Derivative Financial Instruments

9 Months Ended

Sep. 30, 2019

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Financial Instruments

DERIVATIVE FINANCIAL INSTRUMENTS

Risk Management Objective of Using Derivatives

We are exposed to certain risks arising from both our business operations and economic conditions. We principally manage our exposures to a wide variety of business and operational risks through management of our core business activities. We manage economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of our debt funding and the use of derivative financial instruments. Specifically, we enter into derivative financial instruments to manage exposures that arise from business activities that result in our receipt or payment of future cash amounts, the value of which are determined by interest rates. Our derivative financial instruments are used to manage differences in the amount, timing, and duration of our known or expected cash payments principally related to our borrowings.

Cash Flow Hedges of Interest Rate Risk

Our objectives in using interest rate derivatives are to add stability to interest expense and to manage our exposure to interest rate movements. To accomplish these objectives, we primarily use interest rate swaps as part of our interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for us making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. The change in the fair value of derivatives designated and that qualify as cash flow hedges is recorded on our consolidated balance sheet in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During the nine months ended September 30, 2019 and 2018, such derivatives were used to hedge the variable cash flows associated with existing variable-rate debt.

As of September 30, 2019 and December 31, 2018, $300 million of our variable-rate debt is hedged by swaps with notional values totaling $300 million.

Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on our variable-rate debt. We estimate that over the next twelve months an additional $0.1 million will be reclassified to earnings as an increase to interest expense.

Non-designated Hedges

We do not use derivatives for trading or speculative purposes. During the nine months ended September 30, 2019 and 2018 we did not have any derivatives that were not designated as cash flow hedges for accounting purposes.

Tabular Disclosure of Fair Values of Derivative Instruments on the Consolidated Balance Sheets

The table below presents the fair value of our derivative financial instruments as well as their classification on the consolidated balance sheet as of September 30, 2019 and December 31, 2018.

	Derivative Assets					Derivative Liabilities
	Balance Sheet Location	Fair Value at				Balance Sheet Location	Fair Value at
(Dollars in thousands)		September 30, 2019		December 31, 2018			September 30, 2019		December 31, 2018
Derivatives designated as hedging instruments:
Interest rate swaps	Derivative assets	$	143	$	5,982	Derivative liabilities	$	7,955	$	—
Total		$	143	$	5,982		$	7,955	$	—

Tabular Disclosure of the Effect of Derivative Instruments on the Statements of Comprehensive Income

The table below presents the effect of our interest rate swaps on the statements of comprehensive income for the three and nine months ended September 30, 2019 and 2018.

(Dollars in thousands)	Amount of Gain or (Loss) Recognized in OCI on Derivative (Effective Portion)			Location of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)	Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)		Total Amount of Interest expense Presented in the Consolidated Statements of Income
Three months ended September 30, 2019	$	(3,226	)	Interest expense	$	420	$	(6,665	)
Three months ended September 30, 2018	$	1,132		Interest expense	$	748	$	(4,934	)
Nine months ended September 30, 2019	$	(12,189	)	Interest expense	$	1,610	$	(19,969	)
Nine months ended September 30, 2018	$	9,234		Interest expense	$	1,562	$	(14,667	)

Tabular Disclosure Offsetting Derivatives

The table below presents a gross presentation, the effects of offsetting, and a net presentation of our derivatives at September 30, 2019 and December 31, 2018. The net amounts of derivative assets or liabilities can be reconciled to the tabular disclosure of fair value. The tabular disclosure of fair value provides the location that derivative assets and liabilities are presented on the consolidated balance sheets.

Offsetting of Derivative Assets
	Gross Amounts of Recognized Assets		Gross Amounts Offset in the Consolidated Balance Sheet		Net Amounts of Assets Presented in the Consolidated Balance Sheet		Gross Amounts Not Offset in the Consolidated Balance Sheet
(In thousands)							Financial Instruments			Cash Collateral Received		Net Amount
September 30, 2019	$	143	$	—	$	143	$	(143	)	$	—	$	—
December 31, 2018	5,982		—		5,982		—			—		5,982

Offsetting of Derivative Liabilities
	Gross Amounts of Recognized Liabilities		Gross Amounts Offset in the Consolidated Balance Sheet		Net Amounts of Liabilities Presented in the Consolidated Balance Sheet		Gross Amounts Not Offset in the Consolidated Balance Sheet
(In thousands)							Financial Instruments			Cash Collateral Posted		Net Amount
September 30, 2019	$	7,955	$	—	$	7,955	$	(143	)	$	—	$	7,812
December 31, 2018	—		—		—		—			—		—

Credit-risk-related Contingent Features

The agreement with our derivative counterparty provides that if we default on any of our indebtedness, including default for which repayment of the indebtedness has not been accelerated by the lender, then we could also be declared in default on our derivative obligations.

At September 30, 2019 and December 31, 2018, the fair value of derivatives related to these agreements was approximately $7.8 million in net liabilities and $6.0 million in net assets, respectively. As of September 30, 2019, we have not posted any collateral related to these agreements. If we or our counterparty had breached any of these provisions at September 30, 2019, we could have been required to settle our obligations under the agreements at their termination value of approximately $7.8 million.