There are three levels of inputs in the fair value hierarchy that may be used to measure fair value. Financial instruments are considered Level 1 when valuation can be based on quoted prices in active markets for identical assets or liabilities. Level 2 financial instruments are valued using quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or models using inputs that are observable or can be corroborated by observable market data of substantially the full term of the assets or liabilities. Financial instruments are considered Level 3 when their values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable and when determination of the fair value requires significant management judgment or estimation.

The following sections provide a description of the valuation methodologies used for instruments measured at fair value on a recurring basis, as well as the general classification of such instruments pursuant to the fair value hierarchy:

Investment securities: Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities would include highly liquid government bonds, mortgage products and exchange traded equities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, discounted cash flow or at net asset value per share. Level 2 securities would include U.S. government agency securities, mortgage-backed securities, obligations of states and political subdivisions and certain corporate, asset backed mutual fund and other securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy.

Loans held for sale: The fair values of loans held for sale are determined by discounting estimated cash flows using interest rates approximating prevailing market rates for similar loans adjusted to reflect the inherent credit risk.

Loans held for investment: The fair values of loans held for investment are typically determined based on discounted cash flow analyses using market-based interest rate spreads. Discounted cash flow analyses are adjusted, as appropriate, to reflect current market conditions and borrower-specific credit risk. If the loan is collateral dependent, the fair value is determined based on the difference between the fair value of the collateral and the amortized cost basis of the loan as of the measurement date. Fair value of the loan’s collateral is determined by appraisals, independent valuation, or management’s estimation of fair value which is then adjusted for the cost related to liquidation of the collateral.

Servicing assets: Servicing rights do not trade in an active, open market with readily observable prices. While sales of servicing rights do occur, the precise terms and conditions typically are not readily available. Accordingly, the Company estimates the fair value of servicing rights using discounted cash flow models incorporating numerous assumptions from the perspective of a market participant including servicing income, servicing costs, market discount rates and prepayment speeds. Due to the nature of the valuation inputs, servicing rights are classified within Level 3 of the valuation hierarchy.

Mutual fund: The following mutual fund is registered with the Securities and Exchange Commission as a closed-end, non-diversified management investment company and operates as an interval fund. The fund primarily invests in the unguaranteed portion of SBA504 First Lien Loans secured by owner-occupied commercial real estate. This investment is valued using quoted prices in markets that are not active and is classified as Level 2 within the valuation hierarchy.

Equity warrant assets: Fair value measurements of equity warrant assets of private companies are priced based on a Black-Scholes option pricing model to estimate the asset value by using stated strike prices, option expiration dates, risk-free interest rates and option volatility assumptions. Option volatility assumptions used in the Black-Scholes model are based on public companies that operate in similar industries as the companies in our private company portfolio. Option expiration dates are modified to account for estimates to actual life relative to stated expiration. Values are further adjusted for a general lack of liquidity due to the private nature of the associated underlying company. The Company classifies equity warrant assets within Level 3 of the valuation hierarchy.

The tables below present the recorded amount of assets and liabilities measured at fair value on a recurring basis.

March 31, 2020	Total		Level 1		Level 2		Level 3
Investment securities available-for-sale
US treasury securities	$	5,043	$	—	$	5,043	$	—
US government agencies		23,079		—		23,079		—
Mortgage-backed securities		537,291		—		537,291		—
Municipal bonds¹		8,755		—		8,662		93
Loans held for sale		19,151		—		—		19,151
Loans held for investment		831,426		—		—		831,426
Servicing assets²		33,532		—		—		33,532
Mutual fund		2,141		—		2,141		—
Equity warrant assets³		702		—		—		702
Total assets at fair value	$	1,461,120	$	—	$	576,216	$	884,904

December 31, 2019	Total		Level 1		Level 2		Level 3
Investment securities available-for-sale
US treasury securities	$	5,015	$	—	$	5,015	$	—
US government agencies		22,779		—		22,779		—
Mortgage-backed securities		503,297		—		503,297		—
Municipal bonds¹		8,954		—		8,862		92
Loans held for sale		16,198		—		—		16,198
Loans held for investment		824,520		—		—		824,520
Servicing assets²		35,365		—		—		35,365
Mutual fund		2,206		—		2,206		—
Equity warrant assets³		570		—		—		570
Total assets at fair value	$	1,418,904	$	—	$	542,159	$	876,745

The Company elects to account for retained participating interests of government guaranteed loans under the fair value option in order to align the accounting presentation with the Company’s viewpoint of the economics of the loans. Interest income on loans accounted for under the fair value option is recognized in loans and fees on loans on the Company’s consolidated statements of income. There were no loans accounted for under the fair value option that were 90 days or more past due and still accruing interest at March 31, 2020 or December 31, 2019. The unpaid principal balance of unguaranteed exposure for nonaccruals was $12.2 million and $10.7 million at March 31, 2020 and December 31, 2019, respectively.

The following tables provide more information about the fair value carrying amount and the unpaid principal outstanding of loans accounted for under the fair value option at March 31, 2020 and December 31, 2019.

	March 31, 2020
	Total Loans							Nonaccruals							90 Days or More Past Due
	Fair Value Carrying Amount		Unpaid Principal Balance		Difference			Fair Value Carrying Amount		Unpaid Principal Balance		Difference			Fair Value Carrying Amount		Unpaid Principal Balance		Difference
Fair Value Option Elections
Loans held for sale	$	19,151	$	20,056	$	(905	)	$	—	$	—	$	—		$	—	$	—	$	—
Loans held for investment		831,426		858,577		(27,151	)		60,558		65,303		(4,745	)		39,102		40,876		(1,774	)
	$	850,577	$	878,633	$	(28,056	)	$	60,558	$	65,303	$	(4,745	)	$	39,102	$	40,876	$	(1,774	)

	December 31, 2019
	Total Loans							Nonaccruals							90 Days or More Past Due
	Fair Value Carrying Amount		Unpaid Principal Balance		Difference			Fair Value Carrying Amount		Unpaid Principal Balance		Difference			Fair Value Carrying Amount		Unpaid Principal Balance		Difference
Fair Value Option Elections
Loans held for sale	$	16,198	$	17,230	$	(1,032	)	$	—	$	—	$	—		$	—	$	—	$	—
Loans held for investment		824,520		842,456		(17,936	)		49,739		54,370		(4,631	)		26,644		28,137		(1,493	)
	$	840,718	$	859,686	$	(18,968	)	$	49,739	$	54,370	$	(4,631	)	$	26,644	$	28,137	$	(1,493	)

Losses related to borrower-specific credit risk were $922 thousand and $522 thousand for the three months ended March 31, 2020 and 2019, respectively.

The following tables summarize the activity pertaining to loans accounted for under the fair value option.

	Three Months Ended March 31,
Loans held for sale	2020			2019
Balance at beginning of period	$	16,198		$	17,745
Issuances		3,045			13,635
Fair value changes		120			(351	)
Sales		—			(5,700	)
Settlements		(212	)		(36	)
Balance at end of period	$	19,151		$	25,293

	Three Months Ended March 31,
Loans held for investment	2020			2019
Balance at beginning of period	$	824,520		$	885,527
Issuances		61,611			30,108
Fair value changes		(10,758	)		2,434
Settlements		(43,947	)		(49,415	)
Balance at end of period	$	831,426		$	868,654

The following sections provide a description of the valuation methodologies used for instruments measured at fair value on a non-recurring basis, as well as the general classification of such instruments pursuant to the fair value hierarchy:

Collateral dependent loans: Loans are considered collateral dependent when the Company has determined that foreclosure of the collateral is probable or when a borrower is experiencing financial difficulty and the loan is expected to be repaid substantially through the operation or sale of collateral. A collateral dependent loan’s ACL is measured based on the difference between the fair value of the collateral and the amortized cost basis of the loan as of the measurement date. Fair value of the loan’s collateral is determined by appraisals, independent valuation, or management’s estimation of fair value which is then adjusted for the cost related to liquidation of the collateral. Collateral dependent loans are generally classified as Level 3 based on management’s judgment and estimation.

Foreclosed assets: Foreclosed real estate is adjusted to fair value less selling costs upon transfer of the loans to foreclosed real estate. Subsequently, foreclosed real estate is carried at the lower of carrying value or fair value less selling costs. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. Given the lack of observable market prices for identical properties and market discounts applied to appraised values, the Company generally classifies foreclosed assets as nonrecurring Level 3.

Equity security investment with a non-readily determinable fair value: The following equity security investment is measured at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer. When an observable price change in an orderly transaction occurs, the investment is classified as nonrecurring Level 1 within the valuation hierarchy.

The tables below present the recorded amount of assets and liabilities measured at fair value on a non-recurring basis.

March 31, 2020	Total		Level 1		Level 2		Level 3
Collateral dependent loans	$	2,349	$	—	$	—	$	2,349
Foreclosed assets		6,744		—		—		6,744
Total assets at fair value	$	9,093	$	—	$	—	$	9,093

December 31, 2019	Total		Level 1		Level 2		Level 3
Collateral dependent loans	$	1,245	$	—	$	—	$	1,245
Foreclosed assets		5,612		—		—		5,612
Equity security investment with a non-readily determinable fair value		8,738		8,738		—		—
Total assets at fair value	$	15,595	$	8,738	$	—	$	6,857

For Level 3 assets and liabilities measured at fair value on a recurring or non-recurring basis as of March 31, 2020 and December 31, 2019 the significant unobservable inputs used in the fair value measurements were as follows:

Level 3 Assets with Significant Unobservable Inputs	Fair Value		Valuation Technique	Significant Unobservable Inputs	Range
Recurring fair value
Municipal bond	$	93	Discounted expected cash flows	Discount rate Prepayment speed	4.2% 5.0%
Loans held for sale	$	19,151	Discounted expected cash flows	Discount rate Prepayment speed	7.1% to 15.4% WAVG 17.9%
Loans held for investment	$	831,426	Discounted expected cash flows Discounted appraisals	Loss rate Discount rate Prepayment speed Appraisal adjustments	0.0% to 82.5% (WAVG 1.8%) 7.1% to 15.4% WAVG 17.9% 10% to 50%
Equity warrant assets	$	702	Black-Scholes option pricing model	Volatility Risk-free interest rate Marketability discount Remaining life	24.7 to 85.4% 0.7% 20.0% 7-10 years
Non-recurring fair value
Collateral dependent loans	$	2,349	Discounted appraisals	Appraisal adjustments ⁽¹⁾	10.0% to 55.0%
Foreclosed assets	$	6,744	Discounted appraisals	Appraisal adjustments ⁽¹⁾	4.0% to 14.5%

Level 3 Assets with Significant Unobservable Inputs	Fair Value		Valuation Technique	Significant Unobservable Inputs	Range
Recurring fair value
Municipal bond	$	92	Discounted expected cash flows	Discount rate Prepayment speed	4.6% 5.0%
Loans held for sale	$	16,198	Discounted expected cash flows	Discount rate Prepayment speed	7.7% to 21.4% WAVG 13.1%
Loans held for investment	$	824,520	Discounted expected cash flows Discounted appraisals	Loss rate Discount rate Prepayment speed Appraisal adjustments	0.0% to 10.9% (WAVG 1.3%) 7.7% to 21.4% WAVG 13.1% 10.0% to 70.0%
Equity warrant assets	$	570	Black-Scholes option pricing model	Volatility Risk-free interest rate Marketability discount Remaining life	21.0-75.0% 1.90% 20.0% 8-10 years
Non-recurring fair value
Collateral dependent loans	$	1,245	Discounted appraisals	Appraisal adjustments ⁽¹⁾	10.0% to 57.0%
Foreclosed assets	$	5,612	Discounted appraisals	Appraisal adjustments ⁽¹⁾	10.0% to 37.0%

GAAP also requires disclosure of the fair value of financial instruments carried at book value on the consolidated balance sheets.

The carrying amounts and estimated fair values of the Company’s financial instruments not measured at fair value on a recurring or non-recurring basis are as follows:

March 31, 2020	Carrying Amount		Quoted Price In Active Markets for Identical Assets /Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Fair Value
Financial assets
Cash and due from banks	$	256,824	$	256,824	$	—	$	—	$	256,824
Federal funds sold		158,226		158,226		—		—		158,226
Certificates of deposit with other banks		7,250		7,755		—		—		7,755
Loans held for sale		976,899		—		—		1,044,207		1,044,207
Loans and leases, net of allowance for credit losses on loans and leases		1,950,159		—		—		2,053,965		2,053,965
Financial liabilities
Deposits		4,642,148		—		4,717,676		—		4,717,676
Borrowings		50,012		—		—		50,301		50,301

December 31, 2019	Carrying Amount		Quoted Price In Active Markets for Identical Assets /Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Fair Value
Financial assets
Cash and due from banks	$	126,752	$	126,752	$	—	$	—	$	126,752
Federal funds sold		96,787		96,787		—		—		96,787
Certificates of deposit with other banks		7,250		7,568		—		—		7,568
Loans held for sale		950,249		—		—		1,004,135		1,004,135
Loans and leases, net of allowance for credit losses on loans and leases		1,774,532		—		—		1,822,569		1,822,569
Financial liabilities
Deposits		4,229,122		—		4,213,657		—		4,213,657
Borrowings		14		—		—		14		14