Derivative Instruments

3 Months Ended

Mar. 31, 2024

Derivative Instruments and Hedging Activities Disclosure [Abstract]

The Company periodically holds interest rate derivative instruments to mitigate exposure to changes in interest rates, predominantly one-month term SOFR, with $290.0 million and $353.0 million of variable rate borrowings at March 31, 2024 and December 31, 2023, respectively. As a matter of policy, management does not use derivatives for speculative purposes. As of March 31, 2024, the Company had three interest rate swap agreements. During 2021, the Company entered into four fixed-rate interest swap agreements, each having notional amounts of $100.0 million, two which matured during the three months ended March 31, 2024 and two with remaining terms of 22 months as of March 31, 2024. One interest rate swap agreement was entered into during 2019, which has a notional outstanding amount of $100.0 million with a remaining term of three months as of March 31, 2024. The derivative instruments were each designated as cash flow hedges at inception and recorded at fair value.

As it relates to the two fixed-rate interest swap agreements that matured during the three months ended March 31, 2024, the impact was a reduction to Interest expense, in the Company’s Consolidated Statements of Income of approximately $0.2 million for the year ended December 31, 2023 and an increase to Interest expense of approximately $0.1 million in the Company’s Condensed Consolidated Statements of Income for the quarter ended March 31, 2024.

The Company evaluated the effectiveness of the swap agreements to hedge the interest rate risk associated with its variable rate debt and concluded at the swap inception dates that each swap was highly effective in hedging that risk. The Company evaluates the effectiveness of the hedging relationships on an ongoing basis and concluded there was no ineffectiveness in the hedges for the period ended March 31, 2024.

The Company estimates the fair value of derivative instruments using a discounted cash flow technique. 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 that are effective and for which the related forecasted transaction is probable of occurring.

The net fair values of the interest rate swaps as of March 31, 2024 and December 31, 2023 were $15.2 million and $16.5 million, respectively, each representing an asset and reflected within Other assets in the Condensed Consolidated Balance Sheets. The Company recorded an adjustment to interest expense of $(3.1) million and $(5.4) million during the three months ended March 31, 2024 and 2023, respectively.

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

The following table provides additional information about the financial statement effects related to the cash flow hedges for the three months ended March 31, 2024 and 2023:


Derivatives in Cash Flow Hedging Relationships	Amount of Loss Recognized in OCI on Derivatives (Effective Portion)
	Three months ended March 31,
	2024		2023
	(in thousands)
Interest rate contracts	$	(1,017)	$	(6,664)
Total	$	(1,017)	$	(6,664)

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 when it is determined to be improbable that the forecasted transaction will occur. The ineffective portion of the hedges, if any, is recorded in earnings in the current period.

Counterparty Credit Risk

The Company evaluates the creditworthiness of the counterparties under its hedging agreements. The counterparties for the interest rate swaps are large financial institutions that possess investment grade credit ratings. Based on these ratings, the Company believes that the counterparties are credit-worthy and that their continuing performance under the hedging agreements is probable and does not require the counterparties to provide collateral or other security to the Company.