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 and government-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 secondaryloan 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 assets at fair value at June 30,2023and December 31, 2022, respectively

At June 30, 2023, the Company had

no

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

0.1

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

June 30,

Six Months Ended

June 30,

(Dollars in Thousands)

2023

2022

2023

2022

Net realized gains on sales of mortgage loans

$

3,547

$

4,800

$

6,739

$

9,935

Net change in unrealized gain on mortgage loans held for sale

(894)

79

(365)

(895)

Net change in the fair value of mortgage loan commitments (IRLCs)

(75)

(183)

452

(324)

Net change in the fair value of forward sales contracts

316

(896)

(86)

(38)

Pair-Offs on net settlement of forward sales contracts

96

1,954

95

4,209

Mortgage servicing rights additions

632

1,457

1,666

2,088

Net origination fees

2,215

1,854

4,331

3,036

Total mortgage bankingrevenues

$

5,837

$

9,065

$

12,832

$

18,011

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 partiallyguaranteed against loss by the VeteransAdministration.At

June 30, 2023, the servicing portfolio balance consisted of the followingloan types: FNMA (

7

%), GNMA (

1

%), and private investor

(

92

%).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 June 30, 2023 and $

0.3

at

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

and other liabilities, respectively,in the Consolidated Statement of Financial Condition.For the three and six months ended June 30,

2023, the Company repurchased $

0.5

million and $

1.5

million, respectively, indelinquent residential loans that were in GNMA pools.

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

0.6

million and $

1.0

million, respectively, in delinquent

residential loans from the GNMA pools. When delinquent residential loansare repurchased, the Company has the 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

June 30,

Six Months Ended

June 30,

(Dollars in Thousands)

2023

2022

2023

2022

Beginning balance

$

6,801

$

4,001

$

6,067

$

3,774

Additions due to loans sold with servicing retained

632

1,457

1,767

2,088

Deletions and amortization

(406)

(372)

(807)

(776)

Sale of servicing rights

(1)

(2,287)

-

(2,287)

-

Ending balance

$

4,740

$

5,086

$

4,740

$

5,086

The Company sold an MSR portfolio with an unpaid principal balance of $

334

million for a sales price of $

4.0

million,

recognizing a $

1.38

million gain on sale, recordedin other noninterest income on the ConsolidatedStatement of Income.

The Company did

no

t record any permanent impairment losses on mortgage servicing rights for thethree months ended June 30, 2023

or 2022.

The key unobservable inputs used in determining the fair value ofthe Company’s mortgage servicing rights wereas follows:

June 30, 2023

December 31, 2022

Minimum

Maximum

Minimum

Maximum

Discount rates

9.51%

12.00%

9.50%

12.00%

Annual prepayment speeds

11.26%

17.07%

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

16.42

% at June 30, 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 June

30, 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.

11,105

$

60

million warehouse line of credit agreement expiring in

December 2023

.Interest is at the SOFR plus

2.25%

,

to

3.25%

.

16,948

Total WarehouseBorrowings

$

28,053

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

50.2

million. At June 30, 2023, the Company had residentialmortgage loans held 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, 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 June 30,

2023 and December 31, 2022 was $

42.8

million and $

22.9

million, respectively.