NOTE 4 – MORTGAGE BANKING ACTIVITIES

The Company’s mortgagebanking activities include mandatory delivery loan sales, forward sales contracts usedto manage residential

loan pipeline price risk, utilization of warehouse lines to fund secondarymarket residential loan closings, and residential mortgage

servicing.

Residential Mortgage Loan Production

The Company originates, markets, and services conventional andgovernment-sponsored residential mortgage loans.Generally,

conforming fixed rate residential mortgage loans are held for sale in thesecondary market and non-conforming and adjustable-rate

residential mortgage loans may be held for investment.The volume of residential mortgage loans originated for sale and secondary

market prices are the primary drivers of origination revenue.

Residential mortgage loan commitments are generally outstanding for 30to 90 days, which represents the typical period from

commitment to originate a residential mortgage loan to when the closedloan is sold to an investor.Residential mortgage loan

commitments are subject to both credit and price risk.Credit risk is managed through underwriting policies and procedures, including

collateral requirements, which are generally accepted by the secondaryloan markets.Price risk is primarily related to interest rate

fluctuations and is partially managed through forward sales of residentialmortgage-backed securities (primarily to-be announced

securities, or TBAs) or mandatory delivery commitments with investors.

The unpaid principal balance of residential mortgage loans held for sale,notional amounts of derivative contracts related to residential

mortgage loan commitments and forward contract sales and their relatedfair values are set- forth below.

June 30, 2022

December 31, 2021

Unpaid Principal

Unpaid Principal

(Dollars in Thousands)

Balance/Notional

Fair Value

Balance/Notional

Fair Value

Residential Mortgage Loans Held for Sale

$

47,805

$

48,708

$

50,733

$

52,532

Residential Mortgage Loan Commitments ("IRLCs")

(1)

62,201

934

51,883

1,258

Forward Sales Contracts

(2)

31,500

(45)

48,000

(7)

$

49,597

$

53,783

(1)

Recorded in other assets at fair value

(2)

Recorded in other assets and other liabilities at fair valueat June 30, 2022 and December 31, 2021, respectively

The Company had

no

residential mortgage loans held for sale that were 90 days or more outstanding or onnonaccrual at June 30,

2022, and loans held for sale that were 30-69 days outstanding totaled $

0.2

million at December 31, 2021.

Mortgage banking revenue was as follows:

Residential Mortgage Servicing

The Company may retain the right to service residential mortgage loanssold.The unpaid principal balance of loans serviced for

others is the primary driver of servicing revenue.

The following represents a summary of mortgage servicing rights.

Conforming conventional loans serviced by the Company are sold to FNMA ona non-recourse basis, whereby foreclosure losses are

generally the responsibility of FNMA and not the Company.The government loans serviced by the Company are secured through

GNMA, whereby the Company is insured against loss by the Federal HousingAdministration or partially guaranteed against loss by

the VeteransAdministration.At June 30, 2022, the servicing portfolio balance consisted of the followingloan types: FNMA (

50

%),

GNMA (

7

%), and private investor (

43

%).FNMA and private investor loans are structured as actual/actual payment remittance.

The Company had $

0.4

million and $

2.0

million in delinquent residential mortgage loans currently in GNMA poolsserviced by the

Company at June 30, 2022 and December 31, 2021, respectively.The right to repurchase these loans and the corresponding liability

has been recorded in other assets and other liabilities, respectively,in the Consolidated Statement of Financial Condition.For the

three and six months ended June 30, 2022, the Company repurchased$

0.6

million and $

1.0

million in delinquent residential loans

currently in GNMA pools.For the three and six months ended June 30, 2021, the Company repurchased $

0.7

million and $

2.2

million, respectively,in delinquent residentialloans in GNMA pools.When delinquent residential loans are repurchased, the

Company has the intention to modify their terms and include the loans innew GNMA pools.

Activity in the capitalized mortgage servicing rights was as follows:

The Company did

no

t record any permanent impairment losses on mortgage servicing rights for thethree months ended June 30, 2022

and June 30, 2021.

The key unobservable inputs used in determining the fair value of the Company’smortgage servicing rights were as follows:

Changes in residential mortgage interest rates directly affectthe prepayment speeds used in valuing the Company’smortgage

servicing rights.A separate third party model is used to estimate prepayment speeds based on interest rates, housingturnover rates,

estimated loan curtailment, anticipated defaults, and other relevant factors.The weighted average annual prepayment speed was

10.48

% at June 30, 2022 and

15.85

% at December 31, 2021.

WarehouseLine Borrowings

The Company has the following warehouse lines of credit and master repurchaseagreements with various financial institutions at June

30, 2022.

Warehouseline borrowings are classified as short-term borrowings.At December 31, 2021, warehouse line borrowings totaled $

29.0

million. At June 30, 2022, the Company had residential mortgage loansheld for sale and construction loans held for investment

pledged as collateral under the above warehouse lines of credit and master repurchaseagreements.The above agreements also contain

covenants which include certain financial requirements, includingmaintenance of minimum tangible net worth, minimum liquid

assets, and maximum debt to net worth ratio, as defined in the agreements.The Company was in compliance with all significant debt

covenants at June 30, 2022.

The Company has extended a $

50

million warehouse line of credit to CCHL, a

51

% owned subsidiary entity.Balances and

transactions under this line of credit are eliminated in the Company’sconsolidated financial statements and thus not included in the

total short term borrowings noted on the Consolidated Statement ofFinancial Condition.The balance of this line of credit at June 30,

2022 and December 31, 2021 was $

13.3

million and $

14.8

million, respectively.