Note 5. Financial Instruments

The carrying amounts of our cash and cash equivalents, accounts receivable and accounts payable approximate fair value because of the short maturity of these instruments. The carrying value of bank debt approximates fair value, as the interest rate on the bank debt is variable and approximates current market rates.

Concentrations of Credit Risk

Financial instruments that may subject us to concentration of credit risk consist primarily of cash and cash equivalents and accounts receivable. We place our cash and cash equivalents with highly-rated financial institutions, limiting the amount of credit exposure with any one financial institution. Our client base consists of large numbers of geographically diverse customers dispersed throughout the United States; thus, concentration of credit risk with respect to accounts receivable is not significant.

Bonds

We held corporate and municipal bonds with net book value totaling $49.5 million and $42.4 million at December 31, 2017 and 2016, respectively. All bonds are investment grade and are classified as available-for-sale. Our bonds have maturity dates or callable dates ranging from January 2018 through December 2023, and are included in “Funds held for clients — current” in the accompanying Consolidated Balance Sheets based on the intent and ability of us to sell these investments at any time under favorable conditions.

The following table summarizes our bond activity for the years ended December 31, 2017 and 2016 (in thousands):

	2017			2016
Fair value at January 1	$	44,573		$	43,142
Purchases		15,546			11,355
Sales		(940	)		(2,900	)
Maturities and calls		(7,845	)		(6,878	)
Decrease in bond premium		(160	)		(106	)
Fair market value adjustment		(73	)		(40	)
Fair value at December 31	$	51,101		$	44,573

Interest Rate Swaps

We do not purchase or hold any derivative instruments for trading or speculative purposes. We utilize interest rate swaps to manage interest rate risk exposure associated with our floating-rate debt under the credit facility. Under these interest rate swap contracts, we receive cash flows from counterparties at variable rates based on the London Interbank Offered Rate (“LIBOR”) and pay the counterparties a fixed rate. To mitigate counterparty credit risk, we only enter into contracts with selected major financial institutions with investment grade ratings and continually assess their creditworthiness. There are no credit risk-related contingent features in our interest rate swaps nor do the swaps contain provisions under which we would be required to post collateral.

The designation of a derivative instrument as a hedge and its ability to meet the hedge accounting criteria determine how we reflect the change in fair value of the derivative instrument. A derivative qualifies for hedge accounting treatment if, at inception, it meets defined correlation and effectiveness criteria. These criteria require that the anticipated cash flows and/or changes in fair value of the hedging instrument substantially offset those of the position being hedged.

We had no fair value hedging instruments at December 31, 2017 or 2016. Our interest rate swaps are designated as cash flow hedges. Accordingly, the interest rate swaps are recorded as either an asset or liability in the accompanying Consolidated Balance Sheets at fair value. The mark-to-market gains or losses on the swaps are deferred and included as a component of AOCL, net of tax, to the extent the hedge is determined to be effective, and reclassified to interest expense in the same period during which the hedged transaction affects earnings. The interest rate swaps are assessed for effectiveness and continued qualification for hedge accounting on a quarterly basis. For the years ended December 31, 2017 and 2016, the interest rate swaps were deemed to be highly effective.

The following table summarizes our outstanding interest rate swaps and their classification in the accompanying Consolidated Balance Sheets at December 31, 2017 and 2016 (in thousands). Refer to Note 6, Fair Value Measurements, to the accompanying consolidated financial statements for additional disclosures regarding fair value measurements.

	December 31, 2017
	Notional Amount		Fair Value		Balance Sheet Location
Interest rate swaps	$	55,000	$	1,055	Other non-current assets
Interest rate swap	$	15,000	$	76	Other current assets

	December 31, 2016
	Notional Amount		Fair Value		Balance Sheet Location
Interest rate swaps	$	50,000	$	525	Other non-current assets
Interest rate swap	$	10,000	$	4	Other current assets

Under the terms of the interest rate swaps, we pay interest at a fixed rate of interest plus applicable margin as stated in the agreement, and receive interest that varies with the one-month LIBOR. The notional value, fixed rate of interest and expiration date of each interest rate swap is (i) $15 million – 1.155% - November 2018, (ii) $25 million – 1.300% - October 2020, (iii) $10 million – 1.120% - February 2021 and (iv) $20 million – 1.770% - May 2022. During the second quarter of 2017, we entered into a 5-year interest rate swap with a notional value of $20 million, while during the fourth quarter of 2017, one interest rate swap expired with a notional value of $10 million.

During the next twelve months, the amount of the December 31, 2017 AOCL balance that will be reclassified to earnings is expected to be immaterial. The following table summarizes the effects of the interest rate swap on our accompanying Consolidated Statements of Comprehensive Income for the years ended December 31, 2017 and 2016 (in thousands):

	Gain recognized in AOCL, net of tax				Loss reclassified from AOCL into expense
	Twelve Months Ended December 31,				Twelve Months Ended December 31,						Location
	2017		2016		2017			2016
Interest rate swap	$	379	$	182	$	(132	)	$	(410	)	Interest expense