Note

Summary of Significant Accounting Policies

Risks and Uncertainties

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

may

cause significant fluctuations in interest margins.

Mortgage Banking Activities and Mortgage Loans Held for Sale

Mortgage loans held for sale are originated and held until sold to permanent investors. 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.

Mortgage 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. Changes in fair value are reflected in mortgage banking income in the statements of income. Direct loan origination costs are recognized when incurred and are included in non-interest expense in the statements of income.

Interest Rate Lock Commitments (“IRLCs”)

Mortgage loan commitments known as interest rate locks that relate to the origination of a mortgage that will be held for sale upon funding are considered derivative instruments under the derivatives and hedging accounting guidance FASB ASC

815,

Derivatives and Hedging

. Loan commitments that are classified as derivatives are recognized at fair value on the balance sheet as other assets and other liabilities with changes in their fair values recorded as mortgage banking income and included 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

and

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

Derivatives and Risk Management Activities.

Use of Estimates

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

Significant estimates are made by management in determining the allowance for loan losses, carrying values of other real estate owned, assessment of other than temporary impairment (“OTTI”) of investment securities, fair value of financial instruments, (see “Note

7”

below), and the realization of deferred income tax assets. Consideration is given to a variety of factors in establishing these estimates.

In estimating the allowance for loan losses, management considers current economic conditions, past loss experience, diversification of the loan portfolio, delinquency statistics, results of internal loan reviews and regulatory examinations, borrowers’ perceived financial and managerial strengths, the adequacy of underlying collateral, if collateral dependent, or present value of future cash flows, and other relevant and qualitative risk factors. Subsequent to foreclosure, an estimate for the carrying value of other real estate owned is normally determined through valuations that are periodically performed by management and the assets are carried at the lower of carrying amount or fair value, less the cost to sell. Because the allowance for loan losses and carrying value of other real estate owned are dependent, to a great extent, on the general economy and other conditions that

may

be beyond the Company’s and Republic’s control, the estimates of the allowance for loan losses and the carrying values of other real estate owned could differ materially in the near term.

In estimating OTTI of investment securities, securities are evaluated on at least a quarterly basis and more frequently when market conditions warrant such an evaluation, to determine whether a decline in their value is other-than-temporary. To determine whether a loss in value is other-than-temporary, management utilizes criteria such as the reasons underlying the decline, the magnitude and duration of the decline, the intent to hold the security and the likelihood of the Company

not

being required to sell the security prior to an anticipated recovery in the fair value. The term “other-than-temporary” is

not

intended to indicate that the decline is permanent, but indicates that the prospect for a near-term recovery of value is

not

necessarily favorable, or that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of investment. Once a decline in value is determined to be other-than-temporary, the portion of the decline related to credit impairment is charged to earnings.

In evaluating the Company’s ability to recover deferred tax assets, management considers all available positive and negative evidence, including the past operating results and forecasts of future taxable income. In determining future taxable income, management makes assumptions for the amount of taxable income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions require management to make judgments about the future taxable income and are consistent with the plans and estimates used to manage the business. A material reduction in estimated future taxable income

may

require management to record a valuation allowance against the deferred tax assets. A valuation allowance would result in additional income tax expense in the period and could have a significant impact on future earnings.

Stock-Based Compensation

The Company has a Stock Option and Restricted Stock Plan (“the

2005

Plan”), under which the Company granted options, restricted stock or stock appreciation rights to the Company’s employees, directors, and certain consultants. The

2005

Plan became effective on

November 14, 1995,

and was amended and approved at the Company’s

2005

annual meeting of shareholders. Under the terms of the

2005

Plan,

1.5

million shares of common stock, plus an annual increase equal to the number of shares needed to restore the maximum number of shares that could be available for grant under the

2005

Plan to

1.5

million shares, were available for such grants. As of

June 30, 2018,

the only grants under the

2005

Plan were option grants. The

2005

Plan provided that the exercise price of each option granted equaled the market price of the Company’s stock on the date of the grant. Options granted pursuant to the

2005

Plan vest within

one

four

years and have a maximum term of

years. The

2005

Plan terminated on

November 14, 2015

in accordance with the terms and conditions specified in the Plan agreement.

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

less than

10%

of the outstanding shares or such lower number as the Board of Directors

may

determine, are available for such grants. At

June 30, 2018,

the maximum number of common shares issuable under the

2014

Plan was

6.0

million shares. During the

six

months ended

June 30, 2018,

1,069,800

options were granted under the

2014

Plan with a fair value of

$2,953,673.

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

2018

and

2017

are as follows:

	201 8				201 7
Dividend yield (1)			0.0%				0.0%
Expected volatility			28.22%	(2)	45.50%	to	50.09%	(3)
Risk-free interest rate (4)	2.35%	to	2.91%		1.89%	to	2.26%
Expected life (in years) (5 )			6.25		5.5	to	7.0
Assumed forfeiture rate (6 )			4.0%				6.0%

(

)

A dividend yield of

0.0%

is utilized because cash dividends have never been paid.

(

)

The expected volatility was based on the historical volatility of the Company’s common stock price as adjusted for certain historical periods of extraordinary volatility in order to provide a basis for a reasonable estimate of fair value.

(

)

Expected volatility is based on Bloomberg’s

five

and

one

-half to

seven

year volatility calculation for “FRBK” stock.

(

)

The risk-free interest rate is based on the

five

seven

year Treasury bond.

(

)

The expected life reflects a

year vesting period, the maximum

ten

year term and review of historical behavior.

(

)

Forfeiture rate is determined through forfeited and expired options as a percentage of options granted over the current

three

year period.

During the

six

months ended

June 30, 2018

and

2017,

717,364

shares and

492,624

shares vested, respectively. Expense is recognized ratably over the period required to vest. At

June 30, 2018,

the intrinsic value of the

3,886,775

options outstanding was

$8.1

million, while the intrinsic value of the

1,918,112

exercisable (vested) options was

$6.7

million. At

June 30, 2017,

the intrinsic value of the

3,044,325

options outstanding was

$13.0

million, while the intrinsic value of the

1,353,223

exercisable (vested) options was

$7.6

million. During the

six

months ended

June 30, 2018,

145,475

options were exercised resulting in cash receipts of

$561,082

and

43,375

options were forfeited with a weighted average grant date fair value of

$124,944.

During the

six

months ended

June 30, 2017,

179,475

options were exercised resulting in cash receipts of

$590,521

and

9,600

options were forfeited with a weighted average grant date fair value of

$43,581.

Information regarding stock based compensation for the

six

months ended

June 30, 2018

and

2017

is set forth below:

	201 8		201 7
Stock based compensation expense recognized	$	1,052,000	$	817,000
Number of unvested stock options		1,968,663		1,691,102
Fair value of unvested stock options	$	5,555,672	$	4,596,379
Amount remaining to be recognized as expense	$	4,387,864	$	3,453,675

The remaining unrecognized expense amount of

$4,387,864

will be recognized ratably as expense through

June 2022.

Earnings per Share

Earnings per share (“EPS”) consists of

two

separate components: basic EPS and diluted EPS. Basic EPS is computed by dividing net income by the weighted average number of common shares outstanding for each period presented. Diluted EPS is calculated by dividing net income by the weighted average number of common shares outstanding plus dilutive common stock equivalents (“CSEs”). CSEs consist of dilutive stock options granted through the Company’s stock option plans for the

three

and

six

months ended

June 30, 2018.

CSEs consisted of dilutive stock options granted through the Company’s stock option plans and convertible securities related to trust preferred securities issued in

2008

for the

three

and

six

months ended

June 30, 2017.

The convertible securities related to trust preferred securities issued in

2008

fully converted to common stock in

2018.

There was

interest expense in

2018

related to the trust preferred securities issuance. In the diluted EPS computation, the after tax interest expense on the trust preferred securities issuance would normally be added back to the net income for the

three

and

six

months ended

June 30, 2017.

However, 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.

The calculation of EPS for the

three

and

six

months ended

June 30, 2018

and

2017

is as follows (in thousands, except per share amounts):

	Three Months Ended June 30,				Six Months Ended June 30,
	2018		2017		2018		2017

Net income (basic and diluted)	$	2,371	$	2,059	$	4,148	$	3,846

Weighted average shares outstanding		58,746		56,945		57,927		56,885

Net income per share – basic	$	0.04	$	0.04	$	0.07	$	0.07

Weighted average shares outstanding (including dilutive CSEs)		59,911		58,301		59,147		58,165

Net income per share – diluted	$	0.04	$	0.04	$	0.07	$	0.07

The following is a summary of securities that could potentially dilute basic earnings per common share in future periods. These securities were

not

included in the computation of diluted earnings per common share because the effect would have been anti-dilutive for the periods presented.

(in thousands)	Three Months Ended June 30,				Six Months Ended June 30,
	2018		2017		2018		2017

Anti-dilutive securities

Share based compensation awards		2,721		1,688		2,666		1,764

Convertible securities		-		1,625		-		1,625

Total anti-dilutive securities		2,721		3,313		2,666		3,389

Recent Accounting Pronouncements

ASU

2014

May 2014,

the FASB issued Accounting Standards Update (“ASU”)

2014

09,

“Revenue from Contracts with Customers (Topic

660

): Summary and Amendments that Create Revenue from Contracts with Customers (Topic

606

) and Other Assets and Deferred Costs – Contracts with Customers (Subtopic

340

).”

ASU

2014

implements a common revenue standard that clarifies the principles for recognizing revenue. The guidance in this update supersedes the revenue recognition requirements in ASC Topic

605,

Revenue Recognition, and most industry-specific guidance throughout the industry topics of the codification. 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 core principle of ASU

2014

is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The Company’s revenue is comprised of net interest income and noninterest income. The scope of the guidance explicitly excludes interest income as well as many other revenues for financial assets and liabilities including revenue derived from loans, investment securities, and derivatives. This ASU was effective for the Company on

January 1, 2018.

The Company adopted this ASU on a modified retrospective approach. Since there was

net income impact upon adoption of the new guidance, a cumulative effect adjustment to opening retained earnings was

not

deemed necessary. The adoption of this ASU did

not

have a material impact to its financial condition, results of operations, and consolidated financial statements. Refer to Note

11:

Revenue Recognition for further disclosure as to the impact of Topic

606.

ASU

2016

January 2016,

the FASB issued ASU

No.

2016

01,

Financial Instruments - Overall.

The guidance in this ASU among other things, (

) requires equity investments with certain exceptions, to be measured at fair value with changes in fair value recognized in net income, (

) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment, (

) 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, (

) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, (

) 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, (

) 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 (

) 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 guidance was effective for the Company on

January 1, 2018

and was adopted using a modified retrospective approach. The adoption of ASU

No.

2016

January 1, 2018

did

not

have a material impact on the Company’s Consolidated Financial Statements. In accordance with (

) above, the Company measured the fair value of its loan portfolio as of

June 30, 2018

using an exit price notion (see Note

Fair Value of Financial Instruments).

ASU

2016

February 2016,

the FASB issued ASU

No.

2016

02,

Leases.

From the Company’s perspective, the new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than

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. The Company is currently evaluating the impact of the ASU on its financial condition and results of operations and expects to recognize right-of-use assets and lease liabilities for substantially all of its operating lease commitments based on the present value of unpaid lease payments as of the date of adoption. The Company does

not

intend to early adopt this ASU.

ASU

2016

March 2016,

the FASB issued ASU

No.

2016

, Compensation – Stock Compensation: Improvements to Employee Share-Based Payment Accounting

. ASU

2016

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

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

was effective

January 1, 2017.

There was

material impact on the consolidated financial statements upon adoption.

ASU

2016

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. The Company is currently evaluating the impact of this ASU, continuing its implementation efforts and reviewing the loss modeling requirements consistent with lifetime expected loss estimates. The Company expects that the new model will include different assumptions used in calculating credit losses, such as estimating losses over the estimated life of a financial asset and will consider expected future changes in macroeconomic conditions. The adoption of this ASU

may

result in an increase to the Company's allowance for loan losses which will depend upon the nature and characteristics of the Company's loan portfolio at the adoption date, as well as the macroeconomic conditions and forecasts at that date. For the Company, this update will be effective for interim and annual periods beginning after

December 15, 2019.

The Company currently does

not

intend to early adopt this new guidance.

ASU

2016

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 was adopted on

January 1, 2018,

on a retrospective basis. The adoption of

2016

did

not

result any changes in classifications in the Consolidated Statement of Cash Flows.

ASU-

2017

January 2017,

the FASB issued ASU

2017

01,

Business Combinations (Topic

805

)

. The ASU clarifies the definition of a business in ASC

805.

The FASB issued the ASU in response to stakeholder feedback that the definition of a business in ASC

805

is being applied too broadly. In addition, stakeholders said that analyzing transactions under the current definition is difficult and costly. Concerns about the definition of a business were among the primary issues raised in connection with the Financial Accounting Foundation’s post-implementation review report on FASB Statement

No.

141

(R), Business Combinations (codified in ASC

805

). The amendments in the ASU are intended to make application of the guidance more consistent and cost-efficient. The ASU is effective for public business entities in annual periods beginning after

December 15, 2017,

including interim periods therein. For all other entities, the ASU is effective in annual periods beginning after

December 15, 2018,

and interim periods within annual periods beginning after

December 15, 2019.

The ASU must be applied prospectively on or after the effective date, and

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. Unless the Company enters into a business combination, the impact of the ASU will

not

have a material impact on the consolidated financial statements.

ASU

2017

January 2017,

the FASB issued ASU

2017

04,

Simplifying the Test For Goodwill Impairment.

The ASU simplifies the accounting for goodwill impairments by eliminating step

from the goodwill impairment test. Instead, if “the carrying amount of a reporting unit exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit.” For public business entities that are SEC filers, the ASU is effective for annual and any interim impairment tests for periods beginning after

December 15, 2019.

The Company has

not

yet determined the impact the adoption of ASU

2017

will have on the consolidated financial statements.

ASU

2017

March 2017,

the FASB issued ASU

2017

08,

Premium Amortization on Purchased Callable Debt Securities,

which amends the amortization period for certain purchased callable debt securities held at a premium, shortening such period to the earliest call date. The ASU is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after

December 15, 2018.

For all other entities, the ASU is effective for fiscal years beginning after

December 15, 2019,

and interim periods within fiscal years beginning after

December 15, 2020.

Earlier application is permitted for all entities, including adoption in an interim period. If an entity early adopts the ASU in an interim period, any adjustments must be reflected as of the beginning of the fiscal year that includes that interim period. The Company has

not

yet determined the impact the adoption of ASU

2017

will have on the consolidated financial statements.

ASU

2018

February 2018,

the FASB issued ASU

2018

02,

Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income

, which allows for reclassification from accumulated other comprehensive income (loss) to retained earnings for stranded tax effects resulting from the

2017

Tax Cuts and Jobs Act described in the "Income Taxes" section below. The amount of the reclassification should include the effect of the change in the federal corporate income tax rate related to items remaining in accumulated other comprehensive income (loss). The ASU would require an entity to disclose whether it elects to reclassify stranded tax effects from accumulated other comprehensive income (loss) to retained earnings in the period of adoption and, more generally, a description of the accounting policy for releasing income tax effects from accumulated other comprehensive income (loss). The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after

December 15, 2018.

Early adoption of the amendments in this update is permitted for periods for which financial statements have

not

yet been issued or made available for issuance, including in the period the Act was enacted. The Company adopted this ASU on

January 1, 2018,

by recording the reclassification adjustment to its beginning retained earnings in the amount of

$1.6

million. The Company utilized the portfolio approach when releasing tax effects from AOCI for its investment securities.

ASU

2018

February

2018,

the FASB Issued ASU

2018

03,

Technical Corrections and Improvements to Financial Instruments—Overall (Subtopic

825

The ASU was issued to clarify certain aspects of ASU

2016

such as treatment for discontinuations and adjustments for equity securities without a readily determinable market value, forward contracts and purchased options, presentation requirements for certain fair value option liabilities, fair value option liabilities denominated in a foreign currency, and transition guidance for equity securities without a readily determinable fair value. The Company adopted this ASU on

January 1, 2018.

The adoption of this ASU did

not

have a significant impact on the Company’s financial condition, results of operations and consolidated financial statements.