DERIVATIVE INSTRUMENTS

9 Months Ended

Sep. 30, 2023

10. DERIVATIVE INSTRUMENTS

The Company is exposed to certain market risks in the ordinary course of business due to adverse changes in interest rates. The exposure to interest rate risk primarily results from the Company’s variable-rate borrowing. The Company may elect to use derivative financial instruments to manage risks from fluctuations in interest rates. The Company does not purchase or hold derivatives for trading or speculative purposes. Fluctuations in interest rates can be volatile and the Company’s risk management activities do not eliminate these risks.

Interest Rate Swap

In May 2022, the Company entered into an interest rate swap agreement, effective on June 30, 2022, with Bank of America, N.A, which had a $150 million notional value, and a maturity date of June 30, 2027. Beginning in July 2022, the Company receives 1-month SOFR, and pays a fixed rate of interest of 2.815% on 1-month SOFR on a quarterly basis. The total interest rate in any period will also include an applicable margin based on the Company’s consolidated leverage ratio. In connection with the swap, no cash was exchanged between the Company and the counterparty.

The Company designated its interest rate swap as a cash flow hedge and structured it to be highly effective. Consequently, unrealized gains and losses related to the fair value of the interest rate swap are recorded to accumulated other comprehensive income, net of tax.The impact of the Company’s derivative instruments on the accompanying Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2023 are presented in the table below:

	For the Three Months Ended						For the Nine Months Ended
	September 30, 2023			September 30, 2022			September 30, 2023			September 30, 2022
	(In thousands)
Net income	$	12,222		$	12,821		$	38,513		$	40,059
Other comprehensive loss
Unrealized gain on cash flow hedge		1,276			6,473			2,340			5,942
Tax effect at statutory rate (federal and state)		(326	)		(1,654	)		(598	)		(1,518	)
Comprehensive income	$	13,172		$	17,640		$	40,255		$	44,483

The valuations of the Company’s interest rate derivatives are measured as the present value of all expected future cash flows based on SOFR-based yield curves. The present value calculation uses discount rates that have been adjusted to reflect the credit quality of the Company and its counterparty which is a Level 2 fair value measurement.

The fair value of the interest rate swap on September 30, 2023, was $7.7 million, of which $3.5 million has been included within Other current assets and $4.2 million has been included in Other assets, in the accompanying unaudited consolidated balance sheet. The fair value of the interest rate swap on December 31, 2022, was $5.4 million, of which $2.9 million was included in Other current assets and $2.5 million was included in Other assets in the accompanying audited consolidated balance sheet.