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 the secondarymarket 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 secondary loan markets.Price risk is primarily related to interest rate

fluctuations and is partially managed through forward sales of residential mortgage-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, notionalamounts of derivative contracts related to residential

mortgage loan commitments and forward contract sales and their related fair valuesare set- forth below.

(2)

Recorded in other liabilities and other assets at fair valueat March 31, 2023 and December 31, 2022, respectively

At March 31, 2023, the Company had $

0.3

million in residential mortgage loans held for sale 30-89 days past due and $

0.3

million of

loans were on nonaccrual status. At December 31, 2022, the Company had$

0.6

million of residential mortgage loans held for sale 30-

89 days past due and $

0.1

million of loans were on nonaccrual status.

Mortgage banking revenue was as follows:

Three Months Ended March 31,

(Dollars in Thousands)

2023

2022

Net realized gains on sales of mortgage loans

$

3,192

$

5,136

Net change in unrealized gain on mortgage loans held for sale

529

(975)

Net change in the fair value of mortgage loan commitments

(IRLCs)

527

(141)

Net change in the fair value of forward sales contracts

(402)

857

Pair-Offs on net settlement of forward sales contracts

(1)

2,255

Mortgage servicing rights additions

1,034

632

Net origination fees

2,116

1,182

Total mortgage bankingrevenues

$

6,995

$

8,946

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 FederalNational Mortgage Association (“FNMA”) on a non-

recourse basis, whereby foreclosure losses are generallythe responsibility of FNMA and not the Company.The government loans

serviced by the Company are secured through the Government NationalMortgage Association (“GNMA”), whereby the Company is

insured against loss by the Federal Housing Administration or partially guaranteedagainst loss by the VeteransAdministration.At

March 31, 2023, the servicing portfolio balance consisted of the followingloan types: FNMA (

48

%), GNMA (

1

%), and private

investor (

51

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

The Company had

no

delinquent residential mortgage loans in GNMA pools serviced by the Companyat March 31, 2023 and $

0.3

at

December 31, 2022, respectively.The right to repurchase these loans and the corresponding liability has beenrecorded in other assets

and other liabilities, respectively,in the Consolidated Statement of Financial Condition.For the three months ended March 31, 2023

and March 31, 2022, the Company repurchased $

0.9

million and $

0.4

million in delinquent residential loans from the GNMA pools.

When delinquent residential loans are repurchased, the Company hasthe intention to modify their terms and include the loans in new

GNMA pools.

Activity in the capitalized mortgage servicing rights was as follows:

Three Months Ended March 31,

(Dollars in Thousands)

2023

2022

Beginning balance

$

6,067

$

3,774

Additions due to loans sold with servicing retained

1,135

632

Deletions and amortization

(401)

(405)

Ending balance

$

6,801

$

4,001

At March 31, 2023, we recorded the sale of $

334

million (unpaid principal balance) in FNMA mortgage servicing rights thatis

pending FNMA approval.The book value of the mortgage servicing rights of $

2.3

million and the pending gain on sale of $

1.38

million were recorded as a secured borrowing in Other Liabilities within the ConsolidatedFinancial Statement of Condition.

Subsequent to March 31, 2023, FNMA approval was obtained.

The Company did

no

t record any permanent impairment losses on mortgage servicing rights for thethree months ended March 31,

2023 or 2022.

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

March 31, 2023

December 31, 2022

Minimum

Maximum

Minimum

Maximum

Discount rates

9.51%

12.00%

9.50%

12.00%

Annual prepayment speeds

7.12%

19.55%

12.33%

20.45%

Cost of servicing (per loan)

$

85

$

95

$

85

$

95

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

21.20

% at March 31, 2023 and

17.22

% at December 31, 2022.

WarehouseLine Borrowings

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

March 31, 2023.

Amounts

(Dollars in Thousands)

Outstanding

$

75

million master repurchase agreement without defined expiration.Interest is at the SOFR rate plus

2.00%

to

3.00%

, with a floor rate of

3.25%

.A cash pledge deposit of $

0.5

million is required by the lender.

8,309

$

60

million warehouse line of credit agreement expiring in

December 2023

.Interest is at the SOFR plus

2.25%

,

to

3.25%

.

13,864

Total WarehouseBorrowings

$

22,173

Warehouseline borrowings are classified as short-term borrowings.At December 31, 2022, warehouse line borrowings totaled $

50.2

million. At March 31, 2023, the Company had residential mortgageloans held for sale and constructionloans 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 March 31, 2023.

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 March

31, 2023 and December 31, 2022 was $

32.8

million and $

22.9

million, respectively.