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. Due to the nature of the valuation inputs, loans held for sale are classified within Level 3 of the valuation hierarchy.

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. Due to the nature of the valuation inputs, loans held for investment are classified within Level 3 of the valuation hierarchy.

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 below 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 the Company’s private company portfolio. Option expiration dates are modified to account for estimates of 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 table below provides a rollforward of the Level 3 equity warrant asset fair values.

	Three Months Ended June 30,					Six Months Ended June 30,
Equity Warrant Assets	2021			2020		2021			2020
Balance at beginning of period	$	1,314		$	702	$	908		$	570
Issuances		16			15		37			179
Net gains on derivative instruments		385			138		770			106
Settlements		(135	)		—		(135	)		—
Balance at end of period	$	1,580		$	855	$	1,580		$	855

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

June 30, 2021	Total		Level 1		Level 2		Level 3
Investment securities available-for-sale
US government agencies	$	10,764	$	—	$	10,764	$	—
Mortgage-backed securities		802,992		—		802,992		—
Municipal bonds¹		3,640		—		3,544		96
Other debt securities		500		—		500		—
Loans held for sale		29,048		—		—		29,048
Loans held for investment		743,226		—		—		743,226
Servicing assets²		36,966		—		—		36,966
Mutual fund		2,351		—		2,351		—
Equity warrant assets		1,580		—		—		1,580
Total assets at fair value	$	1,631,067	$	—	$	820,151	$	810,916

December 31, 2020	Total		Level 1		Level 2		Level 3
Investment securities available-for-sale
US government agencies	$	15,919	$	—	$	15,919	$	—
Mortgage-backed securities		730,454		—		730,454		—
Municipal bonds¹		3,725		—		3,629		96
Loans held for sale		36,111		—		—		36,111
Loans held for investment		815,374		—		—		815,374
Servicing assets²		33,918		—		—		33,918
Mutual fund		2,351		—		2,351		—
Equity warrant assets		908		—		—		908
Total assets at fair value	$	1,638,760	$	—	$	752,353	$	886,407

The Company has historically elected to account for retained participating interests of all 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 Unaudited Condensed Consolidated Statements of Income. Beginning in the first quarter of 2021, the Company chose not to elect fair value for all retained participating interests arising from new government guaranteed loan sales. Not electing fair value generally results in a larger discount being recorded on the date of the sale. This discount is subsequently accreted into interest income over the underlying loan’s remaining term using the effective interest method. Management made this change of election in alignment with its ongoing effort to reduce volatility and drive more predictable revenue. In accordance with accounting standards, any loans for which fair value was previously elected will continue to be measured as such.

There were no loans accounted for under the fair value option that were 90 days or more past due and still accruing interest at June 30, 2021 or December 31, 2020. The unpaid principal balance of unguaranteed exposure for nonaccruals was $7.2 million and $6.9 million at June 30, 2021 and December 31, 2020, 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 June 30, 2021 and December 31, 2020.

	June 30, 2021
	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	$	29,048	$	30,608	$	(1,560	)	$	—	$	—	$	—		$	—	$	—	$	—
Loans held for investment		743,226		764,648		(21,422	)		39,826		43,980		(4,154	)		23,789		26,882		(3,093	)
	$	772,274	$	795,256	$	(22,982	)	$	39,826	$	43,980	$	(4,154	)	$	23,789	$	26,882	$	(3,093	)

	December 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	$	36,111	$	38,135	$	(2,024	)	$	—	$	—	$	—		$	—	$	—	$	—
Loans held for investment		815,374		845,082		(29,708	)		35,499		39,318		(3,819	)		25,532		28,741		(3,209	)
	$	851,485	$	883,217	$	(31,732	)	$	35,499	$	39,318	$	(3,819	)	$	25,532	$	28,741	$	(3,209	)

	Three Months Ended June 30,					Six Months Ended June 30,
Gains (Losses) on Loans Accounted for under the Fair Value Option	2021		2020			2021		2020
Loans held for sale	$	428	$	(106	)	$	464	$	14
Loans held for investment		707		(983	)		4,889		(11,741	)
	$	1,135	$	(1,089	)	$	5,353	$	(11,727	)

Losses related to borrower-specific credit risk were $484 thousand and $293 thousand for the three and six months ended June 30, 2021, respectively, and $913 thousand and $1.8 million for the three and six months ended June 30, 2020, respectively.

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

	Three Months Ended June 30,						Six Months Ended June 30,
Loans held for sale	2021			2020			2021			2020
Balance at beginning of period	$	35,936		$	19,151		$	36,111		$	16,198
Issuances & repurchases		—			13,154			—			16,199
Fair value changes		428			(106	)		464			14
Sales		—			—			—			—
Settlements		(7,316	)		(128	)		(7,527	)		(340	)
Balance at end of period	$	29,048		$	32,071		$	29,048		$	32,071

	Three Months Ended June 30,						Six Months Ended June 30,
Loans held for investment	2021			2020			2021			2020
Balance at beginning of period	$	790,797		$	831,426		$	815,374		$	824,520
Issuances & repurchases		16,215			37,761			21,785			99,372
Fair value changes		707			(983	)		4,889			(11,741	)
Settlements		(64,493	)		(33,602	)		(98,822	)		(77,549	)
Balance at end of period	$	743,226		$	834,602		$	743,226		$	834,602

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. Loans with agreed upon sales prices are classified as Level 1.

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.

Long-lived asset held for sale: Long-lived assets held for sale are carried at the lower of carrying value or fair value less selling costs. Fair value is based upon an independent market valuation of the property. Given the lack of observable market prices for identical assets and market discounts applied to market prices, the Company generally classifies long-lived assets held for sale as nonrecurring Level 3.

Equity security investments with a non-readily determinable fair value: Equity security investments are 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 for an identical investment of the same issuer, the investment is generally classified as nonrecurring Level 1 within the valuation hierarchy. When an observable price change in an orderly transaction occurs for a similar investment of the same issuer, the investment is generally classified as nonrecurring Level 2 within the valuation hierarchy.

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

June 30, 2021	Total		Level 1		Level 2		Level 3
Collateral dependent loans	$	1,347	$	—	$	—	$	1,347
Foreclosed assets		1,793		—		—		1,793
Equity security investments with a non-readily determinable fair value		51,499		51,499		—		—
Total assets at fair value	$	54,639	$	51,499	$	—	$	3,140

December 31, 2020	Total		Level 1		Level 2		Level 3
Collateral dependent loans	$	4,159	$	—	$	—	$	4,159
Foreclosed assets		4,155		—		—		4,155
Long-lived asset held for sale		8,874		8,874		—		—
Equity security investment with a non-readily determinable fair value		25,367		—		25,367		—
Total assets at fair value	$	42,555	$	8,874	$	25,367	$	8,314

For Level 3 assets and liabilities measured at fair value on a recurring or non-recurring basis as of June 30, 2021 and December 31, 2020 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	$	96	Discounted expected cash flows	Discount rate Prepayment speed	4.6% 5.0%
Loans held for sale	$	29,048	Discounted expected cash flows	Discount rate Prepayment speed	1.2% to 18.5% WAVG 17.8%
Loans held for investment	$	743,226	Discounted expected cash flows Discounted appraisals	Loss rate Discount rate Prepayment speed Appraisal adjustments	0.0% to 72.6% (WAVG 1.3%) 1.2% to 18.5% WAVG 17.8% 10.0% to 65.0%
Equity warrant assets	$	1,580	Black-Scholes option pricing model	Volatility Risk-free interest rate Marketability discount Remaining life	26.4-88.7% 0.87% to 1.45% 20.0% 4-10 years
Non-recurring fair value
Collateral dependent loans	$	1,347	Discounted appraisals	Appraisal adjustments ⁽¹⁾	10.0% to 65.0%
Foreclosed assets	$	1,793	Discounted appraisals	Appraisal adjustments ⁽¹⁾	4.0% to 10.0%

Level 3 Assets with Significant Unobservable Inputs	Fair Value		Valuation Technique	Significant Unobservable Inputs	Range
Recurring fair value
Municipal bond	$	96	Discounted expected cash flows	Discount rate Prepayment speed	4.3% 5.0%
Loans held for sale	$	36,111	Discounted expected cash flows	Discount rate Prepayment speed	4.2% to 18.5% WAVG 19.0%
Loans held for investment	$	815,374	Discounted expected cash flows Discounted appraisals	Loss rate Discount rate Prepayment speed Appraisal adjustments	0.0% to 73.2% (WAVG 1.5%) 4.2% to 18.5% WAVG 19.0% 10.0% to 83.0%
Equity warrant assets	$	908	Black-Scholes option pricing model	Volatility Risk-free interest rate Marketability discount Remaining life	26.5-87.1% 0.36% to 0.93% 20.0% 5-10 years
Non-recurring fair value
Collateral dependent loans	$	4,159	Discounted appraisals	Appraisal adjustments ⁽¹⁾	10.0% to 83.0%
Foreclosed assets	$	4,155	Discounted appraisals	Appraisal adjustments ⁽¹⁾	10.0% to 20.0%

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:

June 30, 2021	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	$	428,907	$	428,907	$	—	$	—	$	428,907
Federal funds sold		9,917		9,917		—		—		9,917
Certificates of deposit with other banks		6,000		6,295		—		—		6,295
Loans held for sale		1,035,863		—		—		1,142,966		1,142,966
Loans and leases, net of allowance for credit losses on loans and leases		4,640,349		—		—		4,790,403		4,790,403
Financial liabilities
Deposits		6,520,833		—		6,421,253		—		6,421,253
Borrowings		1,012,431		—		—		998,550		998,550

December 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	$	297,167	$	297,167	$	—	$	—	$	297,167
Federal funds sold		21,153		21,153		—		—		21,153
Certificates of deposit with other banks		6,500		6,906		—		—		6,906
Loans held for sale		1,139,359		—		—		1,235,122		1,235,122
Loans and leases, net of allowance for credit losses on loans and leases		4,277,250		—		—		4,366,489		4,366,489
Financial liabilities
Deposits		5,712,828		—		5,711,781		—		5,711,781
Borrowings		1,542,093		—		—		1,542,171		1,542,171