Derivatives and Hedging

We are subject to interest rate risk in connection with borrowings under our debt agreements which are subject to variable interest rates. In December 2018 we entered into an interest rate cap, which is a derivative instrument, to manage our interest rate risk on a portion of our variable-rate debt. We do not use derivatives for speculative purposes. The interest rate cap is designated as a cash flow hedge. In exchange for our up-front premium, we would receive variable amounts from a counterparty if interest rates rise above the strike rate on the contract. The interest rate cap agreement is for a notional amount of $300 million and a maturity date of January 2021.

For derivatives designated and that qualify as cash flow hedges of interest rate risk, the changes in the fair value of the derivative is recorded in Accumulated Other Comprehensive Income, or AOCI, and subsequently reclassified into interest expense in the same period(s) during which the hedged transaction affects earnings. Gains and losses on the derivative representing hedge components excluded from the assessment of effectiveness are recognized over the life of the hedge on a systematic and rational basis, as documented at hedge inception in accordance with the Company’s accounting policy election. The earnings recognition of excluded components is presented in interest expense. Amounts reported in AOCI 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 $0.7 million will be reclassified as an increase to interest expense in 2019.

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the Balance Sheet as of December 31, 2018 (in thousands):

The table below presents the effect of cash flow hedge accounting on Accumulated Other Comprehensive Income as of December 31, 2018 (in thousands):



	2018
Amount Recognized in OCI on Derivative:
Interest rate cap agreement	$	456

The table below presents the effect of the Company’s derivative financial instruments on the Income Statement as of December 31, 2018 (in thousands):



	Location and Amount of Gain or (Loss) Recognized in Income on Cash Flow Hedging Relationships
	2018
	Interest Income (Expense)

Total amounts of expense line items presented in the statement of financial performance in which the effects of cash flow hedges are recorded	$	(16	)

Derivative Type

Classification

December 31, 2018

Interest rate cap agreement

Other Assets