Derivative Instruments

9 Months Ended

Sep. 30, 2019

Derivative Instruments and Hedging Activities Disclosure [Abstract]

The Company periodically holds interest rate derivative instruments to mitigate exposure to changes in interest rates, to predominantly one-month LIBOR, with $384.0 million and $427.0 million of such borrowings at September 30, 2019 and December 31, 2018, respectively, tied to this rate. As a matter of policy, management does not use derivatives for speculative purposes. During 2016, the Company entered into one interest rate swap agreement which has a notional outstanding amount of $100.0 million, with a remaining term of 19 months as of September 30, 2019. The derivative was designated in a cash flow hedging relationship.

The Company evaluated the effectiveness of the swap to hedge the interest rate risk associated with its variable rate debt and concluded at the swap inception date that the swap was highly effective in hedging that risk. The Company evaluates the effectiveness of the hedging relationship on an ongoing basis.

The Company estimates the fair value of derivative instruments using a discounted cash flow technique and has used creditworthiness inputs that corroborate observable market data evaluating the Company’s and counterparty’s risk of non-performance. Valuation of the derivative instruments requires certain assumptions for underlying variables and the use of different assumptions would result in a different valuation. Management believes it has applied assumptions consistently during the period. The Company applies hedge accounting and accounts for the change in fair value of its cash flow hedges through other comprehensive income for all derivative instruments.

The net fair value of the interest rate swap was a $245 thousand net liability and a $1.7 million net asset as of September 30, 2019 and December 31, 2018, respectively. The Company recorded a decrease to interest expense of $0.1 million and $0.5 million during the three and nine months ended September 30, 2019, respectively, and a decrease of $0.1 million and $0.2 million to interest expense during the three and nine months ended September 30, 2018, respectively, from derivative instruments.

Effect of Derivative Instruments on Earnings in the Statements of Income and on Comprehensive Income

The following tables provide additional information about the financial statement effects related to the cash flow hedges for the three and nine months ended September 30, 2019 and 2018:



Derivatives in Cash Flow Hedging Relationships	Amount of (Loss) Gain Recognized in OCI on Derivatives (Effective Portion)					Location of Gain Reclassified from Accumulated OCI into Income (Effective Portion)	Amount of Gain Recognized from Accumulated OCI into Income (Effective Portion)
	Three Months Ended September 30,						Three Months Ended September 30,
	2019			2018			2019		2018
	(in thousands)						(in thousands)
Interest rate contracts	$	(223	)	$	221	Interest expense	$	119	$	113
Total	$	(223	)	$	221	Total	$	119	$	113



Derivatives in Cash Flow Hedging Relationships	Amount of (Loss) Gain Recognized in OCI on Derivatives (Effective Portion)					Location of Gain Reclassified from Accumulated OCI into Income (Effective Portion)	Amount of Gain Recognized from Accumulated OCI into Income (Effective Portion)
	Nine Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019		2018
	(in thousands)						(in thousands)
Interest rate contracts	$	(1,907	)	$	1,636	Interest expense	$	516	$	182
Total	$	(1,907	)	$	1,636	Total	$	516	$	182

The effective portion of the change in fair value on a derivative instrument designated as a cash flow hedge is reported as a component of other comprehensive income and is reclassified into earnings in the period during which the transaction being hedged affects earnings or it is probable that the forecasted transaction will not occur. The ineffective portion of the hedges, if any, is recorded in earnings in the current period. There was no ineffectiveness in the hedge for the period ended September 30, 2019.

Counterparty Credit Risk

The Company evaluates the creditworthiness of the counterparties under its hedging agreements. The counterparty for the interest rate swap was a large financial institution in the United States that possessed an investment grade credit rating. Based on this rating, the Company believes that the counterparty was creditworthy and that their continuing performance under the hedging agreement was probable and did not require the counterparty to provide collateral or other security to the Company.

Subsequent Event

On October 3, 2019, the Company entered into another fixed-rate interest swap agreement to mitigate the exposure on the variable rate borrowings in connection with the Fourth Amended and Restated Credit Agreement. The swap is a derivative instrument designated as a cash flow hedge that will be recorded at fair value as either an asset or a liability. The swap has a notional amount of $100 million and matures in June 2024.