Southwest Bancorporation of Texas, Inc. and Subsidiaries
Notes to Consolidated Financial Statements— (Continued)

The approximate amounts of financial instruments with off-balance sheet risk are as follows:

Loan commitments are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.

Since many of the loan commitments and letters of credit may expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. Standby letters of credit are conditional commitments by the Company to guarantee the performance of a customer to a third party.

The Company evaluates each customer ’ credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the counterparty. Collateral held varies but may include certificates of deposit, accounts receivable, inventory, property, plant and equipment, and real property.

Commitments to sell mortgage loans to permanent investors are contracts in which the Company agrees to deliver mortgage loans at specific future dates at specified prices or yields. Risks arise from the possible inability of counterparties to meet the terms of their contracts and from movements in interest rates.

The Company purchases option contracts on FNMA or FHLMC guaranteed mortgage backed securities to reduce the Company’s exposure to the effects of fluctuations in interest rates on the Company’s lending and secondary marketing activities. The time value portion of option premiums paid is recorded in other assets and is amortized to expense over the term of the option. Changes in the intrinsic value of options are deferred and recognized as the related mortgage loans are sold.

The Company administers GNMA mortgage-backed securities on which it guarantees payment of monthly principal and interest to the security holders. The underlying loans are supported by FHA and VA mortgage insurance and are collateralized by real estate. In the event of mortgagor default, losses may arise from principal, interest or other costs which may exceed reimbursement limitations established by FHA or VA.

The Company originates real estate, commercial, construction and consumer loans primarily to customers in the greater Houston, Texas area. Although the Company has a diversified loan portfolio, a substantial portion of its customers ’ ability to honor their contracts is dependent upon the local Houston economy and the real estate market.

The Company maintains funds on deposit at correspondent banks which at times exceed the federally insured limits. Management of the Company monitors the balance in these accounts and periodically assesses the financial condition of correspondent banks.

15. Fair Values of Financial Instruments:

The fair value of financial instruments provided below represents estimates of fair values at a point in time. Significant estimates regarding economic conditions, loss experience, risk characteristics associated with particular financial instruments and other factors were used for the purposes of this disclosure. These estimates are subjective in nature and involve matters of judgment. Therefore, they cannot be determined with precision. Changes in the assumptions could have a material impact on the amounts estimated.