Note

: Fair Value of Financial Instruments

Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts the Company could have realized in a sales transaction on the dates indicated. The estimated fair value amounts have been measured as of their respective year-ends and have not been re-evaluated or updated for purposes of these financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates

may

be different than the amounts reported at each year-end.

The Company follows the guidance issued under ASC

820,

Fair Value Measurement

which defines fair value, establishes a framework for measuring fair value under GAAP, and identifies required disclosures on fair value measurements.

ASC

820

establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level

measurements) and the lowest priority to unobservable inputs (Level

measurements). The

three

levels of the fair value hierarchy under ASC

820

are as follows:

Level

: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Level

: Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability.

Level

: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e. supported with little or no market activity).

An asset or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

For financial assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used at

March

31,

2017

and

December

31,

2016

were as follows:

(dollars in thousands)	Total		(Level 1) Quoted Prices in Active Markets for Identical Assets		(Level 2) Significant Other Observable Inputs		(Level 3) Significant Unobservable Inputs

March 31 , 201 7
Assets:

Collateralized mortgage obligations	$	217,616	$	-	$	217,616	$	-
Agency mortgage-backed securities		36,030		-		36,030		-
Municipal securities		27,640		-		27,640		-
Corporate bonds		64,281		-		61,257		3,024
Asset-backed securities		14,800		-		14,800		-
Trust Preferred Securities		1,961		-		-		1,961
Securities Available for Sale	$	362,328	$	-	$	357,343	$	4,985

Mortgage Loans Held for Sale	$	19,753	$	-	$	19,753	$	-
SBA Servicing Assets		5,298		-		-		5,298
Interest Rate Lock Commitments		831		-		831		-
Best Efforts Forward Loan Sales Commitments		3		-		3		-
Mandatory Forward Loan Sales Commitments		8		-		8		-

Liabilities:

Interest Rate Lock Commitments		7		-		7		-
Best Efforts Forward Loan Sales Commitments		270		-		270		-
Mandatory Forward Loan Sales Commitments		125		-		125		-

December 31, 201 6
Assets:

Collateralized mortgage obligations	$	224,765	$	-	$	224,765	$	-
Agency mortgage-backed securities		36,710		-		36,710		-
Municipal securities		26,547		-		26,547		-
Corporate bonds		64,748		-		61,777		2,971
Asset-backed securities		15,149		-		15,149		-
Trust Preferred Securities		1,820		-		-		1,820
Securities Available for Sale	$	369,739	$	-	$	364,948	$	4,791

Mortgage Loans Held for Sale	$	23,911	$	-	$	23,911	$	-
SBA Servicing Assets		5,352		-		-		5,352
Interest Rate Lock Commitments		439		-		439		-
Best Efforts Forward Loan Sales Commitments		103		-		103		-
Mandatory Forward Loan Sales Commitments		229		-		229		-

Liabilities:

Interest Rate Lock Commitments		55		-		55		-
Best Efforts Forward Loan Sales Commitments		125		-		125		-
Mandatory Forward Loan Sales Commitments		38		-		38		-

The following table presents an analysis of the activity in the SBA servicing assets for the

three

months ended

March

31,

2017

and

2016

	Three Months Ended March 31,
(dollars in thousands)	201 7			201 6

Beginning balance	$	5,352		$	4,886
Additions		211			242
Fair value adjustments		(265	)		(70	)
Ending balance	$	5,298		$	5,058

Fair value adjustments are recorded as loan advisory and servicing fees on the statement of income. Servicing fee income, not including fair value adjustments, totaled

$433,000

and

$434,000

for the

three

months ended

March

31,

2017

and

2016,

respectively.

The following table presents a reconciliation of the securities available for sale measured at fair value on a recurring basis using significant unobservable inputs (Level

for the

three

months ended

March

31,

2017

and

2016:

	Three Months Ended March 31, 2017				Three Months Ended March 31, 2016
Level 3 Investments Only (dollars in thousands)	Trust Preferred Securities		Corporate Bonds		Trust Preferred Securities			Corporate Bonds
Balance, January 1 st	$	1,820	$	2,971	$	1,883		$	2,834
Unrealized (losses) gains		141		53		(24	)		10
Paydowns		-		-		-			-
Proceeds from sales		-		-		-			-
Realized (losses) gains		-		-		-			-
Impairment charges on Level 3		-		-		(1	)		-
Balance, March 31 st	$	1,961	$	3,024	$	1,858		$	2,844

For assets measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy used at

March

31,

2017

and

December

31,

2016

were as follows:

(dollars in thousands)	Total		(Level 1) Quoted Prices in Active Markets for Identical Assets		(Level 2) Significant Other Observable Inputs		(Level 3) Significant Unobservable Inputs
March 31, 2017
Impaired loans	$	8,677	$	-	$	-	$	8,677
Other real estate owned		496		-		-		496

December 31, 2016
Impaired loans	$	9,110	$	-	$	-	$	9,110
Other real estate owned		8,563		-		-		8,563

The table below presents additional quantitative information about level

assets measured at fair value on a nonrecurring basis (dollars in thousands):

	Quantitative Information about Level 3 Fair Value Measurements
Asset Description	Fair Value		Valuation Technique	Unobservable Input	Range (Weighted Average)
March 31, 201 7
Corporate bonds	$	3,024	Discounted Cash Flows	Discount Rate					(5.06%)

Trust preferred securities	$	1,961	Discounted Cash Flows	Discount Rate		8.13%	-	8.63%	(8.36%)

SBA servicing assets	$	5,298	Discounted Cash Flows	Conditional Prepayment Rate					(6.58%)

				Discount Rate					(10.00%)

Impaired loans	$	8,677	Appraised Value of Collateral (1)	Liquidation expenses (2)		10%	-	23%	(12%)	(3)

Other real estate owned	$	496	Appraised Value of Collateral (1)	Liquidation expenses (2)		7%	-	20%	(9%)	(3)

			Sales Price	Liquidation expenses (2)		7%	-	8%	(7%)	(3)

December 31, 201 6
Corporate bonds	$	2,971	Discounted Cash Flows	Discount Rate					(4.68%)

Trust preferred securities	$	1,820	Discounted Cash Flows	Discount Rate		8.85%	-	9.35%	(9.08%)

SBA servicing assets	$	5,352	Discounted Cash Flows	Conditional Prepayment Rate					(6.12%)

				Discount Rate					(10.00%)

Impaired loans	$	9,110	Appraised Value of Collateral (1)	Liquidation expenses (2)		7%	-	20%	(11%)	(3)

			Sales Price	Liquidation expenses (2)					(7%)	(3)

Other real estate owned	$	8,563	Appraised Value of Collateral (1)	Liquidation expenses (2)		5%	-	76%	(17%)	(3)

			Sales Price	Liquidation expenses (2)		7%	-	8%	(7%)	(3)

	(1)	Fair value is generally determined through independent appraisals of the underlying collateral, which include Level 3 inputs that are not identifiable.
	(2)	Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses.
	(3)	The range and weighted average of qualitative factors such as economic conditions and estimated liquidation expenses are presented as a percent of the appraised value.

The significant unobservable inputs for impaired loans and other real estate owned are the appraised value or an agreed upon sales price. These values are adjusted for estimated costs to sell which are incremental direct costs to transact a sale such as broker commissions, legal fees, closing costs and title transfer fees. The costs must be considered essential to the sale and would not have been incurred if the decision to sell had not been made. The costs to sell are based on costs associated with the Company’s actual sales of other real estate owned which are assessed annually.

Fair Value Assumptions

The following information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of the Company’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies

may

not be meaningful. The following methods and assumptions were used to estimate the fair values of the Company’s financial instruments at

March

31,

2017

and

December

31,

2016.

Cash and Cash Equivalents (Carried at Cost)

The carrying amounts reported in the balance sheet for cash and cash equivalents approximate those assets’ fair values.

Investment Securities

The fair value of securities available for sale (carried at fair value) and held to maturity (carried at amortized cost) are determined by obtaining quoted market prices on nationally recognized securities exchanges (Level

1),

or matrix pricing (Level

2),

which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted prices. For certain securities, which are not traded in active markets or are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and/or non-transferability, and such adjustments, are generally based on available market evidence (Level

3).

In the absence of such evidence, management’s best estimate is used. Management’s best estimate consists of both internal and external support on certain Level

investments. Internal cash flow models using a present value formula that includes assumptions market participants would use along with indicative exit pricing obtained from broker/dealers (where available) were used to support fair values of certain Level

investments.

The types of instruments valued based on matrix pricing in active markets include all of the Company’s U.S. government and agency securities, corporate bonds, asset backed securities, and municipal obligations. Such instruments are generally classified within Level

of the fair value hierarchy. As required by ASC

820

10,

the Company does not adjust the matrix pricing for such instruments.

Level

is for positions that are not traded in active markets or are subject to transfer restrictions, and

may

be adjusted to reflect illiquidity and/or non-transferability, with such adjustment generally based on available market evidence. In the absence of such evidence, management’s best estimate is used. Subsequent to inception, management only changes Level

inputs and assumptions when corroborated by evidence such as transactions in similar instruments, completed or pending

third

-party transactions in the underlying investment or comparable entities, subsequent rounds of financing, recapitalizations and other transactions across the capital structure, offerings in the equity or debt markets, and changes in financial ratios or cash flows. The Level

investment securities classified as available for sale are comprised of various issues of trust preferred securities and a single corporate bond.

The trust preferred securities are pools of similar securities that are grouped into an asset structure commonly referred to as collateralized debt obligations (“CDOs”) which consist of the debt instruments of various banks, diversified by the number of participants in the security as well as geographically.

The

secondary

market for these securities has become inactive, and therefore these securities are classified as Level

securities. The fair value analysis does not reflect or represent the actual terms or prices at which any party could purchase the securities. There is currently a limited

secondary

market for the securities and there can be no assurance that any

secondary

market for the securities will expand.

An independent,

third

party pricing service is used to estimate the current fair market value of each CDO held in the investment securities portfolio. The calculations used to determine fair value are based on the attributes of the trust preferred securities, the financial condition of the issuers of the trust preferred securities, and market based assumptions. The INTEX CDO Deal Model Library was utilized to obtain information regarding the attributes of each security and its specific collateral as of

March

31,

2017

and

December

31,

2016.

Financial information on the issuers was also obtained from Bloomberg, the FDIC, and SNL Financial. Both published and unpublished industry sources were utilized in estimating fair value. Such information includes loan prepayment speed assumptions, discount rates, default rates, and loss severity percentages.

The fair market valuation for each CDO was determined based on discounted cash flow analyses. The cash flows are primarily dependent on the estimated speeds at which the trust preferred securities are expected to prepay, the estimated rates at which the trust preferred securities are expected to defer payments, the estimated rates at which the trust preferred securities are expected to default, and the severity of the losses on securities that do default.

Increases (decreases) in actual or expected issuer defaults

tend

to decrease (increase) the fair value of the Company’s senior and mezzanine tranches of CDOs. The values of the Company’s mezzanine tranches of CDOs are also affected by expected future interest rates. However, due to the structure of each security, timing of cash flows, and

secondary

effects on the financial performance of the underlying issuers, the effects of changes in future interest rates on the fair value of the Company’s holdings are not quantifiably estimable.

Also included in Level

investment securities classified as available for sale is a corporate bond transferred from Level

2010

that is not actively traded.

Impairment would depend on the repayment ability of the underlying issuer, which is assessed through a detailed quarterly review of the issuer’s financial statements. The issuer is a “well capitalized” financial institution as defined by federal banking regulations and has demonstrated the ability to raise additional capital, when necessary, through the public capital markets. The fair value of this corporate bond is estimated by obtaining a price of a comparable floating rate debt instrument through Bloomberg.

SBA Loans Held For Sale (Carried at Lower of Cost or Fair Value)

The fair values of SBA loans held for sale is determined, when possible, using quoted

secondary

-market prices and are classified within Level

of the fair value hierarchy. If no such quoted prices exist, the fair value of a loan is determined using quoted prices for a similar loan or loans, adjusted for the specific attributes of that loan. The Company did

not

write down any loans held for sale during the

three

months ended

March

31,

2017

and the year ended

December

31,

2016.

Mortgage Loans Held for Sale (Carried at Fair Value)

The fair value of mortgage loans held for sale is determined by obtaining prices at which they could be sold in the principal market at the measurement date and are classified within Level

of the fair value hierarchy. In

2016,

Republic elected to adopt the fair value option for its mortgage loans held for sale portfolio in order to more accurately reflect their economic value. All mortgage loans held for sale originated subsequent to the election date are carried at fair value. All loans held for sale originated prior to the election date were sold prior to

December

31,

2016.

Interest income on loans held for sale, which totaled

$129,000

for

three

months ended

March

31,

2017

and

for the

three

months ended

March

31,

2016,

are included in interest and fees in the statements of income.

The following table reflects the difference between the carrying amount of mortgage loans held for sale, measured at fair value and the aggregate unpaid principal amount that Republic is contractually entitled to receive at maturity as of

March

31,

2017

and

December

31,

2016

(dollars in thousands):

Mortgage loans held for sale	Carrying Amount		Aggregate Unpaid Principal Balance		Excess Carrying Amount Over Aggregate Unpaid Principal Balance
March 31, 2017	$	19,753	$	19,052	$	701

December 31, 2016	$	23,911	$	23,428	$	483

Republic did not have any mortgage loans held for sale recorded at fair value that were

or more days past due and on non-accrual at

March

31,

2017

and

December

31,

2016.

Interest Rate Lock Commitments (“IRLC”)

The fair value of Republic’s IRLC instruments are based upon the underlying loans measured at fair value on a recurring basis and the probability of such commitments being exercised. Due to observable market data inputs used by Republic, IRLCs are classified within Level

of the valuation hierarchy.

Best Efforts Forward Loan Sales Commitments

Best efforts forward loan sales commitments are classified within Level

of the valuation hierarchy. Best efforts forward loan sales commitments fix the forward sales price that will be realized upon the sale of mortgage loans into the

secondary

market. Best efforts forward loan sales commitments are entered into for loans at the time the borrower commitment is made. These best efforts forward loan sales commitments are valued using the committed price to the counterparty against the current market price of the interest rate lock commitment or mortgage loan held for sale.

Mandatory Forward Loan Sales Commitments

Fair values for mandatory forward loan sales commitments are based on fair values of the underlying mortgage loans and the probability of such commitments being exercised. Due to the observable inputs used by Republic, best efforts mandatory loan sales commitments are classified within Level

of the valuation hierarchy.

Loans Receivable (Carried at Cost)

The fair values of loans receivable, excluding all nonaccrual loans and accruing loans deemed impaired with specific loan allowances, are estimated using discounted cash flow analyses, using market rates at the balance sheet date that reflect the credit and interest rate-risk inherent in the loans. Projected future cash flows are calculated based upon contractual maturity or call dates, projected repayments and prepayments of principal. Generally, for variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values.

Due to the significant judgment involved in evaluating credit quality, loans are classified within Level

of the fair value hierarchy.

Impaired Loans (Carried at Lower of Cost or Fair Value)

Impaired loans are those that the Company has measured impairment based on the fair value of the loan’s collateral. Fair value is generally determined based upon independent

third

party appraisals of the properties, or discounted cash flows based upon the expected proceeds. These assets are included as Level

fair values, based upon the lowest level of input that is significant to the fair value measurements. The fair value consists of the loan balances less any valuation allowance. The valuation allowance amount is calculated as the difference between the recorded investment in a loan and the present value of expected future cash flows or it is calculated based on discounted collateral values if the loans are collateral dependent.

Other Real Estate Owned (Carried at Lower of Cost or Fair Value)

These assets are carried at the lower of cost or fair value. At

March

31,

2017

and

December

31,

2016,

these assets are carried at current fair value and classified within Level

of the fair value hierarchy.

SBA Servicing Asset (Carried at Fair Value)

The SBA servicing asset is initially recorded when loans are sold and the servicing rights are retained and recorded on the balance sheet. An updated fair value is obtained from an independent

third

party on a quarterly basis and adjustments are presented as loan advisory and servicing fees on the statement of operations. The valuation begins with the projection of future cash flows for each asset based on their unique characteristics, the Company’s market-based assumptions for prepayment speeds and estimated losses and recoveries. The present value of the future cash flows are then calculated utilizing the Company’s market-based discount ratio assumptions. In all cases, the Company’s models expected payments for every loan for each quarterly period in order to create the most detailed cash flow stream possible.

The Company uses assumptions and estimates in determining the impairment of the SBA servicing asset. These assumptions include prepayment speeds and discount rates commensurate with the risks involved and comparable to assumptions used by participants to value and bid serving rights available for sale in the market. At

March

31,

2017

and

December

31,

2016,

the sensitivity of the current fair value of the SBA loan servicing rights to immediate

10%

and

20%

adverse changes in key assumptions are included in the accompanying table.

(dollars in thousands)	March 3 1 , 201 7			December 31, 201 6

SBA Servicing Asset

Fair Value of SBA Servicing Asset	$	5,298		$	5,352

Composition of SBA Loans Serviced for Others
Fixed-rate SBA loans		0	%		0	%
Adjustable-rate SBA loans		100	%		100	%
Total		100	%		100	%

Weighted Average Remaining Term (in years)		20.9			21.1

Prepayment Speed		6.58	%		6.12	%
Effect on fair value of a 10% increase	$	(164	)	$	(161	)
Effect on fair value of a 20% increase		(321	)		(316	)

Weighted Average Discount Rate		10.00	%		10.00	%
Effect on fair value of a 10% increase	$	(220	)	$	(226	)
Effect on fair value of a 20% increase		(423	)		(435	)

The sensitivity calculations above are hypothetical and should not be considered to be predictive of future performance. As indicated, changes in value based on adverse changes in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in value

may

not be linear. Also in this table, the effect of an adverse variation in a particular assumption on the value of the SBA servicing rights is calculated without changing any other assumption. While in reality, changes in

one

factor

may

magnify or counteract the effect of the change.

Restricted Stock (Carried at Cost)

The carrying amount of restricted stock approximates fair value, and considers the limited marketability of such securities. Restricted stock is classified within Level

of the fair value hierarchy.

Accrued Interest Receivable and Payable (Carried at Cost)

The carrying amounts of accrued interest receivable and accrued interest payable approximates fair value and are classified within Level

of the fair value hierarchy.

Deposit Liabilities (Carried at Cost)

The fair values disclosed for demand deposits (e.g., interest and noninterest checking, passbook savings and money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered in the market on certificates to a schedule of aggregated expected monthly maturities on time deposits. Deposit liabilities are classified within Level

of the fair value hierarchy.

Subordinated Debt (Carried at Cost)

Fair values of subordinated debt are estimated using discounted cash flow analysis, based on market rates currently offered on such debt with similar credit risk characteristics, terms and remaining maturity. Due to the significant judgment involved in developing the spreads used to value the subordinated debt, it is classified within Level

of the fair value hierarchy.

Off-Balance Sheet Financial Instruments (Disclosed at notional amounts)

Fair values for the Company’s off-balance sheet financial instruments (lending commitments and letters of credit) are based on fees currently charged in the market to enter into similar agreements, taking into account, the remaining terms of the agreements and the counterparties’ credit standing.

The estimated fair values of the Company’s financial instruments were as follows at

March

31,

2017.

	Fair Value Measurements at March 31, 2017
(dollars in thousands)	Carrying Amount		Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Balance Sheet Data
Financial assets:
Cash and cash equivalents	$	36,591	$	36,591		$	36,591	$	-	$	-
Investment securities available for sale		362,328		362,328			-		357,343		4,985
Investment securities held to maturity		421,850		413,699			-		413,699		-
Restricted stock		1,366		1,366			-		1,366		-
Loans held for sale		25,098		25,237			-		19,753		5,484
Loans receivable, net		1,016,962		995,394			-		-		995,394
SBA servicing assets		5,298		5,298			-		-		5,298
Accrued interest receivable		5,987		5,987			-		5,987		-
Interest rate lock commitments		831		831			-		831		-
Best efforts forward loan sales commitments		3		3			-		3		-
Mandatory forward loan sales commitments		8		8			-		8		-

Financial liabilities:
Deposits
Demand, savings and money market	$	1,614,079	$	1,614,079		$	-	$	1,614,079	$	-
Time		106,433		104,888			-		104,888		-
Subordinated debt		21,648		16,927			-		-		16,927
Accrued interest payable		490		490			-		490		-
Interest rate lock commitments		7		7			-		7		-
Best efforts forward loan sales commitments		270		270			-		270		-
Mandatory forward loan sales commitments		125		125			-		125		-

Off-Balance Sheet Data
Commitments to extend credit		-		-			-		-		-
Standby letters-of-credit		-		-			-		-		-

The estimated fair values of the Company’s financial instruments were as follows at

December

31,

2016.

	Fair Value Measurements at December 31, 2016
(dollars in thousands)	Carrying Amount		Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)

Balance Sheet Data
Financial assets:
Cash and cash equivalents	$	34,554	$	34,554	$	34,554	$	-	$	-
Investment securities available for sale		369,739		369,739		-		364,948		4,791
Investment securities held to maturity		432,499		425,183		-		425,183		-
Restricted stock		1,366		1,366		-		1,366		-
Loans held for sale		28,065		28,267		-		23,911		4,356
Loans receivable, net		955,817		937,944		-		-		937,944
SBA servicing assets		5,352		5,352		-		-		5,352
Accrued interest receivable		5,497		5,497		-		5,497		-
Interest rate lock commitments		439		439		-		439		-
Best efforts forward loan sales commitments		103		103		-		103		-
Mandatory forward loan sales commitments		229		229		-		229		-

Financial liabilities:
Deposits
Demand, savings and money market	$	1,566,506	$	1,566,506	$	-	$	1,566,506	$	-
Time		111,164		110,988		-		110,988		-
Subordinated debt		21,881		16,286		-		-		16,286
Accrued interest payable		444		444		-		444		-
Interest rate lock commitments		55		55		-		55		-
Best efforts forward loan sales commitments		125		125		-		125		-
Mandatory forward loan sales commitments		38		38		-		38		-

Off-Balance Sheet Data
Commitments to extend credit		-		-		-		-		-
Standby letters-of-credit		-		-		-		-		-