Note 12 — Derivative Financial Instruments

The following is a summary of our non-qualifying derivative financial instruments held by our Agency Business ($ in thousands):


	September 30, 2018
					Fair Value
		Notional		Balance Sheet	Derivative		Derivative
Derivative	Count	Value		Location	Assets		Liabilities
Rate Lock Commitments	6	$	37,965	Other Assets/Other Liabilities	$	749	$	(28)

Forward Sale Commitments	57		530,931	Other Assets/Other Liabilities		177		(3,378)
		$	568,896		$	926	$	(3,406)


	December 31, 2017
Rate Lock Commitments	3	$	38,578	Other Assets/Other Liabilities	$	276	$	(278)

Forward Sale Commitments	75		330,827	Other Assets/Other Liabilities		408		(1,028)
		$	369,405		$	684	$	(1,306)

We enter into contractual commitments to originate and sell mortgage loans at fixed prices with fixed expiration dates. The commitments become effective when the borrower “rate locks” a specified interest rate within time frames established by us. All potential borrowers are evaluated for creditworthiness prior to the extension of the commitment. Market risk arises if interest rates move adversely between the time of the rate lock by the borrower and the sale date of the loan to an investor. To mitigate the effect of the interest rate risk inherent in providing rate lock commitments to borrowers, we enter into a forward sale commitment with the investor simultaneous with the rate lock commitment with the borrower. The forward sale contract locks in an interest rate and price for the sale of the loan. The terms of the contract with the investor and the rate lock with the borrower are matched in substantially all respects, with the objective of eliminating interest rate risk to the extent practical. Sale commitments with the investors have an expiration date that is longer than our related commitments to the borrower to allow, among other things, for the closing of the loan and processing of paperwork to deliver the loan into the sale commitment.

These commitments meet the definition of a derivative and are recorded at fair value, including the effects of interest rate movements which are reflected as a component of other income, net in the consolidated statements of income. The estimated fair value of rate lock commitments also includes the fair value of the expected net cash flows associated with the servicing of the loan which is recorded as income from MSRs in the consolidated statements of income. During the three and nine months ended September 30, 2018, we recorded a net loss of $4.4 million and $2.3 million, respectively, from changes in the fair value of these derivatives in other income, net and $25.2 million and $62.8 million, respectively, of income from MSRs. During the three and nine months ended September 30, 2017, we recorded net gains of $0.2 million and net losses of $2.3 million, respectively, from changes in the fair value of these derivatives in other income, net and $18.9 million and $56.2 million, respectively, of income from MSRs. See Note 13 - Fair Value for details.