11. DERIVATIVE FINANCIAL INSTRUMENTS

The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks 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 debt funding and 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 receipts and its known or expected cash payments principally related to the Company’s investments and borrowings.

The Company’s objectives in using interest rate derivatives are 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 identical interest rate swaps with a combined notional of $25,000 that amortized quarterly to a notional of $6,673 at the September 2018 maturity. Neither of these interest rate swaps is currently active as the Company terminated one interest rate swap during October 2016 as part of its debt refinancing, and the second matured September 2018. In February 2017, the Company entered into three interest rate swaps with a combined notional of $40,000 that matures in February 2022.

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 (Loss) and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During 2018 and 2017, 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 quarters ended September 30, 2018 and 2017.

The Company estimates that an additional $252 will be reclassified as a decrease to interest expense over the next twelve months. 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, 2018 and December 31, 2017 (in thousands):

Asset Derivatives

Liability Derivatives

Derivatives designated

Balance

Fair value as of:

as hedging

Sheet

September 30,

December 31,

Balance Sheet

September 30,

December 31,

instruments

Location

2018

2017

Location

2018

2017

Interest rate products

Other long-term assets

1,184

196

Other long-term liabilities

—

The tables below presents the effect of cash flow hedge accounting on other comprehensive income (loss) (OCI) for the quarter and nine months ended September 30, 2018 and 2017 (in thousands):


		Amount of gain (loss) recognized			Amount of gain (loss) recognized
		in OCI on derivative			in OCI on derivative
Derivatives in cash flow	Three months ended September 30,				Nine months ended September 30,
hedging relationships	2018		2017		2018		2017
Interest rate products	$	121	$	(34)	$	936	$	(417)


Location of (gain)	Amount of (gain) loss reclassified				Amount of (gain) loss reclassified
loss reclassified	from accumulated OCI into income				from accumulated OCI into income
from accumulated	Three months ended September 30,				Nine months ended September 30,
OCI into income	2018		2017		2018		2017
Interest expense	$	16	$	79	$	52	$	239

The tables below presents the effect of the Company’s derivative financial instruments on the condensed consolidated statements of income and comprehensive income for the three and nine months ended September 30, 2018 and 2017:


		Total amounts of income and expense				Total amounts of income and expense
		line items presented that reflect the				line items presented that reflect the
Derivatives designated	Balance	effects of cash flow hedges recorded				effects of cash flow hedges recorded
as hedging	Sheet	Three months ended September 30,				Nine months ended September 30,
instruments	Location	2018		2017		2018		2017
Interest rate products	Other assets	$	623	$	633	$	1,839	$	1,797

The tables below present a gross presentation, the effects of offsetting, and a net presentation of the Company’s derivatives as of September 30, 2018 and December 31, 2017. 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 condensed consolidated balance sheets.

Gross amounts

Net amounts of

Gross

offset in the

assets presented

Gross amounts not offset in the condensed

amounts of

condensed

in the condensed

consolidated balance sheets

As of

recognized

consolidated

Financial

Cash collateral

September 30, 2018

assets

balance sheets

instruments

received

Net amount

Derivatives

1,184

—

1,184

—

1,184

Gross amounts

Net amounts of

Gross

offset in the

assets presented

Gross amounts not offset in the condensed

As of

amounts of

condensed

in the condensed

consolidated balance sheets

December 31,

recognized

consolidated

Financial

Cash collateral

2017

assets

balance sheets

instruments

received

Net amount

Derivatives

196

—

196

—

196

The Company has agreements with each of its derivative counterparties that contain a provision where if the Company either defaults or is capable of being declared in default on any of its indebtedness, then the Company could also be declared in default on its derivative obligations.