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

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

June 30, 2018

and

December 31, 2017

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

June 3 0 , 2018
Assets:

Collateralized mortgage obligations	$	346,942	$	-	$	346,942	$	-
Agency mortgage-backed securities		69,382		-		69,382		-
Municipal securities		18,578		-		18,578		-
Corporate bonds		59,614		-		56,531		3,083
Asset-backed securities		6,958		-		6,958		-
Trust Preferred Securities		547		-		-		547
Securities Available for Sale	$	502,021	$	-	$	498,391	$	3,630

Mortgage Loans Held for Sale	$	36,090	$	-	$	36,090	$	-
SBA Servicing Assets		4,977		-		-		4,977
Interest Rate Lock Commitments		714		-		714		-
Best Efforts Forward Loan Sales Commitments		1		-		1		-
Mandatory Forward Loan Sales Commitments		6		-		6		-

Liabilities:

Interest Rate Lock Commitments		3		-		3		-
Best Efforts Forward Loan Sales Commitments		210		-		210		-
Mandatory Forward Loan Sales Commitments		301		-		301		-


December 31, 2017
Assets:

Collateralized mortgage obligations	$	320,241	$	-	$	320,241	$	-
Agency mortgage-backed securities		54,866		-		54,866		-
Municipal securities		15,100		-		15,100		-
Corporate bonds		60,282		-		57,196		3,086
Asset-backed securities		13,452		-		13,452		-
Trust Preferred Securities		489		-		-		489
Securities Available for Sale	$	464,430	$	-	$	460,855	$	3,575

Mortgage Loans Held for Sale	$	43,375	$	-	$	43,375	$	-
SBA Servicing Assets		5,243		-		-		5,243
Interest Rate Lock Commitments		363		-		363		-
Best Efforts Forward Loan Sales Commitments		5		-		5		-
Mandatory Forward Loan Sales Commitments		19		-		19		-

Liabilities:

Interest Rate Lock Commitments		1		-		1		-
Best Efforts Forward Loan Sales Commitments		93		-		93		-
Mandatory Forward Loan Sales Commitments		195		-		195		-

The following tables present an analysis of the activity in the SBA servicing assets for the

three

and

six

months ended

June 30, 2018

and

2017:

	Three Months Ended June 30,
(dollars in thousands)	201 8			201 7
Beginning balance, April 1st	$	5,059		$	5,298
Additions		247			267
Fair value adjustments		(329	)		(371	)
Ending balance, June 30th	$	4,977		$	5,194

	Six Months Ended June 30,
(dollars in thousands)	2018			2017
Beginning balance, January 1st	$	5,243		$	5,352
Additions		567			478
Fair value adjustments		(833	)		(636	)
Ending balance, June 30th	$	4,977		$	5,194

Fair value adjustments are recorded as loan and servicing fees on the statement of income. Servicing fee income,

not

including fair value adjustments, totaled

$493,000

and

$485,000

for the

three

months ended

June 30, 2018

and

2017,

respectively. Servicing fee income,

not

including fair value adjustments, totaled

$986,000

and

$918,000

for the

six

months ended

June 30, 2018

and

2017,

respectively. Total loans in the amount of

$207.3

million at

June 30, 2018

and

$204.9

million at

December 31, 2017

were serviced for others.

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

and

six

months ended

June 30, 2018

and

2017:

	Three Months Ended June 30, 201 8						Three Months Ended June 30 , 201 7
Level 3 Investments Only (dollars in thousands)	Trust Preferred Securities			Corporate Bonds			Trust Preferred Securities			Corporate Bonds
Balance, April 1 st	$	561		$	3,090		$	1,961		$	3,024
Unrealized gains (losses)		(14	)		(7	)		525			55
Proceeds from sales		-			-			(970	)		-
Realized losses		-			-			(548	)		-
Balance, June 30 th	$	547		$	3,083		$	968		$	3,079

	Six Months Ended June 30, 201 8					Six Months Ended June 30, 201 7
Level 3 Investments Only (dollars in thousands)	Trust Preferred Securities		Corporate Bonds			Trust Preferred Securities			Corporate Bonds
Balance, January 1 st	$	489	$	3,086		$	1,820		$	2,971
Unrealized gains (losses)		58		(3	)		666			108
Proceeds from sales		-		-			(970	)		-
Realized losses		-		-			(548	)		-
Balance, June 30 th	$	547	$	3,083		$	968		$	3,079

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

June 30, 2018

and

December 31, 2017

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
June 30, 2018
Impaired loans	$	7,149	$	-	$	-	$	7,149
Other real estate owned		-		-		-		-

December 31, 2017
Impaired loans	$	7,322	$	-	$	-	$	7,322
Other real estate owned		5,727		-		-		5,727

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)
June 3 0 , 201 8

Corporate bonds	$	3,083	Discounted Cash Flows	Discount Rate			(7.32%)

Trust preferred securities	$	547	Discounted Cash Flows	Discount Rate			(8.06%)

SBA servicing assets	$	4,977	Discounted Cash Flows	Conditional Prepayment Rate			(9.88%)

				Discount Rate			(11.00%)

Impaired loans	$	7,149	Appraised Value of Collateral (1)	Liquidation expenses (2)		10%	-	30%	(13%) (3)

December 31, 201 7

Corporate bonds	$	3,086	Discounted Cash Flows	Discount Rate			(5.99%)

Trust preferred securities	$	489	Discounted Cash Flows	Discount Rate			(8.33%)

SBA servicing assets	$	5,243	Discounted Cash Flows	Conditional Prepayment Rate			(7.85%)

				Discount Rate			(10.50%)

Impaired loans	$	7,322	Appraised Value of Collateral (1)	Liquidation expenses (2)		10%	-	21%	(14%) (3)

Other real estate owned	$	5,727	Appraised Value of Collateral (1)	Liquidation expenses (2)			(22%) (3)

			Sales Price	Liquidation expenses (2)		4%	-	7%	(7%) (3)

(

)

Fair value is generally determined through independent appraisals of the underlying collateral, which include Level

inputs that are

not

identifiable.

(

)

Appraisals

may

be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses.

(

)

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

June 30, 2018

and

December

31,

2017.

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

), or matrix pricing (Level

), 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

). 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 a single trust preferred security and a single corporate bond.

The trust preferred security is a pool 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 this security has become inactive, and therefore this security is classified as a Level

security. The fair value analysis does

not

reflect or represent the actual terms or prices at which any party could purchase the security. There is currently a limited secondary market for the security and there can be

assurance that any secondary market for the security will expand.

An independent,

third

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

June 30, 2018

and

December 31, 2017.

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 prepayment speed assumptions, discount rates, default rates, and loss severity percentages.

The fair market valuation for the CDO was determined based on discounted cash flow analyses. The cash flows are primarily dependent on the estimated speeds at which the underlying 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 the securities that default.

Increases (decreases) in actual or expected issuer defaults tend to decrease (increase) the fair value of senior and mezzanine tranches of CDOs. The value of the Company’s mezzanine tranches of the CDO is also affected by expected future interest rates. However, due to the structure of the 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 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.

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. 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. Interest income on loans held for sale, which totaled

$231,000

and

$525,000

for

three

and

six

months ended

June 30, 2018,

respectively, and

$171,000

and

$300,000

for the

three

and

six

months ended

June 30, 2017,

respectively, 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

June 30, 2018

and

December 31, 2017 (

dollars in thousands):

	Carrying Amount		Aggregate Unpaid Principal Balance		Excess Carrying Amount Over Aggregate Unpaid Principal Balance
June 30, 2018	$	36,090	$	34,802	$	1,288

December 31, 2017	$	43,375	$	42,046	$	1,329

Changes in the excess carrying amount over aggregate unpaid principal balance are recorded in the statement of income in mortgage banking income. 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

June 30, 2018

and

December 31, 2017.

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.

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

June 30, 2018

and

December 31, 2017,

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 and servicing fees on the statement of income. 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

June 30, 2018

and

December 31, 2017,

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)	June 3 0 , 2018			December 31, 2017

SBA Servicing Asset

Fair Value of SBA Servicing Asset	$	4,977		$	5,243

Composition of SBA Loans Serviced for Others
Fixed-rate SBA loans		2	%		2	%
Adjustable-rate SBA loans		98	%		98	%
Total		100	%		100	%

Weighted Average Remaining Term (in years)		20.4			20.5

Prepayment Speed		9.88	%		7.85	%
Effect on fair value of a 10% increase	$	(174	)	$	(171	)
Effect on fair value of a 20% increase		(338	)		(333	)

Weighted Average Discount Rate		11.00	%		10.50	%
Effect on fair value of a 10% increase	$	(191	)	$	(211	)
Effect on fair value of a 20% increase		(369	)		(407	)

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.

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

June 30, 2018:

	Fair Value Measurements at June 3 0 , 201 8
(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	$	59,354	$	59,354	$	59,354	$	-	$	-
Investment securities available for sale		502,021		502,021		-		498,391		3,630
Investment securities held to maturity		503,742		483,994		-		483,994		-
Restricted stock		8,379		8,379		-		8,379		-
Loans held for sale		39,301		39,301		-		36,090		3,211
Loans receivable, net		1,310,012		1,283,864		-		-		1,283,864
SBA servicing assets		4,977		4,977		-		-		4,977
Accrued interest receivable		8,019		8,019		-		8,019		-
Interest rate lock commitments		714		714		-		714		-
Best efforts forward loan sales commitments		1		1		-		1		-
Mandatory forward loan sales commitments		6		6		-		6		-

Financial liabilities:
Deposits
Demand, savings and money market	$	2,010,345	$	2,010,345	$	-	$	2,010,345	$	-
Time		123,796		122,287		-		122,287		-
Short-term borrowings		161,669		161,669		-		161,669		-
Subordinated debt		11,256		8,501		-		-		8,501
Accrued interest payable		408		408		-		408		-
Interest rate lock commitments		3		3		-		3		-
Best efforts forward loan sales commitments		210		210		-		210		-
Mandatory forward loan sales commitments		301		301		-		301		-

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, 2017.

	Fair Value Measurements at December 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	$	61,942	$	61,942	$	61,942	$	-	$	-
Investment securities available for sale		464,430		464,430		-		460,855		3,575
Investment securities held to maturity		472,213		463,799		-		463,799		-
Restricted stock		1,918		1,918		-		1,918		-
Loans held for sale		45,700		45,714		-		43,375		2,339
Loans receivable, net		1,153,679		1,120,305		-		-		1,120,305
SBA servicing assets		5,243		5,243		-		-		5,243
Accrued interest receivable		7,009		7,009		-		7,009		-
Interest rate lock commitments		363		363		-		363		-
Best efforts forward loan sales commitments		5		5		-		5		-
Mandatory forward loan sales commitments		19		19		-		19		-

Financial liabilities:
Deposits
Demand, savings and money market	$	1,946,558	$	1,946,558	$	-	$	1,946,558	$	-
Time		116,737		115,673		-		115,673		-
Subordinated debt		21,681		18,458		-		-		18,458
Accrued interest payable		293		293		-		293		-
Interest rate lock commitments		1		1		-		1		-
Best efforts forward loan sales commitments		93		93		-		93		-
Mandatory forward loan sales commitments		195		195		-		195		-

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