COMMITMENTS AND CONTINGENCIES

6 Months Ended

Jun. 30, 2020

Commitments and Contingencies Disclosure [Abstract]

COMMITMENTS AND CONTINGENCIES

16. COMMITMENTS AND CONTINGENCIES

Secondary Market Loan Sales

Given the current interest rate environment and the Company's overall asset and liability management approach, the Company typically sells newly originated residential mortgage loans in the secondary market to mortgage loan aggregators and on a more limited basis, to government sponsored entities (GSEs) such as FHLMC, FNMA, and the FHLB. Loans held for sale are reflected on the unaudited Consolidated Statements of Financial Condition at fair value with changes in the value reflected in the unaudited Consolidated Statements of Income. Gains and losses are recognized at the time of sale. The Company periodically retains the servicing rights on residential mortgage loans sold which results in monthly service fee income. The mortgage servicing rights are included in intangible assets in the unaudited Consolidated Statements of Financial Condition. Otherwise, the Company sells loans with servicing released on a nonrecourse basis. Rate-locked loan commitments that the Company intends to sell in the secondary market are accounted for as derivatives under ASC 815, Derivatives and Hedging (ASC 815).

The Company does not sell loans with recourse, except for standard loan sale contract provisions covering violations of representations and warranties and, under certain circumstances, early payment default by the borrower. These are customary repurchase provisions in the secondary market for residential mortgage loan sales. These provisions may include either an indemnification from loss or the repurchase of the loans. Repurchases and losses have been rare and no provision is made for losses at the time of sale. There were no repurchases during the six months ended June 30, 2020 as compared to one repurchase for $0.2 million during the six months ended June 30, 2019.

Swap Guarantees

The Company entered into agreements with four unrelated financial institutions whereby those financial institutions entered into interest rate derivative contracts (interest rate swap transactions) directly with customers referred to them by the Company. Under the terms of the agreements, those financial institutions have recourse to us for any exposure created under each swap transaction, only in the event that the customer defaults on the swap agreement and the agreement is in a paying position to the third-party financial institution. This is a customary arrangement that allows us to provide access to interest rate swap transactions for our customers without creating the swap ourselves. These swap guarantees are accounted for as credit derivatives.

At June 30, 2020 and December 31, 2019, there were 213 and 172 variable-rate to fixed-rate swap transactions between the third-party financial institutions and the Company's customers, respectively. The initial notional aggregate amount was approximately $1.1 billion at June 30, 2020 compared to $941.0 million at December 31, 2019. At June 30, 2020, maturities ranged from under 1 year to 15 years. The aggregate net market value of these swaps to the customers was a liability of $91.7 million at June 30, 2020 and a liability of $26.4 million at December 31, 2019. At June 30, 2020, 211 swaps, with a liability of $93.0 million, were in paying positions to a third party; however, none of the Company's customers were in default of the swap agreements. There were no payments made by the Company under the agreements for the three and six months ended June 30, 2020 and June 30, 2019.

Unfunded Lending Commitments

At June 30, 2020 and December 31, 2019, the allowance for credit losses of unfunded lending commitments were $7.8 million and $1.5 million, respectively. The balance at June 30, 2020 was determined using the CECL methodology, which included a $3.0 million adjustment to retained earnings at the time of adoption. A provision for unfunded lending commitments of $3.4 million and $3.3 million was recognized during the three and six months ended June 30, 2020, respectively, and a provision for unfunded lending commitments of $0.3 million and $0.4 million was recognized during the three and six months ended June 30, 2019, respectively.