UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ]   Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
           For the quarterly period ended SeptemberJune 30, 2016.2017.
or
[      ]    Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
             For the transition period from ____ to ____.
Commission File Number:  000-17007
Republic First Bancorp, Inc.
(Exact name of registrant as specified in its charter)

Pennsylvania
23-2486815
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
  
50 South 16th Street, Philadelphia, Pennsylvania
19102
(Address of principal executive offices)(Zip code)
215-735-4422
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES  [X]   NO  [  ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   YES  [X]     NO  [  ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer,  or a smaller reporting company, or an emerging growth company.  See the definitions of "large accelerated filer," "accelerated filer"filer," "smaller reporting company," and "smaller reporting"emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [   ]
Accelerated filer     [X]
Non-Accelerated filer [   ]
(Do not check if a smaller reporting company)
Smaller reporting company    [   ]
Emerging growth company  [   ]
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES  [  ]    NO   [X]
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer'sRegistrant's classes of common stock, as of the latest practicable date.

Common Stock, par value $0.01 per share
37,917,378
56,971,264
Title of Class
Number of Shares Outstanding as of NovemberAugust 4, 2016
2017



REPUBLIC FIRST BANCORP, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
   
Part I:  Financial InformationPage
   
Item 1.Financial Statements 
 Consolidated balance sheets as of SeptemberJune 30, 20162017 and December 31, 20152016 (unaudited)1
 
Consolidated statements of income for the three and ninesix months ended SeptemberJune 30, 2017 and 2016 and 2015 (unaudited)
2
Consolidated statements of comprehensive income for the three and ninesix months ended SeptemberJune 30, 2017 and 2016 and 2015 (unaudited)
2
3
 Consolidated statements of cash flows for the ninesix months ended SeptemberJune 30, 20162017 and 20152016 (unaudited)
4
 Consolidated statements of changes in shareholders' equity for the ninesix months ended SeptemberJune 30, 20162017 and 20152016 (unaudited)
5
 Notes to consolidated financial statements (unaudited)6
   
Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations4142
   
Item 3.Quantitative and Qualitative Disclosures about Market Risk6162
   
Item 4.Controls and Procedures6162
   
Part II:  Other Information 
   
Item 1.Legal Proceedings6263
   
Item 1A.Risk Factors6263
   
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds6263
   
Item 3.Defaults Upon Senior Securities6263
   
Item 4.Mine Safety Disclosures6263
   
Item 5.Other Information6263
   
Item 6.Exhibits6364
   
Signatures6465
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Balance Sheets
SeptemberJune 30, 20162017 and December 31, 20152016
(Dollars in thousands, except per share data)
(unaudited)
 
September 30,
2016
  
December 31,
2015
  
June 30,
2017
  
December 31,
2016
 
ASSETS          
Cash and due from banks $23,061  $13,777  $28,247  $19,830 
Interest bearing deposits with banks  126,980   13,362   59,750   14,724 
Cash and cash equivalents  150,041   27,139   87,997   34,554 
                
Investment securities available for sale, at fair value  299,385   284,795   345,182   369,739 
Investment securities held to maturity, at amortized cost (fair value of $223,247 and $171,845, respectively)  220,470   172,277 
Investment securities held to maturity, at amortized cost (fair value of $403,183 and $425,183, respectively)  409,373   432,499 
Restricted stock, at cost  1,366   3,059   3,878   1,366 
Loans held for sale  29,715   3,653   29,547   28,065 
Loans receivable (net of allowance for loan losses of $9,453 and $8,703, respectively)  936,088   866,066 
Loans receivable (net of allowance for loan losses of $9,454 and $9,155, respectively)  1,057,056   955,817 
Premises and equipment, net  55,573   46,164   65,471   57,040 
Other real estate owned, net  10,271   11,313   9,909   10,174 
Accrued interest receivable  4,588   4,216   5,840   5,497 
Goodwill  4,892   -   5,011   5,011 
Intangible asset  87   -   9   61 
Other assets  21,986   20,761   24,214   24,108 
Total Assets $1,734,462  $1,439,443  $2,043,487  $1,923,931 
                
LIABILITIES AND SHAREHOLDERS' EQUITY                
Liabilities                
Deposits                
Demand – non-interest bearing $302,372  $243,695  $370,270  $324,912 
Demand – interest bearing  587,197   381,499   647,501   605,950 
Money market and savings  583,536   556,526   607,859   635,644 
Time deposits  109,127   67,578   106,801   111,164 
Total Deposits  1,582,232   1,249,298   1,732,431   1,677,670 
Short-term borrowings  -   47,000   55,000   - 
Accrued interest payable  339   245   317   444 
Other liabilities  9,763   7,049   11,762   8,883 
Subordinated debt  22,476   22,476   21,656   21,881 
Total Liabilities  1,614,810   1,326,068   1,821,166   1,708,878 
                
Shareholders' Equity                
Preferred stock, par value $0.01 per share: 10,000,000 shares authorized; no shares issued and outstanding  -   -   -   - 
Common stock, par value $0.01 per share: 100,000,000 shares authorized; shares issued 38,446,223 as of September 30, 2016 and 38,365,848 as of December 31, 2015; shares outstanding 37,917,378 as of September 30, 2016 and 37,837,003 as of December 31, 2015  384   384 
Common stock, par value $0.01 per share: 100,000,000 shares authorized; shares issued 57,500,109 as of June 30, 2017 and 57,283,712 as of December 31, 2016; shares outstanding 56,971,264 as of June 30, 2017 and 56,754,867 as of December 31, 2016  575   573 
Additional paid in capital  153,887   152,897   255,215   253,570 
Accumulated deficit  (29,385)  (32,833)  (24,042)  (27,888)
Treasury stock at cost (503,408 shares as of September 30, 2016 and December 31, 2015)  (3,725)  (3,725)
Stock held by deferred compensation plan (25,437 shares as of September 30, 2016 and
December 31, 2015)
  (183)  (183)
Treasury stock at cost (503,408 shares as of June 30, 2017 and December 31, 2016)  (3,725)  (3,725)
Stock held by deferred compensation plan (25,437 shares as of June 30, 2017 and December 31, 2016)  (183)  (183)
Accumulated other comprehensive loss  (1,326)  (3,165)  (5,519)  (7,294)
Total Shareholders' Equity  119,652   113,375   222,321   215,053 
Total Liabilities and Shareholders' Equity $1,734,462  $1,439,443  $2,043,487  $1,923,931 


(See notes to consolidated financial statements)
- 1 -


Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Income
For the Three and NineSix Months Ended SeptemberJune 30, 20162017 and 20152016
(Dollars in thousands, except per share data)
 (unaudited)

  
Three Months Ended
June 30,
  
Six Months Ended
June 30,
 
  2017  2016  2017  2016 
Interest income:            
   Interest and fees on taxable loans $12,069  $10,096  $23,010  $19,813 
   Interest and fees on tax-exempt loans  261   227   519   441 
   Interest and dividends on taxable investment securities  4,777   2,620   9,510   5,214 
   Interest and dividends on tax-exempt investment securities  154   179   348   353 
   Interest on federal funds sold and other interest-earning assets  70   87   131   150 
       Total interest income  17,331   13,209   33,518   25,971 
Interest expense:                
   Demand- interest bearing  695   503   1,303   918 
   Money market and savings  732   637   1,430   1,246 
   Time deposits  295   183   591   324 
   Other borrowings  342   289   708   595 
       Total interest expense  2,064   1,612   4,032   3,083 
Net interest income  15,267   11,597   29,486   22,888 
Provision for loan losses  500   650   500   950 
       Net interest income after provision for loan losses  14,767   10,947   28,986   21,938 
Non-interest income:                
   Loan advisory and servicing fees  316   197   653   800 
   Mortgage banking income  2,971   -   5,392   - 
   Gain on sales of SBA loans  796   1,749   1,484   2,582 
   Service fees on deposit accounts  907   654   1,753   1,224 
   Gain (loss) on sale of investment securities  (61)  358   (61)  654 
   Net securities impairment recognized in earnings  -   (4)  -   (5)
   Other non-interest income  40   77   86   188 
Total non-interest income  4,969   3,031   9,307   5,443 
Non-interest expenses:                
   Salaries and employee benefits  9,389   6,551   17,971   12,603 
   Occupancy  1,752   1,447   3,467   2,852 
   Depreciation and amortization  1,121   796   2,296   1,765 
   Legal  127   66   379   154 
   Other real estate owned  612   323   958   908 
   Advertising  222   190   467   319 
   Data processing  765   575   1,550   1,042 
   Insurance  200   188   473   394 
   Professional fees  507   455   935   815 
   Regulatory assessments and costs  324   373   653   715 
   Taxes, other  238   228   474   252 
   Other operating expenses  2,428   1,775   4,866   3,491 
       Total non-interest expense  17,685   12,967   34,489   25,310 
Income before benefit for income taxes  2,051   1,011   3,804   2,071 
Benefit for income taxes  (8)  (12)  (42)  (37)
Net income $2,059  $1,023  $3,846  $2,108 
Net income per share:                
Basic $0.04  $0.03  $0.07  $0.06 
Diluted $0.04  $0.03  $0.07  $0.05 
  Three Months Ended September 30,  Nine Months Ended September 30, 
  2016  2015  2016  2015 
Interest income:        
   Interest and fees on taxable loans $10,446  $9,518  $30,259  $27,611 
   Interest and fees on tax-exempt loans  261   130   702   384 
   Interest and dividends on taxable investment securities  2,591   1,509   7,805   4,396 
   Interest and dividends on tax-exempt investment securities  173   153   526   416 
   Interest on federal funds sold and other interest-earning assets  149   60   299   223 
       Total interest income  13,620   11,370   39,591   33,030 
Interest expense:                
   Demand- interest bearing  553   378   1,471   1,009 
   Money market and savings  677   538   1,923   1,592 
   Time deposits  301   183   625   528 
   Other borrowings  303   279   898   833 
       Total interest expense  1,834   1,378   4,917   3,962 
Net interest income  11,786   9,992   34,674   29,068 
Provision for loan losses  607   -   1,557   - 
       Net interest income after provision for loan losses  11,179   9,992   33,117   29,068 
Non-interest income:                
   Loan advisory and servicing fees  218   163   1,018   1,087 
   Gain on sales of loans  4,413   884   6,995   2,684 
   Service fees on deposit accounts  686   452   1,910   1,213 
   Gain on sale of investment securities  2   64   656   73 
   Other-than-temporary impairment  (12)  -   (39)  (13)
   Portion recognized in other comprehensive income (before taxes)  10   -   32   10 
        Net impairment loss on investment securities  (2)  -   (7)  (3)
   Other non-interest income  94   41   282   149 
Total non-interest income  5,411   1,604   10,854   5,203 
Non-interest expenses:                
   Salaries and employee benefits  7,731   5,730   20,334   16,667 
   Occupancy  1,535   1,240   4,387   3,624 
   Depreciation and amortization  1,051   671   2,816   2,126 
   Legal  158   52   312   631 
   Other real estate owned  702   425   1,610   1,173 
   Advertising  218   233   537   475 
   Data processing  669   408   1,711   1,133 
   Insurance  262   162   656   532 
   Professional fees  352   293   1,167   968 
   Regulatory assessments and costs  296   318   1,011   911 
   Taxes, other  243   169   495   594 
   Other operating expenses  2,065   1,323   5,556   3,811 
       Total non-interest expense  15,282   11,024   40,592   32,645 
Income before benefit for income taxes  1,308   572   3,379   1,626 
Benefit for income taxes  (32)  (10)  (69)  (17)
Net income $1,340  $582  $3,448  $1,643 
Net income per share:                
Basic $0.04  $0.02  $0.09  $0.04 
Diluted $0.03  $0.02  $0.09  $0.04 

(See notes to consolidated financial statements)
- 2 -


 
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
For the Three and NineSix Months Ended SeptemberJune 30, 20162017 and 20152016
(Dollars in thousands)
(unaudited)

  Three Months Ended September 30,  Nine Months Ended September 30, 
  2016  2015  2016  2015 
         
Net income $1,340  $582  $3,448  $1,643 
                 
   Other comprehensive income (loss), net of tax                
       Unrealized gain (loss) on securities (pre-tax $(1,082),
        $490, $3,386, and $(718), respectively)
  (693)  314   2,170   (460)
       Reclassification adjustment for securities gains (pre-tax
       $(2), $(64), $(656), and $(73), respectively)
  (1)  (41)  (420)  (47)
       Reclassification adjustment for impairment charge (pre-
       tax $2, $-, $7, and $3, respectively)
  1   -   4   2 
            Net unrealized gains (losses) on securities  (693)  273   1,754   (505)
       Net unrealized holding losses on securities transferred
       from available-for-sale to held-to-maturity:
                
            Amortization of net unrealized holding losses to
            income during the period (pre-tax $38, $25, $133,
            and $128, respectively)
  24   16   85   82 
                 
Total other comprehensive income (loss)  (669)  289   1,839   (423)
                 
Total comprehensive income $671  $871  $5,287  $1,220 

  
Three Months Ended
June 30,
  
Six Months Ended
June 30,
 
   2017   2016   2017   2016 
Net income $2,059  $1,023  $3,846  $2,108 
                 
   Other comprehensive income, net of tax                
       Unrealized gain on securities (pre-tax $1,651, $1,156, $2,622, and $4,468, respectively)  1,058   741   1,681   2,863 
       Reclassification adjustment for securities losses/(gains) (pre-tax $61, $(358), $61, and $(654), respectively)  39   (229)  39   (419)
Reclassification adjustment for impairment charge (pre-tax $-, $4, $-, and $5, respectively)    -    2    -    3 
            Net unrealized gains on securities  1,097   514   1,720   2,447 
       Net unrealized holding losses on securities transferred from available-for-sale to held-to-maturity:                
            Amortization of net unrealized holding losses to income during the period (pre-tax $43, $37, $85, and $95 respectively)  28   24   55   61 
                 
Total other comprehensive income  1,125   538   1,775   2,508 
                 
Total comprehensive income $3,184  $1,561  $5,621  $4,616 

 (See notes to consolidated financial statements)




- 3 -



Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the NineSix Months Ended SeptemberJune 30, 20162017 and 20152016
(Dollars in thousands)
(unaudited)
 Nine Months Ended September 30,  Six Months Ended June 30, 
 2016  2015  2017  2016 
Cash flows from operating activities          
Net income $3,448  $1,643  $3,846  $2,108 
Adjustments to reconcile net income to net cash provided by operating activities:                
Provision for loan losses  1,557   -   500   950 
Write down of other real estate owned  521   298   258   129 
Depreciation and amortization  2,816   2,126   2,296   1,765 
Stock based compensation  562   441   817   367 
Gain on sale of investment securities  (656)  (73)
Loss (gain) on sale of investment securities  61   (654)
Impairment charges on investment securities  7   3   -   5 
Amortization of premiums on investment securities  1,172   635   1,191   637 
Accretion of discounts on retained SBA loans  (1,057)  (754)  (646)  (677)
Fair value adjustments on SBA servicing assets  894   597   636   570 
Proceeds from sales of SBA loans originated for sale  48,031   27,999   17,692   28,918 
SBA loans originated for sale  (43,016)  (24,128)  (17,294)  (28,170)
Gains on sales of SBA loans originated for sale  (4,212)  (2,684)  (1,484)  (2,582)
Proceeds from sales of mortgage loans originated for sale  79,029   -   173,501   - 
Mortgage loans originated for sale  (82,240)  -   (169,467)  - 
Gains on sales of mortgage loans originated for sale  (2,783)  - 
Gains on mortgage loans originated for sale  (4,430)  - 
Amortization of intangible assets  17   -   52   - 
Amortization of debt issuance costs  15   15 
Increase in accrued interest receivable and other assets  (704)  (3,302)  (2,080)  (1,686)
Decrease in accrued interest payable and other liabilities  (396)  (712)
Increase (decrease) in accrued interest payable and other liabilities  2,752   (593)
Net cash provided by operating activities  2,990   2,089   8,216   1,102 
                
Cash flows from investing activities                
Purchase of investment securities available for sale  (117,812)  (57,807)  (10,311)  (55,937)
Purchase of investment securities held to maturity  (69,792)  (85,246)  -   (38,073)
Proceeds from the sale of securities available for sale  78,582   6,672   21,167   78,582 
Proceeds from the paydowns, maturity, or call of securities available for sale  26,295   26,397   15,762   13,031 
Proceeds from the paydowns, maturity, or call of securities held to maturity  21,106   12,768   22,583   11,029 
Redemption (purchase) of restricted stock  1,693   (22)
(Purchase) redemption of restricted stock  (2,512)  1,692 
Net increase in loans  (70,006)  (77,027)  (101,222)  (55,816)
Net proceeds from sale of other real estate owned  1,387   792   136   76 
Net cash paid in acquisition  (5,913)  - 
Premises and equipment expenditures  (12,122)  (12,190)  (10,727)  (9,218)
Net cash used in investing activities  (146,582)  (185,663)  (65,124)  (54,634)
                
Cash flows from financing activities                
Net proceeds from exercise of stock options  226   1   590   212 
Net increase in demand, money market and savings deposits  291,385   165,565   59,124   146,402 
Net increase (decrease) in time deposits  41,549   (299)
Decrease in short-term borrowings  (66,666)  - 
Net (decrease) increase in time deposits  (4,363)  38,551 
Increase (repayment) in short-term borrowings  55,000   (47,000)
Net cash provided by financing activities  266,494   165,267   110,351   138,165 
                
Net increase (decrease) in cash and cash equivalents  122,902   (18,307)
Net increase in cash and cash equivalents  53,443   84,633 
Cash and cash equivalents, beginning of year  27,139   128,826   34,554   27,139 
Cash and cash equivalents, end of period $150,041  $110,519  $87,997  $111,772 
                
Supplemental disclosures                
Interest paid $5,011  $3,944  $4,159  $3,015 
Income taxes paid $90  $-  $75  $60 
Non-cash transfers from loans to other real estate owned $616  $11,148  $129  $616 
Conversion of subordinated debt to common stock $240  $- 

(See notes to consolidated financial statements)

-
4 -
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
For the NineSix Months Ended SeptemberJune 30, 20162017 and 20152016
(Dollars in thousands)
(unaudited)

 
Common
Stock
  
Additional Paid in Capital
  
Accumulated Deficit
  
Treasury
Stock
  Stock Held by Deferred Compensation Plan  Accumulated Other Comprehensive Loss  
Total Shareholders' Equity
 
                     
Balance January 1, 2017 $573  $253,570  $(27,888) $(3,725) $(183) $(7,294) $215,053 
                            
Net income          3,846               3,846 
Other comprehensive income, net of tax                      1,775   1,775 
Stock based compensation      817                   817 
Conversion of subordinated debt to common stock (36,922 shares)      240                   240 
Options exercised (179,475 shares)  2   588                   590 
                            
Balance June 30, 2017 $575  $255,215  $(24,042) $(3,725) $(183) $(5,519) $222,321 
 
Common Stock
  
Additional Paid in Capital
  
Accumulated Deficit
  
Treasury Stock
  Stock Held by Deferred Compensation Plan  Accumulated Other Comprehensive Loss  
Total Shareholders' Equity
                             
                                          
Balance January 1, 2016 $384  $152,897  $(32,833) $(3,725) $(183) $(3,165) $113,375  $384  $152,897  $(32,833) $(3,725) $(183) $(3,165) $113,375 
                                                        
Net income          3,448               3,448           2,108               2,108 
Other comprehensive income, net of tax                      1,839   1,839                       2,508   2,508 
Stock based compensation      764                   764       367                   367 
Options exercised (80,375 shares)      226                   226 
Options exercised (76,625 shares)      212                   212 
                                                        
Balance September 30, 2016 $384  $153,887  $(29,385) $(3,725) $(183) $(1,326) $119,652 
                            
                            
Balance January 1, 2015 $383  $152,234  $(35,266) $(3,725) $(183) $(632) $112,811 
                            
Net income          1,643               1,643 
Other comprehensive loss, net of tax                      (423)  (423)
Stock based compensation      441                   441 
Options exercised (500 shares)      1                   1 
                            
Balance September 30, 2015 $383  $152,676  $(33,623) $(3,725) $(183) $(1,055) $114,473 
                            
Balance June 30, 2016 $384  $153,476  $(30,725) $(3,725) $(183) $(657) $118,570 

(See notes to consolidated financial statements)


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Republic First Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)

Note 1:  Basis of Presentation

Republic First Bancorp, Inc. (the "Company") is a one-bank holding company organized and incorporated under the laws of the Commonwealth of Pennsylvania.  It is comprised of one wholly-owned subsidiary, Republic First Bank, which does business under the name of Republic Bank ("Republic"). Republic is a Pennsylvania state chartered bank that offers a variety of banking services to individuals and businesses throughout the Greater Philadelphia and South Jersey area through its offices and store locations in Philadelphia, Montgomery, Delaware, Camden, Burlington, and Gloucester Counties. On July 26,28, 2016, Republic entered into a purchase agreement with the owners of Oak Mortgage Company LLC ("Oak Mortgage"), pursuant to which the owners agreed to sell to Republicacquired all of the issued and outstanding limited liability company interests of Oak Mortgage. The transaction closed on July 28, 2016,Mortgage Company, LLC ("Oak Mortgage") and, as a result, Oak Mortgage became a wholly owned subsidiary of Republic on that date. Oak Mortgage is headquartered in Marlton, NJ and is licensed to do business in Pennsylvania, Delaware, New Jersey, and Florida. The Company also has three unconsolidated subsidiaries, which are statutory trusts established by the Company in connection with its sponsorship of three separate issuances of trust preferred securities.

The Company and Republic encounter vigorous competition for market share in the geographic areas they serve from bank holding companies, national, regional and other community banks, thrift institutions, credit unions and other non-bank financial organizations, such as mutual fund companies, insurance companies and brokerage companies.

The Company and Republic are subject to federal and state regulations governing virtually all aspects of their activities, including but not limited to, lines of business, liquidity, investments, the payment of dividends and others.  Such regulations and the cost of adherence to such regulations can have a significant impact on earnings and financial condition.

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Republic. The Company follows accounting standards set by the Financial Accounting Standards Board ("FASB").  The FASB sets accounting principles generally accepted in the United States of America ("US GAAP") that are followed to ensure consistent reporting of financial condition, results of operations, and cash flows. All material inter-company transactions have been eliminated. Events occurring subsequent to the date of the balance sheet have been evaluated for potential recognition or disclosure in the consolidated financial statements.
The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information and with the instructions to United States Securities and Exchange Commission ("SEC") Form 10-Q and Article 10 of SEC Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for financial statements for a complete fiscal year.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and ninesix month periods ended SeptemberJune 30, 20162017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016.2017.

Note 2:  Summary of Significant Accounting Policies

Risks and Uncertainties

The earnings of the Company depend primarily on the earnings of Republic.  The earnings of Republic are dependent primarily upon the level of net interest income, which is the difference between interest earned on its interest-earning assets, such as loans and investments, and the interest paid on its interest-bearing liabilities, such as deposits and borrowings. Accordingly, the Company's results of operations are subject to risks and uncertainties surrounding Republic's exposure to changes in the interest rate environment. Prepayments on residential real estate mortgage and other fixed rate loans and mortgage-backed securities vary significantly and may cause significant fluctuations in interest margins.

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Mortgage Banking Activities and Mortgage Loans Held for Sale

Loans held for sale are originated and held until sold to permanent investors. On July 28, 2016, management elected to adopt the fair value option in accordance with FASB Accounting Standards Codification ("ASC") 820, Fair Value Measurements and Disclosures, and record loans held for sale at fair value.

Loans held for sale originated on or subsequent to the election of the fair value option, are recorded on the balance sheet at fair value. The fair value is determined on a recurring basis by utilizing quoted prices from dealers in such securities. Gains and losses on loan sales are recorded in non-interest income and direct loan origination costs are recognized when incurred and are included in non-interest expense in the statements of income.

Interest Rate Lock Commitments ("IRLCs")

Mortgage loan commitments known as interest rate locks that relate to the origination of a mortgage that will be held for sale upon funding are considered derivative instruments under the derivatives and hedging accounting guidance FASB ASC 815, Derivatives and Hedging. Loan commitments that are derivatives are recognized at fair value on the balance sheet as other assets and as other liabilities with changes in their fair values recorded as a gain or loss in hedging instrumentsmortgage banking income in non-interest income and non-interest expense in the statements of income. Outstanding IRLCs are subject to interest rate risk and related price risk during the period from the date of issuance through the date of loan funding, cancellation or expiration. Loan commitments generally range between 30 and 90 days; however, the borrower is not obligated to obtain the loan. Republic is subject to fallout risk related to IRLCs, which is realized if approved borrowers choose not to close on the loans within the terms of the IRLCs. Republic uses best efforts commitments to substantially eliminate these risks. The valuation of the IRLCs issued by Republic includes the value of the servicing released premium. Republic sells loans servicing released, and the servicing released premium is included in the market price. See Note 11 Derivatives and Risk Management Activities.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make significant estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Significant estimates are made by management in determining the allowance for loan losses, carrying values of other real estate owned, assessment of other than temporary impairment ("OTTI") of investment securities, fair value of financial instruments, (see "Note 7" below), the value of assets acquired and liabilities assumed in business combinations, and the realization of deferred income tax assets. Consideration is given to a variety of factors in establishing these estimates.

In estimating the allowance for loan losses, management considers current economic conditions, past loss experience, diversification of the loan portfolio, delinquency statistics, results of internal loan reviews and regulatory examinations, borrowers' perceived financial and managerial strengths, the adequacy of underlying collateral, if collateral dependent, or present value of future cash flows, and other relevant and qualitative risk factors. Subsequent to foreclosure, an estimate for the carrying value of other real estate owned is normally determined through valuations that are periodically performed by management and the assets are carried at the lower of carrying amount or fair value, less the cost to sell. Because the allowance for loan losses and carrying value of other real estate owned are dependent, to a great extent, on the general economy and other conditions that may be beyond the Company's and Republic's control, the estimates of the allowance for loan losses and the carrying values of other real estate owned could differ materially in the near term.
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In estimating OTTI of investment securities, securities are evaluated on at least a quarterly basis and more frequently when market conditions warrant such an evaluation, to determine whether a decline in their value is other-than-temporary.  To determine whether a loss in value is other-than-temporary, management utilizes criteria such as the reasons underlying the decline, the magnitude and duration of the decline, the intent to hold the security and the likelihood of the Company not being required to sell the security prior to an anticipated recovery in the fair value.  The term "other-than-temporary" is not intended to indicate that the decline is permanent, but indicates that the prospect for a near-term recovery of value is not necessarily favorable, or that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of investment.  Once a decline in value is determined to be other-than-temporary, the portion of the decline related to credit impairment is charged to earnings.
In evaluating the Company's ability to recover deferred tax assets, management considers all available positive and negative evidence, including the past operating results and forecasts of future taxable income. In determining future taxable income, management makes assumptions for the amount of taxable income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions require management to make judgments about the future taxable income and are consistent with the plans and estimates used to manage the business. Any exclusion of or reduction in estimated future taxable income may require management to record a valuation allowance against the deferred tax assets. An increase in the valuation allowance would result in additional income tax expense in the period and could have a significant impact on future earnings.

Stock-Based Compensation

The Company has a Stock Option and Restricted Stock Plan ("the 2005 Plan"), under which the Company granted options, restricted stock or stock appreciation rights to the Company's employees, directors, and certain consultants. The 2005 Plan became effective on November 14, 1995, and was amended and approved at the Company's 2005 annual meeting of shareholders. Under the terms of the 2005 Plan, 1.5 million shares of common stock, plus an annual increase equal to the number of shares needed to restore the maximum number of shares that could be available for grant under the 2005 Plan to 1.5 million shares, were available for such grants. As of SeptemberJune 30, 2016,2017, the only grants under the 2005 Plan were option grants. The 2005 Plan provided that the exercise price of each option granted equaled the market price of the Company's stock on the date of the grant. Options granted pursuant to the 2005 Plan vest within one to four years and have a maximum term of 10 years. The 2005 Plan terminated on November 14, 2015 in accordance with the terms and conditions specified in the Plan agreement.

On April 29, 2014 the Company's shareholders approved the 2014 Republic First Bancorp, Inc. Equity Incentive Plan (the "2014 Plan"), under which the Company may grant options, restricted stock, stock units, or stock appreciation rights to the Company's employees, directors, independent contractors, and consultants.  Under the terms of the 2014 Plan, 2.6 million shares of common stock, plus an annual adjustment to be no less than 10% of the outstanding shares or such lower number as the Board of Directors may determine, are available for such grants. At SeptemberJune 30, 2016,2017, the maximum number of shares of common shares issuable under the 2014 Plan was 4.05.9 million. During the ninesix months ended SeptemberJune 30, 2016, 653,2502017, 900,500 options were granted under the 2014 Plan with a weighted average grant date fair value of $1,174,320.$3,163,831.






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The Company utilizes the Black-Scholes option pricing model to calculate the estimated fair value of each stock option granted on the date of the grant.  A summary of the assumptions used in the Black-Scholes option pricing model for 20162017 and 20152016 are as follows:

 2016 2015  2017 2016 
Dividend yield(1)
 0.0% 0.0%  0.0% 0.0% 
Expected volatility(2)
    46.38% to 52.54%    53.78% to 56.00%     45.50% to 50.09%    47.59% to 52.54% 
Risk-free interest rate(3)
 1.23% to 1.82% 1.49% to 2.00%  1.89% to 2.26% 1.23% to 1.82% 
Expected life(4)
 5.5 to 7.0 years 5.5 to 7.0 years  5.5 to 7.0 years 5.5 to 7.0 years 
Assumed forfeiture rate(5) 10.0% 19.0%  6.0% 10.0% 

(1) A dividend yield of 0.0% is utilized because cash dividends have never been paid.
(2) Expected volatility is based on Bloomberg's five and one-half to seven year volatility calculation for "FRBK" stock.
(3) The risk-free interest rate is based on the five to seven year Treasury bond.
(4) The expected life reflects a 1 to 4 year vesting period, the maximum ten year term and review of historical behavior.
(5) Forfeiture rate is determined through forfeited and expired options as a percentage of options granted over the current three year period.

During the ninesix months ended SeptemberJune 30, 2017 and 2016, 492,624 shares and 2015, 487,550 options and 349,062 options486,550 shares vested, respectively.  Expense is recognized ratably over the period required to vest.  At SeptemberJune 30, 2016,2017, the intrinsic value of the 2,480,5503,044,325 options outstanding was $1,652,149,$13,019,675, while the intrinsic value of the 1,164,0741,353,223 exercisable (vested) options was $1,081,116.$7,642,587.  During the ninesix months ended SeptemberJune 30, 2016, 80,3752017, 179,475 options were exercised withresulting in cash receivedreceipts of $226,271$590,521 and 38,5509,600 options were forfeited with a weighted average grant date fair value of $55,920.$43,581. During the ninesix months ended SeptemberJune 30, 2015, 5002016, 76,625 options were exercised withresulting in cash receivedreceipts of $1,345$212,634 and 16,36925,550 options were forfeited with a weighted average grant date fair value of $21,331.$39,900.

Information regarding stock based compensation for the ninesix months ended SeptemberJune 30, 20162017 and 20152016 is set forth below:

 September 30, 2016  September 30, 2015  2017  2016 
Stock based compensation expense recognized $764,000  $441,000  $817,000  $367,000 
Number of unvested stock options  1,316,476   1,185,151   1,691,102   1,218,476 
Fair value of unvested stock options $2,608,986  $1,908,205  $4,596,379  $2,408,636 
Amount remaining to be recognized as expense $1,284,071  $1,034,337  $3,453,675  $1,479,287 

The remaining amount of $1,284,071$3,453,675 will be recognized as expense through February 2020.May 2021.

Earnings per Share

Earnings per share ("EPS") consist of two separate components: basic EPS and diluted EPS. Basic EPS is computed by dividing net income by the weighted average number of common shares outstanding for each period presented. Diluted EPS is calculated by dividing net income by the weighted average number of common shares outstanding plus dilutive common stock equivalents ("CSEs"). CSEs consist of dilutive stock options granted through the Company's stock option plans and convertible securities related to the trust preferred securities issued in 2008.  In the diluted EPS computation, the after tax interest expense on the trust preferred securities issuance is added back to the net income. For the three and ninesix months ended SeptemberJune 30, 20162017 and 2015,2016, the effect of CSEs (convertible securities related to the trust preferred securities only) and the related add back of after tax interest expense was considered anti-dilutive and therefore was not included in the EPS calculations.




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The calculation of EPS for the three and ninesix months ended SeptemberJune 30, 20162017 and 20152016 is as follows (in thousands, except per share amounts):

 
Three Months Ended
September 30,
  
Nine Months Ended
September 30,
  
Three Months Ended
June 30,
  
Six Months Ended
June 30,
 
 2016  2015  2016  2015  2017  2016  2017  2016 
                    
Net income (basic and diluted) $1,340  $582  $3,448  $1,643  $2,059  $1,023  $3,846  $2,108 
                
Weighted average shares outstanding  37,916   37,816   37,879   37,816   56,945   37,882   56,885   37,860 
Net income per share – basic $0.04  $0.02  $0.09  $0.04  $0.04  $0.03  $0.07  $0.06 
Weighted average shares outstanding (including dilutive CSEs)  38,375   38,064   38,355   38,052   58,301   38,422   58,165   38,344 
Net income per share – diluted $0.03  $0.02  $0.09  $0.04  $0.04  $0.03  $0.07  $0.05 

The following is a summary of securities that could potentially dilute basic earnings per common share in future periods that were not included in the computation of diluted earnings per common share because to do so would have been anti-dilutive for the periods presented.

(in thousands) 
Three Months Ended
September 30,
  
Nine Months Ended
September 30,
  
Three Months Ended
June 30,
  
Six Months Ended
June 30,
 
 2016  2015  2016  2015  2017  2016  2017  2016 
                    
Anti-dilutive securities                    
                    
Share based compensation awards  2,022   1,735   2,005   1,747   1,688   1,855   1,764   1,910 
                                
Convertible securities  1,662   1,662   1,662   1,662   1,625   1,662   1,625   1,662 
                                
Total anti-dilutive securities  3,684   3,397   3,667   3,409   3,313   3,517   3,389   3,572 

Recent Accounting Pronouncements

ASU 2014-04

In January 2014, the FASB issued ASU 2014-04, "Receivables – Troubled Debt Restructuring by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans Upon Foreclosure – a consensus of the FASB Emerging Issues Task Force."  The guidance clarifies when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan should be derecognized and the real estate property recognized.  For public business entities, the ASU is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. For entities other than public business entities, the ASU was effective for annual periods beginning after December 15, 2014, and interim periods within annual periods beginning after December 15, 2015.  The adoption of ASU 2014-04 did not have a material effect on the Company's consolidated financial statements.

ASU 2014-09

       In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers (Topic 660): Summary and Amendments that Create Revenue from Contracts with Customers (Topic 606) and Other Assets and Deferred Costs – Contracts with Customers (Subtopic 340-40)."  The purpose of this guidance is to clarify the principles for recognizing revenue.  The guidance in this update supersedes the revenue recognition requirements in ASC Topic 605, Revenue Recognition, and most industry-specific guidance throughout the industry topics of the codification.  For public companies, early adoption of the update will bewas effective for interim and annual periods beginning after December 15, 2016.  For public companies that elect to defer the update, adoption will be effective for interim and annual periods beginning after December 15, 2017. The Company expects that the most significant impact related to the standard's expected disclosure requirements will be the disaggregation of revenue. The Company is currently assessing the impact that this guidance will have on its consolidated financial statements, but does not expect a material impact. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with The Company (Topic 606): Deferral of the Effective Date. The guidance in this ASU is now effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. The Company doeshas evaluated this ASU and it is not expect this ASUexpected to have a significant impact on its financial condition or results of operations.
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The Company has evaluated its various revenue streams and based upon current accounting standards, there are no material revenue streams which are scoped in to ASC-606.

ASU 2014-14
10

      In August 2014, the FASB issued ASU 2014-14, "Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40): Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure - a consensus of the FASB Emerging Issues Task Force."  The amendments in this Update address a practice issue related to the classification of certain foreclosed residential and nonresidential mortgage loans that are either fully or partially guaranteed under government programs. Specifically, creditors should reclassify loans that meet certain conditions to "other receivables" upon foreclosure, rather than reclassifying them to other real estate owned (OREO). The separate other receivable recorded upon foreclosure is to be measured based on the amount of the loan balance (principal and interest) the creditor expects to recover from the guarantor. The ASU was effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. For all other entities, the amendments are effective for annual periods ending after December 15, 2015, and interim periods beginning after December 15, 2015. The Company adopted ASU 2014-14 effective January 1, 2015. The adoption of ASU 2014-14 did not have a material effect on the Company's consolidated financial statements.

ASU 2015-14

In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers: Deferral of the Effective Date. The guidance in this ASU is now effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. The Company does not expect this ASU to have a significant impact on its financial condition or results of operations.

ASU 2015-16

In September 2015, the FASB issued ASU 2015-16, Simplifying the Accounting for Measurement-Period Adjustments. To simplify the accounting for adjustments made to provisional amounts recognized in a business combination, the guidance in this ASU eliminates the requirement to retrospectively account for those adjustments and requires an entity to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. The guidance in this ASU was effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years and should be applied prospectively to adjustment to provisional amounts that occur after the effective date of this ASU. The adoption of this ASU did not have an impact on the Company's financial condition or results of operations.

ASU 2016-01

In January 2016, the FASB issued Accounting Standards Update ("ASU") No. 2016-01, Financial Instruments - Overall. The guidance in this ASU among other things, (1) requires equity investments with certain exceptions, to be measured at fair value with changes in fair value recognized in net income, (2) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment, (3) eliminates the requirement for public businesses entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet, (4) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, (5) requires an entity to present separately in other comprehensive income the portion of the change in fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments, (6) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements and (7) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities. The guidance in this ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company doeshas evaluated this ASU and it is not expect the adoption of this ASUexpected to have a significant impact on its financial condition or results of operations.
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ASU 2016-02

In February 2016, the FASB issued Accounting Standards Update ("ASU") No. 2016-02, Leases. From the lessee'sCompany's perspective, the new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement for lessees. From the lessor'slandlord perspective, the new standard requires a lessor to classify leases as either sales-type, finance or operating. A lease will be treated as a sale if it transfers all of the risks and rewards, as well as control of the underlying asset, to the lessee. If risks and rewards are conveyed without the transfer of control, the lease is treated as a financing. If the lessor doesn't convey risks and rewards or control, an operating lease results. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. A modified retrospective transition approach is required for lessors for sales-type, direct financing, and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is currentlyAfter evaluating the impact of the pending adoption of the new standard on its consolidated financial statements, the Company expects an increase of assets and liabilities on the Company's consolidated financial statements.

ASU 2016-09

In March 2016, the FASB issued Accounting Standards Update ("ASU") No. 2016-09, Compensation – Stock Compensation: Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 will amend current guidance such that all excess tax benefits and tax deficiencies related to share-based payment awards will be recognized as income tax expense or benefit in the income statement during the period in which they occur. Additionally, excess tax benefits will be classified along with other income tax cash flows as an operating activity rather than a financing activity. ASU 2016-09 also provides that any entity can make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest, which is the current requirement, or account for forfeitures when they occur. ASU 2016-09 will bewas effective January 1, 2017 and is2017. It currently does not expected to have a significantmaterial impact on ourthe Company's consolidated financial statements.statements, however depending upon the exercise timing of share based awards, the ASU could have a material impact on the consolidated financial statements going forward.
11


ASU 2016-13

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The ASU requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. Additionally, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. For the Company, this update will be effective for interim and annual periods beginning after December 15, 2019. The Company has not yet determined the impact the adoption of ASU 2016-13 will have on the consolidated financial statements.
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ASU 2016-15

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230). The ASU addresses classification of certain cash receipts and cash payments in the statement of cash flows. The new guidance is effective on January 1, 2018, on a retrospective basis, with early adoption permitted. This new accounting guidance will result in some changes in classification in the Consolidated Statement of Cash Flows, which the Company does not expect will be significant, and will not have anya material impact on the consolidated financial statements. Due to the current nature of the Company's operations and financial assets and liabilities in relation to the cash flow classifications impacted by the ASU, the Company has determined that the adoption of ASU 2016-15 will not have a material impact on the Company's financial statements.

ASU-2017-01

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805). The ASU clarifies the definition of a business in ASC 805. The FASB issued the ASU in response to stakeholder feedback that the definition of a business in ASC 805 is being applied too broadly. In addition, stakeholders said that analyzing transactions under the current definition is difficult and costly. Concerns about the definition of a business were among the primary issues raised in connection with the Financial Accounting Foundation's post-implementation review report on FASB Statement No. 141(R), Business Combinations (codified in ASC 805). The amendments in the ASU are intended to make application of the guidance more consistent and cost-efficient. The ASU is effective for public business entities in annual periods beginning after December 15, 2017, including interim periods therein. For all other entities, the ASU is effective in annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019. The ASU must be applied prospectively on or after the effective date, and no disclosures for a change in accounting principle are required at transition. Early adoption is permitted for transactions (i.e., acquisitions or dispositions) that occurred before the issuance date or effective date of the standard if the transactions were not reported in financial statements that have been issued or made available for issuance. The Company has not yet determined the impact the adoption of ASU 2017-01 will have on the consolidated financial statements.



12


ASU 2017-04

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test For Goodwill Impairment. The ASU simplifies the accounting for goodwill impairments by eliminating step 2 from the goodwill impairment test. Instead, if "the carrying amount of a reporting unit exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit." For public business entities that are SEC filers, the ASU is effective for annual and any interim impairment tests for periods beginning after December 15, 2019. The Company has not yet determined the impact the adoption of ASU 2017-04 will have on the consolidated financial statements.

ASU 2017-08

In March 2017, the FASB issued ASU 2017-08, Premium Amortization on Purchased Callable Debt Securities, which amends the amortization period for certain purchased callable debt securities held at a premium, shortening such period to the earliest call date. The ASU is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. For all other entities, the ASU is effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Earlier application is permitted for all entities, including adoption in an interim period. If an entity early adopts the ASU in an interim period, any adjustments must be reflected as of the beginning of the fiscal year that includes that interim period. The Company has not yet determined the impact the adoption of ASU 2017-08 will have on the consolidated financial statements.

Note 3:  Legal Proceedings

The Company and Republic are from time to time parties (plaintiff or defendant) to lawsuits in the normal course of business. While any litigation involves an element of uncertainty, management is of the opinion that the liability of the Company and Republic, if any, resulting from such actions will not have a material effect on the financial condition or results of operations of the Company and Republic.

Note 4:  Segment Reporting

       The Company has one reportable segment: community banking. The community bank segment primarily encompasses the commercial loan and deposit activities of Republic, as well as residential mortgage and other consumer loan products in the area surrounding its stores.

 

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Note 5:  Investment Securities

A summary of the amortized cost and market value of securities available for sale and securities held to maturity at SeptemberJune 30, 20162017 and December 31, 20152016 is as follows:

  At June 30, 2017 
 
 
(dollars in thousands)
 
Amortized Cost
  Gross Unrealized Gains  Gross Unrealized Losses  
Fair
Value
 
             
Collateralized mortgage obligations $213,491  $124  $(4,084) $209,531 
Agency mortgage-backed securities  44,778   1   (1,144)  43,635 
Municipal securities  12,277   33   (162)  12,148 
Corporate bonds  66,679   167   (2,244)  64,602 
Asset-backed securities  14,386   -   (88)  14,298 
Trust preferred securities  1,545   -   (577)  968 
Total securities available for sale $353,156  $325  $(8,299) $345,182 
                 
U.S. Government agencies $95,865  $130  $(1,612) $94,383 
Collateralized mortgage obligations  188,594   447   (2,318)  186,723 
Agency mortgage-backed securities  123,894   9   (2,846)  121,057 
Other securities  1,020   -   -   1,020 
Total securities held to maturity $409,373  $586  $(6,776) $403,183 
 At September 30, 2016  At December 31, 2016 
(dollars in thousands)
 
Amortized Cost
  Gross Unrealized Gains  Gross Unrealized Losses  
Fair
Value
  
Amortized Cost
  Gross Unrealized Gains  Gross Unrealized Losses  
Fair
Value
 
                    
Collateralized mortgage obligations $199,622  $1,414  $(640) $200,396  $230,252  $145  $(5,632) $224,765 
Agency mortgage-backed securities  11,632   73   (19)  11,686   37,973   32   (1,295)  36,710 
Municipal securities  23,383   1,067   (8)  24,442   26,825   151   (429)  26,547 
Corporate bonds  46,737   32   (1,341)  45,428   66,718   8   (1,978)  64,748 
Asset-backed securities  16,183   -   (466)  15,717   15,565   -   (416)  15,149 
Trust preferred securities  3,063   -   (1,372)  1,691   3,063   -   (1,243)  1,820 
Other securities  25   -   -   25 
Total securities available for sale $300,645  $2,586  $(3,846) $299,385  $380,396  $336  $(10,993) $369,739 
                                
U.S. Government agencies $28,468  $310  $(58) $28,720  $98,538  $8  $(2,238) $96,308 
Collateralized mortgage obligations  155,098   2,396   (219)  157,275   202,990   793   (2,553)  201,230 
Agency mortgage-backed securities  35,884   348   -   36,232   129,951   1   (3,327)  126,625 
Other securities  1,020   -   -   1,020   1,020   -   -   1,020 
Total securities held to maturity $220,470  $3,054  $(277) $223,247  $432,499  $802  $(8,118) $425,183 


  At December 31, 2015 
 
 
(dollars in thousands)
 
Amortized Cost
  Gross Unrealized Gains  Gross Unrealized Losses  
Fair
Value
 
         
Collateralized mortgage obligations $180,795  $523  $(3,173) $178,145 
Agency mortgage-backed securities  10,073   176   (78)  10,171 
Municipal securities  22,814   562   (32)  23,344 
Corporate bonds  54,294   135   (300)  54,129 
Asset-backed securities  17,631   -   (626)  17,005 
Trust preferred securities  3,070   -   (1,187)  1,883 
Other securities  115   3   -   118 
Total securities available for sale $288,792  $1,399  $(5,396) $284,795 
                 
U.S. Government agencies $17,067  $39  $(72) $17,034 
Collateralized mortgage obligations  146,458   402   (780)  146,080 
Agency mortgage-backed securities  7,732   -   (21)  7,711 
Other securities  1,020   -   -   1,020 
Total securities held to maturity $172,277  $441  $(873) $171,845 






- 14 -




The following table presents investment securities by stated maturity at SeptemberJune 30, 2016.2017. Collateralized mortgage obligations and agency mortgage-backed securities have expected maturities that differ from contractual maturities because borrowers have the right to call or prepay and, therefore, these securities are classified separately with no specific maturity date.
 Available for Sale  Held to Maturity  Available for Sale  Held to Maturity 
(dollars in thousands)
 Amortized Cost  
Fair
Value
  Amortized Cost  
Fair
Value
  
Amortized
Cost
  
Fair
Value
  
Amortized
Cost
  
Fair
Value
 
Due in 1 year or less $675  $677  $-  $-  $1,000  $1,002  $20  $20 
After 1 year to 5 years  12,096   12,260   4,651   4,640   11,128   11,222   4,383   4,362 
After 5 years to 10 years  53,126   51,671   24,837   25,100   57,287   55,487   92,482   91,021 
After 10 years  23,494   22,695   -   -   25,472   24,305   -   - 
Collateralized mortgage obligations  199,622   200,396   155,098   157,275   213,491   209,531   188,594   186,723 
Agency mortgage-backed securities  11,632   11,686   35,884   36,232   44,778   43,635   123,894   121,057 
Total $300,645  $299,385  $220,470  $223,247  $353,156  $345,182  $409,373  $403,183 

Expected maturities will differ from contractual maturities because borrowers have the right to call or prepay obligations with or without prepayment penalties.

The Company's investment securities portfolio consists primarily of debt securities issued by U.S. government agencies, U.S. government-sponsored agencies, state governments, local municipalities and certain corporate entities.  There were no private label mortgage-backed securities ("MBS") or collateralized mortgage obligations ("CMO") held in the investment securities portfolio as of SeptemberJune 30, 20162017 and December 31, 2015.2016.  There were also no MBS or CMO securities that were rated "Alt-A" or "sub-prime" as of those dates.

       The fair value of investment securities is impacted by interest rates, credit spreads, market volatility and liquidity conditions. Net unrealized gains and losses in the available for sale portfolio are included in shareholders' equity as a component of accumulated other comprehensive income or loss, net of tax.  Securities classified as held to maturity are carried at amortized cost.  An unrealized loss exists when the current fair value of an individual security is less than the amortized cost basis.

The Company regularly evaluates investment securities that are in an unrealized loss position in order to determine if the decline in fair value is other than temporary.  Factors considered in the evaluation include the current economic climate, the length of time and the extent to which the fair value has been below cost, the current interest rate environment and the rating of each security.  An other-than-temporary impairment ("OTTI") loss must be recognized for a debt security in an unrealized loss position if the Company intends to sell the security or it is more likely than not that it will be required to sell the security prior to recovery of the amortized cost basis.  The amount of OTTI loss recognized is equal to the difference between the fair value and the amortized cost basis of the security that is attributed to credit deterioration.  Accounting standards require the evaluation of the expected cash flows to be received to determine if a credit loss has occurred.  In the event of a credit loss, that amount must be recognized against income in the current period.  The portion of the unrealized loss related to other factors, such as liquidity conditions in the market or the current interest rate environment, is recorded in accumulated other comprehensive income (loss) for investment securities classified available for sale.

       ImpairmentThere were no impairment charges (credit losses) on trust preferred securities for the three month periodand six month periods ended SeptemberJune 30, 2016 amounted to $2,000. No impairment2017. Impairment charges were incurred on trust preferred securities during the three month period Septemberended June 30, 2015.2016 amounted to $4,000. Impairment charges on trust preferred securities for the ninesix month period ended SeptemberJune 30, 2016 and 2015 amounted to $7,000 and $3,000, respectively.$5,000.




- 15 -


The following table presents a roll-forward of the balance of credit-related impairment losses on securities held for the three at June 30, 2017 and nine months ended September 30, 2016 and 2015 for which a portion of OTTI was recognized in other comprehensive income:
  Three Months Ended September 30, 
 (dollars in thousands) 2016  2015 
     
Beginning Balance, July 1st
 $935  $1,400 
Additional credit-related impairment loss on securities for which an        
other-than-temporary impairment was previously recognized  2   - 
Reductions for securities paid off during the period  -   - 
Reductions for securities sold during the period  -   (470)
Reductions for securities for which the amount previously recognized in other        
comprehensive income was recognized in earnings because the Company        
intends to sell the security  -   - 
Ending Balance, September 30th
 $937  $930 


  Nine Months Ended September 30, 
(dollars in thousands) 2016  2015 
     
Beginning Balance, January 1st
 $930  $3,966 
Additional credit-related impairment loss on securities for which an        
other-than-temporary impairment was previously recognized  7   3 
Reductions for securities paid off during the period  -   - 
Reductions for securities sold during the period  -   (3,039)
Reductions for securities for which the amount previously recognized in other        
comprehensive income was recognized in earnings because the Company        
intends to sell the security  -   - 
Ending Balance, September 30th
 $937  $930 


- 16 -


(dollars in thousands)2017 2016 
     
Beginning Balance, January 1st
 $937  $930 
Additional credit-related impairment loss on securities for which an other-than-temporary impairment was previously recognized  -   5 
Reductions for securities sold during the period  (483)  - 
Ending Balance, June 30th
 $454  $935 

The following tables show the fair value and gross unrealized losses associated with the investment portfolio, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position in the available for sale and held to maturity section:

  At June 30, 2017 
  Less than 12 months  12 months or more  Total 
 
(dollars in thousands)
 
Fair
Value
  Unrealized Losses  
Fair
Value
  Unrealized Losses  
Fair
Value
  Unrealized Losses 
                   
Collateralized  mortgage obligations $159,544  $3,395  $27,528  $689  $187,072  $4,084 
Agency mortgage-backed securities  33,698   1,117   2,799   27   36,497   1,144 
Municipal securities  5,343   162   -   -   5,343   162 
Corporate bonds  19,710   290   33,046   1,954   52,756   2,244 
Asset backed securities  -   -   14,298   88   14,298   88 
Trust preferred securities  -   -   968   577   968   577 
Total Available for Sale $218,295  $4,964  $78,639  $3,335  $296,934  $8,299 
  At September 30, 2016 
  Less than 12 months  12 months or more  Total 
 
(dollars in thousands)
 
Fair
Value
  Unrealized Losses  
Fair
Value
  Unrealized Losses  
Fair
Value
  Unrealized Losses 
             
Collateralized mortgage obligations $76,185  $573  $8,199  $67  $84,384  $640 
Agency mortgage-backed securities  2,584   14   3,432   5   6,016   19 
Municipal securities  486   8   -   -   486   8 
Corporate bonds  28,859   1,142   10,796   199   39,655   1,341 
Asset backed securities  -   -   15,717   466   15,717   466 
Trust preferred securities  -   -   1,691   1,372   1,691   1,372 
Total Available for Sale $108,114  $1,737  $39,835  $2,109  $147,949  $3,846 

 At June 30, 2017 
 Less than 12 months 12 months or more Total 
 
(dollars in thousands)
Fair
Value
 Unrealized Losses 
Fair
Value
 Unrealized Losses 
Fair
Value
 Unrealized Losses 
                   
U.S. Government agencies $59,017  $1,591  $3,362  $21  $62,379  $1,612 
Collateralized mortgage obligations  113,696   1,903   33,927   415   147,623   2,318 
Agency mortgage-backed securities  118,309   2,846   -   -   118,309   2,846 
Total Held to Maturity $291,022  $6,340  $37,289  $436  $328,311  $6,776 

  At December 31, 2016 
  Less than 12 months  12 months or more  Total 
 
(dollars in thousands)
 
Fair
Value
  Unrealized Losses  
Fair
Value
  Unrealized Losses  
Fair
Value
  Unrealized Losses 
                   
Collateralized  mortgage obligations $192,308  $5,380  $7,579  $252  $199,887  $5,632 
Agency mortgage-backed securities  29,916   1,260   3,199   35   33,115   1,295 
Municipal securities  15,414   429   -   -   15,414   429 
Corporate bonds  32,257   1,708   10,726   270   42,983   1,978 
Asset backed securities  -   -   15,149   416   15,149   416 
Trust preferred securities  -   -   1,820   1,243   1,820   1,243 
Total Available for Sale $269,895  $8,777  $38,473  $2,216  $308,368  $10,993 

 At December 31, 2016 
 Less than 12 months 12 months or more Total 
 
(dollars in thousands)
Fair
Value
  Unrealized Losses 
Fair
Value
 Unrealized Losses 
Fair
Value
 Unrealized Losses 
                   
U.S. Government agencies $67,725  $2,198  $3,586  $40  $71,311  $2,238 
Collateralized mortgage obligations  108,974   2,469   8,572   84   117,546   2,553 
Agency mortgage-backed securities  97,725   3,327   -   -   97,725   3,327 
Total Held to Maturity $274,424  $7,994  $12,158  $124  $286,582  $8,118 

16

 At September 30, 2016 
 Less than 12 months 12 months or more Total 
 
(dollars in thousands)
Fair
Value
 Unrealized Losses 
Fair
Value
 Unrealized Losses 
Fair
Value
 Unrealized Losses 
             
U.S. Government agencies $7,067  $47  $3,621  $11  $10,688  $58 
Collateralized mortgage obligations  26,469   219   -   -   26,469   219 
Total Held to Maturity $33,536  $266  $3,621  $11  $37,157  $277 

  At December 31, 2015 
  Less than 12 months  12 months or more  Total 
 
(dollars in thousands)
 
Fair
Value
  Unrealized Losses  
Fair
Value
  Unrealized Losses  
Fair
Value
  Unrealized Losses 
             
Collateralized  mortgage obligations $116,161  $3,173  $-  $-  $116,161  $3,173 
Agency mortgage-backed securities  2,389   14   5,502   64   7,891   78 
Municipal securities  886   15   1,814   17   2,700   32 
Corporate bonds  9,583   258   2,952   42   12,535   300 
Asset backed securities  17,005   626   -   -   17,005   626 
Trust preferred securities  -   -   1,883   1,187   1,883   1,187 
Total Available for Sale $146,024  $4,086  $12,151  $1,310  $158,175  $5,396 

 At December 31, 2015 
 Less than 12 months 12 months or more Total 
 
(dollars in thousands)
Fair
Value
 Unrealized Losses 
Fair
Value
 Unrealized Losses 
Fair
Value
 Unrealized Losses 
             
U.S. Government agencies $11,954  $72  $-  $-  $11,954  $72 
Collateralized mortgage obligations  68,888   732   15,956   48   84,844   780 
Agency mortgage-backed securities  7,711   21   -   -   7,711   21 
Total Held to Maturity $88,553  $825  $15,956  $48  $104,509  $873 

Unrealized losses on securities in the investment portfolio amounted to $4.1$15.1 million with a total fair value of $185.1$625.2 million as of SeptemberJune 30, 20162017 compared to unrealized losses of $6.3$19.1 million with a total fair value of $262.7$595.0 million as of December 31, 2015.2016.  The Company believes the unrealized losses presented in the tables above are temporary in nature and primarily related to market interest rates or limited trading activity in particular type of security rather than the underlying credit quality of the issuers. The Company does not believe that these losses are other than temporary and does not currently intend to sell or believe it will be required to sell securities in an unrealized loss position prior to maturity or recovery of the amortized cost bases.

       The Company held threeseven U.S. Government agency securities, nineteenfifty-five collateralized mortgage obligations and threetwenty-two agency mortgage-backed securities that were in an unrealized loss position at SeptemberJune 30, 2016.2017. Principal and interest payments of the underlying collateral for each of these securities are backed by U.S. Government sponsored agencies and carry minimal credit risk. Management found no evidence of OTTI on any of these securities and believes the unrealized losses are due to fluctuations in fair values resulting from changes in market interest rates and are considered temporary as of SeptemberJune 30, 2016.
- 17 -
2017.

All municipal securities held in the investment portfolio are reviewed on least a quarterly basis for impairment. Each bond carries an investment grade rating by either Moody's or Standard & Poor's. In addition, the Company periodically conducts its own independent review on each issuer to ensure the financial stability of the municipal entity. The largest geographic concentration was in Pennsylvania and New Jersey and consisted of either general obligation or revenue bonds backed by the taxing power of the issuing municipality. At SeptemberJune 30, 2016, one2017, there were eight municipal security wassecurities that were in an unrealized loss position. Management believes the unrealized losses were the result of movements in long-term interest rates and are not reflective of credit deterioration.

At SeptemberJune 30, 2016,2017, the investment portfolio included two asset-backed securities that were in an unrealized loss position. The asset-backed securities held in the investment securities portfolio consist solely of Sallie Mae bonds, collateralized by student loans which are guaranteed by the U.S. Department of Education. Management believes the unrealized losses on these securities were driven by changes in market interest rates and not a result of credit deterioration.  At SeptemberJune 30, 2016,2017, the investment portfolio included six corporate bonds that were in an unrealized loss position. Management believes the unrealized losses on these securities were also driven by changes in market interest rates and not a result of credit deterioration.

The unrealized losses on the trust preferred securities are primarily the result of the secondary market for such securities becoming inactive and are also considered temporary at this time. The following table provides additional detail about the trust preferred securities held in the portfolio as of SeptemberJune 30, 2016.2017.

(dollars in thousands)
Class / Tranche Amortized Cost  
Fair
Value
  Unrealized Losses  Lowest Credit Rating Assigned  Number of Banks Currently Performing  Deferrals / Defaults as % of Current Balance  

Conditional Default Rates for 2016 and beyond
  Cumulative OTTI Life to Date Class / Tranche Amortized Cost  
Fair
Value
  Unrealized Losses  
Lowest Credit
Rating Assigned 
 Number of Banks Currently Performing  Deferrals / Defaults as % of Current Balance 

Conditional Default Rates for 2018 and beyond
 Cumulative OTTI Life to Date 
TPREF Funding IIClass B Notes $725  $377  $(348)  C    19   37%  0.42% $274 Class B Notes $725  $424  $(301)   C  19   29%  0.41% $274 
TPREF Funding IIIClass B2 Notes  1,518   804   (714)  C    15   32   0.43   483 
ALESCO Preferred
Funding V		Class C1 Notes  820   510   (310)  C    42   14   0.41   180 Class C1 Notes  820   544   (276)   C  39   15   0.43   180 
Total  $3,063  $1,691  $(1,372)      76   27%     $937   $1,545  $968  $(577)      58   22%     $454 

There were noDuring the three and six months ended June 30, 2017, the proceeds from the sale of investment securities was $21.2 million. Gross gains of $487,000 were realized on these sales which were offset by gross losses of $548,000. The tax benefit applicable to the net losses for the three and six months ended June 30, 2017 was $22,000. Included in the 2017 sales activity was the sale of one CDO security. Proceeds from the sale of the CDO security totaled $970,000. A gross loss of $548,000 was recognized on this sale. Management had previously stated that it did not intend to sell the CDO security prior to its maturity or the recovery of its cost basis, nor would it be forced to sell this security prior to maturity or recovery of the cost basis.  This statement was made over a period of several years where there was limited trading activity in the pooled trust preferred CDO market resulting in fair market value estimates well below the book values. During 2017, management received several inquiries regarding the availability of its remaining CDO securities and noted an increased level of trading in this type of security. As a result of the increased activity and the level of bids received, management elected to sell one CDO resulting in a net loss of $548,000 during the three and six months ended June 30, 2017 which was partially offset by gains on sales of twenty-eight municipal securities, one agency mortgage-backed security and one collateralized mortgage obligation. The Bank continues to demonstrate the ability and intent to hold the remaining CDOs until maturity or recovery of the cost bases, but will evaluate future opportunities to sell the remaining CDOs if they arise.

17
During the three months ended SeptemberJune 30, 2016. Proceeds2016, the proceeds from the sale of investment securities duringwere $23.9 million. Gross gains of $358,000 were realized on these sales and there were no losses on the ninesale of investment securities. The tax provision applicable to the net gains for the three months ended SeptemberJune 30, 2016 was $129,000. During the six months ended June 30, 2016, the proceeds from the sale of investment securities were $78.6 million. Gross gains of $680,000$678,000 and gross losses of $24,000 were realized on these sales. The tax provision applicable to the net gains for the ninesix months ended SeptemberJune 30, 2016 was $235,000.

Proceeds from the sale of investment securities during the three months ended September 30, 2015 were $2.6 million.  Gross gains of $206,000 and gross losses of $142,000 were realized on these sales.  The tax provision applicable to the net gains for the three months ended September 30, 2015 amounted to $23,000. Proceeds from the sale of investment securities during the nine months ended September 30, 2015 were $6.7 million. Gross gains of $361,000 and gross losses of $288,000 were realized on these sales. The tax provision applicable to the net gains for the nine months ended September 30, 2015 amounted to $26,000.



- 18 -




Note 6:  Loans Receivable and Allowance for Loan Losses

The following table sets forth the Company's gross loans by major categories as of SeptemberJune 30, 20162017 and December 31, 2015:2016:

(dollars in thousands) September 30, 2016  December 31, 2015  
June 30,
2017
  December 31, 2016 
          
Commercial real estate $376,466  $349,726  $412,695  $378,519 
Construction and land development  48,983   46,547   83,571   61,453 
Commercial and industrial  186,126   181,850   176,949   174,744 
Owner occupied real estate  268,435   246,398   285,479   276,986 
Consumer and other  58,580   48,126   68,946   63,660 
Residential mortgage  6,909   2,380   39,286   9,682 
Total loans receivable  945,499   875,027   1,066,926   965,044 
Deferred costs (fees)  42   (258)  (416)  (72)
Allowance for loan losses  (9,453)  (8,703)  (9,454)  (9,155)
Net loans receivable $936,088  $866,066  $1,057,056  $955,817 

The Company disaggregates its loan portfolio into groups of loans with similar risk characteristics for purposes of estimating the allowance for loan losses.  The Company's loan groups include commercial real estate, construction and land development, commercial and industrial, owner occupied real estate, consumer, and residential mortgages.  The loan groups are also considered classes for purposes of monitoring and assessing credit quality based on certain risk characteristics.








- 19 -18


The following tables provide the activity in and ending balances of the allowance for loan losses by loan portfolio class at and for the three and six months ended June 30, 2017 and 2016:
 
 
(dollars in thousands)
 
Commercial Real Estate
 Construction and Land Development Commercial and Industrial Owner Occupied Real Estate 
Consumer and Other
 
Residential Mortgage
 
Unallocated
 
Total
 
                
Three months ended June 30, 2017               
Allowance for loan losses:               
                                 
Beginning balance: $2,962  $546  $2,770  $1,627  $575  $130  $571  $9,181 
Charge-offs  -   -   (152)  (100)  (6)  -   -   (258)
Recoveries  -   -   30   -   1   -   -   31 
Provisions (credits)  209   34   (152)  71   (26)  108   256   500 
Ending balance $3,171  $580  $2,496  $1,598  $544  $238  $827  $9,454 
Three months ended June 30, 2016                      
Allowance for loan losses:                      
                                 
Beginning balance: $2,045  $414  $2,942  $2,091  $312  $11  $1,214  $9,029 
Charge-offs  -   -   -   (926)  -   -   -   (926)
Recoveries  6   -   2   -   -   -   -   8 
Provisions (credits)  1,242   (49)  192   201   12   -   (948)  650 
Ending balance $3,293  $365  $3,136  $1,366  $324  $11  $266  $8,761 

 
 
(dollars in thousands)
Commercial Real Estate
 Construction and Land Development Commercial and Industrial Owner Occupied Real Estate 
Consumer and Other
 
Residential Mortgage
 
Unallocated
 
Total
 
                
Six months ended June 30, 2017               
Allowance for loan losses:               
                 
Beginning balance: $3,254  $557  $2,884  $1,382  $588  $58  $432  $9,155 
Charge-offs  -   -   (152)  (108)  (8)  -   -   (268)
Recoveries  7   -   59   -   1   -   -   67 
Provisions (credits)  (90)  23   (295)  324   (37)  180   395   500 
Ending balance $3,171  $580  $2,496  $1,598  $544  $238  $827  $9,454 
                                 
Six months ended June 30, 2016                      
Allowance for loan losses:                      
                         
Beginning balance: $2,393  $338  $2,932  $2,030  $295  $14  $701  $8,703 
Charge-offs  -   -   (18)  (954)  -   -   -   (972)
Recoveries  6   -   74   -   -   -   -   80 
Provisions (credits)  894   27   148   290   29   (3)  (435)  950 
Ending balance $3,293  $365  $3,136  $1,366  $324  $11  $266  $8,761 



19


The following tables provide a summary of the allowance for loan losses and balance of loans receivable by loan class and by impairment method as of June 30, 2017 and December 31, 2016:

 
 
(dollars in thousands)
Commercial Real Estate
 Construction and Land Development 
Commercial
and
Industrial
 
Owner
Occupied Real Estate
 
Consumer
and Other
 
Residential Mortgage
 
Unallocated
 
Total
 
                 
June 30, 2017                
 
Allowance for loan losses:
                
                 
Individually evaluated for impairment $1,453  $-  $1,552  $212  $221  $-  $-  $3,438 
Collectively evaluated for impairment  1,718   580   944   1,386   323   238   827   6,016 
Total allowance for loan losses $3,171  $580  $2,496  $1,598  $544  $238  $827  $9,454 
                                 
Loans receivable:                                
Loans evaluated individually $13,436  $-  $5,117  $3,336  $1,272  $-  $-  $23,161 
Loans evaluated collectively  399,259   83,571   171,832   282,143   67,674   39,286   -   1,043,765 
Total loans receivable $412,695  $83,571  $176,949  $285,479  $68,946  $39,286  $-  $1,066,926 

 
 
(dollars in thousands)
Commercial Real Estate
 Construction and Land Development 
Commercial
and
Industrial
 
Owner
Occupied Real Estate
 
Consumer
and Other
 
Residential Mortgage
 
Unallocated
 
Total
 
                 
December 31, 2016                
 
Allowance for loan losses:
                
                 
Individually evaluated for impairment $1,277  $-  $1,624  $274  $293  $-  $-  $3,468 
Collectively evaluated for impairment  1,977   557   1,260   1,108   295   58   432   5,687 
Total allowance for loan losses $3,254  $557  $2,884  $1,382  $588  $58  $432  $9,155 
                                 
Loans receivable:                                
Loans evaluated individually $19,245  $-  $5,180  $2,325  $1,290  $130  $-  $28,170 
Loans evaluated collectively  359,274   61,453   169,564   274,661   62,370   9,552   -   936,874 
Total loans receivable $378,519  $61,453  $174,744  $276,986  $63,660  $9,682  $-  $965,044 


20


A loan is considered impaired, when based on current information and events, it is probable that the Company will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan.  Impaired loans include nonperforming loans, but also include internally classified accruing loans.  The following table summarizes information with regard to impaired loans by loan portfolio class as of SeptemberJune 30, 20162017 and December 31, 2015:2016:

  June 30, 2017  December 31, 2016 
 
 
(dollars in thousands)
 
Recorded
Investment
  
Unpaid
Principal
Balance
  
Related
Allowance
  
Recorded
Investment
  
Unpaid
Principal
Balance
  
Related
Allowance
 
With no related allowance recorded:                  
Commercial real estate $7,044  $7,046  $-  $12,347  $12,348  $- 
Construction and land development  -   -   -   -   -   - 
Commercial and industrial  2,244   3,408   -   1,955   3,111   - 
Owner occupied real estate  2,154   2,299   -   621   733   - 
Consumer and other  926   1,233   -   687   976   - 
Residential mortgage  -   -   -   130   130   - 
Total $12,368  $13,986  $-  $15,740  $17,298  $- 

With an allowance recorded:                  
Commercial real estate $6,392  $6,406  $1,453  $6,898  $6,912  $1,277 
Construction and land development  -   -   -   -   -   - 
Commercial and industrial  2,873   5,540   1,552   3,225   5,892   1,624 
Owner occupied real estate  1,182   1,182   212   1,704   1,704   274 
Consumer and other  346   374   221   603   627   293 
Residential mortgage  -   -   -   -   -   - 
Total $10,793  $13,502  $3,438  $12,430  $15,135  $3,468 

Total:                  
Commercial real estate $13,436  $13,452  $1,453  $19,245  $19,260  $1,277 
Construction and land development  -   -   -   -   -   - 
Commercial and industrial  5,117   8,948   1,552   5,180   9,003   1,624 
Owner occupied real estate  3,336   3,481   212   2,325   2,437   274 
Consumer and other  1,272   1,607   221   1,290   1,603   293 
Residential mortgage  -   -   -   130   130   - 
Total $23,161  $27,488  $3,438  $28,170  $32,433  $3,468 



  September 30, 2016  December 31, 2015 
 
 
(dollars in thousands)
 
Recorded Investment
  Unpaid Principal Balance  
Related Allowance
  
Recorded Investment
  Unpaid Principal Balance  
Related Allowance
 
With no related allowance recorded:            
Commercial real estate $12,305  $12,307  $-  $11,692  $11,730  $- 
Construction and land development  -   -   -   117   2,208   - 
Commercial and industrial  1,515   2,648   -   2,381   3,683   - 
Owner occupied real estate  672   685   -   507   507   - 
Consumer and other  1,092   1,400   -   800   1,084   - 
Total $15,584  $17,040  $-  $15,497  $19,212  $- 
21

With an allowance recorded:            
Commercial real estate $7,165  $7,179  $1,290  $511  $511  $47 
Construction and land development  56   2,050   56   -   -   - 
Commercial and industrial  3,719   6,385   1,799   3,112   5,779   1,111 
Owner occupied real estate  1,859   1,860   544   2,862   2,876   1,059 
Consumer and other  292   293   71   147   147   21 
Total $13,091  $17,767  $3,760  $6,632  $9,313  $2,238 

Total:            
Commercial real estate $19.470  $19,486  $1,290  $12,203  $12,241  $47 
Construction and land development  56   2,050   56   117   2,208   - 
Commercial and industrial  5,234   9,033   1,799   5,493   9,462   1,111 
Owner occupied real estate  2,531   2,545   544   3,369   3,383   1,059 
Consumer and other  1,384   1,693   71   947   1,231   21 
Total $28,675  $34,807  $3,760  $22,129  $28,525  $2,238 





- 20 -
The following table presents additional information regarding the Company's impaired loans for the three months ended SeptemberJune 30, 20162017 and SeptemberJune 30, 2015:2016:
 Three Months Ended June 30, 
 2017  2016 
          
 
 
(dollars in thousands)
Average Recorded Investment
 
Interest
Income Recognized
  Average Recorded Investment 
Interest
Income Recognized
 
With no related allowance recorded:         
Commercial real estate $8,794  $95   $12,085  $67 
Construction and land development  -   -    77   - 
Commercial and industrial  2,139   10    1,782   11 
Owner occupied real estate  1,812   17    793   2 
Consumer and other  868   5    847   3 
Residential mortgage  21   -    -   - 
Total $13,634  $127   $15,584  $83 
With an allowance recorded:             
Commercial real estate $6,515  $4   $4,966  $16 
Construction and land development  -   -    2   - 
Commercial and industrial  3,015   17    3,450   19 
Owner occupied real estate  1,380   8    1,808   8 
Consumer and other  407   2    265   3 
Residential mortgage  -   -    -   - 
Total $11,317  $31   $10,491  $46 

Total:             
Commercial real estate $15,309  $99   $17,051  $83 
Construction and land development  -   -    79   - 
Commercial and industrial  5,154   27    5,232   30 
Owner occupied real estate  3,192   25    2,601   10 
Consumer and other  1,275   7    1,112   6 
Residential mortgage  21   -    -   - 
Total $24,951  $158   $26,075  $129 

 Three Months Ended September 30, 
 2016 2015 
 
 
(dollars in thousands)
Average Recorded Investment
 Interest Income Recognized Average Recorded Investment Interest Income Recognized 
With no related allowance recorded:    
Commercial real estate $12,188  $65  $13,923  $73 
Construction and land development  22   -   328   2 
Commercial and industrial  1,611   9   2,459   16 
Owner occupied real estate  665   3   589   1 
Consumer and other  1,027   5   754   3 
Total $15,513  $82  $18,053  $95 
With an allowance recorded:        
Commercial real estate $6,058  $19  $2,479  $3 
Construction and land development  43   -   62   - 
Commercial and industrial  3,607   18   3,776   12 
Owner occupied real estate  1,977   9   3,293   27 
Consumer and other  278   2   111   1 
Total $11,963  $48  $9,721  $43 

Total:        
Commercial real estate $18,246  $84  $16,402  $76 
Construction and land development  65   -   390   2 
Commercial and industrial  5,218   27   6,235   28 
Owner occupied real estate  2,642   12   3,882   28 
Consumer and other  1,305   7   865   4 
Total $27,476  $130  $27,774  $138 


- 21 -22


The following table presents additional information regarding the Company's impaired loans for the ninesix months ended SeptemberJune 30, 20162017 and SeptemberJune 30, 2015:2016:
 Six Months Ended June 30, 
 2017  2016 
          
 
 
(dollars in thousands)
Average Recorded Investment
 
Interest
Income Recognized
  Average Recorded Investment 
Interest
Income Recognized
 
With no related allowance recorded:         
Commercial real estate $10,542  $165   $11,837  $132 
Construction and land development  -   -    97   - 
Commercial and industrial  2,035   18    1,890   21 
Owner occupied real estate  1,469   29    638   3 
Consumer and other  810   8    838   6 
Residential mortgage  43   1    -   - 
Total $14,899  $221   $15,300  $162 
With an allowance recorded:             
Commercial real estate $6,637  $9   $2,737  $24 
Construction and land development  -   -    1   - 
Commercial and industrial  3,159   34    3,280   38 
Owner occupied real estate  1,577   14    2,319   14 
Consumer and other  468   6    239   5 
Residential mortgage  -   -    -   - 
Total $11,841  $63   $8,576  $81 

Total:             
Commercial real estate $17,179  $174   $14,574  $156 
Construction and land development  -   -    98   - 
Commercial and industrial  5,194   52    5,170   59 
Owner occupied real estate  3,046   43    2,957   17 
Consumer and other  1,278   14    1,077   11 
Residential mortgage  43   1    -   - 
Total $26,740  $284   $23,876  $243 

 Nine Months Ended September 30, 
 2016 2015 
 
 
(dollars in thousands)
Average Recorded Investment
 Interest Income Recognized Average Recorded Investment Interest Income Recognized 
With no related allowance recorded:    
Commercial real estate $11,954  $197  $13,073  $214 
Construction and land development  72   -   228   3 
Commercial and industrial  1,797   30   3,435   64 
Owner occupied real estate  647   6   749   5 
Consumer and other  901   11   656   7 
Total $15,371  $244  $18,141  $293 


With an allowance recorded:        
Commercial real estate $3,844  $43  $6,803  $6 
Construction and land development  15   -   112   - 
Commercial and industrial  3,389   56   2,456   12 
Owner occupied real estate  2,205   23   3,837   90 
Consumer and other  252   7   37   1 
Total $9,705  $129  $13,245  $109 

Total:        
Commercial real estate $15,798  $240  $19,876  $220 
Construction and land development  87   -   340   3 
Commercial and industrial  5,186   86   5,891   76 
Owner occupied real estate  2,852   29   4,586   95 
Consumer and other  1,153   18   693   8 
Total $25,076  $373  $31,386  $402 


- 22 -23


The following tables provide the activity in and ending balances of the allowance for loan losses by loan portfolio class at and for the three and nine months ended September 30, 2016 and 2015:
(dollars in thousands) Commercial Real Estate  Construction and Land Development  Commercial and Industrial  Owner Occupied Real Estate  Consumer and Other  Residential Mortgage  Unallocated  Total 
                 
Three months ended September 30, 2016               
Allowance for loan losses:               
                 
Beginning balance:
 
$
3,293
  
$
365
  
$
3,136
  
$
1,366
  
$
324
  
$
11
  
$
266
  
$
8,761
 
Charge-offs
  
-
   
(3
)
  
-
   
-
   
-
   
-
   
-
   
(3
)
Recoveries
  
-
   
-
   
88
   
-
   
-
   
-
   
-
   
88
 
Provisions (credits)
  
9
   
137
   
(79
)
  
251
   
16
   
31
   
242
   
607
 
Ending balance
 
$
3,302
  
$
499
  
$
3,145
  
$
1,617
  
$
340
  
$
42
  
$
508
  
$
9,453
 
                                 
Three months ended September 30, 2015
Allowance for loan losses:
Beginning balance:
 
$
2,707
  
$
311
  
$
2,823
  
$
1,787
  
$
251
  
$
2
  
$
517
  
$
8,398
 
Charge-offs
  
-
   
-
   
-
   
(78
)
  
-
   
-
   
-
   
(78
)
Recoveries
  
-
   
-
   
2
   
-
   
1
   
-
   
-
   
3
 
Provisions (credits)
  
(79
)
  
26
   
313
   
19
   
28
   
12
   
(319
)
  
-
 
Ending balance
 
$
2,628
  
$
337
  
$
3,138
  
$
1,728
  
$
280
  
$
14
  
$
198
  
$
8,323
 
                                 
 
 
(dollars in thousands)
Commercial
Real Estate
 
Construction
and Land
Development
 
Commercial
and
Industrial
 
Owner
Occupied
Real Estate
 
Consumer and Other
 
Residential Mortgage
 
Unallocated
 
Total
 
        
Nine months ended September 30, 2016        
Allowance for loan losses:        
         
Beginning balance: $2,393  $338  $2,932  $2,030  $295  $14  $701  $8,703 
Charge-offs  -   (3)  (18)  (954)  -   -   -   (975)
Recoveries  6   -   162   -   -   -   -   168 
Provisions (credits)  903   164   69   541   45   28   (193)  1,557 
Ending balance $3,302  $499  $3,145  $1,617  $340  $42  $508  $9,453 
Nine months ended September 30, 2015
Allowance for loan losses:
Beginning Balance: $6,828  $917  $1,579  $1,638  $234  $2  $338  $11,536 
Charge-offs  (2,623)  (222)  (325)  (133)  -   -   -   (3,303)
Recoveries  4   5   48   -   33   -   -   90 
Provisions (credits)  (1,581)  (363)  1,836   223   13   12   (140)  - 
Ending balance $2,628  $337  $3,138  $1,728  $280  $14  $198  $8,323 

- 23 -

The following tables provide a summary of the allowance for loan losses and balance of loans receivable by loan class and by impairment method as of September 30, 2016 and December 31, 2015:

 
 
(dollars in thousands)
 
Commercial Real Estate
  Construction and Land Development  Commercial and Industrial  Owner Occupied Real Estate  
Consumer and Other
  
Residential Mortgage
  
Unallocated
  
Total
 
                 
September 30, 2016                
 
Allowance for loan losses:
                
Individually evaluated for impairment $1,290  $56  $1,799  $544  $71  $-  $-  $3,760 
Collectively evaluated for impairment  2,012   443   1,346   1,073   269   42   508   5,693 
Total allowance for loan losses $3,302  $499  $3,145  $1,617  $340  $42  $508  $9,453 
                                 
Loans receivable:                                
Loans evaluated individually $19,470  $56  $5,234  $2,531  $1,384  $-  $-  $28,675 
Loans evaluated collectively  356,996   48,927   180,892   265,904   57,196   6,909   -   916,824 
Total loans receivable $376,466  $48,983  $186,126  $268,435  $58,580  $6,909  $-  $945,499 


 
 
(dollars in thousands)
 
Commercial Real Estate
  Construction and Land Development  Commercial and Industrial  Owner Occupied Real Estate  
Consumer and Other
  
Residential Mortgage
  
Unallocated
  
Total
 
                 
December 31, 2015                
 
Allowance for loan losses:
                
Individually evaluated for impairment $47  $-  $1,111  $1,059  $21  $-  $-  $2,238 
Collectively evaluated for impairment  2,346   338   1,821   971   274   14   701   6,465 
Total allowance for loan losses $2,393  $338  $2,932  $2,030  $295  $14  $701  $8,703 
                                 
Loans receivable:                                
Loans evaluated individually $12,203  $117  $5,493  $3,369  $947  $-  $-  $22,129 
Loans evaluated collectively  337,523   46,430   176,357   243,029   47,179   2,380   -   852,898 
Total loans receivable $349,726  $46,547  $181,850  $246,398  $48,126  $2,380  $-  $875,027 



- 24 -



The performance and credit quality of the loan portfolio is also monitored by analyzing the age of the loans receivable as determined by the length of time a recorded payment is past due.  The following table presents the classes of the loan portfolio summarized by the past due status as of SeptemberJune 30, 20162017 and December 31, 2015:2016:
(dollars in thousands)
 
30-59
Days Past Due
 
60-89
Days Past Due
 
 
Greater than 90 Days
 
 
Total
Past Due
 
 
 
Current
 
Total
Loans Receivable
 
                Loans
        Receivable
         > 90 Days
                    and
          Accruing
 
30-59
Days Past Due
  
60-89
Days Past Due
  
Greater
than 90
Days
  
Total
Past Due
  
Current
  
Total
Loans Receivable
  
Loans
Receivable
> 90 Days
and
Accruing
 
At September 30, 2016      
At June 30, 2017                     
Commercial real estate$-$12$13,280$13,292$363,174$376,466$- $-  $863  $12,961  $13,824  $398,871  $412,695  $- 
Construction and land development - - 56 56 48,927 48,983 -  -   -   -   -   83,571   83,571   - 
Commercial and industrial - 747 3,149 3,896 182,230 186,126 -  -   -   3,309   3,309   173,640   176,949   - 
Owner occupied real estate - - 1,874 1,874 266,561 268,435 -  -   -   1,678   1,678   283,801   285,479   219 
Consumer and other - 22 995 1,017 57,563 58,580 16  113   -   865   978   67,968   68,946   74 
Residential mortgage - - 137 137 6,772 6,909 137  -   -   -   -   39,286   39,286   - 
Total$-$781$19,491$20,272$925,227$945,499$153 $113  $863  $18,813  $19,789  $1,047,137  $1,066,926  $293 
(dollars in thousands)
 
30-59
Days Past Due
 
60-89
Days Past Due
 
 
Greater than 90 Days
 
 
Total
Past Due
 
 
 
Current
 
Total
Loans Receivable
 
                Loans
        Receivable
         > 90 Days
                    and
          Accruing
At December 31, 2015      
Commercial real estate$-$7,657$5,913$13,570$336,156$349,726$-
Construction and land development - - 117 117 46,430 46,547 -
Commercial and industrial 1,661 997 3,156 5,814 176,036 181,850 -
Owner occupied real estate 800 469 2,894 4,163 242,235 246,398 -
Consumer and other 285 192 542 1,019 47,107 48,126 -
Residential mortgage 132 - - 132 2,248 2,380 -
Total$2,878$9,315$12,622$24,815$850,212$875,027$-
 
 
 
(dollars in thousands)
 
30-59
Days Past Due
  
60-89
Days Past Due
  
Greater
than 90
Days
  
Total
Past Due
  
Current
  
Total
Loans Receivable
  
Loans
Receivable
> 90 Days
and
Accruing
 
At December 31, 2016                     
Commercial real estate $-  $9  $13,089  $13,098  $365,421  $378,519  $- 
Construction and land development  -   -   -   -   61,453   61,453   - 
Commercial and industrial  568   -   3,151   3,719   171,025   174,744   - 
Owner occupied real estate  468   -   1,718   2,186   274,800   276,986   172 
Consumer and other  24   22   808   854   62,806   63,660   - 
Residential mortgage  -   -   130   130   9,552   9,682   130 
Total $1,060  $31  $18,896  $19,987  $945,057  $965,044  $302 

The following table presents the classes of the loan portfolio summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within the Company's internal risk rating system as of SeptemberJune 30, 20162017 and December 31, 2015:2016:

 
(dollars in thousands)
 
Pass
  
Special
Mention
  
Substandard
  
Doubtful
  
Total
 
At June 30, 2017:               
Commercial real estate $398,400  $859  $13,436  $-  $412,695 
Construction and land development  83,571   -   -   -   83,571 
Commercial and industrial  171,252   580   3,688   1,429   176,949 
Owner occupied real estate  282,143   -   3,336   -   285,479 
Consumer and other  67,674   -   1,272   -   68,946 
Residential mortgage  39,158   128   -   -   39,286 
Total $1,042,198  $1,567  $21,732  $1,429  $1,066,926 
(dollars in thousands)
 
Pass
  
Special Mention
  
Substandard
  
Doubtful
  
Total
  
Pass
  
Special
Mention
  
Substandard
  
Doubtful
  
Total
 
At September 30, 2016:          
At December 31, 2016:               
Commercial real estate $361,806  $887  $13,773  $-  $376,466  $364,066  $877  $13,576  $-  $378,519 
Construction and land development  48,927   -   56   -   48,983   61,453   -   -   -   61,453 
Commercial and industrial  180,836   56   3,805   1,429   186,126   168,958   606   3,751   1,429   174,744 
Owner occupied real estate  265,904   -   2,531   -   268,435   274,150   511   2,325   -   276,986 
Consumer and other  57,196   -   1,384   -   58,580   62,370   -   1,290   -   63,660 
Residential mortgage  6,909   -   -   -   6,909   9,552   -   130   -   9,682 
Total $921,578  $943  $21,549  $1,429  $945,499  $940,549  $1,994  $21,072  $1,429  $965,044 

 
(dollars in thousands)
 
Pass
  
Special Mention
  
Substandard
  
Doubtful
  
Total
 
At December 31, 2015:          
  Commercial real estate $329,567  $7,956  $12,203  $-  $349,726 
  Construction and land development  46,430   -   117   -   46,547 
  Commercial and industrial  176,132   225   4,064   1,429   181,850 
  Owner occupied real estate  242,560   469   3,369   -   246,398 
  Consumer and other  47,104   75   947   -   48,126 
  Residential mortgage  2,380   -   -   -   2,380 
Total $844,173  $8,725  $20,700  $1,429  $875,027 
- 25 -24


The following table shows non-accrual loans by class as of SeptemberJune 30, 20162017 and December 31, 2015:2016:

(dollars in thousands) 
September 30,
2016
  
December 31,
2015
  
June 30,
2017
  
December 31,
2016
 
Commercial real estate $13,280  $5,913  $12,961  $13,089 
Construction and land development  56   117   -   - 
Commercial and industrial  3,149   3,156   3,309   3,151 
Owner occupied real estate  1,874   2,894   1,459   1,546 
Consumer and other  979   542   791   808 
Residential mortgage  -   -   -   - 
Total $19,338  $12,622  $18,520  $18,594 

If these loans were performing under their original contractual rate, interest income on such loans would have increased approximately $271,000$210,000 and $784,000$486,000 for the three and ninesix months ended SeptemberJune 30, 2016,2017, respectively, and $110,000$313,000 and $573,000$513,000 for the ninethree and six months ended SeptemberJune 30, 2015,2016, respectively.

Troubled Debt Restructurings

A modification to the contractual terms of a loan which results in a concession to a borrower that is experiencing financial difficulty is classified as a troubled debt restructuring ("TDR").  The concessions made in a TDR are those that would not otherwise be considered for a borrower or collateral with similar risk characteristics.  A TDR is typically the result of efforts to minimize potential losses that may be incurred during loan workouts, foreclosure, or repossession of collateral at a time when collateral values are declining.  Concessions include a reduction in interest rate below current market rates, a material extension of time to the loan term or amortization period, partial forgiveness of the outstanding principal balance, acceptance of interest only payments for a period of time, or a combination of any of these conditions.

The following table summarizes the balance of outstanding TDRs SeptemberJune 30, 20162017 and December 31, 2015:2016:

(dollars in thousands)
 Number of Loans  Accrual Status  Non-Accrual Status  Total TDRs  
Number
of Loans
  
Accrual
Status
  
Non-
Accrual
Status
  
Total
TDRs
 
September 30, 2016
        
June 30, 2017            
Commercial real estate
  
1
  
$
5,697
  
$
-
  
$
5,697
   1  $-  $6,518  $6,518 
Construction and land development
  
-
   
-
   
-
   
-
   -   -   -   - 
Commercial and industrial
  
2
   
234
   
349
   
583
   2   1,191   349   1,540 
Owner occupied real estate
  
-
   
-
   
-
   
-
   1   245   -   245 
Consumer and other
  
-
   
-
   
-
   
-
   -   -   -   - 
Residential mortgage
  
-
   
-
   
-
   
-
   -   -   -   - 
Total   3  $  5,931  $  349  $  6,280   4  $1,436  $6,867  $8,303 
          
December 31, 2016          
Commercial real estate  1  $5,669  $-  $5,669 
Construction and land development  -   -   -   - 
Commercial and industrial  2   228   349   577 
Owner occupied real estate  -   -   -   - 
Consumer and other  -   -   -   - 
Residential mortgage  -   -   -   - 
Total  3  $5,897  $349  $6,246 
 
                 
December 31, 2015                
Commercial real estate  1  $5,778  $-  $5,778 
Construction and land development  -   -   -   - 
Commercial and industrial  2   252   935   1,187 
Owner occupied real estate  1   -   1,825   1,825 
Consumer and other  -   -   -   - 
Residential mortgage  -   -   -   - 
Total  4  $6,030  $2,760  $8,790 

25


All TDRs are considered impaired and are therefore individually evaluated for impairment in the calculation of the allowance for loan losses.  Some TDRs may not ultimately result in the full collection of principal and interest as restructured and could lead to potential incremental losses.  These potential incremental losses would be factored into the Company's estimate of the allowance for loan losses.  The level of any subsequent defaults will likely be affected by future economic conditions.
 
- 26 -
There were no loan modifications made during the three months ended September 30, 2015 that met the criteria of a TDR. The Company modified one commercial and industrial loan during the ninethree and six months ended SeptemberJune 30, 2015.2017. In accordance with the modified terms of the commercial and industrial loan, the principal balance of $975,000 was converted from a line of credit to a term loan with a five year maturity. This commercial and industrial loan has been and continues to be an accruing loan.
The Company modified one owner occupied loan during the amortization timeframethree and reducedsix months ended June 30, 2017. In accordance with the effective interest rate when compared tomodified terms of the owner occupied loan of $245,000, certain concessions have been granted, including a reduction in the interest rate and an extension of the original loan. The company also extended the maturity date of the loan. The owner occupied loan has been and continues to be an accruing loan.
The Company modified one commercial real estate loan in the amount of $6.5 million during the six months ended June 30, 2017 that met the criteria of a TDR. This loan was unsecured and the Company had electedtransferred to carry the loan as a non-accrual loan until a satisfactory performance history was established. The pre-modification balance was $1.2 million and the post modification balance was $1.2 million. A payment of $350,000 was receivedstatus during the second quarter of 2015 andas a result of delinquency caused by tenant vacancies. The Company restructured the remaining $850,000 transitioned to other assetsloan based on new leases obtained by the borrower. In accordance with the modified terms of the loan, certain concessions have been granted, including an increase in the fourth quarterprincipal balance of 2015 as$421,000 and a reduction in the loan was converted to a legal settlement. The balance in other assets at September 30, 2016 is $586,000. interest rate.

There were no loan modifications made during the three months and ninesix months ended SeptemberJune 30, 2016 that met the criteria of a TDR.

There were no residential mortgages in the process of foreclosure as of SeptemberJune 30, 20162017 and December 31, 2015.2016. Other real estate owned relating to residential real estate was $42,000 and $126,000 and $193,000 at SeptemberJune 30, 20162017 and December 31, 2015.2016.
After a loan is determined to be a TDR, the Company continues to track its performance under the most recent restructured terms. There were no TDRs that subsequently defaulted during the three and ninesix months ended SeptemberJune 30, 2016.2017. There was one TDRwere no TDRs that subsequently defaulted during the fourth quarter of the year ended December 31, 2015.  A partial writedown and payoff were recorded on this loan during the nine months ended September 30, 2016.
Note 7:  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 sale transaction on the dates indicated.  The estimated fair value amounts have been measured as of their respective year-endsperiod-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.period-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.
26

 
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 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).  The three levels of the fair value hierarchy under ASC 820 are as follows:

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
 
Level 2: 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 3: 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.




 
- 27 -

For financial assets and liabilities measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used at SeptemberJune 30, 20162017 and December 31, 20152016 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
  
Total
  
(Level 1)
Quoted Prices
in Active
Markets for Identical Assets
  
(Level 2)
Significant
Other
Observable
Inputs
  
(Level 3)
Significant
Unobservable
Inputs
 
                    
September 30, 2016        
June 30, 2017            
Assets:                    
                    
Collateralized mortgage obligations $200,396  $-  $200,396  $-  $209,531  $-  $209,531  $- 
Agency mortgage-backed securities  11,686   -   11,686   -   43,635   -   43,635   - 
Municipal securities  24,442   -   24,442   -   12,148   -   12,148   - 
Corporate bonds  45,428   -   42,495   2,933   64,602   -   61,523   3,079 
Asset-backed securities  15,717   -   15,717   -   14,298   -   14,298   - 
Trust Preferred Securities  1,691   -   -   1,691   968   -   -   968 
Other securities  25   -   25   - 
Securities Available for Sale $299,385  $-  $294,761  $4,624  $345,182  $-  $341,135  $4,047 
                                
Mortgage Loans Held for Sale $26,865  $-  $26,865  $-  $24,307  $-  $24,307  $- 
                
SBA Servicing Assets $5,297  $-  $-  $5,297   5,194   -   -   5,194 
                
Interest Rate Lock Commitments $1,027  $-  $1,027  $-   761   -   761   - 
Best Efforts Forward Loan Sales Commitments  21   -   21   - 
Mandatory Forward Loan Sales Commitments  4   -   4   - 
                                
Liabilities:                                
                                
Interest Rate Lock Commitments $9  $-  $9  $-   1   -   1   - 
                
Best Efforts Forward Loan Sales Commitments $377  $-  $377  $-   163   -   163   - 
                
Mandatory Forward Loan Sales Commitments $294  $-  $294  $-   149   -   149   - 
                         
December 31, 2015                
December 31, 2016         
Assets:                                
                                
Collateralized mortgage obligations $178,145  $-  $178,145  $-  $224,765  $-  $224,765  $- 
Agency mortgage-backed securities  10,171   -   10,171   -   36,710   -   36,710   - 
Municipal securities  23,344   -   23,344   -   26,547   -   26,547   - 
Corporate bonds  54,129   -   51,295   2,834   64,748   -   61,777   2,971 
Asset-backed securities  17,005   -   17,005   -   15,149   -   15,149   - 
Trust Preferred Securities  1,883   -   -   1,883   1,820   -   -   1,820 
Other securities  118   -   118   - 
Securities Available for Sale $284,795  $-  $280,078  $4,717  $369,739  $-  $364,948  $4,791 
                                
Mortgage Loans Held for Sale $23,911  $-  $23,911  $- 
SBA Servicing Assets $4,886   -   -  $4,886   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   - 

 
- 28 -


The following table presents an analysis of the activity in the SBA servicing assets for the three and ninesix months ended SeptemberJune 30, 20162017 and 2015:2016:

 Three Months Ended September 30,  Nine Months Ended September 30,  
Three Months Ended
June 30,
  
Six Months Ended
June 30,
 
(dollars in thousands) 2016  2015  2016  2015  2017  2016  2017  2016 
Beginning balance $5,118  $4,319  $4,886  $4,099  $5,298  $5,058  $5,352  $4,886 
Additions  503   227   1,305   672   267   560   478   802 
Fair value adjustments  (324)  (372)  (894)  (597)  (371)  (500)  (636)  (570)
Ending balance $5,297  $4,174  $5,297  $4,174  $5,194  $5,118  $5,194  $5,118 

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 $458,000$485,000 and $447,000$441,000 for the three months ended SeptemberJune 30, 20162017 and 2015,2016, respectively. Servicing fee income, not including fair value adjustments, totaled $1.3 million$918,000 and $1.3 million$875,000 for the ninesix months ended SeptemberJune 30, 20162017 and 2015,2016, 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 3) for the three and ninesix months ended SeptemberJune 30, 20162017 and 2015:2016:

  
Three Months Ended
June 30, 2017
  
Three Months Ended
June 30, 2016
 
Level 3 Investments Only
(dollars in thousands)
 
Trust
Preferred
Securities
  
Corporate
Bonds
  
Trust
Preferred
Securities
  
Corporate
Bonds
 
Balance,  April 1st $1,961  $3,024  $1,858  $2,844 
Unrealized gains  (losses)  525   55   (99)  26 
Paydowns  -   -   -   - 
Proceeds from sales  (970)  -   -   - 
Realized losses  (548)  -   -   - 
Impairment charges on Level 3  -   -   (4)  - 
Balance,  June 30th $968  $3,079  $1,755  $2,870 
 
Three Months Ended
September 30, 2016
  
Three Months Ended
September 30, 2015
  
Six Months Ended
June 30, 2017
  
Six Months Ended
June 30, 2016
 
Level 3 Investments Only
(dollars in thousands)
 Trust Preferred Securities  Corporate Bonds  Trust Preferred Securities  Corporate Bonds  
Trust
Preferred
Securities
  
Corporate
Bonds
  
Trust
Preferred
Securities
  
Corporate
Bonds
 
Balance, July 1st $1,755  $2,870  $2,006  $2,684 
Balance, January 1st $1,820  $2,971  $1,883  $2,834 
Unrealized gains (losses)  (62)  63   220   17   666   108   (123)  36 
Paydowns  -   -   -   -   -   -   -   - 
Proceeds from sales  -   -   (414)  -   (970)  -   -   - 
Realized losses  -   -   (142)  -   (548)  -   -   - 
Impairment charges on Level 3  (2)  -   -   -   -   -   (5)  - 
Balance, September 30th $1,691  $2,933  $1,670  $2,701 
Balance, June 30th $968  $3,079  $1,755  $2,870 

  
Nine Months Ended
September 30, 2016
  
Nine Months Ended
September 30, 2015
 
Level 3 Investments Only
(dollars in thousands)
 Trust Preferred Securities  Corporate Bonds  Trust Preferred Securities  Corporate Bonds 
Balance, January 1st $1,883  $2,834  $3,193  $3,005 
Unrealized gains (losses)  (185)  99   669   (304)
Paydowns  -   -   (19)  - 
Proceeds from sales  -   -   (1,952)  - 
Realized losses  -   -   (218)  - 
Impairment charges on Level 3  (7)  -   (3)  - 
Balance, September 30th $1,691  $2,933  $1,670  $2,701 
29



- 29 -
For assets measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy used at SeptemberJune 30, 20162017 and December 31, 20152016 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
  
Total
  
(Level 1)
Quoted Prices
in Active Markets for
Identical Assets
  
(Level 2)
Significant Other Observable Inputs
  
(Level 3)
Significant Unobservable
Inputs
 
September 30, 2016:        
June 30, 2017:            
Impaired loans $9,331  $-  $-  $9,331  $7,545  $-  $-  $7,545 
Other real estate owned  8,593   -   -   8,593   607   -   -   607 
                                
December 31, 2015:                
December 31, 2016:                
Impaired loans $5,734  $-  $-  $5,734  $9,110  $-  $-  $9,110 
Other real estate owned  10,034   -   -   10,034   8,563   -   -   8,563 

The table below presents additional quantitative information about level 3 assets measured at fair value on a nonrecurring basis (dollars in thousands):

 Quantitative Information about Level 3 Fair Value Measurements Quantitative Information about Level 3 Fair Value Measurements 
Asset Description Fair Value Valuation Technique Unobservable Input Range Weighted    Average Fair Value 
Valuation
Technique
Unobservable Input 
Range (Weighted
Average)
September 30, 2016         
June 30, 2017       
Corporate bonds $2,933 
Discounted
Cash Flows
 Discount Rate (4.35%) $3,079 
Discounted
Cash Flows
Discount Rate  (5.46%)
                  
Trust preferred securities $1,691 
Discounted
Cash Flows
 Discount Rate 8.45% - 8.95% (8.68%) $968 
Discounted
Cash Flows
Discount Rate  8.73% - 8.94% (8.82%)
                  
SBA servicing assets $5,297 
Discounted
Cash Flows
 
Conditional
Prepayment Rate
Discount Rate
 
(6.16%)
(10.00%)
 $5,194 
Discounted
Cash Flows
Conditional
Prepayment Rate
  (6.57%)
                 Discount Rate  
 
(10.25
%)
         
Impaired loans $9,331 Appraised Value of Collateral (1) 
Liquidation expenses (2)
Appraisal adjustment (2)
 
4% - 76% (15%) (3)
(0%) (3)
 $7,545 
Appraised Value of
Collateral (1)
Liquidation expenses (2)  10% - 28% (14%)(3)
                  
Other real estate owned
 $8,593 
Appraised Value of Collateral (1)
 
Sales Price
 
Liquidation expenses (2)
Appraisal adjustment (2)
 
Liquidation expenses (2)
 
7% - 27% (12%) (3)
(0%) (3)
 
    (7%) (3)
 
$
607 
Appraised Value of
Collateral (1)
Liquidation expenses (2)  7% - 20% (8%)(3)
             Sales PriceLiquidation expenses (2)  
 
6% - 8%
 (7%)(3)
December 31, 2015         
         
December 31, 2016         
Corporate bonds $2,834 
Discounted
Cash Flows
 Discount Rate (4.11%) $2,971 
Discounted
Cash Flows
Discount Rate  (4.68%)
                  
Trust preferred securities $1,883 
Discounted
Cash Flows
 Discount Rate 7.31% - 7.81% (7.77%) $1,820 
Discounted
Cash Flows
Discount Rate  8.85% - 9.35% (9.08%)
                  
SBA servicing assets $4,886 
Discounted
Cash Flows
 
Conditional
Prepayment Rate
Discount Rate
 
(6.27%)
(10.00%)
 $5,352 
Discounted
Cash Flows
Conditional
Prepayment Rate
  (6.12%)
                 Discount Rate  
 
(10.00
%)
         
Impaired loans $5,734 Appraised Value of Collateral (1) Liquidation expenses (2) 12% - 78% (20%) (3) $9,110 
Appraised Value of
Collateral (1)
Liquidation expenses (2)  7% - 20% (11%)(3)
             Sales PriceLiquidation expenses (2)  
 
(7%
) (3)
         
Other real estate owned
 
 
$
 
10,034
 
Appraised Value of Collateral (1)
 
Sales Price
 
Liquidation expenses (2)
Appraisal adjustment (2)
 
Liquidation expenses (2)
 
6% - 30% (10%) (3)
(50%) (3)
 
    7% - 9% (9%) (3)
 
$
8,563 
Appraised Value of
Collateral (1)
Liquidation expenses (2)  5% - 76% (17%)(3)
    Sales PriceLiquidation 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.
30


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.
- 30 -

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 certain assets and liabilities of the Company's financial instrumentsCompany at SeptemberJune 30, 20162017 and December 31, 2015.2016.

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 3 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 3 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 2 of the fair value hierarchy. As required by ASC 820-10, the Company does not adjust the matrix pricing for such instruments.

Level 3 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 3 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 3 investment securities classified as available for sale are comprised of various issues of trust preferred securities and a single corporate bond.

31

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 3 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.
- 31 -

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 SeptemberJune 30, 20162017 and December 31, 2015.2016. 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. Due to the current state of the global capital and financial markets, the fair market valuation is subject to greater uncertainty that would otherwise exist.

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 3 investment securities classified as available for sale is a corporate bond transferred from Level 2 in 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 3 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 threesix months ended SeptemberJune 30, 20162017 and the year ended December 31, 2015.2016.

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 2 of the fair value hierarchy. Effective July 28,In 2016, Republic elected to adopt the fair value option for its mortgage loans held for sale portfolio in order to more accurately reflect thetheir economic value of the mortgages held for sale on the balance sheet.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 September 30,December 31, 2016. Interest income on loans held for sale, which totaled $89,000$171,000 and $300,000 for the three and ninesix months ended SeptemberJune 30, 2017, respectively, and $0 for both the three and six months ended June 30, 2016, are included in interest and fees in the statements of income.

- 32 -

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 SeptemberJune 30, 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  
Carrying
Amount
  Aggregate Unpaid Principal Balance  Excess Carrying Amount Over Aggregate Unpaid Principal Balance 
September 30, 2016 $26,865  $25,726  $1,139 
June 30, 2017 $24,307  $23,522  $785 
            
December 31, 2016 $23,911  $23,428  $483 

Republic did not have any mortgage loans held for sale recorded at fair value that were 90 or more days past due and on non-accrual at SeptemberJune 30, 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 2 of the valuation hierarchy.

Best Efforts Forward Loan Sales Commitments

Best efforts forward loan sales commitments are classified within Level 2 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 2 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 3 of the fair value hierarchy.

33

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 3 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.
- 33 -

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 SeptemberJune 30, 20162017 and December 31, 2015,2016, these assets are carried at current fair value and classified within Level 3 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 SeptemberJune 30, 20162017 and December 31, 2015,2016, 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) June 30, 2017  December 31, 2016 
       
SBA Servicing Asset      
       
Fair Value of SBA Servicing Asset $5,194  $5,352 
         
Composition of SBA Loans Serviced for Others        
      Fixed-rate SBA loans  1%  0%
      Adjustable-rate SBA loans  99%  100%
                  Total  100%  100%
         
Weighted Average Remaining Term 20.7 years  21.1 years 
         
Prepayment Speed  6.57%  6.12%
      Effect on fair value of a 10% increase $(161) $(161)
      Effect on fair value of a 20% increase  (315)  (316)
         
Weighted Average Discount Rate  10.25%  10.00%
      Effect on fair value of a 10% increase $(218) $(226)
      Effect on fair value of a 20% increase  (420)  (435)
(dollars in thousands) September 30, 2016  December 31, 2015 
     
SBA Servicing Asset    
     
Fair Value of SBA Servicing Asset $5,297  $4,886 
         
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 21.2 years  20.9 years 
         
Prepayment Speed  6.16%  6.27%
      Effect on fair value of a 10% increase $(162) $(151)
      Effect on fair value of a 20% increase  (318)  (296)
         
Weighted Average Discount Rate  10.00%  10.00%
      Effect on fair value of a 10% increase $(223) $(206)
      Effect on fair value of a 20% increase  (429)  (397)

34

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 2 of the fair value hierarchy.
- 34 -

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 2 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 2 of the fair value hierarchy.

Short-term Borrowings (Carried at Cost)

Due to their short-term nature, the carrying amounts of short-term borrowings, which include overnight borrowings, approximate their fair value. Short-term borrowings are classified within Level 2 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 3 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.




-





35 -


The estimated fair values of the Company's financial instruments were as follows at June 30, 2017:
  Fair Value Measurements at June 30, 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 $87,997  $87,997   $87,997  $-  $- 
Investment securities available for sale  345,182   345,182    -   341,135   4,047 
Investment securities held to maturity  409,373   403,183    -   403,183   - 
Restricted stock  3,878   3,878    -   3,878   - 
Loans held for sale  29,547   29,756    -   24,307   5,449 
Loans receivable, net  1,057,056   1,032,111    -   -   1,032,111 
SBA servicing assets  5,194   5,194    -   -   5,194 
Accrued interest receivable  5,840   5,840    -   5,840   - 
Interest rate lock commitments  761   761    -   761   - 
Best efforts forward loan sales commitments  21   21    -   21   - 
Mandatory forward loan sales commitments  4   4    -   4   - 
                      
Financial liabilities:                     
Deposits                     
Demand, savings and money market $1,625,630  $1,625,630   $-  $1,625,630  $- 
Time  106,801   106,319    -   106,319   - 
Short-term borrowing  55,000   55,000    -   55,000   - 
Subordinated debt  21,656   17,591    -   -   17,591 
Accrued interest payable  317   317    -   317   - 
Interest rate lock commitments  1   1    -   1   - 
Best efforts forward loan sales commitments  163   163    -   163   - 
Mandatory forward loan sales commitments  149   149    -   149   - 
                      
Off-Balance Sheet Data                     
Commitments to extend credit  -   -    -   -   - 
Standby letters-of-credit  -   -    -   -   - 




36



The estimated fair values of the Company's financial instruments were as follows at September 30, 2016 and December 31, 2015:2016.
  Fair Value Measurements at September 30, 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 $150,041  $150,041  $150,041  $-  $- 
Investment securities available for sale  299,385   299,385   -   294,761   4,624 
Investment securities held to maturity  220,470   223,247   -   223,247   - 
Restricted stock  1,366   1,366   -   1,366   - 
Loans held for sale  29,715   29,715   -   26,865   2,850 
Loans receivable, net  936,088   917,242   -   -   917,242 
SBA servicing assets  5,297   5,297   -   -   5,297 
Accrued interest receivable  4,588   4,588   -   4,588   - 
Interest rate lock commitments  1,027   1,027   -   1,027   - 
                     
Financial liabilities:                    
Deposits                    
Demand, savings and money market $1,473,105  $1,473,105  $-  $1,473,105  $- 
Time  109,127   109,172   -   109,172   - 
Subordinated debt  22,476   18,257   -   -   18,257 
Accrued interest payable  339   339   -   339   - 
 
 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  9   9   -   9   -   55   55   -   55   - 
Best efforts forward loan sales commitments  377   377   -   377   -   125   125   -   125   - 
Mandatory forward loan sales commitments  294   294   -   294   -   38   38   -   38   - 
                                        
Off-Balance Sheet Data                                        
Commitments to extend credit  -   -   -   -   -   -   -   -   -   - 
Standby letters-of-credit  -   -   -   -   -   -   -   -   -   - 

  Fair Value Measurements at December 31, 2015 
 
(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 $27,139  $27,139  $27,139  $-  $- 
Investment securities available for sale  284,795   284,795   -   280,078   4,717 
Investment securities held to maturity  172,277   171,845   -   171,845   - 
Restricted stock  3,059   3,059   -   3,059   - 
Loans held for sale  3,653   3,831   -   -   3,831 
Loans receivable, net  866,066   849,578   -   -   849,578 
SBA servicing assets  4,886   4,886   -   -   4,886 
Accrued interest receivable  4,216   4,216   -   4,216   - 
                     
Financial liabilities:                    
Deposits                    
Demand, savings and money market $1,181,720  $1,181,720  $-  $1,181,720  $- 
Time  67,578   67,422   -   67,422   - 
Short-term borrowings  47,000   47,000   -   47,000   - 
Subordinated debt  22,476   18,972   -   -   18,972 
Accrued interest payable  245   245   -   245   - 
Off-Balance Sheet Data
Commitments to extend credit-----
Standby letters-of-credit-----
 

- 36 -
37


Note 8: Changes in Accumulated Other Comprehensive Loss By Component (1)

The following table presents the changes in accumulated other comprehensive loss by component for the ninesix months ended SeptemberJune 30, 20162017 and 2015,2016, and the year ended December 31, 2015.2016.

  
Unrealized Gains (Losses) on Available-For-Sale Securities
  Unrealized Holding Losses on Securities Transferred From Available-For-Sale To Held-To-Maturity  
Total
 
(dollars in thousands)      
Balance January 1, 2016 $(2,562) $(603) $(3,165)
Unrealized gain on securities  2,170   -   2,170 
Amounts reclassified from accumulated other comprehensive income to net
income (2)		  (416)  85   (331)
Net current-period other comprehensive income  1,754   85   1,839 
Balance September 30, 2016 $(808) $(518) $(1,326)
             
Balance January 1, 2015 $82  $(714) $(632)
Unrealized loss on securities  (460)  -   (460)
Amounts reclassified from accumulated other comprehensive income to net
income (2)		  (45)  82   37 
Net current-period other comprehensive income (loss)  (505)  82   (423)
Balance September 30, 2015 $(423) $(632) $(1,055)
             
Balance January 1, 2015 $82  $(714) $(632)
Unrealized loss on securities  (2,577)  -   (2,577)
Amounts reclassified from accumulated other comprehensive income to net
income (2)		  (67)  111   44 
Net current-period other comprehensive income (loss)  (2,644)  111   (2,533)
Balance December 31, 2015 $(2,562) $(603) $(3,165)
  
Unrealized Gains (Losses) on Available-
For-Sale
Securities
  Unrealized Holding Losses on Securities Transferred From Available-For-Sale To Held-To-Maturity  
Total
 
(dollars in thousands)         
Balance January 1, 2017 $(6,831) $(463) $(7,294)
Unrealized gain on securities  1,681   -   1,681 
Amounts reclassified from accumulated other comprehensive income to net income (2)  39   55   94 
Net current-period other comprehensive income  1,720   55   1,775 
Balance June 30, 2017 $(5,111) $(408) $(5,519)
             
Balance January 1, 2016 $(2,562) $(603) $(3,165)
Unrealized gain on securities  2,863   -   2,863 
Amounts reclassified from accumulated other comprehensive income to net income (2)  (416)  61   (355)
Net current-period other comprehensive income  2,447   61   2,508 
Balance June 30, 2016 $(115) $(542) $(657)
             
Balance January 1, 2016 $(2,562) $(603) $(3,165)
Unrealized gain on securities  (3,853)  -   (3,853)
Amounts reclassified from accumulated other comprehensive income to net income (2)  (416)  140   (276)
Net current-period other comprehensive income  (4,269)  140   (4,129)
Balance December 31, 2016 $(6,831) $(463) $(7,294)

(1)All amounts are net of tax. Amounts in parentheses indicate reductions to other comprehensive income.
(2)Reclassification amounts are reported as gains on sales of investment securities, impairment losses, and amortization of net unrealized losses on the Consolidated Statement of Operations.

Note 9: Business Combination

Oak Mortgage Company, LLC

On July 26,28, 2016, Republic entered into an agreement with the owners of Oak Mortgage Company, LLC pursuant to which the owners agreed to sell to Republicacquired all of the issued and outstanding limited liability company interests of Oak Mortgage. The transaction closed on July 28, 2016,Mortgage Company, LLC ("Oak Mortgage") and, as a result, Oak Mortgage became a wholly owned subsidiary of Republic on that date. The aggregate cash purchase price paid to the Sellers for their limited liability company interests at closing was $7.1 million, $1.0 million of which was deposited in an escrow account to be disbursed one year from closing subject to adjustment for any covered indemnity claims under the Purchase Agreement. The purchase price iswas subject to certain post-closing adjustments.



- 37 -38


In connection with the Oak Mortgage acquisition, the following table details the consideration paid, the initial estimated fair value of identifiable assets acquired and liabilities assumed as of the date of the acquisition, the subsequent adjustments to estimates, the final valuation of the fair value of identifiable assets acquired and liabilities assumed as of the date of the acquisition, and the resulting goodwill recorded (in thousands):

Consideration paid:
Cash$7,136
Equity instruments202
Deferred additional purchase price500
Value of consideration$7,838
Assets acquired:
Cash and cash equivalents$1,223
Loans held for sale20,871
Loans receivable1,132
Premises and equipment103
Derivative assets1,508
Intangible assets – non complete agreements104
Other assets125
Total assets25,066
Liabilities assumed:
Warehouse lines of credit19,666
Derivative liabilities412
Other liabilities2,042
Total liabilities22,120
Net assets acquired2,946
Goodwill resulting from acquisition of Oak Mortgage$4,892
Consideration paid: Original Estimates  Adjustments to Estimates  
Final
Valuation
 
Cash $7,136  $-  $7,136 
Equity instruments  202   -   202 
Deferred additional purchase price  500   -   500 
             
Value of consideration $7,838  $-  $7,838 
             
Assets acquired:            
             
Cash and cash equivalents $1,223  $-  $1,223 
Loans held for sale  20,871   -   20,871 
Loans receivable  1,132   -   1,132 
Premises and equipment  103   -   103 
Derivative assets  1,508   -   1,508 
Intangible assets – non compete agreements  104   -   104 
Other assets  125   -   125 
Total assets  25,066   -   25,066 
             
Liabilities assumed:            
             
Warehouse lines of credit  19,666   -   19,666 
Derivative liabilities  412   -   412 
Other liabilities  2,042   119   2,161 
Total liabilities  22,120   119   22,239 
             
Net assets acquired  2,946   (119)  2,827 
             
Goodwill resulting from acquisition of Oak Mortgage $4,892  $119  $5,011 
As of December 31, 2016, the estimates of fair values of the assets acquired and liabilities assumed in the acquisition of Oak Mortgage were finalized.

The following table presents unaudited pro forma information, in thousands, as if the acquisition of Oak Mortgage by the Company had been completed on January 1, 2015.2016. The pro forma information does not necessarily reflect the results of operations that would have occurred had Oak Mortgage been acquired by the Company at the beginning of 2015.2016. The pro forma financial information does not include the impact of possible business model changes, nor does it consider any potential impacts of current market conditions or revenues, expense efficiencies or other factors.

 Nine Months Ended September 30, 
 2016 2015 
Total revenues $52,610  $44,238 
         
Net income $4,462  $3,569 


(dollars in thousands)
Three Months Ended
June 30, 2016
  
Six Months
Ended
June 30, 2016
 
      
Total revenues $19,395  
$
36,855 
         
Net income $1,719  $3,203 




- 38 -39



Note 10: Goodwill and Other Intangibles

The Company's goodwill and intangible assets related to the acquisition of Oak Mortgage in July 2016 is detailed below:

(dollars in thousands)
 
Balance
December 31, 2015
  
Additions/
Adjustments
  Amortization  Balance September 30, 2016  Amortization Period (in years)  
Balance
December 31,
2016
  
Additions/
Adjustments
  Amortization  
Balance
June 30,
2017
  Amortization Period (in years) 
                         
Goodwill $-  $4,892  $-  $4,892  Indefinite  $5,011  $-  $-  $5,011  Indefinite 
Non-compete agreements  -   104   (17)  87   1   61   -   (52)  9  1 
Total $-  $4,996  $(17) $4,979      $5,072  $-  $(52) $5,020     

Note 11: Derivatives and Risk Management Activities

Republic did not have any derivative instruments designated as hedging instruments, or subject to master netting and collateral agreements for the ninesix months ended SeptemberJune 30, 2017 and the six months ended June 30, 2016. The following table summarizes the amounts recorded in Republic's statement of financial condition for derivatives not designated as hedging instruments as of SeptemberJune 30, 2017 and December 31, 2016 (in thousands):

September 30, 2016
Balance Sheet
Presentation
 
Fair
Value
 
Notional
Amount
June 30, 2017
Balance Sheet
Presentation
 
Fair
Value
  
Notional
Amount
 
            
Asset derivatives:            
            
IRLC'sOther Assets  $1,027  $36,090Other Assets $761  $38,651 
Best efforts forward loan sales commitmentsOther Assets  -   546Other Assets  21   9,095 
Mandatory forward loan sales commitmentsOther Assets  -   164Other Assets  4   2,089 
                 
Liability derivatives:                 
                 
IRLC'sOther Liabilities  $9  $1,502Other Liabilities $1  $500 
Best efforts forward loan sales commitmentsOther Liabilities  377   37,046Other Liabilities  163   30,056 
Mandatory forward loan sales commitmentsOther Liabilities  294   25,525Other Liabilities  149   20,793 

 
December 31, 2016
Balance Sheet
Presentation
 
Fair
Value
  
Notional
Amount
 
        
Asset derivatives:       
        
IRLC'sOther Assets $439  $20,792 
Best efforts forward loan sales commitmentsOther Assets  103   8,586 
Mandatory forward loan sales commitmentsOther Assets  229   18,373 
          
Liability derivatives:         
          
IRLC'sOther Liabilities $55  $6,757 
Best efforts forward loan sales commitmentsOther Liabilities  125   18,963 
Mandatory forward loan sales commitmentsOther Liabilities  38   5,024 




40


The following table summarizes the amounts recorded in Republic's statement of income for derivative instruments not designated as hedging instruments for the ninethree and six months ended SeptemberJune 30, 20162017 (in thousands):

Nine Months Ended September 30, 2016
Income Statement
Presentation
 Gain/(Loss)
Three Months Ended June 30, 2017
Income Statement
Presentation
 Gain/(Loss) 
       
Asset derivatives:       
       
IRLC'sLoan advisory and servicing fees  $(454)Mortgage banking income $(71)
Best efforts forward loan sales commitmentsLoan advisory and servicing fees   (26)Mortgage banking income  18 
Mandatory forward loan sales commitmentsLoan advisory and servicing fees   -Mortgage banking income  (4)
          
Liability derivatives:          
          
IRLC'sOther operating expense  $14Mortgage banking income $6 
Best efforts forward loan sales commitmentsOther operating expense   11Mortgage banking income  107 
Mandatory forward loan sales commitmentsOther operating expense   (294)Mortgage banking income  (23)

 
Six Months Ended June 30, 2017
Income Statement
Presentation
 Gain/(Loss) 
     
Asset derivatives:    
     
IRLC'sMortgage banking income $321 
Best efforts forward loan sales commitmentsMortgage banking income  (82)
Mandatory forward loan sales commitmentsMortgage banking income  (225)
      
Liability derivatives:     
      
IRLC'sMortgage banking income $54 
Best efforts forward loan sales commitmentsMortgage banking income  (38)
Mandatory forward loan sales commitmentsMortgage banking income  (110)

There was no income from derivative instruments for the three and six months ended June 30, 2016.

The fair value of Republic's IRLCs, best efforts forward loan sales commitments, and mandatory forward loan sales commitments are based upon the estimated value of the underlying mortgage loan (determined consistent with "Loans Held for Sale"), adjusted for (1) estimated costs to complete and originate the loan, and (2) the estimated percentage of IRLCs that will result in a closed mortgage loan. The valuation of the IRLCs issued by Republic includes the value of the servicing released premium. Republic sells loans servicing released, and the servicing released premium is included in the market price.




- 39 -41


ITEM 2:  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following is management's discussion and analysis of our financial condition, changes in financial condition, and results of operations in the accompanying consolidated financial statements.  This discussion should be read in conjunction with the accompanying notes to the consolidated financial statements.
We may from time to time make written or oral "forward-looking statements", including statements contained in this presentation. The forward-looking statements contained herein are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements.  For example, risks and uncertainties can arise with changes in: general economic conditions, including turmoil in the financial markets and related efforts of government agencies to stabilize the financial system; the adequacy of our allowance for loan losses and our methodology for determining such allowance; adverse changes in our loan portfolio and credit risk-related losses and expenses; concentrations within our loan portfolio, including our exposure to commercial real estate loans, and to our primary service area; changes in interest rates; our ability to identify, negotiate, secure and develop new store locations and renew, modify, or terminate leases or dispose of properties for existing store locations effectively; business conditions in the financial services industry, including competitive pressure among financial services companies, new service and product offerings by competitors, price pressures and similar items; deposit flows; loan demand; the regulatory environment, including evolving banking industry standards, changes in legislation or regulation; impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act; our securities portfolio and the valuation of our securities; accounting principles, policies and guidelines as well as estimates and assumptions used in the preparation of our financial statements; rapidly changing technology; litigation liabilities, including costs, expenses, settlements and judgments; and other economic, competitive, governmental, regulatory and technological factors affecting our operations, pricing, products and services.  You should carefully review the risk factors described in the Annual Report on Form 10-K for the year ended December 31, 20152016 and other documents we file from time to time with the Securities and Exchange Commission. The words "would be," "could be," "should be," "probability," "risk," "target," "objective," "may," "will," "estimate," "project," "believe," "intend," "anticipate," "plan," "seek," "expect" and similar expressions or variations on such expressions are intended to identify forward-looking statements. All such statements are made in good faith by us pursuant to the "safe harbor" provisions of the U.S. Private Securities Litigation Reform Act of 1995. We do not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of us, except as may be required by applicable law or regulations.

Regulatory Reform and Legislation

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the "Dodd-Frank Act") has and will continue to have a broad impact on the financial services industry, including significant regulatory and compliance changes including, among other things, (i) enhanced resolution authority of troubled and failing banks and their holding companies; (ii) increased capital and liquidity requirements; (iii) increased regulatory examination fees; (iv) changes to assessments to be paid to the FDIC for federal deposit insurance; and (v) numerous other provisions designed to improve supervision and oversight of, and strengthening safety and soundness for, the financial services sector. Additionally, the Dodd-Frank Act establishes a new framework for systemic risk oversight within the financial system to be distributed among new and existing federal regulatory agencies, including the Financial Stability Oversight Council, the Consumer Financial Protection Bureau, the Federal Reserve, the Office of the Comptroller of the Currency, and the FDIC. A summary of certain provisions of the Dodd-Frank Act is set forth in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015.2016. For information regarding our updated capital requirements, see "Regulatory Matters" below.


- 40 -42

On February 3, 2017, President Trump signed an executive order calling for the Secretary of Treasury, in consultation with the heads of the member agencies of the Financial Stability Oversight Council,  to review existing U.S. financial laws and regulations, including the Dodd-Frank Act, in order to determine whether they promote a set of "core principles" of financial policy. The core financial principles identified in the executive order include the following: empowering Americans to make independent financial decisions and informed choices in the marketplace, save for retirement, and build individual wealth; preventing taxpayer-funded bailouts; fostering economic growth and vibrant financial markets through more rigorous regulatory impact analysis that addresses systemic risk and market failures, such as moral hazard and information asymmetry; enabling American companies to be competitive with foreign firms in domestic and foreign markets; advancing American interests in international financial regulatory negotiations and meetings; making regulation efficient, effective and appropriately tailored; and restoring public accountability within Federal financial regulatory agencies and rationalizing the Federal financial regulatory framework.  The executive order does not specifically identify any existing laws or regulations considered to be inconsistent with the core principles.  There can be no assurance that any changes to existing law or regulation will be implemented as a result of the executive order or, if implemented, the extent to which such changes may impact our business, financial condition or results of operations.

Financial Condition

Assets

Total assets increased by $295.0$119.6 million, or 20.5%6.2%, to $1.7$2.0 billion at SeptemberJune 30, 2016,2017, compared to $1.4$1.9 billion at December 31, 2015.2016.

Cash and Cash Equivalents

Cash and due from banks and interest bearing deposits with banks comprise this category, which consists of our most liquid assets. The aggregate amount inof these threetwo categories increased by $122.9$53.4 million to $150.0$88.0 million at SeptemberJune 30, 2016 compared to $27.12017, from $34.6 million at December 31, 2015,2016. The increase in cash was primarily due todriven by the increase in deposit growthbalances during the first nine months of 2016.period ended June 30, 2017.

Loans Held for Sale

Loans held for sale are comprised of certain loans guaranteed by the U.S. Small Business Administration ("SBA") which we usually originate with the intention of selling in the future and residential mortgage loans originated by Republic's subsidiary, Oak Mortgage, which we also intend to sell in the future. Total SBA loans held for sale were $2.8$5.2 million at SeptemberJune 30, 20162017 as compared to $3.7$4.2 million at December 31, 2015.2016. Residential mortgage loans held for sale totaled $26.9were $24.3 million at SeptemberJune 30, 2017 compared to $23.9 million at December 31, 2016. Loans held for sale, as a percentage of total Company assets, was 1.7%were 1.4% at SeptemberJune 30, 2016.2017.

Loans Receivable

The loan portfolio represents our largest asset category and is our most significant source of interest income. Our lending strategy is focused on small and medium sized businesses and professionals that seek highly personalized banking services. OurThe loan portfolio consists of secured and unsecured commercial loans including commercial real estate, construction loans, construction and land developmentresidential mortgages, home improvement loans, commercial and industrial loans, owner occupied real estate loans, consumer and otherhome equity loans and residential mortgages. Commercial loans are primarily secured term loans made to small to medium-sized businesseslines of credit, overdraft lines of credit, and professionals for working capital, asset acquisition and other purposes.others. Commercial loans typically range between $250,000 and $5,000,000 but customers may borrow significantly larger amounts up to our legal lending limit to a customer, which was approximately $20.6$27.0 million at SeptemberJune 30, 2016.2017. Loans made to one individual customer, even if secured by different collateral, are aggregated for purposes of the lending limit at September 30, 2016.limit.

Loans receivable increased $70.8$101.5 million, or 8.1%10.5%, to $945.5 million$1.1 billion at SeptemberJune 30, 2016, compared to $874.82017, versus $965.0 million at December 31, 2015. 2016. This growth was the result of an increase in loan demand in all loancommercial real estate, residential mortgage, construction and development, owner occupied real estate, consumer, and commercial and industrial categories over the first nine months of 2016 along withdriven by the successful execution of our relationship banking strategy which focuses on customer service.
43



Investment Securities

Investment securities considered available-for-sale are investments whichthat may be sold in response to changing market and interest rate conditions, and for liquidity and other purposes.  Our investment securities classified as available-for-sale consist primarily of U.S. Government agency collateralized mortgage obligations (CMO), agency mortgage-backed securities (MBS), municipal securities, corporate bonds, asset-backed securities (ABS), and pooled trust preferred securities (CDO).  Available-for-sale securities totaled $299.4$345.2 million at SeptemberJune 30, 2016,2017, compared to $284.8$369.7 million at December 31, 2015.2016. The increasedecrease was primarily due to the purchasesales and paydowns of available-for-sale securities held in the portfolio totaling $117.8$36.9 million partially offset by the proceeds from sales and maturities, and pay downspurchase of available-for-sale securities totaling $104.9$10.3 million during the first ninesix months of 2016.2017. At SeptemberJune 30, 2016,2017, the available-for-sale portfolio had a net unrealized loss of $1.3$8.0 million compared to a net unrealized loss of $4.0$10.7 million at December 31, 2015.2016. The change in value of the investment portfolio was driven by a decrease in market interest rates which drove an increase in the fair value of the bonds held in our portfolio during the first ninesix months of 2016.2017.
- 41 -

Investment securities held-to-maturity are investments for which there is the intent and ability to hold the investment to maturity. These investments are carried at amortized cost. The held-to-maturity portfolio consists primarily of U.S. Government agency Small Business Investment Company bonds (SBIC) and Small Business Administration (SBA) bonds, CMOs,CMO's and MBSs.MBS's. The fair value of securities held-to-maturity totaled $223.2$403.2 million and $171.8$425.2 million at SeptemberJune 30, 20162017 and December 31, 2015,2016, respectively. The increasedecrease was primarily due to the purchasereceipt of $69.8 million of held-to-maturityprincipal payments on CMO and MBS securities partially offset byheld in the maturities and pay downs of held-to-maturity securitiesportfolio totaling $21.1$22.6 million during the first ninesix months of 2016.2017.

Restricted Stock

Restricted stock, which represents a required investment in the capital stock of correspondent banks related to available credit facilities, is carried at cost as of SeptemberJune 30,, 2016 2017 and December 31, 2015.2016.  As of those dates, restricted stock consisted of investments in the capital stock of the Federal Home Loan Bank of Pittsburgh ("FHLB") and Atlantic Community Bankers Bank ("ACBB").

At SeptemberJune 30, 20162017 and December 31, 2015,2016, the investment in FHLB of Pittsburgh capital stock totaled $1.2$3.7 million and $2.9$1.2 million, respectively. The decrease at September 30, 2016increase was due to the repayment of overnight borrowingsa short-term borrowing from FHLB at June 30, 2017 which reduced ourresulted in a higher required investment in FHLB stock.as of that date.  At both SeptemberJune 30, 20162017 and December 31, 2015,2016, ACBB capital stock totaled $143,000.  Both the FHLB and ACBB issued dividend payments during the first ninesix months of 2016.2017.

Other Real Estate Owned

The balance of other real estate owned decreased to $10.3$9.9 million at SeptemberJune 30, 20162017 from $11.3$10.2 million at December 31, 2015,2016, primarily due to sales totaling $1.4 million and writedowns in the amount of $521,000$258,000 and sales totaling $136,000 on existing foreclosed properties partially offset by transfers from loan receivable totaling $866,000 during the ninesix months ended SeptemberJune 30, 2016.2017.

Goodwill

Goodwill resulting from the acquisition of Oak Mortgage in July 2016 amounted to $4.9$5.0 million at SeptemberJune 30, 2016.  There was no goodwill recorded by the Company at2017 and December 31, 2015.2016.

Deposits

Deposits, which include non-interest and interest-bearing demand deposits, money market, savings and time deposits, are Republic's major source of funding. Deposits are generally solicited from our market area through the offering of a variety of products to attract and retain customers, with a primary focus on multi-product relationships.
44



Total deposits increased by $332.9$54.8 million, or 26.6%3.3%, to $1.6$1.73 billion at SeptemberJune 30, 20162017 from $1.2$1.68 billion at December 31, 2015.2016.  The increase was the result of growth across allin demand deposit categories, ledbalances offset by a significant risedecreases in interest-bearing demandmoney market, savings, and time deposit balances. We constantly focus our efforts on the growth of deposit balances through the successful execution of our relationship banking model which is based upon a high level of customer service and satisfaction.  We are also in the midst of an aggressive expansion and relocation plan which we refer to as "The Power of Red is Back".  Over the last three years, we have opened nine new store locations and have several more in various stages of construction and development.  This strategy has also allowed us to nearly eliminate our dependence upon the more volatile sources of funding found in brokered and public fund certificates of deposit.

Short-term Borrowings

As of SeptemberJune 30, 2016,2017, there were no$55.0 million in short-term borrowings from FHLB compared to $47.0$0 at December 31, 2015. The decrease in borrowings was the result of a temporary outflow of deposits at year end which returned in the early part of 2016.
- 42 -

 
Shareholders' Equity

Total shareholders' equity increased $6.3$7.3 million to $119.7$222.3 million at SeptemberJune 30, 20162017 compared to $113.4$215.1 million at December 31, 2015.2016. The increase was primarily due to net income of $3.4$3.8 million recognized during the first ninesix months of 20162017, an increase of $1.6 million related to stock option exercises and a trust preferred securities conversion and the reduction of $1.8 million in accumulated other comprehensive losses.losses associated with an increase in the market value of the investment securities portfolio.  The shift in market value of the securities portfolio has resultedresulting in a reduction of accumulated other comprehensive losses to $1.3of $5.5 million at SeptemberJune 30, 20162017 compared to accumulated other comprehensive losses of $3.2$7.3 million at December 31, 2015.  This change2016 was primarily driven by a decrease in market interest rates which drove an increase in the fair value of the securities held in our portfolio.

Results of Operations

Three Months Ended SeptemberJune 30, 20162017 Compared to Three Months Ended SeptemberJune 30, 20152016

The CompanyWe reported net income of $1.3$2.1 million, or $0.03$0.04 per diluted share, for the three months ended SeptemberJune 30, 2016,2017, compared to net income of $582,000$1.0 million, or $0.02$0.03 per diluted share, for the three months ended SeptemberJune 30, 2015.2016. The increase in net income was primarily driven by growth in interest-earning assets along with the earningsaddition of thea residential mortgage lending team which was acquired during the third quarter of 2016.division.
Net interest income was $15.3 million for the three month period ended SeptemberJune 30, 2016 was $11.8 million2017 compared to $10.0$11.6 million for the three months ended SeptemberJune 30, 2015.2016.  Interest income increased $2.3$4.1 million, or 19.8%31%, to $13.6$17.3 million for the three months ended SeptemberJune 30, 20162017 compared to $11.4$13.2 million for the three months ended SeptemberJune 30, 2015 primarily as a result of a $134.4 million increase in average loan balances and a $172.3 million increase in average investment securities balances.  Interest expense increased $456,000 or 33.1%, to $1.8 million for the three months ended September 30, 2016 compared to $1.4 million for the three months ended September 30, 2015.2016. This increase was primarily due to a $272.8$322.0 million increase in average interest bearing deposits outstanding.investment securities balances and a $144.0 million increase in average loan balances. Interest expense increased $452,000, or 28%, to $2.1 million for the three months ended June 30, 2017 compared to $1.6 million for the three months ended June 30, 2016. This increase was primarily due to an increase in average deposit balances.
We recorded a provision for loan losses in the amount of $607,000$500,000 for the three months ended SeptemberJune 30, 2017 due primarily to an increase in the allowance required for loans collectively evaluated for impairment driven by an increase in loans receivable.  We recorded a provision for loan losses in the amount of $650,000 for the three months ended June 30, 2016.
45

Non-interest income increased by $1.9 million to $5.0 million during the three months ended June 30, 2017 compared to $3.0 million during the three months ended June 30, 2016.  The increase during the three months ended June 30, 2017 was primarily due to increases in mortgage banking income, service fees on deposit accounts, and loan advisory and servicing fees offset by decreases in the gain on the sales of SBA loans and gain on the sales of securities.
Non-interest expenses increased $4.7 million to $17.7 million during the three months ended June 30, 2017 compared to $13.0 million during the three months ended June 30, 2016. This increase was primarily driven by higher salaries, employee benefits, and occupancy expenses associated with the addition of new stores related to our expansion strategy which we refer to as "The Power of Red is Back", as well as the addition of Oak Mortgage in the third quarter of 2016.
Return on average assets and average equity from continuing operations was 0.42% and 3.75%, respectively, during the three months ended June 30, 2017 compared to 0.27% and 3.51%, respectively, for the three months ended June 30, 2016.
Six Months Ended June 30, 2017 Compared to Six Months Ended June 30, 2016

We reported net income of $3.8 million, or $0.07 per diluted share, for the six months ended June 30, 2017 compared to net income of $2.1 million, or $0.05 per diluted share, for the six months ended June 30, 2016. The increase in net income was primarily driven by growth in interest-earning assets along with the addition of a residential mortgage lending division.
Net interest income for the six months ended June 30, 2017 increased $6.6 million to $29.5 million as compared to $22.9 million for the six months ended June 30, 2016.  Interest income increased $7.5 million, or 29%, due to increases in average investment securities balances and average loan balances. Interest expense increased $949,000, or 31%, to $4.0 million for the six months ended June 30, 2017 compared to $3.1 million for the six months ended June 30, 2016. This increase was primarily due to an increase in average interest bearing deposit balances.
We recorded a provision for loan losses of $500,000 for the six months ended June 30, 2017 due to an increase in the allowance required for loans collectively evaluated for impairment driven by an increase in total loans outstanding. We recorded a provision for loan losses of $950,000 for the six months ended June 30, 2016 primarily due to an increase in the allowance required for loans individually evaluated for impairment. For the three months ended September 30, 2015, no provision for loan losses was recorded due to a decrease in the allowance required for loans collectively evaluated for impairment driven by a reduction in the factor used in the calculation related to historical charge-offs which has declined as a result of lower charge-offs in recent years.
Non-interest income increased by $3.8$3.9 million to $9.3 million during the six months ended June 30, 2017 compared to $5.4 million during the threesix months ended SeptemberJune 30, 2016 compared to $1.6 million during the three months ended September 30, 2015.2016. The increase during the threesix months ended SeptemberJune 30, 20162017 was primarily due to $2.8 millionincreases in gains on the sale of residential mortgage loans originated through Oak Mortgagebanking income and an increase of $746,000 from gains on the sale of SBA loans. In addition, service fees on deposit accounts increased $234,000 as a result of an increaseoffset by decreases in the numbergain on the sales of deposit accounts.SBA loans, gain on the sales of securities, and loan advisory and servicing fees.
Non-interest expenses increased by $4.3$9.2 million to $15.3$34.5 million during the three months ended September 30, 2016 compared to $11.0 million during the three months ended September 30, 2015. This increase was primarily driven by higher salaries, employee benefits, occupancy and equipment expenses associated with the addition of new stores related to the Company's expansion strategy over the last twelve months, as well as, the addition of Oak Mortgage in July 2016.
       Return on average assets and average equity was 0.32% and 4.49%, respectively, during the three months ended September 30, 2016 compared to 0.17% and 2.03%, respectively, for the three months ended September 30, 2015.
- 43 -
Nine Months Ended September 30, 2016 compared to September 30, 2015
The Company reported net income of $3.4 million, or $0.09 per diluted share, for the nine months ended September 30, 2016 compared to net income of $1.6 million, or $0.04 per diluted share, for the nine months ended September 30, 2015. The increase in net income was primarily driven by growth in interest-earning assets, along with the earnings of the residential mortgage lending team which was acquired during the third quarter of 2016.
Net interest income for the nine months ended September 30, 2016 increased $5.6 million to $34.7 million as compared to $29.1 million for the nine months ended September 30, 2015. Interest income increased $6.6 million, or 20%, due primarily to increases in average loan balances and average investment securities balances. Interest expense increased $955,000 or 24%, to $4.9 million for the nine months ended September 30, 2016 compared to $4.0 million for the nine months ended September 30, 2015. This increase was primarily due to an increase in average interest bearing deposits outstanding.
The Company recorded a provision for loan losses of $1.6 million for the nine months ended September 30, 2016 primarily due to an increase in the allowance required for loans individually evaluated for impairment. For the ninesix months ended June 30, 2015, no provision for loan losses was recorded due2017 as compared to a decrease in the allowance required for loans collectively evaluated for impairment driven by a reduction in the factor used in the calculation related to historical charge-offs which has declined as a result of lower charge-offs in recent years.
Non-interest income increased by $5.7 million, or 109%, to $10.9$25.3 million during the ninesix months ended SeptemberJune 30, 2016 as compared to $5.2 million during the nine months ended September 30, 2015. The increase was primarily due to $2.8 million in gains on the sale of residential mortgage loans originated through Oak Mortgage and an increase of $1.5 million from gains on the sale of SBA loans. In addition, service fees on deposit accounts increased $697,000 as a result of an increase in the number of deposit accounts, and gains on sale of securities increased $583,000.
Non-interest expenses increased $7.9 million to $40.6 million during the nine months ended September 30, 2015 as compared to $32.6 million during the nine months ended September 30, 2015. The2016. This increase was primarily driven by higher salaries, employee benefits, and occupancy and equipment expenses associated with the addition of new stores related to the Company'sour expansion strategy which we refer to as "The Power of Red is Back", as well as the addition of Oak Mortgage in Julythe third quarter of 2016.

Return on average assets and average equity from continuing operations were 0.30%0.39% and 3.93%3.55%, respectively, during the ninesix months ended SeptemberJune 30, 20162017 compared to 0.17%0.28% and 1.93%3.64%, respectively, for the ninesix months ended SeptemberJune 30, 2015.2016.



- 44 -46


Analysis of Net Interest Income

Historically, the Company'sour earnings have depended primarily upon Republic's net interest income, which is the difference between interest earned on interestearninginterest-earning assets and interest paid on interestbearinginterest-bearing liabilities. Net interest income is affected by changes in the mix of the volume and rates of interestearninginterest-earning assets and interestbearinginterest-bearing liabilities. The following table provides an analysis of net interest income on an annualized basis, setting forth for the periods' (i)periods average assets, liabilities, and shareholders' equity, (ii) interest income earned on interestearninginterest-earning assets and interest expense on interestbearinginterest-bearing liabilities, (iii) annualized average yields earned on interestearninginterest-earning assets and average rates on interestbearinginterest-bearing liabilities, and (iv) Republic's annualized net interest margin (net interest income as a percentage of average total interestearninginterest-earning assets). Averages are computed based on daily balances. Non-accrual loans are included in average loans receivable. All yields are adjusted for tax equivalency.
Average Balances and Net Interest Income
  
For the three months ended
September 30, 2016
    
For the three months ended
September 30, 2015
 
 
(dollars in thousands)
 Average Balance  Interest  
Yield/
Rate(1)
  Average Balance  Interest  
Yield/
Rate(1)
 
Interest-earning assets:            
Federal funds sold and other interest-earning assets $114,260  $149   0.52% $106,357  $60   0.22%
Investment securities and restricted stock  477,601   2,858   2.39%  305,266   1,745   2.29%
Loans receivable  966,106   10,848   4.47%  831,712   9,718   4.64%
Total interest-earning assets  1,557,967   13,855   3.54%  1,243,335   11,523   3.68%
                         
Other assets  103,826           82,638         
                         
Total assets $1,661,793          $1,325,973         
                         
Interest-earning liabilities:                        
Demand – non-interest bearing $282,571          $234,285         
Demand – interest bearing  533,222   553   0.41%  372,795   378   0.40%
Money market & savings  583,256   677   0.46%  500,687   538   0.43%
Time deposits  104,701   301   1.14%  74,863   183   0.97%
Total deposits  1,503,750   1,531   0.41%  1,182,630   1,099   0.37%
                         
Total interest-bearing deposits  1,221,179   1,531   0.50%  948,345   1,099   0.46%
                         
Other borrowings  29,938   303   4.03%  22,476   279   4.92%
                         
Total interest-bearing liabilities  1,251,117   1,834   0.58%  970,821   1,378   0.56%
                         
Total deposits and other borrowings  1,533,688   1,834   0.48%  1,205,106   1,378   0.45%
                         
Non interest-bearing other liabilities  9,247           7,034         
Shareholders' equity  118,858           113,833         
                         
Total liabilities and shareholders' equity $1,661,793          $1,325,973         
Net interest income (2)
     $12,021          $10,145     
Net interest spread          2.96%          3.12%
                         
Net interest margin (2)
          3.07%          3.24%
  
For the three months ended
June 30, 2017
   For the three months ended
June 30, 2016
 
 
(dollars in thousands)
 Average Balance  
Interest
  
Yield/
Rate(1)
   Average Balance  
Interest
  
Yield/
Rate(1)
 
Interest-earning assets:                   
Federal funds sold and other interest-earning assets $28,691  $70   0.98%  $72,517  $87   0.48%
Investment securities and restricted stock (2)
  782,121   5,013   2.56%   460,161   2,895   2.52%
Loans receivable (2)
  1,065,313   12,470   4.70%   921,274   10,445   4.56%
Total interest-earning assets  1,876,125   17,553   3.75%   1,453,952   13,427   3.71%
Other assets  111,493            93,555 ��       
Total assets $1,987,618           $1,547,507         
                          
Interest-earning liabilities:                         
Demand – non-interest bearing $355,325           $266,996         
Demand – interest bearing  659,859   695   0.42%   481,994   503   0.42%
Money market & savings  602,710   732   0.49%   574,207   637   0.45%
Time deposits  105,820   295   1.12%   77,856   183   0.95%
Total deposits  1,723,714   1,722   0.40%   1,401,053   1,323   0.38%
Total interest-bearing deposits  1,368,389   1,722   0.50%   1,134,057   1,323   0.47%
Other borrowings  35,119   342   3.91%   22,476   289   5.17%
Total interest-bearing liabilities  1,403,508   2,064   0.59%   1,156,533   1,612   0.56%
Total deposits and other borrowings  1,758,833   2,064   0.47%   1,423,529   1,612   0.46%
Non-interest bearing other liabilities  8,345            6,871         
Shareholders' equity  220,440            117,107         
Total liabilities and shareholders' equity $1,987,618           $1,547,507         
Net interest income (2)
     $15,489           $11,815     
Net interest spread          3.16%           3.15%
Net interest margin (2)
          3.31%           3.27%
(1)Yields on investments are calculated based on amortized cost.
(2)Net interest income and net interest margin are presented on a tax equivalent basis, a Non-GAAP measure. Net interest income has been increased over the financial statement amount by $222 and $218 for the three months ended June 30, 2017 and 2016, respectively, to adjust for tax equivalency. The tax equivalent net interest margin is calculated by dividing tax equivalent net interest income by average total interest earning assets.

(1)
Yields on investments are calculated based on amortized cost.

(2)
Net interest income and net interest margin are presented on a tax equivalent basis.  Net interest income has been increased over the financial statement amount by $235 and $153 for the three months ended September 30, 2016 and 2015, respectively, to adjust for tax equivalency. The tax equivalent net interest margin is calculated by dividing tax equivalent net interest income by average total interest earning assets.


- 45 -47


Average Balances and Net Interest Income

 
For the nine months ended
September 30, 2016
    
For the nine months ended
September 30, 2015
  
For the six months ended
June 30, 2017
  
For the six months ended
June 30, 2016
 
(dollars in thousands)
 Average Balance  Interest  
Yield/
Rate(1)
  Average Balance  Interest  
Yield/
Rate(1)
  Average Balance  
Interest
  
Yield/
Rate(1)
  Average Balance  
Interest
  
Yield/
Rate(1)
 
Interest-earning assets:                              
Federal funds sold and other interest-earning assets $78,094  $299   0.51% $120,783  $223   0.25% $26,323  $131   1.00% $59,813  $150   0.50%
Investment securities and restricted stock(2)  458,496   8,615   2.51%  275,277   5,036   2.44%  795,003   10,045   2.53%  448,837   5,757   2.57%
Loans receivable(2)  925,110   31,339   4.53%  809,259   28,202   4.66%  1,036,979   23,808   4.63%  904,387   20,491   4.56%
Total interest-earning assets  1,461,700   40,253   3.68%  1,205,319   33,461   3.71%  1,858,305   33,984   3.69%  1,413,037   26,398   3.76%
                        
Other assets  95,054           70,854           106,683           90,620         
                        
Total assets $1,556,754          $1,276,173          $1,964,988          $1,503,657         
                                                
Interest-earning liabilities:                                                
Demand – non-interest bearing $270,503          $230,181          $342,243          $264,403         
Demand – interest bearing  476,134   1,471   0.41%  334,116   1,009   0.40%  640,084   1,303   0.41%  447,276   918   0.41%
Money market & savings  572,347   1,923   0.45%  494,077   1,592   0.43%  604,933   1,430   0.48%  566,833   1,246   0.44%
Time deposits  82,738   625   1.01%  74,613   528   0.95%  106,866   591   1.12%  71,635   324   0.91%
Total deposits  1,401,722   4,019   0.38%  1,132,987   3,129   0.37%  1,694,126   3,324   0.40%  1,350,147   2,488   0.37%
                        
Total interest-bearing deposits  1,131,219   4,019   0.47%  902,806   3,129   0.46%  1,351,883   3,324   0.50%  1,085,744   2,488   0.46%
                        
Other borrowings  29,947   898   4.01%  22,489   833   4.95%  44,078   708   3.24%  29,952   595   3.99%
                        
Total interest-bearing liabilities  1,161,166   4,917   0.57%  925,295   3,962   0.57%  1,395,961   4,032   0.58%  1,115,696   3,083   0.56%
                        
Total deposits and other borrowings  1,431,669   4,917   0.46%  1,155,476   3,962   0.46%  1,738,204   4,032   0.47%  1,380,099   3,083   0.45%
                        
Non interest-bearing other liabilities  7,957           7,106         
Non-interest bearing other liabilities  8,307           7,211         
Shareholders' equity  117,128           113,591           218,477           116,347         
                        
Total liabilities and shareholders' equity $1,556,754          $1,276,173          $1,964,988          $1,503,657         
Net interest income (2)
     $35,336          $29,499          $29,952          $23,315     
Net interest spread          3.11%          3.14%          3.11%          3.20% 
                        
Net interest margin (2)
          3.23%          3.27%          3.25%          3.32% 

(1)
Yields on investments are calculated based on amortized cost.
(1)Yields on investments are calculated based on amortized cost.
(2)
Net interest income and net interest margin are presented on a tax equivalent basis, a Non-GAAP measure. Net interest income has been increased over the financial statement amount by $466 and $427 for the six months ended June 30, 2017 and net interest margin are presented on a tax equivalent basis.  Net interest income has been increased over the financial statement amount by $662 and $431 for the nine months ended September 30, 2016, and 2015, respectively, to adjust for tax equivalency. The tax equivalent net interest margin is calculated by dividing tax equivalent net interest income by average total interest earning assets.




- 46 -48



Rate/Volume Analysis of Changes in Net Interest Income

Net interest income may also be analyzed by segregating the volume and rate components of interest income and interest expense. The following table sets forth an analysis of volume and rate changes in net interest income for the three and ninesix months ended SeptemberJune 30, 2016,2017, as compared to the three and ninesix months ended SeptemberJune 30, 2015.2016. For purposes of this table, changes in interest income and expense are allocated to volume and rate categories based upon the respective changes in average balances and average rates.
 
For the three months ended
September 30, 2016 vs. 2015
  
For the nine months ended
September 30, 2016 vs. 2015
  
For the three months ended
June 30, 2017 vs. 2016
  
For the six months ended
June 30, 2017 vs. 2016
 
 Changes due to:    Changes due to:    Changes due to:     Changes due to:    
(dollars in thousands) 
Average
Volume
  
Average
Rate
  
Total
Change
  Average Volume  
Average
Rate
  
Total
Change
  
Average
Volume
  
Average
Rate
  
Total
Change
  
Average
Volume
  
Average
Rate
  
Total
Change
 
Interest earned:                              
Federal funds sold and other
interest-earning assets
 $8  $81  $89  $(163) $239  $76  $(108) $91  $(17) $(167) $148  $(19)
Securities  1,021   92   1,113   3,443   136   3,579   2,067   51   2,118   4,374   (86)  4,288 
Loans  1,498   (368)  1,130   3,894   (757)  3,137   1,651   374   2,025   2,999   318   3,317 
Total interest-earning assets  2,527   (195)  2,332   7,174   (382)  6,792   3,610   516   4,126   7,206   380   7,586 
                                                
Interest expense:                                                
Deposits                                                
Interest-bearing demand deposits  166   9   175   438   24   462   189   3   192   392   (7)  385 
Money market and savings  93   46   139   261   70   331   31   64   95   83   101   184 
Time deposits  74   44   118   61   36   97   78   34   112   195   72   267 
Total deposit interest expense  333   99   432   760   130   890   298   101   399   670   166   836 
Other borrowings  12   12   24   34   31   65   23   30   53   47   66   113 
Total interest expense  345   111   456   794   161   955   321   131   452   717   232   949 
Net interest income $2,182  $(306) $1,876  $6,380  $(543) $5,837  $3,289  $385  $3,674  $6,489  $148  $6,637 

Net Interest Income and Net Interest Margin

Net interest income, on a fully tax-equivalent basis, for the third quarter of 2016three months ended June 30, 2017 increased by $1.9$3.7 million, or 19%31%, over the same period in 2015.2016.  Interest income, on a fully tax-equivalenttax equivalent basis, on interest-earning assets totaled $13.9$17.6 million and $11.5$13.4 million for the third quarters ofthree months ended June 30, 2017 and 2016, and 2015, respectively. The increase in interest income was the result of a $134.4$322.0 million increase in average loans receivableinvestment securities balances and a $172.3$144.0 million increase in average investmentloan balances for the three months ended SeptemberJune 30, 20162017 as compared to September 30, 2015.the same period in 2016. Total interest expense for the third quarter of 2016three months ended June 30, 2017 increased $456,000,by $452,000, or 33%28%, to $1.8$2.1 million from $1.4$1.6 million over the same period in 2015.2016. Interest expense on deposits for the third quarter of 2016three months ended June 30, 2017 increased by $432,000,$399,000, or 39%31%, over the same period in 2015.

2016.
 
Net interest income, on a fully tax-equivalent basis, for the first nine months of 2016 increased by $5.8 million, or 19.8%, over the same period in 2015. Interest income on a fully tax-equivalent basis, on interest-earning assets totaled $40.3 million and $33.5 million for the first nine months of 2016 and 2015, respectively. The increase in interest income earned was the result of a $115.9 million increase in the average loans receivable and a $183.2 million increase in average investment securities partially offset by a 13 basis point decrease in the loan yields for the first ninesix months ended SeptemberJune 30, 2016 as compared to September 30, 2015. Total interest expense for the first nine months of 20162017 increased $955,000, or 24%, to $4.9$6.6 million, from $4.0 million over the same period in 2015. Interest expense on deposits for the first nine months of 2016 increased by $890,000, or 28%, over the same period in 2015.2016. Interest income, on a fully tax equivalent basis, on interest-earning assets totaled $34.0 million and $26.4 million for the six months ended June 30, 2017 and 2016, respectively. The increase in interest income was the result of a $346.2 million increase in average investment securities balances and a $132.6 million increase in average loan balances for the six months ended June 30, 2017 compared to the six months ended June 30, 2016. Total interest expense for the six months ended June 30, 2017 increased by $949,000, or 31%, to $4.0 million from $3.1 million over the same period in 2016. Interest expense on deposits for the six months ended June 30, 2017 increased by $836,000, or 38%, over the same period in 2016.
 
- 47 -49


Changes in net interest income are frequently measured by two statistics: net interest rate spread and net interest margin. Net interest rate spread is the difference between the average rate earned on interest-earning assets and the average rate incurred on interest-bearing liabilities. Our net interest rate spread on a fully tax-equivalent basis was 2.96%3.16% during the third quarter of 2016three months ended June 30, 2017 compared to 3.12%3.15% during the same period in the 20152016 and was 3.11% during the first ninesix months of 2016 versus 3.14%ended June 30, 2017 compared to 3.20% during the first nine months of 2015.same period in 2016. Net interest margin represents the difference between interest income, including net loan fees earned, and interest expense, reflected as a percentage of average interest-earning assets. The fully tax-equivalent net interest margin decreasedincreased to 3.07%3.31% for the third quarterthree months ended June 30, 2017 compared to 3.27% during the same period in 2016 primarily as a result of 2016 from 3.24% foran increase in the third quarter of 2015. Theyield on loans outstanding. For the six months ended June 30, 2017, the fully tax-equivalent net interest margin decreased to 3.23%3.25% compared to 3.32% for the nine months ofsame period in 2016 from 3.27% in the first nine months of 2015.  The net interest margin for the three month period ending September 30, 2016 decreased primarily as a result of a decrease in the yield on loans receivable and an increase in the rate on total deposits. The net interest margin for the nine month period ending September 30, 2016 decreased primarily as a result of a decrease in the yield on loans receivable, partially offset by a decrease in the average balance related to low yield federal funds sold and other interest earning assets.investment securities balances.

Provision for Loan Losses

The provision for loan losses is charged to operations in an amount necessary to bring the total allowance for loan losses to a level that management believes is adequate to absorb inherent losses in the loan portfolio. The CompanyWe recorded a $607,000 provision for the three month period ended September 30, 2016 and a $1.6 million provision for the nine month period ended September 30, 2016. The Company did not record a$500,000 provision for loan losses for the three and ninesix month periods ended SeptemberJune 30, 2015.2017. During the ninethree and six month periods ended June 30, 2017, an increase in the allowance required for loans collectively evaluated for impairment was driven by an increase in total loans outstanding. We recorded a $650,000 provision for the three month period ended SeptemberJune 30, 2016 and $950,000 for the six month period ended June 30, 2016.  During the three and six month periods ended June 30, 2016, there was an increase in the allowance for loans individually evaluated for impairment primarily as a result of a single loan relationship that moved to non-accrual status during the second quarter of 2016. During the three and nine month periods ended September 30, 2015, a decrease in the allowance required for loans collectively evaluated for impairment was driven by a reduction in the factor used in the calculation related to historical charge-offs which has declined as a result of lower charge-offs in recent years.

Nonperforming assets at SeptemberJune 30, 20162017 totaled $29.8$28.7 million, or 1.72%1.41%, of total assets, up $5.8which represents a decrease of $348,000, or 1%, from $29.1 million, or 24%, from $23.9 million, or 1.66%1.51%, of total assets at December 31, 2015 and up $773,000,2016. Nonperforming assets decreased $2.1 million, or 3%7%, from $29.0$30.8 million, or 2.10%1.95%, of total assets at September 30, 2015, due primarily to one commercial real estate loan relationship in the amount of $7.3 million which moved from 60 to 89 days past due at December 31, 2015 to non-accrual at SeptemberJune 30, 2016.

Non-Interest Income

Total non-interest income increased by $3.8$1.9 million, or 237%64%, to $5.4$5.0 million for the three months ended SeptemberJune 30, 2016,2017, compared to $1.6$3.0 million for the three months ended SeptemberJune 30, 2015.  Gain on the sale of loans2016. Mortgage banking income totaled $4.4$3.0 million during the three months ended SeptemberJune 30, 2016 compared to $884,000 during the same period of 2015. The increase in the gain on sale of loans during the three months ended September 30, 2016 was2017 primarily due to $2.8 million in gains on the sale of residential mortgage loans originated through Oak Mortgage andwhich was acquired in July 2016. Service fees on deposit accounts totaled $907,000 for the three months ended June 30, 2017 which represents an increase of $746,000 from$253,000 over the three month period ended June 30, 2016. This increase was due to the growth in the number of customer accounts and transaction volume. Gains on the sale of SBA loans totaled $796,000 for the three months ended June 30, 2017 versus $1.7 million for the same period in 2016. The decrease of $953,000 in gains on the sale of SBA loans.  Service charges, fees and other operating income, comprised primarily of servicing fees on SBA loans and deposit and loan service charges totaled $998,000 for the third quarter of 2016, which represents an increase of $342,000 compared to the third quarter of 2015. This increase was driven by growtha decrease in customer deposit accounts and transaction volume.  The CompanySBA loans sold during the three months ended June 30, 2017 as a result of lower originations. We recognized gainslosses of $2,000$61,000 on salesthe sale of investment securities during the three months ended SeptemberJune 30, 20162017 as compared to gains of $64,000 on sales of investment securities in$358,000 for the same period in 2016.  Loan advisory and servicing fees totaled $316,000 for the three months ended June 30, 2017 which represents an increase of 2015.  $119,000 from the same period in 2016.

Total non-interest income increased by $5.7$3.9 million, or 109%71%, to $10.9$9.3 million for the ninesix months ended SeptemberJune 30, 2016,2017, compared to $5.2$5.4 million for the ninesix months ended SeptemberJune 30, 2015. Gains on the sale of loans2016. Mortgage banking income totaled $7.0$5.4 million during the first nine months of 2016 compared to $2.7 million in the same period of 2015.  The increase in the gain on sale of loans during the ninesix months ended SeptemberJune 30, 2016 was2017 primarily due to $2.8 million in gains on the sale of residential mortgage loans originated through Oak Mortgage andwhich was acquired  in July 2016. Service fees on deposit accounts totaled $1.8 million for the six months ended June 30, 2017 which represents an increase of $1.5 million from gains$529,000 over the same period in 2016. This increase was due to the growth in the number of customer accounts and transaction volume. Gains on the sale of SBA loans. The Company recognized gains of $656,000 on sales of securities were $1.5 million during the first ninesix months of 2016ended June 30, 2017 compared to gains of $73,000 on sales of securities$2.6 million in the same period of 2015. Service charges,2016 as a result of a decrease in SBA loans sold during the six months ended June 30, 2017 as a result of lower originations. There were recognized losses in the amount of $61,000 on sales of investment securities during the six months ended June 30, 2017 as compared to gains of $654,000 during the six months ended June 30, 2016. Loan advisory and servicing fees and other operating income totaled $3.2 million$653,000 for the first ninesix months of 2016ended June 30, 2017 which represents an increasea decrease of $761,000 compared to$147,000 from the first nine months of 2015. This increase was driven by growthsame period in customer deposit accounts and transaction volume. 
2016.
- 48 -50

Noninterest
Non-Interest Expenses

Three Months Ended SeptemberJune 30, 2016 compared2017 Compared to Three Months Ended SeptemberJune 30, 20152016

       Noninterest
Non-interest expenses increased by $4.3$4.7 million, or 39%36%, for the third quarter of 2016three months ended June 30, 2017 compared to the same period in 2015. An2016. A detailed explanation of changesthe most significant variances in noninterestnon-interest expenses for certain categories for the three months ended SeptemberJune 30, 20162017 and SeptemberJune 30, 20152016 is presented in the following paragraphs.

 SalarySalaries and employee benefits, expenses, which represent the largest component of noninterestnon-interest expenses, increased by $2.0$2.8 million, or 35%43%, for the third quarter of 2016three months ended June 30, 2017 compared to the third quarter of 2015same period in 2016. This increase was primarily driven primarily by annual merit increases along with increased staffing levels related to the Company'sour growth strategy of adding and relocating stores.  The additionstores, which we refer to as "The Power of Oak Mortgage in July 2016 also contributed to the increase in salary and employee benefits.
       Occupancy expenses increased by $295,000, or 24%, and depreciation and amortization expense increased by $380,000, or 57%, for the third quarter of 2016 compared to the third quarter of 2015 as a result of the Company's continuing growth and relocation strategy. Red is Back". One new store was opened during the three month period ended June 30, 2017 and another store was opened early in the third quarter of 2017.  Salaries and employee benefits also increased as a result of the acquisition of Oak Mortgage Company in the third quarter of 2016.
 
       Other real estate owned expenses totaled $702,000 during the third quarter of 2016, an increase of $277,000, or 65%, from the same quarter in 2015. The increase was a result of writedowns on foreclosed properties in the current period.

       All other operating expenses increased $1.3 million, or 44%, compared to the same quarter in 2015. This increase was mainly attributable to expenses related to the addition of residential mortgage loan operations, along with increases in data processing expense, legal fees, insurance, other taxes, fraud losses associated with debit cards, professional fees, transaction fees, and other expenses resulting from our growth strategy.

Nine Months Ended September 30, 2016 compared to Nine Months Ended September 30, 2015

       For the first nine months of 2016, noninterest expenses increased by $7.9 million, or 24%, compared to the first nine months of 2015. An explanation of changes in noninterest expenses for certain categories is presented in the following paragraphs.

       Salary expenses and employee benefits for the first nine months of 2016 were $20.3 million, an increase of $3.7 million, or 22%, compared to the first nine months of 2015 primarily driven by annual merit increases along with increased staffing levels related to the Company's growth strategy of adding and relocating stores.  There were nineteen stores open as of September 30, 2016 compared to seventeen stores open at September 30, 2015.  The addition of Oak Mortgage in July 2016 also contributed to the increase in salary and employee benefits.

Occupancy expenses increased by $763,000,$305,000, or 21%, and depreciation and amortization expense increased by $690,000,$325,000, or 33%41%, for the first ninethree months of 2016ended June 30, 2017 compared to the first nine months of 2015same period last year also as a result of the Company'sour continuing growth and relocation strategy.
- 49 -
strategy.

Other real estate owned expenses totaled $1.6 million for$612,000 during the first ninethree months of 2016,ended June 30, 2017, an increase of $437,000,$289,000, or 37%89%, fromcompared to the first nine months of 2015 primarily assame period in 2016. This increase was a result of higher writedowns on foreclosed assets held in other real estate owned and an increase in costs to carry foreclosed properties in the current period.

All other noninterest expenses increased $2.4 million,$961,000, or 26%,25% for the three months ended June 30, 2017, compared to the same period in 2015.2016. This increase was mainly attributable to the addition of expenses related to the residential mortgage loan operations of Oak Mortgage; increasesMortgage.  Increases in data processing expense, legal expenses, fraud losses associated with debit cards, charitable contributions, professional fees, transaction fees, insurance, regulatory assessment, advertising expense, and other expenses resulting from our growthexpansion strategy also contributed to the growth in noninterestother operating expenses.
Six Months Ended June 30, 2017 Compared to Six Months Ended June 30, 2016

For the first six months ended June 30, 2017, non-interest expenses increased by $9.2 million or 36%, compared to the first six months of 2016. A detailed explanation of the most significant variances in non-interest expenses is presented in the following paragraphs.

Salaries and employee benefits, which represent the largest component of non-interest expenses, increased by $5.4 million, or 43%, for the six months ended June 30, 2017 compared to the same period in 2016. This increase was primarily driven by annual merit increases along with increased staffing levels related to our growth strategy of adding and relocating stores, which we refer to as "The Power of Red is Back". There were twenty stores open as of June 30, 2017 compared to eighteen stores at June 30, 2016.  In addition, four new stores were under construction as of June 30, 2017, two of which are expected to open during the third quarter of 2017. Salaries and employee benefits also increased as a result of the acquisition of Oak Mortgage Company in the third quarter of 2016.

Occupancy expenses increased by $615,000, or 22%, and depreciation and amortization expense increased by $531,000, or 30%, for the six months ended June 30, 2017 versus the same period in 2016 also as a result of our continuing growth and relocation strategy.
51



       Other real estate owned expenses totaled $958,000 for the six months ended June 30, 2017, an increase of $50,000, or 6%, from the same period in 2016 primarily as a result of higher writedowns on foreclosed assets held in other real estate owned in the current period.
  All other non-interest expenses increased $2.6 million, or 36% for the six months ended June 30, 2017, compared to the same period in 2016. This increase was mainly attributable to the addition of expenses related to the residential mortgage loan operations of Oak Mortgage.  Increases in data processing expense, legal expenses, other taxes, professional fees, insurance, and other expenses resulting from our expansion strategy also contributed to the growth in other operating expenses.

       One key measure that management utilizes to monitor progress in controlling overhead expenses is the ratio of annualized net noninterest expenses to average assets. For purposes of this calculation, net noninterestnon-interest expenses equal noninterestnon-interest expenses less noninterestnon-interest income and nonrecurringnon-recurring expense. For the three months ended SeptemberJune 30, 2016,2017, this ratio equaled 2.36%2.57% compared to 2.82%2.58% for the three months ended SeptemberJune 30, 2015.2016. For the nine-month periodsix months ended SeptemberJune 30, 2016, this2017, the ratio equaled 2.55%2.58% compared to 2.87%2.66% for the nine-month period ended September 30, 2015. The decrease for the ninesix months ended SeptemberJune 30, 2016, versus September 30, 2015, respectively, reflecting higher average balances related to the Company'sour growth strategy of adding and relocating stores.

       Another productivity measure utilized by management is the operating efficiency ratio. This ratio expresses the relationship of noninterestnon-interest expenses to net interest income plus noninterestnon-interest income. For the three months ended SeptemberJune 30, 2016,2017, the operating efficiency ratio was 88.9%, compared to 95.1%87.4% versus 88.6% for the same periodthree months ended June 30, 2016. The decrease in 2015.the operating efficiency ratio relates to a 38% increase in total net interest income plus noninterest income. The efficiency ratio equaled 89.2%was 88.9% for the ninesix months ended SeptemberJune 30, 2016, compared to 95.3%2017 versus 89.3% for the ninesix months ended SeptemberJune 30, 2016.2015. The decreasesdecrease for both the three and ninesix months ended SeptemberJune 30, 20162017 versus SeptemberJune 30, 20152016 was due to both net interest income and noninterest income increasing at a faster rate than noninterest expenses.37% increase in total revenue.

Provision (Benefit) for Federal Income Taxes

       The CompanyWe recorded a benefit for income taxes of $32,000$8,000 for the three months ended SeptemberJune 30, 2016,2017, compared to a $10,000$12,000 benefit for the three months ended SeptemberJune 30, 2015.2016.  For the ninesix months ended SeptemberJune 30, 2016, the Company2017, we recorded a benefit for income taxes of $69,000$42,000 compared to a $17,000 benefit of $37,000 for the ninesix months ended SeptemberJune 30, 2015.2016.  The $69,000$42,000 benefit recorded duringfor the first ninesix months of 2016ended June 30, 2017 was the net result of a tax provision in the amount of $804,000$1.1 million calculated on the net profit generated during the period using the Company'sour normal estimated tax rate, offset by an adjustment to the deferred tax asset valuation allowance in the amount of $873,000.$1.1 million.  The effective tax rates for the three-month periodsthree months ended SeptemberJune 30, 2017 and 2016 were 29% and 2015 were 25% and 20%23%, respectively, and for the nine month periodssix months ended SeptemberJune 30, 2017 and 2016 were 28% and 2015 were 24% and 20%23%, respectively, excluding an adjustment to the deferred tax asset valuation allowance.

We evaluate the carrying amount of our deferred tax assets on a quarterly basis or more frequently, if necessary, in accordance with the guidance provided in Financial Accounting Standards Board (FASB) Accounting Standards Codification Topic 740 (ASC 740), in particular, applying the criteria set forth therein to determine whether it is more likely than not (i.e. a likelihood of more than 50%) that some portion, or all, of the deferred tax asset will not be realized within its life cycle, based on the weight of available evidence.  If management makes a determination is made based on the available evidence that it is more likely than not that some portion or all of the deferred tax assets will not be realized in future periods, a valuation allowance is calculated and recorded.  These determinations are inherently subjective and dependent upon estimates and judgments concerning management's evaluation of both positive and negative evidence.
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In conducting the deferred tax asset analysis, we believe it is important to consider the unique characteristics of an industry or business.  In particular, characteristics such as business model, level of capital and reserves held by financial institutions and their ability to absorb potential losses are important distinctions to be considered for bank holding companies like us. In addition, it is also important to consider that net operating loss carryforwards ("NOLs") for federal income tax purposes can generally be carried back two years and carried forward for a period of twenty years. In order to realize our deferred tax assets, we must generate sufficient taxable income in such future years.
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In assessing the need for a valuation allowance, we carefully weighed both positive and negative evidence currently available.  Judgment is required when considering the relative impact of such evidence. The weight given to the potential effect of positive and negative evidence must be commensurate with the extent to which it can be objectively verified.

When calculating an estimate for a valuation allowance, we assessed the possible sources of taxable income available under tax law to realize a tax benefit for deductible temporary differences and carryforwards as defined in ASC 740. We did not use projections of future taxable income, exclusive of reversing temporary differences and carryforwards, as a factor in the analysis. We will exclude future taxable income as a factor until we can show increasing and sustainable profitability.  Based on the analysis of available positive and negative evidence, we determined that a valuation allowance should be recorded as of SeptemberJune 30 2016 , 2017 and December 31, 2015.2016.

We did assess tax planning strategies as defined under ASC 740 to determine the amount of a valuation allowance. Strategies reviewed included the sale of investment securities and loans with fair values greater than book values, redeployment of cash and cash equivalents into higher yielding investment options, a switch from tax-exempt to taxable investments and loans, and the election of a decelerated depreciation method for tax purposes on future fixed asset purchases. We believe that these tax planning strategies are (a) prudent and feasible, (b) steps that we would not ordinarily take, but would take to prevent an operating loss or tax credit carryforward from expiring unused, and (c) would result in the realization of existing deferred tax assets. These tax planning strategies, if implemented, would result in taxable income in the first full reporting period after deployment and accelerate the recovery of deferred tax asset balances if faced with the inability to recover those assets or the risk of potential expiration. We believe that these are viable tax planning strategies and appropriately considered in the analysis at this time, but may not align with the strategic direction of the organization today and therefore, have no present intention to implement such strategies.

The net deferred tax asset balance before consideration of a valuation allowance was $18.5$19.4 million as of SeptemberJune 30, 20162017 and $20.2$21.4 million as of December 31, 2015.2016. After assessment of all available tax planning strategies, the Companywe determined that a partial valuation allowance in the amount of $12.8$10.9 million as of SeptemberJune 30, 20162017 and $13.7$12.2 million as of December 31, 20152016 should be recorded.

The deferred tax asset will continue to be analyzed on a quarterly basis for changes affecting realizability.  When the determination is made to include projections of future taxable income asthat a factor in recovering the deferred tax asset, the valuation allowance is no longer required, it will be reduced accordingly resulting in a corresponding increase in net income.

Net Income and Net Income per Common Share

Net income for the third quarter of 2016three months ended June 30, 2017 was $1.3$2.1 million, an increase of $758,000,$1.0 million, compared to $582,000$1.0 million recorded infor the third quarter of 2015.three months ended June 30, 2016.

Net income for the first ninesix months of 2016ended June 30, 2017 was $3.4$3.8 million, an increase of $1.8$1.7 million, compared to $1.6$2.1 million recorded infor the first ninesix months of 2015.ended June 30, 2016. The higherincrease in net income in 2016for the six months ended June 30, 2017 was due to a $5.7 million increase in noninterest income and a $5.6$6.6 million increase in net interest income, partially offset by a $7.9an increase of $3.9 million increase in noninterest expensesincome, and a $1.6 million increasedecrease of $450,000 in the provision for loan losses.losses, partially offset by a $9.2 million increase in noninterest expenses.

For the three month periodmonths ended SeptemberJune 30, 2016,2017, basic and fully-diluted net income per common share was $0.04 compared to $0.02$0.03 for the three months ended SeptemberJune 30, 2015 and fully-diluted2016. For the six months ended June 30, 2017, basic net income per common share was $0.03$0.07 compared to $0.06 for the three month period ended September 30, 2016 compared to $0.02 for the threesix months ended SeptemberJune 30, 2015.  For the nine months ended September 30, 2016, basic and fully-diluted2016. Fully-diluted net income per common share was $0.09$0.07 for the six months ended June 30, 2017 compared to $0.04$0.05 for the ninesix months ended SeptemberJune 30, 2015.2016.


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Return on Average Assets and Average Equity
 
Return on average assets (ROA) measures our net income in relation to our total average assets. Our annualized ROA for the third quarter of 2016three months ended June 30, 2017 was 0.32%0.42%, compared to 0.17%0.27% for the third quarter of 2015.three months ended June 30, 2016. The ROA for the first ninesix months inended June 30, 2017 and 2016 was 0.39% and 2015 was 0.30% and 0.17%0.28%, respectively. Return on average equity (ROE) indicates how effectively we can generate net income on the capital invested by our stockholders. ROE is calculated by dividing annualized net income by average stockholders' equity. The ROE was 4.49%3.75% for the third quarter of 2016,three months ended June 30, 2017, compared to 2.03%3.51% for the third quarter of 2015.three months ended June 30, 2016. The ROE for the first ninesix months ofended June 30, 2017 and 2016 was 3.93%3.55% and 3.64%, compared to 1.93% for the first nine months of 2015.respectively.
Commitments, Contingencies and Concentrations

Financial instruments, whose contract amounts represent potential credit risk, were commitments to extend credit of approximately $187.6$256.7 million and $165.1$215.9 million, and standby letters of credit of approximately $6.5$10.4 million and $5.2$5.7 million, at SeptemberJune 30, 20162017 and December 31, 2015,2016, respectively. These financial instruments constitute off-balance sheet arrangements. Commitments often expire without being drawn upon. Substantially all of the $187.6$256.7 million of commitments to extend credit at SeptemberJune 30, 20162017 were committed as variable rate credit facilities.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and many require the payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. We evaluate each customer's creditworthiness on a case-by-case basis.  The amount of collateral obtained upon extension of credit is based on management's credit evaluation of the customer. Collateral held varies, but may include real estate, marketable securities, pledged deposits, equipment and accounts receivable.

Standby letters of credit are conditional commitments issued that guarantee the performance of a customer to a third party.  The credit risk and collateral policy involved in issuing letters of credit is essentially the same as that involved in extending loan commitments.  The amount of collateral obtained is based on management's credit evaluation of the customer. Collateral held varies but may include real estate, marketable securities, pledged deposits, equipment and accounts receivable. Management believes that the proceeds obtained through a liquidation of such collateral would be sufficient to cover the maximum potential amount of future payments required under the corresponding guidelines. The current amount of liability as of SeptemberJune 30, 20162017 and December 31, 20152016 for guarantees under standby letters of credit issued is not material.

Regulatory Matters

We are required to comply with certain "risk-based" capital adequacy guidelines issued by the FRB and the FDIC. The risk-based capital guidelines assign varying risk weights to the individual assets held by a bank. The guidelines also assign weights to the "credit-equivalent" amounts of certain off-balance sheet items, such as letters of credit and interest rate and currency swap contracts.

In July 2013, the federal bank regulatory agencies adopted revisions to the agencies' capital adequacy guidelines and prompt corrective action rules, which were designed to enhance such requirements and implement the revised standards of the Basel Committee on Banking Supervision, commonly referred to as Basel III. The final rules generally implemented higher minimum capital requirements, added a new common equity tier 1 capital requirement, and established criteria that instruments must meet to be considered common equity tier 1 capital, additional tier 1 capital or tier 2 capital.  The new minimum capital to risk-adjusted assets requirements were a common equity tier 1 capital ratio of 4.5% (6.5% to be considered "well capitalized") and a tier 1 capital ratio of 6.0%, increased from 4.0% (and increased from 6.0% to 8.0% to be considered "well capitalized"); the total capital ratio remained at 8.0% under the new rules (10.0% to be considered "well capitalized"). Under the final capital rules that became effective on January 1, 2015, there was a requirement for a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets which is in addition to the other minimum risk-based capital standards in the rule. Institutions that do not maintain this required capital buffer will become subject to progressively more stringent limitations on the percentage of earnings that can be paid out in dividends or used for stock repurchases and on the payment of discretionary bonuses to senior executive management.
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The following table shows the required capital ratios with the conversation buffer requirementover the phase-in period.

 
Basel III Community Banks
Minimum Capital Ratio Requirements
 2016 2017 2018 2019
        
Common equity tier 1 capital (CET1)5.125% 5.750% 6.375% 7.000%
Tier 1 capital (to risk weighted assets)6.625% 7.250% 7.875% 8.500%
Total capital (to risk-weighted assets)8.625% 9.250% 9.875% 10.500%
Tier 1 capital (to average assets, leverage)4.000% 4.000% 4.000% 6.500%

The risk-based capital ratios measure the adequacy of a bank's capital against the riskiness of its assets and off-balance sheet activities. Failure to maintain adequate capital is being phased in over three years beginning in 2016. We have included the 0.625% increasea basis for 2016 in our minimum"prompt corrective action" or other regulatory enforcement action. In assessing a bank's capital adequacy, ratios in the table below. The capital buffer requirement effectively raises the minimum required common equity Tier 1 capital ratioregulators also consider other factors such as interest rate risk exposure; liquidity, funding and market risks; quality and level or earnings; concentrations of credit, quality of loans and investments; risks of any nontraditional activities; effectiveness of bank policies; and management's overall ability to 7.0%, the Tier 1 capital ratio to 8.5%,monitor and the total capital ratio to 10.5% on a fully phased-in basis on January 1, 2019. The Companycontrol risks.
Management believes that the Company and Republic met, as of SeptemberJune 30, 2017 and December 31, 2016, all capital adequacy requirements are met under the Basel III Capital Rules on a fully phased-in basis as if all such requirements were currently in effect.In the current year, the FDIC categorized Republic as well capitalized under the regulatory framework for prompt corrective action provisions of the Federal Deposit Insurance Act. There are no calculations or events since that notification which management believes would have changed Republic's category.

The Company and Republic's ability to maintain the required levels of capital is substantially dependent upon the success of their capital and business plans, the impact of future economic events on Republic's loan customers and Republic's ability to manage its interest rate risk, growth and other operating expenses.






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The following table presents the capital regulatory ratios for both Republic and the Company as of SeptemberJune 30, 2016,2017, and December 31, 20152016 (dollars in thousands):

(dollars in thousands) 
Actual
 Minimum Capital Adequacy  
Minimum Capital Adequacy with Capital Buffer
  To Be Well Capitalized Under Prompt Corrective Action Provisions 
Actual 
 
Minimum Capital
Adequacy 
 
Minimum Capital
Adequacy with
Capital Buffer 
 
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions 
 Amount  Ratio Amount  Ratio  Amount  Ratio  Amount  Ratio Amount  Ratio  Amount  Ratio  Amount  Ratio  Amount  Ratio 
At September 30, 2016:             
At June 30, 2017: At June 30, 2017:                  
                                 
Total risk based capital                                 
Republic $137,688   11.51% $95,668   8.00% $103,142   8.625% $119,585   10.00% $183,091   13.20%  $110,935   8.00% $128,269   9.25% $138,669   10.00%
Company  144,109   12.00%  96,039   8.00%  103,543   8.625%  -   -%  249,681   17.94%   111,351   8.00%  128,750   9.25%  -   -%
Tier one risk based capital                                                    
Republic  128,235   10.72%  71,751   6.00%  79,225   6.625%  95,668   8.00%  173,637   12.52%   83,201   6.00%  100,535   7.25%  110,935   8.00%
Company  134,656   11.22%  72,030   6.00%  79,533   6.625%  -   -%  240,227   17.26%   83,513   6.00%  100,912   7.25%  -   -%
CET 1 risk based capital                                                    
Republic  128,235   10.72%  53,813   4.50%  61,287   5.125%  77,730   6.50%  173,637   12.52%   62,401   4.50%  79,735   5.75%  90,135   6.50%
Company  112,856   9.40%  54,022   4.50%  61,525   5.125%  -   -%  218,667   15.71%   62,635   4.50%  80,034   5.75%  -   -%
Tier one leveraged capital                                                    
Republic  128,235   7.78%  65,924   4.00%  65,924   4.00%  82,405   5.00%  173,637   8.76%   79,242   4.00%  89,148   4.50%  99,053   5.00%
Company  134,656   8.14%  66,147   4.00%  66,147   4.00%  -   -%  240,227   12.09%   79,468   4.00%  89,402   4.50%  -   -%
                           
 
At December 31, 2015: 
 
Total risk based capital 
Republic $138,566   12.65% $87,617   8.00% $-   -% $109,521   10.00%
Company  145,089   13.19%  87,976   8.00%  -   -%  -   -%
Tier one risk based capital                         
Republic  129,863   11.86%  65,712   6.00%  -   -%  87,617   8.00%
Company  136,386   12.40%  65,982   6.00%  -   -%  -   -%
CET 1 risk based capital                         
Republic  129,863   11.86%  49,284   4.50%  -   -%  71,189   6.50%
Company  114,586   10.42%  49,487   4.50%  -   -%  -   -%
Tier one leveraged capital                         
Republic  129,863   9.22%  56,328   4.00%  -   -%  70,410   5.00%
Company  136,386   9.65%  56,531   4.00%  -   -%  -   -%
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At December 31, 2016:                  
                      
Total risk based capital   
Republic $179,057   13.93%  $102,811   8.00% $110,843   8.625% $128,514   10.00%
Company  245,043   18.99%   103,226   8.00%  111,290   8.625%  -   -%
Tier one risk based capital                           
Republic  169,902   13.22%   77,108   6.00%  85,140   6.625%  102,811   8.00%
Company  235,888   18.28%   77,419   6.00%  85,484   6.625%  -   -%
CET 1 risk based capital                           
Republic  169,902   13.22%   57,831   4.50%  65,863   5.125%  83,534   6.50%
Company  214,088   16.59%   58,064   4.50%  66,129   5.125%  -   -%
Tier one leveraged capital                           
Republic  169,902   9.20%   73,843   4.00%  73,843   4.50%  92,304   5.00%
Company  235,888   12.74%   74,073   4.00%  74,073   4.50%  -   -%

Dividend Policy

We have not paid any cash dividends on our common stock.  We have no plans to pay cash dividends in 2016.2017.  Our ability to pay dividends depends primarily on receipt of dividends from our subsidiary, Republic.  Dividend payments from Republic are subject to legal and regulatory limitations.  The ability of Republic to pay dividends is also subject to profitability, financial condition, capital expenditures and other cash flow requirements.

Liquidity

A financial institution must maintain and manage liquidity to ensure it has the ability to meet its financial obligations. These obligations include the payment of deposits on demand or at their contractual maturity; the repayment of borrowings as they mature; the payment of lease obligations as they become due; the ability to fund new and existing loans and other funding commitments; and the ability to take advantage of new business opportunities. Liquidity needs can be met by either reducing assets or increasing liabilities. Our most liquid assets consist of cash and amounts due from banks.

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Regulatory authorities require us to maintain certain liquidity ratios in order for funds to be available to satisfy commitments to borrowers and the demands of depositors. In response to these requirements, we have formed an asset/liability committee (ALCO), comprised of certain members of Republic's Board of Directors and senior management to monitor such ratios. The ALCO committee is responsible for managing the liquidity position and interest sensitivity. That committee's primary objective is to maximize net interest income while configuring Republic's interest-sensitive assets and liabilities to manage interest rate risk and provide adequate liquidity for projected needs. The ALCO committee meets on a quarterly basis or more frequently if deemed necessary.

Our target and actual liquidity levels are determined by comparisons of the estimated repayment and marketability of interest-earning assets with projected future outflows of deposits and other liabilities. Our most liquid assets, comprised of cash and cash equivalents on the balance sheet, totaled $150.0$88.0 million at SeptemberJune 30, 2016,2017, compared to $27.1$34.6 million at December 31, 2015.2016. Loan maturities and repayments are another source of asset liquidity. At SeptemberJune 30, 2016,2017, Republic estimated that more than $45.0$80.0 million of loans would mature or repay in the six monthsix-month period ending MarchDecember 31, 2017. Additionally, a significant portion of our investment securities are available to satisfy liquidity requirements through sales on the open market or by pledging as collateral to access credit facilities. At SeptemberJune 30, 2016,2017, we had outstanding commitments (including unused lines of credit and letters of credit) of $194.1$267.1 million. Certificates of deposit scheduled to mature in one year totaled $40.5$73.5 million at SeptemberJune 30, 2016.2017. We anticipate that we will have sufficient funds available to meet all current commitments.
 
Daily funding requirements have historically been satisfied by generating growth in core deposits and certificates of deposit balances,with competitive rates, buying federal funds or utilizing the credit facilities of the FHLB. We have established a line of credit with the FHLB of Pittsburgh.  Our maximum borrowing capacity with the FHLB was $437.3$503.4 million at SeptemberJune 30, 2016.2017. At SeptemberJune 30, 20162017 and December 31, 2015,2016, we had no outstanding term borrowings with the FHLB.  At SeptemberJune 30, 2017, we had outstanding short-term borrowings of $55.0 million with the FHLB.  At December 31, 2016, we had no outstanding short-term borrowings with the FHLB. As of December 31, 2015, we had outstanding borrowings with the FHLB of $47.0 million. As of SeptemberJune 30, 2016,2017, FHLB had issued letters of credit, on Republic's behalf, totaling $75.0 million against our available credit line. We also established a contingency line of credit of $10.0 million with ACBB to assist in managing our liquidity position. We had no amounts outstanding against the ACBB line of credit at both SeptemberJune 30, 20162017 and December 31, 2015.2016.

Investment Securities Portfolio

At SeptemberJune 30, 2016,2017, we identified certain investment securities that were being held for indefinite periods of time, including securities that will be used as part of our asset/liability management strategy and that may be sold in response to changes in interest rates, prepayments and similar factors.  These securities are classified as available for sale and are intended to increase the flexibility of our asset/liability management.  Our investment securities classified as available-for-sale consist primarily of CMOs, MBSs, municipal securities, corporate bonds, ABSs, and CDOs.  Available-for-sale securities totaled $299.4$345.2 million and $284.8$369.7 million as of SeptemberJune 30, 20162017 and December 31, 2015,2016, respectively.  At SeptemberJune 30, 2016,2017, the portfolio had a net unrealized loss of $1.3$8.0 million and a net unrealized loss of $4.0$10.7 million at December 31, 2015.2016.
 
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Loan Portfolio

Our loan portfolio consists of secured and unsecured commercial loans including commercial real estate loans, construction and land development loans, commercial and industrial loans, owner occupied real estate loans, consumer and other loans, and residential mortgages. Commercial loans are primarily secured term loans made to small to medium-sized businesses and professionals for working capital, asset acquisition and other purposes. Commercial loans are originated as either fixed or variable rate loans with typical terms of 1 to 5 years. Republic's commercial loans typically range between $250,000 and $5.0 million, but customers may borrow significantly larger amounts up to Republic's legal lending limit of approximately $20.6$27.0 million at SeptemberJune 30, 2016.2017. Individual customers may have several loans often secured by different collateral.

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Credit Quality

Republic's written lending policies require specified underwriting, loan documentation and credit analysis standards to be met prior to funding, with independent credit department approval for the majority of new loan balances. A committee consisting of senior management and certain members of the Board of Directors oversees the loan approval process to monitor that proper standards are maintained, while approving the majority of commercial loans.
Loans, including impaired loans, are generally classified as non-accrual if they are past due as to maturity or payment of interest or principal for a period of more than 90 days, unless such loans are wellsecuredwell-secured and in the process of collection. Loans that are on a current payment status or past due less than 90 days may also be classified as non-accrual if repayment in full of principal and/or interest is in doubt.  Loans may be returned to accrual status when all principal and interest amounts contractually due are reasonably assured of repayment within an acceptable period of time, and there is a sustained period of repayment performance by the borrower, in accordance with the contractual terms.
While a loan is classified as non-accrual, or as an impaired loan and the future collectability of the recorded loan balance is doubtful,any collections of interest and principal are generally applied as a reduction to principal outstanding. When the future collectability of the recorded loan balance is expected, interest income may be recognized on a cash basis. For non-accrual loans, which have been partially charged off, recognition of interest on a cash basis is limited to that which would have been recognized on the recorded loan balance at the contractual interest rate. Cash interest receipts in excess of that amount are recorded as recoveries to the allowance for loan losses until prior chargeoffscharge-offs have been fully recovered.



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The following table shows information concerning loan delinquency and nonperformingnon-performing assets as of the dates indicated (dollars in thousands):
  
September 30,
2016
  
December 31,
2015
 
Loans accruing, but past due 90 days or more $153  $- 
Non-accrual loans  19,338   12,622 
Total non-performing loans  19,491   12,622 
Other real estate owned  10,271   11,313 
Total non-performing assets $29,762  $23,935 
Non-performing loans as a percentage of total loans, net  of unearned income(1)
  2.06%  1.44%
Non-performing assets as a percentage of total assets  1.72%  1.66%
  
June 30,
2017
  
December 31,
2016
 
Loans accruing, but past due 90 days or more $293  $302 
Non-accrual loans  18,520   18,594 
Total non-performing loans  18,813   18,896 
Other real estate owned  9,909   10,174 
Total non-performing assets $28,722  $29,070 
         
(1)Non-performing loans are comprised of (i) loans that are on non-accrual basis and (ii) accruing loans that are 90 days or more past due. Non-performing assets are composed of non-performing loans and other real estate owned.
Non-performing loans as a percentage of total loans, net  of unearned income  1.76%  1.96%
Non-performing assets as a percentage of total assets  1.41%  1.51%

Non-performing asset balances increaseddecreased by $5.8 million$348,000 to $29.8$28.7 million as of SeptemberJune 30, 20162017 from $23.9$29.1 million at December 31, 2015.2016.  Non-accrual loans increased $6.7 milliondecreased $74,000 to $19.3$18.5 million at SeptemberJune 30, 2016,2017, from $12.6$18.6 million at December 31, 2015,2016. Loans accruing, but past due primarily90 days or more decreased to one commercial real estate loan relationship in the amount of $7.3 million which moved$293,000 at June 30, 2017 from 60 to 89 days past due$302,000 at December 31, 2015 to non-accrual at September2016. At June 30, 2016. In addition to non-accrual loans, impaired loans also include loans that are currently performing but potential credit concerns with the borrowers' financial condition have caused management to have doubts as to the ability of such borrowers to continue to comply with present repayment terms. At September 30, 20162017 and December 31, 2015,2016, all identified impaired loans are internally classified and individually evaluated for impairment in accordance with the guidance under ASC 310.
The following table presents our 30 to 89 days past due loans at SeptemberJune 30, 20162017 and December 31, 2015.2016.  

(dollars in thousands)   
September 30,
2016
     
December 31,
2015
 June 30, December 31, 
2017 2016 
30 to 59 days past due $-  $2,878  $113  $1,060 
60 to 89 days past due  781   9,315   863   31 
Total loans 30 to 89 days past due $781  $12,193  $976  $1,091 

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Other Real Estate Owned

The balance of other real estate owned decreased to $10.2$9.9 million at SeptemberJune 30, 20162017 from $11.3$10.2 million at December 31, 2015.2016.  The following table presents a reconciliation of other real estate owned for the ninethree months ended SeptemberJune 30, 20162017 and the year ended December 31, 2015:2016:

(dollars in thousands) 
September 30,
2016
  
December 31,
2015
  
June 30,
2017
  
December 31,
2016
 
Beginning Balance, January 1st
 $11,313  $3,715  $10,174  $11,313 
Additions  866   11,459   129   616 
Valuation adjustments  (521)  (3,069)  (258)  (355)
Dispositions  (1,387)  (792)  (136)  (1,400)
Ending Balance $10,271  $11,313  $9,909  $10,174 

At SeptemberJune 30, 2016,2017, we had no credit exposure to "highly leveraged transactions" as defined by the FDIC.
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Allowance for Loan Losses

The allowance for loan losses is a valuation allowance for probable losses inherent in the loan portfolio. We evaluate the need to establish an allowance against loan losses on a quarterly basis. When an increase in this allowance is necessary, a provision for loan losses is charged to earnings. The allowance for loan losses consists of three components. The first component is allocated to individually evaluated loans found to be impaired and is calculated in accordance with ASC 310.310 Receivables. The second component is allocated to all other loans that are not individually identified as impaired pursuant to ASC 310 ("non-impaired loans").impaired. This component is calculated for all non-impaired loans on a collective basis in accordance with ASC 450.450 Contingencies. The third component is an unallocated allowance to account for a level of imprecision in management's estimation process.

We evaluate loans for impairment and potential charge-off on a quarterly basis.  Management regularly monitors the condition of borrowers and assesses both internal and external factors in determining whether any loan relationships have deteriorated. Any loan rated as substandard or lower will have an individual collateral evaluation analysis prepared to determine if a deficiency exists. We first evaluate the primary repayment source.  If the primary repayment source is seriously inadequatedetermined to be insufficient and unlikely to repay the debt, we then look to the other availablesecondary repayment sources. Secondary sources are conservatively reviewed for liquidation values. Updated appraisals and financial data are obtained to substantiate current values.  If the reviewed sources are deemed to be inadequate to cover the outstanding principal and any costs associated with the resolution of the troubled loan, an estimate of the deficient amount will be calculated and a specific allocation of loan loss reserve is recorded.
Factors considered in the calculation of the allowance for non-impaired loans include several qualitative and quantitative factors such as historical loss experience, trends in delinquency and nonperforming loan balances, changes in risk composition and underwriting standards, experience and ability of management, and general economic conditions along with other external factors. Historical loss experience is analyzed by reviewing charge-offs over a three year period to determine loss rates consistent with the loan categories depicted in the allowance for loan loss table below.

The factors supporting the allowance for loan losses do not diminish the fact that the entire allowance for loan losses is available to absorb losses in the loan portfolio and related commitment portfolio, respectively. Our principal focus, therefore, is on the adequacy of the total allowance for loan losses. The allowance for loan losses is subject to review by banking regulators. Our primary bank regulators regularly conduct examinations of the allowance for loan losses and make assessments regarding the adequacy and the methodology employed in their determination.
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An analysis of the allowance for loan losses for the ninesix months ended SeptemberJune 30, 20162017 and 2015,2016, and the twelve months ended December 31, 20152016 is as follows:

(dollars in thousands) For the nine months ended September 30, 2016  For the twelve months ended December 31, 2015  For the nine months ended September 30, 2015 
       
Balance at beginning of period $8,703  $11,536  $11,536 
Chargeoffs:            
Commercial real estate  -   2,624   2,623 
Construction and land development  3   260   222 
Commercial and industrial  18   408   325 
Owner occupied real estate  954   133   133 
Consumer and other  -   -   - 
    Residential mortgage  -   -   - 
Total chargeoffs  975   3,425   3,303 
Recoveries:            
Commercial real estate  6   4   4 
Construction and land development  -   5   5 
Commercial and industrial  162   49   48 
Owner occupied real estate  -   -   - 
Consumer and other  -   34   33 
    Residential mortgage  -   -   - 
Total recoveries  168   92   90 
Net chargeoffs  807   3,333   3,213 
Provision for loan losses  1,557   500   - 
Balance at end of period $9,453  $8,703  $8,323 
             
Average loans outstanding(1)
 $925,110  $820,820  $809,259 
As a percent of average loans:(1)
            
Net chargeoffs (annualized)  0.12%  0.41%  0.53%
Provision for loan losses (annualized)  0.22%  0.06%  -%
Allowance for loan losses  1.02%  1.06%  1.03%
Allowance for loan losses to:            
Total loans, net of unearned income  1.00%  0.99%  0.98%
Total nonperforming loans  48.50%  68.95%  54.70%
(1)Includes non-accruing loans.

(dollars in thousands) 
For the six
months ended
June 30, 2017
  For the twelve months ended December 31, 2016  
For the six
months ended
June 30, 2016
 
          
Balance at beginning of period $9,155  $8,703  $8,703 
Charge‑offs:            
Commercial real estate  -   -   - 
Construction and land development  -   60   - 
Commercial and industrial  152   143   18 
Owner occupied real estate  108   1,052   954 
Consumer and other  8   11   - 
Residential mortgage  -   10   - 
Total charge‑offs  268   1,276   972 
Recoveries:            
Commercial real estate  7   6   6 
Construction and land development  -   -   - 
Commercial and industrial  59   163   74 
Owner occupied real estate  -   -   - 
Consumer and other  1   2   - 
Residential mortgage  -   -   - 
Total recoveries  67   171   80 
Net charge‑offs/(recoveries)  201   1,105   892 
Provision for loan losses  500   1,557   950 
Balance at end of period $9,454  $9,155  $8,761 
             
Average loans outstanding(1)
 $1,036,979  $936,492  $904,387 
As a percent of average loans:(1)
            
Net charge‑offs (annualized)  0.04%  0.12%  0.20%
Provision for loan losses (annualized)  0.10%  0.17%  0.21%
Allowance for loan losses  0.91%  0.98%  0.97%
Allowance for loan losses to:            
Total loans, net of unearned income  0.89%  0.95%  0.94%
Total non‑performing loans  50.25%  48.45%  46.50%
             
(1) Includes non-accruing loans.     
We recorded a provision for loan losses of $607,000$500,000 for the three and six month periods ended June 30, 2017.  We recorded a provision for loan losses of $650,000 for the three month period ended SeptemberJune 30, 2016 and $1.6 million$950,000 for the ninesix month period ended SeptemberJune 30, 2016. We did not record a provision for loan losses for the three and nine months ended September 30, 2015. During the first ninesix months of 2017, there was an increase in the allowance required for loans collectively evaluated for impairment that was driven by an increase in total loans outstanding.  During the first six months of 2016, there was an increase in the allowance required for loans individually evaluated for impairment primarily driven by a single loan relationship that transferred to non-performing status during the second quarter of 2016. A decrease in the appraised value of the collateral supporting this loan relationship drove the need for an increase in the loan loss provision. During the nine months of 2015, there was a decrease in the allowance required for loans collectively evaluated for impairment driven by a reduction in the factor used in the calculation related to historical charge-offs which has declined as a result of lower charge-offs in recent years.

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The allowance for loan losses as a percentage of non-performing loans (coverage ratio) was 48.50%50.25% at SeptemberJune 30, 2016,2017, compared to 68.95%48.45% at December 31, 20152016 and 54.70%46.50% at SeptemberJune 30, 2015.2016. Total non-performing loans were $19.5$18.8 million, $12.6$18.9 million and $15.2$18.8 million at SeptemberJune 30, 2017, December 31, 2016 and June 30, 2016, December 31, 2015 and September 30, 2015, respectively.  The increase in non-performing loans in 2016 was primarily driven by one

Management makes at least a quarterly determination as to an appropriate provision from earnings to maintain an allowance for loan relationshiplosses that it determines is adequate to absorb inherent losses in the amountloan portfolio. The Board of $7.3 million that was transferredDirectors periodically reviews the status of all non-accrual and impaired loans and loans classified by the management team. The Board of Directors also considers specific loans, pools of similar loans, historical charge-off activity, economic conditions and other relevant factors in reviewing the adequacy of the allowance for loan losses. Any additions deemed necessary to non-performingthe allowance for loan losses are charged to operating expenses.

We evaluate loans from 60for impairment and potential charge-offs on a quarterly basis.  Any loan rated as substandard or lower will have a collateral evaluation analysis completed in accordance with the guidance under generally accepted accounting principles (GAAP) on impaired loans to 89 past due during the second quarter of 2016.
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determine if a deficiency exists. Our credit monitoring process assesses the ultimate collectability of an outstanding loan balance from all potential sources. When a loan is determined to be uncollectible it is charged-off against the allowance for loan losses. Unsecured commercial loans and all consumer loans are charged-off immediately upon reaching the 90-day delinquency mark unless they are well secured and in the process of collection.  The timing on charge-offs of all other loan types is subjective and will be recognized when management determines that full repayment, either from the cash flow of the borrower, collateral sources, and/or guarantors, will not be sufficient and that repayment is unlikely.  A full or partial charge-off is recognized equal to the amount of the estimated deficiency calculation.

Serious delinquency is often the first indicator of a potential charge-off. Reductions in appraised collateral values and deteriorating financial condition of borrowers and guarantors are factors considered when evaluating potential charge-offs. The likelihood of possible recoveries or improvements in a borrower's financial condition are also assessed when considering a charge-off.  We recorded net charge-offs of $807,000$201,000 during the ninesix month period ended SeptemberJune 30, 2016,2017, compared to net charge-offs of $3.2 million$892,000 during the ninesix month period ended SeptemberJune 30, 2015.2016. The higher amount ofdecrease in charge-offs in 20152017 was primarily due to a single loan relationship which transferred to other real estate owned during the second quarter ofsubsequently defaulted in 2015 resulting in a significant charge-off in that period.the second quarter of 2016. The provision for loan losses associated with this loan was recorded in a prior period.
Partial charge-offs of non-performing and impaired loans can significantly reduce the coverage ratio and other credit loss statistics due to the fact that the balance of the allowance for loan losses will be reduced while still carrying the remainder of a non-performing loan balance in the impaired loan category.  The amount of non-performing loans for which partial charge-offs have been recorded amounted to $2.3$2.4 million at Septemberboth June 30, 2016 compared to $3.4 million at2017 and December 31, 2015.2016.
The following table provides additional analysis of partially charged-off loans at SeptemberJune 30, 20162017 and December 31, 2015.2016.
 (dollars in thousands) September 30, 2016  December 31, 2015 
Total nonperforming loans $19,491  $12,622 
Nonperforming and impaired loans with partial charge-offs  2,307   3,431 
         
Ratio of nonperforming loans with partial charge-offs to total loans  0.24%  0.39%
Ratio of nonperforming loans with partial charge-offs to total nonperforming loans  11.84%  27.18%
Coverage ratio net of nonperforming loans with partial charge-offs  409.75%  253.66%
(dollars in thousands) 
June 30,
2017
  
December 31,
2016
 
Total nonperforming loans $18,813  $18,896 
Nonperforming and impaired loans with partial charge-offs  2,438   2,394 
         
Ratio of nonperforming loans with partial charge-offs to total loans  0.23%  0.25%
Ratio of nonperforming loans with partial charge-offs to total nonperforming loans  12.96%  12.67%
Coverage ratio net of nonperforming loans with partial charge-offs  387.78%  382.41%

The Company'sOur charge-off policy is reviewed on an annual basis and updated as necessary. During the ninesix month period ended SeptemberJune 30, 2016,2017, there were no changes made to this policy.


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Effects of Inflation

The majority of assets and liabilities of a financial institution are monetary in nature. Therefore, a financial institution differs greatly from most commercial and industrial companies that have significant investments in fixed assets or inventories.  Management believes that the most significant impact of inflation on its financial results is through our need and ability to react to changes in interest rates.  Management attempts to maintain an essentially balanced position between rate sensitive assets and liabilities over a one-year time horizon in order to protect net interest income from being affected by wide interest rate fluctuations.

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ITEM 3: QUANTITATIVE AND QUALITATIVE INFORMATION ABOUT MARKET RISK

There has been no material change in the Company's assessment of its sensitivity to market risk since its presentation in the Annual Report on Form 10-K for the fiscal year ended December 31, 2015 filed with the SEC on March 11, 2016.10, 2017.

ITEM 4: CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures  

The Company maintains disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and accumulated and communicated to the Company's management, including the Company's principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

The Company's management, with the participation of the principal executive officer and the principal financial officer, conducted an evaluation, as of the end of the period covered by this report, of the effectiveness of the Company's disclosure controls and procedures, as such term is defined in Exchange Act Rule 13a-15(e). Based on this evaluation, the principal executive officer and the principal financial officer have concluded that, as of the end of the period covered by this report, the Company's disclosure controls and procedures, as defined in Rule 13a-15(e), were effective at the reasonable assurance level.

Changes in Internal Controls

The principal executive officer and principal financial officer also conducted an evaluation of the Company's internal control over financial reporting ("Internal Control") to determine whether any changes in Internal Control occurred during the quarter ended SeptemberJune 30, 20162017 that have materially affected or which are reasonably likely to materially affect Internal Control.  Based on that evaluation, there has been no such change during the quarter ended SeptemberJune 30, 2016.2017.

Limitations on the Effectiveness of Controls

Control systems, no matter how well designed and operated, can provide only reasonable, not an absolute, level of assurance that the objectives of the control system are met.  The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of the effectiveness of controls to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

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PART II.   OTHER INFORMATION

ITEM 1.   LEGAL PROCEEDINGS

The Company and Republic are from time to time parties (plaintiff or defendant) to lawsuits in the normal course of business. While any litigation involves an element of uncertainty, management is of the opinion that the liability of the Company and Republic, if any, resulting from such actions will not have a material effect on the financial condition or results of operations of the Company and Republic.
ITEM 1A. RISK FACTORS

There have been no material changes to theSignificant risk factors disclosed undercould adversely affect the Company's business, financial condition and results of operation.  Risk factors discussing these risks can be found in Part I, "Item 1A. Risk Factors" in the Company's Annual Report on Form 10-K for the year ended December 31, 2015.2016 and Form 10-Q for the quarter ended March 31, 2017.  The risk factors in the Company's Annual Report on Form 10-K have not materially changed. You should carefully consider these risk factors. The risks described in the Company's Form 10-K and Form 10-Q are not the only risks facing the Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.  MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5.  OTHER INFORMATION

None.


 

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ITEM 6.  EXHIBITS

The following Exhibits are filed as part of this report.  (Exhibit numbers correspond to the exhibits required by Item 601 of Regulation SKS-K for quarterly reports on Form 10Q)10-Q).

Exhibit Number 
 
Description
 
 
Location
     
3.1 Amended and Restated Articles of Incorporation of Republic First Bancorp, Inc. Incorporated by reference to Form 8-K10-K filed May 13, 2010March 10, 2017
     
3.2 
Amended and Restated BylawsBy-Laws of Republic First Bancorp, Inc.
 
 Incorporated by reference to Form S-1 filed April 23, 2010 (333-166286)
     
10.1
Limited Liability Company Purchase Agreement dated July 26, 2016 by and among, Republic First Bank d/b/a Republic Bank and Owners of Oak Mortgage Company, LLC.
31.1
 
Incorporated by reference to Form 8-K filed August 1, 2016
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer of Republic First Bancorp, Inc.
Filed herewith
     
31.1
Rule 13a-14(a)/15d-14(a) Certification of Chairman and Chief Executive Officer of Republic First Bancorp, Inc.Filed herewith
31.2
 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer of Republic First Bancorp, Inc. 
Filed herewith
     
32.1
 Section 1350 Certification of Harry D. Madonna 
Furnished herewith
     
32.2
 Section 1350 Certification of Frank A. Cavallaro 
Furnished herewith
     
101 
The following materials from the Company's Quarterly Report on Form 10-Q for the quarter ended SeptemberJune 30, 20162017, formatted in XBRL (eXtensible Business Reporting Language); (i) Consolidated Balance Sheets as of SeptemberJune 30, 20162017 and December 31, 2015,2016, (ii) Consolidated Statements of Income for the three and ninesix months ended SeptemberJune 30, 20162017 and 2015,2016, (iii)  Consolidated Statements of Comprehensive Income (Loss) for the three and ninesix months ended SeptemberJune 30, 20162017 and 2015,2016, (iv) Consolidated Statements of Cash Flows for the ninesix months ended SeptemberJune 30, 20162017 and 2015,2016, (v) Consolidated Statements of Changes in Shareholders' Equity for the ninesix months ended SeptemberJune 30, 20162017 and 2015,2016, and (vi) Notes to Consolidated Financial Statements.
  
     



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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.


  REPUBLIC FIRST BANCORP, INC.
   
Date:  NovemberAugust 7, 2016
2017		By:/s/ Harry D. Madonna
  Harry D. Madonna
  
Chairman, President and Chief Executive Officer
(principal executive officer)
   
Date:  NovemberAugust 7, 2016
2017		By:/s/ Frank A. Cavallaro
  Frank A. Cavallaro
  
Executive Vice President and Chief Financial Officer
(principal financial and accounting officer)
   


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