NOTE 6 – DERIVATIVE FINANCIAL INSTRUMENTS AND REPURCHASE AGREEMENTS

Risk Management Objective of Using Derivatives

The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company manages its exposures to a wide variety of business and operational risks primarily through management of its core business activities. The Company manages economic risks, including interest rate, liquidity and credit risk, primarily by managing the amount, sources and duration of its assets and liabilities and through the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing and duration of the Company’s known or expected cash payments principally related to certain variable rate assets.

Non-designated Hedges

The Company does not use derivatives for trading or speculative purposes. Derivatives not designated as hedges are not speculative and result from a service the Company provides to certain customers. The Company executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. Those interest rate swaps are simultaneously offset by interest rate swaps that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions. As the interest rate swaps associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer swaps and the offsetting swaps are recognized directly in earnings. As of June 30, 2018 and December 31, 2017, the notional amount of customer-facing swaps was approximately $49.2 million and $39.3 million, respectively. The same amounts were offset with third party counterparties, as described above.

The Company has minimum collateral posting thresholds with its derivative counterparties. As of June 30, 2018 and December 31, 2017, the Company had no posted cash as collateral with correspondents. At June 30, 2018, the Company held cash from counterparties as collateral in the amount of $1.0 million.

The table below presents the fair value of the Company’s derivative financial instruments, as well as their classification on the balance sheet, as of June 30, 2018 and December 31, 2017.

Asset Derivatives

Liability Derivatives

June 30, 2018

Balance Sheet

Fair

Balance Sheet

Fair

($ in thousands)

Location

Value

Location

Value

Derivatives not designated as hedging instruments:

Interest rate contracts

Other Assets

1,415

Other Liabilities

1,415

Asset Derivatives

Liability Derivatives

December 31, 2017

Balance Sheet

Fair

Balance Sheet

Fair

($ in thousands)

Location

Value

Location

Value

Derivatives not designated as hedging instruments:

Interest rate contracts

Other Assets

698

Other Liabilities

698

The Company’s derivative financial instruments had no net effect on the income statements for the three and six months ended June 30, 2018 and 2017.

Securities Sold Under Repurchase Agreements

State Bank has retail repurchase agreements to facilitate cash management transactions with commercial customers. These obligations are secured by agency and mortgage-backed securities and such collateral is held by the Federal Home Loan Bank. The agreements mature within one month. These repurchase agreements are secured by agency and mortgage-backed securities with a market value of $21.2 million. These securities have various maturity dates beyond 2018.