11. DERIVATIVE FINANCIAL INSTRUMENTS

The Company is exposed to certain risk 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 amortize quarterly to a notional of $6,673 at the September 2018 maturity. One of these interest rate swaps is currently active. The Company terminated the other interest rate swap during October 2016 as part of its debt refinancing. 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 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 March 31, 2018 and 2017.

During 2018, the Company estimates that an additional $70 will be reclassified as a decrease to interest expense. 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 March 31, 2018 and December 31, 2017 (in thousands):

Asset Derivatives

Liabilty Derivatives

Fair value as of:

Derivatives designated
as hedging instruments

Balance Sheet
Location

March 31,
2018

December
31, 2017

Balance Sheet
Location

March 31,
2018

December 31,
2017

Interest rate products

Other assets

800

196

Other liabilities

—

The table below presents the effect of cash flow hedge accounting on accumulated other comprehensive income (OCI) for the quarters ended March 31, 2018 and 2017 (in thousands):

	Amount of gain (loss) recognized in OCI on derivative					Location of gain (loss) reclassified	Amount of gain (loss) reclassified from accumulated OCI into income (effective portion)
Derivatives in cash flow	Three months ended March 31,					from accumulated	Three months ended March 31,
hedging relationships	2018		2017			OCI into income	2018			2017
Interest rate products	$	568	$	(134	)	Interest expense	$	(36	)	$	(48	)

The table below presents the effect of the Company’s derivative financial instruments on the condensed consolidated statement of income and comprehensive income for the quarters ended March 31, 2018 and 2017:

		Total amounts of income and expense line items presented that reflect the effects of cash flow hedges recorded
		Three months ended March 31,
Derivatives designated as hedging instruments	Balance Sheet Location	2018		2017
Interest rate products	Other assets	$	614	$	523

The tables below present a gross presentation, the effects of offsetting, and a net presentation of the Company’s derivatives as of March 31, 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.

As of	Gross amounts of		Gross amounts offset in the condensed		Net amounts of assets presented in the condensed		Gross amounts not offset in the condensed consolidated balance sheets
March 31, 2018	recognized assets		consolidated balance sheets		consolidated balance sheets		Financial instruments		Cash collateral received		Net amount
Derivatives	$	800	$	—	$	800	$	—	$	—	$	800

As of	Gross amounts of		Gross amounts offset in the condensed		Net amounts of assets presented in the condensed		Gross amounts not offset in the condensed consolidated balance sheets
December 31, 2017	recognized assets		consolidated balance sheets		consolidated balance sheets		Financial instruments		Cash collateral 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.