##### Table of Contents





UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549





FORM 10-Q







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

For Quarterly Period Ended: March 31, 2008

OR



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

Commission File Number: 000-52032





MONARCH FINANCIAL HOLDINGS,
INC.

(Exact name of registrant as specified in its charter)







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



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

(757) 389-5112

(Registrants telephone number, including area code)

Not Applicable

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





Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to filed such reports), and (2) has been subject to such filing requirements for the past 90
days.    Yes  x    No   ̈

Indicate by check mark whether the registrant is a large accelerated filer, 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  4,873,065 as of May 15, 2008.









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##### Table of Contents

MONARCH FINANCIAL HOLDINGS, INC.

FORM 10-Q

MARCH 31, 2008

INDEX



|         |  |                                                                                                         |  |   
|-------- |  | ------------------------------------------------------------------------------------------------------- |  | --
|PART I.  |  | FINANCIAL INFORMATION                                                                                   |  |   
|         |  |                                                                                                        
|ITEM 1.  |  | Consolidated Statements of Condition as of March 31, 2008 and December 31, 2007                         |  | 3 
|         |  |                                                                                                        
|         |  | Consolidated Statements of Income for the three months ended March 31, 2008 and March 31, 2007          |  | 4 
|         |  |                                                                                                        
|         |  | Consolidated Statements of Shareholders Equity for the periods ended March 31, 2008 and March 31, 2007 |  | 5 
|         |  |                                                                                                        
|         |  | Consolidated Statements of Cash Flows for the periods ended March 31, 2008 and March 31, 2007           |  | 6 
|         |  |                                                                                                        
|         |  | Notes to Consolidated Financial Statements                                                              |  | 7 
|         |  |                                                                                                        
|ITEM 2.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                   |  | 15
|         |  |                                                                                                        
|ITEM 3.  |  | Quantitative and Qualitative Disclosures about Market Risk                                              |  | 23
|         |  |                                                                                                        
|ITEM 4.  |  | Controls and Procedures                                                                                 |  | 24
|         |  |                                                                                                        
|PART II. |  | OTHER INFORMATION                                                                                       |  |   
|         |  |                                                                                                        
|Item 1.  |  | Legal Proceedings                                                                                       |  | 25
|         |  |                                                                                                        
|Item 2.  |  | Changes in Securities                                                                                   |  | 25
|         |  |                                                                                                        
|Item 3.  |  | Defaults Upon Senior Securities                                                                         |  | 25
|         |  |                                                                                                        
|Item 4.  |  | Submissions of Matters to Vote of Security Holders                                                      |  | 25
|         |  |                                                                                                        
|Item 5.  |  | Other Information                                                                                       |  | 25
|         |  |                                                                                                        
|Item 6.  |  | Exhibits and Reports on Form 8-K                                                                        |  | 26



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



|                                                                                                                              |  |                        |             |   |                         |   |             |  
|----------------------------------------------------------------------------------------------------------------------------- |  | ---------------------- | ----------- | - | ----------------------- | - | ----------- | -
|                                                                                                                              |  | UnauditedMarch 31,2008 |             |   | AuditedDecember 31,2007 |  
|ASSETS:                                                                                                                       |  |                        |             |   |                         |   |             |  
|Cash and due from banks                                                                                                       |  | $                      | 16,692,085  |   |                         | $ | 8,409,011   |  
|Interest-bearing bank balances                                                                                                |  |                        | 613,776     |   |                         |   | 992,539     |  
|Federal funds sold                                                                                                            |  |                        | 704,120     |   |                         |   | 63,000      |  
|                                                                                                                              |  |                        |             |   |                         |   |             |  
|Total cash and cash equivalents                                                                                               |  |                        | 18,009,981  |   |                         |   | 9,464,550   |  
|                                                                                                                              |  |                       
|Investment securities held-to-maturity, at cost                                                                               |  |                        | 1,491,733   |   |                         |   | 22,084,559  |  
|Investment securities available-for-sale, at fair value                                                                       |  |                        | 8,082,514   |   |                         |   | 8,873,740   |  
|Loans held for sale                                                                                                           |  |                        | 30,541,322  |   |                         |   | 18,792,568  |  
|Loans:                                                                                                                        |  |                        |             |   |                         |   |             |  
|Loans, net of unearned income                                                                                                 |  |                        | 461,158,472 |   |                         |   | 419,153,283 |  
|Less: allowance for loan losses                                                                                               |  |                        | (4,325,000  | ) |                         |   | (3,976,000  | )
|                                                                                                                              |  |                        |             |   |                         |   |             |  
|Loans, net                                                                                                                    |  |                        | 456,833,472 |   |                         |   | 415,177,283 |  
|                                                                                                                              |  |                       
|Interest receivable                                                                                                           |  |                        | 1,697,588   |   |                         |   | 1,980,350   |  
|Property and equipment, net                                                                                                   |  |                        | 10,283,640  |   |                         |   | 9,719,217   |  
|Restricted equity securities                                                                                                  |  |                        | 3,201,500   |   |                         |   | 4,847,600   |  
|Bank owned life insurance                                                                                                     |  |                        | 6,603,010   |   |                         |   | 6,543,665   |  
|Goodwill                                                                                                                      |  |                        | 775,000     |   |                         |   | 775,000     |  
|Intangible assets                                                                                                             |  |                        | 1,130,956   |   |                         |   | 1,175,599   |  
|Other assets                                                                                                                  |  |                        | 4,555,639   |   |                         |   | 3,729,640   |  
|                                                                                                                              |  |                        |             |   |                         |   |             |  
|Total assets                                                                                                                  |  | $                      | 543,206,355 |   |                         | $ | 503,163,771 |  
|                                                                                                                              |  |                        |             |   |                         |   |             |  
|                                                                                                                              |  |                       
|LIABILITIES:                                                                                                                  |  |                        |             |   |                         |   |             |  
|Deposits:                                                                                                                     |  |                        |             |   |                         |   |             |  
|Noninterest-bearing                                                                                                           |  | $                      | 69,984,627  |   |                         | $ | 66,078,161  |  
|Interest-bearing                                                                                                              |  |                        | 398,949,826 |   |                         |   | 323,626,118 |  
|                                                                                                                              |  |                        |             |   |                         |   |             |  
|Total deposits                                                                                                                |  |                        | 468,934,453 |   |                         |   | 389,704,279 |  
|                                                                                                                              |  |                       
|Borrowings:                                                                                                                   |  |                        |             |   |                         |   |             |  
|Federal Home Loan Bank advances                                                                                               |  |                        | 23,159,219  |   |                         |   | 63,531,200  |  
|Trust preferred subordinated debt                                                                                             |  |                        | 10,000,000  |   |                         |   | 10,000,000  |  
|                                                                                                                              |  |                        |             |   |                         |   |             |  
|Total borrowings                                                                                                              |  |                        | 33,159,219  |   |                         |   | 73,531,200  |  
|                                                                                                                              |  |                       
|Other liabilities                                                                                                             |  |                        | 3,375,203   |   |                         |   | 3,322,094   |  
|                                                                                                                              |  |                        |             |   |                         |   |             |  
|Total liabilities                                                                                                             |  |                        | 505,468,875 |   |                         |   | 466,557,573 |  
|                                                                                                                              |  |                        |             |   |                         |   |             |  
|Minority interest in subsidiaries                                                                                             |  |                        | 93,472      |   |                         |   | 57,702      |  
|                                                                                                                              |  |                       
|STOCKHOLDERS EQUITY:                                                                                                         |  |                        |             |   |                         |   |             |  
|Preferred stock, $5 par value, 2,000,000 shares authorized, none issued                                                       |  |                        |            |   |                         |   |            |  
|Common stock, $5 par value, 20,000,000 shares authorized, issued and outstanding 4,875,865 and 4,827,505 shares, respectively |  |                        | 24,379,325  |   |                         |   | 24,137,525  |  
|Additional paid-in capital                                                                                                    |  |                        | 4,836,738   |   |                         |   | 5,008,121   |  
|Accumulated earnings                                                                                                          |  |                        | 8,387,912   |   |                         |   | 7,419,711   |  
|Accumulated other comprehensive income (loss)                                                                                 |  |                        | 40,033      |   |                         |   | (16,861     | )
|                                                                                                                              |  |                        |             |   |                         |   |             |  
|Total stockholders equity                                                                                                    |  |                        | 37,644,008  |   |                         |   | 36,548,496  |  
|                                                                                                                              |  |                        |             |   |                         |   |             |  
|Total liabilities and stockholders equity                                                                                    |  | $                      | 543,206,355 |   |                         | $ | 503,163,771 |  
|                                                                                                                              |  |                        |             |   |                         |   |             |  

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



3



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##### Table of Contents

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

Consolidated Statements of Income

Monarch Financial Holdings, Inc. and Subsidiaries

Unaudited



|                                                    |  |                          |           |   |      |   |           |  
|--------------------------------------------------- |  | ------------------------ | --------- | - | ---- | - | --------- | -
|                                                    |  | 3 Months Ended March 31, |          
|                                                    |  | 2008                     |           |   | 2007 |  
|Interest income:                                    |  |                          |           |   |      |   |           |  
|Interest and fees on loans                          |  | $                        | 7,392,560 |   |      | $ | 6,759,212 |  
|Interest on investment securities                   |  |                          |           |   |      |   |           |  
|Taxable                                             |  |                          | 119,535   |   |      |   | 161,253   |  
|Interest on federal funds sold                      |  |                          | 3,500     |   |      |   | 5,086     |  
|Dividends on equity securities                      |  |                          | 59,397    |   |      |   | 36,322    |  
|Other interest income                               |  |                          | 18,090    |   |      |   | 17,317    |  
|                                                    |  |                          |           |   |      |   |           |  
|Total interest income                               |  |                          | 7,593,082 |   |      |   | 6,979,190 |  
|                                                    |  |                          |           |   |      |   |           |  
|                                                    |  |                         
|Interest expense:                                   |  |                          |           |   |      |   |           |  
|Interest on deposits                                |  |                          | 3,333,689 |   |      |   | 2,757,625 |  
|Interest on trust preferred subordinated debt       |  |                          | 162,536   |   |      |   | 174,094   |  
|Interest on borrowings                              |  |                          | 504,001   |   |      |   | 277,786   |  
|                                                    |  |                          |           |   |      |   |           |  
|Total interest expense                              |  |                          | 4,000,226 |   |      |   | 3,209,505 |  
|                                                    |  |                          |           |   |      |   |           |  
|Net interest income                                 |  |                          | 3,592,856 |   |      |   | 3,769,685 |  
|Provision for loan losses                           |  |                          | 395,102   |   |      |   | 143,000   |  
|                                                    |  |                          |           |   |      |   |           |  
|Net interest income after provision for loan losses |  |                          | 3,197,754 |   |      |   | 3,626,685 |  
|                                                    |  |                          |           |   |      |   |           |  
|Noninterest income:                                 |  |                          |           |   |      |   |           |  
|Mortgage banking revenue                            |  |                          | 4,325,346 |   |      |   | 460,547   |  
|Service charges and fees                            |  |                          | 329,054   |   |      |   | 249,839   |  
|Investment and insurance commissions                |  |                          | 287,358   |   |      |   | 245,365   |  
|Security gains, net                                 |  |                          | 3,146     |   |      |   |          |  
|Other                                               |  |                          | 103,815   |   |      |   | 90,994    |  
|                                                    |  |                          |           |   |      |   |           |  
|Total noninterest income                            |  |                          | 5,048,719 |   |      |   | 1,046,745 |  
|                                                    |  |                          |           |   |      |   |           |  
|                                                    |  |                         
|Noninterest expenses:                               |  |                          |           |   |      |   |           |  
|Salaries and employee benefits                      |  |                          | 4,605,422 |   |      |   | 2,008,312 |  
|Occupancy expenses                                  |  |                          | 490,776   |   |      |   | 279,948   |  
|Furniture and equipment expenses                    |  |                          | 297,590   |   |      |   | 147,207   |  
|Data processing services                            |  |                          | 167,375   |   |      |   | 153,951   |  
|Loan origination expenses                           |  |                          | 467,509   |   |      |   | 127,628   |  
|Advertising and marketing expenses                  |  |                          | 59,796    |   |      |   | 53,709    |  
|Professional fees                                   |  |                          | 90,040    |   |      |   | 61,058    |  
|Virginia franchise tax                              |  |                          | 28,284    |   |      |   | 96,170    |  
|Stationery and supplies                             |  |                          | 98,946    |   |      |   | 61,709    |  
|Other                                               |  |                          | 456,904   |   |      |   | 329,436   |  
|                                                    |  |                          |           |   |      |   |           |  
|Total noninterest expenses                          |  |                          | 6,762,642 |   |      |   | 3,319,128 |  
|                                                    |  |                          |           |   |      |   |           |  
|Income before income taxes and minority interests   |  |                          | 1,483,831 |   |      |   | 1,354,302 |  
|Minority interest in subsidiarys net income        |  |                          | (47,430   | ) |      |   | (20,430   | )
|                                                    |  |                          |           |   |      |   |           |  
|Net income before income taxes                      |  |                          | 1,436,401 |   |      |   | 1,333,872 |  
|Income tax expense                                  |  |                          | (468,200  | ) |      |   | (407,484  | )
|                                                    |  |                          |           |   |      |   |           |  
|Net income                                          |  | $                        | 968,201   |   |      | $ | 926,388   |  
|                                                    |  |                          |           |   |      |   |           |  
|Basic net income per share                          |  | $                        | 0.20      |   |      | $ | 0.19      |  
|Diluted net income per share                        |  |                          | 0.20      |   |      |   | 0.18      |  

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 |  | AdditionalPaid-InCapital |            |  | AccumulatedEarnings |           | AccumulatedOtherComprehensiveIncome (Loss) |  |   | Total     | 
|                                                                      |  | Shares       |  | Amount                   |            |  |                     |          
|BalanceDecember 31, 2006                                             |  | 4,845,917    |  | $                        | 24,229,585 |  | $                   | 5,627,218 |                                            |  | $ | 4,261,537 |  | $ | (109,829 | ) |  | $ | 34,008,511 |  
|                                                                      |  |              |  |                          |            | 
|Net income for three months ended March 31, 2007                      |  |             |  |                          |           |  |                     |          |                                            |  |   | 926,388   |  |   |         |   |  |   | 926,388    |  
|Unrealized loss on available for sale securities, net of income taxes |  |             |  |                          |           |  |                     |          |                                            |  |   |          |  |   | (2,183   | ) |  |   | (2,183     | )
|                                                                      |  |              |  |                          |            |  |                     |           |                                            |  |   |           |  |   |          |   |  |   |            |  
|Total comprehensive income                                            |  |              |  |                          |            |  |                     |           |                                            |  |   |           |  |   |          |   |  |   | 924,205    |  
|                                                                      |  |              |  |                          |            |  |                     |           |                                            |  |   |           |  |   |          |   |  |   |            |  
|Stock options exercised                                               |  | 47,290       |  |                          | 236,450    |  |                     | 178,988   |                                            |  |   |          |  |   |         |   |  |   | 415,438    |  
|Stock-based compensation expense                                      |  | 1,200        |  |                          | 6,000      |  |                     | 77,803    |                                            |  |   |          |  |   |         |   |  |   | 83,803     |  
|                                                                      |  |              |  |                          |            |  |                     |           |                                            |  |   |           |  |   |          |   |  |   |            |  
|BalanceMarch 31, 2007                                                |  | 4,894,407    |  | $                        | 24,472,035 |  | $                   | 5,884,009 |                                            |  | $ | 5,187,925 |  | $ | (112,012 | ) |  | $ | 35,431,957 |  
|                                                                      |  |              |  |                          |            |  |                     |           |                                            |  |   |           |  |   |          |   |  |   |            |  
|                                                                      |  |              |  |                          |            | 
|BalanceDecember 31, 2007                                             |  | 4,827,505    |  | $                        | 24,137,525 |  | $                   | 5,008,121 |                                            |  | $ | 7,419,711 |  | $ | (16,861  | ) |  | $ | 36,548,496 |  
|Net income for three months ended March 31, 2008                      |  |             |  |                          |           |  |                     |          |                                            |  |   | 968,201   |  |   |         |   |  |   | 968,201    |  
|Unrealized gain on available for sale securities, net of income taxes |  |             |  |                          |           |  |                     |          |                                            |  |   |          |  |   | 56,894   |   |  |   | 56,894     |  
|                                                                      |  |              |  |                          |            |  |                     |           |                                            |  |   |           |  |   |          |   |  |   |            |  
|Total comprehensive income                                            |  |              |  |                          |            |  |                     |           |                                            |  |   |           |  |   |          |   |  |   | 1,025,095  |  
|                                                                      |  |              |  |                          |            |  |                     |           |                                            |  |   |           |  |   |          |   |  |   |            |  
|Stock-based compensation expense                                      |  | 48,360       |  |                          | 241,800    |  |                     | (171,383  | )                                          |  |   |          |  |   |         |   |  |   | 70,417     |  
|                                                                      |  |              |  |                          |            |  |                     |           |                                            |  |   |           |  |   |          |   |  |   |            |  
|BalanceMarch 31, 2008                                                |  | 4,875,865    |  | $                        | 24,379,325 |  | $                   | 4,836,738 |                                            |  | $ | 8,387,912 |  | $ | 40,033   |   |  | $ | 37,644,008 |  
|                                                                      |  |              |  |                          |            |  |                     |           |                                            |  |   |           |  |   |          |   |  |   |            |  

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



|                                                                       |  |                          |             |   |      |   |             |  
|---------------------------------------------------------------------- |  | ------------------------ | ----------- | - | ---- | - | ----------- | -
|                                                                       |  | 3 Months Ended March 31, |            
|                                                                       |  | 2008                     |             |   | 2007 |  
|Operating activities:                                                  |  |                          |             |   |      |   |             |  
|Net income                                                             |  | $                        | 968,201     |   |      | $ | 926,388     |  
|Adjustments to reconcile to net cash provided by operating activities: |  |                          |             |   |      |   |             |  
|Provision for loan losses                                              |  |                          | 395,102     |   |      |   | 143,000     |  
|Provision for depreciation                                             |  |                          | 225,359     |   |      |   | 157,993     |  
|Amortization of intangible assets                                      |  |                          | 44,643      |   |      |   |            |  
|Accretion of discounts and amortization of premiums, net               |  |                          | 153         |   |      |   | (14,681     | )
|Deferral of loan costs, net of deferred fees                           |  |                          | (174,063    | ) |      |   | (6,080      | )
|Gain on disposal of asset                                              |  |                          | (10,000     | ) |      |   |            |  
|Stock-based compensation                                               |  |                          | 70,417      |   |      |   | 42,621      |  
|Net gain on disposition of investment securities                       |  |                          | (3,146      | ) |      |   |            |  
|Amortization of deferred gain                                          |  |                          | (40,862     | ) |      |   |            |  
|Changes in:                                                            |  |                          |             |   |      |   |             |  
|Loans held for sale                                                    |  |                          | (11,748,754 | ) |      |   | (619,200    | )
|Interest receivable                                                    |  |                          | 282,762     |   |      |   | 21,319      |  
|Other assets                                                           |  |                          | (545,577    | ) |      |   | (323,902    | )
|Other liabilities                                                      |  |                          | 129,741     |   |      |   | (89,420     | )
|                                                                       |  |                          |             |   |      |   |             |  
|Net cash from operating activities                                     |  |                          | (10,406,024 | ) |      |   | 238,038     |  
|                                                                       |  |                          |             |   |      |   |             |  
|                                                                       |  |                         
|Investing activities:                                                  |  |                          |             |   |      |   |             |  
|Purchases of held-to-maturity securities                               |  |                          |            |   |      |   | (19,983,100 | )
|Purchases of available-for-sale securities                             |  |                          | (1,044,610  | ) |      |   |            |  
|Proceeds from maturities and sales of available-for-sale securities    |  |                          | 1,917,858   |   |      |   | 2,522,054   |  
|Proceeds from maturities and calls of held-to-maturity securities      |  |                          | 20,600,000  |   |      |   | 35,000,000  |  
|Loan originations, net of principal repayments                         |  |                          | (42,246,304 | ) |      |   | (17,240,474 | )
|Purchases of property and equipment                                    |  |                          | (779,782    | ) |      |   | (576,896    | )
|Sale of restricted equity securities, net of redemptions               |  |                          | 1,646,100   |   |      |   | (228,300    | )
|                                                                       |  |                          |             |   |      |   |             |  
|Net cash from investing activities                                     |  |                          | (19,906,738 | ) |      |   | (506,716    | )
|                                                                       |  |                          |             |   |      |   |             |  
|                                                                       |  |                         
|Financing activities:                                                  |  |                          |             |   |      |   |             |  
|Net (decrease) increase in noninterest-bearing deposits                |  |                          | 3,906,466   |   |      |   | (3,684,220  | )
|Net increase in interest-bearing deposits                              |  |                          | 75,323,708  |   |      |   | 7,836,116   |  
|FHLB advances, net of repayments                                       |  |                          | (40,371,981 | ) |      |   | (3,514,978  | )
|Proceeds from issuance of common stock, net of issuance costs          |  |                          |            |   |      |   | 243,806     |  
|                                                                       |  |                          |             |   |      |   |             |  
|Net cash from financing activities                                     |  |                          | 38,858,193  |   |      |   | 880,724     |  
|                                                                       |  |                          |             |   |      |   |             |  
|CHANGE IN CASH AND CASH EQUIVALENTS                                    |  |                          | 8,545,431   |   |      |   | 612,046     |  
|CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                       |  |                          | 9,464,550   |   |      |   | 18,966,342  |  
|                                                                       |  |                          |             |   |      |   |             |  
|CASH AND CASH EQUIVALENTS AT END OF PERIOD                             |  | $                        | 18,009,981  |   |      | $ | 19,578,388  |  
|                                                                       |  |                          |             |   |      |   |             |  
|                                                                       |  |                         
|SUPPLEMENTAL SCHEDULES AND CASH FLOW INFORMATION                       |  |                          |             |   |      |   |             |  
|Interest on deposits and other borrowings                              |  | $                        | 3,846,264   |   |      | $ | 3,227,896   |  
|Income taxes                                                           |  | $                        | 750,000     |   |      | $ | 175,000     |  
|Loans transferred to foreclosed real estate during the year            |  | $                        | 369,076     |   |      | $ |            |  

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



6



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##### Table of Contents

MONARCH FINANCIAL HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. BASIS OF PRESENTATION

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

NOTE 2. GENERAL

Monarch Financial Holdings, Inc. (Monarch or the Company) is a Virginia chartered
Company that offers a full range of financial services, primarily to individuals and businesses in the Hampton Roads area of Virginia and Northeastern North Carolina as well as in other markets for mortgage originators. 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 an office in downtown Norfolk. OBX Bank, a division of Monarch Bank, has one office in Kitty Hawk, North
Carolina.

In August 2001, the Company formed Monarch Investment, LLC, to facilitate the sale of annuities and investment securities and
services. The Company owns a 100% of 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. On April 30, 2008, Bankers Investment
Group, LLC, and BI Investments, LLC, were merged into Infinex Financial Group (Infinex), a broker-dealer headquartered in Meriden, Connecticut, with Monarch Investment, LLC, now holding a 5.62% ownership interest in Infinex. Investment clients doing
business through BI Investments, LLC, will begin using Infinex as their broker-dealer upon conversion in June of 2008.

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

In January 2003, Monarch Investment, LLC, purchased a minority interest in Bankers Insurance, LLC, in a joint venture with the Virginia Bankers
Association and many other community banks. Bankers Insurance, LLC, is a full service property/casualty and life/health agency that ranks as one of the largest agencies in Virginia. Bankers Insurance, LLC, provides insurance to 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 July 2007 Monarch Investment, LLC,
purchased a 51% ownership in Coastal Home Mortgage, LLC, from another bank. This joint venture provides residential loan services through Monarch Mortgage. The 49% ownership is shared by four individuals involved in commercial and residential
construction in the Hampton Roads area.

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



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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, 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. Their primary office is in Virginia Beach with additional offices in Chesapeake and Norfolk, Virginia, Rockville, Waldorf, Crofton, Annapolis and College Park, Maryland, and Rehobeth Beach, Deleware.

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

NOTE 3. EARNINGS PER SHARE (EPS)

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



|                                                  |  |                          |           |      |   |          
|------------------------------------------------- |  | ------------------------ | --------- | ---- | - | ---------
|                                                  |  | 3 months ended March 31,
|                                                  |  | 2008                     |           | 2007
|Net income (numerator, basic and diluted)         |  | $                        | 968,201   |      | $ | 926,388  
|Weighted average shares outstanding (denominator) |  |                          | 4,773,545 |      |   | 4,827,185
|                                                  |  |                          |           |      |   |          
|Income per common sharebasic                     |  | $                        | 0.20      |      | $ | 0.19     
|                                                  |  |                          |           |      |   |          
|Average diluted shares outstanding (denominator)  |  |                          | 4,947,754 |      |   | 5,076,094
|                                                  |  |                          |           |      |   |          
|Income per common sharediluted                   |  | $                        | 0.20      |      | $ | 0.18     
|                                                  |  |                          |           |      |   |          

The dilutive effect of stock options is 174,209 and 248,909 shares for the three months ended
March 31, 2008 and 2007, respectively.

NOTE 4. FAIR VALUE ACCOUNTING

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

Fair Value Measurements (SFAS 157)

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

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



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



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



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



8



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

The following table presents for each of the fair value hierarchy
levels, the Companys assets and liabilities related to continuing operations which are measured at fair value on a recurring basis as of March 31, 2008:



|                                         |  |                                                 |           |                                                              |   |                                            |  |                                         |           |  |   |  
|---------------------------------------- |  | ----------------------------------------------- | --------- | ------------------------------------------------------------ | - | ------------------------------------------ |  | --------------------------------------- | --------- |  | - | -
|                                         |  | Fair Value Measurements at Reporting Date Using
|Description                              |  | Fair Value at3/31/2008                          |           | Quoted Prices inActive Marketsfor IdenticalAssets ( Level 1) |   | SignificantOtherObservableInputs (Level 2) |  | SignificantUnobservableInputs (Level 3)
|Assets                                   |  |                                                 |           |                                                              |   |                                            |  |                                         |           |  |   |  
|Investment securitiesavailable-for-sale |  | $                                               | 8,082,514 |                                                              | $ |                                           |  | $                                       | 8,082,514 |  | $ | 
|Rate lock commitments, net               |  |                                                 | 326,485   |                                                              |   |                                           |  |                                         | 326,485   |  |   | 
|                                         |  |                                                 |           |                                                              |   |                                            |  |                                         |           |  |   |  
|Total Assets                             |  | $                                               | 8,408,999 |                                                              | $ |                                           |  | $                                       | 8,408,999 |  | $ | 
|                                         |  |                                                 |           |                                                              |   |                                            |  |                                         |           |  |   |  

The following table provides quantitative disclosures about the fair value measurements for the
Companys assets related to continuing operations which are measured at fair value on a nonrecurring basis as of March 31, 2008:



|                  |  |                             |         |                                                             |   |                                             |  |                                         |   |  |   |        
|----------------- |  | --------------------------- | ------- | ----------------------------------------------------------- | - | ------------------------------------------- |  | --------------------------------------- | - |  | - | -------
|                  |  |                             |         | Fair Value Measurements at Report Date Using               
|Description       |  | Fair Value atMarch 31, 2008 |         | Quoted Prices inActive Marketsfor IdenticalAssets (Level 1) |   | Significant OtherObservableInputs (Level 2) |  | SignificantUnobservableInputs (Level 3)
|Real estate owned |  | $                           | 369,076 |                                                             | $ |                                            |  | $                                       |  |  | $ | 369,076

At the time a loan secured by real estate becomes real estate owned, the Company records the
property at the lower of its carrying amount or fair value. Upon foreclosure and through liquidation, the Company evaluates the propertys fair value as compared to its carrying amount and records a valuation adjustment when the carrying amount
exceeds fair value. Any valuation adjustments at the time a loan becomes real estate owned is charged to the allowance for loan losses. Any subsequent valuation adjustments are recorded to earnings in the (Losses) gains on sale of loans
line item of the Companys consolidated statements of operations. During the quarter ended March 31, 2008, the Company recorded no losses due to valuation adjustments on real estate owned in its consolidated statements of operations.

The following table provides a summary of the impact to earnings for the quarter ended March 31, 2008 from the Companys asset
and liabilities which are measured at fair value on a recurring and nonrecurring basis:



|                                          |  |                                |  |                                                        |         |                                            |                                
|----------------------------------------- |  | ------------------------------ |  | ------------------------------------------------------ | ------- | ------------------------------------------ | -------------------------------
|Asset or Liability Measured at Fair Value |  | Fair ValueMeasurementFrequency |  | Fair ValueAdjustmentsIncluded inCurrent PeriodEarnings |         | Statement of Operations Line Item Impacted
|Rate lock commitments                     |  | Recurring                      |  | $                                                      | 194,346 |                                            | Mortgage income adjustments    
|Real estate owned                         |  | Nonrecurring                   |  |                                                        |        |                                            | (Losses) gains on sale of loans
|                                          |  |                                |  |                                                        |         |                                            |                                
|Total fair value gains (losses)           |  |                                |  | $                                                      | 194,346 |                                            |                                
|                                          |  |                                |  |                                                        |         |                                            |                                



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Valuation Methods

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

Real estate owned. Real estate owned is carried at the lower of cost or fair value less estimated selling costs. The Company estimates fair
value at the assets liquidation value less selling costs using managements assumptions which are based on historical loss severities for similar assets.

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

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

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

At March 31, 2008, the
Company has not elected to implement fair value accounting for any balance sheet items as allowed by SFAS 159.

NOTE 5. COMPREHENSIVE INCOME

Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain
changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of
comprehensive income. The only component of other comprehensive income consists of unrealized gains and losses on available-for-sale securities. 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 months ended March 31, 2008 and 2007:



|                                                                                         |  |                            |           |   |      |   |         |  
|---------------------------------------------------------------------------------------- |  | -------------------------- | --------- | - | ---- | - | ------- | -
|                                                                                         |  | Three Months EndedMarch 31 |          
|                                                                                         |  | 2008                       |           |   | 2007 |  
|Net Income                                                                               |  | $                          | 968,201   |   |      | $ | 926,388 |  
|Change in unrealized gains (losses) on securities available-for-sale, net of tax expense |  |                            | 56,894    |   |      |   | (2,183  | )
|                                                                                         |  |                            |           |   |      |   |         |  
|Total comprehensive income                                                               |  | $                          | 1,025,095 |   |      | $ | 924,205 |  
|                                                                                         |  |                            |           |   |      |   |         |  
|                                                                                         |  |                           
|Unrealized holding gains (losses) during the period                                      |  | $                          | 86,204    |   |      | $ | (3,308  | )
|Less reclassification adjustment for losses included in income                           |  |                            |          |   |      |   |        |  
|                                                                                         |  |                            |           |   |      |   |         |  
|Total other comprehensive (income) loss before income tax expense                        |  |                            | 86,204    |   |      |   | (3,308  | )
|Income tax expense                                                                       |  |                            | (29,310   | ) |      |   | 1,125   |  
|                                                                                         |  |                            |           |   |      |   |         |  
|Net unrealized losses                                                                    |  | $                          | 56,894    |   |      | $ | (2,183  | )
|                                                                                         |  |                            |           |   |      |   |         |  



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NOTE 6. STOCK-BASED COMPENSATION

As of March 31, 2008, 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 630,000 split-adjusted 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 five years from issue. Total compensation costs are recognized
annually on a pro-rata basis over the vesting period.

NOTE 7. SEGMENT REPORTING

Reportable segments include community banking and mortgage banking services. Community banking involves making loans to and generating deposits from
individuals and businesses in the markets where 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.



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##### Table of Contents

Segment information for the three months ended March 31, 2008 and 2007 is shown in the following
table.



|                                                      |  |                  |             |   |                 |   |            |                          |  |   |             |   |  |   |             |  
|----------------------------------------------------- |  | ---------------- | ----------- | - | --------------- | - | ---------- | ------------------------ |  | - | ----------- | - |  | - | ----------- | -
|                                                      |  | CommunityBanking |             |   | MortgageBanking |   |            | IntersegmentEliminations |  |   | Total       |  
|Three Months Ended March 31, 2008                     |  |                  |             |   |                 |   |            |                          |  |   |             |   |  |   |             |  
|Net interest income after provision for loan losses   |  | $                | 3,310,414   |   |                 | $ | (252,927   | )                        |  | $ | 140,267     |   |  | $ | 3,197,754   |  
|Noninterest income                                    |  |                  | 745,123     |   |                 |   | 4,452,607  |                          |  |   | (149,011    | ) |  |   | 5,048,719   |  
|Noninterest expense                                   |  |                  | (3,347,358  | ) |                 |   | (3,437,034 | )                        |  |   | 21,750      |   |  |   | (6,762,642  | )
|                                                      |  |                  |             |   |                 |   |            |                          |  |   |             |   |  |   |             |  
|Net income before income taxes and minority interests |  | $                | 708,179     |   |                 | $ | 762,646    |                          |  | $ | 13,006      |   |  | $ | 1,483,831   |  
|                                                      |  |                  |             |   |                 |   |            |                          |  |   |             |   |  |   |             |  
|                                                      |  |                  |             |  
|Three Months Ended March 31, 2007                     |  |                  |             |   |                 |   |            |                          |  |   |             |   |  |   |             |  
|Net interest income after provision for loan losses   |  | $                | 3,657,073   |   |                 | $ | (30,388    | )                        |  | $ |            |   |  | $ | 3,626,685   |  
|Noninterest income                                    |  |                  | 601,128     |   |                 |   | 460,547    |                          |  |   | (14,930     | ) |  |   | 1,046,745   |  
|Noninterest expense                                   |  |                  | (2,903,899  | ) |                 |   | (458,729   | )                        |  |   | 43,500      |   |  |   | (3,319,128  | )
|                                                      |  |                  |             |   |                 |   |            |                          |  |   |             |   |  |   |             |  
|Net income before income taxes and minority interests |  | $                | 1,354,302   |   |                 | $ | (28,570    | )                        |  | $ | 28,570      |   |  | $ | 1,354,302   |  
|                                                      |  |                  |             |   |                 |   |            |                          |  |   |             |   |  |   |             |  
|                                                      |  |                  |             |  
|                                                      |  | CommunityBanking |             |   | MortgageBanking |   |            | IntersegmentEliminations |  |   | Total       |  
|Segment Assets                                        |  |                  |             |   |                 |   |            |                          |  |   |             |   |  |   |             |  
|2008                                                  |  | $                | 539,316,023 |   |                 | $ | 34,870,645 |                          |  | $ | (30,980,313 | ) |  | $ | 543,206,355 |  
|2007                                                  |  | $                | 410,179,905 |   |                 | $ | 2,046,001  |                          |  | $ | (2,748,201  | ) |  | $ | 409,477,705 |  

NOTE 8. ACQUISITION

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



|                   |  |   |          
|------------------ |  | - | ---------
|At August 10, 2007
|                   | 
|Equipment          |  | $ | 22,000   
|Intangible assets  |  |   | 1,250,000
|Goodwill           |  |   | 775,000  
|                   |  |   |          
|                   |  | $ | 2,047,000
|                   |  |   |          



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NOTE 9. GOODWILL AND INTANGIBLE ASSETS

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

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



|                              |  |                 |           |                         |   |             |  |   |          
|----------------------------- |  | --------------- | --------- | ----------------------- | - | ----------- |  | - | ---------
|                              |  | AcquisitionCost |           | AccumulatedAmortization |   | EndingValue
|March 31, 2008                |  |                 |           |                         |   |             |  |   |          
|Amortizable intangible assets |  | $               | 1,250,000 |                         | $ | 119,044     |  | $ | 1,130,956
|Goodwill                      |  |                 | 775,000   |                         |   |            |  |   | 775,000  

Amortization expense for the three month period ended March 31, 2008 totaled $44,643.
Amortization expense of $74,401 was recorded in the last six months of 2007.



|                                |  |   |          
|------------------------------- |  | - | ---------
|Estimated Amortization Expense: |  |   |          
|For the year ended 12/31/08     |  | $ | 178,572  
|For the year ended 12/31/09     |  |   | 178,572  
|For the year ended 12/31/10     |  |   | 178,572  
|For the year ended 12/31/11     |  |   | 178,572  
|For the year ended 12/31/12     |  |   | 178,572  
|Thereafter                      |  |   | 282,739  
|                                |  |   |          
|                                |  | $ | 1,175,599
|                                |  |   |          



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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 2007 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 is directly related to price level indices.

The Company adopted SFAS 142, Goodwill and Other Intangible Assets, effective January 1, 2002. Accordingly, goodwill is no longer subject to amortization over its estimated useful life, but is subject to at
least an annual assessment for impairment by applying a fair value-based test. Additionally, under SFAS 142, acquired intangible assets (such as core deposit intangibles) are separately recognized if the benefit of the assets can be sold,
transferred, licensed, rented, or exchanged, and amortized over their useful lives. Branch acquisition transactions were outside the scope of SFAS 142 and, accordingly, intangible assets related to such transactions continued to amortize upon
the adoption of SFAS 142. The costs of purchased deposit relationships and other intangible assets, based on independent valuation by a qualified third party, are to be amortized over their estimated lives.

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. Adoption of SFAS 157 did not have a material impact on the Company 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.

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 after November 15, 2007. Adoption of SFAS 159 did not have a material impact on the Company financial statements.

Refer to the Companys December 31, 2007 Annual Report on Form 10-K for previously announced accounting pronouncements.



14



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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 2007 Form 10-K.

Earnings Summary

Monarch Financial Holdings, Inc. reported net income of $968,201 for the three months ending
March 31, 2008, compared to $926,388 for the same period in 2007, an increase of $41,813 or 4.5%. Net interest income decreased 4.7% or $176,829 to $3,592,856 during the first quarter of 2008, when compared to 2007. Noninterest income increased
382.3% to $5,048,719 during the three months ended March 31, 2008 when compared to $1,046,745 for the same period in 2007. Noninterest expenses totaled $6,762,642, an increase of $3,443,514, or 103.7% for the first quarter of 2008 compared to
2007. Basic and diluted earnings per share of common stock were $0.20 and $0.20 for the first quarter of 2008 compared to $0.19 and $0.18 for 2007

Profitability as measured by Monarchs annualized return on average assets (ROA) was 0.77% compared to 1.01% for the three months ended March 31, 2008 and 2007, respectively. Another measure of the Companys profitability,
the annualized return on average equity (ROE) was 10.49% for the first quarter of 2008 compared to 10.80% for the same period in 2007.

Net Interest
Income

Net interest income represents a principal source of earnings for the Company. In 2008 net interest income declined due to a
combination of sharply declining rates and strong liability growth. This is in contrast to 2007 net interest income, which increased through the combination of predominately higher interest rates and greater asset growth. The Federal Reserve
Banks Federal Open Market Committee has decreased the Federal Funds rate 200 basis points since mid-December 2007 to a low of 2.25% compared to the same period in 2007 in which the rate was a level 5.25%. The Wall Street Journal Prime Rate has
followed the Federal Funds rate trend with current rates at 5.25% compared to 8.25% for the first quarter of 2007. 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 while decreases reduce interest income. Additionally, the Company is asset sensitive as the loans that are tied to Wall Street Journal Prime are set to move immediately with each rate change, while a major category of funding
liabilities reprice based on longer maturity dates, creating margin compression.

Net interest income was $3,592,856 for the first quarter
of 2008, $176,829 or 4.7% below first quarter 2007. Total interest and fees on loans, the largest component of net interest income, increased 9.4%, or $633,348 to $7,392,560 during the first quarter of 2008 compared to $6,759,212 for the same period
in 2007 due to a 32.1% increase in loan volume.



15



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##### Table of Contents

Interest on investment securities continued to decline due to decreasing portfolio balances. Interest on
federal funds sold and overnight funds also decreased. Interest on investment securities declined 25.9% to $119,535 in the first quarter 2008, compared to $161,253 for the same period in 2007 while the Companys investment portfolio declined
28.0%, on average. A majority of the decline in the investment portfolio is due to maturities coupled with rate called securities. Interest on federal funds sold declined 31.2% to $3,500 for the first quarter of 2008 compared to $5,086 for the same
period in 2007, in spite of a 3.7% increase in average outstandings due to lower interest rates in 2008.

Dividends on restricted equity
securities were 63.5% higher in the first quarter of 2008, at $59,397 compared to $36,322 for the same period in 2007, as a result of higher balances of stock in the Federal Reserve and the Federal Home Loan Bank of Atlanta. Other interest income,
which is primarily interest bearing deposits at the Federal Home Loan Bank, increased 4.5% to $18,090 for the first quarter of 2008 compared to $17,317 from the first quarter of 2007.

Interest expense on deposits increased $576,064 or 20.9% for the first quarter of 2008 compared to 2007. The increase in deposit expense is due to an
increase in average outstanding, higher cost deposits arising from a shift in the deposit mix. Interest expense on borrowings totaled $666,537, a 47.5% increase for the first quarter of 2007. Increased borrowings were the result of consistently
higher loan funding needs. The Company issued trust preferred subordinated debt in the third quarter of 2006 which provided a funding source for loans. Trust preferred interest expense for the first quarter of 2008 compared to 2007 decreased $11,558
or 6.6% to $162,536 due to lower Libor-based pricing for the period.

Average Balances, Income and Expenses, Yields and Rates

The net interest spread on a tax-equivalent basis decreased 75 basis points to 2.75% for first quarter of 2008 when compared to 3.49% for the same period
in 2007. The yield on earning assets decreased 137 basis points to 6.74% in 2008 compared to 8.09% for the first quarter of 2007, while the cost of interest bearing liabilities only decreased 61 basis points to 3.99% from 4.60%, respectively, for
the same period. Higher growth in earning assets compared to liabilities served to further compress the interest margin 119 basis points to 3.23% for the same period.

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 5.51% for the first three months of 2008 compared to 5.93% for the same period in 2007.

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 cost on trust preferred securities decreased to
6.45% from 6.98% in the first quarter of 2008 compared to 2007.

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



16



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##### Table of Contents

AVERAGE BALANCES, INCOME AND EXPENSE, YIELDS AND RATES



|                                              |  |                             |             |   |                |   |               |  |      |                |  |   |                |   |               |   |           |  |      |  
|--------------------------------------------- |  | --------------------------- | ----------- | - | -------------- | - | ------------- |  | ---- | -------------- |  | - | -------------- | - | ------------- | - | --------- |  | ---- | -
|                                              |  | For Periods Ended March 31, |            
|                                              |  | 2008                        |             |   | 2007           |  
|                                              |  | AverageBalance              |             |   | Income/Expense |   | YieldRate (1) |  |      | AverageBalance |  |   | Income/Expense |   | YieldRate (1) |  
|ASSETS                                        |  |                             |             |   |                |   |               |  |      |                |  |   |                |   |               |   |           |  |      |  
|Securities, at amortized cost                 |  |                             |             |   |                |   |               |  |      |                |  |   |                |   |               |   |           |  |      |  
|Taxable                                       |  | $                           | 11,053,013  |   |                | $ | 119,535       |  | 4.35 | %              |  | $ | 15,344,155     |   |               | $ | 161,253   |  | 4.26 | %
|                                              |  |                             |             |   |                |   |               |  |      |                |  |   |                |   |               |   |           |  |      |  
|Total securities                              |  |                             | 11,053,013  |   |                |   | 119,535       |  | 4.35 | %              |  |   | 15,344,155     |   |               |   | 161,253   |  | 4.26 | %
|Loans, net                                    |  |                             | 434,163,803 |   |                |   | 7,392,560     |  | 6.85 | %              |  |   | 328,697,139    |   |               |   | 6,759,212 |  | 8.34 | %
|Federal funds sold                            |  |                             | 409,836     |   |                |   | 3,500         |  | 3.43 | %              |  |   | 394,997        |   |               |   | 5,086     |  | 5.22 | %
|Dividend-earning restricted equity securities |  |                             | 4,270,533   |   |                |   | 59,397        |  | 5.59 | %              |  |   | 2,598,882      |   |               |   | 36,322    |  | 5.67 | %
|Deposits in other banks                       |  |                             | 2,241,375   |   |                |   | 18,090        |  | 3.25 | %              |  |   | 1,321,184      |   |               |   | 17,317    |  | 5.32 | %
|Bank owned life insurance (2)                 |  |                             | 6,567,805   |   |                |   | 89,917        |  | 5.51 | %              |  |   | 6,321,563      |   |               |   | 92,425    |  | 5.93 | %
|                                              |  |                             |             |   |                |   |               |  |      |                |  |   |                |   |               |   |           |  |      |  
|Total earning assets                          |  |                             | 458,706,365 |   |                |   | 7,682,999     |  | 6.74 | %              |  |   | 354,677,920    |   |               |   | 7,071,615 |  | 8.09 | %
|                                              |  |                             |             |   |                |   |               |  |      |                |  |   |                |   |               |   |           |  |      |  
|Less: Allowance for loan losses               |  |                             | (3,987,509  | ) |                |   |               |  |      |                |  |   | (3,276,789     | ) |               |   |           |  |      |  
|Total non earning assets                      |  |                             | 61,428,529  |   |                |   |               |  |      |                |  |   | 19,626,262     |   |               |   |           |  |      |  
|                                              |  |                             |             |   |                |   |               |  |      |                |  |   |                |   |               |   |           |  |      |  
|Total assets                                  |  | $                           | 516,147,385 |   |                |   |               |  |      |                |  | $ | 371,027,393    |   |               |   |           |  |      |  
|                                              |  |                             |             |   |                |   |               |  |      |                |  |   |                |   |               |   |           |  |      |  
|                                              |  |                             |             |   |                |  
|LIABILITIES and SHAREHOLDERS EQUITY          |  |                             |             |   |                |   |               |  |      |                |  |   |                |   |               |   |           |  |      |  
|Interest-bearing deposits:                    |  |                             |             |   |                |   |               |  |      |                |  |   |                |   |               |   |           |  |      |  
|Checking                                      |  | $                           | 13,680,678  |   |                | $ | 25,346        |  | 0.75 | %              |  | $ | 9,695,337      |   |               | $ | 7,062     |  | 0.30 | %
|Regular savings                               |  |                             | 5,468,450   |   |                |   | 7,680         |  | 0.56 | %              |  |   | 6,401,288      |   |               |   | 9,552     |  | 0.61 | %
|Money market savings                          |  |                             | 136,323,229 |   |                |   | 1,132,611     |  | 3.34 | %              |  |   | 145,094,331    |   |               |   | 1,650,481 |  | 4.61 | %
|Certificates of deposit                       |  |                             |             |   |                |   |               |  |      |                |  |   |                |   |               |   |           |  |      |  
|$100,000 and over                             |  |                             | 99,766,275  |   |                |   | 1,167,543     |  | 4.71 | %              |  |   | 43,170,531     |   |               |   | 541,265   |  | 5.08 | %
|Under $100,000                                |  |                             | 87,060,151  |   |                |   | 1,000,509     |  | 4.62 | %              |  |   | 47,763,624     |   |               |   | 549,265   |  | 4.66 | %
|                                              |  |                             |             |   |                |   |               |  |      |                |  |   |                |   |               |   |           |  |      |  
|Total interest-bearing deposits               |  |                             | 342,298,783 |   |                |   | 3,333,689     |  | 3.92 | %              |  |   | 252,125,111    |   |               |   | 2,757,625 |  | 4.44 | %
|Borrowings                                    |  |                             | 60,810,457  |   |                |   | 666,537       |  | 4.41 | %              |  |   | 30,758,951     |   |               |   | 451,880   |  | 5.96 | %
|                                              |  |                             |             |   |                |   |               |  |      |                |  |   |                |   |               |   |           |  |      |  
|Total interest-bearing liabilities            |  |                             | 403,109,240 |   |                | $ | 4,000,226     |  | 3.99 | %              |  |   | 282,884,062    |   |               | $ | 3,209,505 |  | 4.60 | %
|Noninterest-bearing liabilities               |  |                             |             |   |                |   |               |  |      |                |  |   |                |   |               |   |           |  |      |  
|Demand deposits                               |  |                             | 60,715,469  |   |                |   |               |  |      |                |  |   | 51,226,688     |   |               |   |           |  |      |  
|Other noninterest-bearing liabilities         |  |                             | 15,199,725  |   |                |   |               |  |      |                |  |   | 2,148,166      |   |               |   |           |  |      |  
|                                              |  |                             |             |   |                |   |               |  |      |                |  |   |                |   |               |   |           |  |      |  
|Total liabilities                             |  |                             | 479,024,434 |   |                |   |               |  |      |                |  |   | 336,258,916    |   |               |   |           |  |      |  
|Shareholders equity                          |  |                             | 37,122,951  |   |                |   |               |  |      |                |  |   | 34,768,477     |   |               |   |           |  |      |  
|                                              |  |                             |             |   |                |   |               |  |      |                |  |   |                |   |               |   |           |  |      |  
|Total liabilities and stockholders equity    |  | $                           | 516,147,385 |   |                |   |               |  |      |                |  | $ | 371,027,393    |   |               |   |           |  |      |  
|                                              |  |                             |             |   |                |   |               |  |      |                |  |   |                |   |               |   |           |  |      |  
|Net interest income (2)                       |  |                             |             |   |                | $ | 3,682,773     |  |      |                |  |   |                |   |               | $ | 3,862,110 |  |      |  
|                                              |  |                             |             |   |                |   |               |  |      |                |  |   |                |   |               |   |           |  |      |  
|Interest rate spread (2)(3)                   |  |                             |             |   |                |   |               |  | 2.75 | %              |  |   |                |   |               |   |           |  | 3.49 | %
|                                              |  |                             |             |   |                |   |               |  |      |                |  |   |                |   |               |   |           |  |      |  
|Net interest margin (2)(4)                    |  |                             |             |   |                |   |               |  | 3.23 | %              |  |   |                |   |               |   |           |  | 4.42 | %
|                                              |  |                             |             |   |                |   |               |  |      |                |  |   |                |   |               |   |           |  |      |  



|(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 30,572 adjustment for 2008 and a $31,425 adjustment for 2007.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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



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##### Table of Contents

Noninterest Income

Total noninterest income was $5,048,719 for the first quarter of 2008, an increase of $4,001,974 or 382.3%, compared to $1,046,745 for the same period in 2007. This significant increase is due to a change in
management focus with regard to the expansion of the mortgage operations of the Company.

Gross mortgage banking income from Monarch
Mortgage and the Companys commercial mortgage banking subsidiary, Monarch Capital, LLC, increased $3,864,799 or 839.2% to $4,325,346 for the first quarter of 2008 compared to 2007. In the first half of 2007 the Companys mortgage
operations consisted of a small group of mortgage lenders utilizing an outside company for mortgage processing. In June 2007 management undertook a significant expansion of mortgage operations, which included an in-house processing center and a full
service multi-branch mortgage operation, under the name Monarch Mortgage. The newly expanded, Monarch Mortgage closed 572 loans totaling $154,603,656 in the first quarter of 2008 compared to pre-expansion closings of 76 loans totaling $15,260,240
for the same period in 2007.

Service charges and fees on deposit accounts totaled $329,054 for the first quarter of 2008, which represents
a quarterly increase of 31.7% over the same period in 2007. 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 $287,358 for the first three months of 2008 compared to $245,365 for the same period in 2007. On October 1, 2006, the Company formed a subsidiary called Virginia Asset Group, LLC (VAG), with an investment broker to
sell insurance and non-deposit investment products. The Company has a 51% ownership in VAG.

Other noninterest income increased $12,821, or
14.1% to $103,815, including security gains, in the first quarter of 2008 compared to $90,994 in 2007. A large component of other noninterest income is Bank Owned Life Insurance (BOLI), which is included in the net interest income calculation for
yield analysis. The Company purchased $6.0 million in BOLI during the fourth quarter of 2005. The income from BOLI, which is not subject to tax, was $59,345 in the first quarter of 2008 compared to $61,000 for the same period in 2007. The
tax-effective income earnings are $89,917 for the first three months of 2008 compared to $92,425 for the same period in 2007. In the first quarter of 2008 security gains totaled $3,146 due to rate calls with no security losses to report. There were
no security gains or losses in the first three months of 2007.

Noninterest Expense

Total noninterest expenses for the first quarter of 2008 were $6,762,642, an increase of $3,443,514, or 103.7%, compared to $3,319,128 for the same period
in 2007. Salaries and employee benefits were $4,605,422 for the first quarter of 2008, an increase of $2,597,110 or 129.3% over the 2007 total of $2,008,312. The majority of this increase was related to personnel growth at Monarch Mortgage. With the
companys expansion of mortgage operations and into other markets, the number of full-time equivalent employees has risen to 259 at March 31, 2008 compared to 118 for the same period in 2007. Secondary increases are attributable to the
following factors: 1) an increase in occupancy plus furniture and equipment expenses of $361,211 related to the additional banking and mortgage offices; 2) an increase in loan origination expense of $339,881 related to increased production by
Monarch Mortgage; 3) a $37,237 growth-related increase in stationary and supplies; 4) a $28,982 increase in legal and accounting fees; 5) a reduction of $67,886 in bank franchise fees related to timing differences of payments; and 5) an increase of
$146,979 in other expenses related to overall growth.

Income Taxes

The income tax provision was $468,200 for the first quarter of 2008 compared to $407,484 for the prior year. The effective tax rate for the first quarter of 2008 was 32.6%, compared to 30.5% for the same period in
2007.



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##### Table of Contents

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

GENERAL

Total assets increased 8.0% to $543,206,355
at March 31, 2008 when compared to assets of $503,163,771 at December 31, 2007. On an annual basis total assets increased 32.7% at March 31, 2008 when compared to assets of $409,477,705 at March 31, 2007. Total loans as of
March 31, 2008 were $461.2 million, an increase of $42.0 million, or 10.0%, from $419.2 million at year-end 2007. On an annual basis total loans increased $122.6 million, or 36.2%, from $338.5 million in March 2007. Mortgages held for sale were
$30.5 million, an increase of $11.7 million from $18.8 million at December 31, 2007, and on an annual basis mortgages held for sale increased $29.3 million from $1.2 million at March 31, 2007 primarily due to increased volume at our
mortgage division. Investment securities were $9.6 million at March 31, 2008, compared to $31.0 million at year-end 2007. On an annual basis, investments securities decreased $22.9 million, or 70.5% over March 31, 2007. Cash and cash
equivalents were $18.0 million, an increase of $8.5 million, or 90.3% from $9.4 million at December 31, 2007.

Deposits increased
$79.2 million, or 20.3%, during the three months ended March 31, 2008. On an annualized basis deposits increased $150.7 million or 47.3%. Noninterest-bearing demand deposit accounts increased $3.9 million to $69.9 million, a 5.9% increase over
December 31, 2007 and $11.0 million on an annual basis when compared to March 31, 2007. During the first quarter of 2008, the Company began offering several new interest-bearing demand deposit products. As a result, interest-bearing demand
deposits increased to $22.0 million, a 96.7% or $11.0 million increase over $11.0 million at December 31, 2007. Interest-bearing demand deposits are included in interest-bearing deposits which totaled $398.9 million at March 31, 2008,
compared to $323.6 million at year-end 2007. Money market deposits and certificates of deposits (CDs) are the major categories of our interest-bearing deposits.

Money market accounts, which are attractive to more rate sensitive depositors due to their higher relative yield coupled with accessibility, tend to be adversely impacted by declining rates and positive trends in the
stock market. Therefore, recent activity in the stock market coupled with declining rates has resulted in declining money market balances. Money market deposits declined $3.6 million to $133.4 million in March 2008 compared to $137.0 million at
December 31, 2007. On an annual basis, money market deposits declined $13.8 million from $147.2 million at March 31, 2007. Due to loan growth and the funding needs of a growing mortgage operation, the Company has moved to heavier reliance
on CDs as a funding source. CDs have increased to $237.7 million, an increase of $67.7 million, or 39.8% over December 31, 2007 and $141.3 million, or 146.4% over $96.5 million at March 31, 2007. The majority of this growth has been in the
form of out-of-market brokered CDs which can be obtained in a short period of time on a larger scale than in-market organic growth. The Company has also found this source of deposits to be both efficient and cost effective.

Stockholders equity was $37.6 million at March 31, 2008, compared to $36.5 million at December 31, 2007. Components of the change in
stockholders equity include net income of $968,201, change to net unrealized gains from net unrealized losses on available-for-sale securities totaling $56,894, and stock based compensation totaling $70,417.

Asset Quality

The Company had four nonperforming
assets totaling $965 thousand at March 31, 2008. In the first quarter of 2008 the company charged-off two loans totaling $57 thousand and had recoveries of $11 thousand. There were three nonperforming assets at December 31, 2007 totaling
$81 thousand. Nonperforming assets traditionally consist of nonaccrual loans, loans past due 90 days or more and still accruing interest, restructured loans and other real estate owned. 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 $4,325,000 and $3,378,000 at March 31, 2008 and
March 31, 2007, respectively. The ratio of the allowance for loan losses to total loans outstanding at March 31, 2008 and 2007 was 0.94% and 1.00%, respectively.



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##### Table of Contents

During the first quarter of 2008 and 2007, the Company recorded $395,102 and $143,000 in provision
expense, respectively. Loans charged-off during the first three months of 2008 totaled $57,294 and recoveries totaled $11,192 for a net charge-off of $46,102. There were no loans charged-off or recovered in the first quarter of 2007. Since it began
operations in 1999, the Company has recorded total charge-offs of approximately $344,000. The table below summarizes the activity in the allowance for loans losses for the three month periods ending March 31, 2008 and 2007.

Activity in the allowance for loan losses for the three months ended March 31, was as follows:



|                                  |  |      |           |   |      |   |          
|--------------------------------- |  | ---- | --------- | - | ---- | - | ---------
|                                  |  | 2008 |           |   | 2007
|Balance, January 1                |  | $    | 3,976,000 |   |      | $ | 3,235,000
|Provisions charged against income |  |      | 395,102   |   |      |   | 143,000  
|Recoveries of loans charged off   |  |      | 11,192    |   |      |   | 0        
|Loans charged off                 |  |      | (57,294   | ) |      |   | 0        
|                                  |  |      |           |   |      |   |          
|Balance at end of period          |  | $    | 4,325,000 |   |      | $ | 3,378,000
|                                  |  |      |           |   |      |   |          

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 March 31, 2008.

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 $73,015,470 with $44,856,251 available at March 31, 2008. 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 $23,159,219 at March 31, 2008 and
$63,531,200 at December 31, 2007. The Company had four borrowing advances outstanding as of March 31, 2008, with the following final maturities:



|               |            |                 |               
|-------------- | ---------- | --------------- | --------------
|Advance Amount |            | Expiration Date
|$              | 1,409,000  |                 | April 2008    
|               | 10,000,000 |                 | November 2009 
|               | 10,000,000 |                 | November 2010 
|               | 1,750,219  |                 | September 2015
|               |            |                 |               
|$              | 23,159,219 |                 |               
|               |            |                 |               



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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%.

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

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

The advance maturing in April 2008 is a daily rate credit that matures April 1, 2008. The rate on March 31, 2008 was 3.00%.

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 March 31, 2008 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 March 31, 2008 and December 31, 2007 were a line of credit to secure public funds and commitments to extend
credit and standby letters of credit issued to customers. The line of credit to secure public funds was from Federal Home Loan Bank for $5 million at March 31, 2008 and December 31, 2007.

Commitments to extend credit, which amounted to $229.1 million at March 31, 2008 and $242.2 million at December 31, 2007, represent legally
binding agreements to lend to customers with fixed expiration dates or other termination clauses. Since many of the commitments are expected to expire without being funded, the total commitment amounts do not necessarily represent future liquidity
requirements.

There were no commitments by the Company to purchase securities on March 31, 2008 or December 31, 2007.

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 March 31, 2008 and December 31, 2007, the Company had $5.7 million and $6.6 million, respectively, in outstanding standby letters of credit.

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

Capital Adequacy

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.



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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.

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 March 31, 2008 Monarch Bank had a Tier 1 risk-based capital ratio of 8.80% and a Total risk-based capital ratio of 9.64%. At
December 31, 2007 these ratios were 9.22% and 10.05%, 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 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
|------- | -----------------

None.



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

None.



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

Not applicable.



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

None.



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

None.



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



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

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

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

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

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





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

Form 8-K filed
February 11, 2008 to announce the election of E. Neal Crawford, Jr. as director.

Form 8-K filed March 11, 2008
to announce an amended and restated employment agreement for William F. Rountree, Jr. and employment agreements for Brad E. Schwartz and E. Neal Crawford, Jr.



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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: May 15, 2008
|President & Chief Executive Officer                |  |  |  |                   
|                                                   |  | 
|/s/ Brad E. Schwartz.                              |  |  |  |                   
|Brad E. Schwartz                                   |  |  |  | Date: May 15, 2008
|Executive Vice President & Chief Financial Officer |  |  |  |                   



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