UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

FORM 10-K
(Mark One)
[ X ]  Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2013.
[ X ]  Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2016.
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)

Registrant’sRegistrant's telephone number, including area code 215-735-4422

Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, par value $0.01 per share
 Nasdaq Global
The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act:  None
Indicate by check mark if the registrant is a well-known seasonseasoned issuer, as defined in Rule 405 of the Securities Act. YES  [  ]   NO    [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  YES [  ]  NO [X]
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.   YES  [X]     NO  [  ]
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  [X]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one)
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.   YES  [X]     NO  [  ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  [X]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one)
Large accelerated filer    [   ]
Accelerated filer     [X ]
Non-Accelerated filer   [   ]
(Do not check if a smaller reporting company)
Smaller reporting company    [X]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  YES  [  ]    NO   [X]

The aggregate market value of the voting and non-voting common equity held by non-affiliates was $60,051,330$139,107,302 based on the last sale price on Nasdaq Global Market on June 28, 2013.30, 2016.

Indicate the number of shares outstanding of each of the registrant’sregistrant's classes of common stock, as of the latest practicable date.

Common Stock, par value $0.01 per share
25,972,897
56,840,764
Title of Class
Number of Shares Outstanding as of March 21, 20149, 2017

DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’sregistrant's Definitive Proxy Statement for its 20142017 Annual Meeting of Shareholders, which Definitive Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days after the registrant’sregistrant's fiscal year ended December 31, 2013,2016, are incorporated by reference into Part III of this Form 10-K; provided, however, that the Compensation Committee Report, the Audit Committee Report and any other information in such proxy statement that is not required to be included in this Annual Report on Form 10-K, shall not be deemed to be incorporated herein by reference or filed as a part of this Annual Report on Form 10-K.
 
 
 
 
 REPUBLIC FIRST BANCORP, INC. AND SUBSIDIARY 
 TABLE OF CONTENTS 
   
 PAGE
PART I:  
Item 1.Business
1
   
Item 1A.Risk Factors
12
13
   
Item 1B.Unresolved Staff Comments
23
24
   
Item 2.Properties
23
24
   
Item 3.Legal Proceedings
23
25
   
Item 4.Mine Safety Disclosures
24
25
   
PART II:  
Item 5.Market for Registrant’sRegistrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
24
25
   
Item 6.Selected Financial Data
25
26
   
Item 7.Management’sManagement's Discussion and Analysis of Financial Condition and Results of Operations
26
27
   
Item 7A.Quantitative and Qualitative Disclosures About Market Risk
62
69
   
Item 8.Financial Statements and Supplementary Data
62
69
   
Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
112
134
   
Item 9A.Controls and Procedures
112
134
   
Item 9B.Other Information
115135
   
PART III:  
Item 10.Directors, Executive Officers and Corporate Governance
115
136
   
Item 11.Executive Compensation
115
136
   
Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
115
137
   
Item 13.Certain Relationships and Related Transactions, and Directors Independence
116
137
   
Item 14.Principal Accounting Fees and Services
116
137
   
PART IV:  
Item 15.Exhibits, Financial Statement Schedules
116
138
   
Signatures
120
142
 
 
 
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PART I

Item 1:  Business

Throughout this Annual Report on Form 10-K, the registrant, Republic First Bancorp, Inc., is referred to as the “Company”"Company" or as “we,” “our”"we," "our" or “us”"us". The Company’sCompany's website address is www.myrepublicbank.com. The Company’sCompany's Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and other documents filed by the Company with the United States Securities and Exchange Commission (“SEC”("SEC") are available free of charge on the Company’sCompany's website under the Investor Relations menu. Such documents are available on the Company’sCompany's website as soon as reasonably practicable after they have been filed electronically with the SEC.
 
Forward Looking Statements
 
This document contains “forward-looking"forward-looking statements,”" as that term is defined in the U.S. Private Securities Litigation Reform Act of 1995.  These statements can be identified by reference to a future period or periods or by the use of words such as “would"would be,” “could" "could be,” “should" "should be,” “probability,” “risk,” “target,” “objective,” “may,” “will,” “estimate,” “project,” “believe,” “intend,” “anticipate,” “plan,” “seek,” “expect”" "probability," "risk," "target," "objective," "may," "will," "estimate," "project," "believe," "intend," "anticipate," "plan," "seek," "expect" and similar expressions or variations on such expressions.  These forward-looking statements include, among others:  statements of goals, intentions and expectations, statements regarding the impact of accounting pronouncements, statements regarding prospects and business strategy, statements regarding allowance for loan losses, asset quality and market risk and estimates of future costs, benefits and results.
 
Forward-looking statements 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, and in addition to the “Risk Factors”"Risk Factors" discussed elsewhere in this Form 10-K, risks and uncertainties can arise with changes in or related to:

·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;

·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;
 
 
 
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·the 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.

Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’smanagement's beliefs only as of the date hereof.  Except as required by applicable law or regulation, we do not undertake, and specifically disclaim any obligation, to update or revise any forward-looking statements to reflect any changed assumptions, any unanticipated events or any changes in the future.  Significant factors which could have an adverse effect on the operations and future prospects of the Company are detailed in the “Risk Factors”"Risk Factors" section included under Item 1A of Part I of this Annual Report on Form 10-K.  Readers should carefully review the risk factors included in this Annual Report on Form 10-K and in other documents the Company files from time to time with the SEC.

General

Republic First Bancorp, Inc. was organized and incorporated under the laws of the Commonwealth of Pennsylvania in 1987 and is the holding company for Republic First Bank, which does business under the name Republic Bank, and we may refer to as Republic or the Bank.Bank throughout this document.  Republic offers a variety of credit and depository banking services. Such services are offered to individuals and businesses primarily in the Greater Philadelphia and Southern New Jersey area through their offices and branches in Philadelphia, Montgomery, and Delaware Counties in Pennsylvania and Camden, County,Burlington, and Gloucester Counties in New Jersey.
  
Historically, our primary objective had been to position ourselves as an alternative to the large banksfinancial institutions for commercial banking services in the Greater Philadelphia and Southern New Jersey area.  In the second quarter ofregion.  However, in 2008, we began to redirectmade an important and strategic shift in our strategicbusiness approach, redirecting our efforts toward retail banking and the creation of a major regional retail bank that would meet an important need in our existing marketplace. Focused on delivering high levels of customer service and commercial bank withsatisfaction, driving innovation, developing a distinctbold brand by focusing on innovation, customer satisfaction, brand building and creating shareholder value, creation.  Republic Bank sought to offer a banking experience that would turn customers into Fans.  As other banks began to turn toward automation for growth, Republic Bank took a different approach and chose not only to embrace advances in technology, but to also define itself by the personal touch.

To achieve thissuch a transformation, the Bank hired a number of former seniorwe recruited several key banking executives who had previously served in leadership roles at Commerce Bank, employees: Andrew Logue, President and Chief Operating Officer; Rhonda Costello, Chief Retail Officer; Jay Neilon, Chief Credit Officer; and Frank Cavallaro, Chief Financial Officer.
Additionally, the Bank hired two experienced and former Commerce Bank regional market managers, Stephen McWilliams and Robert Worley.  They lead the Bank’s lending effortsupon which this business model draws inspiration.  With a strong management team in the greater Philadelphia and Southern New Jersey area and in turn have hiredplace, along with adequate capital resources to support this revitalized vision, we began to build a number of experienced lendersunique brand with the same focus. With this management team and additional new employees for support, we have built the foundation and madegoal of establishing ourselves as a commitment to become a leadingpremier financial institution in the Philadelphia metropolitan area.
 
 
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We believe we haveAn important part of that strategic shift toward creating a strong management team, as well as adequate capital resources and liquidity to deal with current economic conditions and growth plans for the future.   In connection with the change in strategy to become a retail-focusedretail and customer service based organization,focused bank was the decision in August 2010 we rebrandedto rebrand our stores from Republic First Bank to operate underRepublic Bank, which had been the name “Republic Bank.” This is the name inunder which the Bank was originallywe had initially incorporated under and utilizedoperated from 1988 until 1996.
During 2009 and 2010,1988-1996.  In support of that rebrand, we also renovated refurbished and remodeled mostthe majority of our existing stores, making significant capital improvements,branches which refer to and operate as partstores.  Further, we embraced critical service changes that reframed the Republic Bank brand and experience in the eyes of our ongoing effortthe consumer to adopt a more retail customer focusinclude expanded hours, absolutely free checking, free coin counting, no ATM surcharges, mobile banking and attract additional retail business.  We have expanded customer services hours, enhanced our banking systems to better serve the retail customer and expanded our retail product offerings.  In 2013, we relocated our Media store to a significantly improved and renovated corner location.  In the first quarter of 2014 we took the first step in expanding our store network in Southern New Jersey by opening our new prototype building in Cherry Hill, NJ.much more.

On the lending side, we historicallyalso shifted away from our historic approach, which was primarily focused our efforts on business banking and isolated commercial lending transactions, in particular commercial real estate loans.  We have restructuredWhile restructuring our loan portfolio and deemphasizeddeemphasizing the origination of commercial real estate loans.  To further these efforts,loans, we also undertook a detailed reviewsreview of our more significant credit relationships with an emphasis on reducingrelationships.  This review allowed us to reduce exposure, enhancedenhance our allowance for loan loss methodology and committedcommit to originate fewer commercial real estate loans in orderan effort to reduce our credit concentrations in that loanparticular category.

In December 2011, we completed the sale of several distressed commercial real estate loans and foreclosed properties to a single investor.  This transaction dramatically reduced our non-performing asset balances and significantly improved our credit quality metrics. We believe theThis loan sale representedwas a major stepcornerstone transaction in completing the transformation of the Bank, which began in 2008.Republic Bank.

With these significant changes implemented, Republic Bank was then well-positioned to execute an aggressive expansion plan which was given the title, "The Power of Red is Back."  To support this growth strategy, we completed the sale of $45 million of common stock through a private placement offering in April 2014 which provided the necessary capital to implement our aggressive expansion plan.

Since its inception, the expansion plan has produced strong results and continues to build momentum. Over the last three years we have opened eight new stores using our signature glass building. During 2016, we expanded our store network in Southern New Jersey by opening new locations in Washington Township and Moorestown. We also relocated an existing store to an improved site in Wynnewood, PA in 2016.  There are several other locations in various stages of approval and development for future openings.

During 2016 we also expanded our product offerings through the addition of a residential mortgage lending team. We entered into an agreement to acquire Oak Mortgage Company. The transaction closed in July 2016 and Oak Mortgage became a wholly owned subsidiary of the Bank. Oak Mortgage is headquartered in Marlton, NJ and is licensed to do business in Pennsylvania, Delaware, New Jersey, and Florida providing our customers with new opportunities in the residential lending market. The Oak Mortgage team is a tremendous fit for Republic's commitment to extraordinary customer service and has proven to be a perfect complement to the Bank's network of store locations.

To strengthen our capital position and prepare for the next stage of growth and expansion, we completed a capital raise in the amount of $100 million through a registered direct offering of our common stock in December 2016. At the same time, Vernon W. Hill, II became a member of the Board of Directors and was appointed Chairman of Republic First Bancorp, Inc. He has been a major investor and consultant to Republic since 2008. Mr. Hill is often credited with reinventing the concept of Retail Banking. He was the Founder and Chairman of Commerce Bancorp, a $50 billion Retail Bank headquartered in metro Philadelphia, which grew to 450 locations along the east coast before its sale in 2007. He is also the Founder and Chairman of Metro Bank (UK), which is the first new Retail high street bank opened in Britain since 1840 and in just six years has grown to more than $12 billion in assets and 48 locations.
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As of December 31, 2013, we2016, the Company had total assets of approximately $961.7 million,$1.9 billion, total shareholders’shareholders' equity of approximately $62.9$215.1 million, total deposits of approximately $869.5 million,$1.7 billion, net loans receivable of approximately $667.0$955.8 million, and a net lossincome of $3.5$4.9 million. The Company hasWe have one reportable segment: community banking. The community bankingbank segment primarily encompasses the commercial loan and deposit activities of Republic, as well as residential mortgage and other consumer loan products in the areasarea surrounding ourits stores.

We provide banking services through the Bank, and do not presently engage in any activities other than traditional banking activities.

Republic Bank
 
Republic is a commercial bank chartered pursuant to the laws of the Commonwealth of Pennsylvania, and is subject to examination and comprehensive regulation by the Federal Deposit Insurance Corporation (FDIC) and the Pennsylvania Department of Banking and Securities.  The deposits held by the Bank are insured, up to applicable limits, by the Deposit Insurance Fund of the FDIC.  Republic presently conducts its principal banking activities through its six Philadelphia offices and eight suburban offices in Plymouth Meeting, Bala Cynwyd, Ardmore and Abington, located in Montgomery County, Media, located in Delaware County, and Haddonfield, Cherry Hill and Voorhees, located in Southern New Jersey.

Service Area/Area / Market Overview
 
Our primary service area consists of Greater Philadelphia and Southern New Jersey.  We presently conduct our principal banking activities through nineteen branch locations which are commonly referred to as "stores" throughout this document to reflect our retail oriented approach to customer service and convenience.  Eleven of these stores are located in Philadelphia and the surrounding suburbs of Plymouth Meeting, Bala Cynwyd, Wynnewood, Abington, and Media in Pennsylvania.  There are also eight stores located in the Southern New Jersey market in Haddonfield, Cherry Hill, Voorhees, Glassboro, Marlton, Berlin, Washington Township, and Moorestown. Our commercial lending activities extend beyond our primary service area, to include other counties in Pennsylvania and New Jersey, as well as parts of Delaware, Maryland, New York and other out-of-market opportunities. Our residential lending activities also extend outside of our primary service area, to include other counties in Pennsylvania and New Jersey, as well as Delaware and Florida through our subsidiary Oak Mortgage.
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Competition

We face substantial competition from other financial institutions in our service area.  Competitors include Wells Fargo, BB&T, Citizens, PNC, Sovereign,Santander, TD Bank and Bank of America, as well as many local community banks.  In addition, we compete directly with savings banks, savings and loan associations, finance companies, credit unions, factors, mortgage brokers, insurance companies, securities brokerage firms, mutual funds, money market funds, private lenders and other institutions for deposits, commercial loans, mortgages and consumer loans, as well as other services.  Competition among financial institutions is based upon a number of factors, including the quality of services rendered, interest rates offered on deposit accounts, interest rates charged on loans and other credit services, service charges, the convenience of banking facilities, locations and hours of operation and, in the case of loans to larger commercial borrowers, applicable lending limits.  Many of the financial institutions with which we compete have greater financial resources than we do, and offer a wider range of deposit and lending products.
 
Our legal lending limit to one borrower was approximately $13.9$27.0 million at December 31, 2013.2016.  Loans above this amount may be made if the excess over the lending limit is participated to other institutions.  We are subject to potential intensified competition from new branches of established banks in the area as well as new banks that could open in our market area.  There are banks and other financial institutions, which serve surrounding areas, and additional out-of-state financial institutions, which currently, or in the future, may compete in our market. We compete to attract deposits and loan applications both from customers of existing institutions and from customers new to the greater Philadelphia areaour market and we anticipate a continued increase in competition in our marketservice area.
 
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We continue to believe that an attractive niche exists serving small to medium sized business customers not adequately served by our larger competitors, and we will continue to seek opportunities to build commercial relationships to complement our retail strategy.  We believe small to medium-sized businesses will continue to respond very positivelyin a positive manner to the attentive and highly personalized service we provide.

Products and Services
 
We offer a range of competitively priced banking products and services, including consumer and commercial deposit accounts, checking accounts, interest-bearing demand accounts, money market accounts, certificates of deposit, savings accounts, sweep accounts, lockbox services and individual retirement accounts (and other traditional banking services), secured and unsecured commercial loans, real estate loans, construction and land development loans, automobile loans, home improvement loans, mortgages, home equity and overdraft lines of credit, and other products.  We attempt to offer a high level of personalized service to both our retail and commercial customers.
 
In February 2011, we announced the launch ofWe also maintain a Small Business Lending team that specializes in the origination of loans guaranteed by the U.S. Small Business Administration (“SBA”("SBA") lending group to provide much needed credit to small businesses throughout our service areas.  We hired two experiencedarea.  This team has developed into one of the top lenders to leadunder the SBA program in our newregion.  For the last several years they have been ranked as one of the top SBA lending unit.  Arnold V. Horvath, Executive Vice-President,lenders in the tri-state market of Pennsylvania, New Jersey and Pamela Innis, Senior Vice-President, who are both former executives with Commerce Bank and most recently Metro Bank.Delaware based on the dollar volume of loan originations.

We are members of the STAR™ and PLUS™ automated teller (ATM) networks, and Allpoint - America's Largest Surcharge Free ATM Network which enable us to provide our customers with free access to more than 55,000 ATMs worldwide. We currently have fourteennineteen proprietary ATMs located in our store network.
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Our lending activities generally are focused on small and medium sized businesses within the communities that we serve. Commercial real estate loans represent the largest category within our loan portfolio, amounting to approximately 50%39% of total loans outstanding at December 31, 2013.2016.  Repayment of these loans is, in part, dependent on general economic conditions affecting our customers and various businesses within the community.  As a commercial lender, we are subject to credit risk. Economic and financial conditions in recent yearscould have adversely affected manyan adverse effect on the ability of our borrowers.borrowers to repay their loans. To manage the challenges of thisthat the economic environment may present we have adopted a more conservative loan classification system, enhancedcontinually review and enhance our allowance for loan loss methodology, and undertakenperform a comprehensive review of our loan portfolio on a regular basis.  

With the addition of Oak Mortgage Company in 2016, we are now able to offer residential mortgage loan products to customers in Pennsylvania, New Jersey, Delaware, and Florida. A majority of the residential loans originated are currently sold on the secondary market shortly after closing. Oak Mortgage follows the established underwriting policies and guidelines of third party vendors with whom loans are being sold to maintain compliance, but credit risk still exists in the portfolio. Repayment of residential loans held in the portfolio is, in part, dependent on general economic conditions affecting our customers.  

Although management continues to followfollows established underwriting policies and closely monitormonitors loans through Republic’sRepublic's loan review officer, credit risk is still inherent in the portfolio.  The majority of Republic’sRepublic's loan portfolio is collateralized with real estate or other collateral; however, a portion of the commercial portfolio is unsecured, representing loans made to borrowers considered to be of sufficient financial strength to merit unsecured financing.  Republic makes both fixed and variable rate commercial loans with terms typically ranging from one to five years. Variable rate loans are generally tied to the national prime rate of interest.
 
We have been affected by the challenging conditions in the economy and financial markets.  Beginning in mid-2008, like many other commercial lenders, we experienced elevated levels of charge-offs and loan loss provisions and increased amounts of non-performing loans and other real estate owned. During 2009 we instituted a vigilant credit administration process where we select and review a significant portion of our loan portfolio on a regular basis. The sale of several distressed commercial real estate loans and other real estate owned in December 2011 substantially improved asset quality for the Bank and immediately strengthened our balance sheet.  In 2012 and 2013, the loan loss provision and other credit quality cost returned to more normalized levels. We also believe that economic indicators in the markets that we serve continue to show steady signs of improvement which will enable us to continue progress toward consistent and sustainable growth and profitability.
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BranchStore Expansion Plans and Growth Strategy
 
We will carefully evaluate growth opportunities throughout 20142017 and beyond.  Renovation and refurbishment of all existing store locations took place during 2009.  WeThe Bank relocated our Media, PAan existing store to a renovatednew improved site in Wynnewood, PA during 2016. We also opened two new stores located in Washington Township and improved corner location in 2013.  In the first quarter of 2014 we opened a storeMoorestown, NJ utilizing our new and distinctive prototype building in Cherry Hill, NJ.  Relocations2016. The Bank anticipates the continuation of its expansion strategy through the opening of additional new stores in 2017. Relocation of other existing store locations are planned formay also occur in the future as we continue to direct moreenhance our brand and focus towardon constantly improving the retail customer experience. We also anticipate pursuing additional de novo store opportunities in our primary service area in the future. The opening and relocation of these stores is subject to regulatory approval.

The addition of Oak Mortgage as a wholly owned subsidiary in July 2016 provides us with new growth opportunities in the residential lending market. Oak Mortgage is licensed to do business in Pennsylvania, New Jersey, Delaware, and Florida and gives us the ability to serve both new and existing customers throughout our store network.

Securities Portfolio

We maintain an investment securities portfolio.  We purchase investment securities that are in compliance with our investment policies, which are approved annually by our Board of Directors.  The investment policies address such issues as permissible investment categories, credit quality, maturities and concentrations.  At December 31, 20132016 and 2012,2015, approximately 68%86% and 63%78%, respectively, of the aggregate dollar amount of the investment securities consisted of either U.S. government debt securities or U.S. government agency issued mortgage-backed securities.  Credit risk associated with these U.S. government debt securities and the U.S. government agency securities is minimal, with risk-based capital weighting factors of 0% and 20%, respectively.  The remainder of the securities portfolio consists of municipal securities, pooled trust preferred securities, corporate bonds, asset-backed securities, and Federal Home Loan Bank (FHLB) capital stock.

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Supervision and Regulation
 
General

Republic, as a Pennsylvania state chartered bank, is not a member of the Federal Reserve System (“("Federal Reserve”Reserve") and is subject to supervision and regulation by the FDIC and the Pennsylvania Department of Banking and Securities. Our bank holding company is subject to supervision and regulation by the Board of Governors of the Federal Reserve under the Federal Bank Holding Company Act of 1956, as amended (“("BHC Act”Act").  As a bank holding company, our activities and those of Republic are limited to the business of banking and activities closely related or incidental to banking, and we may not directly or indirectly acquire the ownership or control of more than 5% of any class of voting shares or substantially all of the assets of any company, including a bank, without the prior approval of the Federal Reserve.
 
We are subject to extensive requirements and restrictions under federal and state law, including requirements to maintain reserves against deposits, restrictions on the types and amounts of loans that may be granted and the interest that may be charged thereon, and limitations on the types of investments that may be made and the types of services that may be offered. Various federal and state consumer laws and regulations also affect the operations of Republic. In addition to the impact of regulation, commercial banks are affected significantly by the actions of the Federal Reserve attempting to control the money supply and credit availability in order to influence market interest rates and the national economy.   
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The following discussion summarizes certain banking laws and regulations that affect us and Republic.

Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010

On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”"Dodd-Frank Act").  The Dodd-Frank Act has and will continue to havehad 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 established 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 below.
•Source of Strength.  According to Federal Reserve policy, bank holding companies are expected to act as a source of financial strength to each subsidiary bank and to commit resources to support each such subsidiary.  The Dodd-Frank Act codifies the source-of-strength doctrine and expands upon the Federal Reserve policy, defining “source"source of strength”strength" to mean the “ability"ability of a company that directly or indirectly controls an insured depository institution to provide financial assistance to such insured depository institution in the event of the financial distress of the insured depository institution.”"
•Increased Capital Standards and Enhanced Supervision.  The federal banking agencies are required to establishestablished minimum leverage and risk-based capital requirements for banks and bank holding companies.  These new standards are summarized under “Capital Adequacy”"Capital Adequacy" below. The Dodd-Frank Act also requires capital requirements to be countercyclical such that the required amount of capital increases in times of economic expansion and decreases in times of economic contraction consistent with safety and soundness.

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•The Consumer Financial Protection Bureau (“Bureau”("Bureau").  The Dodd-Frank Act created the Bureau within the Federal Reserve.  The Bureau is tasked with establishing and implementing rules and regulations under certain federal consumer protection laws with respect to the conduct of providers of certain consumer financial products and services.  The Bureau has broad rulemaking, supervisory and enforcement powers for a wide range of consumer protection laws applicable to banks with greater than $10 billion or more in assets.  Smaller institutions will be subject to rules promulgated by the Bureau, but will continue to be examined and supervised by federal banking regulators for consumer compliance purposes. In addition, the Dodd-Frank Act permits states to adopt consumer protection laws and regulations that are more stringent than those regulations promulgated by the Bureau and state attorneys general are permitted to enforce consumer protection rules adopted by the Bureau against state-chartered institutions.
•Corporate Governance.  The Dodd-Frank Act requires publicly traded companies to provide their shareholders with 1) a non-binding shareholder vote on executive compensation; 2) a non-binding shareholder vote on the frequency of such vote; 3) disclosure of “golden parachute”"golden parachute" arrangements in connection with specified change in control transactions; and 4) a non-binding shareholder vote on golden parachute arrangements in connection with these change in control transactions.
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•Debit Card Interchange Fees.  The Dodd-Frank Act requires that the amount of any interchange fee charged by a debit card issuer with respect to a debit card transaction be reasonable and proportional to the cost incurred by the issuer.  While the restrictions on interchange fees do not apply to banks that, together with their affiliates, have assets of less than $10 billion, the rule could affect the competitiveness of debit cards issued by smaller banks.

•Interstate Banking and Branching.  The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the “Interstate"Interstate Banking Law”Law") amended various federal banking laws then in effect to provide for nationwide interstate banking, interstate bank mergers and interstate branching. The interstate banking provisions allowed for the acquisition by a bank holding company of a bank located in another state by merger or b acquisition, although individual states had the ability to “opt out”"opt out" of such provision.  The Dodd-Frank Act relaxes national branching requirements, allowing national and state banks to establish branches in any state if that state would permit the establishment of the branch by a state bank chartered de novo in that state.

•Deposit Insurance.   The Dodd-Frank Act permanently increased the maximum deposit insurance amount to $250,000 for insured deposits.  Amendments to the Federal Deposit Insurance Act, which were mandated by the Dodd-Frank Act, have revised the assessment base against which an insured depository institution’sinstitution's deposit insurance premiums paid to the Deposit Insurance Fund (“DIF”("DIF") are calculated.  Under the amendments, the assessment base is no longer the institution’sinstitution's deposit base, but rather its average consolidated total assets less its average tangible equity during the assessment period.  Additionally, the Dodd-Frank Act made changes to the minimum designated reserve ratio of the DIF, by increasing the minimum from 1.15 percent to 1.35 percent of the estimated amount of total insured deposits by 2020 and eliminating the requirement that the FDIC pay dividends to depository institutions when the reserve ratio exceeds certain thresholds.  The Dodd- Frank Act also provided that, effective July 21, 2011, depository institutions may pay interest on demand deposits.  For further discussion of deposit insurance regulatory matters, see “Deposit"Deposit Insurance and Assessments”Assessments" below.
•Transactions with Affiliates.  Under federal law, we are subject to restrictions that limit certain types of transactions between Republic and its non-bank affiliates.  In general, we are subject to quantitative and qualitative limits on extensions of credit, purchases of assets and certain other transactions involving us and our non-bank affiliates.  Transactions between Republic and its non-bank affiliates are required to be on arms length terms.  The Dodd-Frank Act enhanced the requirements for certain transactions with affiliates under Section 23A and 23B of the Federal Reserve Act, including expanding the definition of “covered transactions”"covered transactions" and “affiliates,”"affiliates," as well as increasing the amount of time for which collateral requirements regarding covered transactions must be maintained.

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•Transactions with Insiders.  Under the Dodd-Frank Act, insider transaction limitations are expanded through the strengthening of loan restrictions to insiders and the expansion of the types of transactions subject to the various limits, including derivative transactions, repurchase agreements, reverse repurchase agreements and securities lending or borrowing transactions.  Restrictions have also been placed on certain asset sales to and from an insider to an institution, including requirements that such sales be on market terms and, if representing more than 10% of capital, approved by the institution’sinstitution's board of directors.
• Compensation Practices.  The Dodd-Frank Act provides that the appropriate federal regulators must establish standards prohibiting as an unsafe and unsound practice any compensation plan of a bank holding company or other “covered financial institution” that provides an insider or other employee with “excessive compensation” or could lead to a material financial loss to such firm.  The federal bank regulatory agencies have issued policies on compensation practices including consideration of the impact of activities to achieve incentive compensation with the related risk to the financial institution of such behavior.  Together, the Dodd-Frank Act and the guidance on compensation may impact the current compensation policies at the Company.
•      Holding Company Capital Levels.  The Dodd-Frank Act requires bank regulators to establish minimum capital levels for holding companies that are at least as stringent as those applicable to depository institutions.  All trust preferred securities, or TRUPs, issued prior to May 19, 2010 by bank holding companies with less than $15 billion in assets are permanently grandfathered in Tier 1 capital, subject to a limitation of 25% of Tier 1 capital.
 
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Many of the requirements of the Dodd-Frank Act will be implemented over time, and most are subject to implementing regulations that have or will become effective over the course of several years.  Given the complexity associated with the manner in which the provisions of the Dodd-Frank Act will be implemented by the various regulatory agencies through regulations, the full extent of the impact such requirements will have on financial institutions’institutions' operations is unclear.  The changes resulting from the Dodd-Frank Act may impact the profitability of our business activities, require changes to certain of our business practices, impose upon us more stringent capital, liquidity and leverage ratio requirements or otherwise adversely affect our business. These changes may also require us to invest significant management attention and resources to evaluate and make necessary changes in order to comply with new statutory and regulatory requirements.

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.

Gramm-Leach-Bliley Act
 
The federal Gramm-Leach-Bliley Act (the “GLB Act”"GLB Act"), enacted in 1999:1999 repealed the key provisions of the Glass Steagall Act so as to permit commercial banks to affiliate with investment banks (securities firms); amended the BHC Act to permit qualifying bank holding companies to engage in many types of financial activities that were not permitted for banks themselves; and permitted subsidiaries of banks to engage in a broad range of financial activities that were not permitted for banks themselves.
 
The result was to permit banking companies to offer a wider range of financial products and services to combine with other types of financial companies, such as securities and insurance companies. The impact of the GLB Act has, however, now been substantially limited by the Dodd-Frank Act and regulations issued by the Federal Reserve thereunder, specifically the so-called “Volcker"Volcker Rule,”" which will limit the ability of banks and their affiliates to invest in, or to engage in, non-banking activities for their own account.
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The GLB Act created a new type of bank holding company called a “financial"financial holding company” (“FHC”company" ("FHC").  An FHC is authorized to engage in any activity that is “financial"financial in nature or incidental to financial activities”activities" and any activity that the Federal Reserve determines is “complementary"complementary to financial activities”activities" and does not pose undue risks to the financial system.  Among other things, “financial"financial in nature”nature" activities include securities underwriting and dealing, insurance underwriting and sales, and certain merchant banking activities.  A bank holding company qualifies to become an FHC if each of its depository institution subsidiaries is “well"well capitalized,” “well" "well managed,”" and has a rating under the Community Reinvestment Act (“CRA”("CRA") of “satisfactory”"satisfactory" or better.  A qualifying bank holding company becomes an FHC by filing with the Federal Reserve an election to become an FHC.  We have not elected to become an FHC.  Bank holding companies that do not qualify or elect to become FHCs will be limited in their activities to those previously permitted by law and regulation.
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In addition, the GLB Act provided significant new protections for the privacy of customer information.  These provisions apply to any company the business of which is engaging in activities permitted for an FHC, even if it is not itself an FHC.  The GLB Act subjected a financial institution to four new requirements regarding non-public information about a customer.  The financial institution must: adopt and disclose a privacy policy; give customers the right to “opt out”"opt out" of disclosures to non-affiliated parties; not disclose any information to third party marketers; and follow regulatory standards to protect the security and confidentiality of customer information.

Sarbanes-Oxley Act of 2002
 
The Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”("Sarbanes-Oxley") comprehensively revised the laws affecting corporate governance, auditing and accounting, executive compensation and corporate reporting for entities, such as us, with equity or debt securities registered under the Exchange Act. Among other things, Sarbanes-Oxley and its implementing regulations have established new membership requirements and additional responsibilities for our audit committee, imposed restrictions on the relationship between us and our outside auditors (including restrictions on the types of non-audit services our auditors may provide to us), imposed additional responsibilities for our external financial statements on our chief executive officer and chief financial officer, and expanded the disclosure requirements for our corporate insiders. The requirements are intended to allow shareholders to more easily and efficiently monitor the performance of companies and directors.

Regulatory Restrictions on Dividends
  
Dividend payments by Republic to usthe holding company are subject to the Pennsylvania Banking Code of 1965 (“("Banking Code”Code") and the Federal Deposit Insurance Act (“FDIA”("FDIA"). Under the Banking Code, no dividends may be paid except from “accumulated"accumulated net earnings”earnings" (generally, undivided profits). Under the FDIA, an insured bank may pay no dividends if the bank is in arrears in the payment of any insurance assessment due to the FDIC. Under the Banking Code, Republic would be limited to $10.8$23.9 million of dividends payable plus an additional amount equal to its net profit for 2014,2017, up to the date of any such dividend declaration. However, dividends would be further limited in order to maintain capital ratios as discussed in “Capital Adequacy”"Capital Adequacy".
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Federal regulatory authorities have adopted standards for the maintenance of adequate levels of regulatory capital by banks. Adherence to such standards further limits the ability of Republic to pay dividends to us.

Dividend Policy
 
We have not paid any cash dividends on our common stock, and have no plans to pay any cash dividends in 20142017 or in the foreseeable future.  See Item 5. Market for Registrant’sRegistrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities of this Form 10-K for more information.
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Deposit Insurance and Assessments

The FDIC is an independent federal agency that insures deposits, up to prescribed statutory limits, of federally insured banks and savings institutions and safeguards the safety and soundness of the banking and savings industries. The deposits of Republic are insured up to applicable limits per insured depositor by the FDIC. As noted above, pursuant to the Dodd-Frank Act, the maximum deposit insurance amount has been permanently increased to $250,000.

As an FDIC-insured bank, Republic is subject to FDIC insurance assessments.  The FDIC regulations assess insurance premiums for small insured depository institutions based on a risk-based assessment system.  Under this assessment system, the FDIC evaluates the risk of each financial institution based on regulatory capital ratios and other supervisory factors. The rules base assessments on an institution’sinstitution's average consolidated total assets less its average tangible equity, as opposed to total deposits.  The base assessment rates for small insured depository institutions range from 2.5 to 9 basis points for the least risky institutions to 30 to 45 basis points for the riskiest.  The rate schedules will automatically adjust in the future as the Deposit Insurance Fund ("DIF") reserve ratio reaches certain milestones.

The FDIC has authority to increase insurance assessments.  Any future increase in insurance premiums may adversely affect our results of operations.

The Dodd-Frank Act also requires the FDIC to take such steps as are necessary to increase the reserve ratio of the DIF from 1.15% to 1.35% of insured deposits by 2020. The FDIC has issued rules regarding the method to be used to achieve a 1.35% reserve ratio by 2020 and offset the effect on institutions with assets less than $10 billion in assets.

All FDIC-insured depository institutions pay an annual assessment to provide funds for the payment of interest on bonds issued by the Financing Corporation, a federal corporation chartered under the authority of the Federal Housing Finance Board.  The bonds, commonly referred to as Financing Corporation (“FICO”("FICO") bonds, were issued to capitalize the Federal Savings and Loan Insurance Corporation. These assessments will continue until the FICO bonds mature in 2017 through 2019.

Capital Adequacy

The Federal Reserve has adoptedissued risk-based and leverage capital rules applicable to U.S. banking organizations such as the Company and Republic.  These guidelines are intended to reflect the relationship between the banking organization's capital and the degree of risk associated with its operations based on transactions recorded on-balance sheet as well as off-balance sheet items.  The Federal Reserve may from time to time require that a banking organization maintain capital above the minimum levels discussed below, due to the banking organization's financial condition or actual or anticipated growth.
The capital adequacy rules define qualifying capital instruments and specify minimum amounts of capital as a percentage of assets that banking organizations are required to maintain.  Common equity Tier 1 capital generally includes common stock and related surplus, retained earnings and, in certain cases and subject to certain limitations, minority interest in consolidated subsidiaries, less goodwill, other non-qualifying intangible assets and certain other deductions.  Tier 1 capital for banks and bank holding companies such as us. The required minimum ratio of total capital to risk-weighted assets (including off-balance sheet activities, such as standby letters of credit) is 8.0%. At least halfgenerally consists of the total capital is required to besum of common equity Tier 1 capital, consisting principally of common shareholders’ equity,elements, non-cumulative perpetual preferred stock, and related surplus in certain cases and subject to limitations, minority interests in the equity accounts of consolidated subsidiaries that do not qualify as common equity Tier 1 capital, less goodwill. The remainder,certain deductions.  Tier 2 capital may consistgenerally consists of a limited amount ofhybrid capital instruments, perpetual debt and mandatory convertible debt securities, cumulative perpetual preferred stock, term subordinated debt and intermediate-term preferred stock, and, subject to limitations, allowances for loan losses.  The sum of Tier 1 and Tier 2 capital less certain hybrid capital instrumentsrequired deductions represents qualifying total risk-based capital.  Prior to the effectiveness of certain provisions of the Dodd-Frank Act, bank holding companies were permitted to include trust preferred securities and other debt securities,cumulative perpetual preferred stock andin Tier 1 capital, subject to limitations.  However, the Federal Reserve's capital rule applicable to bank holding companies permanently grandfathers non-qualifying capital instruments, including trust preferred securities, issued before May 19, 2010 by depository institution holding companies with less than $15 billion in total assets as of December 31, 2009, subject to a limited amountlimit of the general loan loss allowance.25% of Tier 1 capital.  In addition, under rules that became effective January 1, 2015, accumulated other comprehensive income (positive or negative) must be reflected in Tier 1 capital; however, we were permitted to make a one-time, permanent election to continue to exclude accumulated other comprehensive income from capital. We have made this election.
 
 
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In addition toUnder the capital rules, risk-based capital guidelines,ratios are calculated by dividing common equity Tier 1, Tier 1, and total risk-based capital, respectively, by risk-weighted assets.  Assets and off-balance sheet credit equivalents are assigned to one of several categories of risk-weights, based primarily on relative risk.  Under the Federal Reserve has establishedReserve's rules, Republic is required to maintain a minimum leverage ratio (Tiercommon equity Tier 1 capital to averageratio requirement of 4.5%, a minimum Tier 1 capital ratio requirement of 6%, a minimum total assets) guidelines for bank holding companies. These guidelines currently provide forcapital requirement of 8% and a minimum leverage ratio of 3% for those bank holding companies that have the highest regulatory examination ratings and are not contemplating or experiencing significant growth or expansion. All other bank holding companies currently must maintain a minimum Tier 1 leverage ratiorequirement of 4% with higher leverage capital ratios required for bank holding companies that have significant financial and/or operational weakness, a high risk profile, or are undergoing or anticipating rapid growth. Both we and Republic are in compliance with these guidelines. The FDIC subjects Republic to similar capital requirements.

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 implement higher minimum capital requirements, add a new common equity tier 1 capital requirement, and establish 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 are 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 remains at 8.0% under the new rules (10.0% to be considered “well capitalized”).  Under the new rules, in order to avoid limitations on capital distributions (including dividend payments and certain discretionary bonus payments to executive officers), a banking organization must hold a capital conservation buffer comprised of common equity tier 1 capital above its minimum risk-based capital requirements in an amount greater than 2.5% of total risk-weighted assets.  The new minimum capital requirements are effectiveconservation buffer, which is composed of common equity tier 1 capital, began on January 1, 2015. The2016 at the 0.625% level and will be phased in over a three year period (increasing by that amount on each January 1, until it reaches 2.5% on January 1, 2019).  Implementation of the deductions and other adjustments to common equity tier 1 capital contribution buffer requirements phase inbegan on January 1, 2015 and will be phased-in over a three-year period beginning(beginning at 40% on January 1, 2016.2015, 60% on January 1, 2016 and an additional 20% per year thereafter).
The new capital to risk-adjusted assets requirements (which includes the impact of the capital conservation buffer effective January 1, 2017) are as follows:
  Minimum Capital  
  Effective January 1, Well
  2016 2017 Capitalized
Common equity tier 1 capital ratio 5.125% 5.75% 6.5%
Tier 1 capital ratio 6.625% 7.25% 8.0%
Total capital ratio 8.625% 9.25% 10.0%

Republic is considered "well capitalized" under the FDIC's prompt corrective action rules and the Company is considered "well capitalized" under the Federal Reserve's rules applicable to bank holding companies.

The risk-based capital standards are required to take adequate account of interest rate risk, concentration of credit risk and the risks of non-traditional activities. 

Legislative and Regulatory Changes
 
We are heavily regulated by regulatory agencies at the federal and state levels. We, like most of our competitors, have faced and expect to continue to face increased regulation and regulatory and political scrutiny, which creates significant uncertainty for us as well as the financial services industry in general.
 
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Future Legislative and Regulatory Developments
 
It is conceivable that compliance with current or future legislative and regulatory initiatives could require us to change certain of our business practices, impose significant additional costs on us, limit the products that we offer, result in a significant loss of revenue, limit our ability to pursue business opportunities in an efficient manner, require us to increase our regulatory capital, cause business disruptions, impact the value of assets that we hold or otherwise adversely affect our business, results of operations, or financial condition.  We have recently witnessed the introduction of a number of regulatory proposals that could substantially impact us and others in the financial services industry.  The extent of changes imposed by, and frequency of adoption of, any regulatory initiatives could make it more difficult for us to comply in a timely manner, which could further limit our operations, increase compliance costs or divert management attention or other resources.  The long-term impact of legislative and regulatory initiatives on our business practices and revenues will depend upon the successful implementation of our strategies, consumer behavior, and competitors’competitors' responses to such initiatives, all of which are difficult to predict.  Additionally, we may pursue, through appropriate avenues, legislative and regulatory advocacy to provide our input on possible legislative and regulatory developments.
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Profitability, Monetary Policy and Economic Conditions
 
In addition to being affected by general economic conditions, the earnings and growth of Republic will be affected by the policies of regulatory authorities, including the Pennsylvania Department of Banking and Securities, the FDIC, and the Federal Reserve.  An important function of the Federal Reserve is to regulate the supply of money and other credit conditions in order to manage interest rates.  The monetary policies and regulations of the Federal Reserve have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future.  The effects of such policies upon the future business, earnings and growth of Republic cannot be determined.

Employees

As of December 31, 2013,2016, we had a total of 226306 full-time equivalent employees.

Item 1A:  Risk Factors
 
In addition to the other information included elsewhere in this report and in “Management’s"Management's Discussion and Analysis of Results of Operations and Financial Condition,”" the following factors could significantly affect our business, financial condition, results of operations, or future prospects. Any of the following risks, either alone or taken together, could materially and adversely affect our business, financial condition, results of operations, or future prospects.  If one or more of these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, our actual results may be materially adversely affected. There may be additional risks that we do not presently know or that we currently believe are immaterial which could also materially adversely affect our business, financial condition, results of operations, or future prospects.

We are subject to credit risk in connection with our lending activities, and our financial condition and results of operations may be negatively impacted by economic conditions and other factors that adversely affect our borrowers.
Our financial condition and results of operations are affected by the ability of our borrowers to repay their loans, and in a timely manner.  Lending money is a significant part of the banking business.  Borrowers, however, do not always repay their loans.  The risk of non-payment is assessed through our underwriting and loan review procedures based on several factors including credit risks of a particular borrower, changes in economic conditions, the duration of the loan, and in the case of a collateralized loan, uncertainties as to the future value of the collateral and other factors.  Despite our efforts, we do and will experience loan losses, and our financial condition and results of operations will be adversely affected. Our non-performing assets were approximately $14.5$29.1 million at December 31, 2013.2016.  Our allowance for loan losses was approximately $12.3$9.2 million at December 31, 2013.2016. Our loans between thirty and eighty-nine days delinquent totaled $28.5$1.1 million at December 31, 2013.2016.
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Our concentration of commercial real estate loans could result in increased loan losses and costs of compliance.
A substantial portion of our loan portfolio is comprised of commercial real estate loans.  The commercial real estate market is cyclical and poses risks of loss to us because of the concentration of commercial real estate loans in our loan portfolio, and the lack of diversity in risk associated with such a concentration.  Banking regulators have been giving and continue to give commercial real estate lending greater scrutiny, and banks with larger commercial real estate loan portfolios are expected by their regulators to implement improved underwriting, internal controls, risk management policies and portfolio stress-testing practices to manage risks associated with commercial real estate lending.  In addition, commercial real estate lenders are making greater provisions for loan losses and accumulating higher capital levels as a result of commercial real estate lending exposures.  Additional losses or regulatory requirements related to our commercial real estate loan concentration could materially adversely affect our business, financial condition and results of operations.
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Our allowance for loan losses may not be adequate to absorb actual loan losses, and we may be required to make further provisions for loan losses and charge off additional loans in the future, which could materially and adversely affect our business.
We attempt to maintain an allowance for loan losses, established through a provision for loan losses accounted for as an expense, which is adequate to absorb losses inherent in our loan portfolio.  If our allowance for loan losses is inadequate, it may have a material adverse effect on our financial condition and results of operations.
The determination of the allowance for loan losses inherently involves a high degree of subjectivity and judgment and requires us to make significant estimates of current credit risks and future trends, all of which may undergo material changes.  Changes in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of our control, may require us to increase our allowance for loan losses. Increases in nonperforming loans have a significant impact on our allowance for loan losses.  Our allowance for loan losses may not be adequate to absorb actual loan losses. If trends in the real estate markets were to deteriorate, we could experience increased delinquencies and credit losses, particularly with respect to real estate construction and land acquisition and development loans and one-to-four family residential mortgage loans. As a result, we may have to make provisions for loan losses and charge off loans in the future, which could materially adversely affect our financial condition and results of operations. 
In addition to our internal processes for determining loss allowances, bank regulatory agencies periodically review our allowance for loan losses and may require us to increase the provision for loan losses or recognize further loan charge-offs, based on judgments that differ from those of our management.  If loan charge-offs in future periods exceed the allowance for loan losses, we will need to increase our allowance for loan losses. Furthermore, growth in our loan portfolio would generally lead to an increase in the provision for loan losses. Any increases in our allowance for loan losses will result in a decrease in net income and capital, and may have a material adverse effect on our financial condition, results of operations and cash flows.
 
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We are required to make significant estimates and assumptions in the preparation of our financial statements, including our allowance for loan losses, and our estimates and assumptions may not be accurate.
The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, or GAAP, require our 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 income and expense during the reporting periods.  Critical estimates are made by management in determining, among other things, the allowance for loan losses, carrying values of other real estate owned, assessment of other than temporary impairment (“OTTI”("OTTI") of investment securities, fair value of financial instruments, and the realization of deferred income taxes.  If our underlying estimates and assumptions prove to be incorrect, our financial condition and results of operations may be materially adversely effected.
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affected.
Our results of operations may be materially and adversely affected by other-than-temporary impairment charges relating to our investment portfolio.
In prior years we recorded other-than-temporary impairment charges for certain bank pooled trust preferred securities, and we may be required to record future impairment charges on our investment securities if they suffer declines in value that we determine are other-than-temporary. Numerous factors, including the lack of liquidity for re-sales of certain investment securities, the absence of reliable pricing information for investment securities, adverse changes in the business climate, adverse regulatory actions or unanticipated changes in the competitive environment, could have a negative effect on our investment portfolio in future periods. If an impairment charge is significant enough, it could affect the Bank’sBank's ability to pay dividends, which could materially adversely affect us. Significant impairment charges could also negatively impact our regulatory capital ratios and result in us not being classified as “well-capitalized”"well-capitalized" for regulatory purposes.
Our net interest income, net income and results of operations are sensitive to fluctuations in interest rates.
Our net income depends on the net income of Republic, and Republic is dependent primarily upon its net interest income, which is the difference between the 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.
Our results of operations will be affected by changes in market interest rates and other economic factors beyond our control.  If our interest-earning assets have longer effective maturities than our interest-bearing liabilities, the yield on our interest-earning assets generally will adjust more slowly than the cost of our interest-bearing liabilities, and, as a result, our net interest income generally will be adversely affected by material and prolonged increases in interest rates, and positively affected by comparable declines in interest rates.  Conversely, if liabilities re-price more slowly than assets, net interest income would be adversely affected by declining interest rates, and positively affected by increasing interest rates.  At any time, our assets and liabilities will reflect interest rate risk of some degree.
In addition to affecting interest income and expense, changes in interest rates also can affect the value of our interest-earning assets, comprising fixed and adjustable-rate instruments, as well as the ability to realize gains from the sale of such assets.  Generally, the value of fixed-rate instruments fluctuates inversely with changes in interest rates, and changes in interest rates may therefore have a material adverse affect on our results of operations.
 
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We are a holding company dependent for liquidity on payments from our banking subsidiary, which payments are subject to restrictions.
We are a holding company and depend on dividends, distributions and other payments from Republic to fund dividend payments, if any, and to fund all payments on obligations. Republic and its subsidiaries are subject to laws that restrict dividend payments or authorize regulatory bodies to block or reduce the flow of funds from those subsidiaries to us.  Restrictions or regulatory actions of that kind could impede our access to funds that we may need to make payments on our obligations or dividend payments, if any.  In addition, our right to participate in a distribution of assets upon a subsidiary’ssubsidiary's liquidation or reorganization is subject to the prior claims of the subsidiary’ssubsidiary's creditors.
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We may be required to pay higher FDIC premiums or special assessments in the future that could adversely affect our earnings.
The FDIC’s insurance fund has been depleted over recent years as a result of bank failures across the country.  The Dodd-Frank Act requires the FDIC to increase reserves against future losses, which requires increased assessments that are to be borne primarily by institutions with assets of greater than $10 billion. In addition, the FDIC may issue a special assessment across all FDIC insured institutions.  Any future increases in FDIC assessments or higher periodic fees could adversely affect us.
Our business is concentrated in and dependent upon the continued growth and welfare of our primary market area.

Our primary service area consists of Greater Philadelphia and Southern New Jersey.  Our success depends upon the business activity, population, income levels, deposits and real estate activity in this area.  Although our customers’customers' businesses and financial interests may extend well beyond this area, adverse economic conditions that affect our primary service area could reduce our growth rate, affect the ability of our customers to repay their loans to us, and generally adversely affect our financial condition and results of operations. Because of our geographic concentration, we are less able than other regional or national financial institutions to diversify our credit risks across multiple markets.
Unfavorable economic and financial market conditions may adversely affect our financial position and results of operations.
Although the U.S. economy has continued to gradually improve from the depressed levels of 2008 and early 2009, economic growth has been slow and uneven.  We are operating in a challenging and uncertain economic environment, including generally uncertain conditions nationally and globally. While economic conditions in the United States are showing signs of recovery,have gradually improved, there can be no assurance that these difficult conditions will continue to improve.  Concerns over the stability of the financial markets and the economy have resulted in decreased lending by financial institutions to their customers and to each other.  This market turmoil and tightening of credit has led to increased commercial and consumer deficiencies, lack of customer confidence, increased market volatility and widespread reduction in general business activity.not re-emerge.

The existing economicEconomic pressure on consumers and businesses and theany resulting lack of confidence in the financial markets may adversely affect our business, financial condition, results of operations and stock price.  A worsening of current economic conditions would likely exacerbate the adverse effects of existing market conditions on us and others in the industry.  In particular, we may face the following risks in connection with these events:

·increased regulation of our industry and  increased compliance costs;

·hampering our ability to assess the creditworthiness of customers and to estimate the losses inherent in our credit exposure, as such assessments are made more complex by these difficult market and economic conditions;

·increasing our credit risk, by increasing the likelihood that our major customers become insolvent and unable to satisfy their obligations to us;
·impairing our ability to originate loans, by making our customers and prospective customers less willing to borrow, and making loans that meet our underwriting criteria difficult to find; and
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·limiting our interest income, by depressing the yields we are able to earn on our investment portfolio.
 
These potential effects are difficult to forecast and mitigate.  Distress in the credit markets and issues relating to liquidity among financial institutions have resulted in the failure of some financial institutions and others have been forced to seek acquisition partners. The United States and other governments have taken unprecedented steps in an effort to stabilize the financial system, including investing in financial institutions.  These efforts, however, may not succeed.  Our business as well as our financial condition and results of operations could be adversely affected by disruption and volatility in financial markets, continued capital and liquidity concerns regarding financial institutions, limitations resulting from further governmental action in an effort to stabilize or provide additional regulation of the financial system.
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Our ability to use net operating loss carryforwards to reduce future tax payments may be limited.
As of December 31, 2013,2016, we had approximately $33.8$24.0 million of U.S. Federal net operating loss carryforwards, referred to as “NOLs,”"NOLs," available to reduce taxable income in future years.
Utilization of the NOLs may be subject to a substantial annual limitation due to ownership change limitations that may have occurred or that could occur in the future, as required by Section 382 of the Internal Revenue Code of 1986, as amended, referred to as the “Code.”"Code." These ownership changes may limit the amount of NOLs that can be utilized annually to offset future taxable income and tax, respectively. In general, an ownership change, as defined by Section 382 of the Code results from a transaction or series of transactions over a three-year period resulting in an ownership change of more than 50 percentage points of the outstanding stock of a company by certain stockholders or public groups. In the event of an ownership change, Section 382 imposes an annual limitation on the amount of post-ownership change taxable income a corporation may offset with pre-ownership change NOLs. The limitation imposed by Section 382 for any post-change year would be determined by multiplying the value of our stock immediately before the ownership change (subject to certain adjustments) by the applicable long-term tax-exempt rate. Any unused annual limitation may be carried over to later years, and the limitation may under certain circumstances be increased by built-in gains which may be present with respect to assets held by us at the time of the ownership change that are recognized in the five-year period after the ownership change.
In addition, the ability to use NOLs will be dependent on our ability to generate taxable income. The NOLs may expire before we generate sufficient taxable income. There were no NOLs that expired in the fiscal years ended December 31, 20132016 and December 31, 2012.2015. There are no NOLs that could expire if not utilized for the year ending December 31, 2014.
2017.
Our assets as of December 31, 20132016 included a deferred tax asset and we may not be able to realize the full amount of such asset.
We recognize deferred tax assets and liabilities based on differences between the financial statement carrying amounts and the tax bases of assets and liabilities. At December 31, 2013,2016, the net deferred tax asset was approximately $6.1$9.2 million, compared to a balance of approximately $3.6$6.5 million at December 31, 2012. The increase in the net deferred tax asset resulted mainly from an increase in the unrealized losses on securities available for sale and OREO writedowns in 2013.
2015.
We regularly review our deferred tax assets for recoverability to determine whether it is more likely than not (i.e. 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 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’smanagement's evaluation of both positive and negative evidence.
16
Based on the analysis of the available positive and negative evidence, we determined that a valuation allowance should be recorded as of December 31, 2013.  As a result of cumulative losses in recent years and the slow and uneven growth in the current economic environment, we2016. We did not use projections of future taxable income, exclusive of reversing temporary timing differences and carryforwards, as a factor to project recoverability of the deferred tax asset balance.   We will exclude future taxable income as a factor until we can show consistentincreasing and sustainedsustainable profitability. The release of this valuation allowance would have a positive impact on future earnings.  There can be no assurance as to when we could be in a position to recapture the benefits of our deferred tax asset.  Further discussion on the analysis of our deferred tax asset can be found in the “Provision"Provision (Benefit) for Income Taxes”Taxes" section of Item 7. Management’sManagement's Discussion and Analysis of Financial Condition and Results of Operations.
 
17
Potential acquisitions may disrupt the Company's business and dilute shareholder value.

We regularly evaluate opportunities to acquire and invest in banks and in other complementary businesses. As a result, we may engage in negotiations or discussions that, if they were to result in a transaction, could have a material effect on our operating results and financial condition, including short and long-term liquidity and capital structure. Our acquisition activities could be material to us. For example, we could issue additional shares of common stock in a purchase transaction, which could dilute current shareholders'ownership interest. These activities could require us to use a substantial amount of cash, other liquid assets, and/or incur debt. In addition, if goodwill recorded in connection with our prior or potential future acquisitions were determined to be impaired, then we would be required to recognize a charge against our earnings, which could materially and adversely affect our results of operations during the period in which the impairment was recognized. Any potential charges for impairment related to goodwill would not impact cash flow, tangible capital or liquidity but would decrease shareholders' equity.

Our acquisition activities could involve a number of additional risks, including the risks of:

·incurring time and expense associated with identifying and evaluating potential acquisitions and negotiating potential transactions;

·using inaccurate estimates and judgments to evaluate credit, operations, management, and market risks with respect to the target institution or its assets;

·the time and expense required to integrate the operations and personnel of the combined businesses;

·creating an adverse short-term effect on our results of operations; and

·losing key employees and customers as a result of an acquisition that is poorly conceived.

We may not be successful in overcoming these risks or any other problems encountered in connection with potential acquisitions. Our inability to overcome these risks could have an adverse effect on our ability to achieve our business strategy and maintain our market value.

We may not be able to manage our growth, which may adversely impact our financial results.
As part of our retail growth strategy, we may expand into additional communities or attempt to strengthen our position in our current markets by opening new stores and acquiring existing stores of other financial institutions.  To the extent that we undertake additional stores openings and acquisitions, we are likely to experience the effects of higher operating expenses relative to operating income from the new operations, which may have an adverse effect on our levels of reported net income, return on average equity and return on average assets. Other effects of engaging in such growth strategies may include potential diversion of our management’smanagement's time and attention and general disruption to our business.
As part of our retail strategy, we plan to open new stores in our primary service area, including Southern New Jersey.  We may not, however, be able to identify attractive locations on terms favorable to us, obtain regulatory approvals, or hire qualified management to operate new stores.  In addition, the organizational and overhead costs may be greater than we anticipate.  New stores may take longer than expected to reach profitability, or may not become profitable.  The additional costs of starting new stores may adversely impact our financial results.
 
18
Our ability to manage growth successfully will depend on whether we can continue to fund our growth while maintaining cost controls, as well as on factors beyond our control, such as national and regional economic conditions and interest rate trends.  If we are not able to control costs, such growth could adversely impact our earnings and financial condition.
Our retail strategy relies heavily on our management team, and the unexpected loss of key managers may adversely affect our operations.
Since June 2008,In recent years, we have been successful in attracting new and talented managementemployees to Republic, to add to our management team.   We believe that our ability to successfully implement our retail strategy will require us to retain and attract additional management experienced in banking and financial services, and familiar with the communities in our market.  Our ability to retain executive officers, the current management teams,team, branch managers and loan officers of Republic will continue to be important to the successful implementation of our strategy.  It is also critical, as we grow, to be able to attract and retain qualified additional members of the management team and qualified loan officers with the appropriate level of experience and knowledge about our market areas to implement the community-based operating strategy. The unexpected loss of services of any key management personnel, or the inability to recruit and retain qualified personnel in the future, could have an adverse effect on our business, financial condition and results of operations.
17
We are subject to numerous governmental regulations and to comprehensive examination and supervision by regulators, which could have an adverse impact on our operations and could restrict the scope of our operations.
Both the Company and Republic operate in a highly regulated environment and are subject to supervision and regulation by several governmental regulatory agencies, including the Board of Governors of the Federal Reserve System, the FDIC and the Pennsylvania Department of Banking and Securities (“PDB”("PDB"). We are subject to federal and state regulations governing virtually all aspects of our activities, including lines of business, capital, liquidity, investments, payment of dividends, and others. Regulations that apply to us are generally intended to provide protection for depositors and customers rather than investors.
We are subject to extensive regulation and supervision under federal and state laws and regulations. See Item 1. Business - Supervision and Regulation. The requirements and limitations imposed by such laws and regulations limit the manner in which we conduct our business, undertake new investments and activities and obtain financing.  Financial institution regulation has been the subject of significant legislation in recent years and may be the subject of further significant legislation in the future, none of which is within our control. For example, Basel III regulations adopted by the federal bank regulatory agencies will require bank holding companies and banks to undertake significant activities to demonstrate compliance with the new and higher capital standards.  Compliance with these rules which are still being analyzed, could impose additional costs on banking entities and their holding companies.  Management is reviewinghas reviewed the new standards and evaluatingwill continue to evaluate all options and strategies to ensure ongoing compliance with the new standards, notwithstanding Republic’sRepublic's current status as well-capitalized.
New programs and proposals may subject us and other financial institutions to additional restrictions, oversight and costs that may have an adverse impact on our business, financial condition, results of operations or the price of our common stock. Federal and state regulatory agencies also frequently adopt changes to their regulations or change the manner in which existing regulations are applied or enforced. We cannot predict the substance or impact of future legislation, regulation or the application thereof. Compliance with such current and potential regulation and scrutiny may significantly increase our costs, impede the efficiency of our internal business processes, require us to increase our regulatory capital and limit our ability to pursue business opportunities in an efficient manner.
 
19
We face significant competition in our market from other banks and financial institutions.
The banking and financial services industry in our market area is highly competitive.  We may not be able to compete effectively in our markets, which could adversely affect our results of operations.  The increasingly competitive environment is a result of changes in regulation, changes in technology and product delivery systems, and consolidation among financial service providers.  Larger institutions have greater access to capital markets, with higher lending limits and a broader array of services.  Competition may require increases in deposit rates and decreases in loan rates, and adversely impact our net interest margin.
We may not have the resources to effectively implement new technologies, which could adversely affect our competitive position and results of operations.
The financial services industry is constantly undergoing technological changes with frequent introductions of new technology-driven products and services.  In addition to better serving customers, the effective use of technology increases efficiency and enables financial institutions to reduce costs.  Our future success will depend in part upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands for convenience as well as to create additional efficiencies in our operations as we continue to grow and expand in our market. Many of our larger competitors have substantially greater resources to invest in technological improvements. As a result, they may be able to offer additional or superior products to those that we will be able to offer, which would put us at a competitive disadvantage. Accordingly, we may not be able to effectively implement new technology-driven products and services or be successful in marketing such products and services to our customers.  If we are unable to do so, our competitive position and results of operations could be adversely affected.
18
Our disclosure controls and procedures and our internal control over financial reporting may not achieve their intended objectives.
We maintain disclosure controls and procedures designed to ensure that we timely report information as specified in the rules and forms of the Securities and Exchange Commission, although we have not always so reported.Commission.  We also maintain a system of internal control over financial reporting.  These controls may not achieve their intended objectives.  Control processes that involve human diligence and compliance, such as our disclosure controls and procedures and internal control over financial reporting, are subject to lapses in judgment and breakdowns resulting from human failures.  Controls can also be circumvented by collusion or improper management override.  Because of such limitations, there are risks that material misstatements due to error or fraud may not be prevented or detected and that information may not be reported on a timely basis.  If our controls are not effective, it could have a material adverse effect on our financial condition, results of operations, and market for our common stock, and could subject us to regulatory scrutiny.
We are subject to certain operational risks, including, but not limited to, customer or employee fraud and data processing system failures and errors.
 
Employee errors and misconduct could subject us to financial losses or regulatory sanctions and seriously harm our reputation. Misconduct by our employees could include hiding unauthorized activities from us, improper or unauthorized activities on behalf of our customers or improper use of confidential information. It is not always possible to prevent employee errors and misconduct, and the precautions we take to prevent and detect this activity may not be effective in all cases. Employee errors could also subject us to financial claims for negligence.
 
20
We maintain a system of internal controls and insurance coverage to mitigate operational risks, including data processing system failures and errors, and customer or employee fraud. Should our internal controls fail to prevent or detect an occurrence, or if any resulting loss is not insured or exceeds applicable insurance limits, it could have a material adverse effect on our business, financial condition and results of operations.
System failure or breaches of our network security could subject us to increased operating costs as well as litigation and other liabilities.
The computer systems and network infrastructure we use could be vulnerable to unforeseen problems. Our operations are dependent upon our ability to protect our computer equipment against damage from physical theft, fire, power loss, telecommunications failure or a similar catastrophic event, as well as from security breaches, denial of service attacks, viruses, worms and other disruptive problems caused by hackers. Any damage or failure that causes an interruption in our operations could have a material adverse effect on our financial condition and results of operations. Computer break-ins, phishing and other disruptions could also jeopardize the security of information stored in and transmitted through our computer systems and network infrastructure, which may result in significant liability to us and may cause existing and potential customers to refrain from doing business with us. Although we, with the help of third-party service providers, intend to continue to implement security technology and establish operational procedures to prevent such damage, these security measures may not be successful. In addition, advances in computer capabilities, new discoveries in the field of cryptography or other developments could result in a compromise or breach of the algorithms we and our third-party service providers use to encrypt and protect customer transaction data. A failure of such security measures could have a material adverse effect on our financial condition and results of operations.
19
If we want to, or are compelled to, raise additional capital in the future, that capital may not be available to us when it is needed or on terms that are favorable to us or current shareholders.
Federal banking regulators require us, and Republic, to maintain capital to support our operations.  Regulatory capital ratios are defined and required ratios are established by laws and regulations promulgated by banking regulatory agencies.  At December 31, 2013,2016, our regulatory capital ratios were above “well capitalized”"well capitalized" levels under current bank regulatory guidelines. To be “well"well capitalized,”" banking companies generally must maintain a Tier 1 leverage ratio of at least 5%, a Common Equity Tier 1 ratio of at least 6.5%, a Tier 1 risk-based capital ratio of at least 6%8%, and a total risk-based capital ratio of at least 10%. Regulators, however, may require us, or Republic, to maintain higher regulatory capital ratios. For example, regulators recently have required some banks to attain a Tier 1 leverage ratio of at least 8%, a Tier 1 risk-based capital ratio of at least 10%, and a total risk-based capital ratio of at least 12%.  In addition, as discussed in Item 1. Business – Supervision and Regulation - Capital Adequacy, in July 2013 the FDIC and other federal banking agencies adopted new standards revising regulatory capital requirements, which establish new higher capital ratio requirements and narrow the definitions of capital.

Our ability to raise additional capital in the future will depend on conditions in the capital markets at that time, which are outside of our control, on our financial performance and on other factors. Accordingly, we may not be able to raise additional capital on terms and time frames acceptable to us, or at all.  If we cannot raise additional capital in sufficient amounts when needed, our ability to comply with regulatory capital requirements could be materially impaired. Additionally, the inability to raise capital in sufficient amounts may adversely affect our operations, financial condition and results of operations.  Our ability to borrow could also be impaired by factors that are nonspecific to us, such as disruption of the financial markets or negative news and expectations about the prospects for the financial services industry.  If we raise capital through the issuance of additional shares of our common stock or other securities, we would likely dilute the ownership interests of investors, and could dilute the per share book value and earnings per share of our common stock.  Furthermore, a capital raise through issuance of additional shares may have an adverse impact on our stock price.
 
21
We are exposed to environmental liabilities with respect to real estate that we have or had title to in the past.
A significant portion of our loan portfolio is secured by real property. In the course of our business, we may foreclose, accept deeds in lieu of foreclosure, or otherwise acquire real estate, and in doing so could become subject to environmental liabilities with respect to these properties.  We may become responsible to a governmental agency or third parties for property damage, personal injury, investigation and clean-up costs incurred by those parties in connection with environmental contamination, or may be required to investigate or clean-up hazardous or toxic substances, or chemical releases at a property. The costs associated with environmental investigation or remediation activities could be substantial. In addition, as the owner or former owner of a contaminated site, we may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from the property.  Although we have policies and procedures to perform an environmental review before acquiring title to any real property, these may not be sufficient to detect all potential environmental hazards.  If we were to become subject to significant environmental liabilities, it could materially and adversely affect us.
20
A substantial decline in the value of our Federal Home Loan Bank of Pittsburgh common stock may adversely affect our financial condition.

We own common stock of the Federal Home Loan Bank of Pittsburgh, or the FHLB, in order to qualify for membership in the Federal Home Loan Bank system, which enables us to borrow funds under the Federal Home Loan Bank advance program. The carrying value and fair market value of our FHLB common stock was $1.4 million as of December 31, 2013.

Published reports indicate that certain member banks of the Federal Home Loan Bank system may be subject to asset quality risks that could result in materially lower regulatory capital levels. In December 2008, the FHLB had notified its member banks that it had suspended dividend payments and the repurchase of capital stock until further notice was provided.  In October 2010, the FHLB of Pittsburgh began to repurchase excess capital stock and, in 2012, resumed the payment of dividends.  During 2013 the FHLB of Pittsburgh repurchased all excess restricted stock outstanding and continued with the payment of dividends.  In an extreme situation, it is possible that the capitalization of a Federal Home Loan Bank, including the FHLB, could be substantially diminished or reduced to zero.  Consequently, given that there is no market for our FHLB common stock, we believe that there is a risk that our investment could be deemed other-than-temporarily impaired at some time in the future. If this occurs, it may adversely affect our results of operations and financial condition. If the FHLB were to cease operations, or if we were required to write-off our investment in the FHLB, our business, financial condition, liquidity, capital and results of operations may be materially adversely effected.

Our common stock is not insured by any governmental entity and, therefore, an investment in our common stock involves risk.

Our common stock is not a deposit account or other obligation of any bank, and is not insured by the FDIC or any other governmental entity, and is subject to investment risk, including possible loss.

There may be future sales of our common stock, which may materially and adversely affect the market price of our common stock.

We are not restricted from issuing additional shares of our common stock, including securities that are convertible into or exchangeable or exercisable for shares of our common stock. Our issuance of shares of common stock in the future will dilute the ownership interests of our existing shareholders.
 
Additionally, the sale of substantial amounts of our common stock or securities convertible into or exchangeable or exercisable for our common stock, whether directly by us or by existing common shareholders in the secondary market, the perception that such sales could occur or the availability for future sale of shares of our common stock or securities convertible into or exchangeable or exercisable for our common stock could, in turn, materially and adversely affect the market price of our common stock and our ability to raise capital through future offerings of equity or equity-related securities.  We are party to a registration rights agreement with the holders of the convertible trust preferred securities of Republic First Bancorp Capital Trust IV, which requires us, under certain circumstances, to register up to 1.7 million shares of our common stock into which the trust preferred securities may be converted for resale under the Securities Act of 1933.
 
In addition, our Board of Directors is authorized to designate and issue preferred stock without further shareholder approval, and we may issue other equity securities that are senior to our common stock in the future for a number of reasons, including, without limitation, to support operations and growth, to maintain our capital ratios and to comply with any future changes in regulatory standards.
 
21
Our common stock is currently traded on the Nasdaq Global Market.  During 2013,2016, the average daily trading volume for our common stock was approximately 29,60098,200 shares.  Sales of our common stock may place significant downward pressure on the market price of our common stock. Furthermore, it may be difficult for holders to resell their shares at prices they find attractive, or at all.
22

Our common stock is subordinate to our existing and future indebtedness and any preferred stock and effectively subordinated to all indebtedness and preferred equity claims against our subsidiaries.

Shares of our common stock are common equity interests in us and, as such, will rank junior to all of our existing and future indebtedness and other liabilities. Additionally, holders of our common stock may become subject to the prior dividend and liquidation rights of holders of any classes or series of preferred stock that our Board of Directors may designate and issue without any action on the part of the holders of our common stock. Furthermore, our right to participate in a distribution of assets upon any of our subsidiaries’subsidiaries' liquidation or reorganization is subject to the prior claims of that subsidiary’ssubsidiary's creditors and preferred shareholders. As of December 31, 2013,2016, we had $22.5$21.9 million of outstanding debt.

Our ability to pay dividends depends upon the results of operations of our subsidiaries.

We have never declared or paid cash dividends on our common stock.  Our Board of Directors intends to follow a policy of retaining earnings for the purpose of increasing our capital for the foreseeable future.
 
Holders of our common stock are entitled to receive dividends if, as and when declared from time to time by our Board of Directors in its sole discretion out of funds legally available for that purpose, after debt service payments and payments of dividends required to be paid on our outstanding preferred stock, if any.
 
While we, as a bank holding company, are not subject to certain restrictions on dividends applicable to Republic, our ability to pay dividends to the holders of our common stock will depend to a large extent upon the amount of dividends paid by Republic to us.  Regulatory authorities restrict the amount of cash dividends Republic can declare and pay without prior regulatory approval.  Presently, Republic cannot declare or pay dividends in any one-year in excess of retained earnings for that year subject to risk based capital requirements.

If we fail to maintain an effective system of internal control over financial reporting and disclosure controls and procedures, current and potential shareholders may lose confidence in our financial reporting and disclosures and could subject us to regulatory scrutiny.

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, referred to as Section 404, we are required to include in our Annual Reports on Form 10-K, our management’smanagement's report on internal control over financial reporting. While we have reported no material weaknesses in the Form 10-K for the fiscal year ended December 31, 2013,2016, we cannot guarantee that we will not have any material weaknesses in the future.
 
Compliance with the requirements of Section 404 is expensive and time-consuming. If, in the future, we fail to complete this evaluation in a timely manner we could be subject to regulatory scrutiny and a loss of public confidence in our internal control over financial reporting.  In addition, any failure to maintain an effective system of disclosure controls and procedures could cause our current and potential shareholders and customers to lose confidence in our financial reporting and disclosure required under the Exchange Act, which could adversely affect our business.
 
 
2223

Our governing documents, Pennsylvania law, and current policies of our Board of Directors contain provisions, which may reduce the likelihood of a change in control transaction, which may otherwise be available and attractive to shareholders.

Our articles of incorporation and bylaws contain certain anti-takeover provisions that may make it more difficult or expensive or may discourage a tender offer, change in control or takeover attempt that is opposed by our Board of Directors.  In particular, the articles of incorporation and bylaws classify our Board of Directors into three groups, so that shareholders elect only approximately one-third of the Board each year; permit shareholders to remove directors only for cause and only upon the vote of the holders of at least 75% of the voting shares; require our shareholders to give us advance notice to nominate candidates for election to the Board of Directors or to make shareholder proposals at a shareholders’shareholders' meeting; require the vote of the holders of at least 60% of our voting shares for shareholder amendments to our bylaws; require the vote of the holders of at least 75% of our voting shares to approve certain business combinations; and restrict the holdings and voting rights of shareholders who would acquire more than 10% of our outstanding common stock without the approval of two-thirds of our Board of Directors.  These provisions of our articles of incorporation and bylaws could discourage potential acquisition proposals and could delay or prevent a change in control, even though a majority of our shareholders may consider such proposals desirable.  Such provisions could also make it more difficult for third parties to remove and replace the members of our Board of Directors.  Moreover, these provisions could diminish the opportunities for shareholders to participate in certain tender offers, including tender offers at prices above the then-current market value of our common stock, and may also inhibit increases in the trading price of our common stock that could result from takeover attempts or speculation. 

In addition, anti-takeover provisions in Pennsylvania law could make it more difficult for a third party to acquire control of us. These provisions could adversely affect the market price of our common stock and could reduce the amount that shareholders might receive if we are sold.  For example, Pennsylvania law may restrict a third party’sparty's ability to obtain control of us and may prevent shareholders from receiving a premium for their shares of our common stock.  Pennsylvania law also provides that our shareholders are not entitled by statute to propose amendments to our articles of incorporation.

Item 1B:  Unresolved Staff Comments
 
None.

Item 2:  Description of Properties

The Company currently leases its headquarters, executive offices, and twelve store locations underhas twenty lease agreements that expire aton various dates in the future. Six of the leased locations are utilized as back-office support locations, operations centers, loan production offices, training facilities and the Company's corporate headquarters.  The other fourteen leased properties are for store locations, twelve of which are open and operating today and two which will be opened in the future. The spaces covered by these leases range in square footage from approximately 800 square feet to 40,000 square feet.  Please see Note 11 “Commitments"Commitments and Contingencies”Contingencies" to the Consolidated Financial Statements for further information regarding the leases.  In addition, the Company owns threeeight properties utilized for store locations.  TwoSeven of the stores are open and operating today, and one is currently under construction.scheduled to begin construction during 2017.  Management believes these facilities are adequate to meet the Company’sCompany's present and immediately foreseeable needs.needs from a real estate perspective.
 

Item 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.

23
Item 4:  Mine Safety Disclosures

Not applicable.

PART II

Item 5:  Market for Registrant’sRegistrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
Market Information

Shares of the Company’sCompany's class of common stock are listed on the Nasdaq Global Market under the symbol “FRBK.”"FRBK."  The table below sets forth the high and low sales prices reported for the common stock on the Nasdaq Global Market for the periods indicated.   As of March 21, 20148, 2017,, there were approximately 1,800 2,300 record holders of the Company’sCompany's common stock.  On March 21, 2014,9, 2017, the closing price of a share of common stock on The Nasdaq GlobalStock Market LLC was $4.26.$8.18.

QuarterHighLowHighLow
2013:  
4th $ 3.30 $ 2.90
3rd $ 3.83 $ 2.75
2nd $ 3.19 $ 2.62
1st $ 2.78 $ 1.97
2016:  
4th
$ 9.15$ 3.70
3rd
$ 4.52$ 4.00
2nd
$ 4.84$ 3.91
1st
$ 4.45$ 3.84
    
2012:  
4th $ 2.30 $ 1.90
3rd $ 2.25 $ 1.92
2nd $ 2.42 $ 1.77
1st $ 2.42 $ 1.38
2015:  
4th
$ 4.67$ 3.53
3rd
$ 4.03$ 3.32
2nd
$ 3.73$ 3.36
1st
$ 3.94$ 3.27

Dividend Policy

The Company has not paid any cash dividends on its common stock and has no plans to pay cash dividends during 20142017.  The Company’sCompany's ability to pay dividends depends primarily on receipt of dividends from the Company’sCompany's 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.
 
2425
 
 
Item 6:  Selected Financial Data
  As of or for the Years Ended December 31, 
(dollars in thousands, except per share data) 2016  2015  2014  2013  2012 
                
INCOME STATEMENT DATA               
Total interest income $54,227  $45,436  $40,473  $37,205  $38,260 
Total interest expense  6,863   5,381   4,644   4,590   6,366 
Net interest income  47,364   40,055   35,829   32,615   31,894 
Provision for loan losses  1,557   500   900   4,935   1,350 
Non-interest income  15,312   9,943   8,017   9,216   8,828 
Non-interest expenses  56,293   47,091   40,550   40,411   35,902 
Income (loss) before benefit for income taxes  
4,826
   
2,407
   
2,396
   (3,515)  
3,470
 
Benefit for income taxes  (119)  (26)  (46)  (35)  (144)
Net income (loss) $4,945  $2,433  $2,442  $(3,480) $3,614 
                     
PER SHARE DATA                    
Basic earnings (loss) per share $0.13  $0.06  $0.07  $(0.13) $0.14 
Diluted earnings (loss) per share $0.12  $0.06  $0.07  $(0.13) $0.14 
Book value per share $3.79  $3.00  $2.98  $2.42  $2.69 
Tangible book value per share $3.70  $3.00  $2.98  $2.42  $2.69 
                     
BALANCE SHEET DATA                    
Total assets $1,923,931  $1,438,824  $1,214,598  $961,665  $988,658 
Total loans, net  955,817   866,066   770,404   667,048   608,359 
Total investment securities  803,604   460,131   254,402   206,482   193,142 
Total deposits  1,677,670   1,249,298   1,072,230   869,534   889,201 
Short-term borrowings  -   47,000   -   -   - 
Subordinated debt  21,881   21,857   22,476   22,476   22,476 
Total shareholders' equity  215,053   113,375   112,811   62,899   69,902 
                     
PERFORMANCE RATIOS                    
Return on average assets  0.30%  0.19%  0.23%  (0.37)%  0.37%
Return on average shareholders' equity  3.97%  2.14%  2.51%  (5.07)%  5.36%
Net interest margin  3.14%  3.29%  3.56%  3.66%  3.53%
Total non-interest expenses as a percentage of average assets  3.45%  3.59%  3.80%  4.25%  3.70%
                     
ASSET QUALITY RATIOS                    
Allowance for loan losses as a percentage of loans  0.95%  0.99%  1.48%  1.81%  1.54%
Allowance for loan losses as a percentage of non-performing loans  48.45%  68.95%  53.81%  117.69%  59.46%
Non-performing loans as a percentage of total loans  1.96%  1.44%  2.74%  1.53%  2.60%
Non-performing assets as a percentage of total assets  1.51%  1.66%  2.07%  1.51%  2.52%
Net charge-offs as a percentage of average loans, net  0.12%  0.41%  0.22%  0.35%  0.63%
                     
LIQUIDITY AND CAPITAL RATIOS                    
Average equity to average assets  7.63%  8.67%  9.12%  7.22%  6.95%
Leverage ratio  12.74%  9.65%  11.23%  8.59%  9.01%
CET 1 capital to risk-weighted assets  16.59%  10.42%  -   -   - 
Tier 1 capital to risk-weighted assets  18.28%  12.40%  13.88%  10.28%  11.48%
Total capital to risk-weighted assets  18.99%  13.19%  15.10%  11.53%  12.73%

  As of or for the Years Ended December 31, 
(dollars in thousands, except per share data) 2013  2012  2011  2010  2009 
                
INCOME STATEMENT DATA               
Total interest income $37,205  $38,260  $38,273  $40,309  $43,470 
Total interest expense  4,590   6,366   8,199   10,245   16,055 
Net interest income  32,615   31,894   30,074   30,064   27,415 
Provision for loan losses  4,935   1,350   15,966   16,600   14,200 
Non-interest income  9,216   8,828   10,581   2,620   79 
Non-interest expenses  40,411   35,902   41,200   32,848   30,959 
Income (loss) before provision (benefit) for income taxes  (3,515)   3,470   (16,511)  (16,764)  (17,665)
Provision (benefit) for income taxes  (35)  (144)  8,191   (6,074)  (6,223)
Net income (loss) $(3,480) $3,614  $(24,702) $(10,690) $(11,442)
                     
PER SHARE DATA                    
Basic earnings (loss) per share $(0.13) $0.14  $(0.95) $(0.57) $(1.07)
Diluted earnings (loss) per share $(0.13) $0.14  $(0.95) $(0.57) $(1.07)
Book value per share $2.42  $2.69  $2.50  $3.39  $6.64 
                     
BALANCE SHEET DATA                    
Total assets $961,665  $988,658  $1,047,353  $876,097  $1,008,642 
Total loans, net  667,048   608,359   577,442   608,911   680,977 
Total investment securities  206,482   193,142   179,784   150,087   192,395 
Total deposits  869,534   889,201   952,611   757,730   882,894 
FHLB & overnight advances  -   -   -   -   25,000 
Subordinated debt  22,476   22,476   22,476   22,476   22,476 
Total shareholders’ equity  62,899   69,902   64,851   88,146   70,264 
                     
PERFORMANCE RATIOS                    
Return on average assets  (0.37)%   0.37%   (2.68)%   (1.14)%   (1.22)% 
Return on average shareholders’ equity  (5.07)%   5.36%   (28.68)%   (13.42)%   (15.32)% 
Net interest margin  3.66%   3.53%   3.59%   3.50%   3.13% 
Total non-interest expenses as a percentage of average assets  4.25%   3.70%   4.47%   3.52%   3.29% 
                     
ASSET QUALITY RATIOS                    
Allowance for loan losses as a percentage of loans  1.81%   1.54%   2.04%   1.84%   1.85% 
Allowance for loan losses as a percentage of non-performing loans  117.69%   59.46%   106.52%   28.62%   49.32% 
Non-performing loans as a percentage of total loans  1.53%   2.60%   1.92%   6.45%   3.75% 
Non-performing assets as a percentage of total assets  1.51%   2.52%   1.70%   6.30%   3.93% 
Net charge-offs as a percentage of average loans, net  0.35%   0.63%   2.44%   2.73%   1.33% 
                     
LIQUIDITY AND CAPITAL RATIOS                    
Average equity to average assets  7.22%   6.95%   9.34%   8.47%   7.94% 
Leverage ratio  8.59%   9.01%   8.77%   11.01%   9.36% 
Tier 1 capital to risk-weighted assets  10.28%   11.48%   11.81%   13.68%   11.89% 
Total capital to risk-weighted assets  11.53%   12.73%   13.09%   14.93%   13.14% 
 
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Item 7:  Management’sManagement's Discussion and Analysis of Financial Condition and Results of Operations
 
The following discussion and analysis of the results of operations and financial condition should be read in conjunction with Item 6 “Selected"Selected Financial Data”Data" and the consolidated financial statements and the notes thereto included in Item 8 of this report. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Certain risks, uncertainties and other factors, including but not limited to those set forth in Item 1A, entitled, “Risk Factors”"Risk Factors" and elsewhere in this report may cause actual results to differ materially from those projected in the forward-looking statements.

Executive Summary

We continued to make great progress with "The Power of Red is Back" expansion campaign in 2016.  We are successfully expanding our presence in the Philadelphia region through the addition of new stores and the development of new customer relationships. During 2016 we welcomed thousands of new customers into our stores and won them over with extraordinary service. The growth in asset, loan and deposit balances clearly demonstrates our ongoing success with this strategy. While we continue to make significant investments to build a new bank, we are very pleased with our ability to improve profitability as we move forward with our growth plan.

In 2016, we also announced the addition of Vernon W. Hill, II to the Board of Directors. He will serve as Chairman of the Company. Mr. Hill is often credited with reinventing the concept of Retail Banking as the Founder and Chairman of Commerce Bank, a $50 billion financial institution that grew to more than 450 locations primarily in the northeastern corridor of the U.S. More recently, Mr. Hill has achieved significant success with his Retail Banking concept as the Founder and Chairman of Metro Bank in the U.K. which has grown to 48 locations and over $12 billion assets in just six years. Mr. Hill has been a major investor and consultant to Republic Bank for the last several years.  His appointment as Chairman reinforces our commitment to our growth and expansion plan based on creating a legendary, emotional brand by turning customers into Fans.

During 2016, we also expanded our product offerings through the addition of a residential mortgage lending team. In July 2016, we acquired Oak Mortgage Company. Oak Mortgage is headquartered in Marlton, NJ and is licensed to do business in Pennsylvania, Delaware, New Jersey, and Florida providing our customers with new opportunities in the residential lending market. The Oak Mortgage team is an important addition to the Republic Team which is committed to extraordinary customer service and has proven to be a perfect complement to the Bank's network of store locations.

Additional highlights for the year ended December 31, 2013 are as follows:2016 include the following accomplishments:

·Loans grew by $61.4We completed a $100 million or 10%,common stock offering during the fourth quarter of 2016. As a result, shareholders' equity increased to $679.3$215.1 million atas of December 31, 2013, versus $617.92016 compared to $113.4 million atas of December 31, 2012, driven by an increase in quality loan demand during 2013. Increases were recognized in2015. This capital raise will allow us to execute our aggressive expansion plan over the consumer, commercial and industrial, owner occupied real estate, and commercial real estate categories.next several years.

·CoreNew stores were opened in Washington Township and Moorestown, NJ during 2016 bringing the total store count to nineteen. We also opened a prototype store at a prime location in Wynnewood, PA where we relocated our store from nearby Ardmore.  We ended the year with a store under construction in Cherry Hill, NJ which is scheduled to be completed in early 2017 and ground will soon be broken on sites in Medford, Sicklerville and Fairless Hills.  There are also several additional sites in various stages of approval and development for future store locations.
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·New stores opened since the beginning of the "Power of Red is Back" expansion campaign in 2014 are currently growing deposits at an average rate of $38 million per year, while the average deposit growth for all stores over the last twelve months was approximately $23 million per store.

·Total revenue grew by $17.525% during 2016, while non-interest expenses grew at a rate of 20%.

·Net income increased by 103% to $4.9 million, or 2%$0.12 per diluted share, for the twelve months ended December 31, 2016 compared to $2.4 million, or $0.06 per diluted share, for the twelve months ended December 31, 2015. We continue to open new stores and increase net income despite the additional costs associated with the expansion strategy. The acquisition of Oak Mortgage has also contributed to improved earnings.

·Total assets increased by $485 million, or 34%, to a total$1.9 billion as of $859.3December 31, 2016 compared to $1.4 billion as of December 31, 2015.

·Total deposits increased by $428 million, or 34%, to $1.7 billion as of December 31, 2016 compared to $1.2 billion as of December 31, 2015.

·Total loans grew $90 million, or 10%, to $965 million as of December 31, 2016 compared to $875 million at December 31, 2015.

·SBA lending continued to be an important part of our lending strategy. More than $70 million in new SBA loans were originated during the year ended December 31, 2013 as a result of the continued success of our retail focused, customer service model.

·Small Business lending continues to be a focal point of the Company’s lending strategy.  The Small Business lending2016. Our team originated $76.6 million in new SBA loans during the year ended December 31, 2013 and is currently ranked as the #1 SBA lender in the New Jersey and the #3 SBA lender insoutheastern Pennsylvania market based on the dollar volume of loan originations.

·The net interest margin increased year over year despite an incredibly challenging rate environment. The net interest margin increased to 3.66% for the year endedOur Total Risk-Based Capital ratio was 18.99% and Tier I Leverage Ratio was 12.74% at December 31, 2013 compared to 3.53% for the year ended December 31, 2012.2016.

·Capital levels remain strong with a Total Risk-Based Capital ratioBook value per common share increased to $3.79 as of 11.53% and a Tier 1 Leverage Ratio of 8.59% at December 31, 2013.2016 compared to $3.00 per share as of December 31, 2015.

·Non-performing assets as a percentage of total assets decreased from 2.52% to 1.51%. Net charge-offs as a percentage of loans decreased to 0.35%, which is the lowest level the Company has seen since 2007.
Non-GAAP Based Financial Measures

·We relocated our store in Media, PA to a newly renovated, prime location during the fourth quarter of 2013.  In addition, during 2013 we also broke ground on two locations in South Jersey which will feature our new and distinctive prototype building.

·The Haddonfield, NJ store continues to grow at a strong pace, with $88.0 million in core deposits since opening in 2010.
Our selected financial data contains a non-GAAP financial measure calculated using non-GAAP amounts.  This measure is tangible book value per common share. Tangible book value per share adjusts the numerator by the amount of Goodwill and Other Intangible Assets (reduction of Shareholders' Equity).  Management uses non-GAAP measures to present historical periods comparable to the current period presentation.  In addition, management believes the use of non-GAAP measures provides additional clarity when assessing our financial results and use of equity.  Disclosures of this type should not be viewed as substitutes for results determined to be in accordance with U.S. GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other entities.

Critical Accounting Policies, Judgments and Estimates
 
In reviewing and understanding our financial information, you are encouraged to read and understand the significant accounting policies used in preparing the consolidated financial statements. These policies are described in Note 2 – Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements. The accounting and financial reporting policies conform to accounting principles generally accepted in the United States of America and to general practices within the banking industry. The preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Management evaluates these estimates and assumptions on an ongoing basis including those related to the allowance for loan losses, carrying values of other real estate owned, other than temporary impairment of securities, fair value of financial instruments and deferred income taxes.  Management bases its estimates on historical experience and various other factors and assumptions that are believed to be reasonable under the circumstances. These form the basis for making judgments on the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
 
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We have identified the policies related to the allowance for loan losses, other-than-temporary impairment of securities, loans receivable, mortgage loans held for sale, interest rate lock commitments, forward loan sale commitments, goodwill, other real estate owned, and deferred income taxes as being critical.

Allowance for Loan Losses - Management’sManagement's ongoing evaluation of the adequacy of the allowance for loan losses is based on our past loan loss experience, the volume and composition of our lending, adverse situations that may affect a borrower’sborrower's ability to repay, the estimated value of any underlying collateral, current economic conditions and other factors affecting the known and inherent risk in the portfolio.  The allowance for loan losses is increased by charges to income through the provision for loan losses and decreased by charge-offs (net of recoveries). The allowance is maintained at a level that management, based upon its evaluation, considers adequate to absorb losses inherent in the loan portfolio. This evaluation is inherently subjective as it requires material estimates including, among others, the amount and timing of expected future cash flows on impacted loans, exposure at default, value of collateral, and estimated losses on our commercial and residential loan portfolios. All of these estimates may be susceptible to significant change.
 
The allowance consists of specific allowances for both impaired and classified loans, and a general allowance on the remainder of the portfolio.portfolio, and an unallocated component to account for a level of imprecision in management's estimation process. Although management determines the amount of each element of the allowance separately, the allowance for loan losses is available for the entire loan portfolio.
 
Management establishes an allowance on certain impaired loans for the amount by which the discounted cash flows, observable market price, or fair value of collateral if the loan is collateral dependent, is lower than the carrying value of the loan. A loan is considered to be impaired when, based upon current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan. A delay or shortfall in amount of payments does not necessarily result in the loan being identified as impaired.
 
Management also establishes a general allowance on non-classifiednon-impaired loans to recognize the inherent losses associated with lending activities, but which, unlike specific allowances, have not been allocated to particular loans. This general valuation allowance is determined by segregating the loans by loan category and assigning allowance percentages based on our historical loss experience, delinquency trends, and management’smanagement's evaluation of the collectability of the loan portfolio.

Management also evaluates classified loans, which are not impaired. We segregate these loans by category and assign qualitative factors to each loan based on inherent losses associated with each type of lending and consideration that these loans, in the aggregate, represent an above-average credit risk and that more of these loans will prove to be uncollectible compared to loans in the general portfolio.  Classification of a loan within this category is based on identified weaknesses that increase the credit risk of the loan.
 
2729


 
The allowance is adjusted for significant factors that, in management’smanagement's judgment, affect the collectability of the portfolio as of the evaluation date. These significant factors may include changes in lending policies and procedures, changes in existing general economic and business conditions affecting its primary lending areas, credit quality trends, collateral value, loan volumes and concentrations, seasoning of the loan portfolio, loss experience in particular segments of the portfolio, duration of the current business cycle, and bank regulatory examination results. The applied loss factors are re-evaluated each reporting period to ensure their relevance in the current economic environment.

While management uses the best information known to it in order to make loan loss allowance valuations, adjustments to the allowance may be necessary based on changes in economic and other conditions, changes in the composition of the loan portfolio, or changes in accounting guidance. In times of economic slowdown, either regional or national, the risk inherent in the loan portfolio could increase resulting in the need for additional provisions to the allowance for loan losses in future periods. An increase could also be necessitated by an increase in the size of the loan portfolio or in any of its components even though the credit quality of the overall portfolio may be improving. Historically, the estimates of the allowance for loan loss have provided adequate coverage against actual losses incurred.  In addition, the Pennsylvania Department of Banking and Securities and the FDIC, as an integral part of their examination processes, periodically review the allowance for loan losses. The Pennsylvania Department of Banking and Securities or the FDIC may require the recognition of adjustment to the allowance for loan losses based on their judgment of information available to them at the time of their examinations. To the extent that actual outcomes differ from management’smanagement's estimates, additional provisions to the allowance for loan losses may be required that would adversely impact earnings in future periods.
 
Other-Than-Temporary Impairment of 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 and our intent and ability to retain its investment in the security for a period of time sufficient to allow for an anticipated recovery in the fair value. The term “other-than-temporary”"other-than-temporary" is not intended to indicate that the decline is permanent, but indicates that the prospects 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 the investment. Once a decline in value is determined to be other-than-temporary, the value of the security is reduced and a corresponding charge to earnings is recognized.

Mortgage Banking Activities and Mortgage Loans Held for Sale - Loans held for sale are originated and held until sold to permanent investors. In 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.
 
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 Interest Rate Lock Commitments - 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 mortgage banking income in non-interest income 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 24 Derivatives and Risk Management Activities.

Forward Loan Sale Commitments - Forward loan sale commitments are commitments to sell individual mortgage loans at a fixed price to an investor at a future date. Forward loan sale commitments are accounted for as derivatives and carried at fair value, determined as the amount that would be necessary to settle the derivative financial instrument at the balance sheet date. Gross derivative assets and liabilities are recorded as other assets and other liabilities with changes in fair value during the period recorded as mortgage banking income in non-interest income in the statements of income.

Goodwill - Goodwill represents the excess of cost over the identifiable net assets of businesses acquired. Goodwill is recognized as an asset and is to be reviewed for impairment annually as of July 31 and between annual tests when events and circumstances indicate that impairment may have occurred. Impairment is a condition that exists when the carrying amount of goodwill exceeds its implied fair value. A qualitative factor test can be performed to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. If the results of the qualitative review indicate that it is unlikely (less than 50% probability) that the carrying value of the reporting unit exceeds its fair value, no further evaluation needs to be performed. There was $5.0 million of goodwill at December 31, 2016 and $0 at December 31, 2015.

Other Real Estate Owned - Other real estate owned consists of assets acquired through, or in lieu of, loan foreclosure.  They are held for sale and are initially recorded at fair value less cost to sell at the date of foreclosure, establishing a new cost basis.  Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value, less the cost to sell.  Revenue and expenses from operations and changes in the valuation allowance are included in net expenses from other real estate owned.
Income Taxes - Management makes estimates and judgments to calculate various tax liabilities and determine the recoverability of various deferred tax assets, which arise from temporary differences between the tax and financial statement recognition of revenues and expenses. Management also estimates a reserve for deferred tax assets if, based on the available evidence, it is more likely than not that some portion or all of the recorded deferred tax assets will not be realized in future periods. These estimates and judgments are inherently subjective. Historically, management’smanagement's estimates and judgments to calculate the deferred tax accounts have not required significant revision.
 
In evaluating our ability to recover deferred tax assets, management considers all available positive and negative evidence, including the past operating results and forecastforecasts 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 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.
 
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Results of Operations

For the year ended December 31, 20132016 as compared to the year ended December 31, 20122015

We recorded areported net lossincome of $3.5$4.9 million, or $(0.13)$0.12 per diluted share, for 2013the twelve months ended December 31, 2016 compared to net income of $3.6$2.4 million, or $0.14$0.06 per diluted share, for 2012.the twelve months ended December 31, 2015. The increase in net loss in 2013income was primarily driven by two isolated events.

We recorded a one-time chargegrowth in interest-earning assets along with earnings of the amount of $1.9 millionresidential mortgage lending team which was acquired during the third quarter of 2013 related2016.
Net interest income for the twelve months ended December 31, 2016 increased $7.3 million to a settlement agreement$47.4 million as compared to $40.1 million for the twelve months ended December 31, 2015. Interest income increased $8.8 million, or 19.3%, due primarily to an increase in connection with a lawsuitaverage loans receivable and investment securities balances. Interest expense increased $1.5 million, or 27.5%, primarily due to an increase in which we were a defendant.  The lawsuit arose from an issue that occurred prior to 2007.  We had vigorously contested the claims in the suit.  However, as a result of reversals of certain procedural rulings in the case, we concluded that it would be in our best interest to avoid further litigation by executing a settlement agreement.  The settlement released us from all claims and actions related to the matter.
average deposit balances.
We also recorded a loan loss provision in the amount of $3.6$1.6 million for the twelve months ended December 31, 2016 compared to a provision of $500,000 during the twelve months ended December 31, 2015. The higher provision recorded for the twelve months ended December 31, 2016 was driven by an increase in the allowance required for loans individually evaluated for impairment in 2016.
Non-interest income increased $5.4 million to $15.3 million during the fourth quartertwelve months ended December 31, 2016 as compared to $9.9 million during the twelve months ended December 31, 2015 primarily driven by gains on the sale of 2013residential mortgage loans and SBA loans, partially offset by legal settlements recorded during the twelve months ended December 31, 2015.
Non-interest expenses increased $9.2 million to $56.3 million during the twelve months ended December 31, 2016 as compared to $47.1 million during the twelve months ended December 31, 2015.  The increase was primarily driven by higher salaries, employee benefits, occupancy and equipment expenses associated with the addition of new stores related to a single loanour expansion strategy which we refer to as "The Power of Red is Back", as well as, the addition of Oak Mortgage in our portfolio.  This loan was determined to be impaired during the fourth quarter and the provision was a result of a significant reduction in the collateral value supporting the loan based upon a current appraisal.2016.

Return on average assets and average equity was (0.37)%from continuing operations were 0.30% and (5.07)%3.97%, respectively, during the twelve months ended December 31, 2016 compared to 0.19% and 2.14%, respectively, for 2013 as compared to 0.37% and 5.36%, respectively, for 2012.  Average equity to average assets was 7.22% for 2013 as compared to 6.95% for 2012.the twelve months ended December 31, 2015.
 
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Average Balances and Net Interest Income
 
Historically, our earnings have depended primarily upon Republic’sRepublic's net interest income, which is the difference between interest earned on interest-earning assets and interest paid on interest-bearing liabilities. Net interest income is affected by changes in the mix of the volume and rates of interest-earning assets and interest-bearing liabilities. The following table provides an analysis of net interest income on an annualized basis, setting forth for the periods average assets, liabilities, and shareholders’shareholders' equity, interest income earned on interest-earning assets and interest expense on interest-bearing liabilities, average yields earned on interest-earning assets and average rates on interest-bearing liabilities, and Republic’sRepublic's net interest margin (net interest income as a percentage of average total interest-earning assets). Averages are computed based on daily balances. Non-accrual loans are included in average loans receivable. Yields are adjusted for tax equivalency, using a rate of 35% in 2013, 20122016, 2015, and 2011.
29

2014.

Average Balances and Net Interest Income
  
For the Year Ended
December 31, 2016
  
For the Year Ended
December 31, 2015
  
For the Year Ended
December 31, 2014
 
 
 
(dollars in thousands)
 
Average Balance
  
Interest Income/
Expense
  
Yield/
Rate(1)
  
Average Balance
  
Interest Income/
Expense
  
Yield/
Rate(1)
  
Average Balance
  
Interest Income/
Expense
  
Yield/
Rate(1)
 
Interest-earning assets:                           
Federal funds sold and other interest earning assets $92,452  $473   0.51% $106,876  $278   0.26% $75,593  $187   0.25%
Investment securities and restricted stock  506,545   12,346   2.44%  309,018   7,692   2.49%  217,939   5,613   2.58%
Loans receivable  936,492   42,304   4.52%  820,820   38,072   4.64%  724,231   35,052   4.84%
Total interest-earning assets  1,535,489   55,123   3.59%  1,236,714   46,042   3.72%  1,017,763   40,852   4.01%
Other assets  96,902           73,873           49,647         
Total assets $1,632,391          $1,310,587          $1,067,410         
                                     
Interest bearing liabilities:                                    
Demand – non-interest bearing $284,326          $235,810          $189,810         
Demand – interest bearing  510,745   2,088   0.41%  349,055   1,401   0.40%  233,693   888   0.38%
Money market & savings  586,750   2,639   0.45%  508,846   2,170   0.43%  439,484   1,929   0.44%
Time deposits  89,713   942   1.05%  73,819   695   0.94%  78,073   719   0.92%
Total deposits  1,471,534   5,669   0.39%  1,167,530   4,266   0.37%  941,060   3,536   0.38%
Total interest bearing deposits  1,187,208   5,669   0.48%  931,720   4,266   0.46%  751,250   3,536   0.47%
Other borrowings  27,471   1,194   4.35%  22,008   1,115   5.07%  21,875   1,108   5.07%
Total interest-bearing liabilities  1,214,679   6,863   0.57%  953,728   5,381   0.56%  773,125   4,644   0.60%
Total deposits and other borrowings  1,499,005   6,863   0.46%  1,189,538   5,381   0.45%  962,935   4,644   0.48%
Non-interest bearing other liabilities  8,867           7,340           7,084         
Shareholders' equity  124,519           113,709           97,391         
Total liabilities and shareholders' equity $1,632,391          $1,310,587          $1,067,410         
                                     
Net interest income(2)
     $48,260          $40,661          $36,208     
Net interest spread          3.02%          3.16%          3.41%
Net interest margin(2)
          3.14%          3.29%          3.56%
                                     

  
For the Year Ended
December 31, 2013
 
For the Year Ended
December 31, 2012
 
For the Year Ended
December 31, 2011
 
 
(dollars in thousands)
 Average Balance  
Interest Income/
Expense
  
Yield/
Rate(1)
 Average Balance  
Interest Income/
Expense
  
Yield/
Rate(1)
 Average Balance  
Interest Income/
Expense
  
Yield/
Rate(1)
Interest-earning assets:                           
Federal funds sold and other interest earning assets $67,307  $185   0.27% $116,268  $300   0.26% $62,082  $145   0.23%
Investment securities and restricted stock  192,315   4,820   2.51%  187,446   5,622   3.00%  156,367   5,119   3.27%
Loans receivable  640,233   32,523   5.08%  609,943   32,734   5.37%  630,309   33,417   5.30%
Total interest-earning assets  899,855   37,528   4.17%  913,657   38,656   4.23%  848,758   38,681   4.56%
Other assets  50,616           56,149           73,053         
Total assets $950,471          $969,806          $921,811         
                                     
Interest bearing liabilities:                                    
Demand – non-interest bearing $149,125          $136,999          $119,189         
Demand – interest bearing  192,224   825   0.43%  146,319   796   0.54%  91,577   590   0.64%
Money market & savings  417,652   1,786   0.43%  433,422   2,718   0.63%  345,885   3,457   1.00%
Time deposits  92,484   867   0.94%  155,549   1,718   1.10%  244,741   3,017   1.23%
Total deposits  851,485   3,478   0.41%  872,289   5,232   0.60%  801,392   7,064   0.88%
Total interest bearing deposits  702,360   3,478   0.50%  735,290   5,232   0.71%  682,203   7,064   1.04%
Other borrowings  22,476   1,112   4.95%  22,531   1,134   5.03%  24,831   1,135   4.57%
Total interest-bearing liabilities  724,836   4,590   0.63%  757,821   6,366   0.84%  707,034   8,199   1.16%
Total deposits and other borrowings  873,961   4,590   0.53%  894,820   6,366   0.71%  826,223   8,199   0.99%
Non-interest bearing other liabilities  7,902           7,573           9,472         
Shareholders’ equity  68,608           67,413           86,116         
Total liabilities and shareholders' equity $950,471          $969,806          $921,811         
                                     
Net interest income(2)
     $32,938          $32,290          $30,482     
Net interest spread          3.54%          3.39%          3.40%
Net interest margin(2)
          3.66%          3.53%          3.59%
                                     
(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.  Net interest income has been increased over the financial statement amount by $323, $396, and $408 in 2013, 2012 and 2011,(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 $896, $606, and $379 in 2016, 2015, and 2014, 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.
 
 
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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 periods indicated. 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.

 
Year ended
December 31, 2013 vs. 2012
  
Year ended
December 31, 2012 vs. 2011
  
Year ended
December 31, 2016 vs. 2015
  
Year ended
December 31, 2015 vs. 2014
 
 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
 $(134) $19  $(115) $140  $15  $155  $(74) $269  $195  $81  $10  $91 
Securities  122   (924)  (802)  932   (429)  503   4,814   (160)  4,654   2,267   (188)  2,079 
Loans  1,409   (1,620)  (211)  (1,170)  487   (683)  5,180   (948)  4,232   4,448   (1,428)  3,020 
Total interest-earning assets  1,397   (2,525)  (1,128)  (98)  73   (25)  9,920   (839)  9,081   6,796   (1,606)  5,190 
                                                
Interest expense:                                                
Deposits                                                
Interest-bearing demand deposits $197  $(168) $29  $298  $(92) $206  $661  $26  $687  $463  $50  $513 
Money market and savings  (62)  (870)  (932)  588   (1,327)  (739)  348   121   469   293   (52)  241 
Time deposits  (591)  (260)  (851)  (985)  (314)  (1,299)  167   80   247   (40)  16   (24)
Total deposit interest expense  (456)  (1,298)  (1,754)  (99)  (1,733)  (1,832)  1,176   227   1,403   716   14   730 
Other borrowings  -   (22)  (22)  (16)  15   (1)  33   46   79   -   7   7 
Total interest expense  (456)  (1,320)  (1,776)  (115)  (1,718)  (1,833)  1,209   273   1,482   716   21   737 
Net interest income $1,853  $(1,205) $648  $17  $1,791  $1,808  $8,711  $(1,112) $7,599  $6,080  $(1,627) $4,453 

Net Interest Income and Net Interest Margin

The tax equivalent netNet interest marginincome, on a fully tax-equivalent basis, for the twelve months of 2016 increased 13 basis points to 3.66% during 2013,by $7.6 million, or 18.7%, over the same period in 2015. Interest income on interest-earning assets totaled $55.1 million for the twelve months of 2016, an increase of $9.1 million, compared to 3.53% during 2012 and the Company’s tax equivalent netsame period in 2015. The increase in interest income increased $648,000, or 2.0%, to $32.9 million for 2013, as compared to $32.3 million for 2012. Yields on interest-bearing assets decreased 6 basis points to 4.17% in 2013 from 4.23% in 2012 andearned was the rates on total deposits and other borrowings decreased 18 basis points to 0.53% in 2013 from 0.71% in 2012.

The Company’s total tax equivalent interest income decreased $1.1 million, or 2.9%, to $37.5 million for 2013 as compared to $38.7 million for 2012.  A 29 basis point decrease in loan yields and a 49 basis point decrease in securities yields were partially offset by a $30.3 millionresult of an increase in the average balance of loans outstanding.

The Company’s total interest expense decreased $1.8 million, or 27.9%,receivable and investment securities that helped to $4.6 million for 2013, from $6.4 million for 2012 as the Company continues to lower the rates paid on interest bearing deposit accounts. Interest-bearing liabilities averaged $724.8 million for 2013, versus $757.8 million for 2012,offset a decrease of $33.0 million.  Average deposit balances decreased $20.8 million, as a result of the Company’s retail focused, customer service strategy, which emphasizes the gathering of low-cost core deposits, while reducing its dependence on wholesale funding sources such as brokered and internet-based certificates of deposit.  Internet based certificate of deposit balances decreased by $36.9 million during 2013.  The average rate paid on interest-bearing deposits decreased 21 basis points to 0.50% for 2013, as compared to 0.71% for 2012.  Average time deposit balances declined $63.1 million for 2013 as compared to 2012.  Interest expense paid on time deposit balances decreased $851,000 to $867,000 in 2013 from $1.7 million in 2012.  The maturity and roll-off of higher cost time deposits resulted in the12 bp decrease in the average rate paidyield on time deposits of 16 basis points to 0.94% for 2013 as compared to 1.10% for 2012. Average interest-bearing demand balances increased $45.9 million for 2013 as compared to 2012.  Money market and savingsloans receivable. Total interest expense decreased $932,000for the twelve months of 2016 increased $1.5 million, or 27.5%, to $1.8$6.9 million from $5.4 million over the same period in 2013 from $2.72015. Interest expense on deposits increased by $1.4 million, in 2012, primarily due to a reduction in rates paid on money market and savings deposits.  Accordingly, rates on total interest-bearing liabilities decreased 21 basis points in 2013 when compared to 2012.
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or 32.9%, for the twelve months of 2016 versus the same period of 2015. Interest expense on other borrowings decreased $22,000increased by $79,000 for the twelve months of 2016 compared to $1.1 millionthe same period in 2013.  Average other borrowings, consisting mainly of $22.5 million of trust preferred securities outstanding, decreased $55,000, or 0.2%,2015.

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 respective periods.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 3.02% during the twelve months of 2016 versus 3.16% during the twelve months of 2015. 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.  For the twelve months of 2016 and 2015, the fully tax-equivalent net interest margin was 3.14% and 3.29%, respectively.  The net interest margin for the year ending December 31, 2016 decreased primarily as a result of a decrease in the yield on loans receivable.
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Provision for Loan Losses

We recorded a provision for loan losses in the amount of $1.6 million for the twelve months ended December 31, 2016 compared to a $500,000 provision for the twelve months ended December 31, 2016. 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 Company recorded a $4.9 million provision for loan losses during 2013 compared to $1.4 million for the comparable prior year period.

The increase in the provision recorded during 2013 wasfor the twelve months ended December 31, 2016 as compared to the twelve months ended December 31, 2015 increased primarily driven byas a result of a single loan relationship which was originatedthat moved to non-accrual status during 2016. This resulted in 2006 and determined to be impaired during the fourth quarter of 2013 due to delinquency in payments.  The need for a provisionan increase in the amount of $3.6 million was the result of a significant reduction in the collateral value supporting theallowance for loan based upon a current appraisal.  Management is working closely with this borrower to resolve the delinquency issue and address the collateral deficiency.losses individually evaluated for impairment.
Non-Interest Income 

Total noninterest income for the twelve months of 2016 increased by $5.4 million, or 54.0%, from the same period in 2015. Mortgage banking income totaled $5.1 million during 2016 primarily due to gains on the sale of residential mortgage loans of $4.7 million originated through Oak Mortgage which was acquired by us in 2016.  Gains on the sale of SBA loans totaled $5.0 million during 2016 compared to $3.1 million in the same period of 2015. We recognized gains of $656,000 on the sale of securities during 2016 compared to gains of $108,000 on sales of securities in 2015. Service charges, fees, and other operating income totaled $4.8 million for 2016 which represents an increase of $602,000 compared to 2015. This increase was driven by growth in customer deposit accounts and transaction volume. In 2015, we recorded a $2.6 million insurance settlement which was related to a claim against a corporate insurance policy originally submitted in 2010.

Non-Interest Expenses
In 2016, noninterest expenses increased by $9.2 million, or 19.5%, compared to 2015. An explanation of changes in noninterest expenses for certain categories is presented in the following paragraphs.

Salary expenses and employee benefits in 2016 were $28.6 million, an increase of $6.1 million, or 27.2%, compared to 2015 primarily driven by annual merit increases along with increased staffing levels related to our aggressive growth strategy of adding and relocating stores, which we refer to as "The Power of Red is Back." There were nineteen stores open as of December 31, 2016 compared to seventeen stores open at December 31, 2015.  The lower provision recordedaddition of Oak Mortgage in July 2016 also contributed to the increase in salary and employee benefits.

Occupancy related expenses increased by $1.2 million, or 23.9%, and depreciation and amortization expense increased by $438,000, or 14.2%, in 2016 compared to 2015, also as a result of our growth and relocation strategy.

Other real estate owned expenses totaled $2.2 million during 20122016, a decrease of $2.1 million, when compared to 2015 primarily due to a reduction in writedowns on foreclosed assets held in other real estate owned.

All other noninterest expenses for the twelve months of 2016 increased $3.5 million compared to the same period last year. This increase was mainly attributable to the significant improvement in credit quality in the loan portfolio, along with a reduction in the componentaddition of the allowance for loan lossesexpenses related to loans collectively evaluated for impairment caused by an adjustment to the analysisresidential mortgage loan operations of historicalOak Mortgage.  Increases in data processing expenses, fraud losses during the period.  See disclosure under “Credit Quality”associated with debit cards, charitable contributions, professional fees, transaction fees, insurance, regulatory assessment and “Allowance for Loan Losses” for further discussion.
Non-Interest Income
Total non-interest income increased to $9.2 million for 2013 compared to $8.8 million for 2012, primarily dueadvertising expense resulting from our growth strategy also contributed to the growth in fees earned on the servicing of SBA loans.
Non-Interest Expenses
Total non-interest expenses increased $4.5 million, or 12.6%, to $40.4 million for 2013 compared to $35.9 million for 2012 primarily as a result of higher expenses related to foreclosed real estate during 2013 and a one-time charge related to a settlement agreement in connection with litigation in which the Company was a defendant.  Carrying costs and write downs of other real estate owned amounted to $3.2 million in 2013 compared to $763,000 in 2012.  The increase was primarily driven by the writedown in value of one property as a result of a current appraisal.  The legal settlement of $1.9 million was executed to avoid further litigation on a matter stemming from an issue associated with a lending relationship that arose several years ago.  The settlement released the Company from all claims and actions related to this matter.
operating expenses.
 
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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 noninterest expenses equal noninterest expenses less noninterest income and nonrecurring expense. For the twelve month period ended December 31, 2016, the ratio equaled 2.51% compared to 2.83% for the twelve month period ended December 31, 2015, respectively.  The decline in this ratio was mainly due to higher average assets related to our growth strategy of adding and relocating stores.

Another productivity measure utilized by management is the operating efficiency ratio. This ratio expresses the relationship of noninterest expenses to net interest income plus noninterest income. The efficiency ratio equaled 89.8% for the twelve months of 2016, compared to 94.2% for the twelve months of 2015. The decrease for the twelve months ended December 31, 2016 versus December 31, 2015 was due to both net interest income and noninterest income increasing at a faster rate than noninterest expenses.

Provision (Benefit) for Income Taxes
 
The CompanyWe recorded a benefit for income taxes of $119,000 for the twelve months ended December 31, 2016, compared to a $26,000 benefit for the twelve months ended December 31, 2015.  The $119,000 benefit recorded during the twelve months of 2016 was the net result of an estimated tax provision in the amount of $35,000 for the twelve month period ended December 31, 2013, compared to a benefit for income taxes of $144,000 for the twelve month period ended December 31, 2012.  The $35,000 benefit recorded in 2013 was the result of a tax benefit in the amount of $1.5$1.2 million calculated on the net lossprofit generated during the period using the Company’sour normal estimated tax ratesrate, offset by an adjustment to the deferred tax asset valuation allowance in the amount of $1.4$1.3 million.  The effective tax rate was (42%)rates for 2013the twelve month periods ended December 31, 2016 and 27% for 2012,2015 were 25% and 38%, respectively, excluding thean adjustment to the deferred tax asset valuation allowance.

The Company evaluatesWe evaluate the carrying amount of its 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 (ASC) 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 based on the available evidence that it is more likely than not that some portion or all of the deferred tax assetassets 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’smanagement's evaluation of both positive and negative evidence.

In conducting the deferred tax asset analysis, the Company believeswe 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 the Company. In addition, it is also important to consider that NOLsnet 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 fully recognizerealize our deferred tax assets, we must generate sufficient taxable income in such future years.

In assessing the need for a valuation allowance, the Companywe 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.  A cumulative loss in recent years is a significant piece of negative evidence that is difficult to overcome. Based on the analysis of available positive and negative evidence, the Companywe determined that a valuation allowance should be recorded as of December 31 2013 , 2016 and December 31, 2012.2015.
36

When calculating an estimate for a valuation allowance, the Company 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. As a result of cumulative losses in recent years and the uncertain nature of the current economic environment, the Company did not use projections of future taxable income, exclusive of reversing temporary timing differences and carryforwards, as a factor. The Company will exclude future taxable income as a factor until it can show consistent and sustainable profitability.

The CompanyWe 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 foron future fixed asset purchases. The Company believesWe believe that these tax planning strategies are (a) prudent and feasible;feasible, (b) steps that the Companywe would not ordinarily take, but would take to prevent an operating loss or tax credit carryforward from expiring unused;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. The Company believesWe 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, has no present intention to implement such strategies.
33

The net deferred tax asset balance before consideration of a valuation allowance was $21.4 million as of December 31, 20132016 and $17.5$20.2 million as of December 31, 2012.  The2015.  After assessment of all available tax planning strategies, assessed resultedwe determined that a partial valuation allowance in the projected realizationamount of approximately $6.1 million in tax assets which can be considered more likely than not to be realized as of December 31, 2013 and $3.6$12.2 million as of December 31, 2012. Accordingly, the Company recorded a partial valuation allowance related to the deferred tax asset balance in the amount of $15.32016 and $13.7 million as of December 31, 2013 and $13.9 million as of December 31, 2012.2015 should be recorded.

The deferred tax asset will continue to be analyzed on a quarterly basis for changes affecting realizability.  Sustained profitability is a driving factor used to determine when projections of future taxable income become more reliable and can again be used to assess the ability to fully realize the deferred tax asset.  When the determination is made to include projections of future taxable income asthat a factor, 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 twelve month period ended December 31, 2016 was $4.9 million, an increase of $2.5 million compared to $2.4 million for the twelve month period ended December 31, 2015. For the twelve month period ended December 31, 2016, basic and fully-diluted net income per common share were $0.13 and $0.12, respectively, compared to basic and fully-diluted net income per common share of $0.06 for the twelve month period ended December 31, 2015.

Return on Average Assets and Average Equity
Return on average assets (ROA) measures our net income in relation to our total average assets. The ROA for the twelve month periods ended December 31, 2016 and 2015 was 0.30% and 0.19%, 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 for the twelve month period ended December 31, 2016 was 3.97%, compared to 2.14% for the twelve month period ended December 31, 2015.

Results of Operations

For the year ended December 31, 20122015 as compared to the year ended December 31, 20112014

We recordedreported net income of $3.6$2.4 million, or $0.14$0.06 per diluted share, for 2012the twelve months ended December 31, 2015 compared to a net lossincome of $24.7$2.4 million, or $0.95$0.07 per diluted share, for 2011. The netthe twelve months ended December 31, 2014.
37
Net interest income for 2012 was primarily driven by the significant improvement in asset qualitytwelve months ended December 31, 2015 increased $4.2 million to $40.1 million as compared to 2011, which resulted$35.8 million for the twelve months ended December 31, 2014.  Interest income increased $5.0 million, or 12.3%, due primarily to an increase in a much lower loan loss provisionaverage loans receivable and a reduction of other credit costsinvestment securities balances. Interest expense increased $737,000 or 15.9%, primarily due to an increase in 2012.  average deposit balances.
We recorded a loan loss provision in the amount of $1.4 million$500,000 for 2012the twelve months ended December 31, 2015 compared to a $16.0 million provision of $900,000 during the twelve months ended December 31, 2014.  The lower provision recorded for 2011.  Financial results for 2011 were impactedthe twelve months ended December 31, 2015 was driven by a loss incurred ondecrease in the reserve required for loans individually evaluated for impairment in 2015.
Non-interest income increased $1.9 million to $9.9 million during the twelve months ended December 31, 2015 as compared to $8.0 million during the twelve months ended December 31, 2014 primarily driven by a bulk$2.6 million insurance settlement recorded in 2015 which was related to a bond claim against a corporate insurance policy originally submitted in 2010.
Non-interest expenses increased $6.5 million to $47.1 million during the twelve months ended December 31, 2015 as compared to $40.6 million during the twelve months ended December 31, 2014.  The increase was primarily driven by higher salaries, employee benefits, occupancy and equipment expenses associated with the addition of new stores related to our expansion strategy which we refers to as "The Power of Red is Back." In addition, we made a decision in 2015 to aggressively pursue a potential sale of distressed and impaired commercial real estate loans and foreclosed properties which closedour largest OREO asset resulting in the fourth quartera write-down of 2011. approximately $2.2 million.

Return on average assets and average equity was 0.37%from continuing operations were 0.19% and 5.36%2.14%, respectively, during the twelve months ended December 31, 2015 compared to 0.23% and 2.51%, respectively, for 2012 as compared to (2.68)% and (28.68)%, respectively, for 2011.  Average equity to average assets was 6.95% for 2012 as compared to 9.34% for 2011.the twelve months ended December 31, 2014.

Net Interest Income and Net Interest Margin

The Company’s total tax equivalentNet interest income, remained flat at $38.7on a fully tax-equivalent basis, for the twelve months of 2015 increased by $4.5 million, or 12.3%, over the same period in 2014. Interest income on interest-earning assets totaled $46.0 million for 2012 compared to 2011.  A $20.4 million reduction in average loans receivable was offset by a 7 basis point increase in loan yields and a $31.1 million increase in average investment securities.  The Company also reduced its average non-performing asset balances through a bulk salethe twelve months of distressed loans and foreclosed properties during the fourth quarter of 2011.

The Company’s total interest expense decreased $1.8 million, or 22.4%, to $6.4 million for 2012, from $8.2 million for 2011 as the Company continues to lower the rates paid on interest bearing deposit accounts. Interest-bearing liabilities averaged $757.8 million for 2012, versus $707.0 million for 2011,2015, an increase of $50.8 million.  Average deposit balances increased $70.9$5.2 million, and average other borrowings decreased $2.3 million, as acompared to the same period in 2014. The increase in interest income earned was the result of an increase in the Company’s retail focused, customer service strategy, which emphasizesaverage balance of loans receivable and investment securities that helped to offset a 20 bp decrease in the gatheringyield on loans receivable. Total interest expense for the twelve months of low-cost core deposits.  The average rate paid on interest-bearing deposits decreased 33 basis points2015 increased $737,000, or 15.9%, to 0.71% for 2012, as compared to 1.04% for 2011.  Average time deposit balances declined $89.2$5.4 million for 2012 as compared to 2011.from $4.6 million over the same period in 2014. Interest expense on time deposit balances decreased $1.3 million to $1.7 million in 2012 from $3.0 million in 2011.  The maturity and roll-offdeposits increased by $730,000, or 20.6%, for the twelve months of higher cost time deposits resulted in2015 versus the decrease in the average rate paid on time depositssame period of 13 basis points to 1.10% for 2012 as compared to 1.23% for 2011. Average money market and savings balances increased $87.5 million for 2012 as compared to 2011.  Money market and savings interest expense decreased $739,000 to $2.7 million in 2012 from $3.5 million in 2011, primarily due to a reduction in rates paid on money market and savings deposits as a result of the aforementioned customer service strategy.  Accordingly, rates on total interest-bearing liabilities decreased 32 basis points in 2012 when compared to 2011.
34

The tax equivalent net interest margin decreased 6 basis points to 3.53% during 2012, compared to 3.59% during 2011 and the Company’s tax equivalent net interest income increased $1.8 million, or 5.9 %, to $32.3 million for 2012, as compared to $30.5 million for 2011.

Yields on interest-bearing assets decreased 33 basis points to 4.23% in 2012 from 4.56% in 2011 and the rates on total deposits and other borrowings decreased 28 basis points to 0.71% in 2012 from 0.99% in 2011. The decrease in yields on assets and rates on deposits/and borrowings was due to decreases in both average loans outstanding and the average cost of deposits.
2014. Interest expense on other borrowings decreased $1,000increased by $7,000 for the twelve months of 2015 compared to $1.1 millionthe same period in 2012.  Average other borrowings, consisting mainly of $22.5 million of trust preferred securities outstanding, decreased $2.3 million, or 9.3%,2014.

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 respective periods. Asaverage 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 3.16% during the twelve months of 2015 versus 3.41% during the twelve months of 2014. 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.  For the twelve months of 2015 and 2014, the fully tax-equivalent net interest margin was 3.29% and 3.56%, respectively.  The net interest margin for the year ending December 31, 2015 decreased primarily as a result of a decrease in the continued success of our retail deposit gathering strategy we were able to further reduce dependenceyield on short-term borrowings during 2012.loans receivable.
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Provision for Loan Losses

We recorded a provision for loan losses in the amount of $500,000 for the twelve months ended December 31, 2015 compared to a $900,000 provision for the twelve months ended December 31, 2014. 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 Company recorded a $1.4 million provision for loan losses during 2012 compared to $16.0 million for the comparable prior year period.

The lower provision recorded during 2012 was mainly attributablefor the twelve months ended December 31, 2015 as compared to the significanttwelve months ended December 31, 2014 decreased due to an improvement in creditasset quality, which resulted in the loan portfolio, along with a reduction in the component of the allowance for loan losses related torequired for loans collectivelyindividually evaluated for impairment causedin 2015.
Non-Interest Income 

Total noninterest income for the twelve months of 2015 increased by an adjustment$1.9 million, or 24.0%, from the same period in 2014. We recorded a $2.6 million insurance settlement in 2015 which was related to a claim against a corporate insurance policy originally submitted in 2010.  Loan advisory and servicing fees increased by $774 thousand in 2015 due to higher servicing fee income on SBA loans. Service fees on deposit accounts increased by $496,000 in 2015 compared to 2014 due to the analysisgrowth in the number of historical lossescustomer accounts and deposit balances. We recognized gains of $108,000 on the sale of investment securities during 2015 compared to gains of $458,000 on the sale of investment securities in 2014. Gains recognized on the sale of SBA loans were $3.1 million during the period.  See disclosure under “Credit Quality”twelve months of 2015 compared to $4.7 million in the same period of 2014 primarily due to a decrease in the volume of loans originated and “Allowance for Loan Losses” for further discussion.sold in 2015.

Non-Interest Expenses
 
The $16.0 provision recordedIn 2015, noninterest expenses increased by $6.5 million, or 16.1%, compared to 2014. An explanation of changes in 2011 wasnoninterest expenses for certain categories is presented in the following paragraphs.

Salary expenses and employee benefits in 2015 were $22.5 million, an increase of $2.4 million, or 11.9%, compared to 2014 primarily driven by $9.6 millionannual merit increases along with increased staffing levels related to our aggressive growth strategy of charge-offs taken in relationadding and relocating stores, which we refer to a bulk saleas "The Power of classified and non-performing commercial real estate loans that was closed during the fourth quarter of 2011.  This sale substantially reduced non-performing asset balances and immediately improved credit quality metrics.  The remainder of the provision recorded during 2011 was driven by updated appraisals of collateral associated with troubled loans, which were received earlier in the year.  Every non-performing asset included in the loan sale, which drove the loan loss provisions recorded during 2011 and 2010, was originated prior to December 31, 2007.  Red is Back."

Non-Interest Income
Total non-interest income decreased to $8.8Occupancy related expenses increased by $1.4 million, for 2012or 20.8%, in 2015 compared to $10.6 million for 2011, primarily due to revenue recognized on two legal settlements in 2011 which did not recur in 2012.
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Non-Interest Expenses

Total non-interest expenses decreased $5.3 million, or 12.9% to $35.9 million for 2012 compared to $41.2 million for 2011 primarily2014, also as a result of lower expenses related to foreclosedthe growth and relocation strategy. Three new stores were opened during 2015 and two additional sites were under construction at year end.

Other real estate owned expenses totaled $4.2 million during 2012. Carrying costs and write downs2015, an increase of $2.4 million, when compared to 2014 primarily due to higher writedowns on foreclosed assets held in other real estate owned. A writedown of $2.2 million was recorded against the largest asset held in other real estate owned amounted to $0.8 million in 2012 compared to $7.3 million in 2011.  A significant portion of the write downs and expenses incurred during 2011 were related to the disposition of foreclosed properties in a bulk sale of impaired assets which was completed in the fourth quarter of 2011. The decrease in other real estate costs was offset by increases of $1.3 million in salaries and benefits and $1.0 million in legal fees during 2012.  Salaries and benefits primarily grew2015 as a result of meritour decision to aggressively pursue a potential sale of this asset.

In addition, minor increases in data processing, other operating expenses, regulatory assessments, insurance, other taxes, and advertising for the twelve months of 2015 versus the same period last year were offset by minor decreases in legal expenses and professional fees.

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 noninterest expenses equal noninterest expenses less noninterest income and nonrecurring expense. For the twelve month period ended December 31, 2015, the ratio equaled 2.83% compared to 3.05% for the twelve month period ended December 31, 2014, respectively, reflecting higher bonus expense.  Legal fees increasedaverage assets related to our growth strategy.
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Another productivity measure utilized by management is the operating efficiency ratio. This ratio expresses the relationship of noninterest expenses to net interest income plus noninterest income. The efficiency ratio equaled 94.2% for the twelve months of 2015, compared to 92.5% for the twelve months of 2014. The increase for the twelve months ended December 31, 2015 versus December 31, 2014 was due to costs incurred on matters associated with troubled loans.an increase in total noninterest expenses.

Provision (Benefit) for Income Taxes
 
The CompanyWe recorded a benefit for income taxes in the amount of $144,000$26,000 for the twelve month periodmonths ended December 31, 2012,2015, compared to a provision for income taxes of $8.2 million$46,000 benefit for the twelve month periodmonths ended December 31, 2011.2014.  The $144,000$26,000 benefit recorded in 2012during the twelve months of 2015 was the net result of aan estimated tax provision in the amount of $939,000$911,000 calculated on the net profit generated during the period using the Company’sour normal estimated tax ratesrate, offset by an adjustment to the deferred tax asset valuation allowance in the amount of $1.0 million.$937,000.  The effective tax rate was 27%rates for 2012the twelve month periods ended December 31, 2015 and 2014 were 38% for 2011,and 26%, respectively, excluding thean adjustment to the deferred tax asset valuation allowance.

We evaluate the carrying amount of its 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 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.

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 the Company. 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.

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. A cumulative loss in recent years is a significant piece of negative evidence that is difficult to overcome.

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 carry forwards as defined in ASC 740. We did not use projections of future taxable income, exclusive of reversing temporary timing differences and carryforwards, as a factor in the analysis. We will exclude future taxable income as a factor until we can show consistent and sustainable profitability. Based on the analysis of available positive and negative evidence, we determined that a valuation allowance should be recorded as of December 31, 2015 and December 31, 2014.
40

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, has no present intention to implement such strategies.

The net deferred tax asset balance before consideration of a valuation allowance was $20.2 million as of December 31, 2015 and $19.6 million as of December 31, 2014.  After assessment of all available tax planning strategies, we determined that a partial valuation allowance in the amount of $13.7 million as of December 31, 2015 and $14.7 million as of December 31, 2014 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 as a factor in recovering the deferred tax asset, the valuation allowance will be reduced accordingly resulting in a corresponding increase in net income.

Net Income and Net Income per Common Share

Net income for the twelve month periods ended December 31, 2015 and 2014 was $2.4 million. For the twelve month period ended December 31, 2015, basic and fully-diluted net income per common share was $0.06 compared to basic and fully-diluted net income per common share of $0.07 for the twelve month period ended December 31, 2014.

Return on Average Assets and Average Equity
Return on average assets (ROA) measures our net income in relation to our total average assets. The ROA for the twelve month periods ended December 31, 2015 and 2014 was 0.19% and 0.23%, 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 for the twelve month period ended December 31, 2015 was 2.14%, compared to 2.51% for the twelve month period ended December 31, 2014.
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Financial Condition

December 31, 20132016 compared to December 31, 20122015

Total assets decreased $27.0increased by $485.1 million to $961.7 million$1.9 billion at December 31, 2013,2016, compared to $988.7 million$1.4 billion at December 31, 2012, mainly due to a decrease in cash and cash equivalents and deposit balances.2015.

Cash and Cash Equivalents
 
Cash and due from banks and interest bearing deposits comprise this category, which consists of our most liquid assets. The aggregate amount in these twothree categories decreasedincreased by $92.1$7.4 million to $35.9$34.6 million at December 31, 2013,2016, from $128.0$27.1 million at December 31, 2012. The decrease was primarily caused by a growth in outstanding loan balances, a decrease in deposit balances, and the purchase of investment securities during 2013.2015.

Loans Held for Sale

Loans held for sale are comprised of loans guaranteed by the U.S. Small Business Administration (“SBA”("SBA") which the Companywe usually originatesoriginate 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 $4.9$4.2 million at December 31, 2013.  This increase was primarily driven by the timing of settlement on the2016 compared to $3.7 million at December 31, 2015.  Residential mortgage loans held for sale of two loans which closed shortly after the year end.totaled $23.9 million at December 31, 2016. Loans held for sale, as a percentage of our total Company assets, were less than 1%1.5% at December 31, 2013.2016.

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. The loan portfolio consists of secured and unsecured commercial loans including commercial real estate, construction loans, residential mortgages, automobile loans, home improvement loans, home equity loans and lines of credit, overdraft lines of credit, and 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 $13.9$27.0 million at December 31, 2013.2016. Loans made to one individual customer, even if secured by different collateral, are aggregated for purposes of the lending limit. The aggregate amountThere were no loans in excess of those relationships that exceeded $9.3 millionthe legal lending limit at December 31, 2013, was $143.2 million. A $9.32016.  An $18.0 million threshold, which amounts to approximately 10% of total regulatory capital, reflects an additional internal monitoring guideline.
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  There were no such relationships in excess of $18.0 million at December 31, 2016.

Loans increased $61.4$90.2 million, or 10%, to $679.3$965.0 million at December 31, 2013,2016, versus $617.9$874.8 million at December 31, 2012.2015.  This growth was driven bythe result of an increase in loan demand in the consumer, commercial real estate, commercial and industrial and owner occupied real estate, commercial real estate, consumer, construction and development, and residential categories resulting in higher originations during 2013.driven by the successful execution of our relationship banking strategy which focuses on customer service.

Investment Securities
 
Investment securities considered available-for-sale are investments that 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 $204.9$369.7 million at December 31, 2013,2016, compared to $189.3$284.8 million at December 31, 2012.2015. The increase of $15.6 million was primarily due to the purchase of available-for-sale securities totaling $62.5$207.5 million partially offset by proceeds from sales and pay downs of securities totaling $40.9$115.6 million during 2013.2016. At December 31, 2013,2016, the portfolio had a net unrealized loss of $4.4$10.7 million compared to a net unrealized gainloss of $1.6$4.0 million at December 31, 2012.2015.  The change in value of the investment portfolio was driven by an increase in market interest rates and widening asset spreadswhich drove a decrease in value of the securities held in our portfolio during 2013.2016.
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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 debt securities. AtU.S. Government agency Small Business Investment Company bonds (SBIC) and Small Business Administration (SBA) bonds, CMO's and MBS's. The fair value of securities held-to-maturity totaled $425.2 million and $171.8 million at December 31, 20132016 and December 31, 2012, securities held to maturity totaled $21,000 and $67,000,2015, respectively. The decreaseincrease was due to the purchase of $46,000 was the result$294.2 million of a debt security reaching its maturityheld-to-maturity securities partially offset by pay downs of securities totaling $33.2 million during the fourth quarter of 2013. At both dates, respective carrying values approximated market values.2016.

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 December 31, 20132016 and December 31, 2012.2015.  As of those dates, restricted stock consisted of investments in the capital stock of the Federal Home Loan Bank of Pittsburgh (“FHLB”("FHLB") and Atlantic CentralCommunity Bankers Bank (“ACBB”("ACBB").  In 2012, the FHLB repurchased 29% of Republic’s total restricted stock outstanding and issued its first dividend payments since 2008. During 2013, FHLB repurchased all remaining excess restricted stock outstanding and continued with the quarterly payment of dividends.

At December 31, 20132016 and December 31, 2012,2015, the investment in FHLB of Pittsburgh stock totaled $1.4$1.2 million and $3.7$2.9 million, respectively.  The decrease was due to a short-term borrowing from FHLB at December 31, 2015 which resulted in a higher required investment as of that date.  At both December 31, 20132016 and December 31, 2012,2015, ACBB stock totaled $143,000.
37

Other Real Estate Owned
 
The balance of other real estate owned decreased to $4.1$10.2 million at December 31, 20132016 from $8.9$11.3 million at December 31, 2012,2015, primarily due to the sale of two OREO propertiessales totaling $2.2$1.4 million and writedowns in the amount of $2.6 million on existing foreclosed properties during 2013.current year.

Bank Owned Life InsuranceGoodwill

At December 31, 2013,Goodwill resulting from the Company carried no investmentacquisition of Oak Mortgage in bank owned life insurance asset, comparedJuly 2016 amounted to a $10.5$5.0 million asset at December 31, 2012.  The decrease2016.  There was due to surrender proceeds of $10.5 million received as a result of the Company’s decision to liquidate this investment in the second quarter of 2013.no goodwill recorded at December 31, 2015.

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

Total deposits decreasedincreased by $19.7$428.4 million to $869.5 million$1.7 billion at December 31, 2013,2016, from $889.2 million$1.2 billion at December 31, 2012.  2015.  The decreaseincrease was primarily the result of growth across all deposit categories, led by a reductionsignificant rise in certificatedemand 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 money marketsatisfaction.  We are also in the midst of an aggressive expansion and savings balances partially offset by increasesrelocation 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 non-interestvarious stages of construction and interest-bearing demand deposit balances. The reduction in certificate of deposit balances was primarily the result of maturities of internet-based certificates of deposit which the Company considers non-core deposits and intentionally decided notdevelopment.  This strategy has also allowed us to renew. Republic has continued to focus on its efforts to gather low-cost, core deposits, intentionally reducingnearly eliminate our dependence onupon the more volatile sources of funding found in brokered and public fund certificates of deposit.
 
Shareholders’
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Short-term Borrowings
As of December 31, 2016, there were no short-term borrowings from FHLB compared to $47.0 million at December 31, 2015. The decrease in borrowings was the result of a temporary outflow of deposits at the end of the year in 2015, which returned in the early part of 2016.

Shareholders' Equity
 
Total shareholders’shareholders' equity decreased $7.0increased $101.7 million to $62.9$215.1 million at December 31, 2013,2016, compared to $69.9$113.4 million at December 31, 2012, primarily due to accumulated other comprehensive losses associated with unrealized losses2015. We completed a capital raise in the investment securities portfolioamount of $100 million through a registered direct offering of our common stock in 2013 and the net loss recognizeda private placement offering in 2013.  The shift in market value of the securities portfolio resulting in accumulated other comprehensive losses of $2.8 million at December 31, 2013 compared to accumulated other comprehensive income of $1.0 million at December 31, 2012 was primarily driven by an increase in market interest rates and widening asset spreads during the period causing a decline in the value of the investments held in the portfolio.2016.

Investment Securities Portfolio
 
Republic’sRepublic's investment securities portfolio is intended to provide liquidity and contribute to earnings while diversifying credit risk. We attempt to maximize earnings while minimizing our exposure to interest rate risk. The securities portfolio consists primarily of U.S. Government agency collateralized mortgage obligations (CMO), agency mortgage-backed securities (MBS), corporate bonds, municipal securities, asset-backed securities (ABS), and pooled trust preferred securities (CDO)., and U.S. Government agency Small Business Investment Company bonds (SBIC) and Small Business Administration (SBA) bonds. Our ALCO committee monitors and reviews all security purchases.
38

A summary of investment securities available-for-sale and investment securities held-to-maturity at December 31, 2013, 20122016, 2015, and 20112014 is as follows:
  At December 31, 
(dollars in thousands) 2016  2015  2014 
Available for sale         
Collateralized mortgage obligations $230,252  $180,795  $98,626 
Agency mortgage-backed securities  37,973   10,073   13,271 
Municipal securities  26,825   22,814   15,784 
Corporate bonds  66,718   54,294   33,840 
Asset-backed securities  15,565   17,631   18,353 
Trust preferred securities  3,063   3,070   5,261 
Other securities  -   115   115 
Total amortized cost of securities $380,396  $288,792  $185,250 
             
Total fair value of investment securities $369,739  $284,795  $185,379 
             
Held to maturity            
U.S. Government agencies $98,538  $17,067  $1 
Collateralized mortgage obligations  202,990   146,458   67,845 
Agency mortgage-backed securities  129,951   7,732   - 
Other securities  1,020   1,020   20 
Total amortized cost of securities $432,499  $172,277  $67,866 
             
Total fair value of investment securities $425,183  $171,845  $68,253 
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  At December 31, 
(dollars in thousands) 2013  2012  2011 
Available for sale         
Collateralized mortgage obligations $127,242  $97,959  $117,382 
Mortgage-backed securities  15,669   20,626   12,764 
Municipal securities  9,737   11,150   10,863 
Corporate bonds  32,174   32,231   26,881 
Asset-backed securities  19,089   19,785   - 
Trust preferred securities  5,277   5,785   6,375 
Other securities  115   131   131 
Total amortized cost of securities $209,303  $187,667  $174,396 
             
Total fair value of investment securities $204,891  $189,259  $174,323 
             
Held to maturity            
U.S. Government Agencies $1  $1  $2 
Other securities  20   66   138 
Total amortized cost of securities $21  $67  $140 
             
Total fair value of investment securities $21  $69  $144 
The strong growth in deposit balances during 2016, 2015, and 2014 has resulted in a corresponding increase in interest earning assets.  A capital raise in the amount of $100 million completed in December 2016 also contributed to the growth of interest earning assets during the current year. The total amortized cost of the investment securities portfolio has grown to $812.9 million at December 31, 2016 compared to $461.1 million at December 31, 2015 and $253.1 million at December 31, 2014.  Investment securities represented 42% of total assets at December 31, 2016 and 32% of total assets at December 31, 2015.  We evaluate our investment securities portfolio on a continual basis in light of the interest rate environment and changing market conditions and when appropriate, take necessary actions to improve and enhance our overall positioning.  We consider the portfolio to be well structured and of high quality. At December 31, 2016, 86% of the portfolio consisted of U.S. government agency securities which were rated Aaa /AA+ by the major credit rating agencies.

       The investment securities portfolio includes securities classified as both available for sale and held to maturity. During 2016 and 2015, we designated a portion of our securities portfolio as held to maturity based our intent and ability to hold those securities until they mature.

       The fair value of investment securities is impacted by interest rates, credit spreads, market volatility and liquidity conditions. The fair value of investment securities generally decreases when interest rates rise and increases when interest rates fall. In addition, the fair value generally decreases when credit spreads widen and increases when credit spreads tighten. Net unrealized losses in the total investment securities portfolio increased to $18.0 million at December 31, 2016 compared to net unrealized losses of $4.4 million at December 31, 2015 as a result of a rise in interest rates in 2016. The comparable amounts for the securities classified as available for sale were unrealized losses of $10.7 million at December 31, 2016 and unrealized gains of $4.0 million at December 31, 2015.

No single issuer of securities (excluding government agencies) account forin the portfolio exceeded more than 10% of shareholders’shareholders' equity at December 31, 20132016. No single issuer of securities (excluding government agencies) in the portfolio exceeded more than 10% of shareholders' equity at December 31, 2015 with the exception of corporate bonds issued by Goldman Sachs and Morgan Stanley.  The Goldman Sachs bonds had a book value of $10.3$18.0 million and a market value of $10.8 million at December 31, 2013.$17.9 million. The Morgan Stanley bonds had a book value of $10.0$15.0 million and a market value of $10.3$15.1 million at December 31, 2013.2015.

At December 31, 2013,2016, the investment portfolio included seventeenforty-six municipal securities with a total market value of $9.6$26.5 million.  TheThese securities are reviewed quarterly for impairment.  Research on each issuer is completed to assess the financial stability of the municipal entity.  The largest geographic concentration was in Pennsylvania and New Jersey where oneforty-two municipal securitysecurities had a market value of $1.3$24.8 million. As of December 31, 2013,2016, management found no evidence of other than temporary impairment (“OTTI”("OTTI") on any of the municipal securities held in the investment securities portfolio.

At December 31, 2013,2016, the portfolio included two asset-backed securities with a total market value of $19.4$15.1 million, the majority of which (97%) is guaranteed by the U.S. Dept. of Education.Education, which were in an unrealized loss position. Management believes the unrealized losses on these securities were driven by market interest rates and not a result of any credit deterioration.

At December 31, 2013,2016, the portfolio also included three pooled trust preferred securities (CDOs) with a market value of $2.9$1.8 million. The unrealized loss for the CDOs was due to the secondary market for such securities becoming inactive and is considered temporary.
 
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During 2016, we sold no CDO securities. During 2015, we sold four CDO securities. Proceeds from the sale of the CDO securities totaled $2.0 million. Gross gains of $70,000 and gross losses of $288,000 were realized on these sales.  The tax provision applicable to the net losses for the twelve months ended December 31, 2015 amounted to $78,000. Management had previously stated that it did not intend to sell the CDO securities prior to their maturity or the recovery of their cost bases, nor would it be forced to sell these securities prior to maturity or recovery of the cost bases.  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 2015, management received several inquiries regarding the availability of the 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 the four CDOs resulting in a net loss of $218,000 during 2015 which was offset by gains on sales of agency mortgage-backed securities and corporate bonds.  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.

During 2016, we sold eight collateralized mortgage obligations, two agency mortgage-backed securities, and one corporate bond. Proceeds of sales totaled $78.6 million. Gross gains of $680,000 and gross losses of $24,000 were realized on these sales. The tax provision applicable to the gross gains amounted to $244,000. During 2015, we also sold twenty-nine agency mortgage-backed securities and two corporate bonds. Proceeds of sales totaled $9.7 million. Gross gains of $326,000 were realized on these sales. The tax provision applicable to the gross gains amounted to $117,000.

The following table presents the contractual maturity distribution and weighted average yield by holding type and year of maturity of our investment securities portfolio at December 31, 2013. Mortgage-backed2016. 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 categorized based on finalclassified separately with no specific maturity dates and do not consider the impact of amortization or prepayments on the estimated average life.date.

  December 31, 2016 
  Within One Year  One to Five Years  Five to Ten Years  Past Ten Years  Total 
 
(dollars in thousands)
 
Amount
  
Yield
  
Amount
  
Yield
  
Amount
  
Yield
  
Amount
  
Yield
  Fair value  
Cost
  
Yield
 
Available for Sale                                 
Collateralized  mortgage obligations $-   
-
  $-   
-
  $-   
-
  $-   
-
  $224,765  $230,252   2.09%
Agency mortgage-backed securities  
-
       
-
   
-
   
-
   
-
   
-
   
-
   
36,710
   
37,973
   2.18%
Municipal securities  1,002   4.17%  4,453   2.55%  18,748   2.86%  2,344   2.54%  26,547   26,825   2.83%
Corporate bonds  -   -   8,671   3.38%  34,237   3.53%  21,840   4.24%  64,748   66,718   3.73%
Asset-backed securities  -   -   6,367   1.90%  8,782   2.58%  -   -   15,149   15,565   2.29%
Trust Preferred securities  
-
   
-
   
-
   
-
   
1,820
   3.29%  
-
   
-
   
1,820
   
3,063
   3.29%
Total AFS securities $1,002   4.17% $19,491   2.71% $63,587   3.19% $24,184   4.08% $369,739  $380,396   2.44%
                                             
Held to Maturity                                            
U.S. Government Agencies $-   
-
  $3,586   2.08% $92,722   2.37% $-   
-
  $96,308  $98,538   2.36%
Collateralized  mortgage obligations  
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   
201,230
   
202,990
   2.18%
Agency mortgage-backed securities  -   -   
-
   
-
   
-
   
-
   
-
   
-
   126,625   129,951   2.41%
Other securities  -   -   1,020   2.21%  -   -   -   -   1,020   1,020   2.21%
Total HTM securities $-   -  $4,606   2.11% $92,722   2.37% $-   -  $425,183  $432,499   2.29%


  December 31, 2013
  Within One Year One to Five Years Five to Ten Years Past Ten Years Total
 
(dollars in thousands)
 Amount  Yield Amount  Yield Amount  Yield Amount  Yield Fair value  Cost  Yield
Available for Sale                                 
Collateralized  mortgage obligations $-    -  $-    -  $-    -  $123,440   2.43% $123,440  $127,242   2.43%
Mortgage-backed securities   -    -    -    -    30   1.94%   16,151   3.40%   16,181    15,669   3.40%
Municipal securities  -   -   -   -   5,642   2.54%  4,001   4.14%  9,643   9,737   3.20%
Corporate bonds  -   -   26,173   3.28%  4,074   5.59%  3,006   3.69%  33,253   32,174   2.92%
Asset-backed securities  -   -   -   -   10,536   1.45%  8,871   1.47%  19,407   19,089   1.46%
Trust Preferred securities   -    -    -    -   -   -    2,850   0.00%   2,850    5,277   0.00%
Other securities  -   -   117   1.17%  -   -   -   -   117   115   1.17%
Total AFS securities $-   -  $26,290   3.27% $20,282   2.58% $158,319   2.50% $204,891  $209,303   2.50%
                                             
Held to Maturity                                            
U.S. Government Agencies $-    -  $1   1.51% $-    -  $-    -  $1  $1   1.51%
Other securities  -   -   20   0.00%  -   -   -   -   20   20   0.00%
Total HTM securities $-   -  $21   0.08% $-   -  $-   -  $21  $21   0.08%


46
Fair Value of Financial Instruments

Management uses its best judgment in estimating the fair value of the Company’sour 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 Companywe could have realized in a sale transaction on the dates indicated.  The estimated fair value amounts have been measured as of their respective year-ends and have not been re-evaluated or updated for purposes of these financial statements subsequent to those respective dates.  As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at each year-end.

The Company followsWe follow the guidance issued under ASC 820, Fair Value Measurement, which defines fair value, establishes a framework for measuring fair value under GAAP, and identifies required disclosures on fair value measurements.
 
ASC 820 establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value.  The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 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.
 
40
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’sasset's or liability’sliability's level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

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’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’smanagement's best estimate is used.  Management’sManagement'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 theour U.S. government and agency securities, corporate bonds, asset backed securities, and municipal obligations and corporate bonds.obligations. Such instruments are generally classified within Level 2 of the fair value hierarchy. As required by ASC 820,820-10, we do not adjust the matrix pricing for such instruments.
47

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’smanagement'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 currently held in the company’s portfolio are classified as available for sale and consistare comprised of various issues of trust preferred securities and a single corporate bond.

The trust preferred securities are pools of similar securities that are grouped into an asset structure commonly referred to as collateralized debt obligations (“CDOs”("CDOs") which consist of the debt instruments of various banks, diversified by the number of participants in the security as well as geographically. These securities are performing according to terms, however theThe secondary market for suchthese securities has become inactive, and suchtherefore these securities are therefore 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 noa limited secondary market for the securities and there can be no assurance that any secondary market for the securities will develop.expand.

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 year ended December 31, 2013, 2012,2016, 2015, and 2011:
41
2014:

 
Year Ended
December 31, 2013
  
Year Ended
December 31, 2012
  
Year Ended
December 31, 2011
  
Year Ended
December 31, 2016
  
Year Ended
December 31, 2015
  
Year Ended
December 31, 2014
 
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
  
Trust
Preferred Securities
  
Corporate
Bonds
  
Trust
Preferred Securities
  
Corporate
Bonds
 
Balance, January 1, $3,187  $3,007  $3,410  $3,004  $3,450  $3,000  $1,883  $2,834  $3,193  $3,005  $2,850  $3,006 
Security transferred to Level 3 measurement  -   -   -   -   -   -   -   -   -   -   -   - 
Unrealized gains (losses)  171   (1)  401   3   2   4   (56)  137   882   (171)  360   (1)
Paydowns  (508)  -   (590)  -   -   -   -   -   (19)  -   (10)  - 
Proceeds from sales  -   -   (1,952)  -   -   - 
Realized losses  -   -   (218)  -   -   - 
Impairment charges on Level 3  -   -   (34)  -   (42)  -   (7)  -   (3)  -   (7)  - 
Balance, December 31, $2,850  $3,006  $3,187  $3,007  $3,410  $3,004  $1,820  $2,971  $1,883  $2,834  $3,193  $3,005 

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 December 31, 20132016 and December 31, 2012.2015. 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.  A detailed explanation of the assumptions used to estimate the fair market value of the CDOs can be found in Note 14 “Fair Value Measurements and Fair Values of Financial Investments” to the Consolidated Financial Statements.

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. 
 
48
Increases (decreases) in actual or expected issuer defaults tend to decrease (increase) the fair value of the Company’sour senior and mezzanine tranches of CDOs. The values of the Company’sour 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’sour holdings are not quantifiably estimable.

Also included in Level 3 investment securities classified as available for sale is a single-issuer corporate bond transferred from Level 2 in 2010 since the bondthat 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’sissuer's financial statements.  The issuer is a “well capitalized”"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.

42

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’sRepublic's commercial loans typically range between $250,000 and $5.0 million, but customers may borrow significantly larger amounts up to Republic’sRepublic's legal lending limit of approximately $13.9$27.0 million at December 31, 2013.2016. Management has established an internal monitoring guideline for loan relationships in the amount of $18.0 million which approximates 10% of capital and reserves. Individual customers may have several loans often secured by different collateral. Such relationships in excess of $9.3 million (an internal monitoring guideline which approximates 10% of capital and reserves) at December 31, 2013, amounted to $143.2 million. There were no loanssuch relationships in excess of the legal lending limit or the internal monitoring guideline of $18.0 million at December 31, 2013.2016.
 
The majority of loans outstanding are with borrowers in our marketplace, Philadelphia and surrounding suburbs, including southern New Jersey. In addition, we have loans to customers whose assets and businesses are concentrated in real estate. Repayment of our loans is in part dependent upon general economic conditions affecting our market place and specific industries. We evaluate each customer’scustomer's credit worthiness on a case-by-case basis. The amount of collateral obtained is based on management’smanagement's credit evaluation of the customer. Collateral varies but primarily includes residential, commercial and income-producing properties.

At December 31, 2013,2016, we had loan concentrations exceeding 10% of total loans for credits extended to lessors of nonresidential real estate in the aggregate amount of $207.5$201.0 million, which represented 30.5%20.8% of gross loans receivable at December 31, 2013 and lessors of residential real estate in the aggregate amount of $104.9$128.8 million, which represented 15.4%13.3% of gross loans receivable at December 31, 2013.receivable.  Loan concentrations are considered to exist when amounts are loaned to multiple numbers of borrowers engaged in similar activities that management believes would cause them to be similarly impacted by economic or other conditions. At December 31, 2013,2016, we had no foreign loans outstanding.

Total loans, net of deferred loan fees, increased by $61.4 million, or 9.9%, to $679.3 million at December 31, 2013, from $617.9 million at December 31, 2012, as we saw a positive trend in quality loan demand during 2013 and continued success in our relationship banking model.
49
 

The following table sets forth gross loans by major categories for the periods indicated:

  At December 31, 
(dollars in thousands) 2016  2015  2014  2013  2012 
                
Commercial real estate $378,519  $349,726  $379,259  $342,794  $335,561 
Construction and land development  61,453   46,547   29,861   23,977   26,659 
Commercial and industrial  174,744   181,850   145,113   118,209   103,768 
Owner occupied real estate  276,986   246,398   188,025   160,229   126,242 
Consumer and other  63,660   48,126   39,713   31,981   23,449 
Residential mortgage  9,682   2,380   408   2,359   2,442 
Total loans $965,044  $875,027  $782,379  $679,549  $618,121 
                     
Deferred loan fees  72   258   439   238   220 
Total loans, net of deferred loan fees $964,972  $874,769  $781,940  $679,311  $617,901 
  At December 31, 
(dollars in thousands) 2013  2012  2011  2010  2009 
                
Commercial real estate $342,794  $335,561  $344,377  $374,935  $393,262 
Construction and land development  23,977   26,659   35,061   73,795   103,790 
Commercial and industrial  118,209   103,768   87,668   78,428   88,926 
Owner occupied real estate  160,229   126,242   102,777   70,833   85,481 
Consumer and other  31,981   23,449   16,683   17,808   19,460 
Residential mortgage  2,359   2,442   3,150   5,026   3,341 
Total loans $679,549  $618,121  $589,716  $620,825  $694,260 
                     
Deferred loan fees  238   220   224   470   442 
Total loans, net of deferred loan    fees $679,311  $617,901  $589,492  $620,355  $693,818 

43
Total loans, net of deferred loan fees, increased $90.2 million, or 10%, to $965.0 million at December 31, 2016, versus $874.8 million at December 31, 2015.  This growth was the result of an increase in loan demand in the owner occupied real estate, commercial real estate, consumer, construction and development, and residential mortgage categories driven by the successful execution of our relationship banking strategy which focuses on customer service.

Loan Maturity and Interest Rate Sensitivity

The amount of loans outstanding by category as of the dates indicated, which are due in: (i) one year or less, (ii) more than one year through five years, and (iii) over five years, is shown in the following table.  Loan balances are also categorized according to their sensitivity to changes in interest rates.

(dollars in thousands)
 
 
Commercial Real Estate
  Construction and Land Development  Commercial and Industrial  Owner Occupied Real Estate  
 
Consumer and Other
  
 
Residential Mortgage
  
 
 
Total
  
Commercial
Real Estate
  
Construction
and Land Development
  
Commercial
and Industrial
  
Owner
Occupied
Real Estate
  
Consumer
and Other
  Residential Mortgage  Total 
Fixed rate:                                          
1 year or less $41,298  $10,146  $6,206  $4,942  $37  $-  $62,629  $66,932  $11,278  $16,002  $21,075  $348  $-  $115,635 
1-5 years  168,964   60   22,807   64,941   258   -   257,030   212,487   3,216   49,329   116,465   449   -   381,946 
After 5 years  63,388   -   12,662   45,542   6,375   423   128,390   67,197   2,475   34,752   68,322   9,658   9,682   192,086 
Total fixed rate  273,650   10,206   41,675   115,425   6,670   423   448,049   346,616   16,969   100,083   205,862   10,455   9,682   689,667 
                                                        
Adjustable rate:                                                        
1 year or less $31,420  $3,509  $41,992  $1,786  $113  $-  $78,820  $12,623  $6,712  $42,830  $5,585  $683  $-  $68,433 
1-5 years  29,167   5,973   17,392   5,778   1,557   -   59,867   17,269   26,570   20,602   7,276   3,566   -   75,283 
After 5 years  8,557   4,289   17,150   37,240   23,641   1,936   92,813   2,011   11,202   11,229   58,263   48,956   -   131,661 
Total adjustable rate  69,144   13,771   76,534   44,804   25,311   1,936   231,500   31,903   44,484   74,661   71,124   53,205   -   275,377 
                                                        
Total $342,794  $23,977  $118,209  $160,229  $31,981  $2,359  $679,549  $378,519  $61,453  $174,744  $276,986  $63,660  $9,682  $965,044 

In the ordinary course of business, loans maturing within one year may be renewed, in whole or in part, as to principal amount, and at interest rates prevailing at the date of renewal.

At December 31, 2013, 65.9%2016, 71.5% of total loans were fixed rate compared to 64.7%71.9% at December 31, 2012.2015.
50

Credit Quality

Republic’sRepublic's written lending policies require specific 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 well-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 of principal and/or interest in full 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, 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 charge-offs have been fully recovered.
 
 
4451

The following summary shows information concerning loan delinquency and non-performing assets at the dates indicated:

 At December 31,  At December 31,    
(dollars in thousands) 2013  2012  2011  2010  2009  2016  2015  2014  2013  2012 
Loans accruing, but past due 90 days or more $-  $202  $748  $-  $-  $302  $-  $-  $-  $202 
Non-accrual loans:                                        
Commercial real estate  1,104   7,987   1,880   14,955   7,466   13,089   5,913   13,979   1,104   7,987 
Construction and land development  1,618   1,342   4,022   18,970   15,904   -   117   377   1,618   1,342 
Commercial and industrial  6,837   4,693   3,925   4,500   997   3,151   3,156   4,349   6,837   4,693 
Owner occupied real estate  205   968   -   1,061   1,225   1,546   2,894   2,306   205   968 
Consumer and other  656   856   737   506   442   808   542   429   656   856 
Residential mortgage  -   -   -   -   -   -   -   -   -   - 
Total non-accrual loans  10,420   15,846   10,564   39,992   26,034   18,594   12,622   21,440   10,420   15,846 
Total non-performing loans(1)
  10,420   16,048   11,312   39,992   26,034   18,896   12,622   21,440   10,420   16,048 
Other real estate owned  4,059   8,912   6,479   15,237   13,611   10,174   11,313   3,715   4,059   8,912 
Total non-performing assets(1)
 $14,479  $24,960  $17,791  $55,229  $39,645  $29,070  $23,935  $25,155  $14,479  $24,960 
                                        
Non-performing loans as a percentage of total loans, net of unearned income(1)
  1.53%  2.60%  1.92%  6.45%  3.75%  1.96%  1.44%  2.74%  1.53%  2.60%
Non-performing assets as a percentage of total assets  1.51%  2.52%  1.70%  6.30%  3.93%  1.51%  1.66%  2.07%  1.51%  2.52%

(1)(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.

Problem loans can consist of loans that are performing, but for which potential credit problems of the borrowers have caused management to have serious doubts as to the ability of such borrowers to continue to comply with present repayment terms.  At December 31, 2013,2016, all identified problem loans included in the preceding table are internally classified and have been evaluated for a specific reserve allocation in the allowance for loan losses (see “Allowancediscussion on "Allowance for Loan Losses”Losses").

Non-performing assets decreasedincreased by $10.5$5.1 million, or 42%21%, to $14.5$29.1 million at December 31, 2013,2016, compared to $25.0$23.9 million at December 31, 2012. The decrease is the result2015. This increase was primarily due to transfers of paydowns$9.8 million from performing to non-performing assets during 2016, of $9.2which $7.3 million and writedowns of $4.8 millionwas due to a single loan relationship, partially offset by $3.8 million in loans transferred to non-accrual status.a combination of advances, loan paydowns, OREO sales, loan charge-offs, and OREO writedowns totaling $4.7 million.

The following summary shows the impact on interest income of non-accrual loans, subsequent to being placed on non-accrual for the periods indicated:

  For the Year Ended December 31, 
  2013  2012  2011  2010  2009 
Interest income that would have been recorded had the loans been in accordance with their original terms $ 488,000  $ 699,000  $ 583,000  $ 2,405,000  $1,180,000 
 
Interest income included in net income
 $-  $-  $-  $-  $- 
  For the Year Ended December 31, 
(dollars in thousands) 2016  2015  2014  2013  2012 
Interest income that would have been recorded had the loans been in accordance with their original terms $1,024  $765  $980  $488  $699 
 
Interest income included in net income
 $-  $-  $-  $-  $- 
 
 
4552

 
Allowance for Loan Losses

The allowance for loan losses is a valuation allowance for probable losses inherent in the loan portfolio. The Company evaluatesWe 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 Receivables. The second component is allocated to all other loans that are not individually identified as impaired pursuant to ASC 310-10 (“("non-impaired loans”loans"). This component is calculated for all non-impaired loans on a collective basis in accordance with ASC 450 Contingencies. The third component is an unallocated allowance to account for a level of imprecision in management’smanagement's estimation process.

The Company evaluatesWe 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 secondary and/or tertiary 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.
Prior to the first quarter of 2012, historical losses for all commercial loans secured by real estate were aggregated into one group for purposes of calculating a loss rate for loans collectively evaluated for impairment in the allowance for loan loss calculation. During the first quarter of 2012, management elected to disaggregate this grouping into five separate categories based on distinct risk factors to provide a more detailed estimate for the allowance calculation. This change resulted in a reduction of approximately $2.6 million in the estimated allowance required for non-impaired loans in the first quarter of 2012 due to the application of lower loss rates to a larger segment of the commercial real estate portfolio with a lower risk profile.

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. The Company’sOur 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. The Company’sOur 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.
 
4653

A detailed analysis of our allowance for loan losses for the years ended December 31, 2016, 2015, 2014, 2013, 2012, 2011, 2010 and 20092012 is as follows:

 For the Year Ended December 31,  For the Year Ended December 31, 
(dollars in thousands) 2013  2012  2011  2010  2009  2016  2015  2014  2013  2012 
                              
Balance at beginning of period $9,542  $12,050  $11,444  $12,841  $8,409  $8,703  $11,536  $12,263  $9,542  $12,050 
Charge-offs:                                        
Commercial real estate  1,291   1,582   8,783   3,823   4,145   -   2,624   364   1,291   1,582 
Construction and land development  60   1,004   3,719   13,835   4,552   60   260   303   60   1,004 
Commercial and industrial  611   1,304   1,088   1,468   865   143   408   1,185   611   1,304 
Owner occupied real estate  320   -   1,838   -   44   1,052   133   150   320   - 
Consumer and other  75   102   41   42   164   11   -   10   75   102 
Residential mortgage  -   -   -   -   -   10   -   -   -   - 
Total charge-offs  2,357   3,992   15,469   19,168   9,770   1,276   3,425   2,012   2,357   3,992 
Recoveries:                                        
Commercial real estate  54   -   44   437   -   6   4   5   54   - 
Construction and land development  -   105   10   621   -   -   5   214   -   105 
Commercial and industrial  63   -   -   110   -   163   49   166   63   - 
Owner occupied real estate  -   -   15   -   -   -   -   -   -   - 
Consumer and other  26   29   40   3   2   2   34   -   26   29 
Residential mortgage  -   -   -   -   -   -   -   -   -   - 
Total recoveries  143   134   109   1,171   2   171   92   385   143   134 
Net charge-offs  2,214   3,858   15,360   17,997   9,768   1,105   3,333   1,627   2,214   3,858 
Provision for loan losses  4,935   1,350   15,966   16,600   14,200   1,557   500   900   4,935   1,350 
Balance at end of period $12,263  $9,542  $12,050  $11,444  $12,841  $9,155  $8,703  $11,536  $12,263  $9,542 
                                        
Average loans outstanding(1)
 $640,233  $609,943  $630,309  $659,882  $736,647  $936,492  $820,820  $724,231  $640,233  $609,943 
 
As a percent of average loans:(1)
               
Net charge-offs  0.35%  0.63%  2.44%  2.73%  1.33%
Provision for loan losses  0.77%  0.22%  2.53%  2.52%  1.93%
Allowance for loan losses  1.92%  1.56%  1.91%  1.73%  1.75%
                     
Allowance for loan losses to:                    
Total loans, net of unearned income  1.81%  1.54%  2.04%  1.84%  1.85%
Total non-performing loans  117.69%  59.46%  106.52%  28.62%  49.32%
As a percent of average loans:(1)
               
Net charge-offs  0.12%  0.41%  0.22%  0.35%  0.63%
Provision for loan losses  0.17%  0.06%  0.12%  0.77%  0.22%
Allowance for loan losses  0.98%  1.06%  1.59%  1.92%  1.56%
                     
Allowance for loan losses to:                    
Total loans, net of unearned income  0.95%  0.99%  1.48%  1.81%  1.54%
Total non-performing loans  48.45%  68.95%  53.81%  117.69%  59.46%

(1)(1) Includes non-accruing loans.

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 loan loss provision in the amount of $4.9$1.6 million in 20132016 compared to a $1.4 million$500,000 provision in 2012.

The2015.  Non-performing loans increased by $6.3 million, or 50%, to $18.9 million at December 31, 2016, compared to $12.6 million at December 31, 2015. Impaired loans also increased to $28.2 million at December 31, 2016 from $22.1 million at December 31, 2015. An increase in the provision recorded during 2013 was primarilyallowance required for loans collectively evaluated for impairment driven by a single loan relationship which was determined to be impaired during the fourth quarter of 2013 due to delinquency in payments.  The need for a provisiongrowth in the amount of $3.6 millionloan portfolio was the result ofoffset by a significant reduction associated with an improvement in the collateral value supporting the loan based upon a current appraisal.  Management is working closely with this borrower to resolve the delinquency issue and address the collateral deficiency.
factor used for historical loss experience during 2016.
 
4754

The decrease in the provision recorded in 2012 compared to 2011 was driven by a significant improvement in asset quality year over year.  In the fourth quarter 2011 we completed a bulk sale of distressed loans and foreclosed properties which drove a substantial portion of the provision recorded in 2011.  This transaction was reflective of our effort to transform and strengthen the balance sheet by substantially reducing non-performing asset balances and improving credit quality metrics through one transaction.  We continue to closely monitor and examine all aspects of the loan portfolio to assure that credit quality issues have been appropriately addressed.

The allowance for loan losses as a percentage of non-performing loans (coverage ratio) was 117.7%48.4% at December 31, 20132016 as compared to 59.5%69.0% at December 31, 20122015 and 106.5%53.8% at December 31, 2011.  The decrease in the coverage ratio at December 31, 2012 when compared to December 31, 2011 was primarily the result of an increase in non-performing2014.  All loans during 2012.  This increase was driven by one loan relationship that transferred to non-accrual status in the third quarter 2012.  This loan was paid off during 2013 resulting in a reduction in non-performing loans and a corresponding increase in the coverage ratio.individually evaluated for impairment are adequately secured with collateral and/or specific reserves.  Coverage is considered adequate by management as of December 31, 2013.2016.

Management makes at least a quarterly determination as to an appropriate provision from earnings to maintain an allowance for loan losses that it determines is adequate to absorb inherent losses in the loan portfolio. The Board of Directors 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 the allowance for loan losses are charged to operating expenses.

The Company’s charge-off policy was enhanced during 2010 to memorialize the factors which drive the recognition of a charge-off.  Prior to 2010 the charge-off policy simply stated that a charge-off would be recognized when management made the determination that full repayment on a loan or obligation to the company was not probable. Additional language was added to memorialize the factors considered when making the determination on when collection becomes not probable.  The policy now includes wording that discusses the review of primary and secondary repayment sources on a loan, assessment of a borrower’s liquidity and length of delinquency. These same factors were previously used when making the determination to record a charge-off.  They are now formally documented in a written policy. These changes have had no discernible impact on the quantitative or qualitative factors used to determine the adequacy of the allowance for loan losses.  The Company evaluatesWe evaluate loans for 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 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.
48

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’sborrower's financial condition is also assessed when considering a charge-off.

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 there were partial charge-offs during the year amounted to $6.2$2.4 million at December 31, 20132016 compared to $11.3$3.4 million at December 31, 2012.2015. This decrease was primarily driven by loan payoffs during 2016. 

The Company’sOur charge-off policy is reviewed on an annual basis and updated as necessary.  During the twelve months ended December 31, 2013,2016, there have been no changes made to this policy.

We have an existing loan review program, which monitors the loan portfolio on an ongoing basis. A loan review officer who reviews both the loan portfolio and overall adequacy of the allowance for loan losses conducts this loan review on a quarterly basis and reports directly to the Board of Directors.

Estimating the appropriate level of the allowance for loan losses at any given date is difficult, particularly in a continually changing economy. In management’smanagement's opinion, the allowance for loan losses was appropriate at December 31, 2013.2016. However, there can be no assurance that, if asset quality deteriorates in future periods, additions to the allowance for loan losses will not be required.

Management is unable to determine in which loan category future charge-offs and recoveries may occur. The following schedule sets forth the allocation of the allowance for loan losses among various categories. The allocation is based on management’smanagement's evaluation of historical charge-off experience and adjusted for several qualitative factors. The entire allowance for loan losses is available to absorb loan losses in any loan category.
55

The allocation of the allowance for loan losses for the past five years ended December 31, 2013, 2012, 2011, 2010 and 2009 is as follows:

 At December 31,  At December 31, 
 2013  2012  2011  2010  2009  2016  2015  2014  2013  2012 
(dollars in thousands)
 Amount  % of Loans  Amount  % of Loans  Amount  % of Loans  Amount  % of Loans  Amount  % of Loans  
Amount
  % of Loans  
Amount
  % of Loans  
Amount
  % of Loans  
Amount
  % of Loans  
Amount
  % of Loans 
Commercial real estate $6,454   50.4% $3,979   54.3% $7,372   58.4% $7,243   60.4% $6,828   56.6% $3,254   39.2% $2,393   40.0% $6,828   48.5% $6,454   50.4% $3,979   54.3%
Construction and land development  1,948   3.5%  1,273   4.3%  558   6.0%  837   11.9%  3,789   15.0%  557   6.4%  338   5.3%  917   3.8%  1,948   3.5%  1,273   4.3%
Commercial and industrial  2,309   17.4%  1,880   16.8%  1,928   14.9%  1,443   12.6%  1,057   12.8%  2,884   18.1%  2,932   20.8%  1,579   18.5%  2,309   17.4%  1,880   16.8%
Owner occupied real estate  985   23.6%  1,967   20.4%  1,963   17.4%  1,575   11.4%  894   12.3%  1,382   28.7%  2,030   28.1%  1,638   24.0%  985   23.6%  1,967   20.4%
Consumer and other  225   4.7%  234   3.8%  113   2.8%  130   2.9%  159   2.8%  588   6.6%  295   5.5%  234   5.1%  225   4.7%  234   3.8%
Residential mortgage  14   0.4%  17   0.4%  23   0.5%  41   0.8%  27   0.5%  58   1.0%  14   0.3%  2   0.1%  14   0.4%  17   0.4%
Unallocated  328   -   192   -   93   -   175   -   87   -   432   -   701   -   338   -   328   -   192   - 
Total allowance for loan losses $12,263   100% $9,542   100% $12,050   100% $11,444   100% $12,841   100% $9,155   100% $8,703   100% $11,536   100% $12,263   100% $9,542   100%

The allowance for loan losses is an amount that represents management’smanagement's estimate of known and inherent losses related to the loan portfolio and unfunded loan commitments.  Because the allowance for loan losses is dependent, to a great extent, on the general economy and other conditions that may be beyond our control, the estimate of the allowance for loan losses could differ materially in the near term.
49

The allowance consists of specific, general and unallocated components.  The specific component relates to loans that are categorized as “internally classified”.impaired loans.  For such loans, that are also classified as impaired, an allowance is established when the discounted cash flows, (or collateral value, or observable market price)price of the impaired loan is lower than the carrying value of that loan.  The general component covers non-classified loansthe remainder of the portfolio and is based on historical loss experience adjusted for several qualitative factors.  An unallocated component is maintained to cover uncertainties that could affect management’smanagement's estimate of probable losses.  The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.  All identified losses are immediately charged off and therefore no portion of the allowance for loan losses is restricted to any individual loan or group of loans, and the entire allowance is available to absorb any and all loan losses.

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’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. These qualitative risk factors include:

1.Lending policies and procedures, including underwriting standards and collection, charge-off and recovery practices.
2.National, regional and local economic and business conditions as well as the condition of various segments.
3.Nature and volume of the portfolio and terms of loans.
4.Experience, ability and depth of lending management and staff.
5.
Volume and severity of past due, classified and nonaccrual loans as well as other loan modifications.
6.
Quality of the Company’sour loan review system, and the degree of oversight by the Company’s our Board of Directors.
7.
Existence and effect of any concentration of credit and changes in the level of such concentrations.
56
8.Effect of external factors, such as competition and legal and regulatory requirements.

Each factor is assigned a value to reflect improving, stable or declining conditions based on management’smanagement's best judgment using relevant information available at the time of the evaluation.  Adjustments to the factors are supported through documentation of changes in conditions in a narrative accompanying the allowance for loan loss calculation.

We also provide specific reserves for impaired loans to the extent the estimated realizable value of the underlying collateral is less than the loan balance, when the collateral is the only source of repayment. Also, we estimate and recognize reserve allocations on loans classified as “internally"internally classified accruing loans”loans" based upon any factor that might impact loss estimates. Those factors include but are not limited to the impact of economic conditions on the borrower and management’smanagement's potential alternative strategies for loan or collateral disposition.  An unallocated allowance is established for losses that have not been identified through the formulaic and other specific components of the allowance as described above. Management has identified several factors that impact credit losses that are not considered in either the formula or the specific allowance segments. These factors consist of macro and micro economic conditions, industry and geographic loan concentrations, changes in the composition of the loan portfolio, changes in underwriting processes and trends in problem loan and loss recovery rates. The impact of the above is considered in light of management’smanagement's conclusions as to the overall adequacy of underlying collateral and other factors.

50

The majority of our loan portfolio represents loans made for commercial purposes, while significant amounts of residential property may serve as collateral for such loans. We attempt to evaluate larger loans individually, on the basis of our loan review process, which scrutinizes loans on a selective basis and other available information. Even if all commercial purpose loans could be reviewed, information on potential problems might not be available. Our portfolio of loans made for purposes of financing residential mortgages and consumer loans are evaluated in groups. At December 31, 2013,2016, loans made for commercial real estate, construction and land development, commercial and industrial, owner occupied real estate, consumer and other, and residential mortgage purposes, respectively, amounted to $342.8$378.5 million, $24.0$61.5 million, $118.2$174.7 million, $160.2$277.0 million, $32.0$63.7 million, and $2.4$9.7 million.

A loan is considered impaired, in accordance with ASC 310, when based on current information and events, it is probable that the Companywe will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan.  Impaired loans include nonperforming commercial loans, but also include internally classified accruing loans.  As of December 31, 2013,2016, management identified a total of three troubled debt restructurings in the loan portfolio in the amount of $4.2$6.2 million. Four troubled debt restructurings in the amount of $7.5$8.8 million were identified as of December 31, 2012.2015.


The following table presents the Company’sour impaired loans at December 31, 2013, 20122016, 2015, and 2011:2014:

(dollars in thousands) December 31, 
  2016  2015  2014 
Impaired loans without a valuation allowance $15,740  $15,497  $16,742 
Impaired loans with a valuation allowance  12,430   6,632   18,902 
Total impaired loans $28,170  $22,129  $35,644 
             
Valuation allowance related to impaired loans $3,468  $2,238  $5,130 
Total nonaccrual loans  18,594   12,622   21,440 
Total loans past-due ninety days or more and            
   still accruing  302   -   - 
(dollars in thousands)  December 31, 
  2013  2012  2011 
Impaired loans without a valuation allowance $10,790  $27,594  $23,463 
Impaired loans with a valuation allowance  21,743   13,421   14,736 
Total impaired loans $32,533  $41,015  $38,199 
             
Valuation allowance related to impaired loans $5,610  $2,943  $3,104 
Total nonaccrual loans  10,420   15,846   10,564 
Total loans past-due ninety days or more and            
   still accruing  -   202   748 
57

The recorded investment in loans that are impaired in accordance with ASC 310 totaled $32.5$28.2 million, $41.0$22.1 million, and $38.2$35.6 million at December 31, 2013, 20122016, 2015, and 2011,2014, respectively. The amounts of related valuation allowances were $5.6$3.5 million, $2.9$2.2 million, and $3.1$5.1 million, respectively at those dates.  For the years ended December 31, 2013, 20122016, 2015, and 20112014, the average recorded investment in impaired loans was approximately $33.7$25.7 million, $40.8$29.5 million, and $70.7$33.0 million, respectively.  Republic earned $1.2 million, $1.6 million,$502,000, $516,000, and $1.8 million$614,000 of interest income on impaired loans (internally classified accruing loans) in 2013, 2012,2016, 2015, and 2011,2014, respectively.  There were no commitments to extend credit to any borrowers with impaired loans as of the end of the periods presented herein.

Total impaired loans decreasedincreased by $8.5$6.0 million, or 21%27%, during the year ended December 31, 2013.2016. This decreaseincrease was primarily driven by a single non-performing loan relationship in the resultamount of balance payoffs and credit upgrades processed$7.3 million that was classified as impaired in 2013.the second quarter of 2016.  The valuation allowance related to impaired loans increased to $5.6$3.5 million at December 31, 20132016 compared to $2.9$2.2 million at December 31, 2012. 

2015. At December 31, 20132016 and 2012,2015, internally classified accruing loans totaled approximately $22.1$9.6 million and $25.2$9.5 million, respectively.

The amounts of related valuation allowance were $4.0 million and $1.6 million, respectively at those dates.  Republic had delinquent loans as follows: (i)following table presents our 30 to 59 days past due, at December 31, 2013 and 2012, in the aggregate principal amount of $21.5 million and $1.1 million respectively; and (ii) 60 to 89 days past due loans at December 31, 20132016, 2015, and 2012 in the aggregate principal amount of $7.0 million and $27.8 million, respectively.  2014:  

(dollars in thousands)  December 31, 
   2016   2015   2014 
30 to 59 days past due $1,060  $2,878  $1,681 
60 to 89 days past due  31   9,315   14,062 
Total loans 30 to 89 days past due $1,091  $12,193  $15,743 

The increasedecrease in loan balances 30 to 59 days past due was the result of delinquency in one lending relationship at December 31, 2015 in the amount of $1.1 million that moved to current status at December 31, 2016 and two lending relationships at December 31, 2013, one of which2015 in the amount of $12.7 million$774,000 that moved into 30 to 59 days past duenonaccrual status at December 31, 2013 from2016.  The decrease in loan balances 60 to 89 days past due aswas the result of delinquency in one lending relationship at December 31, 2012.2015 in the amount of $7.3 million that moved to non-accrual status in 2016.  Management has engaged in active discussions with bothall delinquent relationships to address these delinquencies and is confident that acceptable resolutions will be achieved in the near term.
51

Deposits

Total deposits at December 31, 20132016 were $869.5 million, a decrease$1.7 billion, an increase of $19.7$428.4 million or 2.2%34.3% from total deposits of $889.2 million$1.2 billion at December 31, 2012.2015.  Total deposits by account type at December 31, 2013, 20122016, 2015, and 20112014 are as follows:

(dollars in thousands) At December 31, 
  2016  2015  2014 
Demand deposits, non-interest bearing $324,912  $243,695  $224,245 
Demand deposits, interest bearing  605,950   381,499   283,768 
Money market & savings deposits  635,644   556,526   488,848 
Time deposits  111,164   67,578   75,369 
Total deposits $1,677,670  $1,249,298  $1,072,230 
(dollars in thousands) At December 31, 
  2013  2012  2011 
Demand deposits, non-interest bearing $157,806  $145,407  $226,287 
Demand deposits, interest bearing  230,221   180,440   109,242 
Money market & savings deposits  402,671   440,120   400,141 
Time deposits  78,836   123,234   216,941 
Total deposits $869,534  $889,201  $952,611 
58

In general, Republic pays higher interest rates on time deposits compared to other deposit categories.  Republic’sRepublic's various deposit liabilities may fluctuate from period-to-period, reflecting customer behavior and strategies to optimize net interest income.  The decreaseincrease in total deposits to $869.5 million$1.7 billion at December 31, 20132016 from $889.2 million$1.2 billion at December 31, 20122015 was primarily the result of $44.4a $305.7 million decreaseincrease in timedemand deposits and a $37.5$79.1 million decreaseincrease in money market and savings deposits. We have intentionally allowed internet based certificates of deposit to mature and roll off to reduce our cost of funds. These decreases have been offset by strong growth in interest bearing demand deposits of $49.8 million and a $12.4 million increase within non-interest bearing deposits, which reflectreflects the success of our retail-focused strategy based on a high level of customer service and satisfaction which drives the gathering low-cost core deposits.  This strategy has also allowed us to significantly reduceeliminate our dependence on the more volatile sourcessource of funding in brokered and internet based certificates of deposit.

The average balances and weighted average rates of Republic’sRepublic's deposits for the last three years ended December 31, 2013, 2012 and 2011 are as follows:

  For the Years Ended December 31, 
  2013  2012  2011 
 
(dollars in thousands)
 Average Balance  Rate  Average Balance  Rate  Average Balance  Rate 
Demand deposits:                  
Non-interest bearing $149,125     $136,999     $119,189    
Interest bearing  192,224   0.43%  146,319   0.54%  91,577   0.64%
Money market & savings deposits  417,652   0.43%  433,422   0.63%  345,885   1.00%
Time deposits  92,484   0.94%  155,549   1.10%  244,741   1.23%
Total deposits $851,485   0.41% $872,289   0.60% $801,392   0.88%
52
  For the Years Ended December 31,  
  2016  2015  2014  
 
(dollars in thousands)
 
Average
Balance
  
Rate
  
Average
Balance
  
Rate
  
Average
Balance
  
Rate
  
Demand deposits:                   
Non-interest bearing $284,326     $235,810     $189,810     
Interest bearing  510,745   0.41%  349,055   0.40%  233,693   0.38% 
Money market & savings deposits  586,750   0.45%  508,846   0.43%  439,484   0.44% 
Time deposits  89,713   1.05%  73,819   0.94%  78,073   0.92% 
Total deposits $1,471,534   0.39% $1,167,530   0.37% $941,060   0.38% 

The remaining maturity of certificates of deposit for $100,000 or more as of December 31, 20132016 is as follows:

(dollars in thousands)   
Maturity:   
3 months or less $11,190 
3 to 6 months  4,234 
6 to 12 months  22,788 
Over 12 months  36,131 
Total $74,343 
(dollars in thousands)
 
   
Maturity:   
3 months or less $7,163 
3 to 6 months  3,242 
6 to 12 months  11,593 
Over 12 months  17,407 
Total $39,405 


The following is a summary of the remaining maturity of time deposits, which includes certificates of deposits of $100,000 or more, as of December 31, 2013:2016:

(dollars in thousands)   
Maturity:   
2017 $65,247 
2018  21,554 
2019  1,605 
2020  21,793 
2021  965 
Thereafter  - 
Total $111,164 
(dollars in thousands)
 
   
Maturity:   
2014 $53,294 
2015  12,980 
2016  11,253 
2017  462 
2018  847 
Thereafter  - 
Total $78,836 
59

Off-Balance Sheet Arrangements
 
We are a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the financial statements.
 
Credit risk is defined as the possibility of sustaining a loss due to the failure of the other parties to a financial instrument to perform in accordance with the terms of the contract. The maximum exposure to credit loss under commitments to extend credit and standby letters of credit is represented by the contractual amount of these instruments. We use the same underwriting standards and policies in making credit commitments as we do for on-balance-sheet instruments.
 
Financial instruments whose contract amounts represent potential credit risk are commitments to extend credit of approximately $109.3$215.9 million and $99.7$165.1 million and standby letters of credit of approximately $2.7$5.7 million and $4.3$5.2 million at December 31, 20132016 and 2012,2015, respectively.  Commitments often expire without being drawn upon. The $109.3$215.9 million of commitments to extend credit at December 31, 2013,2016, substantially all were variable rate commitments.
 
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. The Company evaluatesWe evaluate each customer’scustomer's creditworthiness on a case-by-case basis. The amount of collateral obtained upon extension of credit is based on management’smanagement's credit evaluation of the customer. Collateral held varies but may include real estate, marketable securities, pledged deposits, equipment and accounts receivable.
53

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’smanagement's credit evaluation of the customer. Collateral held varies but may include real estate, marketable securities, pledged deposits, equipment and accounts receivable.
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Contractual Obligations and Other Commitments
 
The following table sets forth contractual obligations and other commitments representing required and potential cash outflows as of December 31, 2013:2016:
 
(dollars in thousands)
 Total  Less than One Year  One to Three Years  Three to Five Years  After Five Years  
Total
  
Less than
One Year
  
One to
Three Years
  
Three to
Five Years
  
After Five
Years
 
Minimum annual rentals or non-cancellable operating leases $43,055  $2,547  $4,923  $4,891  $30,694  $30,500  $3,581  $6,755  $5,281  $14,883 
Remaining contractual maturities of time deposits  78,836   53,294   24,233   1,309   -   111,552   65,635   23,159   22,758   - 
Subordinated debt  22,476   -   -   -   22,476   22,501   25   -   -   22,476 
Director and Officer retirement plan obligations  1,368   459   200   219   490   1,320   622   224   164   310 
Loan commitments  109,315   58,980   4,264   8,052   38,019   215,868   81,802   32,548   30,487   71,031 
Standby letters of credit  2,684   2,299   -   -   385   5,683   5,248   435   -   - 
Total $257,734  $117,579  $33,620  $14,471  $92,064  $387,424  $156,913  $63,121  $58,690  $108,700 

As of December 31, 2013,2016, we had entered into non-cancelable lease agreements for our main office and operations center, twelve current Republic retail branch facilities, and twofour loan offices, one pending retail branch facility, and one training center expiring on various dates through August 31, 2043, including renewal options.November 30, 2036. The leases are accounted for as operating leases. The minimum rental payments required under these leases are $43.1$30.5 million through the year 2043, including renewal options.   2036.

We have retirement plan agreements with certain directors and officers.  At December 31, 2013,2016, the accrued benefits under the plan were approximately $1.4$1.3 million, with a minimum age of 65 established to qualify for the payments. 

Interest Rate Risk Management
 
We attempt to manage our assets and liabilities in a manner that optimizes net interest income in a range of interest rate environments. Management uses an “interest"interest sensitivity gap” (“GAP”gap" ("GAP") analysis and simulation models to monitor behavior of its interest sensitive assets and liabilities. A GAP analysis is the difference between interest-sensitive assets and interest-sensitive liabilities.  Adjustments to the mix of assets and liabilities are made periodically in an effort to provide steady growth in net interest income.
 
Management presently believes that the effect on Republic of any future reduction in interest rates, reflected in lower yielding assets, could be detrimental since Republicwe may not have the immediate ability to commensurately decrease rates on its interest bearing liabilities, primarily time deposits, other borrowings and certain transaction accounts. An increase in interest rates could have a negative effect on Republic, due to a possible lag in the re-pricing of core deposits not taken into account in the static GAP analysis.  Interest rate risk management involves managing the extent to which interest-sensitive assets and interest-sensitive liabilities are matched. We attempt to optimize net interest income while managing period-to-period fluctuations therein. We typically define interest-sensitive assets and interest-sensitive liabilities as those that re-price within one year or less.  Generally, we limit long-term fixed rate assets and liabilities in our efforts to manage interest rate risk.
 
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A positive GAP occurs when interest-sensitive assets exceed interest-sensitive liabilities re-pricing in the same time periods, and a negative GAP occurs when interest-sensitive liabilities exceed interest-sensitive assets re-pricing in the same time periods. A negative GAP ratio suggests that a financial institution may be better positioned to take advantage of declining interest rates rather than increasing interest rates, and a positive GAP ratio suggests the converse.  Static GAP analysis describes interest rate sensitivity at a point in time; however,time. However, it alone does not accurately measure the magnitude of changes in net interest income as changes in interest rates do not impact all categories of assets and liabilities equally or simultaneously.  Interest rate sensitivity analysis also requires assumptions about re-pricing certain categories of assets and liabilities.  For purposes of interest rate sensitivity analysis, assets and liabilities are stated at their contractual maturity, estimated likely call date, or earliest re-pricing opportunity.  Mortgage-backed securities and amortizing loans are scheduled based on their anticipated cash flow, including prepayments based on historical data and current market trends.  Savings, money market and interest-bearing demand accounts do not have a stated maturity or re-pricing term and can be withdrawn or re-priced at any time. Management estimates the re-pricing characteristics of these accounts based upon decay rates and run off projections obtained in a deposit study performed by an independent third party, along with management’smanagement's estimates of when rates would have to be increased to retain balances in response to competition.  Such estimates are necessarily arbitrary and wholly judgmental. As a result of the run off projections, these deposits are not considered to re-price simultaneously and, accordingly, a portion of the deposits are moved into time brackets exceeding one year. However, management may choose not to re-price liabilities proportionally to changes in market interest rates, for competitive or other reasons.
 
Shortcomings, inherent in a simplified and static GAP analysis, may result in an institution with a negative GAP having interest rate behavior associated with an asset-sensitive balance sheet. For example, although certain assets and liabilities may have similar maturities or periods to re-pricing, they may react in different degrees to changes in market interest rates. Furthermore, re-pricing characteristics of certain assets and liabilities may vary substantially within a given time period. In the event of a change in interest rates, prepayments and other cash flows could also deviate significantly from those assumed in calculating GAP in the manner presented in the table on the following page.
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The following tables present a summary of our GAP analysis at December 31, 2013.2016.  Amounts shown in the table include both estimated maturities and instruments scheduled to re-price, including prime based loans.  For purposes of these tables, we have used assumptions based on industry data and historical experience to calculate the expected maturity of loans because, statistically, certain categories of loans are prepaid before their maturity date, even without regard to interest rate fluctuations. Additionally, certain prepayment assumptions were made with regard to investment securities based upon the expected prepayment of the underlying collateral of the mortgage-backed securities. The interest rate on a portion of the CDOs is variable and adjusts quarterly.

Interest Rate Sensitivity Gap 
As of December 31, 2013 
                             
 
 
(dollars in thousands)
 0 – 90 Days  91-180 Days  181-365 Days  
1-2
Years
  
2-3
Years
  
3-4
Years
  
4-5
Years
  More than 5 Years  Financial Statement Total Fair Value 
                             
Interest sensitive assets:                            
Investment securities and other interest-bearing balances $25,116  $1,833  $3,467  $11,356  $15,914  $15,397  $7,022  $149,732  $229,837  $229,837 
Average interest rate  0.93%  1.42%  1.67%  1.52%  2.07%  2.52%  2.38%  2.49%  2.32%    
Loans receivable  274,709   19,651   23,975   42,263   67,880   93,868   99,021   62,875   684,242   677,725 
Average interest rate  5.02%  5.56%  5.90%  4.80%  5.04%  4.54%  4.40%  6.02%  4.99%    
Total $299,825  $21,484  $27,442  $53,619  $83,794  $109,265  $106,043  $212,607  $914,079  $907,562 
                                         
Cumulative totals $299,825  $321,309  $348,751  $402,370  $486,164  $595,429  $701,472  $914,079     
                                         
Interest sensitive liabilities:                                        
Demand interest bearing(1)
 $12,436  $12,436  $24,871  $18,782  $16,533  $14,316  $12,400  $118,447  $230,221  $230,221 
Average interest rate  0.39%  0.39%  0.39%  0.38%  0.38%  0.38%  0.38%  0.37%  0.41%    
Savings accounts(1)
  6,427   6,427   12,854   14,672   10,278   7,596   5,759   33,648   97,661   97,661 
Average interest rate  0.45%  0.45%  0.45%  0.46%  0.46%  0.46%  0.46%  0.48%  0.46%    
Money market accounts(1)
  3,480   3,480   6,959   6,042   11,231   48,403   39,829   185,586   305,010   305,010 
Average interest rate  0.40%  0.40%  0.40%  0.40%  0.36%  0.33%  0.33%  0.33%  0.33%    
Time deposits  18,494   9,122   25,679   12,979   11,253   463   846   -   78,836   79,323 
Average interest rate  0.61%  0.52%  0.68%  1.24%  1.90%  1.17%  1.00%  -   0.91%    
Subordinated debt  11,341   -   -   -   -   -   -   11,135   22,476   17,835 
Average interest rate  1.96%  -   -   -   -   -   -   8.00%  4.95%    
Total $52,178  $31,465  $70,363  $52,475  $49,295  $70,778  $58,834  $348,816  $734,204  $730,050 
                                         
Cumulative totals $52,178  $83,643  $154,006  $206,481  $255,776  $326,554  $385,388  $734,204     
                                         
Interest rate sensitivity GAP $247,647  $(9,981) $(42,921) $1,144  $34,499  $38,487  $47,209  $(136,209)        
Cumulative GAP $247,647  $237,666  $194,745  $195,889  $230,388  $268,875  $316,084  $179,875         
Interest sensitive assets/Interest sensitive liabilities  574.62%  384.14%  226.45%  194.87%  190.07%  182.34%  182.02%  124.50%  
Cumulative GAP/ Total earning assets  27.09%  26.00%  21.31%  21.43%  25.20%  29.41%  34.58%  19.68%  

(1)Demand, savings and money market accounts are scheduled to reprice based upon decay rate and run off percentage estimates obtained through a deposit study performed by an independent third party, along with management’s estimates of when rates would have to be increased to retain balances in response to competition.  Such estimates are necessarily arbitrary and wholly judgmental.
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Interest Rate Sensitivity Gap 
As of December 31, 2016 
                               
 
 
(dollars in thousands)
 
0 – 90 Days
  
91-180 Days
  
181-365 Days
  
1-2
Years
  
2-3
Years
  
3-4 Years
  
4-5 Years
  More than 5 Years  Financial Statement Total  
Fair Value
 
                               
                               
Interest sensitive assets:                              
Investment securities and other interest-bearing balances $36,283  $22,397  $42,061  $78,557  $69,877  $65,169  $57,035  $446,949  $818,328  $811,012 
Average interest rate  2.36%  2.46%  2.42%  2.43%  2.45%  2.39%  2.57%  2.71%  2.59%    
Loans receivable  314,024   35,223   77,788   112,391   87,943   131,432   120,075   114,161   993,037   975,164 
Average interest rate  5.07%  4.23%  3.34%  4.32%  4.25%  4.13%  4.19%  3.64%  4.35%    
Total $350,307  $57,620  $119,849  $190,948  $157,820  $196,601  $177,110  $561,110  $1,811,365  $1,786,176 
                                         
Cumulative totals $350,307  $407,927  $527,776  $718,724  $876,544  $1,073,145  $1,250,255  $1,811,365         
                                         
Interest sensitive liabilities:                                        
Demand interest bearing(1)
 $-  $-  $-  $-  $-  $-  $-  $605,950  $605,950  $605,950 
Average interest rate  -   -   -   -   -   -   -   0.41%  0.41%    
Savings accounts(1)
  278   278   556   302   91   30   -   182,789   184,324   184,324 
Average interest rate  0.48%  0.48%  0.48%  0.48%  0.48%  0.48%  -   0.44%  0.44%    
Money market accounts(1)
  2,937   2,937   5,874   7,999   6,273   15,833   18,995   390,472   451,320   451,320 
Average interest rate  0.43%  0.43%  0.43%  0.43%  0.43%  0.41%  0.40%  0.40%  0.40%    
Time deposits  54,979   8,570   28,500   15,429   1,605   1,116   965   -   111,164   110,988 
Average interest rate  1.27%  0.57%  1.13%  1.05%  0.93%  0.99%  0.99%  -   1.14%    
Subordinated debt  11,246   -   -   -   -   -   -   10,635   21,881   16,286 
Average interest rate  2.58%  -   -   -   -   -   -   8.00%  5.21%    
Total $69,440  $11,785  $34,930  $23,730  $7,969  $16,979  $19,960  $1,189,846  $1,374,639  $1,368,868 
                                         
Cumulative totals $69,440  $81,225  $116,155  $139,885  $147,854  $164,833  $184,793  $1,374,639         
                                         
Interest rate sensitivity GAP $280,867  $45,835  $84,919  $167,218  $149,851  $179,622  $157,150  $(628,736)        
Cumulative GAP $280,867  $326,702  $411,621  $578,839  $728,690  $908,312  $1,065,462  $436,726         
Interest sensitive assets/Interest sensitive liabilities  504.47%  502.22%  454.37%  513.80%  592.84%  651.05%  676.57%  131.77%        
Cumulative GAP/ Total earning assets  15.51%  18.04%  22.72%  31.96%  40.23%  50.15%  58.82%  24.11%        
 

(1) Demand, savings and money market accounts are scheduled to reprice based upon decay rate and run off percentage estimates obtained through a deposit study performed by an independent third party, along with management's estimates of when rates would have to be increased to retain balances in response to competition.  Such estimates are necessarily arbitrary and wholly judgmental.

In addition to the GAP analysis, we utilize income simulation modeling in measuring our interest rate risk and managing our interest rate sensitivity.  Income simulation considers not only the impact of changing market interest rates on forecasted net interest income, but also other factors such as yield curve relationships, the volume and mix of assets and liabilities and general market conditions.
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Net Portfolio Value and Net Interest Income Analysis

The income simulation models management used to measure interest rate risk and manage interest rate sensitivity generates estimates of the change in net portfolio value (NPV) and net interest income (NII) over a range of interest rate scenarios.  NPV is the present value of expected cash flows from assets, liabilities, and off-balance sheet contracts.  The NPV ratio, under any interest rate scenario, is defined as the NPV in that scenario divided by the market value of assets in the same scenario.  The following table sets forth our NPV as of December 31, 20132016 and reflects the changes to NPV as a result of immediate and sustained changes in interest rates as indicated (dollars in thousands):

Change in Interest Rates
in Basis Points
(Rate Shock)
Net Portfolio Value  NPV as a % of Portfolio Value of Assets Net Portfolio Value  
NPV as a % of Portfolio
Value of Assets
 
Amount
$
Change
%
Change
NPV Ratio
Change
(in Basis Points)
 Amount  
$
Change
  
%
Change
  
NPV
Ratio
  
Change
(in Basis Points)
 
                     
+400
$113,702
$29,820
35.55%  12.53%145 $411,407  $95,828   30.38%  24.26%  766 
+300111,31427,43232.70%  12.03%95  396,593   81,044   25.68%  22.71%  611 
+200104,85720,70524.68%  11.12%35  379,061   63,512   20.13%  21.07%  447 
+10094,86310,98113.09%  9.96%(56)  352,680   37,131   11.77%  19.04%  244 
Static83,882                 -0.00%  8.73%-  315,549   -   0.00%  16.60%  - 
-10071,509(12,373)(14.75)%  7.37%(134)  253,473   (62,076)  (19.67)%  13.09%  (351)

In addition to modeling changes in NPV, we also analyze potential changes to NII for a forecasted twelve-month period under rising and falling interest rate scenarios. The following table shows the NII model as of December 31, 20132016 (dollars in thousands):

Change in
Interest Rates in
Basis Points(1)
 
Net Interest
Income 
 
$
Change
 
%
Change
          
+400 $67,295   5,323   8.59%
+300  66,013   4,041   6.52%
+200  64,701   2,729   4.40%
+100  63,323   1,351   2.18%
Static  61,972   -   0.00%
-100  61,171   (801)  (1.29)%
             
Change in Interest Rates in
Basis Points(1)
Net Interest  Income
$
Change
%
Change
    
+400$ 36,121565   1.59%
+300  35,971415   1.17%
+200  35,851295   0.83%
+100  35,722166  0.47%
Static  35,556    -    0.00%
-100  35,404(152)(0.43)%
    
(1)(1)The net interest income results were calculated assuming a rate ramp, achieving the rate change over a 12-month period, not an immediate and sustained rate shock.

As is the case with the GAP table, certain shortcomings are inherent in the methodology used in the above interest rate risk measurements.  Modeling changes in NPV and NII require the making of certain assumptions, which may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates.  In this regard, the models presented assume that the composition of our interest sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and also assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration to maturity or re-pricing of specific assets and liabilities.  Accordingly, although the NPV measurements and net interest income models provide an indication of interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on net interest income and will differ from actual results.
 
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Management believes that the assumptions utilized in evaluating our estimated net interest income are reasonable; however,reasonable. However, the interest rate sensitivity of our assets, liabilities and off-balance sheet financial instruments as well as the estimated effect of changes in interest rates on estimated net interest income could vary substantially if different assumptions are used or actual experience differs from the experience on which the assumptions were based. Periodically, we may and do make significant changes to underlying assumptions, which are wholly judgmental.  Prepayments on residential mortgage loans and mortgage-backed securities have increased over historical levels in recent years due to the lower interest rate environment, and may result in reductions in margins.

Capital Resources
 
We have sponsored three outstanding issues of corporation-obligated mandatorily redeemable capital securities of a subsidiary trust holding solely junior subordinated debentures of the Corporation more commonly known as trust preferred securities. The subsidiary trusts are not consolidated for financial reporting purposes.  The purpose of the issuances of these securities was to increase capital. The trust preferred securities qualify as Tier 1 capital for regulatory purposes in amounts up to 25% of total Tier 1 capital.

On December 27, 2006, Republic Capital Trust II (Trust II) issued $6.0 million of trust preferred securities to investors and $0.2 million of common securities to us.  Trust II purchased $6.2 million of our floating rate junior subordinated debentures due 2037, and we used the proceeds to call the securities of Republic Capital Trust I (Trust I).  The debentures purchased by Trust II have a variable interest rate, adjustable quarterly, at 1.73% over the 3-month LIBOR.  We may redeem the debentures on any interest payment date without a prepayment penalty.
 
On June 28, 2007, Republic Capital Trust III (Trust III), issued $5.0 million of trust preferred securities to one investor and $0.2 million common securities to us.  Trust III purchased $5.2 million of our floating rate junior subordinated debentures due 2037, which have a variable interest rate, adjustable quarterly, at 1.55% over the 3 month LIBOR.  We have the ability to redeem the debentures on any interest payment date without a prepayment penalty. 

On June 10, 2008, Republic First Bancorp Capital Trust IV (Trust IV) issued $10.8 million of convertible trust preferred securities as part of our strategic capital plan.  The securities were purchased by investors, including Vernon W. Hill, II, founder and chairman (retired) of Commerce Bancorp, and since the investment, a consultant to the Company.as of December 5, 2016, our chairman.  The investor group also included a family trust of Harry D. Madonna, our chairman, president and chief executive officer of Republic Bank, and Theodore J. Flocco, Jr., who since the investment, has been elected by the shareholders to our Board of Directors and serves as the Chairman of our Audit Committee.  Trust IV also issued $0.3 million of common securities to us.  Trust IV purchased $11.1 million of our fixed rate junior subordinated convertible debentures due 2038, which pay interest at an annual rate of 8.0% and are redeemable on any interest payment date (a) at any time on or after June 13, 2013 if the closing price of our common stock for 20 trading days in the period of 30 consecutive trading days ending on the trading day prior to the mailing of the notice of redemption exceeds 120% of the then-applicable conversion price, or (b) on or after June 30, 2018, without a prepayment penalty.  The trust preferred securities of Trust IV are currently convertible into approximately 1.7 million shares of our common stock, which is subject to customary adjustments.

Deferred issuance costs included in subordinated debt were $595,000 and $619,000 at December 31, 2016 and December 31, 2015, respectively. Amortization of deferred issuance costs were $24,000, $24,000, and $24,000 for the years ended December 31, 2016, 2015, and 2014, respectively.
 
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Shareholders’On April 22, 2014, we issued 11,842,106 shares of our common stock in a private placement offering for gross proceeds of $45.0 million. On December 5, 2016, we issued 18,691,589 shares of common stock in a registered direct offering for gross proceeds of $100.0 million.

Shareholders' equity as of December 31, 20132016 totaled approximately $62.9$215.1 million compared to approximately $69.9$113.4 million as of December 31, 2012.2015.  The book value per share of our common stock decreased from $2.69increased to $3.79 as of December 31, 2012,2016, based upon 25,972,89756,754,867 shares outstanding, as adjusted for treasury stock and deferred compensation plan shares, to $2.42from $3.00 as of December 31, 2013,2015, based upon 25,972,89737,837,003 shares outstanding at December 31, 2013, as2015. Outstanding shares are adjusted for treasury stock and deferred compensation plan shares.

Regulatory Capital Requirements
 
The Company isWe are required to comply with certain “risk-based”"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”"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 these guidelines, banks are expected to meetthe final capital rules that became effective on January 1, 2015, there was a minimum target ratiorequirement for “qualifying total capital” to weighted riska common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets of 8%, at least one-half of which is in addition to bethe other minimum risk-based capital standards in the formrule. Institutions that do not maintain this required capital buffer will become subject to progressively more stringent limitations on the percentage of “Tierearnings that can be paid out in dividends or used for stock repurchases and on the payment of discretionary bonuses to senior executive management. The capital buffer requirement is being phased in over three years beginning in 2016. We have included the 0.625% increase for 2016 in our minimum capital adequacy ratios in the table below. The capital buffer requirement effectively raises the minimum required common equity Tier 1 capital”. Qualifyingcapital ratio to 7.0%, the Tier 1 capital ratio to 8.5%, and the total capital is divided into two separate categories or “tiers”. “Tierratio to 10.5% on a fully phased-in basis on January 1, capital” includes common stockholders’ equity, certain qualifying perpetual preferred stock and minority interests in the equity accounts of consolidated subsidiaries, less goodwill. “Tier 2 capital” components (limited in the aggregate to one-half of total qualifying capital) includes allowances for credit losses (within limits), certain excess levels of perpetual preferred stock and certain types of “hybrid” capital instruments, subordinated debt and other preferred stock. Applying the federal guidelines, the ratio of qualifying total capital to weighted-risk assets was 11.53% and 12.73% at December 31, 2013 and 2012, respectively, and as required by the guidelines, at least one-half of the qualifying total capital consisted of Tier l capital elements. Tier l risk-based capital ratios on December 31, 2013 and 2012 were 10.28% and 11.48%, respectively. At December 31, 2013 and 2012, we exceeded the requirements for risk-based capital adequacy under federal guidelines.  At December 31, 2013 and 2012, our leverage ratio was 8.59% and 9.01%, respectively.2019.

The risk-based capital ratios measure the adequacy of a bank’sbank's capital against the riskiness of its assets and off-balance sheet activities. Failure to maintain adequate capital is a basis for “prompt"prompt corrective action”action" or other regulatory enforcement action. In assessing a bank’sbank's capital adequacy, regulators 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’smanagement's overall ability to monitor and control risks.
 
Under FDIC regulations, a bank is deemed to be “well capitalized” when it has a “leverage ratio” (“Tier l capital to total assets”) of at least 5%, a Tier l capital to weighted-risk assets ratio of at least 6%, and a total capital to weighted-risk assets ratio of at least 10%. At December 31, 2013 and 2012, Republic was considered “well capitalized” under FDIC regulations.
59
The following table presents our regulatory capital ratios at December 31, 2013 and 2012:

(dollars in thousands) 
 
Actual
 For Capital Adequacy Purposes To be well capitalized under regulatory capital guidelines
  Amount Ratio Amount Ratio Amount  Ratio
At December 31, 2013:                  
                   
Total risk based capital                  
Republic $92,493   11.38% $65,038   8.00% $81,297   10.00%
Company  93,848   11.53%  65,092   8.00%  -   -%
Tier one risk based capital                        
Republic  82,305   10.12%  32,519   4.00%  48,778   6.00%
Company  83,652   10.28%  32,546   4.00%  -   -%
Tier one leveraged capital                        
Republic  82,305   8.46%  38,921   4.00%  48,651   5.00%
Company  83,652   8.59%  38,971   4.00%  -   -%
                         
At December 31, 2012:                        
                         
Total risk based capital                        
Republic $96,366   12.70% $60,685   8.00% $75,857   10.00%
Company  97,006   12.73%  60,971   8.00%  -   -%
Tier one risk based capital                        
Republic  86,883   11.45%  30,343   4.00%  45,514   6.00%
Company  87,479   11.48%  30,485   4.00%  -   -%
Tier one leveraged capital                        
Republic  86,883   8.96%  38,786   4.00%  48,483   5.00%
Company  87,479   9.01%  38,838   4.00%  -   -%

Management believes that the Company and Republic met, as of December 31, 20132016 and 2012,2015, all capital adequacy requirements to which we are subject. 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’sRepublic's category.
 
66

The Company and Republic’sRepublic'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’sRepublic's loan customers and Republic’sRepublic's ability to manage its interest rate risk, growth and other operating expenses.

In July 2013,The following table presents the federal bankCompany's and Republic's capital regulatory agencies adopted revisions to the agencies’ capital adequacy guidelinesratios at December 31, 2016 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 implement higher minimum capital requirements, add a new common equity tier 1 capital requirement, and establish 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 are 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 remains at 8.0% under the new rules (10.0% to be considered “well capitalized”).  Under the new rules, in order to avoid limitations on capital distributions (including dividend payments and certain discretionary bonus payments to executive officers), a banking organization must hold a capital conservation buffer comprised of common equity tier 1 capital above its minimum risk-based capital requirements in an amount greater than 2.5% of total risk-weighted assets. The new minimum capital requirements are effective on January 1, 2015. The capital contribution buffer requirements phase in over a three-year period beginning January 1, 2016.
60
2015:

(dollars in thousands) 
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 
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   4.00%  92,304   5.00%
Company  235,888   12.74%   74,073   4.00%  74,073   4.00%  -   -%
                            
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%  -   -%  -   -%

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, amounts due from banks and federal funds sold.

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’sRepublic'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’scommittee's primary objective is to maximize net interest income while configuring Republic’sRepublic'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.
67
 
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 $35.9$34.6 million at December 31, 2013,2016, compared to $128.0$27.1 million at December 31, 2012.2015. Loan maturities and repayments are another source of asset liquidity. At December 31, 2013,2016, Republic estimated that more than $35.0$55.0 million of loans would mature or repay in the six-month period ending June 30, 2014.2017. Additionally, the majoritya 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 December 31, 2013,2016, we had outstanding commitments (including unused lines of credit and letters of credit) of $112.0$221.6 million. Certificates of deposit scheduled to mature in one year totaled $53.3$65.2 million at December 31, 2013.2016. We anticipate that we will have sufficient funds available to meet all current commitments.
 
Daily funding requirements have historically been satisfied by generating core deposits and certificates of deposit 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 $372.6$467.1 million at December 31, 2013.2016. As of December 31, 2013 and 2012,2016, we had no outstanding borrowings with the FHLB.  As of December 31, 2015, we had outstanding borrowings of $47.0 million. As of December 31, 2016, 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 Atlantic CentralCommunity Bankers Bank (“ACBB”("ACBB") to assist in managing our liquidity position. We had no amounts outstanding against the ACBB line of credit at December 31, 20132016 and 2012.
61
2015.

Variable Interest Entities

The Company followsWe follow the guidance under ASC 810, Consolidation, with regard to variable interest entities.  ASC 810 clarifies the application of consolidation principles for certain legal entities in which voting rights are not effective in identifying the investor with the controlling financial interest. An entity is subject to consolidation under ASC 810 if the investors do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support, are unable to direct the entity’sentity's activities, or are not exposed to the entity’sentity's losses or entitled to its residual returns ("variable interest entities"). Variable interest entities within the scope of ASC 810 will be required to be consolidated by their primary beneficiary. The primary beneficiary of a variable interest entity is determined to be the party that absorbs a majority of the entity's expected losses, receives a majority of its expected returns, or both.

The Company doesWe do not consolidate itsour subsidiary trusts.  ASC 810 precludes consideration of the call option embedded in the preferred securities when determining if the Company haswe have the right to a majority of the trusts’trusts' expected residual returns. The non-consolidation results in the investment in the common securities of the trusts to be included in other assets with a corresponding increase in outstanding debt of $676,000. In addition, the income received on the Company’sour investment in the common securities of the trusts is included in other income.
68

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 financial results is our need and ability to react to changes in interest rates. As discussed previously, 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.
 
Item 7A:  Quantitative and Qualitative Disclosure about Market Risk

See “Management"Management Discussion and Analysis of Results of Operations and Financial Condition – Interest Rate Risk Management”Management".
 
Item 8:  Financial Statements and Supplementary Data

The Consolidated Financial Statements of the Company begin on page 6571..



69

 
Tel:  717-233-8800
Fax:  717-233-8801
www.bdo.com
 
 
945 E. Park Drive, Suite 103
Harrisburg, PA 17111
 
62

 

Tel: 717-233-8800
320 Market Street, 6th Floor
Fax: 717-233-8801Harrisburg, PA 17101
www.bdo.com


Report of Independent Registered Public Accounting Firm


Board of Directors and Shareholders
Republic First Bancorp, Inc.
Philadelphia, Pennsylvania

We have audited the accompanying consolidated balance sheetsheets of Republic First Bancorp, Inc. and Subsidiaries (the “Bancorp”"Company"), Inc. as of December 31, 20132016 and 2015 and the related consolidated statements of operations andincome, comprehensive income (loss), changes in shareholders’ equity, and cash flows, and shareholders' equity for each of the year then ended.three years in the period ended December 31, 2016. These consolidated financial statements are the responsibility of the Bancorp’sCompany's management. Our responsibility is to express an opinion on the consolidatedthese financial statements based on our audit.audits.

We conducted our auditaudits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Republic First Bancorp, Inc. and Subsidiaries at December 31, 2013 and the results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Bancorp’s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control – Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 24, 2014 expressed an unqualified opinion.



Harrisburg, Pennsylvania
March 24, 2014



63
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
Republic First Bancorp, Inc.
We have audited the accompanying consolidated balance sheet of Republic First Bancorp, Inc. and Subsidiaries (the “Bancorp”) as of December 31, 2012 and the related consolidated statements of operations, comprehensive income (loss), changes in shareholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2012. These consolidated financial statements are the responsibility of the Bancorp’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Republic First Bancorp, Inc. and Subsidiaries as ofat December 31, 20122016 and 2015, and the results of their operations and their cash flows for each of the three years in the two-year period ended December 31, 2012, 2016, in conformity with accounting principles generally accepted in the United States of America.


We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 10, 2017 expressed an unqualified opinion thereon.


Pittsburgh,


Harrisburg, Pennsylvania
March 15, 201310, 2017






6470

 
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31, 20132016 and 20122015
(Dollars in thousands, except per share data)
 December 31, 2013  December 31, 2012  December 31, 2016  December 31, 2015 
ASSETS            
Cash and due from banks $12,525  $9,097  $19,830  $13,777 
Interest bearing deposits with banks  23,355   118,907   14,724   13,362 
Cash and cash equivalents  35,880   128,004   34,554   27,139 
                
Investment securities available for sale, at fair value  204,891   189,259   369,739   284,795 
Investment securities held to maturity, at amortized cost (fair value of $21 and $69, respectively)  21   67 
Investment securities held to maturity, at amortized cost (fair value of $425,183 and $171,845, respectively)  432,499   172,277 
Restricted stock, at cost  1,570   3,816   1,366   3,059 
Loans held for sale  4,931   82   28,065   3,653 
Loans receivable (net of allowance for loan losses of $12,263 and $9,542, respectively)  667,048   608,359 
Loans receivable (net of allowance for loan losses of $9,155 and $8,703, respectively)  955,817   866,066 
Premises and equipment, net  22,748   21,976   57,040   46,164 
Other real estate owned, net  4,059   8,912   10,174   11,313 
Accrued interest receivable  3,049   3,128   5,497   4,216 
Bank owned life insurance  -   10,490 
Goodwill  5,011   - 
Intangible asset  61   - 
Other assets  17,468   14,565   24,108   20,142 
Total Assets $961,665  $988,658  $1,923,931  $1,438,824 
                
LIABILITIES AND SHAREHOLDERS' EQUITY                
Liabilities                
Deposits                
Demand – non-interest bearing $157,806  $145,407  $324,912  $243,695 
Demand – interest bearing  230,221   180,440   605,950   381,499 
Money market and savings  402,671   440,120   635,644   556,526 
Time deposits  78,836   123,234   111,164   67,578 
Total Deposits  869,534   889,201   1,677,670   1,249,298 
        
Short-term borrowings  -   47,000 
Accrued interest payable  237   301   444   245 
Other liabilities  6,519   6,778   8,883   7,049 
Subordinated debt  22,476   22,476   21,881   21,857 
Total Liabilities  898,766   918,756   1,708,878   1,325,449 
                
Shareholders’ Equity        
Preferred stock, par value $0.01 per share: 10,000,000 shares authorized; no shares issued  -   - 
Common stock, par value $0.01 per share: 50,000,000 shares authorized; shares issued 26,501,742  265   265 
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 57,283,712 as of December 31, 2016 and 38,365,848 as of December 31, 2015; shares outstanding 56,754,867 as of December 31, 2016 and 37,837,003 as of December 31, 2015  573   384 
Additional paid in capital  107,078   106,753   253,570   152,897 
Accumulated deficit  (37,708)  (34,228)  (27,888)  (32,833)
Treasury stock at cost (416,303 shares)  (3,099)  (3,099)
Stock held by deferred compensation plan (112,542 shares)  (809)  (809)
Accumulated other comprehensive income (loss)  (2,828)  1,020 
Total Shareholders’ Equity  62,899   69,902 
Total Liabilities and Shareholders’ Equity $961,665  $988,658 
Treasury stock at cost (503,408 shares as of December 31, 2016 and December 31, 2015)  (3,725)  (3,725)
Stock held by deferred compensation plan (25,437 shares as of December 31, 2016 and December 31, 2015)  (183)  (183)
Accumulated other comprehensive loss  (7,294)  (3,165)
Total Shareholders' Equity  215,053   113,375 
Total Liabilities and Shareholders' Equity  1,923,931  $1,438,824 

(See notes to consolidated financial statements)
71
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Income
For the Years Ended December 31, 2016, 2015, and 2014
(Dollars in thousands, except per share data)
  Years Ended December 31, 
  2016  2015  2014 
Interest income         
Interest and fees on taxable loans $40,827  $37,241  $34,530 
Interest and fees on tax-exempt loans  960   540   339 
Interest and dividends on taxable investment securities  11,264   6,792   5,053 
Interest and dividends on tax-exempt investment securities  703   585   364 
Interest on federal funds sold and other interest-earning assets  473   278   187 
Total interest income  54,227   45,436   40,473 
Interest expense            
   Demand- interest bearing  2,088   1,401   888 
   Money market and savings  2,639   2,170   1,929 
   Time deposits  942   695   719 
   Other borrowings  1,194   1,115   1,108 
Total interest expense  6,863   5,381   4,644 
Net interest income  47,364   40,055   35,829 
Provision for loan losses  1,557   500   900 
Net interest income after provision for loan losses  45,807   39,555   34,929 
Non-interest income            
Loan advisory and servicing fees  1,627   2,226   1,452 
Mortgage banking income  5,062   -   - 
Gain on sales of SBA loans  4,981   3,139   4,717 
Service fees on deposit accounts  2,658   1,720   1,224 
Legal settlements  -   2,550   - 
Gain on sale of investment securities  656   108   458 
Net securities impairment losses recognized in earnings  (7)  (3)  (7)
Other non-interest income  335   203   173 
Total non-interest income  15,312   9,943   8,017 
Non-interest expenses            
 Salaries and employee benefits  28,602   22,488   20,089 
 Occupancy  6,109   4,929   4,247 
 Depreciation and amortization  3,518   3,080   2,382 
 Legal  459   915   1,290 
 Other real estate owned  2,182   4,239   1,794 
 Advertising  811   627   597 
 Data processing  2,408   1,593   1,345 
 Insurance  962   720   586 
 Professional fees  1,580   1,268   1,468 
 Regulatory assessments and costs  1,413   1,248   1,065 
 Taxes, other  366   689   616 
 Other operating expenses  7,883   5,295   5,071 
Total non-interest expense  56,293   47,091   40,550 
Income before benefit for income taxes  4,826   2,407   2,396 
Benefit for income taxes  (119)  (26)  (46)
Net income $4,945  $2,433  $2,442 
Net income per share            
Basic $0.13  $0.06  $0.07 
Diluted $0.12  $0.06  $0.07 


(See notes to consolidated financial statements)
 
6572
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Operations
For the Years Ended December 31, 2013, 2012 and 2011
(Dollars in thousands, except per share data)
  Years Ended December 31, 
  2013  2012  2011 
Interest income:         
Interest and fees on taxable loans $31,986  $32,326  $32,954 
Interest and fees on tax-exempt loans  349   265   301 
Interest and dividends on taxable investment securities  4,435   4,899   4,416 
Interest and dividends on tax-exempt investment securities  250   470   457 
Interest on federal funds sold and other interest-earning assets  185   300   145 
Total interest income  37,205   38,260   38,273 
Interest expense:            
Demand- interest bearing  825   796   590 
Money market and savings  1,786   2,718   3,457 
Time deposits  867   1,718   3,017 
Other borrowings  1,112   1,134   1,135 
Total interest expense  4,590   6,366   8,199 
Net interest income  32,615   31,894   30,074 
Provision for loan losses  4,935   1,350   15,966 
Net interest income after provision for loan losses  27,680   30,544   14,108 
Non-interest income:            
Loan advisory and servicing fees  1,615   1,251   480 
Gain on sales of SBA loans  5,338   5,531   5,263 
Service fees on deposit accounts  1,046   922   768 
Legal settlements  238   155   2,780 
Gain on sale of investment securities  703   737   640 
Other-than-temporary impairment losses  -   (35)  (49)
Portion recognized in other comprehensive income (before taxes)  -   1   7 
     Net impairment loss on investment securities  -   (34)  (42)
Bank owned life insurance income  13   73   137 
Other non-interest income  263   193   555 
Total non-interest income  9,216   8,828   10,581 
Non-interest expenses:            
Salaries and employee benefits  17,064   16,512   15,197 
Occupancy  3,635   3,454   3,336 
Depreciation and amortization  2,105   2,006   2,107 
Legal  1,878   2,966   1,948 
Other real estate owned  3,179   763   7,301 
Advertising  447   307   334 
Data processing  1,000   1,187   1,163 
Insurance  625   654   829 
Professional fees  1,420   1,106   1,600 
Regulatory assessments and costs  1,257   1,367   1,913 
Taxes, other  557   594   862 
Legal settlement  1,875   -   - 
Other operating expenses  5,369   4,986   4,610 
Total non-interest expense  40,411   35,902   41,200 
Income (loss) before provision (benefit) for income taxes  (3,515)  3,470   (16,511)
Provision (benefit) for income taxes  (35)  (144)  8,191 
Net income (loss) $(3,480) $3,614  $(24,702)
Net income (loss) per share:            
Basic $(0.13) $0.14  $(0.95)
Diluted $(0.13) $0.14  $(0.95)


(See notes to consolidated financial statements)
66
 

Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
For the Years Ended December 31, 2013, 20122016, 2015, and 20112014
(Dollars in thousands)

  Years Ended December 31, 
  2013  2012  2011 
          
Net income (loss) $(3,480) $3,614  $(24,702)
             
Other comprehensive income (loss), net of tax            
Unrealized gain (loss) on securities (pre-tax $(5,301), $2,368 and $2,233, respectively)  (3,398)  1,517   1,437 
Reclassification adjustment for securities gains (pre-tax $703, $737 and $640, respectively)  (450)  (472)  (416)
Reclassification adjustment for impairment charge (pre-tax $-, $34 and $42, respectively)  -   22   27 
             
Total other comprehensive income (loss)  (3,848)  1,067   1,048 
             
Total comprehensive income (loss) $(7,328) $4,681  $(23,654)

  Years Ended December 31, 
  2016  2015  2014 
          
Net income $4,945  $2,433  $2,442 
             
Other comprehensive income (loss), net of tax            
Unrealized gain (loss) on securities (pre-tax $(6,011), $(4,021) and $4,992, respectively)  (3,853)  (2,577)  3,199 
Reclassification adjustment for securities gains (pre-tax $(656), $(108) and $(458), respectively)  (420)  (69)  (293)
Reclassification adjustment for impairment charge (pre-tax $7, $3 and $7, respectively)  4   2   4 
Net unrealized gains (losses) on securities  (4,269)  (2,644)  2,910 
Net unrealized holding losses on securities transferred from available-for-sale to held-to-maturity (pre-tax $-, $- and $(1,233), respectively)  -   -   (790)
Amortization of net unrealized holding
losses during the period (pre-tax $219, $173 and $118, respectively)
  140   111   76 
             
Total other comprehensive income (loss)  (4,129)  (2,533)  2,196 
             
Total comprehensive income (loss) $816  $(100) $4,638 
             
(See notes to consolidated financial statements)
 
6773
 
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2013, 20122016, 2015, and 20112014
(Dollars in thousands)

 2013  2012  2011  2016  2015  2014 
Cash flows from operating activities                  
Net income (loss) $(3,480) $3,614  $(24,702)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:            
Net income $4,945  $2,433  $2,442 
Adjustments to reconcile net income to net cash provided by operating activities:            
Provision for loan losses  4,935   1,350   15,966   1,557   500   900 
(Gain) loss on sale of other real estate owned  (68)  10   4,804 
Loss on sale of other real estate owned  -   -   9 
Write down of other real estate owned  2,567   130   1,299   355   3,069   1,138 
Depreciation and amortization  2,105   2,006   2,107   3,518   3,080   2,382 
Deferred income taxes  (304)  (225)  8,262   (380)  (84)  (142)
Stock based compensation  325   370   359   759   600   420 
Gain on sale of investment securities  (703)  (737)  (640)  (656)  (108)  (458)
Impairment charges on investment securities  -   34   42   7   3   7 
Amortization of premiums on investment securities  731   440   75   1,980   840   540 
Accretion of discounts on retained SBA loans  (1,364)  (1,005)  (899)
Fair value adjustments on SBA servicing assets  1,075   14   655 
Proceeds from sales of SBA loans originated for sale  57,939   56,983   56,748   58,107   32,922   51,388 
SBA loans originated for sale  (57,450)  (50,609)  (52,410)  (53,627)  (31,760)  (43,416)
Gains on sales of SBA loans originated for sale  (5,338)  (5,531)  (5,263)  (4,981)  (3,139)  (4,717)
Increase in value of bank owned life insurance  (13)  (73)  (137)
Net (increase) decrease in accrued interest receivable and other assets  (363)  (222)  1,734 
Decrease in accrued interest payable and other liabilities  (323)  (336)  (330)
Proceeds from sales of mortgage loans originated for sale  163,414   -   - 
Mortgage loans originated for sale  (161,717)  -   - 
Gains on mortgage loans originated for sale  (4,737)  -   - 
Amortization of intangible assets  43   -   - 
Amortization of debt issuance costs  24   24   24 
Increase in accrued interest receivable and other assets  (1,993)  (2,966)  (1,796)
Net (decrease) increase in accrued interest payable and other liabilities  (1,040)  213   325 
Net cash provided by operating activities  560   7,204   7,914   5,289   4,636   8,802 
                        
Cash flows from investing activities                        
Purchase of investment securities available for sale  (62,544)  (72,464)  (80,987)  (207,482)  (146,668)  (78,825)
Purchase of investment securities held to maturity  (294,187)  (121,402)  - 
Proceeds from the sale of securities available for sale  7,946   25,784   34,277   78,585   11,707   5,700 
Proceeds from the maturity or call of securities available for sale  32,931   33,670   17,969 
Proceeds from the maturity or call of securities held to maturity  48   75   7 
Proceeds from redemption of FHLB stock  2,246   1,505   1,180 
Proceeds from the paydowns, maturity or call of securities available for sale  36,982   31,159   25,822 
Proceeds from the paydowns, maturity or call of securities held to maturity  33,160   16,689   2,308 
Net redemption (purchase) of restricted stock  1,693   (1,902)  413 
Net increase in loans  (63,870)  (35,174)  (13,865)  (89,428)  (106,616)  (104,357)
Proceeds from sale of loans  -   -   22,576 
Net proceeds from sale of other real estate owned  2,600   334   9,447   1,400   792   197 
Proceeds from death benefit on bank owned life insurance  -   -   2,275 
Surrender proceeds on bank owned life insurance  10,503   -   - 
Net cash paid in acquisition  (5,913)  -   - 
Premises and equipment expenditures  (2,877)  (475)  (584)  (14,291)  (14,214)  (14,664)
Net cash used in investing activities  (73,017)  (46,745)  (7,705)  (459,481)  (330,455)  (163,406)
                        
Cash flows from financing activities                        
Net proceeds from stock offering  99,175   -   44,853 
Net proceeds from exercise of stock options  726   64   1 
Net increase in demand, money market and savings deposits  24,731   30,297   211,067   384,786   184,859   206,163 
Net decrease in time deposits  (44,398)  (93,707)  (16,186)
Net cash (used in) provided by financing activities  (19,667)  (63,410)  194,881 
Net increase (decrease) in time deposits  43,586   (7,791)  (3,467)
(Repayment) increase in short-term borrowings  (66,666)  47,000   - 
Net cash provided by financing activities  461,607   224,132   247,550 
                        
Net (decrease) increase in cash and cash equivalents  (92,124)  (102,951)  195,090 
Net increase (decrease) in cash and cash equivalents  7,415   (101,687)  92,946 
Cash and cash equivalents, beginning of year  128,004   230,955   35,865   27,139   128,826   35,880 
Cash and cash equivalents, end of year $35,880  $128,004  $230,955  $34,554  $27,139  $128,826 
                        
Supplemental disclosures:            
Supplemental disclosures            
Interest paid $4,654  $7,114  $8,103  $6,664  $5,401  $4,616 
Income taxes paid $235  $-  $-  $190  $-  $70 
Non-cash transfers from loans to other real estate owned $246  $2,907  $6,792  $616  $11,459  $1,000 
Transfer of available-for-sale-securities to held-to-maturity securities $-  $-  $70,118 

(See notes to consolidated financial statements)
 
6874
 
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders’Shareholders' Equity
For the Years Ended December 31, 2013, 20122016, 2015, and 20112014
(Dollars in thousands)

 Common Stock  Additional Paid in Capital  Accumulated Deficit  Treasury Stock  Stock Held by Deferred Compensation Plan  Accumulated Other Comprehensive Income (Loss)  Total Shareholders’ Equity  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, 2011 $265  $106,024  $(13,140) $(3,099) $(809) $(1,095) $88,146 
                            
Net loss          (24,702)              (24,702)
Other comprehensive income, net of tax                      1,048   1,048 
Stock based compensation      359                   359 
                            
Balance December 31, 2011 $265  $106,383  $(37,842) $(3,099) $(809) $(47) $64,851 
Balance January 1, 2014 $265   107,078   (37,708)  (3,099)  (809)  (2,828)  62,899 
                                                        
Net income          3,614               3,614           2,442               2,442 
Other comprehensive income, net of tax                      1,067   1,067                       2,196   2,196 
Proceeds from shares issued under common stock offering (11,842,106 shares) net of offering costs of $147  118   44,735                   44,853 
Stock based compensation      370                   370       420                   420 
Options exercised (500 shares)      1                   1 
Transfer from deferred compensation plan to treasury stock (87,105 shares)              (626)  626       - 
                                                        
Balance December 31, 2012 $265  $106,753  $(34,228) $(3,099) $(809) $1,020  $69,902 
Balance December 31, 2014  383   152,234   (35,266)  (3,725)  (183)  (632)  112,811 
                                                        
Net loss          (3,480)              (3,480)
Net income          2,433               2,433 
Other comprehensive loss, net of tax                      (3,848)  (3,848)                      (2,533)  (2,533)
Stock based compensation      325                   325       600                   600 
Options exercised (21,500 shares)  1   63                   64 
                                                        
Balance December 31, 2013 $265  $107,078  $(37,708) $(3,099) $(809) $(2,828) $62,899 
Balance December 31, 2015  384   152,897   (32,833)  (3,725)  (183)  (3,165)  113,375 
                            
Net income          4,945               4,945 
Other comprehensive loss, net of tax                      (4,129)  (4,129)
Proceeds from shares issued under common stock offering (18,691,589 shares) net of offering costs of $825  187   98,988                   99,175 
Stock based compensation      759                   759 
Stock options issued in acquisition      202                   202 
Options exercised (226,275 shares)  2   724                   726 
                            
Balance December 31, 2016 $573  $253,570  $(27,888) $(3,725) $(183) $(7,294) $215,053 
   

(See notes to consolidated financial statements)
 
6975
Republic First Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements

1.Nature of Operations

Republic First Bancorp, Inc. (“The Company”(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"). 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 CamdenGloucester Counties. On July 26, 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 Republic all of the issued and outstanding limited liability company interests of Oak Mortgage. The transaction closed on July 28, 2016, 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.

2.Summary of Significant Accounting Policies

Basis of Presentation

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”("FASB").  The FASB sets accounting principles generally accepted in the United States of America (“("US GAAP”GAAP") that are followed to ensure consistent reporting of financial condition, results of operations, and cash flows. 
The Company has evaluatedAll material inter-company transactions have been eliminated. Events occurring subsequent events throughto the date of issuance of the balance sheet have been evaluated for potential recognition or disclosure in the consolidated financial data included herein.statements.  

Risks and Uncertainties and Certain Significant Estimates
 
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, our results of operations are subject to risks and uncertainties surrounding our 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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The preparation of financial statements in conformity with US 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.
 
70
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”("OTTI") of investment securities, fair value of financial instruments 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, diversification of the loan portfolio, delinquency statistics, results of internal loan reviews, borrowers’ perceived financial and managerial strengths, the adequacy of underlying collateral, if collateral dependent, or present value of future cash flows, and other relevant factors.  An estimate for the carrying value of other real estate owned is normally derived through appraisals which are updated on a regular basis or through agreements of sale that have been negotiated.  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 control, the estimate of the allowance for loan losses and the carrying values of other real estate owned could differ materially in the near term.

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 value of the security is reduced by the portion of the decline related to credit impairment.

In evaluating the Company’s ability to recover deferred tax assets, management considers all available positive and negative evidence.   Management also makes assumptions on the amount of future taxable income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies.  These assumptions require management to make judgments that are consistent with the plans and estimates used to manage the Company’s business.  As a result of cumulative losses in recent years and the slow and uneven growth in the current economic environment, the Company has decided to currently exclude future taxable income from its analysis of the ability to recover deferred tax assets and has recorded a valuation allowance against its deferred tax assets.  An increase or decrease in the valuation allowance would result in an adjustment to income tax expense in the period and could have a significant impact on the Company’s future earnings.

Significant Group Concentrations of Credit Risk
 
Most of the Company’sCompany's activities are with customers located within the Greater Philadelphia region.  Note 3 – Investment Securities discusses the types of investment securities that the Company invests in.  Note 4 – Loans Receivable discusses the types of lending that the Company engages in as well as loan concentrations.  The Company does not have a significant concentration of credit risk with any one customer.

Cash and Cash Equivalents
 
For purposes of the statements of cash flows, the Company considers all cash and due from banks, interest-bearing deposits with an original maturity of ninety days or less and federal funds sold, maturing in ninety days or less, to be cash and cash equivalents.
71

Restrictions on Cash and Due from Banks
 
Republic is required to maintain certain average reserve balances as established by the Federal Reserve Board. The amounts of those balances for the reserve computation periods that include December 31, 20132016 and 20122015 were approximately $3.1$23.3 million and $1.6$10.8 million, respectively. These requirements were satisfied through the restriction of vault cash and a balance at the Federal Reserve Bank of Philadelphia.

Investment Securities
 
Held to Maturity – Certain debt securities that management has the positive intent and ability to hold until maturity are classified as held to maturity and are carried at their remaining unpaid principal balances, net of unamortized premiums or unaccreted discounts.  Premiums are amortized and discounts are accreted using the interest method over the estimated remaining term of the underlying security.
 
Available for Sale – Debt and equity securities that will be held for indefinite periods of time, including securities that may be sold in response to changes in market interest or prepayment rates, needs for liquidity, and changes in the availability of and in the yield of alternative investments, are classified as available for sale.  These assets are carried at fair value.  Unrealized gains and losses are excluded from operations and are reported net of tax as a separate component of other comprehensive income until realized. Realized gains and losses on the sale of investment securities are reported in the consolidated statements of operations and determined using the adjusted cost of the specific security sold on the trade date.
77

Investment 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”"other-than-temporary" is not intended to indicate that the decline is permanent, but indicates that the prospects 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 the 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. Impairment charges on bank pooled trust preferred securities of $0, $34,000,$7,000, $3,000, and $42,000$7,000 were recognized during the years ended December 31, 2013, 20122016, 2015, and 2011,2014, respectively, as a result of estimated other-than-temporary impairment.

Restricted Stock
 
Restricted stock, which represents a required investment in the capital stock of correspondent banks related to available credit facilities, was carried at cost as of December 31, 20132016 and 2012.2015.  As of those dates, restricted stock consisted of investments in the capital stock of the FHLB of Pittsburgh and Atlantic CentralCommunity Bankers Bank (“ACBB”("ACBB").  The required investment in the capital stock of the FHLB is calculated based on outstanding loan balances and open credit facilities with the FHLB.  Excess investments are returned to Republic on a quarterly basis. In

At December 2009,31, 2016 and December 31, 2015, the investment in FHLB notified member banksstock totaled $1.2 million and $2.9 million, respectively.  The decrease was due to a short-term borrowing from FHLB at December 31, 2015 which resulted in a higher required investment as of that it was temporarily suspendingdate. At both December 31, 2016 and December 31, 2015, ACBB stock totaled $143,000.

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 repurchasefair 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 capital stock alongthe 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

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 all dividend payments.  In October 2010,changes in their fair values recorded as mortgage banking income in non-interest income in the FHLBstatements of Pittsburgh lifted this suspensionincome. Outstanding IRLCs are subject to interest rate risk and began partial repurchasesrelated price risk during the period from the date of excess investmentsissuance 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 its capital stock.  During 2013 the FHLB of Pittsburgh repurchased all excess restricted stock outstandingmarket price. See Note 24 Derivatives and made regular quarterly dividend payments.
Risk Management Activities.
 
7278
 

Forward Loan Sale Commitments

Forward loan sale commitments are commitments to sell individual mortgage loans at a fixed price to an investor at a future date. Forward loan sale commitments are accounted for as derivatives and carried at fair value, determined as the amount that would be necessary to settle the derivative financial instrument at the balance sheet date. Gross derivative assets and liabilities are recorded as other assets and other liabilities with changes in fair value during the period recorded as mortgage banking income in non-interest income in the statements of income.

Goodwill

Goodwill represents the excess of cost over the identifiable net assets of businesses acquired. Goodwill is recognized as an asset and is to be reviewed for impairment annually as of July 31 and between annual tests when events and circumstances indicate that impairment may have occurred. Impairment is a condition that exists when the carrying amount of goodwill exceeds its implied fair value. A qualitative factor test can be performed to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. If the results of the qualitative review indicate that it is unlikely (less than 50% probability) that the carrying value of the reporting unit exceeds its fair value, no further evaluation needs to be performed. There was $5.0 million of goodwill at December 31, 2016 and $0 at December 31, 2015.

Loans Receivable

The loans receivable portfolio is segmented into commercial and industrial loans, commercial real estate loans, owner occupied real estate loans, construction and land development loans, commercial and industrial loans, owner occupied real estate loans, consumer and other loans, and residential mortgages.  Consumer loans consist of home equity loans and other consumer loans.

Commercial and industrial loans are underwritten after evaluating historical and projected profitability and cash flow to determine the borrower's ability to repay their obligation as agreed. Commercial and industrial loans are made primarily based on the identified cash flow of the borrower and secondarily on the underlying collateral supporting the loan facility. Accordingly, the repayment of a commercial and industrial loan depends primarily on the creditworthiness of the borrower (and any guarantors), while liquidation of collateral is a secondary and often insufficient source of repayment.

Commercial real estate and owner occupied real estate loans are subject to the underwriting standards and processes similar to commercial and industrial loans, in addition to those underwriting standards for real estate loans. These loans are viewed primarily as cash flow dependent and secondarily as loans secured by real estate. Repayment of these loans is generally dependent upon the successful operation of the property securing the loan or the principal business conducted on the property securing the loan. In addition, the underwriting considers the amount of the principal advanced relative to the property value. Commercial real estate and owner occupied real estate loans may be adversely affected by conditions in the real estate markets or the economy in general. Management monitors and evaluates commercial real estate and owner occupied real estate loans based on cash flow estimates, collateral and risk-rating criteria. The Company also utilizes third-party experts to provide environmental and market valuations. Substantial effort is required to underwrite, monitor and evaluate commercial real estate and owner occupied real estate loans.
79

Construction and land development loans are underwritten based upon a financial analysis of the developers and property owners and construction cost estimates, in addition to independent appraisal valuations. These loans will rely on the value associated with the project upon completion. These cost and valuation amounts used are estimates and may be inaccurate. Construction loans generally involve the disbursement of substantial funds over a short period of time with repayment substantially dependent upon the success of the completed project. Sources of repayment of these loans would be permanent financing upon completion or sales of developed property. These loans are closely monitored by onsite inspections and are considered to be of a higher risk than other real estate loans due to their ultimate repayment being sensitive to general economic conditions, availability of long-term financing, interest rate sensitivity, and governmental regulation of real property.

Consumer and other loans consist of home equity loans and lines of credit and other loans to individuals originated through the Company's retail network, which are typically secured by personal property or unsecured. Home equity loans and lines of credit often carry additional risk as a result of typically being in a second position or lower in the event collateral is liquidated. Consumer loans have may also have greater credit risk because of the difference in the underlying collateral, if any. The application of various federal and state bankruptcy and insolvency laws may limit the amount that can be recovered on such loans.

Residential mortgage loans are secured by one to four family dwelling units. This group consists of first mortgages and are originated at loan to value ratios of 80% or less.

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at the amount of unpaid principal, reduced by unearned income and an allowance for loan losses. Interest on loans is calculated based upon the principal amounts outstanding. The Company defers and amortizes certain origination and commitment fees, and certain direct loan origination costs over the contractual life of the related loan. This results in an adjustment of the related loans yield.
 
The Company accounts for amortization of premiums and accretion of discounts related to loans purchased based upon the effective interest method. If a loan prepays in full before the contractual maturity date, any unamortized premiums, discounts or fees are recognized immediately as an adjustment to interest income.

Loans are generally classified as non-accrual if they are past due as to maturity or payment of principal or interest for a period of more than 90 days, unless such loans are well-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 of interest and principal by the borrower, in accordance with the contractual terms. Generally, in the case of non-accrual loans, cash received is applied to reduce the principal outstanding.

Allowance for Credit Losses

The allowance for credit losses consists of the allowance for loan losses and the reserve for unfunded lending commitments.  The allowance for loan losses represents management’smanagement's estimate of losses inherent in the loan portfolio as of the balance sheet date and is recorded as a reduction to loans.  The reserve for unfunded lending commitments would represent management’smanagement's estimate of losses inherent in its unfunded loan commitments and would be recorded in other liabilities on the consolidated balance sheet, if necessary.  The allowance for credit losses is established through a provision for loan losses charged to operations. Loans are charged against the allowance when management believes that the collectability of the loan principal is unlikely. Recoveries on loans previously charged off are credited to the allowance.
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The allowance for credit losses is an amount that represents management’smanagement's estimate of known and inherent losses related to the loan portfolio and unfunded loan commitments.  Because the allowance for credit losses is dependent, to a great extent, on the general economy and other conditions that may be beyond Republic’sRepublic's control, the estimate of the allowance for credit losses could differ materially in the near term.

The allowance consists of specific, general and unallocated components.  The specific component relates to loans that are categorized as “internally classified”.impaired.  For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan.  The general component covers non-classified loans and is based on historical loss experience adjusted for several qualitative factors.  An unallocated component is maintained to cover uncertainties that could affect management’smanagement's estimate of probable losses.  The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.  All identified losses are immediately charged off and therefore no portion of the allowance for loan losses is restricted to any individual loan or group of loans, and the entire allowance is available to absorb any and all loan losses.
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In estimating the allowance for credit 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’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.  These qualitative risk factors include:

1)Lending policies and procedures, including underwriting standards and collection, charge-off and recovery practices.
2)National, regional and local economic and business conditions as well as the condition of various segments.
3)Nature and volume of the portfolio and terms of loans.
4)Experience, ability and depth of lending management and staff.
5)Volume and severity of past due, classified and nonaccrual loans as well as other loan modifications.
6)Quality of the Company’sCompany's loan review system, and the degree of oversight by the Company’sCompany's Board of Directors.
7)Existence and effect of any concentration of credit and changes in the level of such concentrations.
8)Effect of external factors, such as competition and legal and regulatory requirements.

Each factor is assigned a value to reflect improving, stable or declining conditions based on management’smanagement's best judgment using relevant information available at the time of the evaluation.  Adjustments to the factors are supported through documentation of changes in conditions in a narrative accompanying the allowance for loan loss calculation.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement.  Factors considered by management in determining impairment, include payment status collateral value, and the probability of collecting scheduled principal and interest payments when due.  Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.  Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, and the borrower’sborrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed.record.  Impairment is measured on a loan-by-loan basis for commercial and construction loans by the present value of expected future cash flows discounted at the loan’sloan's effective interest rate, the loan’sloan's obtainable market price, or the fair value of the collateral if the loan is collateral dependent.
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An allowance for loan losses is established for an impaired loan if its carrying value exceeds its estimated fair value.  The estimated fair values of substantially all of the Company’sCompany's impaired loans are measured based on the estimated fair value of the loan’sloan's collateral.

For commercial loans secured by real estate, estimated fair values are determined primarily through third-party appraisals.  When a real estate secured loan becomes impaired, a decision is made regarding whether an updated certified appraisal of the real estate is necessary. This decision is based on various considerations, including the age of the most recent appraisal, the loan-to-value ratio based on the original appraisal and the condition of the property.  Appraised values are discounted to arrive at the estimated selling price of the collateral, which is considered to be the estimated fair value.  The discounts also include estimated costs to sell the property.
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For commercial and industrial loans secured by non-real estate collateral, such as accounts receivable, inventory and equipment, estimated fair values are determined based on the borrower’sborrower's financial statements, inventory reports, accounts receivable agings or equipment appraisals or invoices.  Indications of value from these sources are generally discounted based on the age of the financial information or the quality of the assets.
 
Large groups of smaller balance homogeneous loans are collectively evaluated for impairment.  Accordingly, the Company does not separately identify individual residential mortgage loans, home equity loans and other consumer loans for impairment disclosures, unless such loans are the subject of a troubled debt restructuring agreement.

Loans whose terms are modified are classified as troubled debt restructurings if the Company grants such borrowers concessions and it is deemed that those borrowers are experiencing financial difficulty.  Concessions granted under a troubled debt restructuring generally involve a temporary reduction in interest rate or an extension of a loan’sloan's stated maturity date.  Non-accrual troubled debt restructurings are restored to accrual status if principal and interest payments, under the modified terms, are current for six consecutive months after modification.  Loans classified as troubled debt restructurings are designated as impaired.

The allowance calculation methodology includes further segregation of loan classes into risk rating categories.  The borrower’sborrower's overall financial condition, repayment sources, guarantors and value of collateral, if appropriate, are evaluated annually for commercial loans or when credit deficiencies arise, such as delinquent loan payments, for commercial and consumer loans.  Credit quality risk ratings include regulatory classifications of special mention, substandard, doubtful and loss.  Loans classified special mention have potential weaknesses that deserve management’smanagement's close attention.  If uncorrected, the potential weaknesses may result in deterioration of the repayment prospects.  Loans classified substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt.  They include loans that are inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any.  Loans classified doubtful have all the weaknesses inherent in loans classified substandard with the added characteristic that collection or liquidation in full, on the basis of current conditions and facts, is highly improbable.  Loans classified as a loss are considered uncollectible and are charged to the allowance for loan losses.  Loans not classified are rated pass.
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In addition, federal and state regulatory agencies, as an integral part of their examination process, periodically review the Company’sCompany's allowance for loan losses and may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination, which may not be currently available to management. Based on management’smanagement's comprehensive analysis of the loan portfolio, management believes the current level of the allowance for loan losses is adequate.

Transfers of Financial Assets
 
The Company accounts for the transfers and servicing financial assets in accordance with ASC 860, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities. ASC 860, revises the standards for accounting for the securitizations and other transfers of financial assets and collateral.
 
Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered.  Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

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A servicing asset related to SBA loans is initially recorded when these loans are sold and the servicing rights are retained. The servicing asset is recorded on the balance sheet and included in other assets. An updated fair value of the servicing asset is obtained from an independent third party on a quarterly basis and any necessary adjustments are included in 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, our market-based assumptions for prepayment speeds and estimated losses and recoveries.  The present value of the future cash flows are then calculated utilizing our market-based discount ratio assumptions.  In all cases, we model expected payments for every loan for each quarterly period in order to create the most detailed cash flow stream possible.

The Company uses various 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.

For more information on the SBA servicing asset including the sensitivity of the current fair value of the SBA loan servicing rights to adverse changes in key assumptions, see Note 15 – Fair Value Measurements and Fair Values of Financial Instruments.

SBA Loans Held for Sale

Loans held for sale consist of the guaranteed portion of SBA loans that the Company intends to sell after origination and are reflected at the lower of aggregate cost or fair value. When the sale of the loan occurs, the premium received is combined with the estimated present value of future cash flows on the related servicing asset and recorded as a Gain on the Sale of SBA loans which is categorized as non-interest income. Subsequent fees collected for servicing of the sold portion of a loan are combined with fair value adjustments to the SBA servicing asset and recorded as a net amount in Loan Advisory and Servicing Fees, which is also categorized as non-interest income.
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Guarantees
 
The Company accounts for guarantees in accordance with ASC 815 Guarantor’sGuarantor's Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others.  ASC 815 requires a guarantor entity, at the inception of a guarantee covered by the measurement provisions of the interpretation, to record a liability for the fair value of the obligation undertaken in issuing the guarantee.  The Company has financial and performance letters of credit.  Financial letters of credit require the Company to make payment if the customer’scustomer's financial condition deteriorates, as defined in the agreements.   Performance letters of credit require the Company to make payments if the customer fails to perform certain non-financial contractual obligations.  The maximum potential undiscounted amount of future payments of these letters of credit as of December 31, 20132016 is $2.7$5.7 million and they expire as follows: $2.3$5.2 million in 20142017, $124,000 in 2018, and $385,000$311,000 in 2019.  Amounts due under these letters of credit would be reduced by any proceeds that the Company would be able to obtain in liquidating the collateral for the loans, which varies depending on the customer.  There was no liability for guarantees under standby letters of credit as of December 31, 2016 and December 31, 2015.

Premises and Equipment
 
Premises and equipment (including land) are stated at cost less accumulated depreciation and amortization. Depreciation of furniture and equipment is calculated over the estimated useful life of the asset using the straight-line method for financial reporting purposes, and accelerated methods for income tax purposes. The estimated useful lives are 40 years for buildings and 3 to 13 years for furniture, fixtures and equipment.  Leasehold improvements are amortized over the shorter of their estimated useful lives or terms of their respective leases, which range from 1 to 30 years. Repairs and maintenance are charged to current operations as incurred, and renewals and major improvements are capitalized.

Other Real Estate Owned
 
Other real estate owned consists of assets acquired through, or in lieu of, loan foreclosure.  They are held for sale and are initially recorded at fair value less cost to sell at the date of foreclosure, establishing a new cost basis.  Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value, less the cost to sell.  Revenue and expenses from operations and changes in the valuation allowance are included in net expenses from other real estate owned.
Bank Owned Life Insurance
The Company carries no investment in bank owned life insurance (“BOLI”) policies as of December 31, 2013.

Advertising Costs
 
It is the Company’sCompany's policy to expense advertising costs in the period in which they are incurred.
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Income Taxes
 
Income tax accounting guidance results in two components of income tax expense: current and deferred.  Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues.  The Company determines deferred income taxes using the liability (or balance sheet) method.  Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities and enacted changes in tax rates and laws are recognized in the period in which they occur.
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Deferred income tax expense results from changes in deferred tax assets and liabilities between periods.  Deferred tax assets are reduced by a valuation allowance if, based on the weight of the evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized.

The Company accounts for uncertain tax positions if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination.  The term more likely than not means a likelihood of more than 50 percent; the terms examined and upon examination also include resolution of the related appeals or litigation processes, if any.  A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information.  The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances, and information available at the reporting date and is subject to management’smanagement's judgment.

The Company recognizes interest and penalties on income taxes, if any, as a component of the provision for income taxes.

Stock Based Compensation
 
The Company has a Stock Option and Restricted Stock Plan (“Plan”("the 2005 Plan"), under which stockthe Company granted options, restricted stock or stock appreciation rights may be granted to the Company’sCompany's employees, directors, and certain consultants. The 2005 Plan initially 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 maycould be available for grant under the 2005 Plan to 1.5 million shares, arewere available for such grants. As of December 31, 2013,2016, the only grants under the 2005 Plan have beenwere option grants. The 2005 Plan providesprovided that the exercise price of each option granted equalsequaled the market price of the Company’sCompany's stock on the date of the grant. Options granted pursuant to the 2005 Plan vest within one to four years from the date of grant 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 December 31, 2016, the maximum number of shares of common shares issuable under the 2014 Plan was 5.9 million.

Earnings Per Share
 
Earnings per share (“EPS”("EPS") consists of two separate components, basic EPS and diluted EPS. Basic EPS is computed by dividing net income (loss) by the weighted average number of common shares outstanding for each period presented. Diluted EPS is calculated by dividing net income (loss) by the weighted average number of common shares outstanding plus dilutive common stock equivalents (“CSE”("CSE"). CSEs consist of dilutive stock options granted through the Company’s PlanCompany's stock option plans and convertible securities related to 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.  In 2013, 20122016, 2015, and 2011,2014, 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 years ended December 31, 2013, 20122016, 2015, and 20112014 is as follows:
(dollars in thousands, except per share amounts) 2016  2015  2014 
          
Net income - basic and diluted $4,945  $2,433  $2,442 
             
Weighted average shares outstanding  39,281   37,818   34,232 
             
Net income per share – basic $0.13  $0.06  $0.07 
             
Weighted average shares outstanding (including dilutive CSEs)  39,865   38,094   34,591 
             
Net income per share – diluted $0.12  $0.06  $0.07 

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)   2016   2015   2014 
          
Anti-dilutive securities         
          
   Share based compensation awards  1,747   1,671   1,136 
             
   Convertible securities  1,662   1,662   1,662 
             
      Total anti-dilutive securities  3,409   3,333   2,798 
       
(dollars in thousands, except per share amounts) 2013  2012  2011 
          
Net income (loss) - basic and diluted $(3,480) $3,614  $(24,702)
             
Weighted average shares outstanding  25,973   25,973   25,973 
Net income (loss) per share – basic $(0.13) $0.14  $(0.95)
             
Weighted average shares outstanding (including dilutive CSEs)  25,973   25,992   25,973 
Net income (loss) per share – diluted $(0.13) $0.14  $(0.95)


Comprehensive Income / (Loss)

The Company presents as a component of comprehensive income (loss) the amounts from transactions and other events, which currently are excluded from the consolidated statements of operations and are recorded directly to shareholders’shareholders' equity.  These amounts consist of unrealized holding gains (losses) on available for sale securities.securities and amortization of unrealized holding losses on available-for-sale securities transferred to held-to-maturity.
Trust Preferred Securities

The Company has sponsored three outstanding issues of corporation-obligated mandatorily redeemable capital securities of a subsidiary trust holding solely junior subordinated debentures of the corporation, more commonly known as trust preferred securities. The subsidiary trusts are not consolidated with the Company for financial reporting purposes.  The purpose of the issuances of these securities was to increase capital.  The trust preferred securities qualify as Tier 1 capital for regulatory purposes in amounts up to 25% of total Tier 1 capital.  See Note 7 "Borrowings" for further information regarding the issuances.
 
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Variable Interest Entities
 
The Company follows the guidance under ASC 810, Consolidation, with regard to variable interest entities.  ASC 810 clarifies the application of consolidation principles for certain legal entities in which voting rights are not effective in identifying the investor with the controlling financial interest. An entity is subject to consolidation under ASC 810 if the investors do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support, are unable to direct the entity’sentity's activities, or are not exposed to the entity’sentity's losses or entitled to its residual returns ("variable interest entities"). Variable interest entities within the scope of ASC 810 will be required to be consolidated by their primary beneficiary. The primary beneficiary of a variable interest entity is determined to be the party that absorbs a majority of the entity's expected losses, receives a majority of its expected returns, or both.

The Company does not consolidate its subsidiary trusts.  ASC 810 precludes consideration of the call option embedded in the preferred securities when determining if the Company has the right to a majority of the trusts’trusts' expected residual returns. The non-consolidation results in the investment in the common securities of the trusts to be included in other assets with a corresponding increase in outstanding debt of $676,000. In addition, the income received on the Company’sCompany's investment in the common securities of the trusts is included in other income.

Treasury Stock
 
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Common stock purchased for treasury is recorded at cost.

Recent Accounting Pronouncements

ASU 2014-042014-09

In JanuaryMay 2014, the FASB issued ASU 2014-04, “Receivables2014-09, "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 – Troubled Debt Restructuring by CreditorsContracts with Customers (Subtopic 310-40): Reclassification340-40)."  The purpose of Residential Real Estate Collateralized Consumer Mortgage Loans Upon Foreclosure – a consensusthis 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 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.codification.  For public business entities,companies, early adoption of the ASU isupdate will be effective for annual periods,interim and interim periods within those annual periods beginning after December 15, 2014.2016.  For entities other than public business entities,companies that elect to defer the ASU isupdate, adoption will be effective for interim and annual periods beginning after December 15, 2014,2017. 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 has evaluated this ASU and it does not have a significant impact on its financial condition or results of operations.

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 has evaluated this ASU and it does not have a significant impact on its financial condition or results of operations.
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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 has evaluated this ASU and it does not have a significant impact on its financial condition or results of operations.

ASU 2016-02

In February 2016, the FASB issued Accounting Standards Update ("ASU") No. 2016-02, Leases. From the Republic 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 landlord 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. After 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 books.
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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 be effective January 1, 2017 and it does not have a significant impact on our financial statements.

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.

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 any impact on the consolidated 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, 2015.2019. 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 doeshas not believeyet determined the impact the adoption of the amendment to this guidanceASU 2017-01 will have a material impact on the consolidated financial statements.
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ASU 2013-022017-04

In February 2013,January 2017, the FASB issued ASU 2013-02, “Reporting2017-04, 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 Amounts Reclassified Outa 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 Comprehensive Income.” The amendments in this ASU are intendedgoodwill allocated to improve thethat reporting of reclassifications out of accumulated other comprehensive income by requiring an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required to be reclassified in its entirety to net income.unit." For other amountspublic business entities that are not required to be reclassified in their entirety to net income inSEC filers, the same reporting period, an entityASU is required to cross-reference other disclosures required that provide additional detail about those amounts.  This would be the case when a portion of the amount reclassified out of accumulated other comprehensive income is reclassified to a balance sheet account instead of directly to income or expense in the same reporting period.  The ASU was effective for public entitiesannual and any interim impairment tests for reporting periods beginning after December 15, 2012 and did2019. The Company has not yet determined the impact the adoption of ASU 2017-04 will have a material impact on the Company’sconsolidated financial statements.

Reclassifications
 
Certain reclassifications have been made to 20122015 and 20112014 information to conform to the 20132016 presentation.  The reclassifications had no effect on results of operations.
operations or shareholders' equity. Included in the reclassifications are $595,000 and $619,000 of deferred debt issuance costs from "Other assets" to "Subordinated debt" at December 31, 2016 and December 31, 2015, respectively, as a result of the adoption of ASU 2015-03.
 
7990

3.Investment Securities

A summary of the amortized cost and market value of securities available for sale and securities held to maturity at December 31, 20132016 and 20122015 is as follows:

 At December 31, 2013  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 $127,242  $665  $(4,467) $123,440  $230,252  $145  $(5,632) $224,765 
Mortgage-backed securities  15,669   623   (111)  16,181 
Agency mortgage-backed securities  37,973   32   (1,295)  36,710 
Municipal securities  9,737   68   (162)  9,643   26,825   151   (429)  26,547 
Corporate bonds  32,174   1,079   -   33,253   66,718   8   (1,978)  64,748 
Asset-backed securities  19,089   318   -   19,407   15,565   -   (416)  15,149 
Trust preferred securities  5,277   -   (2,427)  2,850   3,063   -   (1,243)  1,820 
Other securities  115   2   -   117 
Total securities available for sale $209,303  $2,755  $(7,167) $204,891  $380,396  $336  $(10,993) $369,739 
                                
U.S. Government agencies $1  $-  $-  $1  $98,538  $8  $(2,238) $96,308 
Collateralized mortgage obligations  202,990   793   (2,553)  201,230 
Agency mortgage-backed securities  129,951   1   (3,327)  126,625 
Other securities  20   -   -   20   1,020   -   -   1,020 
Total securities held to maturity $21  $-  $-  $21  $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 
  At December 31, 2012 
 
 
(dollars in thousands)
 Amortized Cost  Gross Unrealized Gains  Gross Unrealized Losses  
Fair
Value
 
             
Collateralized mortgage obligations $97,959  $1,830  $(6) $99,783 
Mortgage-backed securities  20,626   1,014   -   21,640 
Municipal securities  11,150   967   (16)  12,101 
Corporate bonds  32,231   639   (185)  32,685 
Asset-backed securities  19,785   135   (191)  19,729 
Trust preferred securities  5,785   -   (2,598)  3,187 
Other securities  131   3   -   134 
Total securities available for sale $187,667  $4,588  $(2,996) $189,259 
                 
U.S. Government agencies $1  $-  $-  $1 
Other securities  66   2   -   68 
Total securities held to maturity $67  $2  $-  $69 
91

The maturity distribution of the amortized cost and estimated market value offollowing table presents investment securities by contractualstated maturity at December 31, 2013 is as follows:2016. 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 
 
(dollars in thousands)
 Amortized Cost  Fair Value  Amortized Cost  Fair Value 
             
Due in 1 year or less $1,192  $1,195  $-  $- 
After 1 year to 5 years  74,270   74,351   21   21 
After 5 years to 10 years  123,418   118,653   -   - 
After 10 years  10,423   10,692   -   - 
Total $209,303  $204,891  $21  $21 
80
  Available for Sale  Held to Maturity 
 
(dollars in thousands)
 
Amortized
Cost
  
Fair
Value
  
Amortized
Cost
  
Fair
Value
 
Due in 1 year or less $1,000  $1,002  $-  $- 
After 1 year to 5 years  19,693   19,491   4,646   4,606 
After 5 years to 10 years  66,007   63,587   94,912   92,722 
After 10 years  25,471   24,184   -   - 
Collateralized mortgage obligations  230,252   224,765   202,990   201,230 
Agency mortgage-backed securities  37,973   36,710   129,951   126,625 
Total $380,396  $369,739  $432,499  $425,183 

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

As of December 31, 2013 and December 31, 2012, the collateralized mortgage obligations and mortgage backed securities included in theThe Company's investment securities portfolio consist solelyconsists primarily of debt securities issued by U.S. government sponsored agencies.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 securitiesobligations ("CMO") held in the investment securities portfolio as of those dates. The Company did not hold any mortgage-backedDecember 31, 2016 and December 31, 2015.  There were also no MBS or CMO securities that were rated “Alt-A”"Alt-A" or “Subprime”"sub-prime" as of December 31, 2013those dates.

The fair value of investment securities is impacted by interest rates, credit spreads, market volatility and December 31, 2012.  In addition, the Company did not hold any private label CMO’s as of December 31, 2013liquidity conditions. Net unrealized gains and December 31, 2012.  As of December 31, 2013 and December 31, 2012, the asset-backed securities heldlosses in the investment securitiesavailable for sale portfolio consist solelyare included in shareholders' equity as a component of Sallie Mae bonds collateralized by student loans whichaccumulated other comprehensive income or loss, net of tax.  Securities classified as held to maturity are guaranteed bycarried at amortized cost.  An unrealized loss exists when the U.S. Departmentcurrent fair value of Education.an individual security is less than the amortized cost basis.

In instances when a determinationThe Company regularly evaluates investment securities that are in an unrealized loss position in order to determine if the decline in fair value is made that another 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 exists with respect to("OTTI") loss must be recognized for a debt security butin an unrealized loss position if the investor does not intendCompany intends to sell the debt security andor it is more likely than not that the investorit will not be required to sell the debt security prior to its anticipated recovery accountingof 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 other-than-temporary impairmentevaluation of the expected cash flows to be separated into (a)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 total other-than-temporary impairment related to a decrease in cash flows expected to be collected from the debt security (the credit loss) and (b) the amount of the total other-than-temporary impairment related to all other factors.  The amount of the total other-than-temporary impairmentunrealized loss related to other factors, such as liquidity conditions in the market or the current interest rate environment, is recognizedrecorded in accumulated other comprehensive income.  There were no impairment charges (credit losses) on trust preferredincome (loss) for investment securities classified available for the year ended December 31, 2013. sale.

Impairment charges (credit losses) on trust preferred securities for the years ended December 31, 20122016, 2015, and 20112014 amounted to $34,000$7,000, $3,000, and $42,000,$7,000, respectively.

The Company realized gross gains on the sale of securities of $703,000 in 2013.  The related sale proceeds amounted to $7.9 million.  The tax provision applicable to these gross gains in 2013 amounted to approximately $253,000.  The Company realized gross gains on the sale of securities of $737,000 in 2012.  The related sale proceeds amounted to $25.8 million.  The tax provision applicable to these gross gains in 2012 amounted to approximately $265,000.  The Company realized gross gains on the sale of securities of $640,000 in 2011. The related sale proceeds amounted to $34.3 million.  The tax provision applicable to these gross gains in 2011 amounted to approximately $224,000.

At December 31, 20132016 and 2012,2015, investment securities in the amount of approximately $113.1$380.1 million and $100.8$209.4 million, respectively, were pledged as collateral for public deposits and certain other deposits as required by law.
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The following table presents a roll-forward of the balance of credit-related impairment losses on securities held at December 31, 20132016, 2015, and 20122014 for which a portion of OTTI was recognized in other comprehensive income:

(dollars in thousands) 2013  2012 
       
Beginning Balance, January 1st
 $3,959  $3,925 
Additional credit-related impairment loss on securities for which an        
other-than-temporary impairment was previously recognized  -   34 
Reductions for securities paid off during the period  -   - 
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, December 31st
 $3,959  $3,959 
(dollars in thousands) 2016  2015  2014 
          
Beginning Balance, January 1st
 $930  $3,966  $3,959 
Additional credit-related impairment loss on securities for which an            
other-than-temporary impairment was previously recognized  7   3   7 
Reductions for securities sold during the period  -   (3,039)  - 
Ending Balance, December 31st
 $937  $930  $3,966 
 
 
8193
 

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 as of December 31, 20132016 and 2012:2015:

 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, 2013 
  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 $73,137  $3,923  $8,697  $544  $81,834  $4,467 
Mortgage-backed securities  1,450   41   1,123   70   2,573   111 
Municipal securities  5,108   162   -   -   5,108   162 
Corporate bonds  -   -   -   -   -   - 
Trust preferred securities  -   -   2,850   2,427   2,850   2,427 
Total $79,695  $4,126  $12,670  $3,041  $92,365  $7,167 

 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 

 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 

  At December 31, 2012 
  Less than 12 months  12 months or more  Total 
  
Fair
Value
  Unrealized Losses  
Fair
Value
  Unrealized Losses  
Fair
Value
  Unrealized Losses 
                   
Collateralized  mortgage obligations $9,991  $6  $-  $-  $9,991  $6 
Municipal securities  1,050   16   -   -   1,050   16 
Corporate bonds  -   -   9,811   185   9,811   185 
Asset-backed securities  9,218   191   -   -   9,218   191 
Trust preferred securities  -   -   3,187   2,598   3,187   2,598 
Total $20,259  $213  $12,998  $2,783  $33,257  $2,996 

The impairment ofUnrealized losses on securities in the investment portfolio totaled $7.2amounted to $19.1 million with a total fair value of $92.4$595.0 million atas of December 31, 2013.2016 compared to unrealized losses of $6.3 million with a total fair value of $262.7 million as of December 31, 2015.  The most significant components of this impairment are related toCompany believes the collateralized mortgage obligations and trust preferred securities heldunrealized losses presented in the portfolio. The unrealized losses on the CMO’stables above are temporary in nature and primarily related to the recent movement in 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 theseor believe it will be required to sell securities in an unrealized loss position prior to maturity or recoveringrecovery of the cost bases and does not believe it will be forced to sell these securities prior to maturity or recovering theamortized cost bases.
 
At December 31, 2013, the investment portfolio included twenty-five
94
The Company held ten U.S. Government agency securities, fifty-two collateralized mortgage obligations with a total market valueand nineteen agency mortgage-backed securities that were in an unrealized loss position at December 31, 2016. Principal and interest payments of $123.4 million.  Seventeenthe underlying collateral for each of these securities carried an unrealized loss at December 31, 2013.  At December 31, 2013, the investment portfolio included forty-two mortgage-backed securities with a total market value of $16.2 million.  Two of these securities carried an unrealized loss at December 31, 2013.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 changesfluctuations in market valuefair values resulting from changes in market interest rates and are considered temporary as of December 31, 2013.2016.

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 December 31, 2016, the investment portfolio included twenty-three municipal securities 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 any credit deterioration.

At December 31, 2016, 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 any credit deterioration.

At December 31, 2016, the investment portfolio included eight 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 any 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.
82
The following table provides additional detail abouton the trust preferred securities held in the portfolio as of December 31, 2013.2016.

 (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 2017 and beyond
  Cumulative OTTI Life to Date 
TPREF Funding II Class B Notes $725  $402  $(323)  C   19   37%   0.41%  $274 
TPREF Funding III Class B2 Notes  1,518   889   (629)  C   15   32   0.44   483 
ALESCO Preferred Funding V Class C1 Notes  820   529   (291)  C   41   14   0.40   180 
Total   $3,063  $1,820  $(1,243)      75   28%      $937 

The Company had proceeds from the sale of securities available for sale in 2016 of $78.6 million. Gross gains of $680,000 and gross losses of $24,000 were realized on theses sales. The tax provision applicable to these gross gains in 2016 amounted to approximately $236,000.
95

(dollars in thousands)Class / TrancheAmortized Cost
Fair
Value
Unrealized LossesLowest Credit Rating AssignedNumber of Banks Currently PerformingDeferrals / Defaults as % of Current BalanceConditional Default Rates for 2013 and beyondCumulative OTTI Life to Date
Preferred Term Securities IVMezzanine Notes$49$39$(10)B618%0.34%$-
Preferred Term Securities VIIMezzanine Notes 989 726 (263)C11540.36 2,173
TPREF Funding IIClass B Notes 739 336 (403)C17410.39 260
TPREF Funding IIIClass B2 Notes 1,520 696 (824)C17340.31 480
Trapeza CDO I, LLCClass C1 Notes 556 284 (272)C9490.38 470
ALESCO Preferred Funding IVClass B1 Notes 604 358 (246)C4160.36 396
ALESCO Preferred Funding VClass C1 Notes 820 411 (409)C39240.36 180
Total $5,277 $2,850 $(2,427) 14038% $3,959

AtProceeds of sales of securities available for sale in 2015 were $11.7 million. Gross gains of $396,000 and gross losses of $288,000 were realized on these sales.  The tax provision applicable to the net gains for the year ended December 31, 2013,2015 amounted to $39,000. Included in the investment portfolio included seventeen municipal2015 sales activity were the sales of four CDO securities. Proceeds from the sale of the CDO securities withtotaled $2.0 million. Gross gains of $70,000 and gross losses of $288,000 were realized on these sales.  The tax provision applicable to the net losses for the twelve months ended December 31, 2015 amounted to $78,000. Management had previously stated that it did not intend to sell the CDO securities prior to their maturity or the recovery of their cost bases, nor would it be forced to sell these securities prior to maturity or recovery of the cost bases.  This statement was made over a totalperiod of several years where there was limited trading activity in the pooled trust preferred CDO market resulting in fair market value of $9.6 million.  Nine of these securities carried an unrealized loss at December 31, 2013.  Eachestimates well below the book values. During 2015, management received several inquiries regarding the availability of the municipalCDO securities are reviewed quarterly for impairment. Research on each issuer is completed to ensure the financial stabilityand noted an increased level of trading in this type of security. As a result of the municipal entity.increased activity and the level of bids received, management elected to sell the four CDOs resulting in a net loss of $218,000 during 2015 which was offset by gains on sales of agency mortgage- backed securities and corporate bonds.  The largest geographic concentration was in Pennsylvania where one municipal security had a market value of $1.3 million.  As of December 31, 2013, management found no evidence of OTTI on anyBank continues to demonstrate the ability and intent to hold the remaining CDOs until maturity or recovery of the municipal securities held incost bases, but will evaluate future opportunities to sell the investment securities portfolio.remaining CDOs if they arise.

4.Loans Receivable

The following table sets forth the Company’sCompany's gross loans by major categories as of December 31, 20132016 and 2012:2015:

(dollars in thousands) 
December 31,
2013
  
December 31,
2012
  December 31, 2016  December 31, 2015 
            
Commercial real estate $342,794  $335,561  $378,519  $349,726 
Construction and land development  23,977   26,659   61,453   46,547 
Commercial and industrial  118,209   103,768   174,744   181,850 
Owner occupied real estate  160,229   126,242   276,986   246,398 
Consumer and other  31,981   23,449   63,660   48,126 
Residential mortgage  2,359   2,442   9,682   2,380 
Total loans receivable  679,549   618,121   965,044   875,027 
Deferred costs (fees)  (238)  (220)  (72)  (258)
Allowance for loan losses  (12,263)  (9,542)  (9,155)  (8,703)
Net loans receivable $667,048  $608,359  $955,817  $866,066 

A loan is considered impaired, in accordance with ASC 310 Receivables, when based on current information and events, it is probable that theThe 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 commercial loans, but also include internally classified accruing loans. 

83
The following table summarizes information with regard to impaired loans bydisaggregates its loan portfolio class asinto groups of December 31, 2013 and 2012:

  December 31, 2013  December 31, 2012 
 
 
(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 $6,850  $6,971  $-  $19,231  $20,000  $- 
Construction and land development  902   4,076   -   3,153   6,312   - 
Commercial and industrial  2,043   2,882   -   3,793   7,106   - 
Owner occupied real estate  542   862   -   505   505   - 
Consumer and other  453   711   -   912   1,146   - 
Total $10,790  $15,502  $-  $27,594  $35,069  $- 

With an allowance recorded:                  
Commercial real estate $13,044  $13,044  $3,679  $6,085  $6,085  $1,077 
Construction and land development  716   3,867   237   593   3,700   70 
Commercial and industrial  4,889   7,634   1,254   3,147   3,255   861 
Owner occupied real estate  2,891   2,891   430   3,450   3,450   860 
Consumer and other  203   210   10   146   155   75 
Total $21,743  $27,646  $5,610  $13,421  $16,645  $2,943 

Total:                  
Commercial real estate $19,894  $20,015  $3,679  $25,316  $26,085  $1,077 
Construction and land development  1,618   7,943   237   3,746   10,012   70 
Commercial and industrial  6,932   10,516   1,254   6,940   10,361   861 
Owner occupied real estate  3,433   3,753   430   3,955   3,955   860 
Consumer and other  656   921   10   1,058   1,301   75 
Total $32,533  $43,148  $5,610  $41,015  $51,714  $2,943 
loans with similar risk characteristics for purposes of estimating the allowance for loan losses.

The following table presents additional information regarding the Company’s impaired loansCompany's loan groups include commercial real estate, construction and land development, commercial and industrial, owner occupied real estate, consumer, and residential mortgages.  The remaining loan groups are also considered classes for the years ended December 31, 2013purposes of monitoring and 2012:

 Years Ended December 31, 
 2013 2012 
 
 
(dollars in thousands)
Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized 
With no related allowance recorded:        
Commercial real estate $14,062  $731  $15,675  $821 
Construction and land development  1,954   35   4,587   112 
Commercial and industrial  2,783   19   4,366   128 
Owner occupied real estate  347   9   912   32 
Consumer and other  651   6   875   9 
Total $19,797  $800  $26,415  $1,102 

With an allowance recorded:            
Commercial real estate $6,261  $195  $7,207  $312 
Construction and land development  499   -   1,163   - 
Commercial and industrial  3,881   40   3,393   47 
Owner occupied real estate  3,139   146   2,542   154 
Consumer and other  110   -   87   - 
Total $13,890  $381  $14,392  $513 

Total:            
Commercial real estate $20,323  $926  $22,882  $1,133 
Construction and land development  2,453   35   5,750   112 
Commercial and industrial  6,664   59   7,759   175 
Owner occupied real estate  3,486   155   3,454   186 
Consumer and other  761   6   962   9 
Total $33,687  $1,181  $40,807  $1,615 
assessing credit quality based on certain risk characteristics.
 
8496
 

The total average recorded investment on the Company’s impaired loans for the years ended December 31, 2013, 2012, and 2011 were $33.7 million, $40.8 million, and $70.7 million, respectively,  and the related interest income recognized for those dates was $1.2 million, $1.6 million, and $1.9 million, respectively.  If these loans were performing under their original contractual rate, interest income on such loans would have increased approximately $488,000, $699,000, and $583,000 for the years ended December 31, 2013, 2012, and 2011, respectively.
Included in loans are loans due from directors and other related parties of $8.8 million, $9.1 million, and $16.9$7.9 million at December 31, 2013, 2012,2016, $8.5 million at December 31, 2015, and 2011, respectively.  All loans made to directors have substantially the same terms and interest rates as other bank borrowers.$8.8 million at December 31, 2014.  The Board of Directors approves loans to individual directors to confirm that collateral requirements, terms and rates are comparable to other borrowers and are in compliance with underwriting policies.  The following presents the activity in amount due from directors and other related parties for the years ended December 31, 2013, 20122016, 2015, and 2011.2014.

 
(dollars in thousands)
 December 31, 2013  December 31, 2012  December 31, 2011 
Balance at beginning of year $9,128  $16,941  $16,376 
Additions  51   259   1,727 
Repayments  (417)  (8,072)  (1,162)
Balance at end of year $8,762  $9,128  $16,941 
85
(dollars in thousands) 
December 31,
2016
  
December 31,
2015
  
December 31,
2014
 
Balance at beginning of year $8,521  $8,753  $8,762 
Additions  -   295   500 
Repayments  (659)  (527)  (509)
Balance at end of year $7,862  $8,521  $8,753 

5.    Allowances for Loan Losses

The following tables provide the activity in and ending balances of the allowance for loan losses by loan portfolio class at and for the years ended December 31, 2013, 2012,2016, 2015, and 2011:2014:

 
 
(dollars in thousands)
Commercial Real Estate Construction and Land Development Commercial and Industrial Owner Occupied Real Estate Consumer and Other Residential Mortgage Unallocated Total 
                
Year ended December, 2013               
Allowance for loan losses:               
                 
Beginning balance: $3,979  $1,273  $1,880  $1,967  $234  $17  $192  $9,542 
Charge-offs  (1,291)  (60)  (611)  (320)  (75)  -   -   (2,357)
Recoveries  54   -   63   -   26   -   -   143 
Provisions (credits)  3,712   735   977   (662)  40   (3)  136   4,935 
Ending balance $6,454  $1,948  $2,309  $985  $225  $14  $328  $12,263 
  
Year ended December, 2012                             
Allowance for loan losses:                             
                                 
Beginning Balance: $7,372  $558  $1,928  $1,963  $113  $23  $93  $12,050 
Charge-offs  (1,582)  (1,004)  (1,304)  -   (102)  -   -   (3,992)
Recoveries  -   105   -   -   29   -   -   134 
Provisions (credits)  (1,811)  1,614   1,256   4   194   (6)  99   1,350 
Ending balance $3,979  $1,273  $1,880  $1,967  $234  $17  $192  $9,542 
                                 
Year ended December, 2011                                
Allowance for loan losses:                                
                                 
Beginning Balance: $7,243  $837  $1,443  $1,575  $130  $41  $175  $11,444 
Charge-offs  (8,783)  (3,719)  (1,088)  (1,838)  (41)  -   -   (15,469)
Recoveries  44   10   -   15   40   -   -   109 
Provisions (credits)  8,868   3,430   1,573   2,211   (16)  (18)  (82)  15,966 
Ending balance $7,372  $558  $1,928  $1,963  $113  $23  $93  $12,050 
 
 
(dollars in thousands)
 
Commercial Real Estate
  Construction and Land Development  
Commercial
and
Industrial
  Owner Occupied Real Estate  
Consumer
and Other
  
Residential Mortgage
  
Unallocated
  
Total
 
                       
Year ended December, 2016                        
Allowance for loan losses:                        
                         
Beginning balance: $2,393  $338  $2,932  $2,030  $295  $14  $701  $8,703 
Charge-offs  -   (60)  (143)  (1,052)  (11)  (10)  -   (1,276)
Recoveries  6   -   163   -   2   -   -   171 
Provisions (credits)  855   279   (68)  404   302   54   (269)  1,557 
Ending balance $3,254  $557  $2,884  $1,382  $588  $58  $432  $9,155 
                                 
Year ended December, 2015                                
Allowance for loan losses:                                
                                 
Beginning Balance: $6,828  $917  $1,579  $1,638  $234  $2  $338  $11,536 
Charge-offs  (2,624)  (260)  (408)  (133)  -   -   -   (3,425)
Recoveries  4   5   49   -   34   -   -   92 
Provisions (credits)  (1,815)  (324)  1,712   525   27   12   363   500 
Ending balance $2,393  $338  $2,932  $2,030  $295  $14  $701  $8,703 
                                 
Year ended December, 2014                                
Allowance for loan losses:                                
                                 
Beginning Balance: $6,454  $1,948  $2,309  $985  $225  $14  $328  $12,263 
Charge-offs  (364)  (303)  (1,185)  (150)  (10)  -   -   (2,012)
Recoveries  5   214   166   -   -   -   -   385 
Provisions (credits)  733   (942)  289   803   19   (12)  10   900 
Ending balance $6,828  $917  $1,579  $1,638  $234  $2  $338  $11,536 
 
 
8697


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 December 31, 20132016 and 2012:2015:

(dollars in thousands)
Commercial Real Estate Construction and Land Development Commercial and Industrial Owner Occupied Real Estate Consumer and Other Residential Mortgage 
 
Unallocated
 
 
Total
 
Commercial
Real Estate
  Construction and Land Development  
Commercial
and Industrial
  
Owner Occupied
Real Estate
  
Consumer
and Other
  
Residential Mortgage
  
Unallocated
 
Total
 
                                      
December 31, 2013                
December 31, 2016                      
                                      
Allowance for loan losses:                                      
Individually evaluated for impairment$3,679 $237 $1,254 $430 $10 $- $- $5,610  $1,277  $-  $1,624  $274  $293  $-  $-  $3,468 
Collectively evaluated for impairment 2,775  1,711  1,055  555  215  14  328  6,653   1,977   557   1,260   1,108   295   58   432   5,687 
Total allowance for loan losses$6,454 $1,948 $2,309 $985 $225 $14 $328 $12,263  $3,254  $557  $2,884  $1,382  $588  $58  $432  $9,155 
                                                        
Loans receivable:                                                        
Loans evaluated individually$19,894 $1,618 $6,932 $3,433 $656 $- $- $32,533  $19,245  $-  $5,180  $2,325  $1,290  $130  $-  $28,170 
Loans evaluated collectively 322,900  22,359  111,277  156,796  31,325  2,359  -  647,016   359,274   61,453   169,564   274,661   62,370   9,552   -   936,874 
Total loans receivable$342,794 $23,977 $118,209 $160,229 $31,981 $2,359 $- $679,549  $378,519  $61,453  $174,744  $276,986  $63,660  $9,682  $-  $965,044 

(dollars in thousands)
Commercial Real Estate Construction and Land Development Commercial and Industrial Owner Occupied Real Estate Consumer and Other Residential Mortgage 
 
Unallocated
 
 
Total
 
Commercial Real Estate
 
Construction
and Land Development
 
Commercial
and Industrial
 
Owner
Occupied
Real Estate
 
Consumer
and Other
 
Residential Mortgage
 
Unallocated
 
Total
 
                                
December 31, 2012                
December 31, 2015                
                                
Allowance for loan losses:                                
Individually evaluated for impairment$1,077 $70 $861 $860 $75 $- $- $2,943  $47  $-  $1,111  $1059  $21  $-  $-  $2,238 
Collectively evaluated for impairment 2,902  1,203  1,019  1,107  159  17  192  6,599   2,346   338   1,821   971   274   14   701   6,465 
Total allowance for loan losses$3,979 $1,273 $1,880 $1,967 $234 $17 $192 $9,542  $2,393  $338  $2,932  $2,030  $295  $14  $701  $8,703 
                                                        
Loans receivable:                                                        
Loans evaluated individually$25,316 $3,746 $6,940 $3,955 $1,058 $- $- $41,015  $12,203  $117  $5,493  $3,369  $947  $-  $-  $22,129 
Loans evaluated collectively 310,245  22,913  96,828  122,287  22,391  2,442  -  577,106   337,523   46,430   176,357   243,029   47,179   2,380   -   852,898 
Total loans receivable$335,561 $26,659 $103,768 $126,242 $23,449 $2,442 $- $618,121  $349,726  $46,547  $181,850  $246,398  $48,126  $2,380  $-  $875,027 
 
 
8798

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 December 31, 2016 and 2015:

  December 31, 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 $12,347  $12,348  $-  $11,692  $11,730  $- 
Construction and land development  -   -   -   117   2,208   - 
Commercial and industrial  1,955   3,111   -   2,381   3,683   - 
Owner occupied real estate  621   733   -   507   507   - 
Consumer and other  687   976   -   800   1,084   - 
Residential mortgage  130   130   -   -   -   - 
Total $15,740  $17,298  $-  $15,497  $19,212  $- 

With an allowance recorded:                  
Commercial real estate $6,898  $6,912  $1,277  $511  $511  $47 
Construction and land development  -   -   -   -   -   - 
Commercial and industrial  3,225   5,892   1,624   3,112   5,779   1,111 
Owner occupied real estate  1,704   1,704   274   2,862   2,876   1,059 
Consumer and other  603   627   293   147   147   21 
Residential mortgage  -   -   -   -   -   - 
Total $12,430  $15,135  $3,468  $6,632  $9,313  $2,238 

Total:                  
Commercial real estate $19,245  $19,260  $1,277  $12,203  $12,241  $47 
Construction and land development  -   -   -   117   2,208   - 
Commercial and industrial  5,180   9,003   1,624   5,493   9,462   1,111 
Owner occupied real estate  2,325   2,437   274   3,369   3,383   1,059 
Consumer and other  1,290   1,603   293   947   1,231   21 
Residential mortgage  130   130   -   -   -   - 
Total $28,170  $32,433  $3,468  $22,129  $28,525  $2,238 
 
99
 

The following table presents additional information regarding the Company's impaired loans for the years ended December 31, 2016, 2015, and 2014:
  Years Ended December 31, 
  2016  2015  2014 
 
 
(dollars in thousands)
 
Average
Recorded
Investment
  
Interest
Income
Recognized
  
Average
Recorded
Investment
  
Interest
Income
Recognized
  
Average
Recorded
Investment
  
Interest
Income
Recognized
 
With no related allowance recorded:                  
Commercial real estate $12,033  $264  $12,796  $282  $7,739  $450 
Construction and land development  58   -   206   2   462   - 
Commercial and industrial  1,828   42   3,225   78   3,070   22 
Owner occupied real estate  642   10   700   6   714   8 
Consumer and other  858   16   685   13   482   4 
Residential mortgage  26   1   -   -   -   - 
Total $15,445  $333  $17,612  $381  $12,467  $484 


With an allowance recorded:                  
Commercial real estate $4,455  $52  $5,544  $13  $13,197  $5 
Construction and land development  12   -   90   -   557   - 
Commercial and industrial  3,357   74   2,587   28   3,244   - 
Owner occupied real estate  2,104   31   3,643   92   3,446   125 
Consumer and other  322   12   59   2   40   - 
Residential mortgage  -   -   -   -   -   - 
Total $10,250  $169  $11,923  $135  $20,484  $130 

Total:                  
Commercial real estate $16,488  $316  $18,340  $295  $20,936  $455 
Construction and land development  70   -   296   2   1,019   - 
Commercial and industrial  5,185   116   5,812   106   6,314   22 
Owner occupied real estate  2,746   41   4,343   98   4,160   133 
Consumer and other  1,180   28   744   15   522   4 
Residential mortgage  26   1   -   -   -   - 
Total $25,695  $502  $29,535  $516  $32,951  $614 

The total average recorded investment on the Company's impaired loans for the years ended December 31, 2016, 2015, and 2014 were $25.7 million, $29.5 million, and $33.0 million, respectively,  and the related interest income recognized for those dates was $502,000, $516,000, and $614,000, respectively.  If these loans were performing under their original contractual rate, interest income on such loans would have increased approximately $1.0 million, $765,000, and $980,000 for the years ended December 31, 2016, 2015, and 2014, respectively.
100

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 December 31, 20132016 and 2012:2015:
 
 
 
(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 


 
 
(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, 2013                     
Commercial real estate $19,707  $5,635  $1,104  $26,446  $316,348  $342,794  $- 
Construction and land development  -   -   1,618   1,618   22,359   23,977   - 
Commercial and industrial  951   71   6,837   7,859   110,350   118,209   - 
Owner occupied real estate  808   1,281   205   2,294   157,935   160,229   - 
Consumer and other  38   -   656   694   31,287   31,981   - 
Residential mortgage  -   -   -   -   2,359   2,359   - 
Total $21,504  $6,987  $10,420  $38,911  $640,638  $679,549  $- 

(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 December 31, 2012                     
At December 31, 2015                     
Commercial real estate $772  $26,000  $7,987  $34,759  $300,802  $335,561  $-  $-  $7,657  $5,913  $13,570  $336,156  $349,726  $- 
Construction and land development  -   261   1,342   1,603   25,056   26,659   -   -   -   117   117   46,430   46,547   - 
Commercial and industrial  86   -   4,693   4,779   98,989   103,768   -   1,661   997   3,156   5,814   176,036   181,850   - 
Owner occupied real estate  285   1,562   968   2,815   123,427   126,242   -   800   469   2,894   4,163   242,235   246,398   - 
Consumer and other  -   -   1,058   1,058   22,391   23,449   202   285   192   542   1,019   47,107   48,126   - 
Residential mortgage  -   -   -   -   2,442   2,442   -   132   -   -   132   2,248   2,380   - 
Total
 $1,143  $27,823  $16,048  $45,014  $573,107  $618,121  $202  $2,878  $9,315  $12,622  $24,815  $850,212  $875,027  $- 

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 our internal risk rating system as of December 31, 20132016 and 2012:2015:
 
(dollars in thousands)
 
Pass
  
Special
Mention
  
Substandard
  
Doubtful
  
Total
 
At December 31, 2016:               
Commercial real estate $364,066  $877  $13,576  $-  $378,519 
Construction and land development  61,453   -   -   -   61,453 
Commercial and industrial  168,958   606   3,751   1,429   174,744 
Owner occupied real estate  274,150   511   2,325   -   276,986 
Consumer and other  62,370   -   1,290   -   63,660 
Residential mortgage  9,552   -   130   -   9,682 
Total $940,549  $1,994  $21,072  $1,429  $965,044 

 
(dollars in thousands)
 Pass  Special Mention  Substandard  Doubtful  Total 
At December 31, 2013:               
Commercial real estate $305,974  $16,372  $20,448  $-  $342,794 
Construction and land development  22,359   -   1,618   -   23,977 
Commercial and industrial  110,629   611   6,969   -   118,209 
Owner occupied real estate  155,648   1,485   3,096   -   160,229 
Consumer and other  30,993   75   913   -   31,981 
Residential mortgage  2,359   -   -   -   2,359 
Total
 $627,962  $18,543  $33,044  $-  $679,549 

(dollars in thousands)
 Pass  Special Mention  Substandard  Doubtful  Total  
Pass
  
Special
Mention
  
Substandard
  
Doubtful
  
Total
 
At December 31, 2012:               
At December 31, 2015:            ��  
Commercial real estate $300,174  $9,174  $26,213  $-  $335,561  $329,567  $7,956  $12,203  $-  $349,726 
Construction and land development  22,652   261   3,746   -   26,659   46,430   -   117   -   46,547 
Commercial and industrial  96,051   642   7,075   -   103,768   176,132   225   4,064   1,429   181,850 
Owner occupied real estate  121,381   906   3,955   -   126,242   242,560   469   3,369   -   246,398 
Consumer and other  22,033   100   1,316   -   23,449   47,104   75   947   -   48,126 
Residential mortgage  2,442   -   -   -   2,442   2,380   -   -   -   2,380 
Total
 $564,733  $11,083  $42,305  $-  $618,121  $844,173  $8,725  $20,700  $1,429  $875,027 
 
 
88101

 
The following table shows non-accrual loans by class as of December 31, 20132016 and 2012:2015:

(dollars in thousands) December 31, 2013  December 31, 2012  
December 31,
2016
  
December 31,
2015
 
            
Commercial real estate
 $1,104  $7,987  $13,089  $5,913 
Construction and land development
  1,618   1,342   -   117 
Commercial and industrial
  6,837   4,693   3,151   3,156 
Owner occupied real estate
  205   968   1,546   2,894 
Consumer and other
  656   856   808   542 
Residential mortgage
  -   -   -   - 
Total
 $10,420  $15,846  $18,594  $12,622 

If these loans were performing under their original contractual rate, interest income on such loans would have increased approximately $488,000, $699,000,$1.0 million, $765,000, and $583,000,$980,000, for 2013, 20122016, 2015, and 2011,2014, 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”("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.
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The following table summarizes information with regard to outstanding troubled debt restructurings for the years endedat December 31, 20132016 and 2012:2015:

 
(dollars in thousands)
 Number of Loans Accrual Status Non-Accrual Status Total TDRs 
December 31, 2013         
Commercial real estate  1  $103  $-  $103 
Construction and land development  -   -   -   - 
Commercial and industrial  1   -   2,188   2,188 
Owner occupied real estate  1   1,894   -   1,894 
Consumer and other  -   -   -   - 
Residential mortgage  -   -   -   - 
Total
  3  $1,997  $2,188  $4,185 
                 
December 31, 2012                
Commercial real estate  1  $1,261  $-  $1,261 
Construction and land development  1   2,069   -   2,069 
Commercial and industrial  1   2,248   -   2,248 
Owner occupied real estate  1   1,933   -   1,933 
Consumer and other  -   -   -   - 
Residential mortgage  -   -   -   - 
Total
  4  $7,511  $-  $7,511 
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(dollars in thousands)
 
Number
of Loans
  
Accrual
Status
  
Non-
Accrual
Status
  
Total
TDRs
  
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  

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 our estimate of the allowance for loan losses.  The level of any subsequent defaults will likely be affected by future economic conditions. There were no loan modifications made during the twelve months ended December 31, 2016 that met the criteria of a TDR. There was one loan modification made during the year ended December 31, 20132015 that met the criteria of a TDR.
The Company modified one owner occupied real estatecommercial and industrial loan during the year ended December 31, 2012.2015. In accordance with the modified terms of this owner occupied real estatethe commercial and industrial loan, the Company increased the principal by $30,000.  The Company also extended the maturity date of the loan. In addition the effective interest rate of the modified loan was reduced when compared to the interest rate of the original loan.  The owner occupied real estatecommercial and industrial loan has been and continues to be an accruing loan.  The borrower has remained current since the modification. The pre-modification balance was $230,000 and the post modification balance was $260,000.
The Company modified one commercial and industrial loan duringThere were no residential mortgages in the year endedprocess of foreclosure as of December 31, 2012. In accordance with the modified terms of the commercial2016 and industrial loan, the Company implemented a hard maturity date whereas the loan had formerly been a demand note.  The loan has also been converted from interest only paymentsDecember 31, 2015. Other real estate owned relating to a term-out of the debt on this loan.  In addition, the Company modified the amortization time frameresidential real estate was $126,000 and reduced the effective interest rate when compared to the interest rate of the original loan.  The Company also extended the maturity date of the loan.  The commercial$193,000 at December 31, 2016 and industrial loan had been an accruing loan.  During 2013 this loan was transferred to non-accrual status. The borrower has not remained current since the modification.

2015, respectively.
After a loan is determined to be a TDR, we continue to track its performance under the most recent restructured terms. There were no TDR that subsequently defaulted during the year ended December 31, 2016. There was one TDR that subsequently defaulted during the year ended December 31, 2015. One loan classified as a TDR also subsequently defaulted during the year ended December 31, 2013. TherePartial writedowns were no TDRs that subsequently defaultedrecorded during the years ended December 31, 2014 and 2015, and a partial transfer to other real estate owned was recorded during the year ended December 31, 2012.2015.
 
6.
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6. Other Real Estate Owned

Other real estate owned consists of properties acquired as a result of foreclosures or deeds in-lieu-of foreclosure. Costs relating to the development or improvement of assets are capitalized, and costs relating to holding the property are charged to expense. As of December 31, 2016 the balance of OREO is comprised of twelve commercial, construction, and residential properties.

The following table presents a reconciliation of other real estate owned for the years ended December 31, 2016, 2015, and 2014:
(dollars in thousands) 
December 31,
2016
  
December 31,
2015
  
December 31,
2014
 
Beginning Balance, January 1st
 $11,313  $3,715   4,059 
Additions  616   11,459   1,000 
Valuation adjustments  (355)  (3,069)  (1,147)
Dispositions  (1,400)  (792)  (197)
Ending Balance $10,174  $11,313   3,715 

7.  Premises and Equipment

A summary of premises and equipment is as follows:

(dollars in thousands)
 December 31, 2013  December 31, 2012  
December 31,
2016
  
December 31,
2015
  
Land $200  $200  $10,170  $8,029  
Bank building  1,057   1,051 
Buildings  25,693   16,215  
Leasehold improvements  19,017   18,714   20,236   19,621  
Furniture, fixtures and equipment  7,670   6,894   15,006   11,680  
Construction in progress  6,402   5,143   3,734   4,471  
  34,346   32,002   74,839   60,016  
Less accumulated depreciation  (11,598)  (10,026)  (17,799)  (13,852) 
Net premises and equipment $22,748  $21,976  $57,040  $46,164  

Depreciation expense on premises equipment and leasehold improvementsequipment amounted to approximately $2.1$3.5 million, $2.0$3.1 million, and $2.1$2.4 million in 2013, 20122016, 2015, and 2011,2014, respectively. The construction in progress balance of $6.4$3.7 million mainly represents costs incurred for the selection and development of future store locations.  Of this balance, $4.0$1.1 million represents land purchased and land deposits for two specificfive store locations. Costs to complete the projects in process are estimated to be $5.0$19.4 million as of December 31, 2013.2016.

7.8.Borrowings

Republic has a line of credit with the Federal Home Loan Bank (“FHLB”("FHLB") of Pittsburgh with a maximum borrowing capacity of $372.6$467.1 million as of December 31, 2013.2016. As of December 31, 2013 and 2012,2016, there were no fixed term or overnight advances against this line of credit. As of December 31, 2015, there were no fixed term advances against this line of credit. As of December 31, 2015, there was an overnight advance of $47.0 million against this line of credit. The interest rate on the overnight advance as of December 31, 2015 was 0.43%. As of December 31, 2016, FHLB had issued letters of credit, on Republic's behalf, totaling $75.0 million against its available credit line, primarily to be used as collateral for public deposits.  There were no fixed term advances outstanding at any month-end during 20132016 and 2012.2015.  At December 31, 2016, $675.8 million of loans collateralized the overnight advance and the letters of credit.  The maximum amount of overnight borrowings outstanding at any month-end was $0$48.8 million in 20132016 and 2012.
$47.0 million in 2015.
 
90104
 
 
Republic also has a line of credit in the amount of $10.0 million available for the purchase of federal funds through another correspondent bank. At December 31, 20132016 and 2012,2015, Republic had no amount outstanding against this line.  The maximum amount ofThere were no overnight advances on this line at any month end was $0 in 20132016 and $4.5 million in 2012.2015.

Subordinated debt and corporation-obligated-mandatorily redeemable capital securities of subsidiary trust holding solely junior obligations of the corporation:

The Company has sponsored three outstanding issues of corporation-obligated mandatorily redeemable capital securities of a subsidiary trust holding solely junior subordinated debentures of the corporation, more commonly known as trust preferred securities. The subsidiary trusts are not consolidated with the Company for financial reporting purposes.  The purpose of the issuances of these securities was to increase capital.  The trust preferred securities qualify as Tier 1 capital for regulatory purposes in amountsan amount up to 25% of total Tier 1 capital.
 
In December 2006, Republic Capital Trust II (“("Trust II”II") issued $6.0 million of trust preferred securities to investors and $0.2 million of common securities to the Company.  Trust II purchased $6.2 million of junior subordinated debentures of the Company due 2037, and the Company used the proceeds to call the securities of Republic Capital Trust I (“("Trust I”I").  The debentures supporting Trust II have a variable interest rate, adjustable quarterly, at 1.73% over the 3-month Libor.  The Company may call the securities on any interest payment date after five years without a prepayment penalty.
 
On June 28, 2007, the Company caused Republic Capital Trust III (“("Trust III”III"), through a pooled offering, to issue $5.0 million of trust preferred securities to investors and $0.2 million common securities to the Company.  Trust III purchased $5.2 million of junior subordinated debentures of the Company due 2037, which have a variable interest rate, adjustable quarterly, at 1.55% over the 3 month Libor.  The Company has the ability to call the securities on any interest payment date without a prepayment penalty.
 
On June 10, 2008, the Company caused Republic First Bancorp Capital Trust IV (“("Trust IV”IV") to issue $10.8 million of convertible trust preferred securities as part of the Company’sCompany's strategic capital plan.  The securities were purchased by various investors, including Vernon W. Hill, II, founder and chairman (retired) of Commerce Bancorp and, since the investment, a consultant toDecember 5, 2016, chairman of the Company.  This investor group also included a family trust of Harry D. Madonna, chairman president and chief executive officer of the Company,Republic Bank, and Theodore J. Flocco, Jr., who, since the investment, has been elected to the Company’sCompany's Board of Directors and serves as the Chairman of the Audit Committee.  Trust IV also issued $0.3 million of common securities to the Company.  Trust IV purchased $11.1 million of junior subordinated debentures due 2038, which pay interest at an annual rate of 8.0% and are callable after the fifth year.year under certain terms and conditions. The trust preferred securities of Trust IV are convertible into approximately 1.7 million shares of common stock of the Company, based on a conversion price of $6.50 per share of Company common stock, and at December 31, 20132016 were fully convertible.

Deferred issuance costs included in subordinated debt were $595,000 and $619,000 at December 31, 2016 and December 31, 2015, respectively. Amortization of deferred issuance costs were $24,000, $24,000, and $24,000 for the years ended December 31, 2016, 2015, and 2014, respectively.
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8.9.Deposits

The following is a breakdown, by contractual maturities of the Company’sCompany's certificates of deposit for the years 20142017 through 2018.2021.

(dollars in thousands) 2014  2015  2016  2017  2018  Thereafter  Total  2017  2018  2019  2020  2021  Thereafter  Total 
                                          
Certificates of Deposit $53,294  $12,980  $11,253  $462  $847  $-  $78,836  $65,247  $21,554  $1,605  $21,793  $965  $-  $111,164 

Certificates of deposit of $100,000$250,000 or more totaled $39.4$42.5 million and $78.3$8.0 million at December 31, 20132016 and 2012,2015, respectively.

Deposits of related parties totaled $57.5$120.2 million and $59.4$93.5 million at December 31, 20132016 and 2012,2015, respectively.
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9.10.Income Taxes

The (benefit) provisionbenefit for income taxes for the years ended December 31, 2013, 20122016, 2015, and 20112014 consists of the following:

(dollars in thousands) 2013  2012  2011  2016  2015  2014 
Current                  
Federal $269  $81  $(71) $261  $58  $96 
State  -   -   -   -   -   - 
Deferred  (304)  (225)  8,262   (380)  (84)  (142)
Total provision (benefit) for income taxes $(35) $(144) $8,191 
Total benefit for income taxes $(119) $(26) $(46)

The following table reconciles the difference between the actual tax provision and the amount per the statutory federal income tax rate of 35.0% for the years ended December 31, 2013, 20122016, 2015, and 2011.2014.

(dollars in thousands) 2016  2015  2014 
Tax provision computed at statutory rate $1,689  $843  $839 
Tax exempt interest  (582)  (394)  (246)
Deferred tax asset valuation allowance adjustment  (1,508)  (937)  (679)
Other  282   462   40 
Total benefit for income taxes $(119) $(26) $(46)
(dollars in thousands) 2013  2012  2011 
Tax (benefit) provision computed at statutory rate $(1,230) $1,214  $(5,779)
Tax exempt interest  (210)  (257)  (265)
Bank owned life insurance  (4)  (26)  (48)
Deferred tax asset valuation allowance  1,428   (1,002)  14,912 
Other  (19)  (73)  (629)
Total provision (benefit) for income taxes $(35) $(144) $8,191 
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The significant components of the Company’sCompany's net deferred tax asset as of December 31, 20132016 and 20122015 are as follows:

(dollars in thousands) 2013  2012  2016  2015  
Deferred tax assets             
Allowance for loan losses $4,403  $3,427  $3,288  $3,125  
Deferred compensation  721   733   824   786  
Unrealized loss on securities available for sale  1,584   - 
Realized loss in other than temporary impairment charge  1,121   1,121 
Unrealized losses on securities available for sale  4,087   1,774  
Realized losses in other than temporary impairment charge  336   334  
Foreclosed real estate write-downs  1,131   232   2,377   2,350  
Interest income on non-accrual loans  955   1,000   1,425   1,185  
Net operating loss carryforward  11,826   11,689   8,896   10,775  
Other  986   1,052   2,001   1,580  
Total deferred tax assets  22,727   19,254   23,234   21,909  
Deferred tax liabilities
                 
Deferred loan costs  859   712   1,313   1,029  
Unrealized gain on securities available for sale  -   572 
Other  460   450   528   672  
Total deferred tax liabilities  1,319   1,734   1,841   1,701  
Net deferred tax asset before valuation allowance  21,408   17,520   21,393   20,208  
Less: valuation allowance  (15,338)  (13,910)  (12,214)  (13,722) 
Net deferred tax asset $6,070  $3,610  $9,179  $6,486  

The Company’sCompany's net deferred tax asset before the consideration of a valuation allowance increased to $21.4 million at December 31, 20132016 compared to $17.5$20.2 million at December 31, 2012.2015. This increase was primarily driven by increases in the unrealized losses on securities available for sale foreclosed real estate writedowns, and the allowance for loan losses during the twelve month period ended December 31, 2013.2016. The $21.4 million net deferred tax asset as of December 31, 20132016 is comprised of $11.8$8.9 million currently recognizable through NOL carryforwards and $9.6$12.5 million attributable to several items associated with temporary timing differences which will reverse at some point in the future to provide a net reduction in tax liabilities. The Company’sCompany's largest future reversal relates to its allowanceunrealized losses on securities available for loan losses,sale, which totaled $4.4$4.1 million as of December 31, 2013.
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2016.

The Company evaluates the carrying amount of its 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 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’smanagement's evaluation of both positive and negative evidence.

In conducting the deferred tax asset analysis, the Company believes 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 the Company. In addition, it is also important to consider that NOLs for federal income tax purposes can generally be carried back two years and carried forward for a period of twenty years.  The Company has an NOL in the amount of $24.0 million which will begin to expire after December 31, 2030 through December 31, 2031 if not utilized prior to that date. 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, the Company 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. A cumulative loss in recent years is a significant piece of negative evidence that is difficult to overcome. Based on the analysis of available positive and negative evidence, the Company determined that a valuation allowance should be recorded as of December 31, 20132016 and 2012.

When determining an estimate for a valuation allowance, the Company 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 740-10-30. As a result of cumulative losses in recent years and the uncertain nature of the current economic environment, the Company did not use projections of future taxable income, exclusive of reversing temporary timing differences and carryforwards, as a factor. The Company will continue to exclude future taxable income as a factor until it can show consistent and sustained profitability.2015.

The Company did assess tax planning strategies as defined under ASC 740-10-30 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 for future fixed asset purchases. The Company believes that these tax planning strategies are (i.) prudent and feasible, (ii.) steps that the Company would not ordinarily take, but would take to prevent an operating loss or tax credit carryforward from expiring unused, and (iii.) 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. The Company believes 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, has no present intention to implement such strategies.
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The net deferred tax asset balance before consideration of a valuation allowance was $21.4 million as of December 31, 20132016 and $17.5$20.2 million as of December 31, 2012.2015.  The tax planning strategies assessed resulted in the projected realization of approximately $6.1$9.2 million in net deferred tax assets as of December 31, 20132016 and $3.6$6.5 million as of December 31, 20122015 which can be considered more likely than not to be realized. Accordingly, the Company recorded a partial valuation allowance related to the deferred tax asset balance in the amount of $15.3$12.2 million as of December 31, 20132016 and $13.9$13.7 million as of December 31, 2012.2015.

The deferred tax asset will continue to be analyzed on a quarterly basis for changes affecting realizability.  As the Company continues to record consecutive quarters of profitable results, projections of future taxable income become more reliable and can again be used as a factor in assessing the ability to fully realize the deferred tax asset.  When the determination is made to include projections of future taxable income as a factor, the valuation allowance will be reduced accordingly resulting in a corresponding increase in net income.

The Company accounts for uncertain tax positions if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination.  The Company has not identified any uncertain tax position as of December 31, 2016.  No interest or penalties have been recorded for the years ended December 31, 2016, 2015, and 2014.  The Internal Revenue Service has completed its audits of the Company’sCompany's federal tax returns for all tax years through December 31, 2008.  There are currently no income tax audits being conducted by the2009.  The Internal Revenue Service oris currently conducting an income tax audit for the year ended December 31, 2013. The Pennsylvania Department of Revenue.Revenue is not currently conducting any income tax audits. The Company’sCompany's federal income tax returns for the years ended December 31, 2012, 2011, and 2010filed subsequent to 2009 remain subject to examination by the Internal Revenue Service.
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10.11.Financial Instruments with Off-Balance Sheet Risk

The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the financial statements.
 
Credit risk is defined as the possibility of sustaining a loss due to the failure of the other parties to a financial instrument to perform in accordance with the terms of the contract. The maximum exposure to credit loss under commitments to extend credit and standby letters of credit is represented by the contractual amount of these instruments. The Company uses the same underwriting standards and policies in making credit commitments as it does for on-balance-sheet instruments.
 
Financial instruments whose contract amounts represent potential credit risk are commitments to extend credit of approximately $109.3$215.9 million and $99.7$165.1 million and standby letters of credit of approximately $2.7$5.7 million and $4.3$5.2 million at December 31, 20132016 and 2012,2015, respectively.  Commitments often expire without being drawn upon. Of the $109.3$215.9 million of commitments to extend credit at December 31, 2013,2016, substantially all were variable rate commitments.
 
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. The Company evaluates each customer’scustomer's creditworthiness on a case-by-case basis. The amount of collateral obtained upon extension of credit is based on management’smanagement's credit evaluation of the customer. Collateral held varies but may include real estate, marketable securities, pledged deposits, equipment and accounts receivable.

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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’smanagement'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 guarantees.  The current amount of liability as of December 31, 20132016 and 20122015 for guarantees under standby letters of credit issued is not material.
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11.12.Commitments and Contingencies

Lease Arrangements

As of December 31, 2013,2016, the Company had entered into non-cancelable leases expiring on various dates through August 31, 2043, including renewal options.November 30, 2036.  Certain leases include escalation clauses that will require increasing cash payments over the term of the lease.  The leases are accounted for as operating leases.  The minimum annual rental payments required under these leases are as follows (dollars in thousands):

Year Ended Amount  Amount  
       
2014 $2,547 
2015  2,521 
2016  2,402 
2017  2,416  $3,581  
2018  2,475   3,449  
2019  3,306  
2020  3,253  
2021  2,028  
Thereafter  30,694   14,883  
Total $43,055  $30,500  

The Company incurred rent expense of $2.3$3.4 million, $2.2$2.9 million, and $2.1$2.7 million for the years ended December 31, 2013, 20122016, 2015, and 2011,2014, respectively.

Other

The Company and Republic are from time to time a party (plaintiff or defendant) to lawsuits that are 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.

12.13.Regulatory Capital

Dividend payments by Republic to the Company are subject to the Pennsylvania Banking Code of 1965 (the “Banking Code”"Banking Code") and the Federal Deposit Insurance Act (the “FDIA”"FDIA"). Under the Banking Code, no dividends may be paid except from “accumulated"accumulated net earnings”earnings" (generally, undivided profits). Under the FDIA, an insured bank may pay no dividends if the bank is in arrears in the payment of any insurance assessment due to the FDIC. Under current banking laws, Republic would be limited to $10.8$23.9 million of dividends plus an additional amount equal to its net profit for 2014,2017, up to the date of any such dividend declaration. However, dividends would be further limited in order to maintain capital ratios.
 
State and Federal regulatory authorities have adopted standards for the maintenance of adequate levels of capital by Republic. Federal banking agencies impose threefour minimum capital requirements on the Company’sCompany's risk-based capital ratios based on total capital, Tier 1 capital, CET 1 capital, and a leverage capital ratio. The risk-based capital ratios measure the adequacy of a bank’sbank's capital against the riskiness of its assets and off-balance sheet activities. Failure to maintain adequate capital is a basis for “prompt"prompt corrective action”action" or other regulatory enforcement action. In assessing a bank’sbank's capital adequacy, regulators 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’smanagement's overall ability to monitor and control risks.
 
95110
 

The following table presents the Company’sCompany's and Republic’sRepublic's capital regulatory ratios at December 31, 20132016 and 2012:2015:

(dollars in thousands) 
 
Actual
  For Capital Adequacy Purposes  To be well capitalized under regulatory capital guidelines  
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 
At December 31, 2013:                  
At December 31, 2016:                    
                                      
Total risk based capital                                      
Republic $92,493   11.38% $65,038   8.00% $81,297   10.00% $179,057   13.93%  $102,811   8.00% $110,843��  8.625% $128,514   10.00%
Company  93,848   11.53%  65,092   8.00%  -   -%  245,043   18.99%   103,226   8.00%  111,290   8.625%  -   -%
Tier one risk based capital                                                  
Republic  82,305   10.12%  32,519   4.00%  48,778   6.00%  169,902   13.22%   77,108   6.00%  85,140   6.625%  102,811   8.00%
Company  83,652   10.28%  32,546   4.00%  -   -%  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  82,305   8.46%  38,921   4.00%  48,651   5.00%  169,902   9.20%   73,843   4.00%  73,843   4.00%  92,304   5.00%
Company  83,652   8.59%  38,971   4.00%  -   -%  235,888   12.74%   74,073   4.00%  74,073   4.00%  -   -%
                                                  
At December 31, 2012:                        
At December 31, 2015:                          
                                                  
Total risk based capital                                         
Republic $96,366   12.70% $60,685   8.00% $75,857   10.00% $138,566   12.65%  $87,617   8.00% $-   -% $109,521   10.00%
Company  97,006   12.73%  60,971   8.00%  -   -%  145,089   13.19%   87,976   8.00%  -   -%  -   -%
Tier one risk based capital                                                  
Republic  86,883   11.45%  30,343   4.00%  45,514   6.00%  129,863   11.86%   65,712   6.00%  -   -%  87,617   8.00%
Company  87,479   11.48%  30,485   4.00%  -   -%  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  86,883   8.96%  38,786   4.00%  48,483   5.00%  129,863   9.22%   56,328   4.00%  -   -%  70,410   5.00%
Company  87,479   9.01%  38,838   4.00%  -   -%  136,386   9.65%   56,531   4.00%  -   -%  -   -%

Management believes that Republic met, as of December 31, 2013,2016, all capital adequacy requirements to which it is subject. As of December 31, 20132016 and 2012,2015, 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 that management believes have changed Republic’sRepublic's category.
 
In July 2013, the federal bank regulatory agencies adopted revisions to the agencies’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 implementimplemented higher minimum capital requirements, addadded a new common equity tier 1 capital requirement, and establishestablished 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 arewere a common equity tier 1 capital ratio of 4.5% (6.5% to be considered “well capitalized”"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”"well capitalized"); the total capital ratio remainsremained at 8.0% under the new rules (10.0% to be considered “well capitalized”"well capitalized").  Under the newfinal capital rules in order to avoid limitations on capital distributions (including dividend payments and certain discretionary bonus payments to executive officers), a banking organization must hold a capital conservation buffer comprised of common equity tier 1 capital above its minimum risk-based capital requirements in an amount greater than 2.5% of total risk-weighted assets. The new minimum capital requirements arethat became effective on January 1, 2015.2015, 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. The capital contribution buffer requirements phaserequirement is being phased in over three years beginning in 2016. We have included the 0.625% increase for 2016 in our minimum capital adequacy ratios in the table below. The capital buffer requirement effectively raises the minimum required common equity Tier 1 capital ratio to 7.0%, the Tier 1 capital ratio to 8.5%, and the total capital ratio to 10.5% on a three-year period beginningfully phased-in basis on January 1, 2016.
2019. The Company believes that, as of 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.
 
96111
 

13.14.Benefit Plans
 
Defined Contribution Plan
 
The Company has a defined contribution plan pursuant to the provision of 401(k) of the Internal Revenue Code. The Plan covers all full-time employees who meet age and service requirements. The plan provides for elective employee contributions with a matching contribution from the Company limited to 4% of total salary. The total expense charged to Republic, and included in salaries and employee benefits relating to the plan, was $425,000$627,000 in 2013, $366,0002016, $546,000 in 20122015, and $307,000$480,000 in 2011.2014.

Directors’Directors' and Officers’Officers' Plans
 
The Company has agreements that provide for an annuity payment upon the retirement or death of certain directors and officers, ranging from $15,000 to $25,000 per year for ten years. The agreements were modified for most participants in 2001, to establish a minimum age of 65 to qualify for the payments. All participants are fully vested. The accrued benefits under the plan amounted to $1.3 million at both December 31, 20132016 and 2012 totaled $1.4 million.2015, which is included in other liabilities. The expense for the years ended December 31, 2013, 20122016, 2015, and 2011,2014, totaled $39,000, $27,000,$31,000, $34,000, and $27,000, respectively.$36,000, respectively, which is included in salaries and employee benefits. The Company funded the plan through the purchase of certain life insurance contracts. The aggregate cash surrender value of these contracts (owned by the Company) aggregated $2.2was $2.4 million and $2.0$2.3 million at December 31, 20132016 and 2012,2015, respectively, whichand is included in other assets.

The Company maintains a deferred compensation plan for the benefit of certain officers and directors.  As of December 31, 2013,2016, no additional individuals may participate in the plan.  The plan permits certain participants to make elective contributions to their accounts, subject to applicable provisions of the Internal Revenue Code.  In addition, the Company may make discretionary contributions to participant accounts.  Company contributions are subject to vesting, and generally vest three years after the end of the plan year to which the contribution applies, subject to acceleration of vesting upon certain changes in control (as defined in the plan) and to forfeiture upon termination for cause (as defined in the plan).  Participant accounts are adjusted to reflect contributions and distributions, and income, gains, losses, and expenses as if the accounts had been invested in permitted investments selected by the participants, including Company common stock.  The plan provides for distributions upon retirement and, subject to applicable limitations under the Internal Revenue Code, limited hardship withdrawals.  As of December 31, 20132016 and 2012, $638,0002015, $974,000 and $681,000,$851,000, respectively, in benefits had vested.  vested and the accrued benefits are included in other liabilities.

Expense recognized for the deferred compensation plan for 2013, 2012,2016, 2015, and 20112014 was $0, $109,000$88,000, $15,000 and $112,000, respectively.$147,000, respectively, and is included in salaries and employee benefits.  Although the plan is an unfunded plan, and does not require the Company to segregate any assets, the Company has purchased shares of Company common stock in anticipation of its obligation to pay benefits under the plan.  Such shares are classified in the financial statements as stock held by deferred compensation plan.  No purchases were made in 2013, 20122016, 2015, and 2011.2014.  As of December 31, 2013,2016, approximately 112,54225,437 shares of Company common stock were classified as stock held by deferred compensation plan.
 
97112
 

14.15.Fair Value Measurements and Fair Values of Financial Instruments
 
Management uses its best judgment in estimating the fair value of the Company’sCompany's financial instruments; however, there are inherent weaknesses in any estimation technique.  Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts the Company could have realized in a sales transaction on the dates indicated.  The estimated fair value amounts have been measured as of their respective year-ends and have not been re-evaluated or updated for purposes of these financial statements subsequent to those respective dates.  As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at each year-end.
 
The Company follows the guidance issued under ASC 820, Fair Value Measurement, which defines fair value, establishes a framework for measuring fair value under GAAP, and identifies required disclosures on fair value measurements.
 
ASC 820 establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value.  The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 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’sliability's level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.
113

For financial assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used at December 31, 20132016 and 20122015 were as follows:

 
 
 
 
(dollars in thousands)
 
Total
  
(Level 1)
Quoted Prices
in Active
Markets for Identical Assets
  
(Level 2)
Significant
Other
Observable
Inputs
  
(Level 3)
Significant Unobservable
Inputs
 
             
December 31, 2016            
Assets:            
             
Collateralized mortgage obligations $224,765  $-  $224,765  $- 
Agency mortgage-backed securities  36,710   -   36,710   - 
Municipal securities  26,547   -   26,547   - 
Corporate bonds  64,748   -   61,777   2,971 
Asset-backed securities  15,149   -   15,149   - 
Trust Preferred Securities  1,820   -   -   1,820 
Securities Available for Sale $369,739  $-  $364,948  $4,791 
                 
Mortgage Loans Held for Sale $23,911  $-  $23,911  $- 
                 
SBA Servicing Assets  5,352   -   -   5,352 
                 
Interest Rate Lock Commitments  439   -   439   - 
                 
Best Efforts Forward Loan Sales Commitments  103   -   103   - 
                 
Mandatory Forward Loan Sales Commitments  229   -   229   - 
                 
Liabilities:                
                 
Interest Rate Lock Commitments  55   -   55   - 
                 
Best Efforts Forward Loan Sales Commitments  125   -   125   - 
                 
Mandatory Forward Loan Sales Commitments  38   -   38   - 
                 
December 31, 2015                
Assets:                
                 
Collateralized mortgage obligations $178,145  $-  $178,145  $- 
Agency mortgage-backed securities  10,171   -   10,171   - 
Municipal securities  23,344   -   23,344   - 
Corporate bonds  54,129   -   51,295   2,834 
Asset-backed securities  17,005   -   17,005   - 
Trust Preferred Securities  1,883   -   -   1,883 
Other securities  118   -   118   - 
Securities Available for Sale $284,795  $-  $280,078  $4,717 
                 
SBA Servicing Assets $4,886  $-  $-  $4,886 
 
 
98114
 

 
 
 
 
(dollars in thousands)
 
 
 
Total
  
(Level 1)
Quoted Prices in Active Markets for Identical Assets
  
(Level 2)
Significant Other Observable Inputs
  
(Level 3)
Significant Unobservable Inputs
 
             
December 31, 2013            
             
Collateralized mortgage obligations $123,440  $-  $123,440  $- 
Mortgage-backed securities  16,181   -   16,181   - 
Municipal securities  9,643   -   9,643   - 
Corporate bonds  33,253   -   30,247   3,006 
Asset-backed securities  19,407   -   19,407   - 
Trust Preferred Securities  2,850   -   -   2,850 
Other securities  117   -   117   - 
Securities Available for Sale $204,891  $-  $199,035  $5,856 
The following table presents an analysis of the activity in the SBA servicing assets for the years ended December 31, 2016, 2015, and 2014:

 
(dollars in thousands)
 2016  2015  2014 
Beginning balance, January 1st $4,886  $4,099   3,477 
Additions  1,541   801   1,277 
Fair value adjustments  (1,075)  (14)  (655)
Ending balance, December 31st $5,352  $4,886   4,099 
December 31, 2012            
             
Collateralized mortgage obligations $99,783  $-  $99,783  $- 
Mortgage-backed securities  21,640   -   21,640   - 
Municipal securities  12,101   -   12,101   - 
Corporate bonds  32,685   -   29,678   3,007 
Asset-backed securities  19,729   -   19,729   - 
Trust Preferred Securities  3,187   -   -   3,187 
Other securities  134   -   134   - 
Securities Available for Sale $189,259  $-  $183,065  $6,194 

Fair value adjustments are recorded as loan advisory and servicing fees on the statement of operations.  Servicing fee income, not including fair value adjustments, totaled $1.8 million, $1.7 million, and $1.5 million for the years ended December 31, 2016, 2015, and 2014, 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 years ended December 31, 2013, 2012,2016, 2015, and 2011:2014:

  
Year Ended
December 31, 2013
  
Year Ended
December 31, 2012
  
Year Ended
December 31, 2011
 
Level 3 Investments Only
(dollars in thousands)
 Trust Preferred Securities  Corporate Bonds  Trust Preferred Securities  Corporate Bonds  Trust Preferred Securities  Corporate Bonds 
Balance, January 1, $3,187  $3,007  $3,410  $3,004  $3,450  $3,000 
Security transferred to Level 3 measurement  -   -   -   -   -   - 
Unrealized gains (losses)  171   (1)  401   3   2   4 
Paydowns  (508)  -   (590)  -   -   - 
Impairment charges on Level 3  -   -   (34)  -   (42)  - 
Balance, December 31, $2,850  $3,006  $3,187  $3,007  $3,410  $3,004 
99
  
Year Ended
December 31, 2016
  
Year Ended
December 31, 2015
  
Year Ended
December 31, 2014
 
Level 3 Investments Only
(dollars in thousands)
 
Trust
Preferred Securities
  
Corporate
Bonds
  
Trust
Preferred Securities
  
Corporate
Bonds
  
Trust
Preferred Securities
  
Corporate
Bonds
 
Balance, January 1, $1,883  $2,834  $3,193  $3,005  $2,850  $3,006 
Security transferred to Level 3 measurement  -   -   -   -   -   - 
Unrealized (losses) gains  (56)  137   882   (171)  360   (1)
Paydowns  -   -   (19)  -   (10)  - 
Proceeds from sales  -   -   (1,952)  -   -   - 
Realized losses  -   -   (218)  -   -   - 
Impairment charges on Level 3  (7)  -   (3)  -   (7)  - 
Balance, December 31, $1,820  $2,971  $1,883  $2,834  $3,193  $3,005 
                         

For assets measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy used at December 31, 20132016 and 2012,2015, respectively, were as follows:

 
(dollars in thousands)
 
Total
  
(Level 1)
Quoted Prices
in Active
Markets for
Identical Assets
  
(Level 2)
Significant
Other
Observable
Inputs
  
(Level 3)
Significant Unobservable
Inputs
 
December 31, 2016:            
Impaired loans $9,110  $-  $-  $9,110 
Other real estate owned  8,563   -   -   8,563 
                 
December 31, 2015:                
Impaired loans $5,734  $-  $-  $5,734 
Other real estate owned  10,034   -   -   10,034 
 
 
(dollars in thousands)
 
 
Total
  
(Level 1)
Quoted Prices in Active Markets for Identical Assets
  
(Level 2)
Significant Other Observable Inputs
  
(Level 3)
Significant Unobservable Inputs
 
December 31, 2013:            
Impaired loans $17,474  $-  $-  $17,474 
Other real estate owned  3,921   -   -   3,921 
SBA servicing assets  3,477   -   -   3,477 
                 
December 31, 2012:                
Impaired loans $19,876  $-  $-  $19,876 
Other real estate owned  3,642   -   -   3,642 
SBA servicing assets  2,340   -   -   2,340 
115


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
Asset Description Fair Value Valuation Technique Unobservable Input 
Range
Weighted Average
December 31, 2013:         
Impaired loans $17,474 Fair Value of Collateral (1) Appraised Value (2) 0% - 40% (23%) (4)
          
Other real estate owned $3,921 Fair Value of Collateral (1) 
Appraised Value (2)
Sales Price
 4% - 77% (17%) (4)
          
SBA Servicing Assets $3,477 
 
Fair Value
 
Individual Loan
Valuation (3)
 (3)
          
December 31, 2012:         
Impaired loans $19,876 Fair Value of Collateral (1) Appraised Value (2) 0% - 48% (15%) (4)
          
Other real estate owned $3,642 Fair Value of Collateral (1) 
Appraised Value (2)
Sales Price
 2% - 8% (5%) (4)
          
SBA Servicing Assets $2,340 
 
Fair Value
 
Individual Loan
Valuation (3)
 (3)
  Quantitative Information about Level 3 Fair Value Measurements
Asset Description Fair Value Valuation Technique Unobservable Input Range Weighted    Average
December 31, 2016         
Corporate bonds $2,971 
Discounted
Cash Flows
 Discount Rate (4.68%)
          
Trust preferred securities $1,820 
Discounted
Cash Flows
 Discount Rate 8.85% - 9.35% (9.08%)
          
SBA servicing assets $5,352 
Discounted
Cash Flows
 
Conditional
Prepayment Rate
 
Discount Rate
 
(6.12%)
 
(10.00%)
          
Impaired loans $9,110 
Appraised Value of
Collateral (1)
 
Sales Price
 
Liquidation expenses (2)
 
 
Liquidation expenses (2)
 
7% - 20% (11%) (3)
 
 
    (7%) (3)
          
 
Other real estate owned
 
 
$
 
8,563
 
Appraised Value of
Collateral (1)
 
Sales Price
 
Liquidation expenses (2)
 
 
Liquidation expenses (2)
 
5% - 76% (17%) (3)
 
 
    7% - 8% (7%) (3)
          
December 31, 2015         
Corporate bonds $2,834 
Discounted
Cash Flows
 Discount Rate (4.11%)
          
Trust preferred securities $1,883 
Discounted
Cash Flows
 Discount Rate 7.31% - 7.81% (7.77%)
          
SBA servicing assets $4,886 
Discounted
Cash Flows
 
Conditional
Prepayment Rate
 
Discount Rate
 
(6.27%)
 
(10.00%)
          
Impaired loans $5,734 
Appraised Value of
Collateral (1)
 Liquidation expenses (2) 12% - 78% (20%) (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)

(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)There is a lack of transactional data in this market place for the non-guaranteed portion of SBA loans.
(4)(3)The range and weighted average of qualitative factors such as economic conditions and estimated liquidation expenses are presented as a percent of the appraised value.

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

The following table presents an analysis of the activity in the SBA servicing assets for the years ended December 31, 2013 and 2012:

(dollars in thousands) 2013  2012 
Beginning balance, January 1st $2,340  $1,102 
Additions  1,349   1,175 
Fair value adjustments  (212)  63 
Ending balance, December 31st $3,477  $2,340 
 
100116
 

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’sCompany'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’sCompany's disclosures and those of other companies may not be meaningful.  The following methods and assumptions were used to estimate the fair values of the Company’sCompany's financial instruments at December 31, 20132016 and December 31, 2012:2015:

Cash and Cash Equivalents (Carried at Cost)

The carrying amounts reported in the balance sheet for cash and cash equivalents approximate those assets’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’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’smanagement's best estimate is used.  Management’sManagement'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’sCompany'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’smanagement'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.

The trust preferred securities are pools of similar securities that are grouped into an asset structure commonly referred to as collateralized debt obligations (“CDOs”("CDOs") which consist of the debt instruments of various banks, diversified by the number of participants in the security as well as geographically. TheThe 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.
 
101117
 

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 December 31, 20132016 and December 31, 2012.2015. Financial information on the issuers was also obtained from Bloomberg, the FDIC, the Office of Thrift Supervision 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’sCompany's senior and mezzanine tranches of CDOs.  The values of the Company’sCompany'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’sCompany's holdings are not quantifiably estimable.

Also included in Level 3 investment securities classified as available for sale is a single-issuer corporate bond transferred from Level 2 in 2010 since the bondthat 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’sissuer's financial statements.  The issuer is a “well capitalized”"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.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 yearsyear ended December 31, 20132016 and 2012.the year ended December 31, 2015.

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. In 2016, Republic elected to adopt the fair value option for its mortgage loans held for sale portfolio in order to more accurately reflect the economic value of the mortgages held for sale on the balance sheet. 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, 2016. Interest income on loans held for sale, which totaled $283,000 for the twelve months ended December 31, 2016, are included in interest and fees in the statements of income.
118

The following table reflects the difference between the carrying amount of mortgage loans held for sale, measured at fair value and the aggregate unpaid principal amount that Republic is contractually entitled to receive at maturity as of December 31, 2016 (dollars in thousands):

Mortgage loans
held for sale
Carrying
Amount
 Aggregate Unpaid Principal Balance Excess Carrying Amount Over Aggregate Unpaid Principal Balance 
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 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.

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’sloan'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.
 
102119

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 December 31, 20132016 and 2012December 31, 2015, these assets are carried at current fair value.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.  UpdatedAn updated fair values arevalue 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, ourthe 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 ourthe Company's market-based discount ratio assumptions.  In all cases, we modelthe 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 December 31, 2013,2016 and December 31, 2015, 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) 
December 31,
2013
  
December 31,
2012
 
       
SBA Servicing Asset      
       
Fair Value of SBA Servicing Asset $3,477  $2,340 
         
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 21.4 years  21.4 years 
         
Prepayment Speed  6.72%  6.59%
      Effect on fair value of a 10% increase $(83) $(55)
      Effect on fair value of a 20% increase  (163)  (107)
         
Weighted Average Discount Rate  13.59%  14.23%
      Effect on fair value of a 10% increase $(162) $(115)
      Effect on fair value of a 20% increase  (316)  (222)
(dollars in thousands) December 31, 2016  December 31, 2015 
       
SBA Servicing Asset      
       
Fair Value of SBA Servicing Asset $5,352  $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 21.1 years 20.9 years
         
Prepayment Speed  6.12%  6.27%
      Effect on fair value of a 10% increase $(161) $(151)
      Effect on fair value of a 20% increase  (316)  (296)
         
Weighted Average Discount Rate  10.00%  10.00%
      Effect on fair value of a 10% increase $(226) $(206)
      Effect on fair value of a 20% increase  (435)  (397)
 
 
103120

 
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.

Accrued Interest Receivable and Payable (Carried at Cost)

The carrying amounts of accrued interest receivable and accrued interest payable approximates fair value.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 Notionalnotional amounts)

Fair values for the Company’sCompany'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’counterparties' credit standing.
 
104121
 

The estimated fair values of the Company’sCompany's financial instruments were as follows at December 31, 20132016 and 2012:2015:

  Fair Value Measurements at December 31, 2016 
 
(dollars in thousands)
 
Carrying
Amount
  
Fair
Value
  
Quoted Prices in Active Markets
for Identical
Assets
(Level 1)
  
Significant Other Observable Inputs
(Level 2)
  
Significant Unobservable
Inputs
(Level 3)
 
Balance Sheet Data               
Financial assets:               
Cash and cash equivalents $34,554  $34,554  $34,554  $-  $- 
Investment securities available for sale  369,739   369,739   -   364,948   4,791 
Investment securities held to maturity  432,499   425,183   -   425,183   - 
Restricted stock  1,366   1,366   -   1,366   - 
Loans held for sale  28,065   28,267   -   23,911   4,356 
Loans receivable, net  955,817   937,944   -   -   937,944 
SBA servicing assets  5,352   5,352   -   -   5,352 
Accrued interest receivable  5,497   5,497   -   5,497   - 
Interest rate lock commitments  439   439   -   439   - 
Best efforts forward loan sales commitments  103   103   -   103   - 
Mandatory forward loan sales commitments  229   229   -   229   - 
                     
Financial liabilities:                    
Deposits                    
Demand, savings and money market $1,566,506  $1,566,506  $-  $1,566,506  $- 
Time  111,164   110,988   -   110,988   - 
Subordinated debt  21,881   16,286   -   -   16,286 
Accrued interest payable  444   444   -   444   - 
Interest rate lock commitments  55   55   -   55   - 
Best efforts forward loan sales commitments  125   125   -   125   - 
Mandatory forward loan sales commitments  38   38   -   38   - 
                     
Off-Balance Sheet Data                    
Commitments to extend credit  -   -   -   -   - 
Standby letters-of-credit  -   -   -   -   - 
 Fair Value Measurements at December 31, 2013  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)
  
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 $35,880  $35,880  $35,880  $-  $-  $27,139  $27,139  $27,139  $-  $- 
Investment securities available for sale  204,891   204,891   -   199,035   5,856   284,795   284,795   -   280,078   4,717 
Investment securities held to maturity  21   21   -   21   -   172,277   171,845   -   171,845   - 
Restricted stock  1,570   1,570   -   1,570   -   3,059   3,059   -   3,059   - 
Loans held for sale  4,931   5,225   -   -   5,225   3,653   3,831   -   -   3,831 
Loans receivable, net  667,048   660,237   -   -   660,237   866,066   849,578   -   -   849,578 
SBA servicing assets  3,477   3,477   -   -   3,477   4,886   4,886   -   -   4,886 
Accrued interest receivable  3,049   3,049   -   3,049   -   4,216   4,216   -   4,216   - 
                                        
Financial liabilities:                                        
Deposits                                        
Demand, savings and money market $790,698  $790,698  $-  $790,698  $-  $1,181,720  $1,181,720  $-  $1,181,720  $- 
Time  78,836   79,323   -   79,323   -   67,578   67,422   -   67,422   - 
Short-term borrowings  47,000   47,000   -   47,000   - 
Subordinated debt  22,476   17,835   -   -   17,835   21,857   18,353   -   -   18,353 
Accrued interest payable  237   237   -   237   -   245   245   -   245   - 
                                        
Off-Balance Sheet Data                                        
Commitments to extend credit  -   -               -   -   -   -   - 
Standby letters-of-credit  -   -               -   -   -   -   - 

  Fair Value Measurements at December 31, 2012 
 
(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 $128,004  $128,004  $128,004  $-  $- 
Investment securities available for sale  189,259   189,259   -   183,065   6,194 
Investment securities held to maturity  67   69   -   69   - 
Restricted stock  3,816   3,816   -   3,816   - 
Loans held for sale  82   82   -   -   82 
Loans receivable, net  608,359   603,237   -   -   603,237 
SBA servicing assets  2,340   2,340   -   -   2,340 
Accrued interest receivable  3,128   3,128   -   3,128   - 
                     
Financial liabilities:                    
Deposits                    
Demand, savings and money market $765,967  $765,967  $-  $765,967  $- 
Time  123,234   124,044   -   124,044   - 
Subordinated debt  22,476   20,187   -   -   20,187 
Accrued interest payable  301   301   -   301   - 
                     
Off-Balance Sheet Data                    
Commitments to extend credit  -   -             
Standby letters-of-credit  -   -             
122
 
 
105

15.  
16.Stock Based Compensation

The Company has a Stock Option and Restricted Stock Plan (“Plan”("the 2005 Plan"), under which stockthe Company granted options, restricted stock or stock appreciation rights may be granted to the Company’sCompany'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 maycould be available for grant under the 2005 Plan to 1.5 million shares, arewere available for such grants. As of December 31, 2013,2016, the only grants under the 2005 Plan have beenwere option grants. The 2005 Plan providesprovided that the exercise price of each option granted equalsequaled the market price of the Company’sCompany's stock on the date of the grant. Any optionOptions granted vestspursuant to the 2005 Plan vest within one to four years and hashave a maximum term of ten10 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 December 31, 2016, the maximum number of shares of common shares issuable under the 2014 Plan was 5.9 million. During the twelve months ended December 31, 2016, 661,750 options were granted under the 2014 Plan with a weighted average grant date fair value of $1,191,224.

The Company utilized 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 2013, 20122016, 2015, and 20112014 is as follows:

 2013 2012 2011 2016  2015  2014 
Dividend yield(1)
 0.0% 0.0% 0.0%  0.0%  0.0%  0.0%
Expected volatility(2)
 54.88% to 55.61% 53.12% to 54.49% 43.33% to 49.11% 46.38% to 52.54%  53.78% to 56.00%  55.79% to 57.99% 
Risk-free interest rate(3)
 1.28% to 2.03% 1.01% to 1.61% 1.38% to 2.84% 1.23% to 1.82%  1.49% to 2.00%  1.51% to 2.26%
Expected life(4)
 7.0 years 7.0 years 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%  23.0%
            

(1)A dividend yield of 0.0% is utilized because cash dividends have never been paid.
(2)Expected volatility is based on Bloomberg’sBloomberg's five and one-half to seven year volatility calculation for “FRBK”"FRBK" stock.
(3)The risk-free interest rate is based on the five to seven year Treasury bond.
(4)
The expected life reflects a 31 to 4 year “all or nothing” 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 2013, 127,287 shares2016, 517,550 options vested as compared to 146,000 shares349,062 options in 20122015 and 53,500 shares209,825 options in 2011.2014.  Expense is recognized ratably over the period required to vest.  At December 31, 20132016, the intrinsic value of the 1,215,5302,331,400 options outstanding was $421,510,$10,871,297, while the intrinsic value of the 306,2171,048,174 exercisable (vested) options was $43,195.$4,911,116.  During 2013, 96,2502016, 50,300 options were forfeited with a weighted average grant date fair value of $306,483.$89,383.
123

Information regarding stock based compensation for the years ended December 31, 2013, 20122016, 2015, and 20112014 is set forth below:

 2013  2012  2011  2016  2015  2014 
Stock based compensation expense recognized $325,000  $370,000  $359,000  $759,000  $600,000  $420,000 
Number of unvested stock options  909,313   710,600   612,350   1,283,226   1,173,276   1,039,638 
Fair value of unvested stock options $1,245,679  $1,091,948  $1,337,780  $2,184,773  $1,906,691  $1,548,840 
Amount remaining to be recognized as expense $545,862  $467,314  $554,763  $1,104,424  $873,714  $702,220 

The remaining amount of $545,862$1,104,424 will be recognized ratably as expense through October 2017.November 2020.
106

A summary of stock option activity under the Plan as of December 31, 2013, 20122016, 2015, and 20112014 is as follows:

 For the Years Ended December 31,  For the Years Ended December 31, 
 2013  2012  2011  2016  2015  2014 
 
 
 
Shares
  Weighted Average Exercise Price  
 
 
Shares
  Weighted Average Exercise Price  
 
 
Shares
  Weighted Average Exercise Price  
Shares
  
Weighted
Average
Exercise
Price
  
Shares
  
Weighted
Average
Exercise
Price
  
Shares
  
Weighted
Average
Exercise
Price
 
                                    
Outstanding, beginning of year  964,530  $4.38   839,417  $6.04   663,500  $7.32   1,946,225  $3.56   1,494,399  $3.59   1,215,530  $3.66 
Granted  347,250   2.72   296,750   1.95   263,850   3.12   661,750   4.06   505,200   3.55   360,900   3.69 
Exercised  -   -   -   -   -   -   (226,275)  3.21   (21,500)  3.01   (500)  1.95 
Forfeited  (96,250)  7.39   (171,637)  8.32   (87,933)  5.73   (50,300)  5.21   (31,874)  5.13   (81,531)  5.15 
Outstanding, end of year  1,215,530  $3.66   964,530  $4.38   839,417  $6.04   2,331,400  $3.70   1,946,225  $3.56   1,494,399  $3.59 
                                                
Options exercisable at year-end  306,217  $6.24   253,930  $7.92   227,067  $9.00   1,048,174  $3.70   772,949  $4.18   454,761  $5.06 
                                                
Weighted average fair value of options granted during the year     $1.51      $1.05      $1.61      $1.80      $1.89      $2.07 

There were noA summary of stock options exercisedoption exercises and related proceeds during the years endedend December 31, 2013, 20122016, 2015, and 2011.2014 is as follows:

   For the Years Ended December 31,  
   2016  2015  2014  
            
 Number of options exercised  226,275   21,500   500  
 Cash received $726,157  $64,624  $975  
 Intrinsic value $739,699  $26,532  $1,010  
 Tax benefit $-  $-  $-  

The following table summarizes information about options outstanding at December 31, 2013:2016:

   Options Outstanding  Options Exercisable  
 
Range of
Exercise Prices
 Number Outstanding  
Weighted-
Average
Remaining Contractual Life
  
Weighted-
Average
Exercise Price
  Shares  
Weighted-
Average
Exercise Price
  
                  
 $1.55 to $2.95  538,675   5.7  $2.36   361,837  $2.20  
 $3.14 to $3.68  897,275   7.3   3.55   428,137   3.51  
 $3.95 to $8.00  886,100   7.3   4.58   248,850   5.89  
 $11.77 to $12.13  9,350   -   11.77   9,350   11.77  
    2,331,400      $3.70   1,048,174  $3.70  
   Options Outstanding  Options Exercisable 
 
Range of Exercise Prices
  
 
Number Outstanding
  Weighted-Average Remaining Contractual Life  Weighted-Average Exercise Price  
 
 
Shares
  Weighted-Average Exercise Price 
                 
$1.39 to $2.95   651,500   8.7  $2.33   41,937  $1.95 
$3.14 to $5.12   311,750   6.8   3.72   12,000   4.50 
$5.70 to $8.00   228,507   3.7   6.58   228,507   6.58 
$9.93 to $12.13   23,773   2.3   11.36   23,773   11.36 
     1,215,530      $3.66   306,217  $6.24 

124
A roll-forward of non-vested options during the year ended December 31, 20132016 is as follows:

 Number of Shares  Weighted-Average Grant Date Fair Value  
Number of
Shares
  
Weighted-
Average Grant
Date Fair Value
  
Nonvested, beginning of year  710,600  $1.54   1,173,276  $1.63  
Granted  347,250   1.51   661,750   1.80  
Vested  (127,287)  1.63   (517,550)  1.53  
Forfeited  (21,250)  1.40   (34,250)  2.01  
Nonvested, end of year  909,313  $1.37   1,283,226  $1.70  

16.  
17.Segment Reporting

The Company has one reportable segment:  community banking.  The community banking segment primarily encompasses the commercial loan and deposit activities of Republic, as well as residential mortgage and consumer loan products in the area surrounding its stores.
107
17.  Transactions with Affiliates Mortgage loans in Delaware and Related PartiesFlorida are primarily made to local customers that have second homes (vacation) in Delaware and Florida. We do not have loan production offices in those states.

At December 31, 2013 and 2012, Republic had outstanding balances of $2.7 million and $3.3 million, respectively, of commercial loans, which had been participated to First Bank of Delaware (“FBD”), a wholly-owned subsidiary of the Company prior to January 1, 2005.  As of December 31, 2013 and 2012 Republic had no outstanding commercial loan balances it had purchased from FBD.  The above loan participations and sales were made at arms length.  They are made as a result of lending limit and other regulatory requirements.

The Board of Directors of FBD approved a Plan of Liquidation and Dissolution on April 27, 2012.  As a result of stockholder approval of the Plan of Dissolution, FBD executed the FBD Liquidating Trust Agreement.  On November 6, 2012, FBD gave notice to the Financial Industry Regulatory Authority of its intent to dissolve on or about November 16, 2012.
18.Transactions with Affiliates and Related Parties

The Company made payments to related parties in the amount of $412,000$1.0 million during 2013 as compared to $346,0002016 and 2015 and $754,000 during 2012 and $333,000 during 2011.2014.  The disbursements made during 2013, 20122016, 2015, and 20112014 include $127,000, $95,000,$450,000, $415,000, and $83,000,$343,000, respectively, in fees for marketing, graphic design, architectural and project management services paid to InterArch, a company owned by the spouse of Vernon W. Hill, II. Mr. Hill is a major shareholderthe Chairman of the Company, and beneficially owning 9.9%owns 8.1% of the common shares currently outstanding.  He also actsThe Company paid $194,000 during 2016 and $144,000 during 2015 to Glassboro Properties, LLC related to a land lease agreement for its Glassboro store. Mr. Hill has an ownership interest in Glassboro Properties LLC, a commercial real estate firm. The Company paid $7,000 during 2015 to SDI Commercial Real Estate LLC for reimbursement of development costs related to site development as part of the Company's growth and expansion strategy. Mr. Hill has an ownership interest in SDI Commercial Real Estate LLC, a commercial real estate firm. Prior to his appointment as Chairman in December 2016, Mr. Hill acted as a consultant for the Company and iswas paid $250,000 annually.annually for his services.

The Company paid $35,000$120,000 during 20132016 and 2015 to Brian Communications for public relations services.services in addition to reimbursements for out-of-pocket expenses and other reimbursable costs. Brian Tierney, a member of the Board of Directors, is the CEO of Brian Communications, a strategic communications agency.
 
108125
 

18.19.  Parent Company Financial Information

The following financial statements for Republic First Bancorp, Inc. (Parent Company) should be read in conjunction with the consolidated financial statements and the other notes related to the consolidated financial statements.

Balance Sheet 
December 31, 2013 and 2012 
(Dollars in thousands) 
       
  
December 31,
2013
  
December 31,
2012
 
ASSETS       
Cash $697  $736 
Corporation-obligated mandatorily redeemable capital securities of subsidiary trust holding junior obligations of the corporation  676   676 
Investment in subsidiaries  80,666   88,945 
Other assets  3,354   2,848 
Total Assets $85,393  $93,205 
         
LIABILITIES AND SHAREHOLDERS’ EQUITY        
Liabilities        
Accrued expenses $18  $827 
Corporation-obligated mandatorily redeemable securities of subsidiary trust holding solely junior subordinated debentures of the corporation  22,476   22,476 
Total Liabilities  22,494   23,303 
         
Shareholders’ Equity        
Total Shareholders’ Equity  62,899   69,902 
         
Total Liabilities and Shareholders’ Equity $85,393  $93,205 
Balance Sheet 
December 31, 2016 and 2015 
(Dollars in thousands) 
       
  December 31, 2016  December 31, 2015 
ASSETS       
Cash $61,011  $2,051 
Corporation-obligated mandatorily redeemable capital securities of subsidiary
trust holding junior obligations of the corporation
  676   676 
Investment in subsidiaries  170,868   128,652 
Other assets  4,589   3,873 
Total Assets $237,144  $135,252 
         
LIABILITIES AND SHAREHOLDERS' EQUITY        
Liabilities        
Accrued expenses $210  $20 
Corporation-obligated mandatorily redeemable securities of subsidiary trust
holding solely junior subordinated debentures of the corporation
  21,881   21,857 
Total Liabilities  22,091   21,877 
         
Shareholders' Equity        
Total Shareholders' Equity  215,053   113,375 
         
Total Liabilities and Shareholders' Equity $237,144  $135,252 
 
 
109126
 

 
Statements of Operations, Comprehensive Income (Loss), and Changes in Shareholders’ Equity 
For the years ended December 31, 2013, 2012 and 2011 
Statements of Income, Comprehensive Income (Loss), and Changes in Shareholders' EquityStatements of Income, Comprehensive Income (Loss), and Changes in Shareholders' Equity 
For the years ended December 31, 2016, 2015, and 2014For the years ended December 31, 2016, 2015, and 2014 
(Dollars in thousands)(Dollars in thousands) (Dollars in thousands) 
   
 2013  2012  2011  2016  2015  2014 
                  
Interest income $33  $34  $33  $35  $34  $33 
Dividend income from subsidiaries  1,859   -   212 
Total income  1,892   34   245   35   34   33 
                        
Trust preferred interest expense  1,112   1,134   1,117   1,160   1,114   1,107 
Expenses  318   317   288   717   572   424 
Total expenses  1,430   1,451   1,405   1,877   1,686   1,531 
Net income (loss) before taxes  462   (1,417)  (1,160)
Net loss before taxes  (1,842)  (1,652)  (1,498)
                        
Benefit for income taxes  (489)  (496)  (406)  (645)  (578)  (524)
Income (loss) before undistributed income of subsidiaries  951   (921)  (754)
Equity in undistributed income (loss) of subsidiaries  (4,431)  4,535   (23,948)
Net income (loss) $(3,480) $3,614  $(24,702)
Loss before undistributed income of subsidiaries  (1,197)  (1,074)  (974)
Equity in undistributed income of subsidiaries  6,142   3,507   3,416 
Net income $4,945  $2,433  $2,442 
                        
Net income (loss) $(3,480) $3,614  $(24,702)
Net income $4,945  $2,433  $2,442 
Total other comprehensive income (loss)  (3,848)  1,067   1,048   (4,129)  (2,533)  2,196 
Total comprehensive income (loss) $(7,328) $4,681  $(23,654) $816  $(100) $4,638 
                        
Shareholders’ equity, beginning of year $69,902  $64,851  $88,146 
Shareholders' equity, beginning of year $113,375  $112,811  $62,899 
Shares issued under common stock offering  99,175   -   44,853 
Stock based compensation  325   370   359   759   600   420 
Net income (loss)  (3,480)  3,614   (24,702)
Stock options issued in acquisition  202   -   - 
Exercise of stock options  726   64   1 
Net income  4,945   2,433   2,442 
Total other comprehensive income (loss)  (3,848)  1,067   1,048   (4,129)  (2,533)  2,196 
Shareholders’ equity, end of year $62,899  $69,902  $64,851 
Shareholders' equity, end of year $215,053  $113,375  $112,811 

 
 
110127

 

Statements of Cash Flows 
For the years ended December 31, 2013, 2012 and 2011 
(Dollars in thousands) 
  
  2013  2012  2011 
Cash flows from operating activities:         
Net income (loss) $(3,480) $3,614  $(24,702)
Adjustments to reconcile net income (loss) to net cash used in operating activities:            
Share based compensation  325   370   359 
Increase in other assets  (506)  (542)  (486)
(Decrease) increase in other liabilities  (809)  (226)  223 
Equity in undistributed (income) losses of subsidiaries  4,431   (4,535)  23,948 
Net cash used in operating activities  (39)  (1,319)  (658)
             
Cash flows from investing activities:            
Investment in subsidiary  -   -   (8,000)
Net cash used in investing activities  -   -   (8,000)
             
Decrease in cash  (39)  (1,319)  (8,658)
Cash, beginning of period  736   2,055   10,713 
Cash, end of period $697  $736  $2,055 
Statements of Cash Flows 
For the years ended December 31, 2016, 2015, and 2014 
(Dollars in thousands) 
  
  2016  2015  2014 
Cash flows from operating activities:         
Net income $4,945  $2,433  $2,442 
Adjustments to reconcile net income to net cash used in operating activities:            
Share based compensation  961   600   420 
Amortization of debt issuance costs  24   24   24 
Increase in other assets  (716)  (636)  (550)
Net increase in other liabilities  190   2   - 
Equity in undistributed income of subsidiaries  (6,142)  (3,507)  (3,416)
Net cash used in operating activities  (738)  (1,084)  (1,080)
             
Cash flows from investing activities:            
Investment in subsidiary  (40,203)  (6,400)  (35,000)
Net cash used in investing activities  (40,203)  (6,400)  (35,000)
             
Cash flows from financing activities:            
Net proceeds from stock offering  99,175   -   44,853 
Exercise of stock options  726   64   1 
Net cash provided by financing activities  99,901   64   44,854 
             
Increase (decrease) in cash  58,960   (7,420)  8,774 
Cash, beginning of period  2,051   9,471   697 
Cash, end of period $61,011  $2,051  $9,471 
 
 
111128

 

19.  
20.Quarterly Financial Data (unaudited)

The following represents summarized unaudited quarterly financial data of the Company for each of the quarters ended during 20132016 and 2012.2015.

Summary of Selected Quarterly Consolidated Financial DataSummary of Selected Quarterly Consolidated Financial Data Summary of Selected Quarterly Consolidated Financial Data 
(dollars in thousands, except per share data)(dollars in thousands, except per share data) (dollars in thousands, except per share data) 
      
 For the Quarter Ended  For the Quarter Ended 
 
December 31st
  
September 30th
  
June 30th
  
March 31st
  
December 31st
  
September 30th
  
June 30th
  
March 31st
 
2013            
2016            
                        
Interest income $9,544  $9,339  $9,215  $9,107  $14,636  $13,620  $13,209  $12,762 
Interest expense  1,106   1,113   1,117   1,254   1,946   1,834   1,612   1,471 
Net interest income  8,438   8,226   8,098   7,853   12,690   11,786   11,597   11,291 
Provision for loan losses  3,760   250   925   -   -   607   650   300 
Non-interest income  2,211   1,892   2,870   2,243   4,727   5,142   3,031   2,412 
Non-interest expense  10,117   12,108   9,056   9,130   15,970   15,013   12,967   12,343 
Provision (benefit) for income taxes  33   (18)  (24)  (26)
Net income (loss) $(3,261) $(2,222) $1,011  $992 
Benefit for income taxes  (50)  (32)  (12)  (25)
Net income $1,497  $1,340  $1,023  $1,085 
                                
Net income (loss) per share (1):
                
Net income per share:                
Basic $(0.13) $(0.09) $0.04  $0.04  $0.03  $0.04  $0.03  $0.03 
Diluted $(0.13) $(0.09) $0.04  $0.04  $0.03  $0.03  $0.03  $0.03 
                                
2012                
2015                
                                
Interest income $9,423  $9,612  $9,649  $9,576  $12,406  $11,370  $10,899  $10,761 
Interest expense  1,406   1,436   1,624   1,900   1,419   1,378   1,290   1,294 
Net interest income  8,017   8,176   8,025   7,676   10,987   9,992   9,609   9,467 
Provision (credit) for loan losses  750   850   500   (750)
Provision for loan losses  500   -   -   - 
Non-interest income  2,852   1,831   2,499   1,646   4,740   1,604   2,022   1,577 
Non-interest expense  9,269   8,787   9,010   8,836   14,446   11,024   11,103   10,518 
Provision (benefit) for income taxes  (54)  (28)  7   (69)
Benefit for income taxes  (9)  (10)  (5)  (2)
Net income $904  $398  $1,007  $1,305  $790  $582  $533  $528 
                                
Net income per share (1):
                                
Basic $0.03  $0.02  $0.04  $0.05  $0.02  $0.02  $0.01  $0.01 
Diluted $0.03  $0.02  $0.04  $0.05  $0.02  $0.02  $0.01  $0.01 

(1)Quarterly net income (loss) per share does not add to full year net income (loss) per share due to rounding.


21.
Changes in Accumulated Other Comprehensive Income (Loss) By Component (1)

     The following table presents the changes in accumulated other comprehensive loss by component for the years ended December 31, 2016, 2015, and 2014.

  
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 loss 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 (loss)  (4,269)  140   (4,129)
Balance December 31, 2016 $(6,831) $(463) $(7,294)
             
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)
             
Balance January 1, 2014 $(2,828) $-  $(2,828)
Unrealized gain on securities  3,199   -   3,199 
Net unrealized holding losses on securities transferred from
available-for-sale to held-to-maturity
  -   (790)  (790)
Amounts reclassified from accumulated other comprehensive
income to net income (2)
  (289)  76   (213)
Net current-period other comprehensive income  2,910   (714)  2,196 
Balance December 31, 2014 $82  $(714) $(632)

(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.

22.Business Combination

Oak Mortgage Company, LLC

On July 26, 2016, Republic entered into an agreement with the owners of Oak Mortgage Company, LLC pursuant to which the owners agreed to sell to Republic all of the issued and outstanding limited liability interests of Oak Mortgage. The transaction closed on July 28, 2016, 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 is subject to certain post-closing adjustments.
130

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: 
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 

An adjustment was made to other liabilities which affected goodwill resulting from the acquisition of Oak Mortgage. As of December 31, 2016, the estimates of fair values of the assets acquired and liabilities assumed in the acquisition of Oak Mortgage are final.

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. 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. 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.

  Year Ended December 31,  
  2016  2015  
 Total revenues $69,436   $56,520  
            
 Net income $6,144   $4,790  
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23: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
December 31,
2016
  
Amortization
Period (in years)
 
                
Goodwill $-  $5,011  $-  $5,011  Indefinite 
Non-compete agreements  -   104   (43)  61  1 
Total $-  $5,115  $(43) $5,072     

24: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 twelve months ended December 31, 2016. The following table summarizes the amounts recorded in Republic's statement of financial condition for derivatives not designated as hedging instruments as of December 31, 2016 (in thousands):

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

The following table summarizes the amounts recorded in Republic's statement of income for derivative instruments not designated as hedging instruments for the twelve months ended December 31, 2016 (in thousands):

 
Twelve Months Ended December 31, 2016
 
Income Statement
Presentation
 Gain/(Loss)  
       
  Asset derivatives:      
       
IRLC's Mortgage banking income $(1,042) 
Best efforts forward loan sales commitments Mortgage banking income  77  
Mandatory forward loan sales commitments Mortgage banking income  229  
        
  Liability derivatives:       
        
IRLC's Mortgage banking income $(32) 
Best efforts forward loan sales commitments Mortgage banking income  264  
Mandatory forward loan sales commitments Mortgage banking income  (38) 

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.
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Tel:  717-233-8800
Fax:  717-233-8801
www.bdo.com
945 E. Park Drive, Suite 103
Harrisburg, PA 17111


Report of Independent Registered Public Accounting Firm


Board of Directors and Shareholders
Republic First Bancorp, Inc.
Philadelphia, Pennsylvania

We have audited Republic First Bancorp, Inc. and Subsidiaries' (the "Company") internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Item 9A, Management's Report on Internal Controls. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Republic First Bancorp, Inc. and Subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on the COSO criteria.


133







We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Republic First Bancorp, Inc. and Subsidiaries as of December 31, 2016 and 2015 and the related consolidated statements of income, comprehensive income (loss), cash flows, and shareholders' equity for each of the three years in the period ended December 31, 2016 and our report dated March 10, 2017 expressed an unqualified opinion thereon.




Harrisburg, Pennsylvania
March 10, 2017



134

Item 9:  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
 
None.
 
Item 9A:  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’sCommission's rules and forms and accumulated and communicated to the Company’sCompany's management, including the Company’sCompany's principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

 
112
The Company’sCompany'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’sCompany'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’sCompany'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’sCompany's internal control over financial reporting (“("Internal Control”Control") to determine whether any changes in Internal Control occurred during the quarter ended December 31, 20132016 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 December 31, 2013.2016.

Management’sManagement's Report on Internal Controls

Management of Republic First Bancorp, Inc. (the “Company”"Company") is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act.
 
The Company’sCompany's management, under the supervision and with the participation of the principal executive officer and principal financial officer, conducted an evaluation of the effectiveness of internal control over financial reporting, as of December 31, 2013,2016, based on the framework in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation under the framework in Internal Control – Integrated Framework 2013, management of the Company has concluded the Company maintained effective internal control over financial reporting, as such term is defined in Securities Exchange Act of 1934 Rules 13a-15(f), as of December 31, 2013.2016.
 
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.
135

BDO, an independent registered public accounting firm, has audited the Company’sCompany's consolidated financial statements as of and for the yearyears ended December 31, 2013,2016 and 2015, and the effectiveness of the Company’sCompany's internal control over financial reporting as of December 31, 2013,2016, as stated in their reports, which are included herein.

Item 9B:  Other Information

On March 9, 2017, the Company entered into an agreement with Vernon W. Hill, II regarding Mr. Hill's provision of services to the Company as Chairman of the board of directors.  The initial term of the agreement is a five-year period commencing on March 9, 2017.  The agreement will be extended on each annual anniversary date to provide for a five-year term unless either party provides the other with timely written notice of termination, in which case the agreement will expire four years from the annual anniversary date next following the notice. This agreement replaces the existing consulting agreement with Mr. Hill that was initially entered into on June 10, 2008.

Under the agreement, Mr. Hill agrees to serve as Chairman of the board of directors of the Company, to preside over all meetings of the Company's board of directors and shareholders, and perform such other functions as required of a public company board chairman and such other duties as the Company's board of directors may require.  For services under the agreement, Mr. Hill will receive base compensation ("compensation") of not less than $360,000 per year, and he will be entitled to participate in any bonus programs, incentive compensation plans, stock option plans or similar benefit or compensation plans at any time in effect that are made generally available to directors and executive officers of the Company.

The Company may terminate Mr. Hill's services under the agreement at any time with or without "cause" (as defined in the agreement).  In the event of a termination by the Company for cause, Mr. Hill would be entitled to any prorated portion of his compensation through the termination date and the Company would have no further obligations under the agreement. In the event that the Company terminates Mr. Hill's services without cause, the Company would be required to pay Mr. Hill, in a lump-sum, compensation due to him until the end of the then current term of the agreement.  The Company may also terminate the agreement for permanent disability, in which case Mr. Hill would receive a portion of his compensation for the balance of the remaining term of the agreement offset by any disability payments due to Mr. Hill under any company-sponsored disability plan.  In the event of death, Mr. Hill's estate would be entitled to a death benefit equal to three times compensation.

Mr. Hill may voluntarily terminate his services under the agreement for specified events of "good reason" occurring within three years after a change in control of the Company.  In the event of Mr. Hill's voluntary termination for any of such events of good reason following a change in control of the Company, he would be entitled to a payment equal to four times compensation.

A copy of Mr. Hill's agreement is attached as Exhibit 10.7 to this Form 10-K.  The foregoing description is qualified by reference to the agreement.
 
113136
 
 

Tel: 717-233-8800
320 Market Street, 6th Floor
Fax: 717-233-8801Harrisburg, PA 17101
www.bdo.com

Report of Independent Registered Public Accounting Firm

Board of Directors and Shareholders
Republic First Bancorp, Inc.
Philadelphia, Pennsylvania
We have audited Republic First Bancorp, Inc. and Subsidiaries (the “Bancorp”) internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control – Integrated Framework (1992) issued byOn March 9, 2017, the Compensation Committee of Sponsoring Organizationsthe board of directors extended the term of the Treadway Commission (the COSO criteria). The Bancorp’s management is responsible for maintaining effective internal control over financial reportingexisting employment agreement, dated May 10, 2013, as amended by a first amendment to employment agreement, dated March 18, 2015 (as so amended, the "Employment Agreement"), with Harry D. Madonna, President and for its assessmentChief Executive Officer of the effectivenessCompany and Chief Executive Officer of internal control over financial reporting, included inRepublic Bank. The agreement will be extended on each annual anniversary date to provide for a three-year term unless either party provides written notice that they desire to terminate the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standardsagreement within six months of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertaintermination date. Prior to the maintenanceamendment, the Employment Agreement renewed annually each year unless either party provided written notice that it desired to terminate the Employment Agreement within six months of records that, in reasonable detail, accurately and fairly reflectany annual renewal date.  Except for the transactions and dispositionsextension described herein, the terms of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting mayEmployment Agreement were not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Republic First Bancorp, Inc. and Subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on the COSO criteria.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Republic First Bancorp, Inc. and Subsidiaries as of December 31, 2013, and the related consolidated statements of operations, comprehensive income (loss), changes in shareholders’ equity, and cash flows for the year then ended and our report dated March 24, 2014 expressed an unqualified opinion.



Harrisburg, Pennsylvania
March 24, 2014
114
Item 9B:  Other Information
None.
changed.
 
PART III

Item 10:Directors, Executive Officers and Corporate Governance
 
Except as set forth below, the information required by this Item is incorporated by reference from the definitive proxy materials of the Company to be filed with the Securities and Exchange Commission in connection with the Company’s 2014Company's 2017 annual meeting of shareholders, including, but not necessarily limited to, the sections entitled “Board"Board of Directors and Committees”Committees" and “Executive"Executive Officers and Compensation.”"

The Company has adopted a code of ethics that applies to the Company’sCompany's principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. The text of the Company’sCompany's code of ethics is available on the Company’sCompany's website at www.myrepublicbank.com. We intend to disclose any changes in or revision to our code of ethics on our website, if applicable.

Item 11:  Executive Compensation
 
The information required by this Item is incorporated by reference from the definitive proxy materials of the Company to be filed with the Securities and Exchange Commission in connection with the Company’s 2014Company's 2017 annual meeting of shareholders, including, but not necessarily limited to, the section entitled “Executive"Executive Officers and Compensation.”"
 




Item 12:  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 
Except as set forth below, the information required by this Item is incorporated by reference from the definitive proxy materials of the Company to be filed with the Securities and Exchange Commission in connection with the Company’s 2014Company's 2017 annual meeting of shareholders, including, but not necessarily limited to, the section entitled “Security"Security Ownership of Certain Beneficial Owners and Management.”"

The following table sets forth information as of December 31, 2013,2016, with respect to the shares of common stock that may be issued under the Company’sCompany's existing equity compensation plans.

 
 
 
 
Plan Category
 
Number of Shares to
be Issued Upon
Exercise of
Outstanding Options, Warrants and Rights
  
Weighted-Average Exercise Price of Outstanding
Options, Warrants
and Rights
  
Number of Shares Remaining
Available for Future Issuance
Under Equity Compensation
Plans (Excluding Securities
Reflected in First Column)
 
Equity compensation plans approved by security holders  
2,331,400
  $3.70   4,789,177(1)(2)  
              
Equity compensation plans not approved by security holders  
-
   
-
   
-
  
              
Total  2,331,400  $3.70   4,789,177(1)(2)  
 
 
 
 
Plan Category
 Number of Shares to be Issued Upon Exercise of Outstanding Options, Warrants and Rights  Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights  Number of Shares Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in First Column) 
Equity compensation plans approved by security holders  1,215,530  $3.66   (1)
  ��          
Equity compensation plans not approved by security holders  -   -   - 
             
Total  1,215,530  $3.66   (1)

(1)Pursuant to the terms of the Stock Option and Restricted Stock Plan, as amended and restated in 2005, no additional equity awards were issuable after November 14, 2015.

 (1)The Amended and Restated Stock Option and Restricted Stock Plan includes an “evergreen formula” which provides that the  maximum number of shares which may be issued is 1,540,000 shares plus an annual increase equal to the number of shares required to restore the maximum number of shares available for grant to 1,540,000 shares.
(2)The 2014 Republic First Bancorp, Inc. Equity Incentive Plan provides for 2,600,000 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, to be available for such grants.

115
Item 13:  Certain Relationships and Related Transactions, and Director Independence
 
The information required by this Item is incorporated by reference from the definitive proxy materials of the Company to be filed with the Securities and Exchange Commission in connection with the Company’s 2014Company's 2017 annual meeting of shareholders, including, but not necessarily limited to, the sections entitled “Certain"Certain Relationships and Related Transactions”Transactions" and “Board"Board of Directors and Committees.”"
 
Item 14.14:  Principal Accountant Fees and Services
 
The information required by this Item is incorporated by reference from the definitive proxy materials of the Company to be filed with the Securities and Exchange Commission in connection with the Company’s 2014Company's 2017 annual meeting of shareholders, including, but not necessarily limited to, the section entitled “Information"Information Regarding Independent Registered Public Accounting Firm”Firm".


138

PART IV

Item 15.15:  Exhibits, Financial Statement Schedules

(a)(1) The following financial statements and related documents of Republic First Bancorp, Inc. are filed as part of this Annual Report on Form 10-K in Part II – Item 8 “Financial"Financial Statements and Supplementary Data”Data":
a.Consolidated Balance Sheets as of December 31, 20132016 and 2012;2015;
b.Consolidated Statements of OperationsIncome for the years ended December 31, 2013, 20122016, 2015, and 2011;2014;
c.Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2013, 20122016, 2015, and 2011;2014;
d.Consolidated Statements of Cash Flows for the years ended December 31, 2013, 20122016, 2015, and 2011;2014;
e.Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2013, 20122016, 2015, and 2011;2014; and
f.Notes to Consolidated Financial Statements.

(a)(2) None

(a)(3) The exhibits filed or furnished, as applicable, as part of this report are listed under Exhibits at subsection (b) of this Item 15.

(b)Exhibits

The following Exhibits are filed as part of this report.


Exhibit
Number
 
Description
 
Location
3.1Amended and Restated Articles of Incorporation of Republic First Bancorp, Inc.Incorporated by reference to Form 8-K filed May 13, 2010
Filed Herewith
   
3.2Amended and Restated By-Laws of Republic First Bancorp, Inc.Incorporated by reference to Form S-1 filed April 23, 2010  (333-166286)
116

Exhibit
Number
Description
Location
4.1The Company will furnish to the SEC upon request copies of the following documents relating to the Company’sCompany's Floating Rate Junior Subordinated Debt Securities due 2037:  (i) Indenture dated as of December 27, 2006, between the Company and Wilmington Trust Company, as trustee; (ii) Amended and Restated Declaration of Trust of Republic Capital Trust II, dated as of December 27, 2006; and (iii) Guarantee Agreement dated as of December 27, 2006, between the Company and Wilmington Trust Company, as trustee, for the benefit of the holders of the capital securities of Republic Capital Trust II 
139
Exhibit
Number
 
Description
Location
4.2The Company will furnish to the SEC upon request copies of the following documents relating to the Company’sCompany's Floating Rate Junior Subordinated Debt Securities due 2037: (i) Indenture dated as of June 28, 2007, between the Company and Wilmington Trust Company, as trustee; (ii) Amended and Restated Declaration of Trust of Republic Capital Trust III, dated as of June 28, 2007; and (iii) Guarantee Agreement dated as of June 28, 2007, between the Company and Wilmington Trust Company, as trustee, for the benefit of the holders of the capital securities of Republic Capital Trust III 
   
4.3The Company will furnish to the SEC upon request copies of the following documents relating to the Company’sCompany's Fixed Rate Junior Subordinated Convertible Debt Securities due 2038: (i) Indenture dated as of June 10, 2008, between the Company and Wilmington Trust Company, as trustee; (ii) Amended and Restated Declaration of Trust of Republic First Bancorp Capital Trust IV, dated as of June 10, 2008; and (iii) Guarantee Agreement dated as of June 10, 2008, between the Company and Wilmington Trust Company, as trustee, for the benefit of the holders of the capital securities of Republic First Bancorp Capital Trust IV 
   
10.1Form of Employment Agreement, between the Companydated July 1, 2015, by and Harry D. Madonna, dated May 10, 2013*among, certain named Executive Officers, Republic First Bancorp, Inc. and Republic First Bank*Incorporated by reference to Form 10-Q8-K filed May 10, 2013July 14, 2015
   
117

Exhibit
Number
Description
Location
10.2Amended and Restated Stock Option Plan and Restricted Stock Plan*Incorporated by reference to Form 10-K filed March 10, 2008
   
10.3Deferred Compensation Plan*Incorporated by reference to Form 10-K filed March 16, 2010
   
10.4Amended and Restated Supplemental Retirement Plan Agreements between Republic First Bank and Certain Directors*Incorporated by reference to Form 10-Q filed November 7, 2008
   
140

Exhibit
Number
Description
Location
10.5Purchase Agreement among Republic First Bancorp, Inc., Republic First Bancorp Capital Trust IV, and Purchasers of the Trust IV Capital  SecuritiesIncorporated by reference to Form 10-Q filed November 7, 2008
   
10.6Registration Rights Agreement among Republic First Bancorp, Inc. and the Holders of the Trust IV Capital SecuritiesIncorporated by reference to Form10-Q filed November 7, 2008
   
10.7Consulting Agreement, dated March 9, 2017, between Republic First Bancorp, Inc. and Vernon W. Hill IIIncorporated by reference to Form 10-Q filed November 7, 2008
Filed Herewith
   
10.8Employment Agreement, betweendated May 10, 2013, by and among Harry D. Madonna, Republic First BankBancorp, Inc., and Andrew J. Logue,Republic First Bank*Incorporated by reference to Form 10-Q filed on May 10, 2013
10.9First Amendment to Employment Agreement, dated AugustMarch 18, 2015, by and among Harry D. Madonna, Republic First Bancorp, Inc. and Republic First Bank*Incorporated by reference to Form 8-K filed on March 20, 2008*2015
10.10Form of Option Award*Incorporated by reference to Form S-1 filed April 23, 2010 (333-166286)
   
10.910.11Employment Agreement between Republic First Bank and Rhonda S. Costello, dated August 25, 2008*Bancorp, Inc. 2014 Equity Incentive Plan*Incorporated by reference to the definitive proxy statement on Schedule 14A filed on March 26, 2014
10.12
Form of Incentive Stock Option Award – 2014 Equity Incentive Plan*
Incorporated by reference to Form S-110-K filed April 23, 2010 (333-166286)on March 13, 2015
   
10.1010.13Form of Nonqualified Stock Option Award*Award – 2014 Equity Incentive Plan*Incorporated by reference to Form S-110-K filed April 23, 2010 (333-166286)on March 13, 2015
   
10.1110.14Amendment to EmploymentForm of Investment Agreement by and between Andrew J. Logue and Republic First Bank, dated April 26, 2010*Incorporated by reference to Form 8-K filed May 4, 2010on April 22, 2014
  
10.12
Amendment to Employment Agreement, by and between Andrew J. Logue and Republic First Bank, dated March 13, 2013.*
Incorporated by reference to Form 10-Q filed May 10, 2013
10.13
Amendment to Employment Agreement, by and between Rhonda Costello and Republic First Bank, dated March 13, 2013.*
Incorporated by reference to Form 10-Q filed May 10, 2013
10.14
Letter Agreement, by and between Jay Neilon and the Company, dated March 13, 2013.*
Incorporated by reference to Form 10-Q filed May 10, 2013
   
10.15
Letter
Limited Liability Company Purchase Agreement dated July 26, 2016 by and between Frank A. Cavallaroamong, Republic First Bank d/b/a Republic Bank and theOwners of Oak Mortgage Company, dated March 13, 2013.*
LLC		Incorporated by reference to Form 10-Qform 8-K filed May 10, 2013August 1, 2016
118

Exhibit
Number
Description
Location
21.1Subsidiaries of the Company
Filed Herewith
   
23.1Consent of BDO USA, LLP 
Filed Herewith
   
23.2Consent of ParenteBeard LLC
Filed Herewith
  
31.1Rule 13a-14(a)/15d-14(a) Certification of Chairman and Chief Executive Officer of Republic First Bancorp, Inc.
Filed Herewith

141
Exhibit
Number
Description
Location
31.2Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer of Republic First Bancorp, Inc.
Filed Herewith
   
32.1Section 1350 Certification of Harry D. Madonna
Furnished Herewith
   
32.2Section 1350 Certification of Frank A. Cavallaro
Furnished Herewith
   
101
The following materials from the Company’sCompany's Annual Report on Form 10-K for the fiscal year ended December 31, 2013,2016, formatted in XBRL (eXtensible Business Reporting Language); (i) Consolidated Balance Sheets as of December 31, 20132016 and December 31, 2012,2015, (ii) Consolidated Statements of OperationsIncome for the years ended December 31, 2013, 20122016, 2015, and 2011,2014, (iii) Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2013, 20122016, 2015, and 2011,2014, (iv) Consolidated Statements of Cash Flows for the years ended December 31, 2013, 20122016, 2015, and 2011,2014, (v) Consolidated StatementStatements of Changes in Shareholders’Shareholders' Equity for the years ended December 31, 2013, 20122016, 2015, and 2011,2014, and (vi) Notes to Consolidated Financial Statements.
 
   
* Constitutes a management compensation agreement or arrangement.

(c)All financial statement schedules are omitted because the required information is not present or not present in amounts sufficient to require submission of the schedule or because the information required is included in the respective financial statements or notes thereto contained herein.
 
 
119142

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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:  March 24, 2014
10, 2017		By:
/s/ Harry D. Madonna
  Harry D. Madonna
  Chairman, President and Chief Executive Officer
  (principal executive officer)
   
Date:  March 24, 2014
10, 2017		By:
/s/ Frank A. Cavallaro
  Frank A. Cavallaro
  Executive Vice President and Chief Financial Officer
  (principal financial and accounting officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

Date:  March 24, 2014
10, 2017		By:
/s/ Robert ColemanVernon W. Hill, II
  Robert Coleman, DirectorVernon W. Hill, II, Chairman of the Board
   
Date:  March 24, 2014
10, 2017		By:
/s/ Theodore J. Flocco, Jr.
  Theodore J. Flocco, Jr., Director
   
Date:  March 24, 2014
10, 2017		By:
/s/ Lisa R. Jacobs
Lisa R. Jacobs, Director
Date:  March 10, 2017By:
/s/ Harry D. Madonna
  Harry D. Madonna, Director and Chairman of the Board
   
Date:  March 24, 2014
10, 2017		By:
/s/ Barry L. Spevak
  Barry L. Spevak, Director
   
Date:  March 24, 2014
10, 2017		By:
/s/ Brian P. Tierney
  Brian P. Tierney, Director
   
Date:  March 24, 2014
10, 2017		By:
/s/ Harris Wildstein, Esq.
  Harris Wildstein, Esq., Director



 
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143