##### Table of Contents

---

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549



---

FORM 10-Q



---



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

For Quarterly Period Ended: September 30, 2007

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  4,801,183 as of November 8, 2007



---



---

##### Table of Contents

MONARCH FINANCIAL HOLDINGS, INC.

FORM 10-Q

SEPTEMBER 30, 2007

INDEX



|         |  |         |  |                                                                                                                 |  |   
|-------- |  | ------- |  | --------------------------------------------------------------------------------------------------------------- |  | --
|PART I.  |  |         |  | FINANCIAL INFORMATION                                                                                           |  |   
|         |  |         | 
|         |  | ITEM 1. |  | Consolidated Statements of Condition as of September 30, 2007 and December 31, 2006                             |  | 3 
|         |  |         | 
|         |  |         |  | Consolidated Statements of Income for the three and nine months ended September 30, 2007 and September 30, 2006 |  | 4 
|         |  |         | 
|         |  |         |  | Consolidated Statements of Shareholders Equity for the periods ended September 30, 2007 and September 30, 2006 |  | 5 
|         |  |         | 
|         |  |         |  | Consolidated Statements of Cash Flows for the periods ended September 30, 2007 and September 30, 2006           |  | 6 
|         |  |         | 
|         |  |         |  | Notes to Consolidated Financial Statements                                                                      |  | 7 
|         |  |         | 
|         |  | ITEM 2. |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                           |  | 13
|         |  |         | 
|         |  | ITEM 3. |  | Quantitative and Qualitative Disclosures about Market Risk                                                      |  | 21
|         |  |         | 
|         |  | ITEM 4. |  | Controls and Procedures                                                                                         |  | 22
|         |  |         | 
|PART II. |  |         |  | OTHER INFORMATION                                                                                               |  |   
|         |  |         | 
|         |  | Item 1. |  | Legal Proceedings                                                                                               |  | 23
|         |  |         | 
|         |  | Item 2. |  | Changes in Securities                                                                                           |  | 23
|         |  |         | 
|         |  | Item 3. |  | Defaults Upon Senior Securities                                                                                 |  | 23
|         |  |         | 
|         |  | Item 4. |  | Submissions of Matters to Vote of Security Holders                                                              |  | 23
|         |  |         | 
|         |  | Item 5. |  | Other Information                                                                                               |  | 23
|         |  |         | 
|         |  | Item 6. |  | Exhibits and Reports on Form 8-K                                                                                |  | 24



2



---

##### Table of Contents

PART IFINANCIAL INFORMATION



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

Consolidated Statements of
Condition

Monarch Financial Holdings, Inc. and Subsidiaries



|                                                                                                                              |  |                   |             |   |                  |   |             |  
|----------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ----------- | - | ---------------- | - | ----------- | -
|                                                                                                                              |  | Unaudited         |             |   | Audited          |  
|                                                                                                                              |  | September 30,2007 |             |   | December 31,2006 |  
|ASSETS:                                                                                                                       |  |                   |             |   |                  |   |             |  
|Cash and due from banks                                                                                                       |  | $                 | 9,880,856   |   |                  | $ | 9,504,743   |  
|Interest-bearing bank balances                                                                                                |  |                   | 5,898,877   |   |                  |   | 7,963,785   |  
|Federal funds sold                                                                                                            |  |                   | 299,431     |   |                  |   | 1,497,814   |  
|                                                                                                                              |  |                   |             |   |                  |   |             |  
|Total cash and cash equivalents                                                                                               |  |                   | 16,079,164  |   |                  |   | 18,966,342  |  
|Investment securities held-to-maturity, at cost                                                                               |  |                   | 12,086,571  |   |                  |   | 38,573,804  |  
|Investment securities available-for-sale, at fair value                                                                       |  |                   | 8,394,986   |   |                  |   | 11,454,863  |  
|Loans held for sale                                                                                                           |  |                   | 9,341,242   |   |                  |   | 606,400     |  
|Loans:                                                                                                                        |  |                   |             |   |                  |   |             |  
|Loans, net of unearned income                                                                                                 |  |                   | 392,549,729 |   |                  |   | 321,263,026 |  
|Less: allowance for loan losses                                                                                               |  |                   | (3,732,311  | ) |                  |   | (3,235,000  | )
|                                                                                                                              |  |                   |             |   |                  |   |             |  
|Loans, net                                                                                                                    |  |                   | 388,817,418 |   |                  |   | 318,028,026 |  
|Interest receivable                                                                                                           |  |                   | 1,964,221   |   |                  |   | 1,646,979   |  
|Property and equipment, net                                                                                                   |  |                   | 9,549,523   |   |                  |   | 6,684,765   |  
|Restricted equity securities                                                                                                  |  |                   | 4,329,800   |   |                  |   | 3,750,600   |  
|Bank owned life insurance                                                                                                     |  |                   | 6,484,016   |   |                  |   | 6,297,151   |  
|Goodwill                                                                                                                      |  |                   | 775,000     |   |                  |   |            |  
|Intangible assets                                                                                                             |  |                   | 1,220,242   |   |                  |   |            |  
|Other assets                                                                                                                  |  |                   | 3,106,247   |   |                  |   | 1,710,645   |  
|                                                                                                                              |  |                   |             |   |                  |   |             |  
|Total assets                                                                                                                  |  | $                 | 462,148,430 |   |                  | $ | 407,719,575 |  
|                                                                                                                              |  |                   |             |   |                  |   |             |  
|                                                                                                                              |  |                  
|LIABILITIES:                                                                                                                  |  |                   |             |   |                  |   |             |  
|Deposits:                                                                                                                     |  |                   |             |   |                  |   |             |  
|Noninterest-bearing                                                                                                           |  | $                 | 69,697,249  |   |                  | $ | 62,685,326  |  
|Interest-bearing                                                                                                              |  |                   | 295,560,900 |   |                  |   | 251,428,149 |  
|                                                                                                                              |  |                   |             |   |                  |   |             |  
|Total deposits                                                                                                                |  |                   | 365,258,149 |   |                  |   | 314,113,475 |  
|Borrowings:                                                                                                                   |  |                   |             |   |                  |   |             |  
|Federal Home Loan Bank advances                                                                                               |  |                   | 49,900,180  |   |                  |   | 48,075,117  |  
|Trust preferred subordinated debt                                                                                             |  |                   | 10,000,000  |   |                  |   | 10,000,000  |  
|                                                                                                                              |  |                   |             |   |                  |   |             |  
|Total borrowings                                                                                                              |  |                   | 59,900,180  |   |                  |   | 58,075,117  |  
|Other liabilities                                                                                                             |  |                   | 1,669,845   |   |                  |   | 1,489,330   |  
|                                                                                                                              |  |                   |             |   |                  |   |             |  
|Total liabilities                                                                                                             |  |                   | 426,828,174 |   |                  |   | 373,677,922 |  
|                                                                                                                              |  |                   |             |   |                  |   |             |  
|Minority interest in subsidiary                                                                                               |  |                   | 57,702      |   |                  |   | 27,619      |  
|                                                                                                                              |  |                  
|STOCKHOLDERS EQUITY:                                                                                                         |  |                   |             |   |                  |   |             |  
|Preferred stock, $5 par value, 2,000,000 shares authorized, none issued                                                       |  |                   |            |   |                  |   |            |  
|Common stock, $5 par value, 20,000,000 shares authorized, issued and outstanding 4,797,606 and 4,845,917 shares, respectively |  |                   | 23,988,030  |   |                  |   | 24,229,585  |  
|Additional paid-in capital                                                                                                    |  |                   | 5,034,151   |   |                  |   | 5,632,741   |  
|Accumulated earnings                                                                                                          |  |                   | 6,288,581   |   |                  |   | 4,261,537   |  
|Accumulated other comprehensive loss                                                                                          |  |                   | (48,208     | ) |                  |   | (109,829    | )
|                                                                                                                              |  |                   |             |   |                  |   |             |  
|Total stockholders equity                                                                                                    |  |                   | 35,262,554  |   |                  |   | 34,014,034  |  
|                                                                                                                              |  |                   |             |   |                  |   |             |  
|Total liabilities and stockholders equity                                                                                    |  | $                 | 462,148,430 |   |                  | $ | 407,719,575 |  
|                                                                                                                              |  |                   |             |   |                  |   |             |  

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



3



---

##### Table of Contents

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

Consolidated Statements of Income

Monarch Financial Holdings, Inc. and Subsidiaries

Unaudited



|                                                    |  |                              |           |   |                              |   |           |      |  |   |            |   |  |   |            |  
|--------------------------------------------------- |  | ---------------------------- | --------- | - | ---------------------------- | - | --------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                                    |  | 3 Months Ended September 30, |           |   | 9 Months Ended September 30, |  
|                                                    |  | 2007                         |           |   | 2006                         |   |           | 2007 |  |   | 2006       |  
|Interest income:                                    |  |                              |           |   |                              |   |           |      |  |   |            |   |  |   |            |  
|Interest and fees on loans                          |  | $                            | 7,804,504 |   |                              | $ | 6,257,226 |      |  | $ | 21,811,033 |   |  | $ | 16,964,484 |  
|Interest on investment securities Taxable           |  |                              | 135,815   |   |                              |   | 212,516   |      |  |   | 444,404    |   |  |   | 572,596    |  
|Interest on federal funds sold                      |  |                              | 6,873     |   |                              |   | 113,646   |      |  |   | 18,522     |   |  |   | 202,934    |  
|Dividends on equity securities                      |  |                              | 43,916    |   |                              |   | 41,125    |      |  |   | 121,513    |   |  |   | 86,793     |  
|Other interest income                               |  |                              | 22,992    |   |                              |   | 168,935   |      |  |   | 57,283     |   |  |   | 303,085    |  
|                                                    |  |                              |           |   |                              |   |           |      |  |   |            |   |  |   |            |  
|Total interest income                               |  |                              | 8,014,100 |   |                              |   | 6,793,448 |      |  |   | 22,452,755 |   |  |   | 18,129,892 |  
|                                                    |  |                              |           |   |                              |   |           |      |  |   |            |   |  |   |            |  
|Interest expense:                                   |  |                              |           |   |                              |   |           |      |  |   |            |   |  |   |            |  
|Interest on deposits                                |  |                              | 3,351,765 |   |                              |   | 2,751,774 |      |  |   | 9,067,897  |   |  |   | 7,184,722  |  
|Interest on trust preferred subordinated debt       |  |                              | 173,963   |   |                              |   | 178,432   |      |  |   | 525,668    |   |  |   | 178,432    |  
|Interest on borrowings                              |  |                              | 397,875   |   |                              |   | 152,320   |      |  |   | 950,887    |   |  |   | 406,056    |  
|                                                    |  |                              |           |   |                              |   |           |      |  |   |            |   |  |   |            |  
|Total interest expense                              |  |                              | 3,923,603 |   |                              |   | 3,082,526 |      |  |   | 10,544,452 |   |  |   | 7,769,210  |  
|                                                    |  |                              |           |   |                              |   |           |      |  |   |            |   |  |   |            |  
|Net interest income                                 |  |                              | 4,090,497 |   |                              |   | 3,710,922 |      |  |   | 11,908,303 |   |  |   | 10,360,682 |  
|Provision for loan losses                           |  |                              | 384,518   |   |                              |   | 207,100   |      |  |   | 643,518    |   |  |   | 482,244    |  
|                                                    |  |                              |           |   |                              |   |           |      |  |   |            |   |  |   |            |  
|Net interest income after provision for loan losses |  |                              | 3,705,979 |   |                              |   | 3,503,822 |      |  |   | 11,264,785 |   |  |   | 9,878,438  |  
|                                                    |  |                              |           |   |                              |   |           |      |  |   |            |   |  |   |            |  
|Noninterest income:                                 |  |                              |           |   |                              |   |           |      |  |   |            |   |  |   |            |  
|Mortgage banking income                             |  |                              | 1,567,605 |   |                              |   | 512,329   |      |  |   | 2,626,483  |   |  |   | 1,686,552  |  
|Service charges and fees                            |  |                              | 288,825   |   |                              |   | 247,756   |      |  |   | 835,129    |   |  |   | 668,601    |  
|Investment and insurance commissions                |  |                              | 257,155   |   |                              |   | 12,539    |      |  |   | 772,325    |   |  |   | 48,173     |  
|Other                                               |  |                              | 91,916    |   |                              |   | 75,773    |      |  |   | 258,997    |   |  |   | 199,171    |  
|                                                    |  |                              |           |   |                              |   |           |      |  |   |            |   |  |   |            |  
|Total noninterest income                            |  |                              | 2,205,501 |   |                              |   | 848,397   |      |  |   | 4,492,934  |   |  |   | 2,602,497  |  
|                                                    |  |                              |           |   |                              |   |           |      |  |   |            |   |  |   |            |  
|Noninterest expenses:                               |  |                              |           |   |                              |   |           |      |  |   |            |   |  |   |            |  
|Salaries and employee benefits                      |  |                              | 3,715,722 |   |                              |   | 1,753,487 |      |  |   | 8,182,312  |   |  |   | 5,084,959  |  
|Occupancy expenses                                  |  |                              | 344,897   |   |                              |   | 249,960   |      |  |   | 926,935    |   |  |   | 707,973    |  
|Furniture and equipment expenses                    |  |                              | 219,845   |   |                              |   | 134,865   |      |  |   | 521,051    |   |  |   | 390,939    |  
|Data processing services                            |  |                              | 158,329   |   |                              |   | 154,682   |      |  |   | 465,155    |   |  |   | 411,947    |  
|Loan origination expenses                           |  |                              | 179,211   |   |                              |   | 90,772    |      |  |   | 460,557    |   |  |   | 329,676    |  
|Advertising and marketing expenses                  |  |                              | 103,808   |   |                              |   | 78,246    |      |  |   | 214,888    |   |  |   | 268,928    |  
|Professional fees                                   |  |                              | 134,747   |   |                              |   | 63,683    |      |  |   | 321,747    |   |  |   | 176,385    |  
|Virginia franchise tax                              |  |                              | 49,696    |   |                              |   | 96,171    |      |  |   | 242,037    |   |  |   | 225,871    |  
|Stationery and supplies                             |  |                              | 108,990   |   |                              |   | 27,126    |      |  |   | 243,928    |   |  |   | 158,999    |  
|Other                                               |  |                              | 420,188   |   |                              |   | 286,377   |      |  |   | 1,116,808  |   |  |   | 842,633    |  
|                                                    |  |                              |           |   |                              |   |           |      |  |   |            |   |  |   |            |  
|Total noninterest expenses                          |  |                              | 5,435,433 |   |                              |   | 2,935,369 |      |  |   | 12,695,418 |   |  |   | 8,598,310  |  
|                                                    |  |                              |           |   |                              |   |           |      |  |   |            |   |  |   |            |  
|Income before income taxes and minority interests   |  |                              | 476,047   |   |                              |   | 1,416,850 |      |  |   | 3,062,301  |   |  |   | 3,882,625  |  
|Minority interest in subsidiarys net income        |  |                              | (38,296   | ) |                              |   |          |      |  |   | (91,720    | ) |  |   |           |  
|                                                    |  |                              |           |   |                              |   |           |      |  |   |            |   |  |   |            |  
|Net income before income taxes                      |  |                              | 437,751   |   |                              |   | 1,416,850 |      |  |   | 2,970,581  |   |  |   | 3,882,625  |  
|Income tax expense                                  |  |                              | (124,290  | ) |                              |   | (464,250  | )    |  |   | (943,537   | ) |  |   | (1,272,723 | )
|                                                    |  |                              |           |   |                              |   |           |      |  |   |            |   |  |   |            |  
|Net income                                          |  | $                            | 313,461   |   |                              | $ | 952,600   |      |  | $ | 2,027,044  |   |  | $ | 2,609,902  |  
|                                                    |  |                              |           |   |                              |   |           |      |  |   |            |   |  |   |            |  
|Basic net income per share                          |  | $                            | 0.07      |   |                              | $ | 0.20      |      |  | $ | 0.42       |   |  | $ | 0.55       |  
|Diluted net income per share                        |  |                              | 0.06      |   |                              |   | 0.19      |      |  |   | 0.40       |   |  |   | 0.52       |  

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



4



---

##### Table of Contents

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

Consolidated Statements of Changes in Shareholders Equity

Monarch Financial Holdings, Inc. and
Subsidiaries

Unaudited



|                                                                               |  |              |   |  |                            |            |   |                      |   |                                              |   |  |       |           |  |   |          |   |  |   |            |  
|------------------------------------------------------------------------------ |  | ------------ | - |  | -------------------------- | ---------- | - | -------------------- | - | -------------------------------------------- | - |  | ----- | --------- |  | - | -------- | - |  | - | ---------- | -
|                                                                               |  | Common Stock |   |  | Additional Paid-In Capital |            |   | Accumulated Earnings |   | AccumulatedOther Comprehensive Income
(Loss) |   |  | Total |          
|                                                                               |  | Shares       |   |  | Amount                     |            |   |                      |   |                                             
|Balance - December 31, 2005                                                    |  | 4,723,748    |   |  | $                          | 23,618,740 |   |                      | $ | 5,743,725                                    |   |  | $     | 635,079   |  | $ | (195,793 | ) |  | $ | 29,801,751 |  
|Net income for nine months ended September 30, 2006                            |  |             |   |  |                            |           |   |                      |   |                                             |   |  |       | 2,609,902 |  |   |         |   |  |   | 2,609,902  |  
|Unrealized gain on available for sale securities, net of income taxes          |  |             |   |  |                            |           |   |                      |   |                                             |   |  |       |          |  |   | 55,353   |   |  |   | 55,353     |  
|                                                                               |  |              |   |  |                            |            |   |                      |   |                                              |   |  |       |           |  |   |          |   |  |   |            |  
|Total comprehensive income                                                     |  |              |   |  |                            |            |   |                      |   |                                              |   |  |       |           |  |   |          |   |  |   | 2,665,255  |  
|                                                                               |  |              |   |  |                            |            |   |                      |   |                                              |   |  |       |           |  |   |          |   |  |   |            |  
|Stock options exercised                                                        |  | 64,568       |   |  |                            | 322,840    |   |                      |   | 50,771                                       |   |  |       |          |  |   |         |   |  |   | 373,611    |  
|Issuance of restricted stock, net of cancellations                             |  | 27,600       |   |  |                            | 138,000    |   |                      |   | (138,000                                     | ) |  |       |          |  |   |         |   |  |   |           |  
|                                                                               |  |              |   |  |                            |            |   |                      |   |                                              |   |  |       |           |  |   |          |   |  |   |            |  
|Balance - September 30, 2006                                                   |  | 4,815,916    |   |  | $                          | 24,079,580 |   |                      | $ | 5,656,496                                    |   |  | $     | 3,244,981 |  | $ | (140,440 | ) |  | $ | 32,840,617 |  
|                                                                               |  |              |   |  |                            |            |   |                      |   |                                              |   |  |       |           |  |   |          |   |  |   |            |  
|Balance - December 31, 2006                                                    |  | 4,845,917    |   |  | $                          | 24,229,585 |   |                      | $ | 5,632,741                                    |   |  | $     | 4,261,537 |  | $ | (109,829 | ) |  | $ | 34,014,034 |  
|Net income for nine months ended September 30, 2007                            |  |             |   |  |                            |           |   |                      |   |                                             |   |  |       | 2,027,044 |  |   |         |   |  |   | 2,027,044  |  
|Unrealized gain on available for sale securities, net of income taxes          |  |             |   |  |                            |           |   |                      |   |                                             |   |  |       |          |  |   | 61,621   |   |  |   | 61,621     |  
|                                                                               |  |              |   |  |                            |            |   |                      |   |                                              |   |  |       |           |  |   |          |   |  |   |            |  
|Total comprehensive income                                                     |  |              |   |  |                            |            |   |                      |   |                                              |   |  |       |           |  |   |          |   |  |   | 2,088,665  |  
|                                                                               |  |              |   |  |                            |            |   |                      |   |                                              |   |  |       |           |  |   |          |   |  |   |            |  
|Stock options exercised, including the realization of tax benefits of $171,632 |  | 69,214       |   |  |                            | 346,070    |   |                      |   | 225,844                                      |   |  |       |          |  |   |         |   |  |   | 571,914    |  
|Stock-based compensation expense                                               |  | 7,080        |   |  |                            | 35,400     |   |                      |   | 138,939                                      |   |  |       |          |  |   |         |   |  |   | 174,339    |  
|Stock repurchase                                                               |  | (124,605     | ) |  |                            | (623,025   | ) |                      |   | (963,373                                     | ) |  |       |          |  |   |         |   |  |   | (1,586,398 | )
|                                                                               |  |              |   |  |                            |            |   |                      |   |                                              |   |  |       |           |  |   |          |   |  |   |            |  
|Balance - September 30, 2007                                                   |  | 4,797,606    |   |  | $                          | 23,988,030 |   |                      | $ | 5,034,151                                    |   |  | $     | 6,288,581 |  | $ | (48,208  | ) |  | $ | 35,262,554 |  
|                                                                               |  |              |   |  |                            |            |   |                      |   |                                              |   |  |       |           |  |   |          |   |  |   |            |  

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



5



---

##### Table of Contents

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

Consolidated Statements of Cash Flows

Monarch Financial Holdings, Inc. and Subsidiaries

Unaudited



|                                                                       |  |                              |             |   |      |   |             |  
|---------------------------------------------------------------------- |  | ---------------------------- | ----------- | - | ---- | - | ----------- | -
|                                                                       |  | 9 Months Ended September 30, |            
|                                                                       |  | 2007                         |             |   | 2006 |  
|Operating activities:                                                  |  |                              |             |   |      |   |             |  
|Net income                                                             |  | $                            | 2,027,044   |   |      | $ | 2,609,902   |  
|Adjustments to reconcile to net cash provided by operating activities: |  |                              |             |   |      |   |             |  
|Provision for loan losses                                              |  |                              | 643,518     |   |      |   | 482,244     |  
|Provision for depreciation                                             |  |                              | 518,953     |   |      |   | 443,437     |  
|Amortization of intangible assets                                      |  |                              | 29,758      |   |      |   |            |  
|Accretion of discounts and amortization of premiums, net               |  |                              | (38,043     | ) |      |   | (26,521     | )
|Deferral of loan costs, net of deferred fees                           |  |                              | 6,482       |   |      |   | 71,877      |  
|Net loss on disposal of asset                                          |  |                              |            |   |      |   | 4,240       |  
|Stock-based compensation                                               |  |                              | 133,159     |   |      |   |            |  
|Changes in:                                                            |  |                              |             |   |      |   |             |  
|Loans held for sale                                                    |  |                              | (8,734,842  | ) |      |   | 1,210,338   |  
|Interest receivable                                                    |  |                              | (317,242    | ) |      |   | (534,449    | )
|Other assets                                                           |  |                              | (1,584,109  | ) |      |   | (451,231    | )
|Other liabilities                                                      |  |                              | 393,327     |   |      |   | (240,411    | )
|                                                                       |  |                              |             |   |      |   |             |  
|Net cash from operating activities                                     |  |                              | (6,921,995  | ) |      |   | 3,569,426   |  
|                                                                       |  |                              |             |   |      |   |             |  
|Investing activities:                                                  |  |                              |             |   |      |   |             |  
|Purchases of held-to-maturity securities                               |  |                              | (44,955,711 | ) |      |   | (76,408,024 | )
|Purchases of available-for-sale securities                             |  |                              | (994,688    | ) |      |   | (1,715,247  | )
|Proceeds from maturities and sales of available-for-sale securities    |  |                              | 4,128,898   |   |      |   | 2,413,509   |  
|Proceeds from maturities and calls of held-to-maturity securities      |  |                              | 71,500,000  |   |      |   | 65,000,000  |  
|Loan originations, net of principal repayments                         |  |                              | (71,439,392 | ) |      |   | (49,651,438 | )
|Purchases of property and equipment                                    |  |                              | (3,383,711  | ) |      |   | (3,149,411  | )
|Purchase of intangible assets                                          |  |                              | (2,025,000  | ) |      |   |            |  
|Sale of restricted equity securities, net of redemptions               |  |                              | (579,200    | ) |      |   | (1,055,050  | )
|                                                                       |  |                              |             |   |      |   |             |  
|Net cash from investing activities                                     |  |                              | (47,748,804 | ) |      |   | (64,565,661 | )
|                                                                       |  |                              |             |   |      |   |             |  
|Financing activities:                                                  |  |                              |             |   |      |   |             |  
|Net increase in noninterest-bearing deposits                           |  |                              | 7,011,923   |   |      |   | 658,179     |  
|Net increase in interest-bearing deposits                              |  |                              | 44,132,751  |   |      |   | 32,499,369  |  
|Net decrease in federal funds purchased                                |  |                              |            |   |      |   | (1,000      | )
|FHLB advances, net of repayments                                       |  |                              | 1,825,063   |   |      |   | 12,925,070  |  
|Proceeds from issuance of trust preferred subordinated debt            |  |                              |            |   |      |   | 10,000,000  |  
|Repurchase of common stock                                             |  |                              | (1,586,398  | ) |      |   |            |  
|Proceeds from issuance of common stock, net of issuance costs          |  |                              | 400,282     |   |      |   | 373,611     |  
|                                                                       |  |                              |             |   |      |   |             |  
|Net cash from financing activities                                     |  |                              | 51,783,621  |   |      |   | 56,455,229  |  
|                                                                       |  |                              |             |   |      |   |             |  
|CHANGE IN CASH AND CASH EQUIVALENTS                                    |  |                              | (2,887,178  | ) |      |   | (4,541,006  | )
|CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                       |  |                              | 18,966,342  |   |      |   | 15,275,674  |  
|                                                                       |  |                              |             |   |      |   |             |  
|CASH AND CASH EQUIVALENTS AT END OF PERIOD                             |  | $                            | 16,079,164  |   |      | $ | 10,734,668  |  
|                                                                       |  |                              |             |   |      |   |             |  
|SUPPLEMENTAL SCHEDULES AND CASH FLOW INFORMATION                       |  |                              |             |   |      |   |             |  
|Cash paid for:                                                         |  |                              |             |   |      |   |             |  
|Interest on deposits and other borrowings                              |  | $                            | 10,330,176  |   |      | $ | 7,652,259   |  
|Income taxes                                                           |  | $                            | 1,468,607   |   |      | $ | 2,114,266   |  

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



6



---

##### Table of Contents

MONARCH FINANCIAL HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. BASIS OF PRESENTATION

In the opinion of
management, the accompanying unaudited consolidated financial statements contain all adjustments consisting of normal recurring accruals necessary to present fairly Monarch Financial Holdings, Inc.s financial position as of September 30,
2007; the consolidated statements of income for the three and nine months ended September 30, 2007 and 2006; the consolidated statements of changes in shareholders equity for the nine months ended September 30, 2007 and 2006; and the
consolidated statements of cash flows for the nine months ended September 30, 2007 and 2006. These financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all of the disclosures
and notes required by generally accepted accounting principles. The financial statements include the accounts of Monarch Financial Holdings, Inc. and its subsidiaries, and all significant intercompany accounts and transactions have been eliminated.
Operating results for the three and nine month period ended September 30, 2007 are not necessarily indicative of the results that may be expected for the year ended December 31, 2007.

NOTE 2. GENERAL

Monarch Financial Holdings, Inc.
(Monarch or the Company) is a Virginia chartered Company that offers a full range of financial services, primarily to individuals and businesses in the Hampton Roads area of Virginia and Northeastern North Carolina. On
June 1, 2006, the Company was created through a reorganization plan, under the laws of the Commonwealth of Virginia, in which Monarch Bank became a wholly-owned subsidiary of Monarch Financial Holdings, Inc. In addition, the number of
authorized common stock shares increased to 20,000,000 and the shareholders of the Company became shareholders of the Corporation in a stock-for-stock conversion. Monarch Bank was incorporated in Virginia on May 1, 1998, and commenced
operations as a commercial bank on April 14, 1999, at its main office in the Greenbrier area in Chesapeake. In addition to its main office, Monarch has eight other Virginia banking offices  in the Great Bridge area in Chesapeake, the
Lynnhaven area in Virginia Beach, the Town Center area in Virginia Beach, the Oceanfront area in Virginia Beach, the Kempsville area in Virginia Beach, the Ghent area in Norfolk, and two offices in downtown Norfolk. 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% interest in Monarch Investment, LLC. The Company has invested in the formation of Bankers Investments Group, LLC, the parent company of BI Investments, LLC, a registered
brokerage firm and investment advisor. BI Investments, LLC, sells non-deposit investment products in various community banks in Virginia, which are owners in Bankers Investments Group, LLC, with the Virginia Bankers Association Management Services
Division. In September 2006, Monarch Investment, LLC, formed a subsidiary titled Virginia Asset Group, LLC. Virginia Asset Group, LLC, is owned 51% by Monarch Investment, LLC and 49% by Darin Ely, 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 November 2004, Monarch Investment,
LLC, purchased a minority interest in Bankers Title of Hampton Roads, LLC, in a joint venture with the Virginia Bankers Association and many other community banks in Virginia. In December 2006 Bankers Title of Hampton Roads, LLC, was merged into
Bankers Title of Central Virginia, LLC, with the minority interest now held in that name. Bankers Title of Central Virginia, LLC, is a full service title insurance agency that provides title insurance products and services to Monarch Bank and
Monarch Mortgage clients as well as to the general public.

In May 2007, the Company expanded banking operations into northeastern North
Carolina with the opening of a full service banking office in the town of Kitty Hawk, under the name of OBX Bank (OBX). OBX, which operates as a division of the Company, 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



7



---

##### Table of Contents

mortgage products such as construction-permanent loans for Monarch Banks loan portfolio. MM has their primary office in Virginia Beach with additional
offices in Chesapeake and Norfolk. Additional offices are located in Rockville, Annapolis and College Park, Maryland.

NOTE 3. EARNINGS PER SHARE
(EPS)

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



|                                                  |  |                              |           |                              |   |           |  |      |           |  |   |          
|------------------------------------------------- |  | ---------------------------- | --------- | ---------------------------- | - | --------- |  | ---- | --------- |  | - | ---------
|                                                  |  | 3 months ended September 30, |           | 9 months ended September 30,
|                                                  |  | 2007                         |           | 2006                         |   | 2007      |  | 2006
|Net income (numerator, basic and diluted)         |  | $                            | 313,461   |                              | $ | 952,600   |  | $    | 2,027,044 |  | $ | 2,609,902
|Weighted average shares outstanding (denominator) |  |                              | 4,779,298 |                              |   | 4,776,701 |  |      | 4,820,415 |  |   | 4,743,686
|                                                  |  |                              |           |                              |   |           |  |      |           |  |   |          
|Income per common share - basic                   |  | $                            | 0.07      |                              | $ | 0.20      |  | $    | 0.42      |  | $ | 0.55     
|                                                  |  |                              |           |                              |   |           |  |      |           |  |   |          
|Average diluted shares outstanding (denominator)  |  |                              | 5,003,254 |                              |   | 5,080,962 |  |      | 5,057,533 |  |   | 5,028,110
|                                                  |  |                              |           |                              |   |           |  |      |           |  |   |          
|Income per common share - diluted                 |  | $                            | 0.06      |                              | $ | 0.19      |  | $    | 0.40      |  | $ | 0.52     
|                                                  |  |                              |           |                              |   |           |  |      |           |  |   |          

The dilutive effect of stock options is 223,956 and 304,261 shares for the three months ended
September 30, 2007 and 2006, respectively and 237,118 and 284,424 for the nine months ended September 30, 2007 and 2006, respectively.

NOTE
4. COMPREHENSIVE INCOME

Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net
income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are
components of comprehensive income. The only component of other comprehensive income consists of unrealized gains and losses on available-for-sale securities. The Company accounts for comprehensive income in accordance with FASB Statement
No. 130, Reporting Comprehensive Income. The following is a detail of comprehensive income for the three and nine months ended September 30, 2007 and 2006:



|                                                                                |  |                                |         |   |                               |   |           |      |  |   |           |   |  |   |           |  
|------------------------------------------------------------------------------- |  | ------------------------------ | ------- | - | ----------------------------- | - | --------- | ---- |  | - | --------- | - |  | - | --------- | -
|                                                                                |  | Three Months EndedSeptember 30 |         |   | Nine Months EndedSeptember 30 |  
|                                                                                |  | 2007                           |         |   | 2006                          |   |           | 2007 |  |   | 2006      |  
|Net Income                                                                      |  | $                              | 313,461 |   |                               | $ | 952,600   |      |  | $ | 2,027,044 |   |  | $ | 2,609,902 |  
|Change in unrealized gains on securities available-for-sale, net of tax expense |  |                                | 70,629  |   |                               |   | 116,123   |      |  |   | 61,621    |   |  |   | 55,353    |  
|                                                                                |  |                                |         |   |                               |   |           |      |  |   |           |   |  |   |           |  
|Total comprehensive income                                                      |  | $                              | 384,090 |   |                               | $ | 1,068,723 |      |  | $ | 2,088,665 |   |  | $ | 2,665,255 |  
|                                                                                |  |                                |         |   |                               |   |           |      |  |   |           |   |  |   |           |  
|Unrealized holding gains during the period                                      |  | $                              | 107,014 |   |                               | $ | 175,944   |      |  | $ | 93,365    |   |  | $ | 83,868    |  
|Less reclassification adjustment for losses included in income                  |  |                                |        |   |                               |   |          |      |  |   |          |   |  |   |          |  
|                                                                                |  |                                |         |   |                               |   |           |      |  |   |           |   |  |   |           |  
|Total other comprehensive loss before income tax expense                        |  |                                | 107,014 |   |                               |   | 175,944   |      |  |   | 93,365    |   |  |   | 83,868    |  
|Income tax expense                                                              |  |                                | (36,385 | ) |                               |   | (59,821   | )    |  |   | (31,744   | ) |  |   | (28,515   | )
|                                                                                |  |                                |         |   |                               |   |           |      |  |   |           |   |  |   |           |  
|Net unrealized losses                                                           |  | $                              | 70,629  |   |                               | $ | 116,123   |      |  | $ | 61,621    |   |  | $ | 55,353    |  
|                                                                                |  |                                |         |   |                               |   |           |      |  |   |           |   |  |   |           |  



8



---

##### Table of Contents

NOTE 5. STOCK-BASED COMPENSATION

As of September 30, 2007, the Company had a stock-based compensation plan. Prior to January 1, 2006, the Company accounted for the plan under the recognition and measurement principles of APB Opinion 25,
Accounting for Stock Issued to Employees,and related interpretations. Under these older standards no stock-based employee compensation cost was reflected in net income, as all options granted under the plan had an exercise price equal to the
market value of the underlying common stock on the date of the grant. On January 1, 2006, the Company adopted FAS Statement No. 123R Share-Based Payment, (FAS 123R) that addresses the accounting for share-based payment
transactions in which a company receives employee services in exchange for either equity instruments of the company or liabilities that are based on the fair value of the companys equity instruments or that may be settled by the issuance of
such equity instruments. FAS 123R eliminates the ability to account for share-based compensation transactions using the intrinsic method and requires that such transactions be accounted for using a fair-value-based method and recognized as expense
in the consolidated statement of income.

In May 2006, Company shareholders ratified the adoption of a new stock-based compensation plan to
succeed the Monarch Bank 1999 Incentive Stock Option Plan. The new Monarch Bank 2006 Equity Incentive Plan authorizes the compensation committee to grant options, stock appreciation rights, stock awards, performance stock awards, and stock units to
designated directors, officers, key employees, consultants and advisors to the Company and its subsidiaries. The Plan authorizes the Company to issue up to 504,000 shares of Company Common Stock plus the number of shares of Company Common Stock
outstanding under the 1999 Plan. The Plan also provides that no award may be granted more than 10 years after the May 2006 ratification date.

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

NOTE 6. SEGMENT REPORTING

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

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



9



---

##### Table of Contents

|                                                      |  |                  |             |   |                 |   |            |                          |  |   |             |   |  |   |             |  
|----------------------------------------------------- |  | ---------------- | ----------- | - | --------------- | - | ---------- | ------------------------ |  | - | ----------- | - |  | - | ----------- | -
|                                                      |  | CommunityBanking |             |   | MortgageBanking |   |            | IntersegmentEliminations |  |   | Total       |  
|Three Months Ended September 30, 2007                 |  |                  |             |   |                 |   |            |                          |  |   |             |   |  |   |             |  
|Net interest income after provision for loan losses   |  | $                | 3,825,890   |   |                 | $ | (119,911   | )                        |  | $ |            |   |  | $ | 3,705,979   |  
|Noninterest income                                    |  |                  | 659,646     |   |                 |   | 1,567,605  |                          |  |   | (21,750     | ) |  |   | 2,205,501   |  
|Noninterest expense                                   |  |                  | (3,337,942  | ) |                 |   | (2,119,241 | )                        |  |   | 21,750      |   |  |   | (5,435,433  | )
|                                                      |  |                  |             |   |                 |   |            |                          |  |   |             |   |  |   |             |  
|Net income before income taxes and minority interests |  | $                | 1,147,594   |   |                 | $ | (671,547   | )                        |  | $ |            |   |  | $ | 476,047     |  
|                                                      |  |                  |             |   |                 |   |            |                          |  |   |             |   |  |   |             |  
|                                                      |  |                  |             |  
|Three Months Ended September 30, 2006                 |  |                  |             |   |                 |   |            |                          |  |   |             |   |  |   |             |  
|Net interest income after provision for loan losses   |  | $                | 3,537,183   |   |                 | $ | (33,361    | )                        |  | $ |            |   |  | $ | 3,503,822   |  
|Noninterest income                                    |  |                  | 394,468     |   |                 |   | 512,329    |                          |  |   | (58,400     | ) |  |   | 848,397     |  
|Noninterest expense                                   |  |                  | (2,519,672  | ) |                 |   | (459,197   | )                        |  |   | 43,500      |   |  |   | (2,935,369  | )
|                                                      |  |                  |             |   |                 |   |            |                          |  |   |             |   |  |   |             |  
|Net income before income taxes and minority interests |  | $                | 1,411,979   |   |                 | $ | 19,771     |                          |  | $ | (14,900     | ) |  | $ | 1,416,850   |  
|                                                      |  |                  |             |   |                 |   |            |                          |  |   |             |   |  |   |             |  
|                                                      |  |                  |             |  
|                                                      |  | CommunityBanking |             |   | MortgageBanking |   |            | IntersegmentEliminations |  |   | Total       |  
|Nine Months Ended September 30, 2007                  |  |                  |             |   |                 |   |            |                          |  |   |             |   |  |   |             |  
|Net interest income after provision for loan losses   |  | $                | 11,434,119  |   |                 | $ | (169,334   | )                        |  | $ |            |   |  | $ | 11,264,785  |  
|Noninterest income                                    |  |                  | 1,977,951   |   |                 |   | 2,626,483  |                          |  |   | (111,500    | ) |  |   | 4,492,934   |  
|Noninterest expense                                   |  |                  | (9,546,405  | ) |                 |   | (3,260,513 | )                        |  |   | 111,500     |   |  |   | (12,695,418 | )
|                                                      |  |                  |             |   |                 |   |            |                          |  |   |             |   |  |   |             |  
|Net income before income taxes and minority interests |  | $                | 3,865,665   |   |                 | $ | (803,364   | )                        |  | $ |            |   |  | $ | 3,062,301   |  
|                                                      |  |                  |             |   |                 |   |            |                          |  |   |             |   |  |   |             |  
|                                                      |  |                  |             |  
|Nine Months Ended September 30, 2006                  |  |                  |             |   |                 |   |            |                          |  |   |             |   |  |   |             |  
|Net interest income after provision for loan losses   |  | $                | 10,010,534  |   |                 | $ | (132,096   | )                        |  | $ |            |   |  | $ | 9,878,438   |  
|Noninterest income                                    |  |                  | 1,151,651   |   |                 |   | 1,686,552  |                          |  |   | (235,706    | ) |  |   | 2,602,497   |  
|Noninterest expense                                   |  |                  | (7,299,931  | ) |                 |   | (1,428,879 | )                        |  |   | 130,500     |   |  |   | (8,598,310  | )
|                                                      |  |                  |             |   |                 |   |            |                          |  |   |             |   |  |   |             |  
|Net income before income taxes and minority interests |  | $                | 3,862,254   |   |                 | $ | 125,577    |                          |  | $ | (105,206    | ) |  | $ | 3,882,625   |  
|                                                      |  |                  |             |   |                 |   |            |                          |  |   |             |   |  |   |             |  
|                                                      |  |                  |             |  
|Segment Assets                                        |  |                  |             |   |                 |   |            |                          |  |   |             |   |  |   |             |  
|2007                                                  |  | $                | 462,280,407 |   |                 | $ | 13,146,540 |                          |  | $ | (13,278,517 | ) |  | $ | 462,148,430 |  
|2006                                                  |  | $                | 390,686,023 |   |                 | $ | 3,952,467  |                          |  | $ | (4,584,372  | ) |  | $ | 390,054,118 |  

NOTE 7. 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 including legal expenses of $53,000. The following table summarizes the estimated fair values of the assets
acquired at the date of acquisition.



10



---

##### Table of Contents

At August 10, 2007

($000s)



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

The intangible assets have a weighted-average useful life of seven years.

NOTE 8. GOODWILL AND INTANGIBLE ASSETS

The Company
adopted SFAS No. 142, Goodwill and Other Intangible Assets, (SFAS 142), which was effective January 1, 2002. SFAS 142 prescribes the accounting treatment for acquired goodwill and intangible assets. The provisions of SFAS 142
discontinue the amortization of goodwill and intangible assets with indefinite lives but require at least an annual impairment review based on evidence of certain impairment indicators.

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



|                              |  |       |           |              |   |        |  |   |          
|----------------------------- |  | ----- | --------- | ------------ | - | ------ |  | - | ---------
|                              |  | Value |           | Amortization |   | Value 
|September 30, 2007            |  |       |           |              |   |        |  |   |          
|Amortizable intangible assets |  | $     | 1,250,000 |              | $ | 29,758 |  | $ | 1,220,242
|Goodwill                      |  |       | 775,000   |              |   |       |  |   | 775,000  

Amortization expense for the third quarter and nine month period ended September 30, 2007
totaled $29,758. No amortization expense was recorded in 2006.

NOTE 9. SUBSEQUENT EVENT

The Company announced a 6-for-5 stock split which was effected as a 20% stock dividend to shareholders of record as of October 10, 2007.



11



---

##### Table of Contents

CRITICAL ACCOUNTING POLICIES

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

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

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

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 February 2007, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 159, The Fair Value Option
for Financial Assets and Liabilities, including an amendment to FASB Statement No. 115, which permits entities to choose to measure many financial instruments and certain other items at fair value and also establishes fair presentation
and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS 159 is effective for financial statements issued for fiscal years
beginning November 15, 2007. The Company is assessing the impact, if any, that adoption will have on its financial statements.

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

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

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



12



---

##### Table of Contents

ITEM 2.

MONARCH FINANCIAL HOLDINGS, INC.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS
OF OPERATIONS

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

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



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



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



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



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



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



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

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

Earnings Summary

Monarch Financial Holdings, Inc. reported net income of $2,027,044 for the nine months ending
September 30, 2007, compared to $2,609,902 for the same period in 2006, a decrease of $582,858 or 22.3%. Net income for the three months ended September 30, 2007 was $313,461, down $639,139 or 67.1% from $952,600 for the same period in
2006. Net interest income increased 10.2% or $379,575 to $4,090,497 during the third quarter of 2007, when compared to 2006 and 14.9% or $1,547,621 to $11,908,303 during the first nine months of 2007, when compared to 2006. For the third quarter of
2007 compared to 2006 noninterest income was $2,205,501, an increase of $1,357,104, or 160.0%. Noninterest income increased 72.6% to $4,492,934 during the nine months ended September 30, 2007 when compared to $2,602,497 for the same period in
2006. Noninterest expenses totaled $5,435,433, an increase of $2,500,064, or 85.2% for the third quarter of 2007 compared to 2006, and $12,695,418, an increase of $4,097,108, or 47.7% for the first nine months of 2007 compared to 2006. Basic and
diluted earnings per share of common stock were $0.07 and $0.06 for the third quarter of 2007 compared to $0.20 and $0.19 for 2006. For the first nine months of 2007 basic and diluted earnings per share of common stock were $0.42 and $0.40,
respectively, compared to $0.55 and $0.52, respectively for the same period in 2006.

For the nine months ended September 30, 2007,
profitability as measured by Monarchs annualized return on average assets (ROA) was 0.68% compared to 1.03% for the same period in 2006. For the third quarter of 2007 ROA was 0.29% compared to 1.04% in 2006. Another measure of the
Companys profitability, the annualized return on average equity (ROE) was 3.47% for the third quarter of 2007 compared to 11.73% for the same period in 2006. For the nine months ended September 30, 2007 and 2006, ROE was 7.64% and 11.17%,
respectively.

Net Interest Income

Net
interest income represents a principal source of earnings for the Company. In 2007 increases in net interest income are attributable primarily to the overall growth of the Company, coupled with predominately higher rates on larger average
outstanding balances. The Federal Reserve Banks Open Market Committee steadily increased short-term interest rates from June 2004 until September 2006. The first decrease in the Federal Funds rate in over two years was September 18, 2007
when the rate was lowered to 4.75%. With this decrease in the Federal Funds rate the Wall Street Journal Prime Rate declined to 7.75%. 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.



13



---

##### Table of Contents

Net interest income was $4,090,497 for the third quarter of 2007, a 10.2%, or a $379,575 increase over
the third quarter of 2006. Net interest income for the first nine months of 2007 increased $1,547,621 to 11,908,303, a 14.9% increase over the same period in 2006. Total interest and fees on loans, the largest component of net interest income,
increased 24.7%, or $1,547,278 to $7,804,504 during the third quarter of 2007 compared to $6,257,226 for the same period in 2006. Year-to-date 2007 interest and fees on loans totaled $21,811,033, an increase of 28.6% over the 2006 year-to-date total
of $16,964,484.

Interest on investment securities continued to decline due to decreasing portfolio balances. Interest on federal funds
sold and overnight funds also decreased as the Company continues its strategy to optimize its use of resources to fund our higher yielding loan portfolio. Third quarter 2007 totals for interest on investment securities declined 36.1% or $76,701 to
$135,815, and year-to-date 2007 totals declined 22.4% or $128,192 to $444,404, when compared to the same periods in 2006. Interest on federal funds declined $106,773, or 94.0% and interest on deposits in other banks declined $145,943, or 86.4% for
the third quarter of 2007 compared to 2006. For the first nine months of 2007 interest on federal funds declined $184,412, or 90.9% to $18,522 and interest on deposits in other banks declined $245,802, or 81.1% to $57,283 when compared to the first
nine months of 2006.

Dividends on restricted equity securities totaled $43,916 compared to $41,125 in the third quarter of 2007 compared
to the same period in 2006, as a result of higher balances of stock in the Federal Reserve and the Federal Home Loan Bank of Atlanta. For the nine month period ended September 30, 2007, dividends on restricted equity securities increased
$34,720 to $121,513, a 40.0% increase over the 2006 nine month total of $86,793.

Interest expense on deposits increased $599,991 or 21.8%
for the third quarter of 2007 and $1,883,175 or 26.2% year-to-date compared to 2006. The increase in deposit expense is due to the increase in average outstanding, higher cost deposits arising from the overall growth of the Company and an increase
in the overall rates paid on deposits. Interest expense on borrowings totaled $397,875, a 161.2% increase for the third quarter of 2007 and $950,887, a 134.2% increase year-to-date compared to 2006. Increased borrowing needs due to funding loan
growth coupled with higher rates contributed to the increase. The Company issued trust preferred subordinated debt in the third quarter of 2006 which provided a funding source for loans. Trust preferred interest expense for the third quarter of 2007
compared to 2006 decreased $4,469 or 2.5% to $173,963 due to lower Libor-based pricing for the period. Since 2007 will be the first full year of trust preferred interest expense, the first nine months of 2007 totaled $525,668 compared to only one
quarter in 2006 of $178,432.

Average Balances, Income and Expenses, Yields and Rates

The net interest spread on a tax-equivalent basis decreased 4 basis points to 3.44% for first nine months of 2007 when compared to 3.48% for the same
period in 2006. The yield on earning assets increased to 8.10% in 2007 compared to 7.55% for the first nine months of 2006, while the cost of interest bearing liabilities increased to 4.66% compared to 4.07%, respectively, for the same period. This
resulted in a lower interest rate spread. The interest margin decreased 2 basis points for the same period due to the higher growth in earning liabilities compared to earning assets. The net interest margin for the first nine months of 2007 was
4.34% compared to 4.36% for the same period in 2006.

Bank Owned Life Insurance (BOLI) has been included in interest earning assets. The
Company purchased $6,000,000 in BOLI during the fourth quarter of 2005. The income on BOLI is not subject to Federal Income tax, giving it a tax-effective yield of 5.93%, year-to-date.

In July, 2006, Monarch added additional capital through the issuance of $10,000,000 in trust preferred securities. These securities are treated as
subordinated debt and have been included in other borrowings.

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



14



---

##### Table of Contents

AVERAGE BALANCES, INCOME AND EXPENSE, YIELDS AND RATES



|                                              |  |                                 |             |   |                |   |              |  |      |                |  |   |                |   |              |   |            |  |      |  
|--------------------------------------------- |  | ------------------------------- | ----------- | - | -------------- | - | ------------ |  | ---- | -------------- |  | - | -------------- | - | ------------ | - | ---------- |  | ---- | -
|                                              |  | For Periods Ended September 30, |            
|                                              |  | 2007                            |             |   | 2006           |  
|                                              |  | AverageBalance                  |             |   | Income/Expense |   | YieldRate(1) |  |      | AverageBalance |  |   | Income/Expense |   | YieldRate(1) |  
|ASSETS                                        |  |                                 |             |   |                |   |              |  |      |                |  |   |                |   |              |   |            |  |      |  
|Securities, at amortized cost                 |  |                                 |             |   |                |   |              |  |      |                |  |   |                |   |              |   |            |  |      |  
|Taxable                                       |  | $                               | 13,898,214  |   |                | $ | 444,404      |  | 4.28 | %              |  | $ | 18,411,580     |   |              | $ | 572,596    |  | 4.16 | %
|                                              |  |                                 |             |   |                |   |              |  |      |                |  |   |                |   |              |   |            |  |      |  
|Total securities                              |  |                                 | 13,898,214  |   |                |   | 444,404      |  | 4.28 | %              |  |   | 18,411,580     |   |              |   | 572,596    |  | 4.16 | %
|Loans, net                                    |  |                                 | 350,244,048 |   |                |   | 21,811,033   |  | 8.33 | %              |  |   | 285,773,850    |   |              |   | 16,964,484 |  | 7.94 | %
|Federal funds sold                            |  |                                 | 444,316     |   |                |   | 18,522       |  | 5.57 | %              |  |   | 5,427,160      |   |              |   | 202,934    |  | 5.00 | %
|Dividend-earning restricted equity securities |  |                                 | 2,921,981   |   |                |   | 121,513      |  | 5.56 | %              |  |   | 2,028,268      |   |              |   | 86,793     |  | 5.72 | %
|Deposits in other banks                       |  |                                 | 1,535,000   |   |                |   | 57,283       |  | 4.99 | %              |  |   | 8,200,461      |   |              |   | 303,085    |  | 4.94 | %
|Bank owned life insurance (2)                 |  |                                 | 6,386,736   |   |                |   | 283,129      |  | 5.93 | %              |  |   | 6,140,552      |   |              |   | 271,008    |  | 5.90 | %
|                                              |  |                                 |             |   |                |   |              |  |      |                |  |   |                |   |              |   |            |  |      |  
|Total earning assets                          |  |                                 | 375,430,295 |   |                |   | 22,735,884   |  | 8.10 | %              |  |   | 325,981,871    |   |              |   | 18,400,900 |  | 7.55 | %
|                                              |  |                                 |             |   |                |   |              |  |      |                |  |   |                |   |              |   |            |  |      |  
|Less: Allowance for loan losses               |  |                                 | (3,436,884  | ) |                |   |              |  |      |                |  |   | (2,846,165     | ) |              |   |            |  |      |  
|Total nonearning assets                       |  |                                 | 24,096,411  |   |                |   |              |  |      |                |  |   | 16,196,071     |   |              |   |            |  |      |  
|                                              |  |                                 |             |   |                |   |              |  |      |                |  |   |                |   |              |   |            |  |      |  
|Total assets                                  |  | $                               | 396,089,822 |   |                |   |              |  |      |                |  | $ | 339,331,777    |   |              |   |            |  |      |  
|                                              |  |                                 |             |   |                |   |              |  |      |                |  |   |                |   |              |   |            |  |      |  
|                                             
|LIABILITIES and SHAREHOLDERS EQUITY          | 
|Interest-bearing deposits:                    |  |                                 |             |   |                |   |              |  |      |                |  |   |                |   |              |   |            |  |      |  
|Checking                                      |  | $                               | 10,505,021  |   |                | $ | 19,833       |  | 0.25 | %              |  | $ | 9,752,445      |   |              | $ | 15,301     |  | 0.21 | %
|Regular savings                               |  |                                 | 6,072,736   |   |                |   | 27,247       |  | 0.60 | %              |  |   | 8,089,138      |   |              |   | 38,342     |  | 0.63 | %
|Money market savings                          |  |                                 | 144,811,491 |   |                |   | 4,974,332    |  | 4.59 | %              |  |   | 151,774,894    |   |              |   | 4,958,390  |  | 4.37 | %
|Certificates of deposit                       |  |                                 |             |   |                |   |              |  |      |                |  |   |                |   |              |   |            |  |      |  
|$100,000 and over                             |  |                                 | 52,078,722  |   |                |   | 2,003,002    |  | 5.14 | %              |  |   | 26,341,371     |   |              |   | 864,890    |  | 4.39 | %
|Under $100,000                                |  |                                 | 56,128,966  |   |                |   | 2,043,483    |  | 4.87 | %              |  |   | 43,057,553     |   |              |   | 1,307,799  |  | 4.06 | %
|                                              |  |                                 |             |   |                |   |              |  |      |                |  |   |                |   |              |   |            |  |      |  
|Total interest-bearing deposits               |  |                                 | 269,596,936 |   |                |   | 9,067,897    |  | 4.50 | %              |  |   | 239,015,401    |   |              |   | 7,184,722  |  | 4.02 | %
|Borrowings                                    |  |                                 | 33,225,095  |   |                |   | 1,476,555    |  | 5.94 | %              |  |   | 16,250,709     |   |              |   | 584,488    |  | 4.81 | %
|                                              |  |                                 |             |   |                |   |              |  |      |                |  |   |                |   |              |   |            |  |      |  
|Total interest-bearing liabilities            |  |                                 | 302,822,031 |   |                | $ | 10,544,452   |  | 4.66 | %              |  |   | 255,266,110    |   |              | $ | 7,769,210  |  | 4.07 | %
|Noninterest-bearing liabilities               |  |                                 |             |   |                |   |              |  |      |                |  |   |                |   |              |   |            |  |      |  
|Demand deposits                               |  |                                 | 56,719,238  |   |                |   |              |  |      |                |  |   | 51,226,688     |   |              |   |            |  |      |  
|Other noninterest-bearing liabilities         |  |                                 | 998,557     |   |                |   |              |  |      |                |  |   | 1,572,844      |   |              |   |            |  |      |  
|                                              |  |                                 |             |   |                |   |              |  |      |                |  |   |                |   |              |   |            |  |      |  
|Total liabilities                             |  |                                 | 360,539,826 |   |                |   |              |  |      |                |  |   | 308,065,642    |   |              |   |            |  |      |  
|Shareholders equity                          |  |                                 | 35,549,996  |   |                |   |              |  |      |                |  |   | 31,266,135     |   |              |   |            |  |      |  
|                                              |  |                                 |             |   |                |   |              |  |      |                |  |   |                |   |              |   |            |  |      |  
|Total liabilities and stockholders equity    |  | $                               | 396,089,822 |   |                |   |              |  |      |                |  | $ | 339,331,777    |   |              |   |            |  |      |  
|                                              |  |                                 |             |   |                |   |              |  |      |                |  |   |                |   |              |   |            |  |      |  
|Net interest income (2)                       |  |                                 |             |   |                | $ | 12,191,432   |  |      |                |  |   |                |   |              | $ | 10,631,690 |  |      |  
|                                              |  |                                 |             |   |                |   |              |  |      |                |  |   |                |   |              |   |            |  |      |  
|Interest rate spread (2)(3)                   |  |                                 |             |   |                |   |              |  | 3.44 | %              |  |   |                |   |              |   |            |  | 3.48 | %
|                                              |  |                                 |             |   |                |   |              |  |      |                |  |   |                |   |              |   |            |  |      |  
|Net interest margin (2)(4)                    |  |                                 |             |   |                |   |              |  | 4.34 | %              |  |   |                |   |              |   |            |  | 4.36 | %
|                                              |  |                                 |             |   |                |   |              |  |      |                |  |   |                |   |              |   |            |  |      |  

---

|(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 96,264 adjustment for 2007 and a $92,143 adjustment for 2006.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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



15



---

##### Table of Contents

Noninterest Income

Total noninterest income was $2,205,501 for the third quarter of 2007, an increase of $1,357,104 or 160.0%, compared to $848,397 for the same period in 2006. Noninterest income totaled $4,492,934 for the first nine
months of 2007 compared to $2,602,497 for the same period in 2006, a $1,890,437 or 72.6% increase.

The Companys subsidiary, Monarch
Home Funding, LLC, was merged into, and became a division of, Monarch Bank in late December 2006 to reduce regulatory and tax expense. In January 2007 the Company reorganized mortgage operations and outsourced backroom functions to an outside
company in order to improve profitability in a declining market. In June 2007 a significant expansion of mortgage operations began by bringing back in-house a full service mortgage operation under the name Monarch Mortgage. Gross mortgage banking
income from Monarch Mortgage and the Companys commercial mortgage banking subsidiary, Monarch Capital, LLC, increased $1,055,276 to $1,567,605 for the quarter and increased $939,931 or 55.7% to $2,626,483 for the first nine months of 2007
compared to 2006.

Service charges and fees on deposit accounts totaled $288,825 for the third quarter and $835,129 for the first nine
months of 2007, which represents a quarterly increase of 16.6% and a year-to-date increase of 24.9% over the same period in 2006. The primary components in this increase were deposit account growth and ATM transaction fees. The Company has an
agreement with a third-party vendor to brand ATMs in Food Lion grocery stores in southeast Virginia and northeast North Carolina. In return for supplying the cash for the machines and paying the machines cash servicing fees, the Company
receives a portion of the transaction surcharge and the Companys customers can withdraw cash from the machines without a fee or transaction surcharge. A portion of the ATM fee increase was also due to fees generated at the Companys 9
ATMs located at the banking center sites. The third-party vendor relationship plus the Companys 9 office ATMs, creates a network that now includes over 50 active branded ATMs.

Investment and insurance commissions were $257,155 for the quarter and $772,325 for the first nine months of 2007. Prior year totals were $12,539 for the
quarter and $48,173 for the first nine months. This significant increase is due to the formation of the Companys subsidiary, Virginia Asset Group, LLC (VAG), on October 1, 2006. The Company has a 51% ownership in VAG, which sells
insurance and non-deposit investment products.

Other noninterest income increased $16,143, or 21.3% to $91,916 in the third quarter of
2007 and $59,826, 30.0% to $258,997 for the first nine months of 2007 compared to 2006. A large component of other noninterest income is Bank Owned Life Insurance (BOLI). The Company purchased $6.0 million in BOLI during the fourth quarter of 2005.
The income from BOLI, which is not subject to tax, was $63,585 in the third quarter and $186,865 for the first nine months of 2007 compared to $60,863 and $178,865 for the same periods in 2006, respectively. The tax-effective income yield was
$283,129 for the first nine months of 2007 compared to $271,008 for the same period in 2006.

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

Noninterest Expense

Total noninterest expenses for the third quarter of 2007 totaled $5,435,433, an increase of $2,500,064, or 85.2%, compared to $2,935,369 for the same period in 2006. Noninterest expenses totaled $12,695,418 in the
first nine months of 2007 compared to $8,598,310 for the same period in 2006, an increase of 47.7% or $4,097,108. Expenses for salaries and employee benefits was the primary source of the increase, contributing 111.9% or $1,962,235 to the increase
for the quarter and $3,097,353 or 60.9% to the nine month increase with the majority related to personnel growth at Monarch Mortgage. With the companys expansion of mortgage operations and into other markets, the number of full-time
equivalents has risen from 119.5 at year-end 2006 to 216.5 at the end of the third quarter 2007. Secondary increases are attributable to following factors: 1) an increase of $349,074 year-to-date, in occupancy plus furniture and equipment expenses
related to the additional banking offices and an additional commercial office; 2) a $130,881 increase in loan origination costs due to increased production 3) a $123,904 increase in legal fees related to the mortgage operations lawsuit 4) a $111,317
increase in regulatory fees and franchise taxes due to increased capital at Monarch Bank and FDIC insurance expense; 5) a reduction of $54,040 in advertising and marketing expense due to hiring an in-house marketing person; and 5) $338,619 in other
expenses related to overall growth.

Income Taxes

The income tax provision was $124,290 for the third quarter of 2007 and $943,537 year-to-date compared to $464,250 and $1,272,723, respectively for the prior year. The effective tax rate for the third quarter of 2007
was 28.4%, compared to 32.8% for the same period in 2006. Year-to-date 2007 the effective tax rate is 31.8% compared to 32.8% in



16



---

##### Table of Contents

2006. The main components of the adjusted tax rate in the first nine months and third quarter of 2007 are tax-free BOLI income in the amount of $186,865 and
$63,585, respectively, and permanent timing differences associated with the tax treatment of goodwill in the amount of $8,611 for both periods. The adjusted tax rate in for the same periods in 2006 is due tax-free BOLI income in the amount of
$178,865 and $60,863, respectively.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

GENERAL

Total assets increased 13.4% to $462,148,430
at September 30, 2007 when compared to assets of $407,719,575 at December 31, 2006. On an annual basis total assets increased 18.5% at September 30, 2007 when compared to assets of $390,054,118 at September 30, 2006. Total
loans as of September 30, 2007 were $392.5 million, an increase of $71.3 million, or 22.2%, from $321.3 million at year-end 2006. On an annual basis total loans increased $79.7 million, or 25.5%, from $312.8 million in September 2006. Mortgages
held for sale were $9.3 million, an increase of $8.7 million from $600 thousand at December 31, 2006 primarily due to increased volume at our mortgage division. Investment securities were $20.5 million at September 30, 2007, compared to
$50.0 million at year-end 2006. On an annual basis, investments securities decreased $26.7 million, or 56.3% over September 2006. Cash and cash equivalents were $16.1 million, a decrease of $2.9 million, or 15.3% from $19.0 million at
December 31, 2006.

Deposits increased $51.1 million, or 16.3%, during the nine months ended September 30, 2007. On an annualized
basis deposits increased $59.1 million or 19.3%. Noninterest-bearing demand deposit accounts increased $7.0 million to $69.7 million, a 11.2% increase over December 31, 2006 and $13.5 million on an annual basis when compared to
September 30, 2006. Interest-bearing deposits totaled $295.6 million at September 30, 2007, compared to $251.4 million at year-end 2006. Certificates of deposits and money market deposits are the major categories of our interest-bearing
deposits.

Stockholders equity was $35.3 million at September 30, 2007, compared to $34.0 million at December 31, 2006.
Components of the change in stockholders equity include net income of $2,027,044, decreases in net unrealized losses on available-for-sale securities totaling $61,621, stock based compensation totaling $174,339, stock repurchase costs of
$1,586,398 and exercised stock options, including the realization of tax benefits, totaling $571,914.

Asset Quality

The Company had two nonperforming assets totaling $313 thousand at September 30, 2007. In the third quarter of 2007 the company charged-off four
loans totaling $148 thousand with a recovery of $1 thousand. There were no nonperforming assets at December 31, 2006. Nonperforming assets traditionally consist of nonaccrual loans, loans past due 90 days or more and still accruing interest,
restructured loans and other real estate owned. There were no impaired loans at September 30, 2007 and December 31, 2006. The Company continues to demand a high level of credit quality on new loans.

Allowance for Loan Losses

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

While the Company believes it has sufficient allowance for its
existing portfolio, there can be no assurances that an additional allowance for losses on existing loans may not be necessary in the future. The allowance for loan losses totaled $3,732,311 and $3,157,000 at September 30, 2007 and
September 30, 2006, respectively. The ratio of the allowance for loan losses to total loans outstanding at September 30, 2007 and 2006 was 0.95% and 1.01%, respectively.

During the first nine months of 2007 and 2006, the Company recorded $643,518 and $482,244 in provision expense, respectively. There were four loans
totaling $147,689 charged-off during the first nine months of 2007 and one loan charged-off totaling $13,187 for the same period in 2006. Charge-offs are charged directly to the allowance when they occur. Since it began business in 1999, the Company
has recorded total charge-offs of approximately $200,000. There was $1,482 in recoveries in the first nine months of 2007 and recoveries totaling $2,943 in the for the same period in 2006. The table below summarizes the activity in the allowance for
loans losses for the nine month periods ending September 30, 2007 and 2006.



17



---

##### Table of Contents

Activity in the allowance for loan losses for the nine months ended September 30, was as follows:



|                                  |  |      |           |   |      |   |           |  
|--------------------------------- |  | ---- | --------- | - | ---- | - | --------- | -
|                                  |  | 2007 |           |   | 2006 |  
|Balance, January 1                |  | $    | 3,235,000 |   |      | $ | 2,685,000 |  
|Provisions charged against income |  |      | 643,518   |   |      |   | 482,244   |  
|Recoveries of loans charged off   |  |      | 1,482     |   |      |   | 2,943     |  
|Loans charged off                 |  |      | (147,689  | ) |      |   | (13,187   | )
|                                  |  |      |           |   |      |   |           |  
|Balance at end of period          |  | $    | 3,732,311 |   |      | $ | 3,157,000 |  
|                                  |  |      |           |   |      |   |           |  

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 September 30, 2007.

Liquidity

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

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

The Company has a line of credit that can equal up to 40% of assets with the Federal Home Loan Bank of Atlanta (FHLB) that totaled approximately $82,940,234 with $28,040,074 available at September 30, 2007. This line is currently
reduced by $5.0 million, which has been pledged as collateral for public deposits. Should the Company ever desire to increase their line of credit beyond the current 40% limit, the FHLB would allow borrowings of up to 50% of total assets once the
Company meets specific eligibility requirements.

Borrowings outstanding under the FHLB line of credit were $49,900,180 at
September 30, 2007 and $48,075,117 at December 31, 2006. The Company had two borrowing advances outstanding as of September 30, 2007, with the following final maturities:



|               |  |                
|-------------- |  | ---------------
|Advance Amount |  | Expiration Date
|$48,100,000    |  | October 2007   
|1,800,160      |  | September 2015 
|               |  |                
|$49,900,180    |  |                
|               |  |                

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%.



18



---

##### Table of Contents

The advance maturing in 2007 is a daily rate credit that matures October 1, 2007. The rate on
September 30, 2007 was 5.44%. The Company uses borrowings at the end of each quarter to increase its investment securities that are not subject to taxation by the Commonwealth of Virginia. The Company is not subject to state income tax but is
subject to Virginia Franchise Tax, which is calculated on its capital level, less certain deductions. One deduction is the average balances of bonds that are not subject to taxation by the Commonwealth of Virginia, primarily certain qualified U.S.
Government Agency bonds. The Company has found that it can save more in taxes than it pays in interest expense. Shortly before the end of each calendar quarter, the Company purchases FHLB discount notes that mature soon after the quarter-end. The
proceeds from the maturity of the discount note are used to repay the borrowings. The Company only enters into this type of agreement near the end of the quarter since that is the period used in the franchise tax calculation.

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

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

Off-Balance Sheet Arrangements

The Company enters into certain financial transactions in the ordinary course of performing
traditional banking services that result in off-balance sheet transactions. The off-balance sheet transactions recognized as of September 30, 2007 and December 31, 2006 were a line of credit to secure public funds and commitments to extend
credit and standby letters of credit issued to customers. The line of credit to secure public funds was from Federal Home Loan Bank for $5 million at September 30, 2007 and December 31, 2006.

Commitments to extend credit, which amounted to $215.8 million at September 30, 2007 and $158.6 million at December 31, 2006, represent legally
binding agreements to lend to customers with fixed expiration dates or other termination clauses. Since many of the commitments are expected to expire without being funded, the total commitment amounts do not necessarily represent future liquidity
requirements.

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

Standby letters of credit are conditional commitments issued by the Company guaranteeing the performance of a customer to a third party.
Those guarantees are primarily issued to support public and private borrowing arrangements. At September 30, 2007 and December 31, 2006, the Company had $5.9 million and $4.7 million, respectively, in outstanding standby letters of credit.

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

Capital Adequacy

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

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



19



---

##### Table of Contents

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 September 30, 2007 Monarch Bank had a Tier 1 risk-based capital ratio of 9.57% and a Total risk-based capital ratio of 10.39%. At December 31, 2006
these ratios were 12.18% and 13.07%, respectively.



20



---

##### Table of Contents

|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.



21



---

##### Table of Contents

|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.



22



---

##### Table of Contents

PART IIOTHER INFORMATION



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

None.

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



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

None.



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

Not applicable.



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

None.



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

None.



23



---

##### Table of Contents

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



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

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

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

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

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

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



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

Form 8-K filed September 25, 2007 to
announce the Companys 6-for-5 stock split.

Form 8-K filed August 13, 2007 to announce Monarch Bank and Resource Banks
purchase agreement and end to litigation.

Form 8-K filed July 18, 2007 to announce the expansion of Monarch Mortgage.

Form 8-K filed July 13, 2007 to announce the litigation filed by Resource Bank against Monarch Bank.



24



---

##### Table of Contents

SIGNATURES

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



|                                                   |  |  |  |                       
|-------------------------------------------------- |  |  |  | ----------------------
|MONARCH FINANCIAL HOLDINGS, INC.                   |  |  |  |                       
|                                                   |  | 
|/s/ William F. Rountree, Jr.                       |  |  |  |                       
|William F. Rountree, Jr.                           |  |  |  | Date: November 8, 2007
|President & Chief Executive Officer                |  |  |  |                       
|                                                   |  | 
|/s/ Brad E. Schwartz                               |  |  |  |                       
|Brad E. Schwartz                                   |  |  |  | Date: November 8, 2007
|Executive Vice President & Chief Financial Officer |  |  |  |                       



25