DERIVATIVE FINANCIAL INSTRUMENTS

9 Months Ended

Sep. 30, 2014

DERIVATIVE FINANCIAL INSTRUMENTS

DERIVATIVE FINANCIAL INSTRUMENTS

9.DERIVATIVE FINANCIAL INSTRUMENTS

The Company did not use derivative contracts prior to the acquisition of Globe Motors in October, 2013.

The Company’s objective in using interest rate derivatives is to add stability to interest expense and to manage its exposure to interest rate movements.  To accomplish this objective, the Company primarily uses interest rate swaps as part of its 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 the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.  During October 2013, the Company entered into two Interest Rate Swaps with a combined notional of $25,000 that amortize quarterly to a notional of $6,673 at maturity.

The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded 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, 2014, such derivatives were used to hedge the variable cash flows associated with existing variable-rate debt.  The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings.  There was no hedge ineffectiveness recorded in the Company’s earnings during the three and nine months ended September 30, 2014.

Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt.  The Company estimates that an additional $187 will be reclassified as an increase to interest expense over the next year.

Additionally, the Company does not use derivatives for trading or speculative purposes and currently does not have any derivatives that are not designated as hedges.

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the condensed consolidated balance sheets as of September 30, 2014 (in thousands):

		September 30, 2014
Derivative Instrument	Balance Sheet Location	Fair Value
Interest Rate Swaps	Other Assets	$	56

The effect of the Company’s derivative financial instruments on the condensed consolidated statement of income and comprehensive income is as follows (in thousands):

For the quarter ended			For the quarter ended
September 30, 2014			September 30, 2014
Derivative Instruments	Net deferral in OCI of derivatives (effective portion)		Statement of earnings classification	Net reclassification from AOCI into income (effective portion)
Interest Rate Swaps	$	57	Interest expense	$	(56	)

For the nine months ended				For the nine months ended
September 30, 2014				September 30, 2014
Derivative Instruments	Net deferral in OCI of derivatives (effective portion)			Statement of earnings classification	Net reclassification from AOCI into income (effective portion)
Interest Rate Swaps	$	(158	)	Interest expense	$	(173	)