Fair Value Measurements and Fair Values 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

December 31, 2019

and

December 31, 2018

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

December 31, 201 9
Assets:

U.S. Government agencies	$	38,305	$	-	$	38,305	$	-
Collateralized mortgage obligations		331,438		-		331,438		-
Agency mortgage-backed securities		98,937		-		98,937		-
Municipal securities		4,082		-		4,082		-
Corporate bonds		66,280		-		63,460		2,820
Securities Available for Sale	$	539,042	$	-	$	536,222	$	2,820

Mortgage Loans Held for Sale	$	10,345	$	-	$	10,345	$	-
SBA Servicing Assets		4,447		-		-		4,447
Interest Rate Lock Commitments		362		-		362		-
Best Efforts Forward Loan Sales Commitments		4		-		4		-
Mandatory Forward Loan Sales Commitments		2		-		2		-

Liabilities:

Interest Rate Lock Commitments		-		-		-		-
Best Efforts Forward Loan Sales Commitments		133		-		133		-
Mandatory Forward Loan Sales Commitments		83		-		83		-

December 31, 201 8
Assets:

Collateralized mortgage obligations	$	196,259	$	-	$	196,259	$	-
Agency mortgage-backed securities		38,499		-		38,499		-
Municipal securities		20,639		-		20,639		-
Corporate bonds		59,274		-		56,205		3,069
Asset-backed securities		6,343		-		6,343		-
Securities Available for Sale	$	321,014	$	-	$	317,945	$	3,069

Mortgage Loans Held for Sale	$	20,887	$	-	$	20,887	$	-
SBA Servicing Assets		4,785		-		-		4,785
Interest Rate Lock Commitments		410		-		410		-
Best Efforts Forward Loan Sales Commitments		5		-		5		-
Mandatory Forward Loan Sales Commitments		10		-		10		-

Liabilities:

Interest Rate Lock Commitments		-		-		-		-
Best Efforts Forward Loan Sales Commitments		138		-		138		-
Mandatory Forward Loan Sales Commitments		230		-		230		-

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

December 31, 2019,

2018,

and

2017:

(dollars in thousands)	201 9			201 8			201 7
Beginning balance, January 1 st	$	4,785		$	5,243		$	5,352
Additions		1,026			1,000			1,078
Fair value adjustments		(1,364	)		(1,458	)		(1,187	)
Ending balance, December 31 st	$	4,447		$	4,785		$	5,243

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

not

including fair value adjustments, totaled

$1.9

million,

$2.0

million, and

$1.8

million for the years ended

December 31, 2019,

2018,

and

2017,

respectively. Total loans in the amount of

$201.7

million at

December 31, 2019

and

$204.4

million at

December 31, 2018

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 years ended

December 31, 2019,

2018,

and

2017:

	Year Ended December 31, 201 9					Year Ended December 31, 201 8						Year Ended December 31, 201 7
Level 3 Investments Only (dollars in thousands)	Trust Preferred Securities		Corporate Bonds			Trust Preferred Securities			Corporate Bonds			Trust Preferred Securities			Corporate Bonds
Balance, January 1,	$	-	$	3,069		$	489		$	3,086		$	1,820		$	2,971
Security transferred to Level 3 measurement		-		-			-			-			-			-
Unrealized (losses) gains		-		(249	)		237			(17	)		1,006			115
Paydowns		-		-			-			-			-			-
Proceeds from sales		-		-			(660	)		-			(1,539	)		-
Realized losses		-		-			(66	)		-			(798	)		-
Impairment charges on Level 3		-		-			-			-			-			-
Balance, December 31,	$	-	$	2,820		$	-		$	3,069		$	489		$	3,086

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

December 31, 2019

and

2018,

respectively, 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
December 31, 2019:
Impaired loans	$	5,730	$	-	$	-	$	5,730
Other real estate owned		899		-		-		899

December 31, 2018:
Impaired loans	$	5,955	$	-	$	-	$	5,955
Other real estate owned		1,114		-		-		1,114

The table below presents additional quantitative information about Level

assets measured at fair value (dollars in thousands):

	Quantitative Information about Level 3 Fair Value Measurements
Asset Description	Fair Value		Valuation Technique	Unobservable Input	Range (Weighted Average)
December 31, 201 9

Corporate bonds	$	2,820	Discounted Cash Flows	Discount Rate	(6.66%)

SBA servicing assets	$	4,447	Discounted Cash Flows	Conditional Prepayment Rate	(13.53%)

				Discount Rate	(10.75%)

Impaired loans	$	5,730	Appraised Value of Collateral (1)	Liquidation expenses (2)	9%	-	20%	(12%)	(3)

Other real estate owned	$	899	Appraised Value of Collateral (1)	Liquidation expenses (2)	6%	-	16%	(8%)	(3)

December 31, 201 8

Corporate bonds	$	3,069	Discounted Cash Flows	Discount Rate	(8.24%)

SBA servicing assets	$	4,785	Discounted Cash Flows	Conditional Prepayment Rate	(10.31%)

				Discount Rate	(11.50%)

Impaired loans	$	5,955	Appraised Value of Collateral (1)	Liquidation expenses (2)	11%	-	24%	(13%)	(3)

Other real estate owned	$	1,114	Appraised Value of Collateral (1)	Liquidation expenses (2)	(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

December 31, 2019

and

December

31,

2018:

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 held in the investment securities portfolio. 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. Republic has

one

Level

investment classified as available for sale which is a single corporate bond.

The corporate bond included in Level

was transferred from Level

2010

and 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, totaled

$500,000

and

$1.2

million for the

twelve

months ended

December 31, 2019

and

December 31, 2018,

respectively, are included in interest and fees in the statements of operations.

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

December 31, 2019

and

December 31, 2018 (

dollars in thousands):

	Carrying Amount		Aggregate Unpaid Principal Balance		Excess Carrying Amount Over Aggregate Unpaid Principal Balance
December 31, 2019	$	10,345	$	9,983	$	362

December 31, 2018	$	20,887	$	20,071	$	816

Changes in the excess carrying amount over aggregate unpaid principal balance are recorded in the statement of operations 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

December 31, 2019

and

December 31, 2018.

Interest Rate Lock Commitments (“IRLC”)

The Company determines the value of IRLCs by comparing the market price to the price locked in with the customer, adding fees or points to be collected at closing, subtracting commissions to be paid at closing, and subtracting estimated remaining loan origination costs to the bank based on the processing status of the loan. The Company also considers pull-through as it determines the fair value of IRLCs. Factors that affect pull-through rates include the origination channel, current mortgage interest rates in the market versus the interest rate incorporated in the IRLC, the purpose of the mortgage (purchase versus financing), the stage of completion of the underlying application and underwriting process, and the time remaining until the IRLC expires. 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. Fair value is determined through valuations periodically performed by

third

-party appraisers, and the real estate is carried at the lower of its carrying amount or fair value less estimated costs to sell. Any declines in the fair value of the real estate properties below the initial cost basis are recorded through a valuation expense. At

December 31, 2019

and

December 31, 2018,

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 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

December 31, 2019

and

December 31, 2018,

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

and

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

(dollars in thousands)	December 31, 201 9			December 31, 201 8

SBA Servicing Asset

Fair Value of SBA Servicing Asset	$	4,447		$	4,785

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)	20.7			20.4

Prepayment Speed		13.53	%		10.31	%
Effect on fair value of a 10% increase	$	(175	)	$	(170	)
Effect on fair value of a 20% increase		(338	)		(330	)

Weighted Average Discount Rate		10.75	%		11.50	%
Effect on fair value of a 10% increase	$	(154	)	$	(186	)
Effect on fair value of a 20% increase		(298	)		(359	)

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 at

December 31, 2019

were as follows:

	Fair Value Measurements at December 3 1 , 2019
(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	$	168,319	$	168,319	$	168,319	$	-	$	-
Investment securities available for sale		539,042		539,042		-		536,222		2,820
Investment securities held to maturity		644,842		653,109		-		653,109		-
Restricted stock		2,746		2,746		-		2,746		-
Loans held for sale		13,349		13,349		-		10,345		3,004
Loans receivable, net		1,738,929		1,731,876		-		-		1,731,876
SBA servicing assets		4,447		4,447		-		-		4,447
Accrued interest receivable		9,934		9,934		-		9,934		-
Interest rate lock commitments		362		362		-		362		-
Best efforts forward loan sales commitments		4		4		-		4		-
Mandatory forward loan sales commitments		2		2		-		2		-

Financial liabilities:
Deposits
Demand, savings and money market	$	2,775,584	$	2,775,584	$	-	$	2,775,584	$	-
Time		223,579		224,095		-		224,095		-
Subordinated debt		11,265		8,540		-		-		8,540
Accrued interest payable		1,630		1,630		-		1,630		-
Interest rate lock commitments		-		-		-		-		-
Best efforts forward loan sales commitments		133		133		-		133		-
Mandatory forward loan sales commitments		83		83		-		83		-

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

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

December 31, 2018

were as follows:

	Fair Value Measurements at December 31, 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	$	72,473	$	72,473	$	72,473	$	-	$	-
Investment securities available for sale		321,014		321,014		-		317,945		3,069
Investment securities held to maturity		761,563		747,323		-		747,323		-
Restricted stock		5,754		5,754		-		5,754		-
Loans held for sale		26,291		26,291		-		20,887		5,404
Loans receivable, net		1,427,983		1,410,945		-		-		1,410,945
SBA servicing assets		4,785		4,785		-		-		4,785
Accrued interest receivable		9,025		9,025		-		9,025		-
Interest rate lock commitments		410		410		-		410		-
Best efforts forward loan sales commitments		5		5		-		5		-
Mandatory forward loan sales commitments		10		10		-		10		-

Financial liabilities:
Deposits
Demand, savings and money market	$	2,238,610	$	2,238,610	$	-	$	2,238,610	$	-
Time		154,257		152,989		-		152,989		-
Subordinated debt		11,259		8,279		-		-		8,279
Accrued interest payable		558		558		-		558		-
Interest rate lock commitments		-		-		-		-		-
Best efforts forward loan sales commitments		138		138		-		138		-
Mandatory forward loan sales commitments		230		230		-		230		-

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