##### Table of Contents





UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549





FORM 10-Q







|x | QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------

For Quarterly Period Ended: September 30, 2008

OR



| ̈ | TRANSITION REPORT UNDER SECTIONS 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ------------------------------------------------------------------------------------

Commission File Number: 000-52032





MONARCH FINANCIAL HOLDINGS,
INC.

(Exact name of registrant as specified in its charter)







|                                                               |  |                                    
|-------------------------------------------------------------- |  | -----------------------------------
|VIRGINIA                                                       |  | 20-4985388                         
|(State of other jurisdiction of Incorporation or organization) |  | (I.R.S. Employer Identification No.



|                                           |  |           
|------------------------------------------ |  | ----------
|1101 Executive Drive, Chesapeake, Virginia |  | 23320     
|(Address of principal executive offices)   |  | (Zip Code)

(757) 389-5112

(Registrants telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)





Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to filed 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 is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of Accelerated Filer and Large Accelerated Filer in Rule 12b-2
of the Exchange Act.

Large accelerated filer    ̈    Accelerated
filer   ̈    Non-accelerated filer  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



APPLICABLE ONLY TO CORPORATE
ISSUERS:

Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.

Common Stock, $5.00 Par Value  5,688,580 as of November 14, 2008.









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##### Table of Contents

MONARCH FINANCIAL HOLDINGS, INC.

FORM 10-Q

SEPTEMBER 30, 2008

INDEX



|         |  |         |  |                                                                                                                 |  |   
|-------- |  | ------- |  | --------------------------------------------------------------------------------------------------------------- |  | --
|PART I.  |  |         |  | FINANCIAL INFORMATION                                                                                           |  |   
|         |  |         | 
|         |  | ITEM 1. |  | Consolidated Statements of Condition as of September 30, 2008 and December 31, 2007                             |  | 3 
|         |  |         | 
|         |  |         |  | Consolidated Statements of Income for the three and nine months ended September 30, 2008 and September 30, 2007 |  | 4 
|         |  |         | 
|         |  |         |  | Consolidated Statements of Stockholders Equity for the periods ended September 30, 2008 and September 30, 2007 |  | 5 
|         |  |         | 
|         |  |         |  | Consolidated Statements of Cash Flows for the periods ended September 30, 2008 and September 30, 2007           |  | 6 
|         |  |         | 
|         |  |         |  | Notes to Consolidated Financial Statements                                                                      |  | 7 
|         |  |         | 
|         |  | ITEM 2. |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                           |  | 15
|         |  |         | 
|         |  | ITEM 3. |  | Quantitative and Qualitative Disclosures about Market Risk                                                      |  | 26
|         |  |         | 
|         |  | ITEM 4. |  | Controls and Procedures                                                                                         |  | 27
|         |  |         | 
|PART II. |  |         |  | OTHER INFORMATION                                                                                               |  |   
|         |  |         | 
|         |  | Item 1. |  | Legal Proceedings                                                                                               |  | 28
|         |  |         | 
|         |  | Item 2. |  | Changes in Securities                                                                                           |  | 28
|         |  |         | 
|         |  | Item 3. |  | Defaults Upon Senior Securities                                                                                 |  | 28
|         |  |         | 
|         |  | Item 4. |  | Submissions of Matters to Vote of Security Holders                                                              |  | 28
|         |  |         | 
|         |  | Item 5. |  | Other Information                                                                                               |  | 28
|         |  |         | 
|         |  | Item 6. |  | Exhibits                                                                                                        |  | 29



2



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##### Table of Contents

PART IFINANCIAL INFORMATION



|ITEM 1. | FINANCIAL STATEMENTS
|------- | --------------------

MONARCH FINANCIAL
HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CONDITION



|                                                                                                                              |  |               |             |   |              |   |             |  
|----------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ----------- | - | ------------ | - | ----------- | -
|                                                                                                                              |  | Unaudited     |             |   | Audited      |  
|                                                                                                                              |  | September 30, |             |   | December 31, |  
|                                                                                                                              |  | 2008          |             |   | 2007         |  
|ASSETS:                                                                                                                       |  |               |             |   |              |   |             |  
|Cash and due from banks                                                                                                       |  | $             | 14,060,431  |   |              | $ | 8,409,011   |  
|Interest bearing bank balances                                                                                                |  |               | 93,850      |   |              |   | 992,539     |  
|Federal funds sold                                                                                                            |  |               |            |   |              |   | 63,000      |  
|                                                                                                                              |  |               |             |   |              |   |             |  
|Total cash and cash equivalents                                                                                               |  |               | 14,154,281  |   |              |   | 9,464,550   |  
|                                                                                                                              |  |              
|Investment securities held-to-maturity, at cost                                                                               |  |               | 500,000     |   |              |   | 22,084,559  |  
|Investment securities available-for-sale, at fair value                                                                       |  |               | 17,290,441  |   |              |   | 8,873,740   |  
|Loans held for sale                                                                                                           |  |               | 36,395,041  |   |              |   | 18,792,568  |  
|                                                                                                                              |  |              
|Loans, net of unearned income                                                                                                 |  |               | 501,052,390 |   |              |   | 419,153,283 |  
|Less: allowance for loan losses                                                                                               |  |               | (4,991,000  | ) |              |   | (3,976,000  | )
|                                                                                                                              |  |               |             |   |              |   |             |  
|Loans, net                                                                                                                    |  |               | 496,061,390 |   |              |   | 415,177,283 |  
|                                                                                                                              |  |              
|Property and equipment, net                                                                                                   |  |               | 10,274,609  |   |              |   | 9,719,217   |  
|Restricted equity securities                                                                                                  |  |               | 3,756,650   |   |              |   | 4,847,600   |  
|Bank owned life insurance                                                                                                     |  |               | 6,724,026   |   |              |   | 6,543,665   |  
|Goodwill                                                                                                                      |  |               | 775,000     |   |              |   | 775,000     |  
|Intangible assets                                                                                                             |  |               | 1,041,670   |   |              |   | 1,175,599   |  
|Other real estate owned                                                                                                       |  |               | 410,288     |   |              |   |            |  
|Other assets                                                                                                                  |  |               | 7,451,381   |   |              |   | 5,709,990   |  
|                                                                                                                              |  |               |             |   |              |   |             |  
|Total assets                                                                                                                  |  | $             | 594,834,777 |   |              | $ | 503,163,771 |  
|                                                                                                                              |  |               |             |   |              |   |             |  
|                                                                                                                              |  |              
|LIABILITIES:                                                                                                                  |  |               |             |   |              |   |             |  
|Deposits:                                                                                                                     |  |               |             |   |              |   |             |  
|Noninterest-bearing                                                                                                           |  | $             | 73,378,530  |   |              | $ | 66,078,161  |  
|Interest-bearing                                                                                                              |  |               | 425,325,547 |   |              |   | 323,626,118 |  
|                                                                                                                              |  |               |             |   |              |   |             |  
|Total deposits                                                                                                                |  |               | 498,704,077 |   |              |   | 389,704,279 |  
|                                                                                                                              |  |              
|Borrowings:                                                                                                                   |  |               |             |   |              |   |             |  
|Trust preferred subordinated debt                                                                                             |  |               | 10,000,000  |   |              |   | 10,000,000  |  
|Federal Home Loan Bank advances                                                                                               |  |               | 31,700,255  |   |              |   | 63,531,200  |  
|Federal funds purchased                                                                                                       |  |               | 4,790,000   |   |              |   |            |  
|                                                                                                                              |  |               |             |   |              |   |             |  
|Total borrowings                                                                                                              |  |               | 46,490,255  |   |              |   | 73,531,200  |  
|                                                                                                                              |  |              
|Other liabilities                                                                                                             |  |               | 3,236,754   |   |              |   | 3,322,094   |  
|                                                                                                                              |  |               |             |   |              |   |             |  
|Total liabilities                                                                                                             |  |               | 548,431,086 |   |              |   | 466,557,573 |  
|                                                                                                                              |  |               |             |   |              |   |             |  
|Minority interest in subsidiaries                                                                                             |  |               | 109,749     |   |              |   | 57,702      |  
|                                                                                                                              |  |              
|STOCKHOLDERS EQUITY:                                                                                                         |  |               |             |   |              |   |             |  
|Preferred stock, $5 par value, 2,000,000 shares authorized, none issued                                                       |  |               |            |   |              |   |            |  
|Common stock, $5 par value, 20,000,000 shares authorized, issued and outstanding 5,688,580 and 4,827,505 shares, respectively |  |               | 28,442,900  |   |              |   | 24,137,525  |  
|Additional paid-in capital                                                                                                    |  |               | 7,810,466   |   |              |   | 5,008,121   |  
|Retained earnings                                                                                                             |  |               | 10,087,272  |   |              |   | 7,419,711   |  
|Accumulated other comprehensive loss                                                                                          |  |               | (46,696     | ) |              |   | (16,861     | )
|                                                                                                                              |  |               |             |   |              |   |             |  
|Total stockholders equity                                                                                                    |  |               | 46,293,942  |   |              |   | 36,548,496  |  
|                                                                                                                              |  |               |             |   |              |   |             |  
|Total liabilities and stockholders equity                                                                                    |  | $             | 594,834,777 |   |              | $ | 503,163,771 |  
|                                                                                                                              |  |               |             |   |              |   |             |  

The accompanying notes are an integral part of these consolidated financial statements.



3



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##### Table of Contents

|ITEM 1. | FINANCIAL STATEMENTS(Continued)
|------- | -------------------------------

MONARCH
FINANCIAL HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF INCOME

(unaudited)



|                                                    |  |                              |           |   |                              |   |           |      |  |   |            |   |  |   |            |  
|--------------------------------------------------- |  | ---------------------------- | --------- | - | ---------------------------- | - | --------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                                    |  | 3 Months Ended September 30, |           |   | 9 Months Ended September 30, |  
|                                                    |  | 2008                         |           |   | 2007                         |   |           | 2008 |  |   | 2007       |  
|Interest income:                                    |  |                              |           |   |                              |   |           |      |  |   |            |   |  |   |            |  
|Interest and fees on loans                          |  | $                            | 7,214,451 |   |                              | $ | 7,804,504 |      |  | $ | 21,611,652 |   |  | $ | 21,811,033 |  
|Interest on investment securities                   |  |                              | 141,123   |   |                              |   | 135,815   |      |  |   | 367,649    |   |  |   | 444,404    |  
|Interest on federal funds sold                      |  |                              | 5,560     |   |                              |   | 6,873     |      |  |   | 17,444     |   |  |   | 18,522     |  
|Dividends on equity securities                      |  |                              | 41,852    |   |                              |   | 43,916    |      |  |   | 162,206    |   |  |   | 121,513    |  
|Interest on other bank accounts                     |  |                              | 10,060    |   |                              |   | 22,992    |      |  |   | 65,040     |   |  |   | 57,283     |  
|                                                    |  |                              |           |   |                              |   |           |      |  |   |            |   |  |   |            |  
|Total interest income                               |  |                              | 7,413,046 |   |                              |   | 8,014,100 |      |  |   | 22,223,991 |   |  |   | 22,452,755 |  
|                                                    |  |                              |           |   |                              |   |           |      |  |   |            |   |  |   |            |  
|Interest expense:                                   |  |                              |           |   |                              |   |           |      |  |   |            |   |  |   |            |  
|Interest on deposits                                |  |                              | 2,962,457 |   |                              |   | 3,351,765 |      |  |   | 9,471,758  |   |  |   | 9,067,897  |  
|Interest on trust preferred subordinated debt       |  |                              | 112,460   |   |                              |   | 173,963   |      |  |   | 384,789    |   |  |   | 525,668    |  
|Interest on borrowings                              |  |                              | 435,059   |   |                              |   | 397,875   |      |  |   | 1,272,451  |   |  |   | 950,887    |  
|                                                    |  |                              |           |   |                              |   |           |      |  |   |            |   |  |   |            |  
|Total interest expense                              |  |                              | 3,509,976 |   |                              |   | 3,923,603 |      |  |   | 11,128,998 |   |  |   | 10,544,452 |  
|                                                    |  |                              |           |   |                              |   |           |      |  |   |            |   |  |   |            |  
|Net interest income                                 |  |                              | 3,903,070 |   |                              |   | 4,090,497 |      |  |   | 11,094,993 |   |  |   | 11,908,303 |  
|                                                    |  |                              |           |  
|Provision for loan losses                           |  |                              | 480,581   |   |                              |   | 384,518   |      |  |   | 1,244,613  |   |  |   | 643,518    |  
|                                                    |  |                              |           |   |                              |   |           |      |  |   |            |   |  |   |            |  
|Net interest income after provision for loan losses |  |                              | 3,422,489 |   |                              |   | 3,705,979 |      |  |   | 9,850,380  |   |  |   | 11,264,785 |  
|                                                    |  |                              |           |   |                              |   |           |      |  |   |            |   |  |   |            |  
|Non-interest income:                                |  |                              |           |   |                              |   |           |      |  |   |            |   |  |   |            |  
|Mortgage banking income                             |  |                              | 4,444,302 |   |                              |   | 1,567,605 |      |  |   | 13,207,029 |   |  |   | 2,626,483  |  
|Investment and insurance commissions                |  |                              | 294,671   |   |                              |   | 288,825   |      |  |   | 991,095    |   |  |   | 835,129    |  
|Service charges and fees                            |  |                              | 357,395   |   |                              |   | 257,155   |      |  |   | 1,021,517  |   |  |   | 772,325    |  
|Other                                               |  |                              | 173,174   |   |                              |   | 91,916    |      |  |   | 642,422    |   |  |   | 258,997    |  
|                                                    |  |                              |           |   |                              |   |           |      |  |   |            |   |  |   |            |  
|Total noninterest income                            |  |                              | 5,269,542 |   |                              |   | 2,205,501 |      |  |   | 15,862,063 |   |  |   | 4,492,934  |  
|                                                    |  |                              |           |   |                              |   |           |      |  |   |            |   |  |   |            |  
|Non-interest expenses:                              |  |                              |           |   |                              |   |           |      |  |   |            |   |  |   |            |  
|Salaries and employee benefits                      |  |                              | 4,714,837 |   |                              |   | 3,715,722 |      |  |   | 14,222,938 |   |  |   | 8,182,312  |  
|Occupancy expenses                                  |  |                              | 545,350   |   |                              |   | 344,897   |      |  |   | 1,593,265  |   |  |   | 926,935    |  
|Furniture and equipment expenses                    |  |                              | 330,712   |   |                              |   | 219,845   |      |  |   | 951,103    |   |  |   | 521,051    |  
|Other                                               |  |                              | 1,823,026 |   |                              |   | 1,154,969 |      |  |   | 4,691,639  |   |  |   | 3,065,120  |  
|                                                    |  |                              |           |   |                              |   |           |      |  |   |            |   |  |   |            |  
|Total noninterest expenses                          |  |                              | 7,413,925 |   |                              |   | 5,435,433 |      |  |   | 21,458,945 |   |  |   | 12,695,418 |  
|                                                    |  |                              |           |   |                              |   |           |      |  |   |            |   |  |   |            |  
|Income before income taxes and minority interests   |  |                              | 1,278,106 |   |                              |   | 476,047   |      |  |   | 4,253,498  |   |  |   | 3,062,301  |  
|Minority interest in subsidiarys net income        |  |                              | (93,073   | ) |                              |   | (38,296   | )    |  |   | (258,437   | ) |  |   | (91,720    | )
|                                                    |  |                              |           |   |                              |   |           |      |  |   |            |   |  |   |            |  
|Net income before income taxes                      |  |                              | 1,185,033 |   |                              |   | 437,751   |      |  |   | 3,995,061  |   |  |   | 2,970,581  |  
|Income tax expense                                  |  |                              | (412,700  | ) |                              |   | (124,290  | )    |  |   | (1,327,500 | ) |  |   | (943,537   | )
|                                                    |  |                              |           |   |                              |   |           |      |  |   |            |   |  |   |            |  
|Net income                                          |  | $                            | 772,333   |   |                              | $ | 313,461   |      |  | $ | 2,667,561  |   |  | $ | 2,027,044  |  
|                                                    |  |                              |           |   |                              |   |           |      |  |   |            |   |  |   |            |  
|Basic net income per share                          |  | $                            | 0.14      |   |                              | $ | 0.07      |      |  | $ | 0.52       |   |  | $ | 0.42       |  
|Diluted net income per share                        |  | $                            | 0.14      |   |                              | $ | 0.06      |      |  | $ | 0.51       |   |  | $ | 0.40       |  

The accompanying notes are an integral part of these consolidated financial statements.



4



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##### Table of Contents

|ITEM 1. | FINANCIAL STATEMENTS(Continued)
|------- | -------------------------------

MONARCH FINANCIAL HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

(unaudited)



|                                                                                                      |  |              |   |  |                          |            |   |                  |   |                                            |   |  |       |            |  |   |          |   |  |   |            |  
|----------------------------------------------------------------------------------------------------- |  | ------------ | - |  | ------------------------ | ---------- | - | ---------------- | - | ------------------------------------------ | - |  | ----- | ---------- |  | - | -------- | - |  | - | ---------- | -
|                                                                                                      |  | Common Stock |   |  | AdditionalPaid-InCapital |            |   | RetainedEarnings |   | AccumulatedOtherComprehensiveIncome (Loss) |   |  | Total |           
|                                                                                                      |  | Shares       |   |  | Amount                   |            |   |                  |   |                                           
|BalanceDecember 31, 2006                                                                             |  | 4,845,917    |   |  | $                        | 24,229,585 |   |                  | $ | 5,627,741                                  |   |  | $     | 4,261,537  |  | $ | (109,829 | ) |  | $ | 34,009,034 |  
|                                                                                                      |  |              |   |  |                          |           
|Net income for nine months ended September 30, 2007                                                   |  |              |   |  |                          |            |   |                  |   |                                            |   |  |       | 2,027,044  |  |   |          |   |  |   | 2,027,044  |  
|                                                                                                      |  |              |   |  |                          |           
|Unrealized loss on securities available-for-sale, net of reclassification adjustment and income taxes |  |              |   |  |                          |            |   |                  |   |                                            |   |  |       |            |  |   | 61,621   |   |  |   | 61,621     |  
|                                                                                                      |  |              |   |  |                          |            |   |                  |   |                                            |   |  |       |            |  |   |          |   |  |   |            |  
|Total comprehensive income                                                                            |  |              |   |  |                          |            |   |                  |   |                                            |   |  |       |            |  |   |          |   |  |   | 2,088,665  |  
|                                                                                                      |  |              |   |  |                          |            |   |                  |   |                                            |   |  |       |            |  |   |          |   |  |   |            |  
|Stock-based compensation expense                                                                      |  | 7,080        |   |  |                          | 35,400     |   |                  |   | 138,939                                    |   |  |       |            |  |   |          |   |  |   | 174,339    |  
|                                                                                                      |  |              |   |  |                          |           
|Stock options exercised, including tax benefit from exercise of options                               |  | 69,214       |   |  |                          | 346,070    |   |                  |   | 225,844                                    |   |  |       |            |  |   |          |   |  |   | 571,914    |  
|Stock repurchase                                                                                      |  | (124,605     | ) |  |                          | (623,025   | ) |                  |   | (963,373                                   | ) |  |       |            |  |   |          |   |  |   | (1,586,398 | )
|                                                                                                      |  |              |   |  |                          |            |   |                  |   |                                            |   |  |       |            |  |   |          |   |  |   |            |  
|BalanceSeptember 30, 2007                                                                            |  | 4,797,606    |   |  | $                        | 23,988,030 |   |                  | $ | 5,029,151                                  |   |  | $     | 6,288,581  |  | $ | (48,208  | ) |  | $ | 35,257,554 |  
|                                                                                                      |  |              |   |  |                          |            |   |                  |   |                                            |   |  |       |            |  |   |          |   |  |   |            |  
|BalanceDecember 31, 2007                                                                             |  | 4,827,505    |   |  | $                        | 24,137,525 |   |                  | $ | 5,008,121                                  |   |  | $     | 7,419,711  |  | $ | (16,861  | ) |  | $ | 36,548,496 |  
|                                                                                                      |  |              |   |  |                          |           
|Net income for nine months ended September 30, 2008                                                   |  |              |   |  |                          |            |   |                  |   |                                            |   |  |       | 2,667,561  |  |   |          |   |  |   | 2,667,561  |  
|                                                                                                      |  |              |   |  |                          |           
|Unrealized loss on securities available-for-sale, net of reclassification adjustment and income taxes |  |              |   |  |                          |            |   |                  |   |                                            |   |  |       |            |  |   | (29,835  | ) |  |   | (29,835    | )
|                                                                                                      |  |              |   |  |                          |            |   |                  |   |                                            |   |  |       |            |  |   |          |   |  |   |            |  
|Total comprehensive income                                                                            |  |              |   |  |                          |            |   |                  |   |                                            |   |  |       |            |  |   |          |   |  |   | 2,637,726  |  
|                                                                                                      |  |              |   |  |                          |            |   |                  |   |                                            |   |  |       |            |  |   |          |   |  |   |            |  
|Stock-based compensation expense                                                                      |  | 69,060       |   |  |                          | 345,300    |   |                  |   | (109,940                                   | ) |  |       |            |  |   |          |   |  |   | 235,360    |  
|                                                                                                      |  |              |   |  |                          |           
|Stock options exercised, including tax benefit from exercise of options                               |  | 17,905       |   |  |                          | 89,525     |   |                  |   | 15,329                                     |   |  |       |            |  |   |          |   |  |   | 104,854    |  
|                                                                                                      |  |              |   |  |                          |           
|Private capital offering net of issuance costs                                                        |  | 774,110      |   |  |                          | 3,870,550  |   |                  |   | 2,896,956                                  |   |  |       |            |  |   |          |   |  |   | 6,767,506  |  
|                                                                                                      |  |              |   |  |                          |            |   |                  |   |                                            |   |  |       |            |  |   |          |   |  |   |            |  
|BalanceSeptember 30, 2008                                                                            |  | 5,688,580    |   |  | $                        | 28,442,900 |   |                  | $ | 7,810,466                                  |   |  | $     | 10,087,272 |  | $ | (46,696  | ) |  | $ | 46,293,942 |  
|                                                                                                      |  |              |   |  |                          |            |   |                  |   |                                            |   |  |       |            |  |   |          |   |  |   |            |  

The accompanying notes are an integral part of these consolidated financial statements.



5



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##### Table of Contents

|ITEM 1. | FINANCIAL STATEMENTS(Continued)
|------- | -------------------------------

MONARCH
FINANCIAL HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)



|                                                                    |  |                              |             |   |      |   |             |  
|------------------------------------------------------------------- |  | ---------------------------- | ----------- | - | ---- | - | ----------- | -
|                                                                    |  | 9 Months Ended September 30, |            
|                                                                    |  | 2008                         |             |   | 2007 |  
|Operating activities:                                               |  |                              |             |   |      |   |             |  
|Net income                                                          |  | $                            | 2,667,561   |   |      | $ | 2,027,044   |  
|Adjustments to reconcile to net cash from operating activities:     |  |                              |             |   |      |   |             |  
|Provision for loan losses                                           |  |                              | 1,244,613   |   |      |   | 643,518     |  
|Provision for depreciation                                          |  |                              | 712,147     |   |      |   | 518,953     |  
|Accretion of discounts and amortization of premiums, net            |  |                              | (23,784     | ) |      |   | (38,043     | )
|Deferral of loan costs, net of deferred fees                        |  |                              | (176,497    | ) |      |   | 6,482       |  
|Amortization of intangible assets                                   |  |                              | 133,929     |   |      |   | 29,758      |  
|Stock-based compensation                                            |  |                              | 235,360     |   |      |   | 133,159     |  
|Net gain on disposition of investment securities                    |  |                              | (10,801     | ) |      |   |            |  
|Net gain on disposition of property and equipment                   |  |                              | (24,443     | ) |      |   |            |  
|Net loss on on sale of other real estate                            |  |                              | 1,586       |   |      |   |            |  
|Amortization of deferred gain                                       |  |                              | (122,589    | ) |      |   |            |  
|Changes in:                                                         |  |                              |             |   |      |   |             |  
|Loans held for sale                                                 |  |                              | (17,602,473 | ) |      |   | (8,734,842  | )
|Interest receivable                                                 |  |                              | 195,102     |   |      |   | (317,242    | )
|Other assets                                                        |  |                              | (2,103,042  | ) |      |   | (1,584,109  | )
|Other liabilities                                                   |  |                              | 118,794     |   |      |   | 393,327     |  
|                                                                    |  |                              |             |   |      |   |             |  
|Net cash from operating activities                                  |  |                              | (14,754,537 | ) |      |   | (6,921,995  | )
|                                                                    |  |                              |             |   |      |   |             |  
|                                                                    |  |                             
|Investing activities:                                               |  |                              |             |   |      |   |             |  
|Purchases of held-to-maturity securities                            |  |                              |            |   |      |   | (44,955,711 | )
|Purchases of available-for-sale securities                          |  |                              | (12,461,254 | ) |      |   | (994,688    | )
|Proceeds from maturities and calls of held-to-maturity securities   |  |                              | 21,600,000  |   |      |   | 71,500,000  |  
|Proceeds from sales and maturities of available-for-sale securities |  |                              | 4,020,050   |   |      |   | 4,128,898   |  
|Loan originations, net of principal repayments                      |  |                              | (82,364,097 | ) |      |   | (71,439,392 | )
|Purchases of premises and equipment                                 |  |                              | (1,243,097  | ) |      |   | (3,383,711  | )
|Purchase of intangible assets                                       |  |                              |            |   |      |   | (2,025,000  | )
|Sale of restricted equity securities, net of redemptions            |  |                              | 1,090,950   |   |      |   | (579,200    | )
|                                                                    |  |                              |             |   |      |   |             |  
|Net cash from investing activities                                  |  |                              | (69,357,448 | ) |      |   | (47,748,804 | )
|                                                                    |  |                              |             |   |      |   |             |  
|                                                                    |  |                             
|Financing activities:                                               |  |                              |             |   |      |   |             |  
|Net increase in noninterest-bearing deposits                        |  |                              | 7,300,369   |   |      |   | 7,011,923   |  
|Net increase in interest-bearing deposits                           |  |                              | 101,699,429 |   |      |   | 44,132,751  |  
|Net repayments of FHLB advances                                     |  |                              | (31,830,945 | ) |      |   | 1,825,063   |  
|Net purchases of federal funds                                      |  |                              | 4,790,000   |   |      |   |            |  
|Repurchase of common stock                                          |  |                              |            |   |      |   | (1,586,398  | )
|Proceeds from issuance of common stock, net of issuance costs       |  |                              | 6,842,863   |   |      |   | 400,282     |  
|                                                                    |  |                              |             |   |      |   |             |  
|Net cash from financing activities                                  |  |                              | 88,801,716  |   |      |   | 51,783,621  |  
|                                                                    |  |                              |             |   |      |   |             |  
|CHANGE IN CASH AND CASH EQUIVALENTS                                 |  |                              | 4,689,731   |   |      |   | (2,887,178  | )
|CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                      |  |                              | 9,464,550   |   |      |   | 18,966,342  |  
|                                                                    |  |                              |             |   |      |   |             |  
|CASH AND CASH EQUIVALENTS AT END OF YEAR                            |  | $                            | 14,154,281  |   |      | $ | 16,079,164  |  
|                                                                    |  |                              |             |   |      |   |             |  
|SUPPLEMENTAL SCHEDULES AND CASH FLOW INFORMATION                    |  |                              |             |   |      |   |             |  
|Cash paid for:                                                      |  |                              |             |   |      |   |             |  
|Interest on deposits and other borrowings                           |  | $                            | 11,312,473  |   |      | $ | 10,330,176  |  
|Income taxes                                                        |  | $                            | 2,742,000   |   |      | $ | 1,468,607   |  
|Loans transferred to foreclosed real estate during the year         |  | $                            | 1,339,193   |   |      | $ |            |  



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##### Table of Contents

MONARCH FINANCIAL HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. BASIS OF PRESENTATION

In the opinion of management, the accompanying unaudited consolidated financial statements
contain all adjustments consisting of normal recurring accruals necessary to present fairly Monarch Financial Holdings, Inc.s financial position as of September 30, 2008; the consolidated statements of income for the three and nine months
ended September 30, 2008 and 2007; the consolidated statements of changes in stockholders equity for the nine months ended September 30, 2008 and 2007; and the consolidated statements of cash flows for the nine months ended
September 30, 2008 and 2007. These financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all of the disclosures and notes required by generally accepted accounting principles.
The financial statements include the accounts of Monarch Financial Holdings, Inc. and its subsidiaries, and all significant intercompany accounts and transactions have been eliminated. Operating results for the three and nine month period ended
September 30, 2008 are not necessarily indicative of the results that may be expected for the year ended December 31, 2008.

In
June, 2008, the FASB issued FASB Staff Position No. EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities (FSP 03-6-1). FSP 03-6-1 defines unvested share-based payment
awards that contain nonforfeitable rights to dividends as participating securities that should be included in computing earnings per share (EPS) using the two-class method under SFAS No. 128, Earnings per Share. FSP 03-6-1 is
effective for the Corporations financial statements for the year beginning on January 1, 2009 and earlier adoption is not permitted. Additionally, all prior-period EPS data shall be adjusted retrospectively. The adoption of FSP 03-6-1 is
not expected to have a material impact on our financial condition and results of operations.

In March, 2008, the FASB issued SFAS
No. 161, Disclosures about Derivative Instruments and Hedging Activities  an amendment of FASB No. 133 (SFAS 161). SFAS 161 requires expanded qualitative, quantitative and credit-risk disclosures about derivatives and
hedging activities and their effects on our financial position, financial performance and cash flows. SFAS 161 also clarifies that derivatives are subject to credit risk disclosures as required by SFAS No. 107, Disclosures about Fair
Value of Financial Instruments. SFAS 161 is effective for our financial statements for the year beginning on January 1, 2009. The adoption of SFAS 161 will not impact our financial condition and results of operations.

In February, 2008, the FASB issued FSP No. FAS 140-3, Accounting for Transfers of Financial Assets and Repurchase Financing Transactions (FSP
140-3). FSP 140-3 requires that an initial transfer of a financial asset and a repurchase financing that was entered into contemporaneously with, or in contemplation of, the initial transfer be evaluated together as a linked transaction under SFAS
140, unless certain criteria are met. FSP 140-3 is effective for our financial statements for the year beginning on January 1, 2009 and earlier adoption is not permitted. The adoption of FAS 140-3 will not have a material impact on our
financial condition and results of operations.

We adopted the Securities and Exchange Commissions (SEC) Staff Accounting Bulletin
(SAB) No. 109, Written Loan Commitments Recorded at Fair Value Through Earnings (SAB 109) for loan commitments measured at fair value through earnings which were issued or modified since adoption. SAB 109 requires that the expected
net future cash flows related to servicing of a loan be included in the measurement of all written loan commitments that are accounted for at fair value through earnings. The adoption of SAB 109 generally has resulted in higher fair values being
recorded upon initial recognition of derivative interest rate lock commitments.

In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements. SFAS 157 establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. While the Statement applies
under other accounting pronouncements that require or permit fair value measurements, it does not require any new fair value measurements. SFAS No. 157 defines fair value as the price that would be received to sell an asset or paid to transfer
a liability (an exit price) in an orderly transaction between market participants at the measurement date. In addition, the Statement establishes a fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value
into three broad levels. Lastly, SFAS No. 157 requires additional disclosures for each interim and annual period separately for each major category of assets and liabilities. The Statement is effective for financial statements issued for fiscal
years beginning after November 15, 2007, and interim periods within those fiscal years. We do not expect the adoption of this Statement to have a material impact on our financial statements.



7



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In February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial Assets and
Financial Liabilities, including an amendment of FASB Statement No. 115, which permits entities to choose to measure many financial instruments and certain other items at fair value and also establishes
fair presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS 159 is effective for financial statements issued for
fiscal years beginning after November 15, 2007. The adoption of this standard did not have a material impact on our financial condition, results of operations or cash flows.

In December 2007, the FASB issued SFAS 141(R), Business Combinations,which replaces SFAS 141, Business Combinations.This Statement
establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree as well as the goodwill
acquired in the business combination or a gain from a bargain purchase. SFAS 141(R) also establishes disclosure requirements which will enable users to evaluate the nature and financial effects of the business combination. SFAS 141(R) is effective
for fiscal years beginning after December 15, 2008. We are currently evaluating the potential impact of the adoption of SFAS 141(R) on our consolidated financial position and results of operations.

In December 2007, the FASB issued SFAS 160, Noncontrolling Interests in Consolidated Financial Statementsan Amendment to ARB No. 51,which establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a
parents ownership interest, and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. SFAS 160 also establishes expanded disclosure requirements that clearly identify and distinguish between the
interest of the parents owners and the interests of the noncontrolling owners of a subsidiary. SFAS 160 is effective for fiscal years beginning a December 15, 2008. We are currently evaluating the potential impact, if any, of the adoption
of SFAS 160 on our consolidated financial position and results of operations.

NOTE 2. GENERAL

We are a Virginia-chartered bank holding company engaged in business and consumer banking, investment and insurance sales, and mortgage origination and
brokerage. We were created on June 1, 2006 through a reorganization plan, under the laws of the Commonwealth of Virginia, in which Monarch Bank became our wholly-owned subsidiary. Monarch Bank was incorporated on May 1, 1998, and opened
for business on April 14, 1999. Our corporate office and main office are located in the Greenbrier area of Chesapeake. In addition we have seven other Virginia banking offices  in the Great Bridge area in Chesapeake, the Lynnhaven area in
Virginia Beach, the Town Center area in Virginia Beach, the Oceanfront area in Virginia Beach, the Kempsville area in Virginia Beach, the Ghent area in Norfolk, and an office in downtown Norfolk. Our North Carolina banking division operates as OBX
Bank through one office in Kitty Hawk.

In August 2001, we formed Monarch Investment, LLC, to enable us to offer additional services to our
clients. We own 100% of Monarch Investment, LLC. As Monarch Investment, LLC, we invested in the formation of Bankers Investment Group, LLC, the parent company of BI Investments, LLC, a registered brokerage firm and investment advisor. On
April 30, 2008, Bankers Investment Group, LLC, and BI Investments, LLC, were merged into Infinex Financial Group (Infinex), a broker-dealer headquartered in Meriden, Connecticut, with Monarch Investment, LLC, now holding a 5.62% ownership
interest in Infinex. In June of 2008, investment clients began using Infinex as their broker-dealer. Infinex sells non-deposit investment products in over 200 community banks throughout the country.

In January 2003, Monarch Investment, LLC, purchased a minority interest in Bankers Insurance, LLC, in a joint venture with the Virginia Bankers
Association and many other community banks. Bankers Insurance, LLC, is a full service property/casualty and life/health agency that ranks as one of the largest agencies in Virginia. Bankers Insurance, LLC, provides insurance to our customers and to
the general public.

In February 2004, we formed Monarch Capital, LLC, for the purpose of engaging in the commercial real estate brokerage
business. We own a 100% interest in Monarch Capital, LLC.

In September 2006, Monarch Investment, LLC, formed a subsidiary titled Virginia
Asset Group, LLC. Virginia Asset Group, LLC, is owned 51% by Monarch Investment, LLC, and 49% by Darin Ely, who serves as its president.

In July 2007, Monarch Investment, LLC, purchased a 51% ownership in Coastal Home Mortgage, LLC, from another bank. This joint venture provides residential loan services through Monarch Mortgage. The 49% ownership is shared by four
individuals involved in commercial and residential construction in the Hampton Roads area.



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In 2007, Monarch Investment, LLC, sold its minority interest in Bankers Title of Hampton Roads, LLC. In
October 2007, Monarch Investment, LLC, formed a new title insurance company, Real Estate Security Agency, LLC, (RESA) along with TitleVentures, LLC. Monarch Investment, LLC, owns 75% of RESA and TitleVentures, LLC, owns 25%. RESA offers residential
and commercial title insurance to the clients of Monarch Mortgage and Monarch Bank.

In May 2007, we expanded banking operations into
northeastern North Carolina with the opening of a full service banking office in the town of Kitty Hawk, under the name of OBX Bank (OBX). OBX, which operates as a division of the Company, is led by a local management team and a local advisory board
of directors.

In June 2007, we announced the expansion of our mortgage operations through the acquisition of a team of experienced
mortgage bankers, and our mortgage division changed its name from Monarch Home Funding to Monarch Mortgage (MM). MM originates and sells conventional, FHA, VA and VHDA residential loans and offers additional mortgage products such as
construction-permanent loans for Monarch Banks loan portfolio. Their primary office is in Virginia Beach with additional offices in Chesapeake and Norfolk, Virginia, Rockville, Waldorf, Crofton, Annapolis and College Park, Maryland, and
Rehobeth Beach, Deleware.

In March 2008, Monarch Investment, LLC, formed Home Mortgage Solutions, Inc., in the Richmond area of Virginia.
Monarch Investment, LLC, owns 51% with BPRP Funding, LLC, a builder/developer, owning 49%. The primary goal of Home Mortgage Solutions, Inc. is to provide mortgages to the clients of BPRP Funding, LLC.

NOTE 3. EARNINGS PER SHARE (EPS)

Basic
earnings per share (EPS) excludes dilution, and is computed by dividing income available to common shareholders by the weighted-average number of shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised, converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. The following is a reconciliation of the numerators and
denominators of the basic and diluted earnings per share computations. The per share computations below have been restated for the effects of the 6-for-5 stock split in October 2007.



|                                                  |  |                              |           |                              |   |           |  |      |           |  |   |          
|------------------------------------------------- |  | ---------------------------- | --------- | ---------------------------- | - | --------- |  | ---- | --------- |  | - | ---------
|                                                  |  | 3 months ended September 30, |           | 9 months ended September 30,
|                                                  |  | 2008                         |           | 2007                         |   | 2008      |  | 2007
|Net income (numerator, basic and diluted)         |  | $                            | 772,333   |                              | $ | 313,461   |  | $    | 2,667,561 |  | $ | 2,027,044
|Weighted average shares outstanding (denominator) |  |                              | 5,561,773 |                              |   | 4,779,298 |  |      | 5,088,633 |  |   | 4,820,415
|                                                  |  |                              |           |                              |   |           |  |      |           |  |   |          
|Income per common sharebasic                     |  | $                            | 0.14      |                              | $ | 0.07      |  | $    | 0.52      |  | $ | 0.42     
|                                                  |  |                              |           |                              |   |           |  |      |           |  |   |          
|Weighted average sharesdiluted (denominator)     |  |                              | 5,690,731 |                              |   | 5,003,254 |  |      | 5,250,089 |  |   | 5,057,533
|                                                  |  |                              |           |                              |   |           |  |      |           |  |   |          
|Income per common sharediluted                   |  | $                            | 0.14      |                              | $ | 0.06      |  | $    | 0.51      |  | $ | 0.40     
|                                                  |  |                              |           |                              |   |           |  |      |           |  |   |          
|Dilutive effect-average number of shares          |  |                              | 128,958   |                              |   | 223,956   |  |      | 161,456   |  |   | 237,118  

NOTE 4. FAIR VALUE ACCOUNTING

Effective January 1, 2008, we adopted SFAS 157 and SFAS 159. Both standards address aspects of the expanding application of fair value accounting.

Fair Value Measurements (SFAS 157)

SFAS 157 defines fair value, establishes a consistent framework for measuring fair value and expands disclosure requirements about fair value measurements. SFAS 157, among other things, requires us to maximize the use of observable inputs
and minimize the use of unobservable inputs when measuring fair value.

These valuation techniques are based upon observable and
unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our market assumptions. These two types of inputs create the following fair value hierarchy:



| |  |  | Level 1  Quoted prices for identical instruments in active markets
| | - |  | -------------------------------------------------------------------



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| |  |  | Level 2  Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and
model-derived valuations whose inputs are observable or whose significant value drivers are observable.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Level 3  Instruments whose significant value drivers are unobservable.
| | - |  | -----------------------------------------------------------------------

We determine fair value based on quoted prices when available or through the use of alternative approaches, such as discounting the expected cash flows
using market interest rates commensurate with the credit quality and duration of the investment. The methods we use to determine fair value on an instrument specific basis are detailed in the section titled Valuation Methods, below.

The following table presents our assets and liabilities related to continuing operations, which are measured at fair value on a recurring
basis for each of the fair value hierarchy levels, as of September 30, 2008:



|                                           |  |                                                 |            |                                                             |   |                                             |  |                                         |            |  |   |  
|------------------------------------------ |  | ----------------------------------------------- | ---------- | ----------------------------------------------------------- | - | ------------------------------------------- |  | --------------------------------------- | ---------- |  | - | -
|                                           |  | Fair Value Measurements at Reporting Date Using
|Description                                |  | Fair Value atSeptember 30,2008                  |            | Quoted Prices inActive Markets forIdentical Assets(Level 1) |   | Significant OtherObservable Inputs(Level 2) |  | SignificantUnobservable Inputs(Level
3)
|Assets                                     |  |                                                 |            |                                                             |   |                                             |  |                                         |            |  |   |  
|Investment securities - available for sale |  | $                                               | 17,290,441 |                                                             | $ |                                            |  | $                                       | 17,290,441 |  | $ | 
|Rate lock commitments, net                 |  |                                                 | 478,635    |                                                             |   |                                            |  |                                         | 478,635    |  |   | 
|                                           |  |                                                 |            |                                                             |   |                                             |  |                                         |            |  |   |  
|Total Assets                               |  | $                                               | 17,769,076 |                                                             | $ |                                            |  | $                                       | 17,769,076 |  | $ | 
|                                           |  |                                                 |            |                                                             |   |                                             |  |                                         |            |  |   |  

The following table provides quantitative disclosures about the fair value measurements for our
assets related to continuing operations which are measured at fair value on a nonrecurring basis as of September 30, 2008:



|                  |  |                                                 |         |                                                             |   |                                             |  |                                         |   |  |   |        
|----------------- |  | ----------------------------------------------- | ------- | ----------------------------------------------------------- | - | ------------------------------------------- |  | --------------------------------------- | - |  | - | -------
|                  |  | Fair Value Measurements at Reporting Date Using
|Description       |  | Fair Value atSeptember 30,2008                  |         | Quoted Prices inActive Markets forIdentical Assets(Level 1) |   | Significant OtherObservable Inputs(Level 2) |  | SignificantUnobservable Inputs(Level
3)
|Real estate owned |  | $                                               | 410,288 |                                                             | $ |                                            |  | $                                       |  |  | $ | 410,288

At the time a loan secured by real estate becomes real estate owned, we record the property at the
lower of its carrying amount or fair value. Upon foreclosure and through liquidation, we evaluate the propertys fair value as compared to its carrying amount and record a valuation adjustment when the carrying amount exceeds fair value. Any
valuation adjustments at the time a loan becomes real estate owned is charged to the allowance for loan losses. Any subsequent valuation adjustments are applied to earnings in the Gain (Loss) on other real estate, net line item of our
consolidated statements of operations. During the nine months ended September 30, 2008, we recorded net losses of $1,586 due to valuation adjustments on real estate owned and gains on sale of real estate owned.

The following table provides a summary of the impact to earnings for the quarter ended September 30, 2008 on our assets and liabilities which are
measured at fair value on a recurring and nonrecurring basis:



|                                          |  |                                 |  |                                                         |         |   |                                            |                                       
|----------------------------------------- |  | ------------------------------- |  | ------------------------------------------------------- | ------- | - | ------------------------------------------ | --------------------------------------
|Asset or Liability Measured at Fair Value |  | Fair Value MeasurementFrequency |  | Fair ValueAdjustmentsIncluded in CurrentPeriod Earnings |         |   | Statement of Operations Line Item Impacted
|Rate lock commitments                     |  | Recurring                       |  | $                                                       | 86,161  |   |                                            | Mortgage income adjustments           
|Real estate owned                         |  | Nonrecurring                    |  |                                                         | (33,964 | ) |                                            | Loss on sale of other real estate, net
|                                          |  |                                 |  |                                                         |         |   |                                            |                                       
|Total fair value gains (losses)           |  |                                 |  | $                                                       | 52,197  |   |                                            |                                       
|                                          |  |                                 |  |                                                         |         |   |                                            |                                       



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Valuation Methods

Securities  available-for-sale. Securities  available-for-sale are valued at quoted market prices, if available. For securities for
which no quoted market price is available, we estimate the fair value on the basis of quotes for similar instruments or other available information. Investment securities classified as available-for-sale are reported at their estimated fair value
with unrealized gains and losses reported in accumulated other comprehensive income. To the extent that the cost basis of investment securities exceeds the fair value and the unrealized loss is considered to be other than temporary, an impairment
charge is recognized and the amount recorded in accumulated other comprehensive income or loss is reclassified to earnings as a realized loss. The specific identification method is used in computing realized gains or losses.

Rate lock commitments. Our mortgage loan pipeline consists of mortgage loan applications that have been received but the loan has not yet closed.
The interest rates on pipeline loans float with market rates or are accompanied by interest rate lock commitments. A locked pipeline loan is a loan where the potential borrower has set the interest rate for the loan by entering into an
interest rate lock commitment, or rate lock commitment, resulting in interest rate risk to us. Rate lock commitments on mortgage loans that are intended to be sold are considered to be derivatives. Accordingly, such commitments, along
with any related fees received from potential borrowers, if material, are recorded at fair value in derivative assets or liabilities, with changes in fair value recorded in the net gain or loss on sale of mortgage loans.

Real estate owned. Real estate owned is carried at the lower of cost or fair value less estimated selling costs. We estimate fair value at
the assets liquidation value less selling costs using managements assumptions which are based on historical loss severities for similar assets. These estimates are reevaluated on a periodic basis to determine if additional adjustments
are needed.

Fair Value Option for Financial Assets and Financial Liabilities (SFAS 159)

Under SFAS 159, we may elect to report most financial instruments and certain other items at fair value on an instrument-by-instrument basis with changes
in fair value reported in earnings. After the initial adoption, the election is made at the acquisition of an eligible financial asset, financial liability, or firm commitment or when certain specified reconsideration events occur. The fair value
election may not be revoked once an election is made.

Additionally, the transition provisions of SFAS 159 permit a one-time election for
existing positions at the adoption date with a cumulative-effect adjustment included in opening retained earnings and future changes in fair value reported in earnings.

At September 30, 2008, we have not elected to implement fair value accounting for any balance sheet items as allowed by SFAS 159.

NOTE 5. COMPREHENSIVE INCOME

Accounting principles generally require that recognized revenue,
expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity section of the balance
sheet, such items, along with net income, are components of comprehensive income. The only component of other comprehensive income consists of unrealized gains and losses on available-for-sale securities. We account for comprehensive income in
accordance with FASB Statement No. 130, Reporting Comprehensive Income. The following is a detail of comprehensive income for the three and nine months ended September 30, 2008 and 2007:



|                                                                                         |  |                                  |         |   |                                 |   |         |      |  |   |           |   |  |   |           |  
|---------------------------------------------------------------------------------------- |  | -------------------------------- | ------- | - | ------------------------------- | - | ------- | ---- |  | - | --------- | - |  | - | --------- | -
|                                                                                         |  | Three months ended September 30, |         |   | Nine months ended September 30, |  
|                                                                                         |  | 2008                             |         |   | 2007                            |   |         | 2008 |  |   | 2007      |  
|Net Income                                                                               |  | $                                | 772,333 |   |                                 | $ | 313,461 |      |  | $ | 2,667,561 |   |  | $ | 2,027,044 |  
|Change in unrealized gains (losses) on securities available-for-sale, net of tax expense |  |                                  | (29,598 | ) |                                 |   | 70,629  |      |  |   | (29,835   | ) |  |   | 61,621    |  
|                                                                                         |  |                                  |         |   |                                 |   |         |      |  |   |           |   |  |   |           |  
|Total comprehensive income                                                               |  | $                                | 742,735 |   |                                 | $ | 384,090 |      |  | $ | 2,637,726 |   |  | $ | 2,088,665 |  
|                                                                                         |  |                                  |         |   |                                 |   |         |      |  |   |           |   |  |   |           |  
|Unrealized holding (losses) gains during the period                                      |  | $                                | (44,845 | ) |                                 | $ | 107,014 |      |  | $ | (45,205   | ) |  | $ | 93,365    |  
|                                                                                         |  |                                  |         |   |                                 |   |         |      |  |   |           |   |  |   |           |  
|Total other comprehensive loss before income tax expense                                 |  |                                  | (44,845 | ) |                                 |   | 107,014 |      |  |   | (45,205   | ) |  |   | 93,365    |  
|Income tax benefit (expense)                                                             |  |                                  | 15,247  |   |                                 |   | (36,385 | )    |  |   | 15,370    |   |  |   | (31,744   | )
|                                                                                         |  |                                  |         |   |                                 |   |         |      |  |   |           |   |  |   |           |  
|Net unrealized (losses) gains                                                            |  | $                                | (29,598 | ) |                                 | $ | 70,629  |      |  | $ | (29,835   | ) |  | $ | 61,621    |  
|                                                                                         |  |                                  |         |   |                                 |   |         |      |  |   |           |   |  |   |           |  



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NOTE 6. STOCK-BASED COMPENSATION

As of September 30, 2008, we have a stock-based compensation plan. Prior to January 1, 2006, we accounted for the plan under the recognition and measurement principles of APB Opinion 25, Accounting for
Stock Issued to Employees,and related interpretations. Under these older standards no stock-based employee compensation cost was reflected in net income, as all options granted under the plan had an exercise price equal to the market value of
the underlying common stock on the date of the grant. On January 1, 2006, we adopted FAS Statement No. 123R Share-Based Payment, (FAS 123R) that addresses the accounting for share-based payment transactions in which a company
receives employee services in exchange for either equity instruments of the company or liabilities that are based on the fair value of the companys equity instruments or that may be settled by the issuance of such equity instruments. FAS 123R
eliminates the ability to account for share-based compensation transactions using the intrinsic method and requires that such transactions be accounted for using a fair-value-based method and recognized as expense in the consolidated statement of
income.

In May 2006, our shareholders ratified the adoption of a new stock-based compensation plan to succeed the Monarch Bank 1999
Incentive Stock Option Plan. The new Monarch Bank 2006 Equity Incentive Plan authorizes the compensation committee to grant options, stock appreciation rights, stock awards, performance stock awards, and stock units to designated directors,
officers, key employees, consultants and advisors to our company and its subsidiaries. The Plan authorizes us to issue up to 630,000 split-adjusted shares of our Common Stock plus the number of shares of our Common Stock outstanding under the 1999
Plan. The Plan also provides that no award may be granted more than 10 years after the May 2006 ratification date.

Since May 2006, we have
issued stock awards under the new Plan at a price equal to the stock price on the issue date with vesting periods of up to five years from issue. Total compensation costs are recognized annually on a pro-rata basis over the vesting period.

NOTE 7. SEGMENT REPORTING

Reportable
segments include community banking and mortgage banking services. Community banking involves making loans to and generating deposits from individuals and businesses in the markets where we have offices. Mortgage banking originates residential loans
and subsequently sells them to investors. The mortgage banking segment is a strategic business unit that offers different products and services. It is managed separately because the segment appeals to different markets and, accordingly, requires
different technology and marketing strategies. The segments most significant revenue and expense is noninterest income and noninterest expense, respectively. We do not have other reportable operating segments. The accounting policies of the
segment are the same as those described in the summary of significant accounting policies. All intersegment sales prices are market based. The assets and liabilities and operating results of our other wholly owned subsidiary, Monarch Capital, LLC,
is included in the mortgage banking segment. Monarch Capital, LLC, provides commercial mortgage brokerage services.



12



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##### Table of Contents

Segment information for the three and nine months ended September 30, 2008 and 2007 is shown in the
following table.



|                                                     |  |                             |             |   |                           |   |             |                          |  |   |             |   |  |   |             |  
|---------------------------------------------------- |  | --------------------------- | ----------- | - | ------------------------- | - | ----------- | ------------------------ |  | - | ----------- | - |  | - | ----------- | -
|Selected Financial Information                       | 
|                                                     |  |                             |             |  
|                                                     |  | Commercial andOther Banking |             |   | MortgageBankingOperations |   |             | IntersegmentEliminations |  |   | Total       |  
|Three Months Ended September 30, 2008                |  |                             |             |   |                           |   |             |                          |  |   |             |   |  |   |             |  
|Net interest income after provision for loan losses  |  | $                           | 3,456,564   |   |                           | $ | (270,093    | )                        |  | $ | 236,018     |   |  | $ | 3,422,489   |  
|Noninterest income                                   |  |                             | 1,204,079   |   |                           |   | 4,517,197   |                          |  |   | (451,734    | ) |  |   | 5,269,542   |  
|Noninterest expenses                                 |  |                             | (3,475,483  | ) |                           |   | (3,776,200  | )                        |  |   | (162,242    | ) |  |   | (7,413,925  | )
|                                                     |  |                             |             |   |                           |   |             |                          |  |   |             |   |  |   |             |  
|Net income before income taxes and minority interest |  | $                           | 1,185,160   |   |                           | $ | 470,904     |                          |  | $ | (377,958    | ) |  | $ | 1,278,106   |  
|                                                     |  |                             |             |   |                           |   |             |                          |  |   |             |   |  |   |             |  
|                                                     |  |                             |             |  
|Three Months Ended September 30, 2007                |  |                             |             |   |                           |   |             |                          |  |   |             |   |  |   |             |  
|Net interest income after provision for loan losses  |  | $                           | 3,825,890   |   |                           | $ | (119,911    | )                        |  | $ |            |   |  | $ | 3,705,979   |  
|Noninterest income                                   |  |                             | 659,646     |   |                           |   | 1,567,605   |                          |  |   | (21,750     | ) |  |   | 2,205,501   |  
|Noninterest expenses                                 |  |                             | (3,337,942  | ) |                           |   | (2,119,241  | )                        |  |   | 21,750      |   |  |   | (5,435,433  | )
|                                                     |  |                             |             |   |                           |   |             |                          |  |   |             |   |  |   |             |  
|Net income before income taxes and minority interest |  | $                           | 1,147,594   |   |                           | $ | (671,547    | )                        |  | $ |            |   |  | $ | 476,047     |  
|                                                     |  |                             |             |   |                           |   |             |                          |  |   |             |   |  |   |             |  
|                                                     |  |                             |             |  
|Nine Months Ended September 30, 2008                 |  |                             |             |   |                           |   |             |                          |  |   |             |   |  |   |             |  
|Net interest income after provision for loan losses  |  | $                           | 10,080,784  |   |                           | $ | (810,374    | )                        |  | $ | 579,970     |   |  | $ | 9,850,380   |  
|Noninterest income                                   |  |                             | 4,243,092   |   |                           |   | 13,636,821  |                          |  |   | (2,017,850  | ) |  |   | 15,862,063  |  
|Noninterest expenses                                 |  |                             | (10,175,743 | ) |                           |   | (11,176,460 | )                        |  |   | (106,742    | ) |  |   | (21,458,945 | )
|                                                     |  |                             |             |   |                           |   |             |                          |  |   |             |   |  |   |             |  
|Net income before income taxes and minority interest |  | $                           | 4,148,133   |   |                           | $ | 1,649,987   |                          |  | $ | (1,544,622  | ) |  | $ | 4,253,498   |  
|                                                     |  |                             |             |   |                           |   |             |                          |  |   |             |   |  |   |             |  
|                                                     |  |                             |             |  
|Nine Months Ended September 30, 2007                 |  |                             |             |   |                           |   |             |                          |  |   |             |   |  |   |             |  
|Net interest income after provision for loan losses  |  | $                           | 11,434,119  |   |                           | $ | (169,334    | )                        |  | $ |            |   |  | $ | 11,264,785  |  
|Noninterest income                                   |  |                             | 1,977,951   |   |                           |   | 2,626,483   |                          |  |   | (111,500    | ) |  |   | 4,492,934   |  
|Noninterest expenses                                 |  |                             | (9,546,405  | ) |                           |   | (3,260,513  | )                        |  |   | 111,500     |   |  |   | (12,695,418 | )
|                                                     |  |                             |             |   |                           |   |             |                          |  |   |             |   |  |   |             |  
|Net income before income taxes and minority interest |  | $                           | 3,865,665   |   |                           | $ | (803,364    | )                        |  | $ |            |   |  | $ | 3,062,301   |  
|                                                     |  |                             |             |   |                           |   |             |                          |  |   |             |   |  |   |             |  
|                                                     |  |                             |             |  
|Segment Assets                                       |  |                             |             |   |                           |   |             |                          |  |   |             |   |  |   |             |  
|2008                                                 |  | $                           | 595,365,222 |   |                           | $ | 40,186,681  |                          |  | $ | (40,717,126 | ) |  | $ | 594,834,777 |  
|2007                                                 |  | $                           | 462,280,407 |   |                           | $ | 13,146,540  |                          |  | $ | (13,278,517 | ) |  | $ | 462,148,430 |  

NOTE 8. ACQUISITION

On August 10, 2007, we acquired a Maryland mortgage office plus certain other mortgage related assets from Resource Bank, a Virginia Beachbased bank owned by Fulton Financial of Lancaster, Pennsylvania. The
assets have been included in the consolidated financial statements since that date. The aggregate purchase price was $2.1 million, of which $53,000 in legal expense was expensed in 2007. The following table summarizes the estimated fair values of
the assets acquired at August 10, 2007.



|                  |  |   |          
|----------------- |  | - | ---------
|Equipment         |  | $ | 22,000   
|Intangible assets |  |   | 1,250,000
|Goodwill          |  |   | 775,000  
|                  |  |   |          
|                  |  | $ | 2,047,000
|                  |  |   |          

NOTE 9. GOODWILL AND INTANGIBLE ASSETS

Goodwill and intangible assets with indefinite lives are recorded at cost and are reviewed at least annually for impairment based on evidence of certain
impairment indicators. Intangible assets with identifiable lives are amortized over their estimated useful lives. The intangible assets have a weighted-average useful life of seven years.



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##### Table of Contents

Information concerning goodwill and intangible assets is presented in the following table:



|                              |  |                  |           |                         |   |              |  |   |          
|----------------------------- |  | ---------------- | --------- | ----------------------- | - | ------------ |  | - | ---------
|                              |  | Acquisition Cost |           | AccumulatedAmortization |   | Ending Value
|September 30, 2008            |  |                  |           |                         |   |              |  |   |          
|Amortizable intangible assets |  | $                | 1,250,000 |                         | $ | 208,330      |  | $ | 1,041,670
|Goodwill                      |  |                  | 775,000   |                         |   |             |  |   | 775,000  
|                              |  |                  |           |                         |   |              |  |   |          
|                              |  | $                | 2,025,000 |                         | $ | 208,330      |  | $ | 1,816,670
|                              |  |                  |           |                         |   |              |  |   |          
|                              |  |                  |          
|December 31, 2007             |  |                  |           |                         |   |              |  |   |          
|Amortizable intangible assets |  | $                | 1,250,000 |                         | $ | 74,401       |  | $ | 1,175,599
|Goodwill                      |  |                  | 775,000   |                         |   |             |  |   | 775,000  
|                              |  |                  |           |                         |   |              |  |   |          
|                              |  | $                | 2,025,000 |                         | $ | 74,401       |  | $ | 1,950,599
|                              |  |                  |           |                         |   |              |  |   |          

Amortization expense for the third quarter ended September 30, 2008 totaled $44,643.
Amortization expense of $133,929 was recorded in the first nine months of 2008.



|                                    |  |   |          
|----------------------------------- |  | - | ---------
|Estimated Amortization Expense:     |  |   |          
|For the three months ended 12/31/08 |  | $ | 44,643   
|For the year ended 12/31/09         |  |   | 178,572  
|For the year ended 12/31/10         |  |   | 178,572  
|For the year ended 12/31/11         |  |   | 178,572  
|For the year ended 12/31/12         |  |   | 178,572  
|Thereafter                          |  |   | 282,739  
|                                    |  |   |          
|                                    |  | $ | 1,041,670
|                                    |  |   |          



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##### Table of Contents

ITEM 2.

MONARCH FINANCIAL HOLDINGS, INC.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

The purpose of this discussion is to focus on important factors affecting our financial condition and results of operations. The discussion and analysis should be read in conjunction with the Consolidated Financial Statements and
supplemental financial data.

This report contains forward-looking statements with respect to our financial condition, results of
operations and business. These forward-looking statements involve risks and uncertainties and are based on the beliefs and assumptions of our management and on information available at the time these statements and disclosures were prepared. Factors
that may cause actual results to differ materially from those expected include the following:



| |  | General economic conditions may deteriorate and negatively impact the ability of borrowers to repay loans and depositors to maintain balances.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------



| |  | Changes in interest rates could reduce income.
|- |  | ----------------------------------------------



| |  | Competitive pressures among financial institutions may increase.
|- |  | ----------------------------------------------------------------



| |  | The businesses that we are engaged in may be adversely affected by legislative or regulatory changes, including changes in accounting standards.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------



| |  | New products developed or new methods of delivering products could result in a reduction in our business and income.
|- |  | --------------------------------------------------------------------------------------------------------------------



| |  | Adverse changes may occur in the securities market.
|- |  | ---------------------------------------------------

A summary of our significant risk factors is set forth in Note 1A in our 2007 Form 10-K.

Earnings Summary

We reported net income of $772,333 and $2,667,561 for the three months and nine months ending September 30, 2008, compared to
$313,461 and $2,027,044 for the same period in 2007. This represents a $458,872, or 146.4% increase in net income for the quarter and $640,517, or 31.6% increase, year-to-date. Net interest income decreased 4.6% or $187,427 and 6.8% or $813,310
during the third quarter and nine months ended September 30, 2008, when compared to 2007. Noninterest income increased 138.9% to $5,269,542 during the third quarter and 253.0% to $15,862,063 during the first nine months of 2008 when compared to
$2,205,501 and $4,492,934, respectively, for the same period in 2007. Noninterest expenses totaled $7,413,925 for the third quarter and $21,458,945 for the first nine months of 2008. This is an increase of $1,978,492 and $8,763,527 over the same
periods in 2007. Basic earnings per share of common stock were $0.14 compared to $0.07 for the third quarters of 2008 and 2007, respectively. Year-to-date, basic earnings were $0.52 in 2008 and $0.42 in 2007. Diluted earnings per share of common
stock were $0.14 and $0.51 compared to $0.06 and $0.40 for the third quarter and first nine months of 2008 compared to 2007.

Profitability
as measured by our annualized return on average assets (ROA) was 0.53% compared to 0.29% for the three months ended, and 0.65% compared to 0.68% for the nine months ended September 30, 2008 and 2007, respectively. Another measure of our
profitability, the annualized return on average equity (ROE) was 6.67% and 8.79% for the third quarter and nine months ended September 30, 2008 compared to 3.47% and 7.64% for the same periods in 2007.

Net Interest Income

Net interest income represents
our principal source of earnings. In 2008 net interest income has declined due to a combination of sharply declining rates and strong liability growth. This is in contrast to 2007 net interest income, which increased through the combination of
predominately higher interest rates and greater asset growth. The Federal Reserve Banks Federal Open Market Committee has decreased the Federal Funds rate 375 basis points since mid-September 2007 to the current low of 1.50%. Although the
first 50 basis point decrease occurred in mid-September 2007, its effects were not felt for a full billing cycle so the effective Federal Funds rate was 5.25% for the first nine month of 2007. The Wall Street Journal Prime Rate has followed the
Federal Funds rate trend with current rates at 4.50% compared to 8.25% for most of the first nine months of 2007. A majority of our loans use the Wall Street Journal Prime Rate as their rate index, and increases in this rate increase interest income
while decreases reduce interest income. Additionally, we are asset sensitive as the loans that are tied to Wall Street Journal Prime are set to move immediately with each rate change, while a major category of funding liabilities reprice based on
longer maturity dates, creating margin compression.



15



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##### Table of Contents

Net interest income was $3,903,070 for the third quarter 2008, a decline of 4.6% or $187,427 from
$4,090,497 during the same period in 2007. Year-to-date net interest income declined 6.8% or $813,310 to $11,094,993 in 2008 compared to 2007. The largest component of net interest income is total interest and fees on loans.

Rate/Volume Analysis

Third quarter 2008 loan
interest income declined $590,053 or 7.6%, compared to 2007 due to lower rates and slower loan growth. Year-to-date loan interest income declined $199,381 or 0.9% as year-to-date loan growth was mitigated by the steep decline in rates noted
previously. Interest on investment securities increased $5,308 for the quarter but declined $76,755, year-to-date 2008, when compared to the same periods in 2007. The growth in investment income during the third quarter was due to a higher volume of
security purchases outstripping the declines in rate. Year-over-year, investment securities have declined due to security maturities coupled with calls. In addition, replacement securities purchased bear a lower interest rate.

Other interest income is primarily interest bearing deposits at the Federal Home Loan Bank. For the first nine months of 2008 other interest income was
$65,040 compared to $57,283 for the same period in 2007. Other interest income was $10,060 for the third quarter 2008 compared to $22,992 in 2007. Interest on federal funds sold was $5,560 and $17,444 in the third quarter and first nine months of
2008 compared to $6,873 and $18,522 for the same periods in 2007.

Higher average outstanding balances of stock in the Federal Reserve and
the Federal Home Loan Bank of Atlanta have resulted in greater year-to-date dividends on restricted equity securities. However, lower third quarter average balances coupled with lower dividend rates have had a negative impact on the dividends for
that period. Year-to-date dividend income was $162,206 in 2008 compared to $121,513 in 2007, an increase of $40,693 or 33.5%. The dividend income for the third quarter of 2008 was $41,852, a decrease of $2,064 or 4.7% compared to the same period in
2007.

Interest expense on deposits decreased $389,308 or 11.6% for the third quarter of 2008 compared to 2007 while year-to-date interest
expense on deposits increased $403,861 or 4.5%. Quarterly interest expense has received the greatest impact from deposits repricing downward. However, year-to-date deposit expense is still at an increase due to an overall shift in the deposit mix to
higher cost deposits. Interest expense on borrowings totaled $435,059 and $1,272,451, an increase of 9.3% and 33.8% for the third quarter and first nine months of 2008 when compare to the same periods in 2007. Borrowings have declined with the
growth in deposits in the third quarter. However, average year-to-date borrowings were higher due to consistently higher loan funding needs. We issued trust preferred subordinated debt in the third quarter of 2006 which provided a funding source.
Trust preferred interest expense for the third quarter of 2008 was $112,460 compared to $173,963 in 2007. For the first nine months of 2008 compared to 2007, trust preferred interest expense decreased $140,879 to $384,789, a 26.8% decline, due to
lower Libor-based pricing for the period.

The following table sets forth an analysis of the impact of changes in rate and volume on our
interest bearing assets and liabilities for the third quarter and first nine months of 2008 compared to 2007.



16



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##### Table of Contents

Changes in Net Interest Income (Rate/Volume Analysis)

Net interest income is the product of the volume of average earning assets and the average rates earned, less the volume of average interest-bearing liabilities and the
average rates paid. The portion of change relating to both rate and volume is allocated to each of the rate and volume changes based on the relative change in each category. The following table analyzes the changes in both rate and volume components
of net interest income on a tax equivalent basis.



|                          |  |                                                     |                |   |                                                    |        |        |                            |  |      |                       |   |        |   |        |   |  |   |        |   |  |   |       |  
|------------------------- |  | --------------------------------------------------- | -------------- | - | -------------------------------------------------- | ------ | ------ | -------------------------- |  | ---- | --------------------- | - | ------ | - | ------ | - |  | - | ------ | - |  | - | ----- | -
|                          |  |                                                     | (in thousands) |  
|                          |  |                                                    
|                          |  | For the Three Months EndedSeptember 30,2008 vs 2007 |                |   | For the Nine Months EndedSeptember 30,2008 vs 2007 |       
|                          |  | InterestIncrease(Decrease)                          |                |   | ChangeAttributable to                              |        |        | InterestIncrease(Decrease) |  |      | ChangeAttributable to |  
|                          |  |                                                     | Rate           |   |                                                    | Volume |        |                            |  | Rate |                       |   | Volume |  
|Interest income           |  |                                                     |                |   |                                                    |        |        |                            |  |      |                       |   |        |   |        |   |  |   |        |   |  |   |       |  
|Loans:                    |  |                                                     |                |   |                                                    |        |        |                            |  |      |                       |   |        |   |        |   |  |   |        |   |  |   |       |  
|Commercial                |  | $                                                   | 278            |   |                                                    | $      | (782   | )                          |  | $    | 1,060                 |   |        | $ | 1,555  |   |  | $ | (1,774 | ) |  | $ | 3,329 |  
|Mortgage                  |  |                                                     | (774           | ) |                                                    |        | (1,084 | )                          |  |      | 310                   |   |        |   | (1,776 | ) |  |   | (2,872 | ) |  |   | 1,096 |  
|Consumer                  |  |                                                     | (94            | ) |                                                    |        | (795   | )                          |  |      | 701                   |   |        |   | 22     |   |  |   | (1,719 | ) |  |   | 1,741 |  
|                          |  |                                                     |                |   |                                                    |        |        |                            |  |      |                       |   |        |   |        |   |  |   |        |   |  |   |       |  
|Total loans               |  |                                                     | (590           | ) |                                                    |        | (2,661 | )                          |  |      | 2,071                 |   |        |   | (199   | ) |  |   | (6,365 | ) |  |   | 6,166 |  
|                          |  |                                                     |                |   |                                                    |        |        |                            |  |      |                       |   |        |   |        |   |  |   |        |   |  |   |       |  
|Securities:               |  |                                                     |                |   |                                                    |        |        |                            |  |      |                       |   |        |   |        |   |  |   |        |   |  |   |       |  
|Federal agencies          |  |                                                     | 11             |   |                                                    |        | (27    | )                          |  |      | 38                    |   |        |   | (16    | ) |  |   | 10     |   |  |   | (26   | )
|Mortgage-backed           |  |                                                     | (3             | ) |                                                    |        |       |                            |  |      | (3                    | ) |        |   | (33    | ) |  |   | (21    | ) |  |   | (12   | )
|Other securities          |  |                                                     | (3             | ) |                                                    |        | 1      |                            |  |      | (4                    | ) |        |   | (28    | ) |  |   | (21    | ) |  |   | (7    | )
|                          |  |                                                     |                |   |                                                    |        |        |                            |  |      |                       |   |        |   |        |   |  |   |        |   |  |   |       |  
|Total securities          |  |                                                     | 5              |   |                                                    |        | (26    | )                          |  |      | 31                    |   |        |   | (77    | ) |  |   | (32    | ) |  |   | (45   | )
|                          |  |                                                     |                |   |                                                    |        |        |                            |  |      |                       |   |        |   |        |   |  |   |        |   |  |   |       |  
|Deposits in other banks   |  |                                                     | (15            | ) |                                                    |        | (33    | )                          |  |      | 18                    |   |        |   | 48     |   |  |   | (67    | ) |  |   | 115   |  
|Federal funds sold        |  |                                                     | (1             | ) |                                                    |        | (7     | )                          |  |      | 6                     |   |        |   | (1     | ) |  |   | (16    | ) |  |   | 15    |  
|Bank owned life insurance |  |                                                     | (3             | ) |                                                    |        | (7     | )                          |  |      | 4                     |   |        |   | (10    | ) |  |   | (21    | ) |  |   | 11    |  
|                          |  |                                                     |                |   |                                                    |        |        |                            |  |      |                       |   |        |   |        |   |  |   |        |   |  |   |       |  
|Total interest income     |  | $                                                   | (604           | ) |                                                    | $      | (2,734 | )                          |  | $    | 2,130                 |   |        | $ | (239   | ) |  | $ | (6,501 | ) |  | $ | 6,262 |  
|                          |  |                                                     |                |   |                                                    |        |        |                            |  |      |                       |   |        |   |        |   |  |   |        |   |  |   |       |  
|Interest expense          |  |                                                     |                |   |                                                    |        |        |                            |  |      |                       |   |        |   |        |   |  |   |        |   |  |   |       |  
|Deposits:                 |  |                                                     |                |   |                                                    |        |        |                            |  |      |                       |   |        |   |        |   |  |   |        |   |  |   |       |  
|Demand                    |  | $                                                   | 33             |   |                                                    |        | 27     |                            |  |      | 6                     |   |        | $ | 102    |   |  |   | 84     |   |  |   | 18    |  
|Money market              |  |                                                     | (884           | ) |                                                    |        | (656   | )                          |  |      | (228                  | ) |        |   | (2,266 | ) |  |   | (1,766 | ) |  |   | (500  | )
|Savings                   |  |                                                     | 7              |   |                                                    |        | 4      |                            |  |      | 3                     |   |        |   | 3      |   |  |   | 2      |   |  |   | 1     |  
|Time                      |  |                                                     | 455            |   |                                                    |        | (725   | )                          |  |      | 1,180                 |   |        |   | 2,565  |   |  |   | (1,074 | ) |  |   | 3,639 |  
|                          |  |                                                     |                |   |                                                    |        |        |                            |  |      |                       |   |        |   |        |   |  |   |        |   |  |   |       |  
|Total deposits            |  |                                                     | (389           | ) |                                                    |        | (1,350 | )                          |  |      | 961                   |   |        |   | 404    |   |  |   | (2,754 | ) |  |   | 3,158 |  
|Federal funds purchased   |  |                                                     | 1              |   |                                                    |        | (2     | )                          |  |      | 3                     |   |        |   | 2      |   |  |   | (6     | ) |  |   | 8     |  
|Other borrowings          |  |                                                     | (26            | ) |                                                    |        | (316   | )                          |  |      | 290                   |   |        |   | 178    |   |  |   | (676   | ) |  |   | 854   |  
|                          |  |                                                     |                |   |                                                    |        |        |                            |  |      |                       |   |        |   |        |   |  |   |        |   |  |   |       |  
|Total interest expense    |  |                                                     | (414           | ) |                                                    |        | (1,668 | )                          |  |      | 1,254                 |   |        |   | 584    |   |  |   | (3,436 | ) |  |   | 4,020 |  
|                          |  |                                                     |                |   |                                                    |        |        |                            |  |      |                       |   |        |   |        |   |  |   |        |   |  |   |       |  
|Net interest income       |  | $                                                   | (190           | ) |                                                    | $      | (1,066 | )                          |  | $    | 876                   |   |        | $ | (823   | ) |  | $ | (3,065 | ) |  | $ | 2,242 |  
|                          |  |                                                     |                |   |                                                    |        |        |                            |  |      |                       |   |        |   |        |   |  |   |        |   |  |   |       |  

Average Balances, Income and Expenses, Yields and Rates

The net interest spread on a tax-equivalent basis decreased 78 basis points to 2.66% for first nine months of 2008 when compared to 3.44% for the same
period in 2007. The yield on earning assets decreased 205 basis points to 6.05% in 2008 compared to 8.10% for the first nine months of 2007, while the cost of interest bearing liabilities only decreased 127 basis points to 3.39% from 4.66%,
respectively, for the same period. On average, liability growth outstripped asset growth and paired with a swifter decline in asset yields, served to compress our net interest margin 128 basis points to 3.06%

Bank Owned Life Insurance (BOLI) has been included in interest earning assets. We purchased $6,000,000 in BOLI during the fourth quarter of 2005. The
income on BOLI is not subject to Federal Income tax, giving it a tax-effective yield of 5.51% for the first nine months of 2008 compared to 5.93% for the same period in 2007.



17



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##### Table of Contents

In July 2006 we added additional capital through the issuance of $10,000,000 in trust preferred
securities. These securities are treated as subordinated debt and have been included in other borrowings. The cost on trust preferred securities decreased to 5.06% from 6.91% in the first nine months of 2008 compared to 2007.

The following table sets forth average balances of total interest earning assets and total interest bearing liabilities for the periods indicated,
showing the average distribution of assets, liabilities, stockholders equity and the related income, expense and corresponding weighted average yields and costs.

AVERAGE BALANCES, INCOME AND EXPENSE, YIELDS AND RATES

The following is an analysis of net interest income, on a
taxable equivalent basis.



|                                              |  |                                 |             |   |                |   |              |  |      |                |  |   |                |   |              |   |            |  |      |  
|--------------------------------------------- |  | ------------------------------- | ----------- | - | -------------- | - | ------------ |  | ---- | -------------- |  | - | -------------- | - | ------------ | - | ---------- |  | ---- | -
|                                              |  | For Periods Ended September 30, |            
|                                              |  | 2008                            |             |   | 2007           |  
|                                              |  | AverageBalance                  |             |   | Income/Expense |   | YieldRate(1) |  |      | AverageBalance |  |   | Income/Expense |   | YieldRate(1) |  
|ASSETS                                        |  |                                 |             |   |                |   |              |  |      |                |  |   |                |   |              |   |            |  |      |  
|Securities, at amortized cost                 |  |                                 |             |   |                |   |              |  |      |                |  |   |                |   |              |   |            |  |      |  
|Taxable                                       |  | $                               | 12,290,979  |   |                | $ | 367,649      |  | 4.00 | %              |  | $ | 13,898,214     |   |              | $ | 444,404    |  | 4.28 | %
|                                              |  |                                 |             |   |                |   |              |  |      |                |  |   |                |   |              |   |            |  |      |  
|Total securities                              |  |                                 | 12,290,979  |   |                |   | 367,649      |  | 4.00 | %              |  |   | 13,898,214     |   |              |   | 444,404    |  | 4.28 | %
|Loans, net                                    |  |                                 | 468,461,049 |   |                |   | 21,611,652   |  | 6.16 | %              |  |   | 350,244,048    |   |              |   | 21,811,033 |  | 8.33 | %
|Federal funds sold                            |  |                                 | 1,051,275   |   |                |   | 17,444       |  | 2.22 | %              |  |   | 444,316        |   |              |   | 18,522     |  | 5.57 | %
|Dividend-earning restricted equity securities |  |                                 | 4,332,645   |   |                |   | 162,206      |  | 5.00 | %              |  |   | 2,921,981      |   |              |   | 121,513    |  | 5.56 | %
|Deposits in other banks                       |  |                                 | 3,798,859   |   |                |   | 65,040       |  | 2.29 | %              |  |   | 1,535,000      |   |              |   | 57,283     |  | 4.99 | %
|Bank owned life insurance (2)                 |  |                                 | 6,630,381   |   |                |   | 273,274      |  | 5.51 | %              |  |   | 6,386,736      |   |              |   | 283,129    |  | 5.93 | %
|                                              |  |                                 |             |   |                |   |              |  |      |                |  |   |                |   |              |   |            |  |      |  
|Total earning assets                          |  |                                 | 496,565,188 |   |                |   | 22,497,265   |  | 6.05 | %              |  |   | 375,430,295    |   |              |   | 22,735,884 |  | 8.10 | %
|                                              |  |                                 |             |   |                |   |              |  |      |                |  |   |                |   |              |   |            |  |      |  
|Less: Allowance for loan losses               |  |                                 | (4,378,100  | ) |                |   |              |  |      |                |  |   | (3,436,884     | ) |              |   |            |  |      |  
|Total nonearning assets                       |  |                                 | 55,291,908  |   |                |   |              |  |      |                |  |   | 24,096,411     |   |              |   |            |  |      |  
|                                              |  |                                 |             |   |                |   |              |  |      |                |  |   |                |   |              |   |            |  |      |  
|Total assets                                  |  | $                               | 547,478,996 |   |                |   |              |  |      |                |  | $ | 396,089,822    |   |              |   |            |  |      |  
|                                              |  |                                 |             |   |                |   |              |  |      |                |  |   |                |   |              |   |            |  |      |  
|                                              |  |                                 |             |   |                |  
|LIABILITIES and SHAREHOLDERS EQUITY          |  |                                 |             |   |                |   |              |  |      |                |  |   |                |   |              |   |            |  |      |  
|Interest-bearing deposits:                    |  |                                 |             |   |                |   |              |  |      |                |  |   |                |   |              |   |            |  |      |  
|Checking                                      |  | $                               | 16,710,550  |   |                | $ | 121,729      |  | 0.97 | %              |  | $ | 10,505,021     |   |              | $ | 19,833     |  | 0.25 | %
|Regular savings                               |  |                                 | 6,228,006   |   |                |   | 29,540       |  | 0.63 | %              |  |   | 6,072,736      |   |              |   | 27,247     |  | 0.60 | %
|Money market savings                          |  |                                 | 128,880,070 |   |                |   | 2,708,259    |  | 2.81 | %              |  |   | 144,811,491    |   |              |   | 4,974,332  |  | 4.59 | %
|Certificates of deposit                       |  |                                 |             |   |                |   |              |  |      |                |  |   |                |   |              |   |            |  |      |  
|$100,000 and over                             |  |                                 | 126,529,066 |   |                |   | 3,008,377    |  | 3.18 | %              |  |   | 52,078,722     |   |              |   | 2,003,002  |  | 5.14 | %
|Under $100,000                                |  |                                 | 101,206,992 |   |                |   | 3,603,853    |  | 4.76 | %              |  |   | 56,128,966     |   |              |   | 2,043,483  |  | 4.87 | %
|                                              |  |                                 |             |   |                |   |              |  |      |                |  |   |                |   |              |   |            |  |      |  
|Total interest-bearing deposits               |  |                                 | 379,554,684 |   |                |   | 9,471,758    |  | 3.33 | %              |  |   | 269,596,936    |   |              |   | 9,067,897  |  | 4.50 | %
|Borrowings                                    |  |                                 | 59,109,988  |   |                |   | 1,657,240    |  | 3.75 | %              |  |   | 33,225,095     |   |              |   | 1,476,555  |  | 5.94 | %
|                                              |  |                                 |             |   |                |   |              |  |      |                |  |   |                |   |              |   |            |  |      |  
|Total interest-bearing liabilities            |  |                                 | 438,664,672 |   |                | $ | 11,128,998   |  | 3.39 | %              |  |   | 302,822,031    |   |              | $ | 10,544,452 |  | 4.66 | %
|Noninterest-bearing liabilities               |  |                                 |             |   |                |   |              |  |      |                |  |   |                |   |              |   |            |  |      |  
|Demand deposits                               |  |                                 | 62,816,450  |   |                |   |              |  |      |                |  |   | 56,719,238     |   |              |   |            |  |      |  
|Other noninterest-bearing liabilities         |  |                                 | 5,481,517   |   |                |   |              |  |      |                |  |   | 998,557        |   |              |   |            |  |      |  
|                                              |  |                                 |             |   |                |   |              |  |      |                |  |   |                |   |              |   |            |  |      |  
|Total liabilities                             |  |                                 | 506,962,639 |   |                |   |              |  |      |                |  |   | 360,539,826    |   |              |   |            |  |      |  
|Shareholders equity                          |  |                                 | 40,516,357  |   |                |   |              |  |      |                |  |   | 35,549,996     |   |              |   |            |  |      |  
|                                              |  |                                 |             |   |                |   |              |  |      |                |  |   |                |   |              |   |            |  |      |  
|Total liabilities and shareholders equity    |  | $                               | 547,478,996 |   |                |   |              |  |      |                |  | $ | 396,089,822    |   |              |   |            |  |      |  
|                                              |  |                                 |             |   |                |   |              |  |      |                |  |   |                |   |              |   |            |  |      |  
|Net interest income (2)                       |  |                                 |             |   |                | $ | 11,368,267   |  |      |                |  |   |                |   |              | $ | 12,191,432 |  |      |  
|                                              |  |                                 |             |   |                |   |              |  |      |                |  |   |                |   |              |   |            |  |      |  
|Interest rate spread (2)(3)                   |  |                                 |             |   |                |   |              |  | 2.66 | %              |  |   |                |   |              |   |            |  | 3.44 | %
|                                              |  |                                 |             |   |                |   |              |  |      |                |  |   |                |   |              |   |            |  |      |  
|Net interest margin (2)(4)                    |  |                                 |             |   |                |   |              |  | 3.06 | %              |  |   |                |   |              |   |            |  | 4.34 | %
|                                              |  |                                 |             |   |                |   |              |  |      |                |  |   |                |   |              |   |            |  |      |  



|(1) | Yields are annualized and based on average daily balances.
|--- | ----------------------------------------------------------

|(2) | Income and yields are reported on a taxable equivalent basis assuming a federal tax rate of 34%, with a $92,913 adjustment for 2008 and a $96,264 adjustment for 2007.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Represents the differences between the yield on total average earning assets and the cost of total interest-bearing liabilities.
|--- | --------------------------------------------------------------------------------------------------------------------------------

|(4) | Represents the ratio of net interest-earnings to the average balance of interest-earning assets.
|--- | ------------------------------------------------------------------------------------------------



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##### Table of Contents

Noninterest Income

Total noninterest income was $5,269,542 for the third quarter of 2008, an increase of $3,064,041 or 138.9%, compared to $2,205,501 for the same period in 2007. Noninterest income increased 253.0% or $11,369,129 to
$15,862,063 during the first nine months of 2008 compared to 2007. This significant increase is due to a change in management focus with regard to the expansion of our mortgage operations. The following table sets forth the major components of
noninterest income for the three months ended and the first nine months of 2008 and 2007.



|                                       |  |                                         |           |                                        |      |   |           |  |   |            |   |  |   |          
|-------------------------------------- |  | --------------------------------------- | --------- | -------------------------------------- | ---- | - | --------- |  | - | ---------- | - |  | - | ---------
|                                       |  | For the Three Months EndedSeptember 30, |           | For the Nine Months EndedSeptember 30,
|                                       |  | 2008                                    |           |                                        | 2007 |   | 2008      |  |   | 2007      
|Mortgage banking income                |  | $                                       | 4,444,302 |                                        |      | $ | 1,567,605 |  | $ | 13,207,029 |   |  | $ | 2,626,483
|Investment and insurance commissions   |  |                                         | 294,671   |                                        |      |   | 288,825   |  |   | 991,095    |   |  |   | 835,129  
|Service charges and fees               |  |                                         | 357,395   |                                        |      |   | 257,155   |  |   | 1,021,517  |   |  |   | 772,325  
|Security gains, net                    |  |                                         |          |                                        |      |   |          |  |   | 10,801     |   |  |   |         
|Loss on sale of other real estate, net |  |                                         | (33,964   | )                                      |      |   |          |  |   | (1,586     | ) |  |   |         
|Bank owned life insurance income       |  |                                         | 61,120    |                                        |      |   | 63,585    |  |   | 180,361    |   |  |   | 186,865  
|Title company income                   |  |                                         | 126,238   |                                        |      |   | 19,527    |  |   | 179,545    |   |  |   | 51,482   
|Gain on sale of assets, net            |  |                                         |          |                                        |      |   |          |  |   | 24,410     |   |  |   |         
|Other                                  |  |                                         | 19,780    |                                        |      |   | 8,804     |  |   | 248,891    |   |  |   | 20,650   
|                                       |  |                                         |           |                                        |      |   |           |  |   |            |   |  |   |          
|                                       |  | $                                       | 5,269,542 |                                        |      | $ | 2,205,501 |  | $ | 15,862,063 |   |  | $ | 4,492,934
|                                       |  |                                         |           |                                        |      |   |           |  |   |            |   |  |   |          

Gross mortgage banking income from Monarch Mortgage and our commercial mortgage banking
subsidiary, Monarch Capital, LLC, increased $2,876,697 or 183.5% to $4,444,302 for the third quarter of 2008 compared to 2007. Year-to-date mortgage banking income increased 402.8% or $10,580,546. In the first half of 2007 our mortgage operations
consisted of a small group of mortgage lenders utilizing an outside company for mortgage processing. In June 2007, our management undertook a significant expansion of mortgage operations, which included an in-house processing center and a full
service multi-branch mortgage operation, under the name Monarch Mortgage. The newly expanded Monarch Mortgage closed 519 loans totaling $126,682,154 in the third quarter for 1,650 year-to-date 2008 closings totaling $431,448,275. This compares to
293 mortgage loan closings totaling $69,007,124 in the third quarter of 2007 and 468 year-to-date 2007 closings totaling $106,435,327.

Investment and insurance commissions increased $5,846 or 2.0% in the third quarter of 2008 and $155,966 or 18.7% for the first nine months compared to the same period in 2007. On October 1, 2006, through Monarch Investment, LLC, we
formed a subsidiary called Virginia Asset Group, LLC (VAG), with an investment advisor to sell insurance and non-deposit investment products. We have a 51% ownership interest in VAG. Other income for the first nine months of 2008 includes a one-time
gain totaling $217,325 from the change of ownership of Monarch Investment, LLC, resulting from the merger of BI Investments, LLC into Infinex Financial Group.

Service charges and fees on deposit accounts increased $100,240 for the third quarter and $249,192 for the first nine months of 2008, which represents a quarterly increase of 39.0% and a year-to-date increase of 32.3%
over the same periods in 2007. The primary components of this increase were deposit account growth and ATM transaction fees. We have an agreement with a third-party vendor to brand ATMs in Food Lion grocery stores in southeast Virginia and northeast
North Carolina. In return for supplying the cash for the machines and paying the machines cash servicing fees, we receive a portion of the transaction surcharge and our customers can withdraw cash from the machines without a fee or transaction
surcharge. A portion of the ATM fee increase was also due to fees generated at our 9 ATMs located at banking center sites. The third-party vendor relationship plus our 9 office ATMs creates a network of over 50 active branded ATMs.

There were no security gains to report in either the third quarter of 2008 or 2007. Year-to date, five of our agency securities have been called prior to
final maturity. The majority of these securities had been purchased at a discount which resulted in gains totaling $10,801. The gain on sale of other real estate reported in the second quarter of 2008 has been offset by losses in the third quarter
with additional expenses and valuation adjustments for two properties that were transferred to other real estate.

Bank Owned Life
Insurance (BOLI), is included in the net interest income calculation for yield analysis. We purchased $6.0 million in BOLI during the fourth quarter of 2005. The income from BOLI, which is not subject to tax, has declined slightly due to rate
adjustments. The tax-effective earnings are $92,606 for the third quarter and $273,274 for the first nine months of 2008 compared to $96,341 and $283,129, respectively, for the same period in 2007.



19



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##### Table of Contents

Through Monarch Investment, LLC, we own a 75% interest in a title company, Real Estate Security Agency,
LLC (RESA), which had year-to-date net income of $179,545. Income reported in the first nine months of 2007 is related to a minority interest we held in Bankers Title of Central Virginia, LLC, which was sold. Prior to the third quarter 2008 title
company income had been accounted for using the equity method. RESA is now being treated as a consolidated entity for accounting purposes.

Noninterest
Expense

Total noninterest expenses increased $1,978,492, or 36.4% for the third quarter and $8,763,527, or 69.0% for the first nine
months of 2008 compared to the same periods in 2007. The following table sets forth the major components of noninterest expense for the three months ended and the first nine months of 2008.



|                                  |  |                                         |           |                                        |   |           |  |      |            |  |   |           
|--------------------------------- |  | --------------------------------------- | --------- | -------------------------------------- | - | --------- |  | ---- | ---------- |  | - | ----------
|                                  |  | For the Three Months EndedSeptember 30, |           | For the Nine Months EndedSeptember 30,
|                                  |  | 2008                                    |           | 2007                                   |   | 2008      |  | 2007
|Salaries and employee benefits    |  | $                                       | 4,714,837 |                                        | $ | 3,715,722 |  | $    | 14,222,938 |  | $ | 8,182,312 
|Occupancy expenses                |  |                                         | 545,350   |                                        |   | 344,897   |  |      | 1,593,265  |  |   | 926,935   
|Furniture and equipment expense   |  |                                         | 330,712   |                                        |   | 219,845   |  |      | 951,103    |  |   | 521,051   
|Loan origination expenses         |  |                                         | 386,727   |                                        |   | 179,211   |  |      | 1,311,311  |  |   | 460,557   
|Data processing services          |  |                                         | 156,888   |                                        |   | 158,329   |  |      | 489,318    |  |   | 465,155   
|Telephone                         |  |                                         | 94,966    |                                        |   | 79,312    |  |      | 297,641    |  |   | 168,447   
|Stationary and supplies           |  |                                         | 89,458    |                                        |   | 108,990   |  |      | 275,222    |  |   | 243,928   
|Professional fees                 |  |                                         | 80,982    |                                        |   | 134,747   |  |      | 247,481    |  |   | 321,747   
|Marketing expense                 |  |                                         | 90,306    |                                        |   | 103,808   |  |      | 253,847    |  |   | 214,888   
|Regulatory Assessment             |  |                                         | 75,000    |                                        |   | 55,754    |  |      | 211,210    |  |   | 109,754   
|Virginia Franchise Tax            |  |                                         | 95,940    |                                        |   | 49,696    |  |      | 220,164    |  |   | 242,037   
|ATM expense                       |  |                                         | 53,665    |                                        |   | 48,576    |  |      | 169,859    |  |   | 145,721   
|Amortization of intangible assets |  |                                         | 44,643    |                                        |   | 29,758    |  |      | 133,929    |  |   | 29,758    
|Other                             |  |                                         | 654,451   |                                        |   | 206,788   |  |      | 1,081,657  |  |   | 663,128   
|                                  |  |                                         |           |                                        |   |           |  |      |            |  |   |           
|                                  |  | $                                       | 7,413,925 |                                        | $ | 5,435,433 |  | $    | 21,458,945 |  | $ | 12,695,418
|                                  |  |                                         |           |                                        |   |           |  |      |            |  |   |           

Salaries and employee benefits showed the greatest increase compared to the same periods in 2007.
The third quarter 2008 increase was 26.9% or $999,115 and the year-to-date increase was 73.8% or $6,040,626. For comparative purposes, these figures represent slower growth trends than second quarter 2008 because our newly expanded mortgage
operations had hired much of their staff and was fully functioning during the third quarter of 2007. The majority of the increase in salaries was related to the personnel growth at Monarch Mortgage. With our expansion of mortgage operations
including entering other markets, the number of full-time equivalent employees has risen to 273 at September 30, 2008 compared to 217 for the same period in 2007. Secondary increases are attributable to the following factors: 1) an increase in
occupancy plus furniture and equipment expenses related to the additional banking and mortgage offices; 2) an increase in loan origination expense related to increased production by Monarch Mortgage; 3) an increase in telephone expenses related to
the mobile nature of our large mortgage workforce; 4) an industry-wide rate adjustment to Federal Deposit Insurance coupled with a higher assessment base.



|                                |  |                                                 |         |            |                                                |   |         |   |            |  |       |  
|------------------------------- |  | ----------------------------------------------- | ------- | ---------- | ---------------------------------------------- | - | ------- | - | ---------- |  | ----- | -
|                                |  | IncreaseFor the Three Months EndedSeptember 30, |         |            | IncreaseFor the Nine Months EndedSeptember 30, |  
|                                |  | Dollars                                         |         | Percentage |                                                |   | Dollars |   | Percentage | 
|Salaries and employee benefits  |  | $                                               | 999,115 |            | 26.9                                           | % |         | $ | 6,040,626  |  | 73.8  | %
|Occupancy expenses              |  |                                                 | 200,453 |            | 58.1                                           | % |         |   | 666,330    |  | 71.9  | %
|Furniture and equipment expense |  |                                                 | 110,867 |            | 50.4                                           | % |         |   | 430,052    |  | 82.5  | %
|Loan origination expenses       |  |                                                 | 207,516 |            | 115.8                                          | % |         |   | 850,754    |  | 184.7 | %
|Telephone                       |  |                                                 | 15,654  |            | 19.7                                           | % |         |   | 129,194    |  | 76.7  | %
|Regulatory Assessment           |  |                                                 | 19,246  |            | 34.5                                           | % |         |   | 101,456    |  | 92.4  | %



20



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##### Table of Contents

Income Taxes

The income tax provision was $412,700 for the third quarter of 2008 compared to $124,290 for the prior year. The effective tax rate for the third quarter of 2008 was 34.8%, compared to 28.4% for the same period in 2007. The year-to-date tax
provision for 2008 was $1,327,500 compared to $943,537 for the same period in 2007. The effective tax rate for the first half of 2008 was 33.2%, compared to 31.8% for the same period in 2007.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

GENERAL

Total assets increased 18.2% to $594,834,777 at September 30, 2008 when compared to assets of $503,163,771 at December 31, 2007. On an annual
basis total assets increased 28.7% at September 30, 2008 when compared to assets of $462,148,430 at September 30, 2007. Total loans as of September 30, 2008 were $501.1 million, an increase of $81.9 million, or 19.5%, from $419.2
million at year-end 2007. On an annual basis total loans increased $108.6 million, or 27.7%, from $392.5 million in September 2007. Loans held for sale were $36.4 million, an increase of $17.6 million from $18.8 million at December 31, 2007,
and on an annual basis mortgages held for sale increased $27.1 million from $9.3 million at September 30, 2007 primarily due to increased volume at our mortgage division. Investment securities were $17.8 million at September 30, 2008,
compared to $31.0 million at year-end 2007. On an annual basis, investments securities decreased $2.7 million, or 13.2% over September 30, 2007. Cash and cash equivalents were $14.2 million, an increase of $4.7 million, or 49.5% from $9.5
million at December 31, 2007.

Deposits increased $109.0 million, or 28.0%, during the nine months ended September 30, 2008. On
an annualized basis deposits increased $133.4 million or 36.5%. Noninterest-bearing demand deposit accounts increased $7.3 million to $73.4 million, an 11.0% increase over December 31, 2007 and $3.7 million on an annual basis when compared to
September 30, 2007. During the first quarter of 2008, we began offering several new interest-bearing demand deposit products. As a result, interest-bearing demand deposits increased to $16.9 million, a 53.6% or $5.9 million increase over $11.0
million at December 31, 2007. Interest-bearing demand deposits are included in interest-bearing deposits which totaled $425.3 million at September 30, 2008, compared to $323.6 million at year-end 2007. Money market deposits and
certificates of deposits (CDs) are the major categories of our interest-bearing deposits.

Money market accounts, which are typically
attractive to more rate sensitive depositors due to their higher relative yield coupled with accessibility, tend to be adversely impacted by declining rates and positive trends in the stock market. However, the current state of flux in economic
markets has led to a change in these trends. The pairing of lower rates and negative trends in the stock market has supported movement out of money markets and into short-term CDs. This trend has impacted our deposit mix. Money market deposits
declined $26.6 million to $110.4 million in September 2008 compared to $137.0 million at December 31, 2007. On an annual basis, money market deposits declined $32.3 million from $142.8 million at September 30, 2007. This trend, along with
loan growth and the funding needs of a growing mortgage operation has moved us to heavier reliance on CDs as a funding source. CDs have increased to $283.7 million, an increase of $159.5 million, or 128.4% over December 31, 2007 and $146.5
million, or 106.8% over $137.2 million at September 30, 2007. A portion of this growth has been in the form of out-of-market brokered CDs which can be obtained in a short period of time on a larger scale than in-market organic growth. We have
also found this source of deposits to be both efficient and cost effective compared to retail CD promotional pricing.

Stockholders
equity was $46.3 million at September 30, 2008, compared to $36.5 million at December 31, 2007. Components of the change in stockholders equity include net income of $2,667,561, net unrealized losses on available-for-sale securities
totaling $29,835, stock based compensation totaling $235,360, exercised options totaling $104,854, and issuance of common stock related to a private capital offering totaling $6,767,506.

Asset Quality

We had nonperforming assets totaling $5.3 million at September 30, 2008. During
the third quarter of 2008 we charged-off loan balances totaling $138 thousand and had recoveries on loans of $28 thousand. Nonperforming assets at December 31, 2007 totaled $414 thousand. Nonperforming assets traditionally consist of nonaccrual
loans, loans past due 90 days or more and still accruing interest, restructured loans and other real estate owned. We continue to demand a high level of credit quality on new loans.



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|                                          |  |                    |           |   |                   |   |         |  
|----------------------------------------- |  | ------------------ | --------- | - | ----------------- | - | ------- | -
|                                          |  | September 30, 2008 |           |   | December 31, 2007 |  
|Loans 90 days past due and still accruing |  | $                  | 930,980   |   |                   | $ | 332,520 |  
|Nonaccrual loans                          |  |                    | 3,965,878 |   |                   |   | 81,751  |  
|Other Real Estate                         |  |                    | 410,288   |   |                   |   |        |  
|                                          |  |                    |           |   |                   |   |         |  
|Total Nonperforming Assets                |  | $                  | 5,307,146 |   |                   | $ | 414,271 |  
|                                          |  |                    |           |   |                   |   |         |  
|Nonperforming assets to period end assets |  |                    | 0.89      | % |                   |   | 0.08    | %

Allowance for Loan Losses

The allowance for loan losses is to provide for losses inherent in the loan portfolio. Our management team is responsible for determining the level of the allowance for loan losses, subject to the review of the Board
of Directors. Among other factors, the Committee considers on a quarterly basis our historical loss experience, the size and composition of the loan portfolio, the value and adequacy of collateral and guarantors, nonperforming credits, our loan
Watch list, and national and local economic conditions.

Although we believe we have sufficient allowance for our existing
portfolio, there can be no assurances that an additional allowance for losses on existing loans may not be necessary in the future. The allowance for loan losses totaled $4,991,000 and $3,732,311 at September 30, 2008 and September 30,
2007, respectively. The ratio of the allowance for loan losses to total loans outstanding at September 30, 2008 and 2007 was 1.00% and 0.95%, respectively.

During the third quarter of 2008 and 2007, we recorded $480,581 and 384,518 in provision expense, respectively. Loans charged-off during the third quarter of 2008 totaled $138,086 and recoveries totaled $27,505 for a
net charge-off of $110,581. Year-to-date charged-off loans total $294,381 and recoveries total $64,768 for a net charge-off of $229,613. Loans charged-off during the third quarter and first nine months of 2007 totaled $147,689 and recoveries totaled
$1,482 for a net charge-off of $146,207. Since it began operations in 1999, we have recorded net charge-offs of approximately $510,041. The table below summarizes the activity in the allowance for loans losses for the three and nine month periods
ending September 30, 2008 and 2007.



|                                                              |  |                                         |           |   |                                        |   |           |      |  |   |             |   |  |   |             |  
|------------------------------------------------------------- |  | --------------------------------------- | --------- | - | -------------------------------------- | - | --------- | ---- |  | - | ----------- | - |  | - | ----------- | -
|                                                              |  | For the Three Months EndedSeptember 30, |           |   | For the Nine Months EndedSeptember 30, |  
|                                                              |  | 2008                                    |           |   | 2007                                   |   |           | 2008 |  |   | 2007        |  
|Balance, beginning of period                                  |  | $                                       | 4,621,000 |   |                                        | $ | 3,494,000 |      |  | $ | 3,976,000   |   |  | $ | 3,235,000   |  
|Provisions charged to operations                              |  |                                         | 480,581   |   |                                        |   | 384,518   |      |  |   | 1,244,613   |   |  |   | 643,518     |  
|Loans charged-off                                             |  |                                         | (138,086  | ) |                                        |   | (147,689  | )    |  |   | (294,381    | ) |  |   | (147,689    | )
|Recoveries                                                    |  |                                         | 27,505    |   |                                        |   | 1,482     |      |  |   | 64,768      |   |  |   | 1,482       |  
|                                                              |  |                                         |           |   |                                        |   |           |      |  |   |             |   |  |   |             |  
|Balance, end of period                                        |  | $                                       | 4,991,000 |   |                                        | $ | 3,732,311 |      |  | $ | 4,991,000   |   |  | $ | 3,732,311   |  
|                                                              |  |                                         |           |   |                                        |   |           |      |  |   |             |   |  |   |             |  
|Total loans outstanding                                       |  |                                         |           |   |                                        |   |           |      |  |   | 501,052,390 |   |  |   | 419,153,283 |  
|Ratio of allowance for loan losses to total loans outstanding |  |                                         |           |   |                                        |   |           |      |  |   | 1.00        | % |  |   | 0.95        | %

We have developed a methodology to determine an allowance to absorb probable loan losses inherent
in the portfolio based on evaluations of the potential collection of loans, historical loss experience, peer bank loss experience, delinquency trends, economic conditions, portfolio composition, and specific loss estimates for loans considered
substandard or doubtful. All commercial and commercial real estate loans that exhibit probable or observed credit weaknesses are subject to individual review. If necessary, reserves would be allocated to individual loans based on managements
estimate of the borrowers ability to repay the loan given the availability of collateral and other sources of cash flow. Any reserves for impaired loans are measured based on the present rate or fair value of the underlying collateral. We
evaluate the potential collection of both principal and interest when assessing the need for a loss accrual. A composite allowance factor that considers our and other peer bank loss experience ratios, delinquency trends, economic conditions, and
portfolio composition are applied to the total of commercial and commercial real estate loans not specifically evaluated.



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Homogenous loans, such as consumer installment, home equity loans, and smaller consumer loans may not be
individually reviewed and are generally risk graded at the same levels. The risk grade and reserves are generally established for each homogenous pool of loans and are based on the expected net charge-offs from a current trend in delinquencies,
losses or historical experience and general economic conditions. When information does arise to indicate that there is a credit weakness for a loan within this portfolio the loan is reviewed individually and reserves are allocated based on our
estimate of managements estimate of the borrowers ability to repay the loan given the availability of collateral and other sources of cash flow. We have no material delinquencies in these types of loans, and have not, since inception,
had a trend or an indication of a trend that would guide us in expected material losses in these types of homogenous pools of loans. We believe that the allowance for loan losses is adequate to absorb any inherent losses on existing loans in our
loan portfolio at September 30, 2008.

Liquidity

Our management team monitors and plans our liquidity position for future periods. Liquidity is provided from cash and due from banks, interest-bearing deposits in other banks, repayments from loans, increases in
deposits, lines of credit from four correspondent banks and two federal agency banks and a planned structured continuous maturity of investments. We believe that these factors provide sufficient and timely liquidity for the foreseeable future.

We also take into account any liquidity needs generated by off-balance sheet transactions such as commitments to extend credit,
commitments to purchase securities and standby letters of credit.

We have a line of credit that can equal up to 30% of assets with the
Federal Home Loan Bank of Atlanta (FHLB) that totaled approximately $94,355,320 with $57,655,065 available at September 30, 2008. This line is currently reduced by $5.0 million, which has been pledged as collateral for public deposits. Should
we ever desire to increase their line of credit beyond the current 30% limit, the FHLB would allow borrowings of up to 40% of total assets once we meet specific eligibility requirements.

Borrowings outstanding under the FHLB line of credit were $31,700,255 at September 30, 2008 and $63,531,200 at December 31, 2007. We had four
borrowing advances outstanding as of September 30, 2008, with the following final maturities:



|               |            |                 |               
|-------------- | ---------- | --------------- | --------------
|Advance Amount |            | Expiration Date
|$              | 10,000,000 |                 | October 2008  
|               | 10,000,000 |                 | November 2009 
|               | 10,000,000 |                 | November 2010 
|               | 1,700,255  |                 | September 2015
|               |            |                 |               
|$              | 31,700,255 |                 |               
|               |            |                 |               

The advance maturing in 2015 is a principal reducing credit that matures on September 28,
2015. Terms include 39 quarterly principal payments of $25k beginning December 2005, with a final payment of $1,025,500 in September 2015. We are utilizing this advance to match-fund several long term fixed rate loans. The interest rate for this
advance is fixed at 4.96%.

The advance maturing in 2009 bears a fixed interest rate of 4.04% and has a one-time conversion feature. The
FHLB has the option of a conversion to a variable rate instrument on November 17, 2008.

The advance maturing in 2010 bears a fixed
interest rate of 3.97% and has a one-time conversion feature. The FHLB has the option of a conversion to a variable rate instrument on May 15, 2009.

The advance maturing in October 2008 is a daily rate credit that matures October 1, 2008. The rate on September 30, 2008 was 3.25%.

In the course of operations, due to fluctuations in loan and deposit levels, we occasionally find it necessary to purchase Federal Funds on a short-term
basis. We also have federal funds lines of credit facilities established with five other banks in the total amount of $26,000,000. At September 30, 2008 there was $4,790,000 in outstanding balances on these lines at a rate of 2.0%. We also have
access to the Federal Reserve Banks discount window should a liquidity crisis occur.



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##### Table of Contents

We have no material commitments or long-term debt for capital expenditures at the report date. The only
long-term debt is for funding loans and is described below under Borrowings.

Off-Balance Sheet Arrangements

In the ordinary course of performing traditional banking services we enter into certain financial transactions that result in off-balance sheet
transactions. The off-balance sheet transactions recognized as of September 30, 2008 and December 31, 2007 were a line of credit to secure public funds and commitments to extend credit and standby letters of credit issued to customers. The
line of credit to secure public funds was from Federal Home Loan Bank for $5 million at September 30, 2008 and December 31, 2007.

Commitments to extend credit, which amounted to $264.1 million at September 30, 2008 and $242.2 million at December 31, 2007, represent legally binding agreements to lend to customers with fixed expiration dates or other
termination clauses. Since many of the commitments are expected to expire without being funded, the total commitment amounts do not necessarily represent future liquidity requirements.

We did not have any commitments to purchase securities on September 30, 2008 or December 31, 2007.

Standby letters of credit are conditional commitments we issue guaranteeing the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements. At September 30, 2008 and December 31, 2007, we had $5.9 million and $6.2 million, respectively, in outstanding standby letters of credit.

We have eighteen non-cancelable leases for premises. The original lease terms are from one to twenty-one years and have various renewal and option dates.

Capital Adequacy

We are subject to
various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could
have a direct material effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of assets,
liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other
factors.

Management reviews the adequacy of our capital on an ongoing basis with reference to the size, composition, and quality of our
resources and compliance with regulatory requirements and industry standards. Management seeks to maintain a capital structure that will assure an adequate level of capital to support anticipated asset growth and absorb potential losses.

In June 2008, we issued and sold 774,110 shares of our common stock to the selling shareholders in two private placements. Selling shareholders were
accredited investors and included certain qualifying insiders. These insiders were members of our board of directors and senior management whose purchases were made in accordance with NASDAQ Capital Market guidelines. We will use the proceeds from
the private placements for working capital and general corporate purposes, including supporting our growth initiatives.

Federal regulatory
risk-based capital ratio guidelines require percentages to be applied to various assets including off-balance sheet assets in relation to their perceived risk. Tier 1 capital consists of stockholders equity and minority interests in
consolidated subsidiaries, less net unrealized gains on available-for-sale securities. Tier 2 capital, a component of total capital, consists of a portion of the allowance for loan losses, certain components of nonpermanent preferred stock and
subordinated debt. The $10 million in trust preferred securities we issued in July 2006 qualified as Tier 1 capital. Our ratios exceed regulatory requirements.



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##### Table of Contents

The following table sets forth our risk-based capital position at September 30, 2008 and
December 31, 2007:



|                                                   |  |                        |        |       |                              |   |         |                                                     |        |  |      |         |  |       |        |  |       |  
|-------------------------------------------------- |  | ---------------------- | ------ | ----- | ---------------------------- | - | ------- | --------------------------------------------------- | ------ |  | ---- | ------- |  | ----- | ------ |  | ----- | -
|                                                   |  | Actual                 |        |       | For Capital AdequacyPurposes |   |         | To Be Well CapitalizedUnder PromptCorrective Action |       
|                                                   |  | Amounts                |        | Ratio |                              |   | Amounts |                                                     | Ratio  |  |      | Amounts |  | Ratio |       
|                                                   |  | (Dollars in Thousands) |       
|As of September 30, 2008                           |  |                        |        |       |                              |   |         |                                                     |        |  |      |         |  |       |        |  |       |  
|Total Risk-Based Capital Ratio                     |  | $                      | 59,485 |       | 12.11                        | % |         | $                                                   | 39,296 |  | 8.00 | %       |  | $     | 49,121 |  | 10.00 | %
|(Total Risk-Based Capital to Risk-Weighted Assets) |  |                        |        |       |                              |   |         |                                                     |        |  |      |         |  |       |        |  |       |  
|                                                   |  |                        |        |       |                              |  
|Tier 1 Risk-Based Capital Ratio                    |  | $                      | 54,494 |       | 11.09                        | % |         | $                                                   | 19,655 |  | 4.00 | %       |  | $     | 29,483 |  | 6.00  | %
|(Tier 1 Capital to Risk-Weighted Assets)           |  |                        |        |       |                              |   |         |                                                     |        |  |      |         |  |       |        |  |       |  
|                                                   |  |                        |        |       |                              |  
|Tier 1 Leverage Ratio                              |  | $                      | 54,494 |       | 9.42                         | % |         | $                                                   | 23,140 |  | 4.00 | %       |  | $     | 28,925 |  | 5.00  | %
|(Tier 1 Capital to Average Assets)                 |  |                        |        |       |                              |   |         |                                                     |        |  |      |         |  |       |        |  |       |  
|                                                   |  |                        |        |       |                              |  
|As of December 31, 2007                            |  |                        |        |       |                              |   |         |                                                     |        |  |      |         |  |       |        |  |       |  
|Total Risk-Based Capital Ratio                     |  | $                      | 48,590 |       | 10.05                        | % |         | $                                                   | 38,678 |  | 8.00 | %       |  | $     | 48,348 |  | 10.00 | %
|(Total Risk-Based Capital to Risk-Weighted Assets) |  |                        |        |       |                              |   |         |                                                     |        |  |      |         |  |       |        |  |       |  
|                                                   |  |                        |        |       |                              |  
|Tier 1 Risk-Based Capital Ratio                    |  | $                      | 44,614 |       | 9.22                         | % |         | $                                                   | 19,358 |  | 4.00 | %       |  | $     | 29,033 |  | 6.00  | %
|(Tier 1 Capital to Risk-Weighted Assets)           |  |                        |        |       |                              |   |         |                                                     |        |  |      |         |  |       |        |  |       |  
|                                                   |  |                        |        |       |                              |  
|Tier 1 Leverage Ratio                              |  | $                      | 44,614 |       | 9.56                         | % |         | $                                                   | 18,668 |  | 4.00 | %       |  | $     | 23,334 |  | 5.00  | %
|(Tier 1 Capital to Average Assets)                 |  |                        |        |       |                              |   |         |                                                     |        |  |      |         |  |       |        |  |       |  



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##### Table of Contents

|ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|------- | ----------------------------------------------------------

The effective management of market risk is essential to achieving our objectives. Market risk reflects the risk of economic loss resulting from adverse changes in market prices and interest rates. This risk of loss can be reflected in
diminished current market values and/or reduced potential net interest income in future periods. We are not subject to currency exchange risk or commodity price risk.

As a financial institution, interest rate risk and its impact on net interest income is the primary market risk exposure. The Asset/Liability Management Committee (ALCO) is primarily responsible for
establishing asset and liability strategies and for monitoring and controlling liquidity and interest rate risk. We evaluate interest sensitivity risk in accordance with its asset liability policies, and then formulates strategies regarding asset
originations, pricing, funding sources, and off-balance sheet commitments in order to decrease sensitivity risk. These strategies are based on managements outlook regarding future interest rate movements, the state of the regional and national
economy, and other financial and business risk factors. We establish prices for deposits and loans based primarily on local market conditions.

The interest sensitivity position (gap) is the difference between interest sensitive assets and interest sensitive liabilities in a specific time interval. The gap can be managed by repricing assets or liabilities, affected by
selling securities available-for-sale, by replacing an asset or liability at maturity, or by adjusting the interest rate or the life of an asset or liability. Matching of assets and liabilities repricing in the same interval helps to hedge the risk
and minimize the impact on interest income in periods of rising and falling interest rates.

Generally, positive gaps affect net interest
margins and earnings negatively in periods of falling rates, and conversely, higher negative gaps adversely impact net interest margin and earnings in periods of rising rates as a higher volume of liabilities will reprice quicker than assets over
the period for which the gap is computed.

Impacts of changing interest rates on loans and deposits are reflected in our financial
statements. Management believes that the mortgage banking operations of its division, Monarch Mortgage, provide somewhat of a natural interest rate hedge, in that we are interest rate sensitive to a downward change in the prime rate for short term
periods. When loan interest rates decline, our earnings will be negatively impacted but the mortgage companys volume should increase as the demand for refinancing and purchase money mortgages increase. The reverse should occur in a rising
interest rate environment.

Monarch is asset-sensitive, primarily due to its adjustable rate loan portfolio. The majority of the our loan
portfolio is indexed to the Wall Street Journal Prime rate and can adjust either daily or monthly. This asset-sensitive position positively impacts our business in a rising rate environment, as asset-yields rise faster than the cost of funding those
assets.



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|ITEM 4. | CONTROLS AND PROCEDURES
|------- | -----------------------

We maintain a system of
internal controls and procedures designed to provide reasonable assurance as to the reliability of our published financial statements and other disclosures included in this report. Within the 90 days prior to the date of this report, we carried out
an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant
to Exchange Act Rule 13a-14. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information relating to our
company (including our consolidated subsidiaries) required to be included in periodic SEC filings. There have been no significant changes in our internal controls or in other factors that could significantly affect internal controls subsequent to
the date we carried out its evaluation.



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##### Table of Contents

PART IIOTHER INFORMATION



|Item 1. | Legal Proceedings
|------- | -----------------

None.



|Item 2. | Changes in Securities
|------- | ---------------------

None.



|Item 3. | Defaults Upon Senior Securities
|------- | -------------------------------

Not applicable.



|Item 4. | Submissions of Matters to a Vote of Security Holders
|------- | ----------------------------------------------------

None.



|Item 5. | Other Information
|------- | -----------------

None.



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|Item 6. | Exhibits and Reports on Form 8-K
|------- | --------------------------------



| | a. | Exhibits
| | -- | --------

Exhibit 11  Refer to EPS calculation in
the Notes to Financial Statements

Exhibit 31.1  Certification of CEO pursuant to Rule 13a-14(a)

Exhibit 31.2  Certification of Principal Financial Officer pursuant to Rule 13a-14(a)

Exhibit 32.1  Certification of CEO and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002



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SIGNATURES

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



|                                                   |  |  |  |                        
|-------------------------------------------------- |  |  |  | -----------------------
|MONARCH FINANCIAL HOLDINGS, INC.                   |  |  |  |                        
|                                                   |  | 
|/s/ William F. Rountree, Jr                        |  |  |  |                        
|William F. Rountree, Jr.                           |  |  |  | Date: November 14, 2008
|President & Chief Executive Officer                |  |  |  |                        
|                                                   |  | 
|/s/ Brad E. Schwartz.                              |  |  |  |                        
|Brad E. Schwartz                                   |  |  |  | Date: November 14, 2008
|Executive Vice President & Chief Financial Officer |  |  |  |                        



30