##### Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549



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FORM 10-Q



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

For Quarterly Period Ended: June 30, 2007

OR



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

Commission File Number: 000-52032



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MONARCH FINANCIAL HOLDINGS, INC.

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                    
|-------------------------------------------------------------- |  | -----------------------------------
|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)



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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, and 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  3,999,314 as of August 9, 2007



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##### Table of Contents

MONARCH FINANCIAL HOLDINGS, INC.

FORM 10-Q

JUNE 30, 2007

INDEX



|         |  |         |  |                                                                                                       |  |   
|-------- |  | ------- |  | ----------------------------------------------------------------------------------------------------- |  | --
|PART I.  |  |         |  | FINANCIAL INFORMATION                                                                                 |  |   
|         |  |         | 
|         |  | ITEM 1. |  | Consolidated Statements of Condition as of June 30, 2007 and December 31, 2006                        |  | 3 
|         |  |         | 
|         |  |         |  | Consolidated Statements of Income for the three and six months ended June 30, 2007 and June 30, 2006  |  | 4 
|         |  |         | 
|         |  |         |  | Consolidated Statements of Shareholders Equity for the periods ended June 30, 2007 and June 30, 2006 |  | 5 
|         |  |         | 
|         |  |         |  | Consolidated Statements of Cash Flows for the periods ended June 30, 2007 and June 30, 2006           |  | 6 
|         |  |         | 
|         |  |         |  | Notes to Consolidated Financial Statements                                                            |  | 7 
|         |  |         | 
|         |  | ITEM 2. |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                 |  | 14
|         |  |         | 
|         |  | ITEM 3. |  | Quantitative and Qualitative Disclosures about Market Risk                                            |  | 22
|         |  |         | 
|         |  | ITEM 4. |  | Controls and Procedures                                                                               |  | 23
|         |  |         | 
|PART II. |  |         |  | OTHER INFORMATION                                                                                     |  |   
|         |  |         | 
|         |  | Item 1. |  | Legal Proceedings                                                                                     |  | 24
|         |  |         | 
|         |  | Item 2. |  | Changes in Securities                                                                                 |  | 24
|         |  |         | 
|         |  | Item 3. |  | Defaults Upon Senior Securities                                                                       |  | 24
|         |  |         | 
|         |  | Item 4. |  | Submissions of Matters to Vote of Security Holders                                                    |  | 24
|         |  |         | 
|         |  | Item 5. |  | Other Information                                                                                     |  | 24
|         |  |         | 
|         |  | Item 6. |  | Exhibits and Reports on Form 8-K                                                                      |  | 25



2



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##### Table of Contents

PART I - FINANCIAL INFORMATION



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

Consolidated Statements of Condition

Monarch Financial Holdings, Inc. and Subsidiaries



|                                                                                                                              |  |                        |             |   |                         |   |             |  
|----------------------------------------------------------------------------------------------------------------------------- |  | ---------------------- | ----------- | - | ----------------------- | - | ----------- | -
|                                                                                                                              |  | UnauditedJune 30, 2007 |             |   | AuditedDecember 31,2006 |  
|ASSETS:                                                                                                                       |  |                        |             |   |                         |   |             |  
|Cash and due from banks                                                                                                       |  | $                      | 10,553,586  |   |                         | $ | 9,504,743   |  
|Interest-bearing bank balances                                                                                                |  |                        | 4,482,747   |   |                         |   | 7,963,785   |  
|Federal funds sold                                                                                                            |  |                        | 845,710     |   |                         |   | 1,497,814   |  
|                                                                                                                              |  |                        |             |   |                         |   |             |  
|Total cash and cash equivalents                                                                                               |  |                        | 15,882,043  |   |                         |   | 18,966,342  |  
|                                                                                                                              |  |                       
|Investment securities held-to-maturity, at cost                                                                               |  |                        | 18,581,750  |   |                         |   | 38,573,804  |  
|Investment securities available-for-sale, at fair value                                                                       |  |                        | 8,835,639   |   |                         |   | 11,454,863  |  
|Loans held for sale                                                                                                           |  |                        | 7,473,575   |   |                         |   | 606,400     |  
|                                                                                                                              |  |                       
|Loans:                                                                                                                        |  |                        |             |   |                         |   |             |  
|Loans, net of unearned income                                                                                                 |  |                        | 357,535,528 |   |                         |   | 321,263,026 |  
|Less: allowance for loan losses                                                                                               |  |                        | (3,494,000  | ) |                         |   | (3,235,000  | )
|                                                                                                                              |  |                        |             |   |                         |   |             |  
|Loans, net                                                                                                                    |  |                        | 354,041,528 |   |                         |   | 318,028,026 |  
|                                                                                                                              |  |                       
|Interest receivable                                                                                                           |  |                        | 1,769,751   |   |                         |   | 1,646,979   |  
|Property and equipment, net                                                                                                   |  |                        | 8,256,806   |   |                         |   | 6,684,765   |  
|Restricted equity securities                                                                                                  |  |                        | 3,654,800   |   |                         |   | 3,750,600   |  
|Bank owned life insurance                                                                                                     |  |                        | 6,420,431   |   |                         |   | 6,297,151   |  
|Other assets                                                                                                                  |  |                        | 2,599,613   |   |                         |   | 1,710,645   |  
|                                                                                                                              |  |                        |             |   |                         |   |             |  
|Total assets                                                                                                                  |  | $                      | 427,515,936 |   |                         | $ | 407,719,575 |  
|                                                                                                                              |  |                        |             |   |                         |   |             |  
|LIABILITIES:                                                                                                                  |  |                        |             |   |                         |   |             |  
|Deposits:                                                                                                                     |  |                        |             |   |                         |   |             |  
|Noninterest-bearing                                                                                                           |  | $                      | 69,310,806  |   |                         | $ | 62,685,326  |  
|Interest-bearing                                                                                                              |  |                        | 273,635,468 |   |                         |   | 251,428,149 |  
|                                                                                                                              |  |                        |             |   |                         |   |             |  
|Total deposits                                                                                                                |  |                        | 342,946,274 |   |                         |   | 314,113,475 |  
|                                                                                                                              |  |                       
|Borrowings:                                                                                                                   |  |                        |             |   |                         |   |             |  
|Federal Home Loan Bank advances                                                                                               |  |                        | 37,025,159  |   |                         |   | 48,075,117  |  
|Trust preferred subordinated debt                                                                                             |  |                        | 10,000,000  |   |                         |   | 10,000,000  |  
|                                                                                                                              |  |                        |             |   |                         |   |             |  
|Total borrowings                                                                                                              |  |                        | 47,025,159  |   |                         |   | 58,075,117  |  
|                                                                                                                              |  |                       
|Other liabilities                                                                                                             |  |                        | 1,242,100   |   |                         |   | 1,489,330   |  
|                                                                                                                              |  |                        |             |   |                         |   |             |  
|Total liabilities                                                                                                             |  |                        | 391,213,533 |   |                         |   | 373,677,922 |  
|                                                                                                                              |  |                        |             |   |                         |   |             |  
|Minority interests in subsidiary                                                                                              |  |                        | 33,202      |   |                         |   | 27,619      |  
|                                                                                                                              |  |                       
|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 4,080,856 and 4,038,548 shares, respectively |  |                        | 20,404,280  |   |                         |   | 20,192,740  |  
|Additional paid-in capital                                                                                                    |  |                        | 10,008,638  |   |                         |   | 9,669,586   |  
|Accumulated earnings                                                                                                          |  |                        | 5,975,120   |   |                         |   | 4,261,537   |  
|Accumulated other comprehensive loss                                                                                          |  |                        | (118,837    | ) |                         |   | (109,829    | )
|                                                                                                                              |  |                        |             |   |                         |   |             |  
|Total stockholders equity                                                                                                    |  |                        | 36,269,201  |   |                         |   | 34,014,034  |  
|                                                                                                                              |  |                        |             |   |                         |   |             |  
|Total liabilities and stockholders equity                                                                                    |  | $                      | 427,515,936 |   |                         | $ | 407,719,575 |  
|                                                                                                                              |  |                        |             |   |                         |   |             |  

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)
|------- | -------------------------------

Consolidated Statements of Income

Monarch Financial Holdings, Inc. and Subsidiaries

Unaudited



|                                                    |  |                         |           |   |                         |   |           |      |  |   |            |   |  |   |            |  
|--------------------------------------------------- |  | ----------------------- | --------- | - | ----------------------- | - | --------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                                    |  | 3 Months Ended June 30, |           |   | 6 Months Ended June 30, |  
|                                                    |  | 2007                    |           |   | 2006                    |   |           | 2007 |  |   | 2006       |  
|Interest income:                                    |  |                         |           |   |                         |   |           |      |  |   |            |   |  |   |            |  
|Interest and fees on loans                          |  | $                       | 7,247,317 |   |                         | $ | 5,668,172 |      |  | $ | 14,006,529 |   |  | $ | 10,707,258 |  
|Interest on investment securities                   |  |                         |           |   |                         |   |           |      |  |   |            |   |  |   |            |  
|Taxable                                             |  |                         | 147,336   |   |                         |   | 182,719   |      |  |   | 308,589    |   |  |   | 360,080    |  
|Interest on federal funds sold                      |  |                         | 6,563     |   |                         |   | 66,268    |      |  |   | 11,649     |   |  |   | 89,288     |  
|Dividends on equity securities                      |  |                         | 41,275    |   |                         |   | 17,573    |      |  |   | 77,597     |   |  |   | 45,668     |  
|Other interest income                               |  |                         | 16,974    |   |                         |   | 68,221    |      |  |   | 34,291     |   |  |   | 134,150    |  
|                                                    |  |                         |           |   |                         |   |           |      |  |   |            |   |  |   |            |  
|Total interest income                               |  |                         | 7,459,465 |   |                         |   | 6,002,953 |      |  |   | 14,438,655 |   |  |   | 11,336,444 |  
|                                                    |  |                         |           |   |                         |   |           |      |  |   |            |   |  |   |            |  
|Interest expense:                                   |  |                         |           |   |                         |   |           |      |  |   |            |   |  |   |            |  
|Interest on deposits                                |  |                         | 2,958,507 |   |                         |   | 2,389,931 |      |  |   | 5,716,132  |   |  |   | 4,432,948  |  
|Interest on trust preferred subordinated debt       |  |                         | 177,611   |   |                         |   |          |      |  |   | 351,705    |   |  |   |           |  
|Interest on borrowings                              |  |                         | 275,226   |   |                         |   | 128,268   |      |  |   | 553,012    |   |  |   | 253,736    |  
|                                                    |  |                         |           |   |                         |   |           |      |  |   |            |   |  |   |            |  
|Total interest expense                              |  |                         | 3,411,344 |   |                         |   | 2,518,199 |      |  |   | 6,620,849  |   |  |   | 4,686,684  |  
|                                                    |  |                         |           |   |                         |   |           |      |  |   |            |   |  |   |            |  
|Net interest income                                 |  |                         | 4,048,121 |   |                         |   | 3,484,754 |      |  |   | 7,817,806  |   |  |   | 6,649,760  |  
|Provision for loan losses                           |  |                         | 116,000   |   |                         |   | 178,887   |      |  |   | 259,000    |   |  |   | 275,144    |  
|                                                    |  |                         |           |   |                         |   |           |      |  |   |            |   |  |   |            |  
|Net interest income after provision for loan losses |  |                         | 3,932,121 |   |                         |   | 3,305,867 |      |  |   | 7,558,806  |   |  |   | 6,374,616  |  
|                                                    |  |                         |           |   |                         |   |           |      |  |   |            |   |  |   |            |  
|Noninterest income:                                 |  |                         |           |   |                         |   |           |      |  |   |            |   |  |   |            |  
|Mortgage banking income                             |  |                         | 598,331   |   |                         |   | 541,325   |      |  |   | 1,058,878  |   |  |   | 1,174,223  |  
|Service charges and fees                            |  |                         | 296,465   |   |                         |   | 218,412   |      |  |   | 546,304    |   |  |   | 420,845    |  
|Investment and insurance commissions                |  |                         | 269,805   |   |                         |   | 25,160    |      |  |   | 515,170    |   |  |   | 35,634     |  
|Other                                               |  |                         | 81,668    |   |                         |   | 62,767    |      |  |   | 172,662    |   |  |   | 123,399    |  
|                                                    |  |                         |           |   |                         |   |           |      |  |   |            |   |  |   |            |  
|Total noninterest income                            |  |                         | 1,246,269 |   |                         |   | 847,664   |      |  |   | 2,293,014  |   |  |   | 1,754,101  |  
|                                                    |  |                         |           |   |                         |   |           |      |  |   |            |   |  |   |            |  
|Noninterest expenses:                               |  |                         |           |   |                         |   |           |      |  |   |            |   |  |   |            |  
|Salaries and employee benefits                      |  |                         | 2,458,277 |   |                         |   | 1,699,047 |      |  |   | 4,466,590  |   |  |   | 3,331,472  |  
|Occupancy expenses                                  |  |                         | 302,090   |   |                         |   | 226,164   |      |  |   | 582,038    |   |  |   | 458,013    |  
|Furniture and equipment expenses                    |  |                         | 153,999   |   |                         |   | 133,351   |      |  |   | 301,206    |   |  |   | 256,074    |  
|Data processing services                            |  |                         | 152,875   |   |                         |   | 126,233   |      |  |   | 306,826    |   |  |   | 257,265    |  
|Loan origination expenses                           |  |                         | 153,718   |   |                         |   | 118,792   |      |  |   | 281,346    |   |  |   | 238,904    |  
|Advertising and marketing expenses                  |  |                         | 57,371    |   |                         |   | 88,387    |      |  |   | 111,080    |   |  |   | 190,683    |  
|Professional fees                                   |  |                         | 125,942   |   |                         |   | 65,643    |      |  |   | 187,000    |   |  |   | 112,702    |  
|Virginia franchise tax                              |  |                         | 96,171    |   |                         |   | 66,000    |      |  |   | 192,341    |   |  |   | 129,700    |  
|Stationery and supplies                             |  |                         | 73,229    |   |                         |   | 68,752    |      |  |   | 134,938    |   |  |   | 131,873    |  
|Other                                               |  |                         | 367,185   |   |                         |   | 293,177   |      |  |   | 696,620    |   |  |   | 556,256    |  
|                                                    |  |                         |           |   |                         |   |           |      |  |   |            |   |  |   |            |  
|Total noninterest expenses                          |  |                         | 3,940,857 |   |                         |   | 2,885,546 |      |  |   | 7,259,985  |   |  |   | 5,662,942  |  
|                                                    |  |                         |           |   |                         |   |           |      |  |   |            |   |  |   |            |  
|Income before income taxes and minority interests   |  |                         | 1,237,533 |   |                         |   | 1,267,985 |      |  |   | 2,591,835  |   |  |   | 2,465,775  |  
|Minority interests in subsidiarys net income       |  |                         | (38,575   | ) |                         |   |          |      |  |   | (59,005    | ) |  |   |           |  
|                                                    |  |                         |           |   |                         |   |           |      |  |   |            |   |  |   |            |  
|Net income before income taxes                      |  |                         | 1,198,958 |   |                         |   | 1,267,985 |      |  |   | 2,532,830  |   |  |   | 2,465,775  |  
|Income tax expense                                  |  |                         | (411,763  | ) |                         |   | (418,107  | )    |  |   | (819,247   | ) |  |   | (808,473   | )
|                                                    |  |                         |           |   |                         |   |           |      |  |   |            |   |  |   |            |  
|Net income                                          |  | $                       | 787,195   |   |                         | $ | 849,878   |      |  | $ | 1,713,583  |   |  | $ | 1,657,302  |  
|                                                    |  |                         |           |   |                         |   |           |      |  |   |            |   |  |   |            |  
|Basic net income per share                          |  | $                       | 0.19      |   |                         | $ | 0.22      |      |  | $ | 0.42       |   |  | $ | 0.42       |  
|Diluted net income per share                        |  |                         | 0.18      |   |                         |   | 0.20      |      |  |   | 0.40       |   |  |   | 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)
|------- | -------------------------------

Consolidated Statements of Changes in Shareholders Equity

Monarch Financial Holdings, Inc. and
Subsidiaries

Unaudited



|                                                                               |  |              |  |                    |            |                     |   |                                 |               |   |           |       |   |          |   |  |   |            |  
|------------------------------------------------------------------------------ |  | ------------ |  | ------------------ | ---------- | ------------------- | - | ------------------------------- | ------------- | - | --------- | ----- | - | -------- | - |  | - | ---------- | -
|                                                                               |  | Common Stock |  | Additional Paid-In |            | AccumulatedEarnings |   | Accumulated Other Comprehensive |               |   |           |      
|                                                                               |  | Shares       |  | Amount             |            | Capital             |   |                                 | Income (Loss) |   |           | Total |  
|Balance - December 31, 2005                                                    |  | 3,936,741    |  | $                  | 19,683,705 |                     | $ | 9,678,760                       |               | $ | 635,079   |       | $ | (195,793 | ) |  | $ | 29,801,751 |  
|Net income for six months ended June 30, 2006                                  |  |             |  |                    |           |                     |   |                                |               |   | 1,657,302 |       |   |         |   |  |   | 1,657,302  |  
|Unrealized loss on available for sale securities, net of income taxes          |  |             |  |                    |           |                     |   |                                |               |   |          |       |   | (60,770  | ) |  |   | (60,770    | )
|                                                                               |  |              |  |                    |            |                     |   |                                 |               |   |           |       |   |          |   |  |   |            |  
|Total comprehensive income                                                     |  |              |  |                    |            |                     |   |                                 |               |   |           |       |   |          |   |  |   | 1,596,532  |  
|                                                                               |  |              |  |                    |            |                     |   |                                 |               |   |           |       |   |          |   |  |   |            |  
|Stock options exercised                                                        |  | 3,937        |  |                    | 19,685     |                     |   | 13,112                          |               |   |          |       |   |         |   |  |   | 32,797     |  
|                                                                               |  |              |  |                    |            |                     |   |                                 |               |   |           |       |   |          |   |  |   |            |  
|Balance - June 30, 2006                                                        |  | 3,940,678    |  | $                  | 19,703,390 |                     | $ | 9,691,872                       |               | $ | 2,292,381 |       | $ | (256,563 | ) |  | $ | 31,431,080 |  
|                                                                               |  |              |  |                    |            |                     |   |                                 |               |   |           |       |   |          |   |  |   |            |  
|Balance - December 31, 2006                                                    |  | 4,038,548    |  | $                  | 20,192,740 |                     | $ | 9,669,586                       |               | $ | 4,261,537 |       | $ | (109,829 | ) |  | $ | 34,014,034 |  
|Net income for six months ended June 30, 2007                                  |  |             |  |                    |           |                     |   |                                |               |   | 1,713,583 |       |   |         |   |  |   | 1,713,583  |  
|Unrealized loss on available for sale securities, net of income taxes          |  |             |  |                    |           |                     |   |                                |               |   |          |       |   | (9,008   | ) |  |   | (9,008     | )
|                                                                               |  |              |  |                    |            |                     |   |                                 |               |   |           |       |   |          |   |  |   |            |  
|Total comprehensive income                                                     |  |              |  |                    |            |                     |   |                                 |               |   |           |       |   |          |   |  |   | 1,704,575  |  
|                                                                               |  |              |  |                    |            |                     |   |                                 |               |   |           |       |   |          |   |  |   |            |  
|Stock options exercised, including the realization of tax benefits of $171,632 |  | 40,408       |  |                    | 202,040    |                     |   | 220,974                         |               |   |          |       |   |         |   |  |   | 423,014    |  
|Stock-based compensation expense                                               |  | 1,900        |  |                    | 9,500      |                     |   | 118,078                         |               |   |          |       |   |         |   |  |   | 127,578    |  
|                                                                               |  |              |  |                    |            |                     |   |                                 |               |   |           |       |   |          |   |  |   |            |  
|Balance - June 30, 2007                                                        |  | 4,080,856    |  | $                  | 20,404,280 |                     | $ | 10,008,638                      |               | $ | 5,975,120 |       | $ | (118,837 | ) |  | $ | 36,269,201 |  
|                                                                               |  |              |  |                    |            |                     |   |                                 |               |   |           |       |   |          |   |  |   |            |  

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)
|------- | -------------------------------

Consolidated Statements of Cash Flows

Monarch Financial Holdings, Inc. and Subsidiaries

Unaudited



|                                                                       |  |                         |             |   |      |   |             |  
|---------------------------------------------------------------------- |  | ----------------------- | ----------- | - | ---- | - | ----------- | -
|                                                                       |  | 6 Months Ended June 30, |            
|                                                                       |  | 2007                    |             |   | 2006 |  
|Operating activities:                                                  |  |                         |             |   |      |   |             |  
|Net income                                                             |  | $                       | 1,713,583   |   |      | $ | 1,657,302   |  
|Adjustments to reconcile to net cash provided by operating activities: |  |                         |             |   |      |   |             |  
|Provision for loan losses                                              |  |                         | 259,000     |   |      |   | 275,144     |  
|Provision for depreciation                                             |  |                         | 319,083     |   |      |   | 292,359     |  
|Accretion of discounts and amortization of premiums, net               |  |                         | (32,479     | ) |      |   | (2,692      | )
|Deferral of loan costs, net of deferred fees                           |  |                         | 5,404       |   |      |   | 100,117     |  
|Stock-based compensation                                               |  |                         | 86,396      |   |      |   |            |  
|Changes in:                                                            |  |                         |             |   |      |   |             |  
|Loans held for sale                                                    |  |                         | (6,867,175  | ) |      |   | (819,481    | )
|Interest receivable                                                    |  |                         | (122,772    | ) |      |   | (203,040    | )
|Other assets                                                           |  |                         | (1,002,024  | ) |      |   | (498,995    | )
|Other liabilities                                                      |  |                         | (34,418     | ) |      |   | (532,119    | )
|                                                                       |  |                         |             |   |      |   |             |  
|Net cash from operating activities                                     |  |                         | (5,675,402  | ) |      |   | 268,595     |  
|                                                                       |  |                         |             |   |      |   |             |  
|Investing activities:                                                  |  |                         |             |   |      |   |             |  
|Purchases of held-to-maturity securities                               |  |                         | (34,962,058 | ) |      |   | (45,933,474 | )
|Purchases of available-for-sale securities                             |  |                         | (494,688    | ) |      |   | (300,882    | )
|Proceeds from maturities and sales of available-for-sale securities    |  |                         | 3,086,856   |   |      |   | 1,104,085   |  
|Proceeds from maturities and calls of held-to-maturity securities      |  |                         | 55,000,000  |   |      |   | 45,000,000  |  
|Loan originations, net of principal repayments                         |  |                         | (36,277,906 | ) |      |   | (29,601,028 | )
|Purchases of property and equipment                                    |  |                         | (1,891,124  | ) |      |   | (659,007    | )
|Sale of restricted equity securities, net of redemptions               |  |                         | 95,800      |   |      |   | (561,150    | )
|                                                                       |  |                         |             |   |      |   |             |  
|Net cash from investing activities                                     |  |                         | (15,443,120 | ) |      |   | (30,951,456 | )
|                                                                       |  |                         |             |   |      |   |             |  
|Financing activities:                                                  |  |                         |             |   |      |   |             |  
|Net increase in noninterest-bearing deposits                           |  |                         | 6,625,480   |   |      |   | 8,945,276   |  
|Net increase in interest-bearing deposits                              |  |                         | 22,207,319  |   |      |   | 35,283,805  |  
|Net decrease in federal funds purchased                                |  |                         |            |   |      |   | (1,000      | )
|FHLB advances, net of repayments                                       |  |                         | (11,049,958 | ) |      |   | 1,950,047   |  
|Proceeds from issuance of common stock, net of issuance costs          |  |                         | 251,382     |   |      |   | 32,797      |  
|                                                                       |  |                         |             |   |      |   |             |  
|Net cash from financing activities                                     |  |                         | 18,034,223  |   |      |   | 46,210,925  |  
|                                                                       |  |                         |             |   |      |   |             |  
|CHANGE IN CASH AND CASH EQUIVALENTS                                    |  |                         | (3,084,299  | ) |      |   | 15,528,064  |  
|CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                       |  |                         | 18,966,342  |   |      |   | 15,275,674  |  
|                                                                       |  |                         |             |   |      |   |             |  
|CASH AND CASH EQUIVALENTS AT END OF PERIOD                             |  | $                       | 15,882,043  |   |      | $ | 30,803,738  |  
|                                                                       |  |                         |             |   |      |   |             |  
|SUPPLEMENTAL SCHEDULES AND CASH FLOW INFORMATION                       |  |                         |             |   |      |   |             |  
|Cash paid for:                                                         |  |                         |             |   |      |   |             |  
|Interest on deposits and other borrowings                              |  | $                       | 6,586,561   |   |      | $ | 4,618,993   |  
|Income taxes                                                           |  | $                       | 991,000     |   |      | $ | 1,739,266   |  

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



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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 June 30, 2007;
the consolidated statements of income for the three and six months ended June 30, 2007 and 2006; the consolidated statements of changes in shareholders equity for the six months ended June 30, 2007 and 2006; and the consolidated
statements of cash flows for the six months ended June 30, 2007 and 2006. 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 six month period ended June 30, 2007 are not necessarily indicative of the results that may be expected for the year ended December 31, 2007.

NOTE 2. GENERAL

Monarch Financial Holdings, Inc. (Monarch or the Company) is
a Virginia chartered Company that offers a full range of banking services, primarily to individuals and businesses in the Hampton Roads area of Virginia and Northeastern North Carolina. On June 1, 2006, the Company was created through a
reorganization plan, under the laws of the Commonwealth of Virginia, in which Monarch Bank became a wholly-owned subsidiary of Monarch Financial Holdings, Inc. In addition, the number of authorized common stock shares increased to 20,000,000 and the
shareholders of the Company became shareholders of the Corporation in a stock-for-stock conversion. Monarch Bank was incorporated in Virginia on May 1, 1998, and commenced operations as a commercial bank on April 14, 1999, at its main
office in the Greenbrier area in Chesapeake. In addition to its main office, Monarch has eight 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 two offices in downtown Norfolk. Outer Banks Bank, a division of Monarch Bank, has one office in Kitty Hawk, North Carolina.

In August 2001, the Company formed Monarch Investment, LLC, for the purpose of selling annuities and investment securities and services.
The Company owns a 100% interest in Monarch Investment, LLC. The Company has invested in the formation of Bankers Investments Group, LLC, the parent company of BI Investments, LLC, a registered brokerage firm and investment advisor. BI Investments,
LLC, sells non-deposit investment products in various community banks in Virginia, which are owners in Bankers Investments Group, LLC, with the Virginia Bankers Association Management Services Division. 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.

In January 2003, the Company 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 Monarch Bank customers and to the general public.

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

In November 2004, the Company purchased a minority interest in Bankers Title of Hampton Roads, LLC, in a joint venture with the Virginia Bankers
Association and many other community banks in Virginia. In December 2006 Bankers Title of Hampton Roads, LLC, was merged into Bankers Title of Central Virginia, LLC with the minority interest now held in that name. Bankers Title of Central Virginia,
LLC, is a full service title insurance agency that provides title insurance products and services to Monarch Bank and Monarch Mortgage clients as well as to the general public.

In May 2007, the Company 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, services all the Virginia offices but is lead by a local management team and a local advisory board of directors.

In June 2007, the Company announced the expansion of its mortgage operations through the acquisition of a team of experienced mortgage bankers, and the
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. MM has their primary office in Virginia Beach with additional offices in Chesapeake and Norfolk.



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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.



|                                                  |  |                         |           |                         |   |           |  |      |           |  |   |          
|------------------------------------------------- |  | ----------------------- | --------- | ----------------------- | - | --------- |  | ---- | --------- |  | - | ---------
|                                                  |  | 3 months ended June 30, |           | 6 months ended June 30,
|                                                  |  | 2007                    |           | 2006                    |   | 2007      |  | 2006
|Net income (numerator, basic and diluted)         |  | $                       | 787,195   |                         | $ | 849,878   |  | $    | 1,713,583 |  | $ | 1,657,302
|Weighted average shares outstanding (denominator) |  |                         | 4,045,643 |                         |   | 3,939,867 |  |      | 4,034,212 |  |   | 3,939,088
|                                                  |  |                         |           |                         |   |           |  |      |           |  |   |          
|Income per common share - basic                   |  | $                       | 0.19      |                         | $ | 0.22      |  | $    | 0.42      |  | $ | 0.42     
|                                                  |  |                         |           |                         |   |           |  |      |           |  |   |          
|Weighted average shares - diluted (denominator)   |  |                         | 4,261,092 |                         |   | 4,222,261 |  |      | 4,245,745 |  |   | 4,194,102
|                                                  |  |                         |           |                         |   |           |  |      |           |  |   |          
|Income per common share - diluted                 |  | $                       | 0.18      |                         | $ | 0.20      |  | $    | 0.40      |  | $ | 0.40     
|                                                  |  |                         |           |                         |   |           |  |      |           |  |   |          

The dilutive effect of stock options is 215,449 and 282,394 shares for the three months ended
June 30, 2007 and 2006, respectively and 211,533 and 255,014 for the six months ended June 30, 2007 and 2006, respectively.

NOTE 4.
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. The Company accounts 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 six months ended June 30, 2007 and 2006:



|                                                                                 |  |                           |         |   |                          |   |         |      |  |   |           |   |  |   |           |  
|-------------------------------------------------------------------------------- |  | ------------------------- | ------- | - | ------------------------ | - | ------- | ---- |  | - | --------- | - |  | - | --------- | -
|                                                                                 |  | Three Months EndedJune 30 |         |   | Six Months Ended June 30 |  
|                                                                                 |  | 2007                      |         |   | 2006                     |   |         | 2007 |  |   | 2006      |  
|Net Income                                                                       |  | $                         | 787,195 |   |                          | $ | 849,878 |      |  | $ | 1,713,583 |   |  | $ | 1,657,302 |  
|Change in unrealized losses on securities available-for-sale, net of tax expense |  |                           | (6,825  | ) |                          |   | (10,755 | )    |  |   | (9,008    | ) |  |   | (60,770   | )
|                                                                                 |  |                           |         |   |                          |   |         |      |  |   |           |   |  |   |           |  
|Total comprehensive income                                                       |  | $                         | 780,370 |   |                          | $ | 839,123 |      |  | $ | 1,704,575 |   |  | $ | 1,596,532 |  
|                                                                                 |  |                           |         |   |                          |   |         |      |  |   |           |   |  |   |           |  
|Unrealized holding losses during the period                                      |  | $                         | (10,341 | ) |                          | $ | (16,295 | )    |  | $ | (13,648   | ) |  | $ | (92,076   | )
|Less reclassification adjustment for losses included in income                   |  |                           |        |   |                          |   |        |      |  |   |          |   |  |   |          |  
|                                                                                 |  |                           |         |   |                          |   |         |      |  |   |           |   |  |   |           |  
|Total other comprehensive loss before                                            |  |                           | (10,341 | ) |                          |   | (16,295 | )    |  |   | (13,648   | ) |  |   | (92,076   | )
|income tax benefit                                                               |  |                           |         |   |                          |   |         |      |  |   |           |   |  |   |           |  
|Income tax benefit                                                               |  |                           | 3,516   |   |                          |   | 5,540   |      |  |   | 4,640     |   |  |   | 31,306    |  
|                                                                                 |  |                           |         |   |                          |   |         |      |  |   |           |   |  |   |           |  
|Net unrealized losses                                                            |  | $                         | (6,825  | ) |                          | $ | (10,755 | )    |  | $ | (9,008    | ) |  | $ | (60,770   | )
|                                                                                 |  |                           |         |   |                          |   |         |      |  |   |           |   |  |   |           |  



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NOTE 5. STOCK-BASED COMPENSATION

As of June 30, 2007, the Company had a stock-based compensation plan. Prior to January 1, 2006, the Company 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, the Company 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, Company 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 the Company and its subsidiaries. The Plan authorizes the Company to issue up to 420,000 shares of Company Common Stock plus the number of shares of Company 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, the Company has 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 three years from issue. Total compensation costs are recognized annually on a
pro-rata basis over the vesting period.

NOTE 6. 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 the Company has
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. The Company does 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 the Companys other wholly owned subsidiary, Monarch Capital, LLC, is included in the mortgage banking segment. Monarch Capital, LLC, provides commercial mortgage brokerage services.

Segment information for the three and six months ended June 30, 2007 and 2006 is shown in the following table. The Other category
includes corporate related items, results of insignificant operations and, as it relates to segment profit (loss), income and expense not allocated to reportable segments.



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|                                                      |  |                  |             |   |                 |   |            |                          |  |   |            |   |  |   |             |  
|----------------------------------------------------- |  | ---------------- | ----------- | - | --------------- | - | ---------- | ------------------------ |  | - | ---------- | - |  | - | ----------- | -
|                                                      |  | CommunityBanking |             |   | MortgageBanking |   |            | IntersegmentEliminations |  |   | Total      |  
|Three Months Ended June 30, 2007                      |  |                  |             |   |                 |   |            |                          |  |   |            |   |  |   |             |  
|Net interest income after provision for loan losses   |  | $                | 3,951,156   |   |                 | $ | (19,035    | )                        |  | $ |           |   |  | $ | 3,932,121   |  
|Noninterest income                                    |  |                  | 590,942     |   |                 |   | 598,331    |                          |  |   | 56,996     |   |  |   | 1,246,269   |  
|Noninterest expense                                   |  |                  | (3,304,564  | ) |                 |   | (682,543   | )                        |  |   | 46,250     |   |  |   | (3,940,857  | )
|                                                      |  |                  |             |   |                 |   |            |                          |  |   |            |   |  |   |             |  
|Net income before income taxes and minority interests |  | $                | 1,237,534   |   |                 | $ | (103,247   | )                        |  | $ | 103,246    |   |  | $ | 1,237,533   |  
|                                                      |  |                  |             |   |                 |   |            |                          |  |   |            |   |  |   |             |  
|Three Months Ended June 30, 2006                      |  |                  |             |   |                 |   |            |                          |  |   |            |   |  |   |             |  
|Net interest income after provision for loan losses   |  | $                | 3,354,096   |   |                 | $ | (48,229    | )                        |  | $ |           |   |  | $ | 3,305,867   |  
|Noninterest income                                    |  |                  | 358,661     |   |                 |   | 541,325    |                          |  |   | (52,322    | ) |  |   | 847,664     |  
|Noninterest expense                                   |  |                  | (2,455,772  | ) |                 |   | (473,274   | )                        |  |   | 43,500     |   |  |   | (2,885,546  | )
|                                                      |  |                  |             |   |                 |   |            |                          |  |   |            |   |  |   |             |  
|Net income before income taxes and minority interests |  | $                | 1,256,985   |   |                 | $ | 19,822     |                          |  | $ | (8,822     | ) |  | $ | 1,267,985   |  
|                                                      |  |                  |             |   |                 |   |            |                          |  |   |            |   |  |   |             |  
|                                                      |  |                  |             |  
|                                                      |  | CommunityBanking |             |   | MortgageBanking |   |            | IntersegmentEliminations |  |   | Total      |  
|Six Months Ended June 30, 2007                        |  |                  |             |   |                 |   |            |                          |  |   |            |   |  |   |             |  
|Net interest income after provision for loan losses   |  | $                | 7,608,229   |   |                 | $ | (49,423    | )                        |  | $ |           |   |  | $ | 7,558,806   |  
|Noninterest income                                    |  |                  | 1,192,069   |   |                 |   | 1,058,878  |                          |  |   | 42,067     |   |  |   | 2,293,014   |  
|Noninterest expense                                   |  |                  | (6,208,463  | ) |                 |   | (1,141,272 | )                        |  |   | 89,750     |   |  |   | (7,259,985  | )
|                                                      |  |                  |             |   |                 |   |            |                          |  |   |            |   |  |   |             |  
|Net income before income taxes and minority interests |  | $                | 2,591,835   |   |                 | $ | (131,817   | )                        |  | $ | 131,817    |   |  | $ | 2,591,835   |  
|                                                      |  |                  |             |   |                 |   |            |                          |  |   |            |   |  |   |             |  
|Six Months Ended June 30, 2006                        |  |                  |             |   |                 |   |            |                          |  |   |            |   |  |   |             |  
|Net interest income after provision for loan losses   |  | $                | 6,473,351   |   |                 | $ | (98,735    | )                        |  | $ |           |   |  | $ | 6,374,616   |  
|Noninterest income                                    |  |                  | 757,183     |   |                 |   | 1,174,223  |                          |  |   | (177,305   | ) |  |   | 1,754,101   |  
|Noninterest expense                                   |  |                  | (4,780,259  | ) |                 |   | (969,683   | )                        |  |   | 87,000     |   |  |   | (5,662,942  | )
|                                                      |  |                  |             |   |                 |   |            |                          |  |   |            |   |  |   |             |  
|Net income before income taxes and minority interests |  | $                | 2,450,275   |   |                 | $ | 105,805    |                          |  | $ | (90,305    | ) |  | $ | 2,465,775   |  
|                                                      |  |                  |             |   |                 |   |            |                          |  |   |            |   |  |   |             |  
|Segment Assets                                        |  |                  |             |   |                 |   |            |                          |  |   |            |   |  |   |             |  
|2007                                                  |  | $                | 427,690,842 |   |                 | $ | 8,443,099  |                          |  | $ | (8,618,005 | ) |  | $ | 427,515,936 |  
|2006                                                  |  | $                | 379,034,686 |   |                 | $ | 5,922,883  |                          |  | $ | (6,508,186 | ) |  | $ | 378,449,383 |  

NOTE 7. SUBSEQUENT EVENT

In the course of its operations, Monarch Financial Holdings, Inc. and its subsidiary are aware of one material pending or threatened litigation, unasserted claims and/or assessments through June 30, 2007, with
that matter resolved prior to the filing of this report. Prior to filing this report Monarch Bank and Resource Bank resolved the outstanding lawsuit related to the departure of the mortgage employees in May and June of 2007 and Monarch Banks
hiring of these individuals.

On Monday, June 11, 2007, Resource Bank, a Virginia Beach based bank owned by Fulton Financial of
Lancaster, Pennsylvania, filed a lawsuit against Monarch Bank and fourteen new employees of Monarch Mortgage in the Circuit Court for the City of Norfolk, Virginia. On Wednesday, July 11, 2007, Resource Bank/Fulton filed their new complaint
against Monarch Bank and



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sixteen ex-Resource employees who are now employed by Monarch Mortgage in Virginia Beach Circuit Court. The Bank was named in three counts for
misappropriation of trade secrets, tortuous interference with contractual relationships and statutory business conspiracy. The lawsuit was seeking $15,000,000 in compensatory and $350,000 in punitive damages from Monarch and the individual
defendants.

On August 10, 2007, Monarch Financial Holdings, Inc. (NASDAQ:MNRK), the parent of Monarch Bank and Monarch Mortgage,
entered into a Purchase Agreement with Resource Bank/Resource Mortgage, a subsidiary at Fulton Financial Corporation (NASDAQ:FULT), providing for the purchase by the Registrant of certain specified mortgage-related business assets effective
immediately. Resource agreed to sell a Maryland mortgage office plus certain other mortgage related assets for a total of $2.1 Million. As a condition of the sale, both Resource Bank and the Registrant, as well as all the other defendants named in
the lawsuit described in the 8-K filed June 13, 2007, agreed to dismiss, with prejudice, their current lawsuits and covenanted not to sue each other for litigation related to this matter. Monarch Bank, Resource Bank and all individuals involved
in the pending litigation reached a settlement in order to avoid further expense, inconvenience and delay, and to dispose of expensive, burdensome and protracted litigation related to the recent hiring of mortgage personnel and compensation owed.



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CRITICAL ACCOUNTING POLICIES

A summary of the Companys significant accounting policies is set forth in Note 2 to the Consolidated Financial Statements in the Companys 2006 Annual Report on Form 10-K.

The Companys financial statements are prepared in accordance with accounting principles generally accepted in the United States of America
(GAAP). The financial information contained within our statements is, to a significant extent, financial information that is based on measures of the financial effects of transactions and events that have already occurred. A variety of
factors could affect the ultimate value that is obtained when earning income, recognizing an expense, recovering an asset or relieving a liability. In addition, GAAP itself may change from one previously acceptable method to another method. Although
the economics of our transactions would be the same, the timing of events that would impact our transactions could change.

The financial
statements and related data presented herein were prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars, without considering the
changes in relative purchasing power of money over time due to inflation. The effect of changing prices on financial institutions is typically different from other industries as the Companys assets and liabilities are monetary in nature.
Interest rates are significantly impacted by inflation, but neither the timing nor the magnitude of the changes are directly related to price level indices.

In September 2006, the Securities and Exchange Commission (SEC) released Staff Accounting Bulletin 108 (SAB 108). SAB 108 expresses the SEC staffs views regarding the process of quantifying financial
statement misstatements. These interpretations were issued to address diversity in practice and the potential under current practice for the build up of improper amounts on the balance sheet. SAB 108 expresses the SEC staffs view
that a registrants materiality evaluation of an identified unadjusted error should quantify the effects of the error on each financial statement and related financial statement disclosures and that prior year misstatements should be considered
in quantifying misstatements in current year financial statements. SAB 108 also states that correcting prior year financial statements for immaterial errors would not require previously filed reports to be amended. Such correction may be
made the next time the registrant files the prior year financial statements. Registrants electing not to restate prior periods should reflect the effects of initially applying the guidance in SAB 108 in their annual financial statements
covering the first fiscal year ending after November 15, 2006. The cumulative effect of the initial application should be reported in the carrying amounts of assets and liabilities as of the beginning of that fiscal year and the offsetting
adjustment should be made to the opening balance of retained earnings for that year. Registrants should disclose the nature and amount of each individual error being corrected in the cumulative adjustment. The disclosure should also
include when and how each error arose and the fact that the errors had previously been considered immaterial. The SEC staff encourages early application of the guidance in SAB 108 for interim periods of the first fiscal year ending after
November 15, 2006. The Company does not expect the implementation of SAB 108 to have a material impact on its financial statements.

In February 2007, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Liabilities, including an amendment to 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 November 15, 2007. The Company is assessing the impact, if any, that
adoption will have on its financial statements.

In September 2006, the FASB issued SFAS 157, Fair Value
Measurements. SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 does not require any new fair
value measurements but may change current practice for some entities. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those years. The Company does
not expect the implementation of SFAS 157 to have a material impact on its financial statements.

In June 2006, the FASB issued
Interpretation No. 48, Accounting for Uncertainty in Income Taxes  an interpretation of FASB Statement No. 109 (FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an
enterprises financial statements in accordance with SFAS 109. The Interpretation prescribes a recognition threshold and measurement principles for the financial statement recognition and measurement of tax positions taken or expected to be
taken on a tax return. This Interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The Company adopted the provisions of FIN 48 effective
January 1, 2007. The effect of applying provisions of the Interpretation to the Companys financial statements was immaterial.



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##### Table of Contents

In March 2006, the FASB issued SFAS 156, Accounting for Servicing of Financial Assetsan
amendment of FASB Statement No. 140. SFAS 156 requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into certain servicing
contracts. The Statement also requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable. SFAS 156 permits an entity to choose between the amortization and fair
value methods for subsequent measurements. At initial adoption, the Statement permits a one-time reclassification of available-for-sale securities to trading securities by entities with recognized servicing rights. SFAS 156 also requires
separate presentation of servicing assets and servicing liabilities subsequently measured at fair value in the statement of financial position and additional disclosures for all separately recognized servicing assets and servicing
liabilities. This Statement is effective as of the beginning of an entitys first fiscal year that begins after September 15, 2006. The Company does not expect the implementation of SFAS 156 to have a material impact on its financial
statements.

In February 2006, the FASB issued SFAS 155, Accounting for Certain Hybrid Financial Instruments  an amendment of
FASB Statements No. 133 and 140. SFAS 155 permits fair value measurement of any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation. The Statement also clarifies which
interest-only strips and principal-only strips are not subject to the requirements of Statement 133. It establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or
that are hybrid financial instruments that contain an embedded derivative requiring bifurcation. SFAS 155 also clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives. Finally, SFAS 155 amends
Statement 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. SFAS 155 is effective
for all financial instruments acquired or issued after the beginning of an entitys first fiscal year that begins after September 15, 2006. The Company does not expect the implementation of SFAS 155 to have a material impact on its
financial statements.

Refer to the Companys December 31, 2006 Annual Report on Form 10-K for previously announced accounting
pronouncements.



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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 the Companys 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 the financial condition, results of
operations and business of the Company. These forward-looking statements involve risks and uncertainties and are based on the beliefs and assumptions of management of the Company 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 the Company is 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 business and income for the Company.
|- |  | --------------------------------------------------------------------------------------------------------------------------------



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

A summary of the Companys significant risk factors is set forth in Note 1A in the Companys 2006 Form 10-K.

Earnings Summary

Monarch Financial Holdings, Inc. reported net income of $1,713,583 for the six months ending June 30,
2007, compared to $1,657,302 for the same period in 2006, an increase of $56,281 or 3.4%. Net income for the three months ended June 30, 2007 was $787,195, down $62,683 or 7.4% from $849,878 for the same period in 2006. Net interest income
increased 18.9% or $626,254 to $3,932,121 during the second quarter of 2007, when compared to 2006 and 18.6% or $1,184,190 to $7,558,806 during the first six months of 2007, when compared to 2006. For the second quarter of 2007 compared to 2006
noninterest income was $1,246,269, an increase of $398,605, or 47.0%. Noninterest income increased 30.7% to $2,293,014 during the six months ended June 30, 2007 when compared to $1,754,101 for the same period in 2006. Noninterest expenses
totaled $3,940,857, an increase of $1,055,311, or 36.6% for the second quarter of 2007 compared to 2006, and $7,259,985, an increase of $1,597,043, or 28.2% for the first six months of 2007 compared to 2006. Basic and diluted earnings per share of
common stock were $0.19 and $0.18 for the second three months of 2007 compared to $0.22 and $0.20 for 2006. For the first six months of 2007 and 2006 basic and diluted earnings per share of common stock were $0.42 and $0.40.

For the six months ended June 30, 2007, profitability as measured by Monarchs annualized return on average assets (ROA) was 0.93% compared to
1.02% for the same period in 2006. For the second quarter of 2007 ROA was 0.81% compared to 1.01% in 2006. Another measure of the Companys profitability, the annualized return on average equity (ROE) was 8.74% for the second quarter of 2007
compared to 10.94% for the same period in 2006. For the six months ended June 30, 2007 and 2006, ROE was 9.75% and 10.87%, respectively.

Net
Interest Income

Net interest income represents a principal source of earnings for the Company. In 2007 increases in net interest income
are attributable primarily to the overall growth of the Company, coupled with consistently higher rates on larger average outstanding balances and increases in the net interest margin. The Federal Reserve Banks Open Market Committee steadily
increased short-term interest rates from June 2004 until June 2006. The last increase in the Federal Funds rate was June 29, 2006 when the rate was increased to 5.25%. With this increase in the Federal Funds rate the Wall Street Journal Prime
Rate moved to 8.25%. A majority of the Companys loans use the Wall Street Journal Prime Rate as their rate index, and increases in this rate increase interest income.



14



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##### Table of Contents

Net interest income was $4,048,121 for the second quarter of 2007, a 16.2%, or a $563,367 increase over
the second quarter of 2006. Net interest income for the first six months of 2007 increased $1,168,046 to 7,817,806, a 17.6% increase over the same period in 2006. Total interest and fees on loans, the largest component of net interest income,
increased 27.9%, or $1,529,145 to $7,247,317 during the second quarter of 2007 compared to $5,668,172 for the same period in 2006. Year-to-date 2007 interest and fees on loans totaled $14,006,529, an increase of 30.8% over the 2006 year-to-date
total of $10,707,258.

Interest on investment securities continued to decline due to decreasing portfolio balances. Interest on federal
funds sold and overnight funds also decreased as the Company continues its strategy to optimize its use of resources to fund our higher yielding loan portfolio. Second quarter 2007 totals for interest on investment securities declined 19.4% or
$35,383 to $147,336, and year-to-date 2007 totals declined 14.3% or $51,491 to $308,589, when compared to the same periods in 2006. Interest on federal funds declined $59,705, or 90.1% and interest on deposits in other banks declined $51,247, or
75.1% for the second quarter of 2007 compared to 2006. For the first six months of 2007 interest on federal funds declined $77,639, or 87.0% to $11,649 and interest on deposits in other banks declined $99,859, or 74.4% to $34,291 when compared to
the first six months of 2006.

Dividends on restricted equity securities totaled $41,275 compared to $17,573 in the second three months of
2007 compared to the same period in 2006, as a result of higher balances of stock in the Federal Reserve and the Federal Home Loan Bank of Atlanta. For the six month period ended June 30, 2007, dividends on restricted equity securities
increased $31,929 to $77,597, a 69.9% increase over the 2006 six month total of $45,668.

Interest expense on deposits increased $568,576
or 23.8% for the second quarter of 2007 and $1,283,184 or 28.9% year-to-date compared to 2006. The increase in deposit expense is due to the increase in average outstanding deposits, arising from the overall growth of the Company and an increase in
the overall rates paid on deposits. Interest expense on borrowings totaled $275,226, a 114.6% increase for the second three months of 2007 and $553,012, a 117.9% increase year-to-date compared to 2006. Increased borrowing needs due to funding loan
growth coupled with higher rates contributed to the increase. The Company issued trust preferred subordinated debt in the third quarter of 2006 which provided a funding source for loans and increased interest expense $177,611 for the second quarter
and $351,705 for the first six months of 2007.

Average Balances, Income and Expenses, Yields and Rates

The net interest spread on a tax-equivalent basis decreased 7 basis points to 3.49% for first six months of 2007 when compared to 3.56% for the same
period in 2006. The yield on earning assets increased to 8.11% in 2007 compared to 7.42% for the first six months of 2006, while the cost of interest bearing liabilities increased to 4.62% compared to 3.87%, respectively, for the same period. This
resulted in a lower interest rate spread. However, the interest margin increased for the same period due to the higher growth in earning assets compared to interest-bearing liabilities and growth in non-interest bearing deposits. The net interest
margin for the first six months of 2007 was 4.44% compared to 4.40% for the same period in 2006.

Bank Owned Life Insurance (BOLI) has been
included in interest earning assets. The Company 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 5.93%, year-to-date.

In July, 2006, Monarch 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 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.



15



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##### Table of Contents

AVERAGE BALANCES, INCOME AND EXPENSE, YIELDS AND RATES



|                                              |  |                            |             |   |                |   |              |  |      |                |  |   |                |   |              |   |            |  |      |  
|--------------------------------------------- |  | -------------------------- | ----------- | - | -------------- | - | ------------ |  | ---- | -------------- |  | - | -------------- | - | ------------ | - | ---------- |  | ---- | -
|                                              |  | For Periods Ended June 30, |            
|                                              |  | 2007                       |             |   | 2006           |  
|                                              |  | AverageBalance             |             |   | Income/Expense |   | YieldRate(1) |  |      | AverageBalance |  |   | Income/Expense |   | YieldRate(1) |  
|ASSETS                                        |  |                            |             |   |                |   |              |  |      |                |  |   |                |   |              |   |            |  |      |  
|Securities, at amortized cost                 |  |                            |             |   |                |   |              |  |      |                |  |   |                |   |              |   |            |  |      |  
|Taxable                                       |  | $                          | 14,576,204  |   |                | $ | 308,589      |  | 4.27 | %              |  | $ | 17,891,231     |   |              | $ | 360,080    |  | 4.06 | %
|                                              |  |                            |             |   |                |   |              |  |      |                |  |   |                |   |              |   |            |  |      |  
|Total securities                              |  |                            | 14,576,204  |   |                |   | 308,589      |  | 4.27 | %              |  |   | 17,891,231     |   |              |   | 360,080    |  | 4.06 | %
|Loans, net                                    |  |                            | 338,342,173 |   |                |   | 14,006,529   |  | 8.35 | %              |  |   | 277,255,407    |   |              |   | 10,707,258 |  | 7.79 | %
|Federal funds sold                            |  |                            | 450,900     |   |                |   | 11,649       |  | 5.21 | %              |  |   | 3,788,681      |   |              |   | 89,288     |  | 4.75 | %
|Dividend-earning restricted equity securities |  |                            | 2,737,702   |   |                |   | 77,597       |  | 5.72 | %              |  |   | 1,904,091      |   |              |   | 45,668     |  | 4.84 | %
|Deposits in other banks                       |  |                            | 1,358,885   |   |                |   | 34,291       |  | 5.09 | %              |  |   | 5,938,125      |   |              |   | 134,150    |  | 4.56 | %
|Bank owned life insurance (2)                 |  |                            | 6,355,233   |   |                |   | 186,788      |  | 5.93 | %              |  |   | 6,110,737      |   |              |   | 178,791    |  | 5.90 | %
|                                              |  |                            |             |   |                |   |              |  |      |                |  |   |                |   |              |   |            |  |      |  
|Total earning assets                          |  |                            | 363,821,097 |   |                |   | 14,625,443   |  | 8.11 | %              |  |   | 312,888,272    |   |              |   | 11,515,235 |  | 7.42 | %
|                                              |  |                            |             |   |                |   |              |  |      |                |  |   |                |   |              |   |            |  |      |  
|Less: Allowance for loan losses               |  |                            | (3,360,282  | ) |                |   |              |  |      |                |  |   | (2,782,298     | ) |              |   |            |  |      |  
|Total nonearning assets                       |  |                            | 20,521,412  |   |                |   |              |  |      |                |  |   | 16,372,851     |   |              |   |            |  |      |  
|                                              |  |                            |             |   |                |   |              |  |      |                |  |   |                |   |              |   |            |  |      |  
|Total assets                                  |  | $                          | 380,982,227 |   |                |   |              |  |      |                |  | $ | 326,478,825    |   |              |   |            |  |      |  
|                                              |  |                            |             |   |                |   |              |  |      |                |  |   |                |   |              |   |            |  |      |  
|LIABILITIES and SHAREHOLDERS EQUITY          |  |                            |             |   |                |   |              |  |      |                |  |   |                |   |              |   |           
|Interest-bearing deposits:                    |  |                            |             |   |                |   |              |  |      |                |  |   |                |   |              |   |            |  |      |  
|Checking                                      |  | $                          | 10,420,702  |   |                | $ | 13,970       |  | 0.27 | %              |  | $ | 10,391,318     |   |              | $ | 10,531     |  | 0.20 | %
|Regular savings                               |  |                            | 6,250,819   |   |                |   | 18,667       |  | 0.60 | %              |  |   | 8,601,863      |   |              |   | 27,287     |  | 0.64 | %
|Money market savings                          |  |                            | 145,166,994 |   |                |   | 3,318,921    |  | 4.61 | %              |  |   | 142,249,304    |   |              |   | 2,981,353  |  | 4.23 | %
|Certificates of deposit                       |  |                            |             |   |                |   |              |  |      |                |  |   |                |   |              |   |            |  |      |  
|$100,000 and over                             |  |                            | 46,314,483  |   |                |   | 1,171,373    |  | 5.10 | %              |  |   | 26,988,469     |   |              |   | 570,180    |  | 4.26 | %
|Under $100,000                                |  |                            | 50,532,398  |   |                |   | 1,193,201    |  | 4.76 | %              |  |   | 43,168,044     |   |              |   | 843,598    |  | 3.94 | %
|                                              |  |                            |             |   |                |   |              |  |      |                |  |   |                |   |              |   |            |  |      |  
|Total interest-bearing deposits               |  |                            | 258,685,396 |   |                |   | 5,716,132    |  | 4.46 | %              |  |   | 231,398,998    |   |              |   | 4,432,949  |  | 3.86 | %
|Borrowings                                    |  |                            | 30,402,864  |   |                |   | 904,717      |  | 6.00 | %              |  |   | 12,813,933     |   |              |   | 253,736    |  | 3.99 | %
|                                              |  |                            |             |   |                |   |              |  |      |                |  |   |                |   |              |   |            |  |      |  
|Total interest-bearing liabilities            |  |                            | 289,088,260 |   |                | $ | 6,620,849    |  | 4.62 | %              |  |   | 244,212,931    |   |              | $ | 4,686,685  |  | 3.87 | %
|Noninterest-bearing liabilities               |  |                            |             |   |                |   |              |  |      |                |  |   |                |   |              |   |            |  |      |  
|Demand deposits                               |  |                            | 55,232,839  |   |                |   |              |  |      |                |  |   | 49,892,548     |   |              |   |            |  |      |  
|Other noninterest-bearing liabilities         |  |                            | 1,215,775   |   |                |   |              |  |      |                |  |   | 1,632,145      |   |              |   |            |  |      |  
|                                              |  |                            |             |   |                |   |              |  |      |                |  |   |                |   |              |   |            |  |      |  
|Total liabilities                             |  |                            | 345,536,874 |   |                |   |              |  |      |                |  |   | 295,737,624    |   |              |   |            |  |      |  
|Shareholders equity                          |  |                            | 35,445,353  |   |                |   |              |  |      |                |  |   | 30,741,201     |   |              |   |            |  |      |  
|                                              |  |                            |             |   |                |   |              |  |      |                |  |   |                |   |              |   |            |  |      |  
|Total liabilities and stockholders equity    |  | $                          | 380,982,227 |   |                |   |              |  |      |                |  | $ | 326,478,825    |   |              |   |            |  |      |  
|                                              |  |                            |             |   |                |   |              |  |      |                |  |   |                |   |              |   |            |  |      |  
|Net interest income (2)                       |  |                            |             |   |                | $ | 8,004,594    |  |      |                |  |   |                |   |              | $ | 6,828,550  |  |      |  
|                                              |  |                            |             |   |                |   |              |  |      |                |  |   |                |   |              |   |            |  |      |  
|Interest rate spread (2)(3)                   |  |                            |             |   |                |   |              |  | 3.49 | %              |  |   |                |   |              |   |            |  | 3.56 | %
|                                              |  |                            |             |   |                |   |              |  |      |                |  |   |                |   |              |   |            |  |      |  
|Net interest margin (2)(4)                    |  |                            |             |   |                |   |              |  | 4.44 | %              |  |   |                |   |              |   |            |  | 4.40 | %
|                                              |  |                            |             |   |                |   |              |  |      |                |  |   |                |   |              |   |            |  |      |  

---

|(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 $63,508 adjustment for 2007 and a $60,790 adjustment for 2006.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(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 $1,246,269 for the second quarter of 2007, an increase of $398,605, or 47.0%, compared to $847,644 for the same period in 2006. Noninterest income totaled $2,293,014 for the first six
months of 2007 compared to $1,754,101 for the same period in 2006, a $538,913 or 30.7% increase.

The Companys subsidiary, Monarch
Home Funding, LLC, was merged into, and became a division of, Monarch Bank in late December 2006 to reduce regulatory and tax expense. In January 2007 the Company reorganized mortgage operations and outsourced backroom functions to an outside
company in order to improve profitability in a declining market. In June 2007 a significant expansion of mortgage operations began by bringing back in-house a full service mortgage operation under the name Monarch Mortgage. Gross mortgage banking
income from Monarch Mortgage and the Companys commercial mortgage banking subsidiary, Monarch Capital, LLC, increased $57,006 to $598,331 for the quarter but declined $115,345 for the first six months of 2007 compared to 2006. A competitive
environment coupled with a soft mortgage market and higher mortgage interest rates have impacted income levels.

Service charges and fees
on deposit accounts totaled $296,465 for the second quarter and $546,304 for the first six months of 2007, which represents a quarterly increase of 35.7% and a year-to-date increase of 29.8% over the same period in 2006. The primary components in
this increase were deposit account growth and ATM transaction fees. The Company has 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, the Company receives a portion of the transaction surcharge and the Companys 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 the Companys 9 ATMs located at the banking center sites. The third-party vendor relationship plus the Companys 9 office ATMs, creates a network that now includes over 50 active
branded ATMs.

Investment and insurance commissions were $269,805 for the quarter and $515,170 for the first six months of 2007. Prior year
totals were $25,160 for the quarter and $35,634 for the first six months. This significant increase is due to the formation of the Companys subsidiary, Virginia Asset Group, LLC (VAG), in September 2006. The Company has a 51% ownership in VAG,
which sells insurance and non-deposit investment products.

Other noninterest income increased $18,901, or 30.1% to $81,668 in the second
three months of 2007 and $49,263, 39.9% to $172,662 for the first six months of 2007 compared to 2006. A large component of other noninterest income is Bank Owned Life Insurance (BOLI). The Company purchased $6.0 million in BOLI during the fourth
quarter of 2005. The income from BOLI was $62,280 in the second quarter and $123,280 for the first six months of 2007 compared to $59,613 and $118,001 for the same periods in 2006, respectively, is not subject to tax. The tax-effective income yield
was $186,788 for the first six months of 2007 compared to $178,791 for the same period in 2006.

There were no security sale related gains
or losses in the first half of 2007 or 2006.

Noninterest Expense

Total noninterest expenses for the second quarter of 2007 totaled $3,940,857, an increase of $1,055,311, or 36.6%, compared to $2,885,546 for the same period in 2006. Noninterest expenses totaled $7,259,985 in the
first six months of 2007 compared to $5,662,942 for the same period in 2006, an increase of 28.2% of $1,597,043. The increase is attributable to following factors: 1) an increase in salaries and employee benefits of $759,230 for the quarter,
$1,135,118 year-to-date, primarily arising from additional salaries due to two new banking offices and mortgage operations, the addition of new production and support staff, additional retirement expense, and higher employee benefit costs; 2) an
increase of $169,157 year-to-date, in occupancy plus furniture and equipment expenses related to the additional banking offices and an additional commercial office; 3) a $98,641 increase in regulatory fees and franchise taxes due to increased
capital at Monarch Bank and FDIC insurance expense; 4) a reduction of $70,603 in advertising and marketing expense due to hiring an in-house marketing person; and 5) $224,169 in other expenses related to overall growth.

Income Taxes

The income tax provision was $411,763
for the second quarter of 2007 and $819,247 year-to-date compared to $418,107 and $808,473, respectively for the prior year. The effective tax rate for the second quarter of 2007 was 34.3%, compared to 32.3% for the same period in 2006. Year-to-date
2007 the effective tax rate is 32.4% compared to 32.8% in 2006.



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##### Table of Contents

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

GENERAL

Total assets increased 4.9% to $427,515,936
at June 30, 2007 when compared to assets of $407,719,575 at December 31, 2006. On an annual basis total assets increased 13.0% at June 30, 2007 when compared to assets of $378,449,383 at June 30, 2006. Total loans as of
June 30, 2007 were $357.5 million, an increase of $36.2 million, or 11.3%, from $321.3 million at year-end 2006. On an annual basis total loans increased $64.7 million, or 22.1%, from $292.8 million in June 2006. Mortgages held for sale were
$7.5 million, an increase of $6.9 million from $600 thousand at December 31, 2006 primarily due to increased volume at our mortgage division. Investment securities were $27.4 million at June 30, 2007, compared to $50.0 million at year-end
2006. On an annual basis, investments securities decreased $9.0 million, or 24.8% over June 2006. Cash and cash equivalents were $15.9 million, a decrease of $3.1 million, or 16.3% from $19.0 million at December 31, 2006.

Deposits increased $28.8 million, or 9.2%, during the six months ended June 30, 2007. On an annualized basis deposits increased $25.6 million or
8.1%. Noninterest-bearing demand deposit accounts increased $6.6 million to $69.3 million, a 10.6% increase over December 31, 2006 and $4.9 million on an annual basis when compared to June 30, 2006. Interest-bearing deposits totaled $273.6
million at June 30, 2007, compared to $251.4 million at year-end 2006. Certificates of deposits in excess of $100k and money market deposits are the major categories of our interest-bearing deposits.

Stockholders equity was $36.3 million at June 30, 2007, compared to $34.0 million at December 31, 2006. Components of the change in
stockholders equity include net income of $1,713,583, increases in net unrealized losses on available-for-sale securities totaling $9,008, stock based compensation totaling $127,578, and exercised stock options, including the realization of
tax benefits, totaling $423,014.

Asset Quality

The Company had no nonperforming assets at June 30, 2007. There were no charge-offs or recoveries during the first half of 2007. There were no nonperforming assets at December 31, 2006. 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. There were no impaired loans at June 30, 2007 and December 31, 2006. The Company continues to demand a high
level of credit quality on new loans.

Allowance for Loan Losses

The allowance for loan losses is to provide for losses inherent in the loan portfolio. The Companys 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 the Companys historical loss experience, the size and composition of the loan portfolio, the value and adequacy of collateral and guarantors,
nonperforming credits, the Companys loan Watch list, and national and local economic conditions.

While the Company
believes it has sufficient allowance for its 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 $3,494,000 and $2,949,000
at June 30, 2007 and June 30, 2006, respectively. The ratio of the allowance for loan losses to total loans outstanding at June 30, 2007 and 2006 was 0.98% and 1.01%, respectively.

During the first six months of 2007 and 2006, the Company recorded $259,000 and $275,144 in provision expense, respectively. There were no loans
charged-off during the first half of 2007 and one loan charged-off totaling $13,187 for the same period in 2006. Charge-offs are charged directly to the allowance when they occur. Since it began business in 1999, the Company has recorded total
charge-offs of approximately $52,000. There were no recoveries in the first quarter of 2007 and recoveries totaling $2,043 in the first quarter of 2006. The table below summarizes the activity in the allowance for loans losses for the six month
periods ending June 30, 2007 and 2006.



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Activity in the allowance for loan losses for the six months ended June 30, was as follows:



|                                  |  |      |           |      |   |           |  
|--------------------------------- |  | ---- | --------- | ---- | - | --------- | -
|                                  |  | 2007 |           | 2006 |  
|Balance, January 1                |  | $    | 3,235,000 |      | $ | 2,685,000 |  
|Provisions charged against income |  |      | 259,000   |      |   | 275,144   |  
|Recoveries of loans charged off   |  |      | 0         |      |   | 2,043     |  
|Loans charged off                 |  |      | 0         |      |   | (13,187   | )
|                                  |  |      |           |      |   |           |  
|Balance at end of period          |  | $    | 3,494,000 |      | $ | 2,949,000 |  
|                                  |  |      |           |      |   |           |  

The Company has 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. The Company evaluates the potential collection of both principal and interest when assessing the need for a loss accrual. A composite allowance factor that considers the Companys 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.

Homogenous loans, such as consumer installment, home equity loans, and smaller consumer loans are not individually reviewed and are generally risk graded at the same levels. The risk grade and reserves are 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. The Company has no material delinquencies in these types of
loans, and has not, since inception, had a trend or an indication of a trend that would guide the Company in expected material losses in these types of homogenous pools of loans. Management believes that the allowance for loan losses is adequate to
absorb any inherent losses on existing loans in the Companys loan portfolio at June 30, 2007.

Liquidity

Management monitors and plans the Companys 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. Management believes that
these factors provide sufficient and timely liquidity for the foreseeable future.

Management also takes 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.

The Company has a line of credit that can equal up to 40% of assets with the Federal Home Loan Bank of Atlanta (FHLB) that totaled approximately $72,012,819 with $29,987,660 available at June 30, 2007. This line is currently reduced by
$5.0 million, which has been pledged as collateral for public deposits. Should the Company ever desire to increase their line of credit beyond the current 40% limit, the FHLB would allow borrowings of up to 50% of total assets once the Company meets
specific eligibility requirements.

Borrowings outstanding under the FHLB line of credit were $37,025,159 at June 30, 2007 and
$48,075,117 at December 31, 2006. The Company had two borrowing advances outstanding as of June 30, 2007, with the following final maturities:



|               |  |                
|-------------- |  | ---------------
|Advance Amount |  | Expiration Date
|$35,200,000    |  | July 2007      
|1,825,159      |  | September 2015 
|               |  |                
|$37,025,159    |  |                
|               |  |                

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. The Company is utilizing this advance to match-fund several long term fixed rate loans. The interest rate for
this advance is fixed at 4.96%.



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The advance maturing in 2007 is a daily rate credit that matures July 1, 2007. The rate on
June 30, 2007 was 5.63%. The Company uses borrowings at the end of each quarter to increase its investment securities that are not subject to taxation by the Commonwealth of Virginia. The Company is not subject to state income tax but is
subject to Virginia Franchise Tax, which is calculated on its capital level, less certain deductions. One deduction is the average balances of bonds that are not subject to taxation by the Commonwealth of Virginia, primarily certain qualified U.S.
Government Agency bonds. The Company has found that it can save more in taxes than it pays in interest expense. Shortly before the end of each calendar quarter, the Company purchases FHLB discount notes that mature soon after the quarter-end. The
proceeds from the maturity of the discount note are used to repay the borrowings. The Company only enters into this type of agreement near the end of the quarter since that is the period used in the franchise tax calculation.

In the course of operations, due to fluctuations in loan and deposit levels, the Company occasionally finds it necessary to purchase Federal Funds on a
short-term basis. The Company also has federal funds lines of credit facilities established with three other banks in the total amount of $15,000,000. At June 30, 2007 there were no outstanding balances on these lines. The Company also has
access to the Federal Reserve Banks discount window should a liquidity crisis occur.

The Company has 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

The Company enters into certain financial transactions in the ordinary course of performing
traditional banking services that result in off-balance sheet transactions. The off-balance sheet transactions recognized as of June 30, 2007 and December 31, 2006 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 June 30, 2007 and December 31, 2006.

Commitments to extend credit, which amounted to $182.1 million at June 30, 2007 and $158.6 million at December 31, 2006, 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.

There were no commitments by the Company to purchase securities on June 30, 2007 or December 31, 2006.

Standby letters of credit are conditional commitments issued by the Company guaranteeing the performance of a customer to a third party. Those
guarantees are primarily issued to support public and private borrowing arrangements. At June 30, 2007 and December 31, 2006, the Company had $5.1 million and $4.7 million, respectively, in outstanding standby letters of credit.

The Company has eleven non-cancelable leases for premises. The original lease terms are from one to thirty years and have various renewal
and option dates.

Capital Adequacy

The Company is 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 the Companys financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company 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 the Companys capital on an
ongoing basis with reference to the size, composition, and quality of the Companys 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.



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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 issued by Monarch in July 2006
qualified as Tier 1 capital. Monarchs ratios exceed regulatory requirements. As of June 30, 2007 Monarch Bank had a Tier 1 risk-based capital ratio of 11.26% and a Total risk-based capital ratio of 12.11%. At December 31, 2006 these
ratios were 12.18% and 13.07%, respectively.



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

The effective management of market risk is essential to achieving the Companys 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. The Company is 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. The Company evaluates 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. The Company establishes 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 the Companys financial statements. Management believes that the
investment and insurance activities of Virginia Asset Group and mortgage banking operations of its division, Monarch Mortgage, provide somewhat of a natural interest rate hedge, in that the Company is interest rate sensitive to a downward change in
the prime rate for short term periods. When loan interest rates decline, the Companys 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 Companys loan portfolio is indexed to the Wall Street Journal Prime rate and can adjust either daily or monthly. This asset-sensitive position positively impacts the Company 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, the Company
carried out an evaluation, under the supervision and with the participation of the Companys management, including the Companys 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, the Companys Chief Executive Officer and Chief Financial Officer concluded that the Companys disclosure controls and procedures are
effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in periodic SEC filings. There have been no significant changes in the Companys internal
controls or in other factors that could significantly affect internal controls subsequent to the date the Company carries out its evaluation.



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PART II - OTHER INFORMATION



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

In the course of its operations, Monarch Financial Holdings, Inc. and its
subsidiary are aware of one material pending or threatened litigation, unasserted claims and/or assessments through June 30, 2007, with that matter resolved prior to the filing of this report. Prior to filing this report Monarch Bank and
Resource Bank resolved the outstanding lawsuit related to the departure of the mortgage employees in May and June of 2007 and Monarch Banks hiring of these individuals.

On Monday, June 11, 2007, Resource Bank, a Virginia Beach based bank owned by Fulton Financial of Lancaster, Pennsylvania, filed a lawsuit against
Monarch Bank and fourteen new employees of Monarch Mortgage in the Circuit Court for the City of Norfolk, Virginia. On Wednesday, July 11, 2007, Resource Bank/Fulton filed their new complaint against Monarch Bank and sixteen ex-Resource
employees who are now employed by Monarch Mortgage in Virginia Beach Circuit Court. The Bank was named in three counts for misappropriation of trade secrets, tortuous interference with contractual relationships and statutory business conspiracy. The
lawsuit was seeking $15,000,000 in compensatory and $350,000 in punitive damages from Monarch and the individual defendants.

On
August 10, 2007, Monarch Financial Holdings, Inc. (NASDAQ:MNRK), the parent of Monarch Bank and Monarch Mortgage, entered into a Purchase Agreement with Resource Bank/Resource Mortgage, a subsidiary at Fulton Financial Corporation
(NASDAQ:FULT), providing for the purchase by the Registrant of certain specified mortgage-related business assets effective immediately. Resource agreed to sell a Maryland mortgage office plus certain other mortgage related assets for a total of
$2.1 Million. As a condition of the sale, both Resource Bank and the Registrant, as well as all the other defendants named in the lawsuit described in the 8-K filed June 13, 2007, agreed to dismiss, with prejudice, their current lawsuits and
covenanted not to sue each other for litigation related to this matter. Monarch Bank, Resource Bank and all individuals involved in the pending litigation reached a settlement in order to avoid further expense, inconvenience and delay, and to
dispose of expensive, burdensome and protracted litigation related to the recent hiring of mortgage personnel and compensation owed.



|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 pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Exhibit 32.2  Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002



| | b. | Form 8-K
| | -- | --------

Form 8-K filed April 4,
2007 to announce the expansion into North Carolina with OBX Bank.

Form 8-K filed April 20, 2007 to announce the
Companys quarterly and annual financial performance.

Form 8-K filed June 13, 2007 to announce the litigation
with Resource Bank related to the hiring of mortgage employees.



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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: August 14, 2007
|President & Chief Executive Officer                |  |  |  |                      
|                                                   |  | 
|/s/ Brad E. Schwartz.                              |  |  |  |                      
|Brad E. Schwartz                                   |  |  |  | Date: August 14, 2007
|Executive Vice President & Chief Financial Officer |  |  |  |                      



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