over to our President and Chief Executive Officer, James Hughes. Jim?
Thank you, David. Welcome and good morning. It's my honor and privilege to present the operating results for 2022. Before we do that, let's just spend a couple of seconds on our first quarter results. We released our earnings a week ago last Monday, as the slide shows, $10.3 million of earnings, which is a high water mark for Unity Bank. Our performance is still in the top quartile of our peer group. Our operating ratios continue to be very, very strong. The only dark side of the earnings release was the decline in the net interest margin.
As Mr. Dallas alluded to, the interest rate is very, very challenging for all banks, as the cost of funding, the cost of deposits is outpacing the ability to reprice the cost of, or the interest-bearing assets. That should continue as long as the yield curve stays inverted, but I'm very confident that we will continue to outperform our peers. Looking at the following chart, you can see the five-year earnings growth of the bank. You know, over 5 years, approximately 75% growth in absolute dollars and on a per share basis. The slide looks a little inconsistent. You know, in 2020, we had the pandemic, and we took a very large provision, about $7 million, and then 2021's numbers were inflated with PPP revenue. Excluding those two items, you'd have a probably a more traditional bar chart.
Again, very strong earnings, and we expect to continue to have earnings growth in the future. Deposits are more important than ever. We were fortunate enough to have a couple of branches in the pipeline. We opened up our 19th branch in Ocean County. Doing extremely well, about $35 million in deposits already. We opened up in Fort Lee with about $25 million in deposits in the last 2-3 months of opening. We look forward to opening our first branch in Morris County in Parsippany, in enclave Lake Hiawatha, which has an Asian Indian population, so we'll do extremely well there. That should open at or around July 1st. The next slide really shows the story of 2022 for the bank.
On the left side, you can see tremendous loan growth, almost 28% growth. Overall, the growth was really comprised of two factors. One, loan originations being very, very strong and the slowdown of loan prepayments. If you look at the residential division, they did about $400 million in 2021. They did about the same number in 2022. The product mix was substantially different. A lot less saleable product, a lot more portfolio lending in 2022. That accounts for the increase from $400 million to $600 million in outstanding. Really what really changed there was the speed of prepayments, slowed down to a crawl. We used to have prepayments about $10 million a month or more. Now it's down to about $3 million a month.
That's really the primary reason that the portfolio grew so strongly. Residential construction, again, up 36%. It wasn't that we outpaced the prior year. Our origination volume was consistent with 2021. What's caused that increase was really the slowdown of finishing jobs due to the pandemic, the supply chain issues. Instead of finishing a home in 18 months, it's now taking 30 months. That should correct itself in 2023. We should probably see actually a decline in residential construction lending. Commercial loan was absolutely due to loan volume. We did about $500 million in commercial loans in 2022. Normally we were pacing around $300 million-$350 million in prior years.
It was a very, very strong year for total loan growth. The negative side is you look at the right side of the slide, total deposits were relatively flat. When rates increase, money moves out of the banking system. We're not immune to that. We brought in a lot of new relationships in 2022. Despite all of our efforts, deposits were flat, which has put in our loan and deposit ratio, as many banks have, under pressure. Our current loan and deposit ratio is around 170%. Our policy is 110%. We're doing all the things possible to get it back into compliance, opening up more branches to grow deposits, improving our sales efforts on deposits. We're no longer doing investment property lending on the commercial side.
I'm very confident by the end of the year, our deposit ratios should be back in line. The next two slides show, again, just the composition of our total loans and our total loan growth over 5 years. You can see the growth from $409 million to $605 million in resi, and then $932 million to $1.2 billion in commercial. On a deposit side, again, a different rate environment. People are very, very aware of the fact that you can get 4%-5% on free money. Money has fallen out of non-interest bearing, $529 million to $494 million. Still relatively strong relative to our peer group. We're funding a lot of the growth with high costs, unfortunately, deposits and CDs.
That accounts for the growth from 2.9%2 to 4.25%. The next page is our income summary. 2022 was a record year for us, up 6.5% in earnings. 2021 had a lot of PPP revenue. 2022, what I would describe as more core-like earnings. There's a slide for each of the categories here which we can go over in detail. The point here, again, a great year on our performance ratio is 180%. Return on average assets 17%. On return on average equity, the decline there was just really solely due to the growth in equity. The real highlight was net interest margin at 4.40%, one of the highest margins in the state.
Going to the next slide, you can see net interest income in absolute dollars went from $53 million in 2018 to $90 million, with a margin up at a high point of 4.40%. Again, the margin is expected to decline in 2023 due to the rate environment. Net interest income may also come under pressure as the cost of deposits continues to increase. Non-interest income, down 33% from the prior year. What's driving that? Service and loan fee income. As rates go up, prepayments slow down, you get less prepayment. That accounts for the decline in service and loan fee income. We're gonna go back to the business of selling our SBA production. We started that in 2022, that should continue into 2023.
The decline in the gain on mortgage sales has nothing to do with really the decline in mortgage volume. It has to do with the products that we are getting. Purchase money mortgages are down due to the higher rate environment. We had fewer sellable products in 2022. Security losses. We do have a small investment portfolio of bank equities. The majority of this loss has not to do with the bank equities, but really investments in bank preferred stock for high yielding dividends. That's marked to market each quarter. Other income was unusually high in 2022. We unwound a swap that was in the money for about $1.2 million, I think in June of last year. The next slide shows non-interest expense. Good cost control overall.
Despite all the inflationary pressures, we were able to control our costs at $42 million, up 4%-4.4% from the prior year. The largest increase was comp and benefits. You know, certainly salary inflation there is a component. We also have a higher headcount due to increasing staffing in back office and in the new branches. All the other areas are basically down from prior periods with the exception of occupancy, again, due to the new locations. The next slide shows book value and share price. You know, our goal is to continue to build the book value and our target on average, we're growing book value about $3 a share per year.
You know, in the good old days, banks used to trade at 150% a book, then in 2020 the pandemic happened, that brought that down. There's always like a little story with each of these declination. Then a back up with the 150% changed to like 130%, 135% a book. Now, first quarter with what's going on in the market, the concern about bank liquidity, which was really not germane to community banks, but to larger regional banks. All banks are under stress with the inverted yield curve. That's, that's the reality of it's gonna be a tough market for all financial institutions. We are continuing to make record earnings, which is a positive.
Uh, and so, uh, if you go to the next slide, uh, and the story here is, you know, we want to, uh, keep our dividend payout ratio. We have been increasing our dividends each year by a penny. Uh, whether that continues or not is yet to be determined by the board. But the story here is the building of, uh, book value. And so why is that important? It, it provides us the opportunity to repurchase our shares when we have opportunities. You know, so I look at what's going on today. Yes, it hurts the banking industry, but banks stocks in my opinion are completely undervalued. And so for the first quarter we bought three hundred and thirty-eight thousand shares of stock to make, uh, to take advantage of it. And we could not have that flexibility if we had a high dividend payout ratio.
We like to build capital, and we like to be opportunistic with buying back our stock when situations like this arise. Just the last slide, again, just showing that we wanna be a sustainable organization at all times. Our community bank leverage ratio and our capital ratios are very strong as depicted by the last slide. With that, I'd be happy to take any questions if anybody has any.
No questions.
No questions? Okay. Back to you, David.
Thank you, Jim. We'd 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 two proposals presented at this meeting?
Proposal one for the election of directors. The current vote total are as follows: Wayne Courtright. Votes in favor are 7,822,016 votes. Votes withheld, 293,208. David D. Dallas. Votes in favor are 7,799,507. Votes withheld, 315,716. Robert H. Dallas, II. Votes in favor, 7,159,255. Votes withheld, 955,968. Peter E. Maricondo. Votes in favor, 6,578,670. Votes withheld, 1,536,554. For proposal two for the adoption of the company's 2023 Equity Compensation Plan. Votes in favor, 7,682,899. Votes against, 267,300.
Votes abstain, 165,024. Thank you.
Thank you, Ms. Mills. In closing, I'd like to thank all attendees and participating in today's meeting and your continued support of Unity Bank. 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.
Motion.
Motion by Mr. Hughes, second by Raj Patel, Director. All in favor? Aye. Thank you. The 2023 annual meeting of the shareholders of Unity Bank is adjourned. Thank you all again. Good day.
This concludes the meeting. You may now disconnect.