##### Table of Contents





UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549





FORM 10-Q







|x | QUARTERLY REPORT UNDER SECTION 13 0R 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------

For Quarterly Period Ended: June 30, 2010

OR



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

Commission File Number: 001-34565





MONARCH
FINANCIAL HOLDINGS, INC.

(Exact name of registrant as specified in its charter)







|                                                               |  |                                                         |  |                                    
|-------------------------------------------------------------- |  | ------------------------------------------------------- |  | -----------------------------------
|VIRGINIA                                                       |  | 6022                                                    |  | 20-4985388                         
|(State of other jurisdiction of
Incorporation or organization) |  | (Primary Standard Industrial
Classification Code Number |  | (I.R.S. Employer
Identification No.

1101 Executive Blvd.

Chesapeake, Virginia 23320

(757) 389-5111

(Name, address, including zip code, and telephone number, including area code, of agent for service)

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 has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files).    Yes  x    No   ̈

Indicate by check mark whether the registrant is a large accelerated filer, and accelerated filer, or a non-accelerated filer, or a
smaller reporting company. See definition of "large accelerated filer, and "accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act.



|                        |  |   |  |                           |  |  
|----------------------- |  | - |  | ------------------------- |  | -
|Large accelerated filer |  |  ̈ |  | Accelerated filer         |  |  ̈
|                        |  |   | 
|Non-accelerated filer   |  |   |  | Smaller reporting company |  | 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

The number of shares of common stock outstanding as of August 9, 2010 was 5,875,034.









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##### Table of Contents

MONARCH FINANCIAL HOLDINGS, INC.

FORM 10-Q

JUNE 30, 2010

INDEX



|         |  |                       |  |                                                                                                                                |  |   
|-------- |  | --------------------- |  | ------------------------------------------------------------------------------------------------------------------------------ |  | --
|PART I.  |  | FINANCIAL INFORMATION |  |                                                                                                                               
|         |  |                       | 
|         |  | ITEM 1.               |  | Consolidated Statements of Condition as of June 30, 2010 and December 31, 2009                                                 |  | 3 
|         |  |                       | 
|         |  |                       |  | Consolidated Statements of Income for the three and six months ended June 30, 2010 and June 30, 2009                           |  | 4 
|         |  |                       | 
|         |  |                       |  | Consolidated Statements of Shareholders Equity and Comprehensive Income for the periods ended June 30, 2010 and June 30, 2009 |  | 5 
|         |  |                       | 
|         |  |                       |  | Consolidated Statements of Cash Flows for the periods ended June 30, 2010 and June 30, 2009                                    |  | 6 
|         |  |                       | 
|         |  |                       |  | Notes to Consolidated Financial Statements                                                                                     |  | 7 
|         |  |                       | 
|         |  | ITEM 2.               |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                          |  | 17
|         |  |                       | 
|         |  | ITEM 3.               |  | Quantitative and Qualitative Disclosures about Market Risk                                                                     |  | 35
|         |  |                       | 
|         |  | ITEM 4.               |  | Controls and Procedures                                                                                                        |  | 36
|         |  |                       | 
|PART II. |  |                       |  | OTHER INFORMATION                                                                                                              |  |   
|         |  |                       | 
|         |  | Item 1.               |  | Legal Proceedings                                                                                                              |  | 37
|         |  |                       | 
|         |  | Item 2.               |  | Changes in Securities                                                                                                          |  | 37
|         |  |                       | 
|         |  | Item 3.               |  | Defaults Upon Senior Securities                                                                                                |  | 37
|         |  |                       | 
|         |  | Item 4.               |  | Submissions of Matters to Vote of Security Holders                                                                             |  | 37
|         |  |                       | 
|         |  | Item 5.               |  | Other Information                                                                                                              |  | 37
|         |  |                       | 
|         |  | Item 6.               |  | Exhibits and Reports on Form 8-K                                                                                               |  | 38



2



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##### Table of Contents

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

MONARCH FINANCIAL HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CONDITION



|                                                                                                                                                 |  |                        |             |   |                  |   |             |  
|------------------------------------------------------------------------------------------------------------------------------------------------ |  | ---------------------- | ----------- | - | ---------------- | - | ----------- | -
|                                                                                                                                                 |  | UnauditedJune 
30,2010 |             |   | December 31,2009 |  
|ASSETS:                                                                                                                                          |  |                        |             |   |                  |   |             |  
|Cash and due from banks                                                                                                                          |  | $                      | 22,471,426  |   |                  | $ | 17,129,674  |  
|Interest bearing bank balances                                                                                                                   |  |                        | 6,840,899   |   |                  |   | 2,541,566   |  
|Federal funds sold                                                                                                                               |  |                        | 10,035,000  |   |                  |   | 14,680,000  |  
|                                                                                                                                                 |  |                        |             |   |                  |   |             |  
|Total cash and cash equivalents                                                                                                                  |  |                        | 39,347,325  |   |                  |   | 34,351,240  |  
|                                                                                                                                                 |  |                       
|Investment securities available-for-sale, at fair value                                                                                          |  |                        | 8,457,177   |   |                  |   | 7,189,930   |  
|Loans held for sale                                                                                                                              |  |                        | 149,527,404 |   |                  |   | 78,997,713  |  
|                                                                                                                                                 |  |                       
|Loans held for investment, net of unearned income                                                                                                |  |                        | 554,796,564 |   |                  |   | 537,700,175 |  
|Less: allowance for loan losses                                                                                                                  |  |                        | (8,575,000  | ) |                  |   | (9,300,000  | )
|                                                                                                                                                 |  |                        |             |   |                  |   |             |  
|Loans, net                                                                                                                                       |  |                        | 546,221,564 |   |                  |   | 528,400,175 |  
|                                                                                                                                                 |  |                       
|Property and equipment, net                                                                                                                      |  |                        | 16,301,718  |   |                  |   | 8,973,042   |  
|Restricted equity securities                                                                                                                     |  |                        | 7,296,150   |   |                  |   | 7,019,700   |  
|Bank owned life insurance                                                                                                                        |  |                        | 7,191,623   |   |                  |   | 7,049,552   |  
|Goodwill                                                                                                                                         |  |                        | 775,000     |   |                  |   | 775,000     |  
|Intangible assets                                                                                                                                |  |                        | 729,169     |   |                  |   | 818,455     |  
|Other assets                                                                                                                                     |  |                        | 14,526,174  |   |                  |   | 15,994,236  |  
|                                                                                                                                                 |  |                        |             |   |                  |   |             |  
|Total assets                                                                                                                                     |  | $                      | 790,373,304 |   |                  | $ | 689,569,043 |  
|                                                                                                                                                 |  |                        |             |   |                  |   |             |  
|                                                                                                                                                 |  |                       
|LIABILITIES:                                                                                                                                     |  |                        |             |   |                  |   |             |  
|Deposits:                                                                                                                                        |  |                        |             |   |                  |   |             |  
|Demand deposits - non-interest bearing                                                                                                           |  | $                      | 104,503,429 |   |                  | $ | 76,168,818  |  
|Demand deposits - interest bearing                                                                                                               |  |                        | 22,067,637  |   |                  |   | 19,670,588  |  
|Savings deposits                                                                                                                                 |  |                        | 22,904,834  |   |                  |   | 22,812,721  |  
|Money market deposits                                                                                                                            |  |                        | 214,541,086 |   |                  |   | 157,308,562 |  
|Time deposits                                                                                                                                    |  |                        | 279,471,376 |   |                  |   | 264,078,199 |  
|                                                                                                                                                 |  |                        |             |   |                  |   |             |  
|Total deposits                                                                                                                                   |  |                        | 643,488,362 |   |                  |   | 540,038,888 |  
|                                                                                                                                                 |  |                       
|Borrowings:                                                                                                                                      |  |                        |             |   |                  |   |             |  
|Trust preferred subordinated debt                                                                                                                |  |                        | 10,000,000  |   |                  |   | 10,000,000  |  
|Federal Home Loan Bank advances                                                                                                                  |  |                        | 60,635,684  |   |                  |   | 66,158,774  |  
|                                                                                                                                                 |  |                        |             |   |                  |   |             |  
|Total borrowings                                                                                                                                 |  |                        | 70,635,684  |   |                  |   | 76,158,774  |  
|                                                                                                                                                 |  |                       
|Other liabilities                                                                                                                                |  |                        | 6,969,360   |   |                  |   | 5,356,227   |  
|                                                                                                                                                 |  |                        |             |   |                  |   |             |  
|Total liabilities                                                                                                                                |  |                        | 721,093,406 |   |                  |   | 621,553,889 |  
|                                                                                                                                                 |  |                        |             |   |                  |   |             |  
|                                                                                                                                                 |  |                       
|STOCKHOLDERS EQUITY:                                                                                                                            |  |                        |             |   |                  |   |             |  
|Preferred stock, $5 par value, 1,185,300 shares authorized; none issued                                                                          |  |                        |            |   |                  |   |            |  
|Noncumulative perpetual preferred stock, series B, liquidation value of $20.0 million, $5 par; 800,000 shares authorized, issued
and outstanding |  |                        | 4,000,000   |   |                  |   | 4,000,000   |  
|Common stock, $5 par value; 20,000,000 shares authorized; issued and outstanding - 5,875,534 and 5,865,534 shares, respectively                  |  |                        | 29,377,670  |   |                  |   | 29,327,670  |  
|Additional paid-in capital                                                                                                                       |  |                        | 22,249,045  |   |                  |   | 22,383,274  |  
|Retained earnings                                                                                                                                |  |                        | 13,841,730  |   |                  |   | 12,360,292  |  
|Accumulated other comprehensive loss                                                                                                             |  |                        | (309,640    | ) |                  |   | (162,939    | )
|                                                                                                                                                 |  |                        |             |   |                  |   |             |  
|Total Monarch Financial Holdings, Inc. stockholders equity                                                                                      |  |                        | 69,158,805  |   |                  |   | 67,908,297  |  
|Noncontrolling interest                                                                                                                          |  |                        | 121,093     |   |                  |   | 106,857     |  
|                                                                                                                                                 |  |                        |             |   |                  |   |             |  
|Total equity                                                                                                                                     |  |                        | 69,279,898  |   |                  |   | 68,015,154  |  
|                                                                                                                                                 |  |                        |             |   |                  |   |             |  
|                                                                                                                                                 |  |                       
|Total liabilities and stockholders equity                                                                                                       |  | $                      | 790,373,304 |   |                  | $ | 689,569,043 |  
|                                                                                                                                                 |  |                        |             |   |                  |   |             |  

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



3



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##### Table of Contents

ITEM 1. FINANCIAL STATEMENTS (Continued)

MONARCH FINANCIAL HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF INCOME

(unaudited)



|                                                            |  |                         |            |   |                         |   |            |      |  |   |            |   |  |   |            |  
|----------------------------------------------------------- |  | ----------------------- | ---------- | - | ----------------------- | - | ---------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                                            |  | 3 Months Ended June 30, |            |   | 6 Months Ended June 30, |  
|                                                            |  | 2010                    |            |   | 2009                    |   |            | 2010 |  |   | 2009       |  
|Interest income:                                            |  |                         |            |   |                         |   |            |      |  |   |            |   |  |   |            |  
|Interest and fees on loans                                  |  | $                       | 9,416,922  |   |                         | $ | 8,326,877  |      |  | $ | 17,887,849 |   |  | $ | 15,812,324 |  
|Interest on investment securities                           |  |                         | 49,029     |   |                         |   | 63,410     |      |  |   | 103,575    |   |  |   | 127,745    |  
|Interest on federal funds sold                              |  |                         | 15,906     |   |                         |   | 2,365      |      |  |   | 24,283     |   |  |   | 3,259      |  
|Dividends on equity securities                              |  |                         | 29,087     |   |                         |   | 23,323     |      |  |   | 47,252     |   |  |   | 38,848     |  
|Interest on other bank accounts                             |  |                         | 1,513      |   |                         |   | 772        |      |  |   | 1,889      |   |  |   | 1,408      |  
|                                                            |  |                         |            |   |                         |   |            |      |  |   |            |   |  |   |            |  
|Total interest income                                       |  |                         | 9,512,457  |   |                         |   | 8,416,747  |      |  |   | 18,064,848 |   |  |   | 15,983,584 |  
|                                                            |  |                         |            |   |                         |   |            |      |  |   |            |   |  |   |            |  
|                                                            |  |                         |            |  
|Interest expense:                                           |  |                         |            |   |                         |   |            |      |  |   |            |   |  |   |            |  
|Interest on deposits                                        |  |                         | 1,903,582  |   |                         |   | 2,324,561  |      |  |   | 3,764,947  |   |  |   | 4,964,971  |  
|Interest on trust preferred subordinated debt               |  |                         | 124,200    |   |                         |   | 72,371     |      |  |   | 245,700    |   |  |   | 149,058    |  
|Interest on borrowings                                      |  |                         | 243,063    |   |                         |   | 318,577    |      |  |   | 425,761    |   |  |   | 579,111    |  
|                                                            |  |                         |            |   |                         |   |            |      |  |   |            |   |  |   |            |  
|Total interest expense                                      |  |                         | 2,270,845  |   |                         |   | 2,715,509  |      |  |   | 4,436,408  |   |  |   | 5,693,140  |  
|                                                            |  |                         |            |   |                         |   |            |      |  |   |            |   |  |   |            |  
|                                                            |  |                         |            |  
|Net interest income                                         |  |                         | 7,241,612  |   |                         |   | 5,701,238  |      |  |   | 13,628,440 |   |  |   | 10,290,444 |  
|                                                            |  |                         |            |  
|Provision for loan losses                                   |  |                         | 1,504,948  |   |                         |   | 1,837,597  |      |  |   | 2,832,818  |   |  |   | 2,538,148  |  
|                                                            |  |                         |            |   |                         |   |            |      |  |   |            |   |  |   |            |  
|                                                            |  |                         |            |  
|Net interest income after provision for loan losses         |  |                         | 5,736,664  |   |                         |   | 3,863,641  |      |  |   | 10,795,622 |   |  |   | 7,752,296  |  
|                                                            |  |                         |            |   |                         |   |            |      |  |   |            |   |  |   |            |  
|                                                            |  |                         |            |  
|Non-interest income:                                        |  |                         |            |   |                         |   |            |      |  |   |            |   |  |   |            |  
|Mortgage banking income                                     |  |                         | 11,024,864 |   |                         |   | 8,824,954  |      |  |   | 18,700,016 |   |  |   | 15,926,075 |  
|Investment and insurance commissions                        |  |                         | 67,585     |   |                         |   | 229,667    |      |  |   | 141,905    |   |  |   | 513,672    |  
|Service charges and fees                                    |  |                         | 429,025    |   |                         |   | 371,358    |      |  |   | 823,356    |   |  |   | 656,827    |  
|Other                                                       |  |                         | 165,922    |   |                         |   | 660,169    |      |  |   | 299,699    |   |  |   | 834,096    |  
|                                                            |  |                         |            |   |                         |   |            |      |  |   |            |   |  |   |            |  
|Total noninterest income                                    |  |                         | 11,687,396 |   |                         |   | 10,086,148 |      |  |   | 19,964,976 |   |  |   | 17,930,670 |  
|                                                            |  |                         |            |   |                         |   |            |      |  |   |            |   |  |   |            |  
|                                                            |  |                         |            |  
|Non-interest expenses:                                      |  |                         |            |   |                         |   |            |      |  |   |            |   |  |   |            |  
|Salaries and employee benefits                              |  |                         | 10,319,400 |   |                         |   | 7,824,816  |      |  |   | 18,243,946 |   |  |   | 14,965,818 |  
|Loan expense                                                |  |                         | 1,475,466  |   |                         |   | 894,825    |      |  |   | 2,476,650  |   |  |   | 1,506,894  |  
|Occupancy expenses                                          |  |                         | 811,554    |   |                         |   | 600,320    |      |  |   | 1,504,030  |   |  |   | 1,174,979  |  
|Furniture and equipment expenses                            |  |                         | 401,786    |   |                         |   | 312,055    |      |  |   | 777,734    |   |  |   | 635,197    |  
|FDIC insurance                                              |  |                         | 258,238    |   |                         |   | 575,254    |      |  |   | 507,074    |   |  |   | 830,755    |  
|Marketing expense                                           |  |                         | 125,112    |   |                         |   | 163,824    |      |  |   | 227,448    |   |  |   | 296,100    |  
|Data processing                                             |  |                         | 222,533    |   |                         |   | 205,691    |      |  |   | 418,069    |   |  |   | 413,651    |  
|Professional fees                                           |  |                         | 209,538    |   |                         |   | 155,312    |      |  |   | 341,845    |   |  |   | 260,829    |  
|Stationary and supplies                                     |  |                         | 172,965    |   |                         |   | 117,742    |      |  |   | 325,840    |   |  |   | 204,460    |  
|Other                                                       |  |                         | 1,089,342  |   |                         |   | 929,050    |      |  |   | 1,897,054  |   |  |   | 1,554,920  |  
|                                                            |  |                         |            |   |                         |   |            |      |  |   |            |   |  |   |            |  
|Total noninterest expenses                                  |  |                         | 15,085,934 |   |                         |   | 11,778,889 |      |  |   | 26,719,690 |   |  |   | 21,843,603 |  
|                                                            |  |                         |            |   |                         |   |            |      |  |   |            |   |  |   |            |  
|                                                            |  |                         |            |  
|Income before income taxes                                  |  |                         | 2,338,126  |   |                         |   | 2,170,900  |      |  |   | 4,040,908  |   |  |   | 3,839,363  |  
|                                                            |  |                         |            |  
|Income tax provision                                        |  |                         | (749,331   | ) |                         |   | (699,500   | )    |  |   | (1,319,031 | ) |  |   | (1,213,900 | )
|                                                            |  |                         |            |   |                         |   |            |      |  |   |            |   |  |   |            |  
|                                                            |  |                         |            |  
|Net income                                                  |  |                         | 1,588,795  |   |                         |   | 1,471,400  |      |  |   | 2,721,877  |   |  |   | 2,625,463  |  
|                                                            |  |                         |            |  
|Less: Net income attributable to noncontrolling interests   |  |                         | (35,887    | ) |                         |   | (51,808    | )    |  |   | (49,152    | ) |  |   | (145,600   | )
|                                                            |  |                         |            |   |                         |   |            |      |  |   |            |   |  |   |            |  
|                                                            |  |                         |            |  
|Net income attributable to Monarch Financial Holdings, Inc. |  | $                       | 1,552,908  |   |                         | $ | 1,419,592  |      |  | $ | 2,672,725  |   |  | $ | 2,479,863  |  
|                                                            |  |                         |            |  
|Preferred stock dividend and accretion of discount          |  |                         | (390,000   | ) |                         |   | (195,601   | )    |  |   | (780,000   | ) |  |   | (389,041   | )
|                                                            |  |                         |            |   |                         |   |            |      |  |   |            |   |  |   |            |  
|Net income available to common stockholders                 |  | $                       | 1,162,908  |   |                         | $ | 1,223,991  |      |  | $ | 1,892,725  |   |  | $ | 2,090,822  |  
|                                                            |  |                         |            |   |                         |   |            |      |  |   |            |   |  |   |            |  
|                                                            |  |                         |            |  
|Basic net income per share                                  |  | $                       | 0.20       |   |                         | $ | 0.22       |      |  | $ | 0.33       |   |  | $ | 0.37       |  
|Diluted net income per share                                |  | $                       | 0.20       |   |                         | $ | 0.21       |      |  | $ | 0.33       |   |  | $ | 0.37       |  

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



4



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##### Table of Contents

ITEM 1. FINANCIAL STATEMENTS (Continued)

MONARCH FINANCIAL HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND COMPREHENSIVE INCOME

(unaudited)



|                                                                                                      |  |              |  |        |                |                           |                  |            |   |  |                        |            |  |                                            |            |   |  |   |          |   |  |   |          |   |  |   |            |  
|----------------------------------------------------------------------------------------------------- |  | ------------ |  | ------ | -------------- | ------------------------- | ---------------- | ---------- | - |  | ---------------------- | ---------- |  | ------------------------------------------ | ---------- | - |  | - | -------- | - |  | - | -------- | - |  | - | ---------- | -
|                                                                                                      |  |              |  |        |                | AdditionalPaid-In
Capital |                  |            |   |  |                        |            |  | AccumulatedOtherComprehensiveIncome (Loss) |            |   |  |   |          |   | 
|                                                                                                      |  | Common Stock |  |        | PreferredStock |                           | RetainedEarnings |            |   |  | NoncontrollingInterest |            |  |                                            |           
|                                                                                                      |  | Shares       |  | Amount |                |                           |                  |            |   |  | Total                  |           
|Balance - December 31, 2008                                                                           |  | 5,735,007    |  | $      | 28,675,035     |                           | $                | 8,065,602  |   |  | $                      | 14,481,383 |  | $                                          | 8,528,094  |   |  | $ | 27,302   |   |  | $ | 111,274  |   |  | $ | 59,888,690 |  
|Comprehensive income:                                                                                 |  |              |  |        |                |                           |                  |            |   |  |                        |            |  |                                            |            |   |  |   |          |   |  |   |          |   |  |   |            |  
|Net income for six months ended June 30, 2009                                                         |  |              |  |        |                |                           |                  |            |   |  |                        |            |  |                                            | 2,479,863  |   |  |   |          |   |  |   | 145,600  |   |  |   | 2,625,463  |  
|Unrealized gain on securities available-for-sale, net of reclassification adjustment and income taxes |  |              |  |        |                |                           |                  |            |   |  |                        |            |  |                                            |            |   |  |   | 8,962    |   |  |   |          |   |  |   | 8,962      |  
|                                                                                                      |  |              |  |        |                |                           |                  |            |   |  |                        |            |  |                                            |            |   |  |   |          |   |  |   |          |   |  |   |            |  
|Total comprehensive income                                                                            |  |              |  |        |                |                           |                  |            |   |  |                        |            |  |                                            |            |   |  |   |          |   |  |   |          |   |  |   | 2,634,425  |  
|                                                                                                      |  |              |  |        |                |                           |                  |            |   |  |                        |            |  |                                            |            |   |  |   |          |   |  |   |          |   |  |   |            |  
|Stock-based compensation expense                                                                      |  |              |  |        |                |                           |                  | 157,600    |   |  |                        |            |  |                                            |            |   |  |   |          |   |  |   |          |   |  |   | 157,600    |  
|Stock options exercised                                                                               |  | 53,979       |  |        | 269,895        |                           |                  | (42,896    | ) |  |                        |            |  |                                            |            |   |  |   |          |   |  |   |          |   |  |   | 226,999    |  
|Accretion of discount on series A cumulative perpetual preferred warrants                             |  |              |  |        |                |                           |                  | (19,500    | ) |  |                        | 19,500     |  |                                            |            |   |  |   |          |   |  |   |          |   |  |   |           |  
|Cash dividend declared on series A cumulative perpetual preferred stock (5%)                          |  |              |  |        |                |                           |                  |            |   |  |                        |            |  |                                            | (369,541   | ) |  |   |          |   |  |   |          |   |  |   | (369,541   | )
|Distributions to noncontrolling interests                                                             |  |              |  |        |                |                           |                  |            |   |  |                        |            |  |                                            |            |   |  |   |          |   |  |   | (106,847 | ) |  |   | (106,847   | )
|                                                                                                      |  |              |  |        |                |                           |                  |            |   |  |                        |            |  |                                            |            |   |  |   |          |   |  |   |          |   |  |   |            |  
|Balance - June 30, 2009                                                                               |  | 5,788,986    |  | $      | 28,944,930     |                           | $                | 8,160,806  |   |  | $                      | 14,500,883 |  | $                                          | 10,638,416 |   |  | $ | 36,264   |   |  | $ | 150,027  |   |  | $ | 62,431,326 |  
|                                                                                                      |  |              |  |        |                |                           |                  |            |   |  |                        |            |  |                                            |            |   |  |   |          |   |  |   |          |   |  |   |            |  
|                                                                                                      |  |              |  |        |                |                           |                  |           
|Balance - December 31, 2009                                                                           |  | 5,865,534    |  | $      | 29,327,670     |                           | $                | 22,383,274 |   |  | $                      | 4,000,000  |  | $                                          | 12,360,292 |   |  | $ | (162,939 | ) |  | $ | 106,857  |   |  | $ | 68,015,154 |  
|Comprehensive income:                                                                                 |  |              |  |        |                |                           |                  |            |   |  |                        |            |  |                                            |            |   |  |   |          |   |  |   |          |   |  |   |            |  
|Net income for six months ended June 30, 2010                                                         |  |              |  |        |                |                           |                  |            |   |  |                        |            |  |                                            | 2,672,725  |   |  |   |          |   |  |   | 49,152   |   |  |   | 2,721,877  |  
|Unrealized loss on interest rate swap net of income taxes                                             |  |              |  |        |                |                           |                  |            |   |  |                        |            |  |                                            |            |   |  |   | (221,521 | ) |  |   |          |   |  |   | (221,521   | )
|Unrealized gain on mandatory delivery of available-for-sale mortgages, net of income taxes            |  |              |  |        |                |                           |                  |            |   |  |                        |            |  |                                            |            |   |  |   | 14,562   |   |  |   |          |   |  |   | 14,562     |  
|Unrealized gain on securities available-for-sale, net of reclassification adjustment and income taxes |  |              |  |        |                |                           |                  |            |   |  |                        |            |  |                                            |            |   |  |   | 60,258   |   |  |   |          |   |  |   | 60,258     |  
|                                                                                                      |  |              |  |        |                |                           |                  |            |   |  |                        |            |  |                                            |            |   |  |   |          |   |  |   |          |   |  |   |            |  
|Total comprehensive income                                                                            |  |              |  |        |                |                           |                  |            |   |  |                        |            |  |                                            |            |   |  |   |          |   |  |   |          |   |  |   | 2,575,176  |  
|                                                                                                      |  |              |  |        |                |                           |                  |            |   |  |                        |            |  |                                            |            |   |  |   |          |   |  |   |          |   |  |   |            |  
|Stock-based compensation expense                                                                      |  | 10,000       |  |        | 50,000         |                           |                  | 125,771    |   |  |                        |            |  |                                            |            |   |  |   |          |   |  |   |          |   |  |   | 175,771    |  
|net of income taxes                                                                                   |  |              |  |        |                |                           |                  |            |   |  |                        |            |  |                                            |            |   |  |   |          |   |  |   |          |   |  |   |            |  
|Cash dividend declared on series B noncumulative perpetual preferred stock (7.8%)                     |  |              |  |        |                |                           |                  |            |   |  |                        |            |  |                                            | (780,000   | ) |  |   |          |   |  |   |          |   |  |   | (780,000   | )
|Cash dividend declared on common stock ($0.07 per share)                                              |  |              |  |        |                |                           |                  |            |   |  |                        |            |  |                                            | (411,287   | ) |  |   |          |   |  |   |          |   |  |   | (411,287   | )
|Redemption of warrants on series A cumulative perpetual preferred stock                               |  |              |  |        |                |                           |                  | (260,000   | ) |  |                        |            |  |                                            |            |   |  |   |          |   |  |   |          |   |  |   | (260,000   | )
|Contributions from noncontrolling interests                                                           |  |              |  |        |                |                           |                  |            |   |  |                        |            |  |                                            |            |   |  |   |          |   |  |   | 36,750   |   |  |   | 36,750     |  
|Distributions to noncontrolling interests                                                             |  |              |  |        |                |                           |                  |            |   |  |                        |            |  |                                            |            |   |  |   |          |   |  |   | (71,666  | ) |  |   | (71,666    | )
|                                                                                                      |  |              |  |        |                |                           |                  |            |   |  |                        |            |  |                                            |            |   |  |   |          |   |  |   |          |   |  |   |            |  
|Balance - June 30, 2010                                                                               |  | 5,875,534    |  | $      | 29,377,670     |                           | $                | 22,249,045 |   |  | $                      | 4,000,000  |  | $                                          | 13,841,730 |   |  | $ | (309,640 | ) |  | $ | 121,093  |   |  | $ | 69,279,898 |  
|                                                                                                      |  |              |  |        |                |                           |                  |            |   |  |                        |            |  |                                            |            |   |  |   |          |   |  |   |          |   |  |   |            |  

The accompanying notes are an integral part of the consolidated financial statement.



5



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##### Table of Contents

ITEM 1. FINANCIAL STATEMENTS (Continued)

MONARCH FINANCIAL HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)



|                                                                     |  |                         |             |   |      |   |             |  
|-------------------------------------------------------------------- |  | ----------------------- | ----------- | - | ---- | - | ----------- | -
|                                                                     |  | 6 Months Ended June 30, |            
|                                                                     |  | 2010                    |             |   | 2009 |  
|Operating activities:                                                |  |                         |             |   |      |   |             |  
|Net income attributable to Monarch Financial Holdings, Inc.          |  | $                       | 2,672,725   |   |      | $ | 2,479,863   |  
|Adjustments to reconcile to net cash from operating activities:      |  |                         |             |   |      |   |             |  
|Provision for loan losses                                            |  |                         | 2,832,818   |   |      |   | 2,538,148   |  
|Depreciation                                                         |  |                         | 571,539     |   |      |   | 490,400     |  
|Accretion of discounts and amortization of premiums, net             |  |                         | 9,715       |   |      |   | 6,104       |  
|Deferral of loan costs, net of deferred fees                         |  |                         | 249,678     |   |      |   | (28,397     | )
|Amortization of intangible assets                                    |  |                         | 89,286      |   |      |   | 89,286      |  
|Stock-based compensation                                             |  |                         | 175,771     |   |      |   | 157,600     |  
|Net income attributable to noncontrolling interests                  |  |                         | 49,152      |   |      |   | 145,600     |  
|Appreciation of bank-owned life insurance                            |  |                         | (142,071    | ) |      |   | (127,257    | )
|(Income) loss from rate lock commitments                             |  |                         | 127,286     |   |      |   | (227,636    | )
|Net loss on disposition of property and equipment                    |  |                         | 777         |   |      |   |            |  
|Net (gain) loss on on sale of other real estate                      |  |                         | 101,996     |   |      |   | (16,455     | )
|Amortization of deferred gain                                        |  |                         | (81,726     | ) |      |   | (81,726     | )
|Changes in:                                                          |  |                         |             |   |      |   |             |  
|Loans held for sale                                                  |  |                         | (70,529,691 | ) |      |   | (42,131,083 | )
|Interest receivable                                                  |  |                         | (327,563    | ) |      |   | (193,540    | )
|Other assets                                                         |  |                         | 1,168,927   |   |      |   | 139,667     |  
|Other liabilities                                                    |  |                         | 1,257,656   |   |      |   | 1,678,145   |  
|                                                                     |  |                         |             |   |      |   |             |  
|Net cash from operating activities                                   |  |                         | (61,773,725 | ) |      |   | (35,081,281 | )
|                                                                     |  |                         |             |   |      |   |             |  
|Investing activities:                                                |  |                         |             |   |      |   |             |  
|Purchases of available-for-sale securities                           |  |                         | (4,276,732  | ) |      |   |            |  
|Proceeds from sales and maturities of available-for-sale securities  |  |                         | 3,091,071   |   |      |   | 592,044     |  
|Proceeds from sale of other real estate                              |  |                         | 2,140,310   |   |      |   | 279,582     |  
|Purchases of premises and equipment                                  |  |                         | (7,900,992  | ) |      |   | (258,435    | )
|Purchase of restricted equity securities, net of redemptions         |  |                         | (276,450    | ) |      |   | (3,435,150  | )
|Loan originations, net of principal repayments                       |  |                         | (22,447,578 | ) |      |   | (12,670,809 | )
|                                                                     |  |                         |             |   |      |   |             |  
|Net cash from investing activities                                   |  |                         | (29,670,371 | ) |      |   | (15,492,768 | )
|                                                                     |  |                         |             |   |      |   |             |  
|Financing activities:                                                |  |                         |             |   |      |   |             |  
|Net increase in noninterest-bearing deposits                         |  |                         | 28,334,611  |   |      |   | 5,082,906   |  
|Net increase in interest-bearing deposits                            |  |                         | 75,114,863  |   |      |   | 25,445,083  |  
|Cash dividends paid on preferred stock                               |  |                         | (780,000    | ) |      |   | (298,083    | )
|Cash dividends paid on common stock                                  |  |                         | (411,287    | ) |      |   |            |  
|Net increase (decrease) of FHLB advances and federal funds purchased |  |                         | (5,523,090  | ) |      |   | 34,146,205  |  
|Contributions from noncontrolling interests                          |  |                         | 36,750      |   |      |   |            |  
|Distributions to noncontrolling interests                            |  |                         | (71,666     | ) |      |   | (106,847    | )
|Redemption of stock warrants                                         |  |                         | (260,000    | ) |      |   |            |  
|Proceeds from issuance of common stock, net of issuance costs        |  |                         |            |   |      |   | 226,999     |  
|                                                                     |  |                         |             |   |      |   |             |  
|Net cash from financing activities                                   |  |                         | 96,440,181  |   |      |   | 64,496,263  |  
|                                                                     |  |                         |             |   |      |   |             |  
|CHANGE IN CASH AND CASH EQUIVALENTS                                  |  |                         | 4,996,085   |   |      |   | 13,922,214  |  
|CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                       |  |                         | 34,351,240  |   |      |   | 8,596,342   |  
|                                                                     |  |                         |             |   |      |   |             |  
|CASH AND CASH EQUIVALENTS AT END OF PERIOD                           |  | $                       | 39,347,325  |   |      | $ | 22,518,556  |  
|                                                                     |  |                         |             |   |      |   |             |  
|                                                                     |  |                        
|SUPPLEMENTAL SCHEDULES AND CASH FLOW INFORMATION                     |  |                         |             |   |      |   |             |  
|Cash paid for:                                                       |  |                         |             |   |      |   |             |  
|Interest on deposits and other borrowings                            |  | $                       | 4,460,546   |   |      | $ | 5,317,788   |  
|Income taxes                                                         |  | $                       | 519,500     |   |      | $ | 2,160,000   |  
|Loans transferred to foreclosed real estate during the year          |  | $                       | 2,278,750   |   |      | $ | 532,158     |  
|Loans to facilitate sale of real estate                              |  | $                       | 735,057     |   |      | $ | 1,777,500   |  

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



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##### Table of Contents

MONARCH FINANCIAL HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. BASIS OF PRESENTATION

In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments consisting of normal
recurring accruals necessary to present fairly Monarch Financial Holdings, Inc.s financial position as of June 30, 2010; the consolidated statements of income for the three and six months ended June 30, 2010 and 2009; the
consolidated statements of changes in stockholders equity for the six months ended June 30, 2010 and 2009; and the consolidated statements of cash flows for the six months ended June 30, 2010 and 2009. These financial statements have
been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all of the disclosures and notes required by generally accepted accounting principles. The financial statements include the accounts of Monarch Financial
Holdings, Inc. and its subsidiaries, and all significant intercompany accounts and transactions have been eliminated. Operating results for the three and six month periods ended June 30, 2010 are not necessarily indicative of the results that
may be expected for the year ended December 31, 2010. Certain prior year amounts have been reclassified to conform to current year presentations.

Recent Issued Accounting Standards

In July 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2010-20, Disclosures about the
Credit Quality of Financing Receivables and the Allowance for Credit Losses. This update is intended to provide for disclosures that facilitate financial statement users evaluation of 1) the nature of credit risk inherent in the entitys
portfolio of financing receivables, 2) how that risk is analyzed and assessed in arriving at the allowance for credit losses, and 3) the changes and reasons for those changes in the allowance for credit losses. Required disclosures include
disaggregation of receivables into two levels  portfolio segment and class of financing receivable. A portfolio segment is defined as the level at which an entity develops and documents a systematic method for determining its allowance for
credit losses. Classes of financing receivables generally are a disaggregation of portfolio segment. Required disclosures on a disaggregated basis include a roll-forward of the allowance for credit losses as well as impaired, nonaccrual,
restructured and past due loans, and credit quality indicators. The disclosures as of the end of the reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010. The disclosures about the
activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or before December 15, 2010.

In February 2010, the FASB issued ASC 2010-09, Subsequent Events (Topic 855)- Amendments to Certain Recognition and Disclosure
Requirements. This guidance, among other things, requires an entity that is either (a) an SEC filer or (b) a bond obligor for conduit debt securities that are traded in a public market to evaluate subsequent events through the date that
the financial statements are issued. The amendments remove the requirement for an SEC filer to disclose a date in both issued and revised financial statements. This guidance is effective for interim or annual periods ending after June 15, 2010.

In March 2010, FASB issued ASU 2010-11, Derivatives and Hedging (Topic 815)  Scope Exception Related to Embedded
Credit Derivatives.This update provides clarification to the scope exceptions (ASU 815-15-15-8 through 15-9) for embedded credit derivative features related to the transfer of credit risk in the form of one financial instrument to another. The
amendments address how to determine which embedded credit derivative features, including those in collateralized debt obligations and synthetic collateralized debt obligations, are considered to be embedded derivatives that should not be analyzed
under Section 815-15-25 for potential bifurcation and separate accounting. The guidance in this update will be effective for the quarter beginning after June 15, 2010, and is not expected to have a significant impact on our consolidated
financial statements.

In January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and Disclosures (Topic 820)
 Improving Disclosures about Fair Value Measurements (Subtopic 820-10).This update will require new disclosures for transfers in and out of Levels 1 and 2 and expand the activity disclosure for Level 3. It will also clarify existing
disclosures by requiring disaggregation of subsets of assets and liabilities when providing fair value and disclosure of inputs and valuations techniques for fair value measures of Level 2 and 3. This guidance, effective for interim and annual
reporting periods beginning after December 15, 2009, (except for the disclosures about purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measures), did not have a significant impact on our
consolidated financial statements. The remaining disclosure with regard to Level 3, are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years, and is not expected to have a significant
impact on our consolidated financial statements.



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##### Table of Contents

In August 2009, the FASB issued ASU 2009-05, Fair Value Measurements and Disclosures
(Topic 820)Measuring Liabilities at Fair Value. This update provides clarification for circumstances in which a quoted price in an active market for the identical liability is not available. In such circumstances a reporting entity is
required to measure fair value using one or more of the following techniques: (1) A valuation technique that uses: (a) the quoted price of the identical liability when traded as an asset; or (b) quoted prices for similar liabilities
or similar liabilities when traded as assets; or (2) another valuation technique that is consistent with the principles of Topic 820 such as an income approach or a market approach. The guidance in this update was effective for the quarter
beginning October 1, 2009 and did not have a significant impact on our consolidated financial statements.

In June 2009,
the FASB issued guidance that establishes the FASB Accounting Standards Codification(the Codification or ASC) as the source of authoritative generally accepted accounting principles (GAAP) recognized by
the FASB for nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission (SEC) under authority of federal securities laws are also included in the Codification as sources of authoritative GAAP for
SEC registrants. The Codification is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Codification supersedes all existing non-SEC accounting and reporting standards. Following
this effective date, instead of issuing new standards in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts, the FASB issues Accounting Standards Updates, which serves only to: (a) update the Codification;
(b) provide background information about the guidance; and (c) provide the bases for conclusions on the change(s) in the Codification. We started following the guidelines in the Codification effective July 1, 2009.

In June 2009, the FASB issued ASU 2009-16 (formerly FASB 166, Accounting for Transfers of Financial Assets  an amendment
of FASB Statement No. 140), to improve the relevance, faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on
its financial position, financial performance, and cash flows; and a transferors continuing involvement, if any, in transferred assets. This statement, effective for periods beginning after November 15, 2009, did not have a significant
effect on our consolidated financial statements.

In June 2009, the FASB issued ASU 2009-17 (formerly FASB 167,
Amendments to FASB Interpretation No. 46(R)). This statement amends Interpretation 46(R) to require an enterprise to replace the quantitative-based analysis in determining whether the enterprises variable interest or
interests give it controlling financial interest in a variable interest entity with a more qualitative approach by providing additional guidance regarding considerations for consolidating an entity. This guidance also requires enhanced disclosures
to provide users of financial information with more transparent information about the enterprises involvement in a variable interest entity. This statement, effective for periods beginning after November 15, 2009, did not have a
significant effect on our consolidated financial statements.

NOTE 2. GENERAL

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

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



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

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

In March 2006, Monarch Investment, LLC, formed a subsidiary titled Virginia Asset Group, LLC (VAG). VAG was owned 51% by Monarch
Investment, LLC, and 49% by a minority shareholder. In August 2009, Monarch Investment, LLC, sold its 51% ownership in VAG to the minority shareholder and began providing non-deposit investment services under the name of Monarch Investments.

In May 2007, we expanded banking operations into northeastern North Carolina with the opening of a banking office in the town
of Kitty Hawk, under the name of OBX Bank (OBX). We opened a second office in the town of Nags Head in December 2009. OBX Bank, which operates as our division, is led by a local management team and a local advisory board of directors.

In June 2007, we announced the expansion of our mortgage operations through the acquisition of a team of experienced mortgage bankers,
and our mortgage division began operating as Monarch Mortgage (MM). MM originates and sells conventional, FHA, VA and VHDA residential loans and offers additional mortgage products such as construction-permanent loans for Monarch Banks loan
portfolio. Their primary office is in Virginia Beach with additional offices in Chesapeake, Norfolk, Suffolk, Richmond, Manassas and Fredericksburg, Virginia, Rockville, Waldorf, Crofton, Bowie, Gaithersburg and Greenbelt, Maryland and Kitty Hawk,
Wilmington and Charlotte, North Carolina, and Greenwood, South Carolina.

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

In October 2007, Monarch Investment, LLC, formed a title insurance company, Real Estate Security
Agency, LLC (RESA) along with TitleVentures, LLC. Monarch Investment, LLC, owns 75% of RESA and TitleVentures, LLC, owns 25%. RESA offers residential and commercial title insurance to the clients of Monarch Mortgage and Monarch Bank.

In March 2008, Monarch Investment, LLC, formed Home Mortgage Solutions, Inc., in the Richmond area of Virginia. Monarch Investment, LLC,
owns 51% with BPRP Funding, LLC, a builder/developer, owning 49%. The primary goal of Home Mortgage Solutions, Inc. is to provide mortgages to the clients of BPRP Funding, LLC. In January 2010, we closed our Home Mortgage Solutions, Inc. operations.

In March 2010, Monarch Investment, LLC, formed Regional Home Mortgage, LLC, in Chesapeake, Virginia. Monarch Investment, LLC,
owns 51% with TREG Funding, LLC, owning 49%, to provide residential mortgages to clients of TREG Funding, LLC.

NOTE 3. EARNINGS PER SHARE
(EPS)

Basic earnings per share (EPS) exclude dilution and are 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.



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##### Table of Contents

|                                                                |  |                         |           |   |                         |   |           |      |  |   |           |   |  |   |           |  
|--------------------------------------------------------------- |  | ----------------------- | --------- | - | ----------------------- | - | --------- | ---- |  | - | --------- | - |  | - | --------- | -
|                                                                |  | 3 months ended June 30, |           |   | 6 months ended June 30, |  
|                                                                |  | 2010                    |           |   | 2009                    |   |           | 2010 |  |   | 2009      |  
|Net income (numerator, basic and diluted)                       |  | $                       | 1,552,908 |   |                         | $ | 1,419,592 |      |  | $ | 2,672,725 |   |  | $ | 2,479,863 |  
|Less: non-cumulative perpetual preferred dividend and accretion |  |                         | (390,000  | ) |                         |   | (195,601  | )    |  |   | (780,000  | ) |  |   | (389,041  | )
|                                                                |  |                         |           |   |                         |   |           |      |  |   |           |   |  |   |           |  
|Net income (numerator, basic and diluted)                       |  |                         | 1,162,908 |   |                         |   | 1,223,991 |      |  |   | 1,892,725 |   |  |   | 2,090,822 |  
|Weighted average shares outstanding (denominator)               |  |                         | 5,704,974 |   |                         |   | 5,663,381 |      |  |   | 5,702,619 |   |  |   | 5,640,461 |  
|                                                                |  |                         |           |   |                         |   |           |      |  |   |           |   |  |   |           |  
|Income per common share - basic                                 |  | $                       | 0.20      |   |                         | $ | 0.22      |      |  | $ | 0.33      |   |  | $ | 0.37      |  
|                                                                |  |                         |           |   |                         |   |           |      |  |   |           |   |  |   |           |  
|Weighted average shares - diluted (denominator)                 |  |                         | 5,795,852 |   |                         |   | 5,734,206 |      |  |   | 5,781,141 |   |  |   | 5,693,308 |  
|                                                                |  |                         |           |   |                         |   |           |      |  |   |           |   |  |   |           |  
|Income per common share - diluted                               |  | $                       | 0.20      |   |                         | $ | 0.21      |      |  | $ | 0.33      |   |  | $ | 0.37      |  
|                                                                |  |                         |           |   |                         |   |           |      |  |   |           |   |  |   |           |  
|                                                                |  |                         |           |  
|Dilutive effect- average number of shares                       |  |                         | 90,878    |   |                         |   | 70,825    |      |  |   | 78,522    |   |  |   | 52,847    |  

For the three and six
months ended June 30, 2010 and 2009, average options to purchase 139,018 and 160,006 shares and 155,056 and 160,006 shares, respectively, were not included in the computation of earnings per common share, because they were anti-dilutive.

NOTE 4. FAIR VALUE ACCOUNTING

Fair Value Hierarchy and Fair Value Measurement

We group our assets and liabilities that are recorded at fair value in three levels, based on the markets in which the assets and
liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:



| |  |  | Level 1  Valuations based on quoted prices in active markets for identical assets or liabilities. Since valuations are based on quoted prices
that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Level 2  Valuations based on quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in
markets that are not active; and model-based valuations for which all significant assumptions are observable or can be corroborated by observable market data.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Level 3  Valuations based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of
the assets or liabilities. Valuations are determined using pricing models and discounted cash flow models and includes management judgment and estimation which may be significant.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



10



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##### Table of Contents

The following table presents our assets and liabilities related to continuing operations,
which are measured at fair value on a recurring basis for each of the fair value hierarchy levels, as of June 30, 2010 and December 31, 2009:



|                                           |  |                                                 |             |                                                              |   |                                            |  |   |             |  |   |          
|------------------------------------------ |  | ----------------------------------------------- | ----------- | ------------------------------------------------------------ | - | ------------------------------------------ |  | - | ----------- |  | - | ---------
|                                           |  | Fair Value Measurements at Reporting Date Using
|                                           |  |                                                 |             | Quoted Prices 
inActive Marketsfor IdenticalAssets (Level
1) |   | SignificantOtherObservableInputs (Level 2) |  |  
|                                           |  |                                                 |             |                                                              |   | SignificantUnobservableInputs (Level 3)   
|                                           |  |                                                 |             |                                                              |  
|                                           |  | Fair Value                                      |             |                                                              |  
|Description                                |  |                                                 |             |                                                              |   |                                            |  |   |             |  |   |          
|Assets at June 30, 2010                    |  |                                                 |             |                                                              |   |                                            |  |   |             |  |   |          
|Investment securities - available for sale |  | $                                               | 8,457,177   |                                                              | $ |                                           |  | $ | 8,457,177   |  | $ |         
|Restricted equity securities               |  |                                                 | 7,296,150   |                                                              |   |                                            |  |   |             |  |   | 7,296,150
|Loans held for sale                        |  |                                                 | 149,527,404 |                                                              |   |                                            |  |   | 149,527,404 |  |   |          
|Rate lock commitments, net                 |  |                                                 | 698,519     |                                                              |   |                                           |  |   |            |  |   | 698,519  
|                                           |  |                                                 |             |                                                              |   |                                            |  |   |             |  |   |          
|Total Assets                               |  | $                                               | 165,979,250 |                                                              | $ |                                           |  | $ | 157,984,581 |  | $ | 7,994,669
|                                           |  |                                                 |             |                                                              |   |                                            |  |   |             |  |   |          
|Derivative financial liability             |  | $                                               | 634,356     |                                                              | $ |                                           |  | $ | 634,356     |  | $ |         
|                                           |  |                                                 |             |                                                              |   |                                            |  |   |             |  |   |          
|                                           |  |                                                 |             |                                                             
|Assets at December 31, 2009                |  |                                                 |             |                                                              |   |                                            |  |   |             |  |   |          
|Investment securities - available for sale |  | $                                               | 7,189,930   |                                                              | $ |                                           |  | $ | 7,189,930   |  | $ |         
|Restricted equity securities               |  |                                                 | 7,019,700   |                                                              |   |                                            |  |   |             |  |   | 7,019,700
|Loans held for sale                        |  |                                                 | 78,997,713  |                                                              |   |                                            |  |   | 78,997,713  |  |   |          
|Rate lock commitments, net                 |  |                                                 | 804,240     |                                                              |   |                                           |  |   |            |  |   | 804,240  
|                                           |  |                                                 |             |                                                              |   |                                            |  |   |             |  |   |          
|Total Assets                               |  | $                                               | 94,011,583  |                                                              | $ |                                           |  | $ | 86,187,643  |  | $ | 7,823,940
|                                           |  |                                                 |             |                                                              |   |                                            |  |   |             |  |   |          
|Derivative financial liability             |  | $                                               | 197,143     |                                                              | $ |                                           |  | $ | 197,143     |  | $ |         
|                                           |  |                                                 |             |                                                              |   |                                            |  |   |             |  |   |          

The changes in restricted equity securities (Level 3
assets) measured at fair value on a recurring basis are summarized below as:



|                               |  |      |           |      |   |          
|------------------------------ |  | ---- | --------- | ---- | - | ---------
|                               |  | 2010 |           | 2009
|Balance, January 1             |  | $    | 7,019,700 |      | $ | 3,575,450
|Issuances and settlements, net |  |      | 276,450   |      |   | 3,444,250
|Income (loss)                  |  |      |          |      |   |         
|                               |  |      |           |      |   |          
|Balance, June 30               |  | $    | 7,296,150 |      | $ | 7,019,700
|                               |  |      |           |      |   |          

The changes in rate lock commitments (Level 3 assets)
measured at fair value on a recurring basis are summarized below as:



|                               |  |      |          |   |      |   |          |  
|------------------------------ |  | ---- | -------- | - | ---- | - | -------- | -
|                               |  | 2010 |          |   | 2009 |  
|Balance, January 1             |  | $    | 804,240  |   |      | $ | 645,484  |  
|Issuances and settlements, net |  |      | (804,240 | ) |      |   | (645,484 | )
|Income (loss)                  |  |      | 698,519  |   |      |   | 864,664  |  
|                               |  |      |          |   |      |   |          |  
|Balance, June 30               |  | $    | 698,519  |   |      | $ | 864,664  |  
|                               |  |      |          |   |      |   |          |  

The following table provides quantitative disclosures about the fair value measurements of our assets
related to continuing operations which are measured at fair value on a nonrecurring basis as of June 30, 2010 and 2009:



|                                |  |                                                 |           |                                                              |   |                                            |  |                                         |   |  |   |          
|------------------------------- |  | ----------------------------------------------- | --------- | ------------------------------------------------------------ | - | ------------------------------------------ |  | --------------------------------------- | - |  | - | ---------
|                                |  | Fair Value Measurements at Reporting Date Using
|                                |  | Fair Value                                      |           | Quoted Prices 
inActive Marketsfor IdenticalAssets (Level
1) |   | SignificantOtherObservableInputs (Level 2) |  | SignificantUnobservableInputs (Level 3)
|                                |  |                                                 |          
|                                |  |                                                 |          
|                                |  |                                                 |          
|Description                     |  |                                                 |           |                                                              |   |                                            |  |                                         |   |  |   |          
|At June 30, 2010                |  |                                                 |           |                                                              |   |                                            |  |                                         |   |  |   |          
|Real estate owned               |  | $                                               | 1,417,086 |                                                              | $ |                                           |  | $                                       |  |  | $ | 1,417,086
|Restructured and impaired loans |  |                                                 | 5,122,021 |                                                              |   |                                           |  |                                         |  |  |   | 5,122,021
|At December 31, 2009            |  |                                                 |           |                                                              |   |                                            |  |                                         |   |  |   |          
|Real estate owned               |  | $                                               | 2,115,700 |                                                              | $ |                                           |  | $                                       |  |  | $ | 2,115,700
|Restructured and impaired loans |  |                                                 | 4,669,494 |                                                              |   |                                           |  |                                         |  |  |   | 4,669,494

For the three and
six months ended June 30, 2010, we recorded a loss on sale of the real estate owned of $52,973 and $101,996, respectively. For the three and six months ended June 30, 2009, we recorded a gain on the sale of real estate owned of $14,319 and
$16,455, respectively. These amounts are itemized in other noninterest income for the periods indicated.



11



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##### Table of Contents

At the time a loan secured by real estate becomes real estate owned we record the property
at the lower of its carrying amount or fair value. Upon foreclosure and through liquidation, we evaluate the propertys fair value as compared to its carrying amount and record a valuation adjustment when the carrying amount exceeds fair value.
Any valuation adjustments at the time a loan becomes real estate owned is charged to the allowance for loan losses. Any subsequent valuation adjustments are applied to earnings in our consolidated statements of income. We recorded a loss of $0 and
$51,955 in the three and six months ended June 30, 2010, respectively, due to valuation adjustments on real estate owned in our consolidated statements of income. These adjustments were recorded within the financial statement caption other
noninterest income for the respective period. We had no losses due to valuation adjustments on real estate owned in our consolidated statements of income in the first six months of 2009.

Fair Value Option for Financial Assets and Financial Liabilities

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

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

Fair Value of Financial Instruments

The following table presents the carrying amounts and fair value of our financial instruments at June 30, 2010 and December 31,
2009. GAAP defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties, other than through a forced or liquidation sale for purposes of this disclosure.
The carrying amounts in the table are included in the balance sheet under the indicated captions.



|                                |  |               |             |                   |   |               |  |           |             |  |   |            
|------------------------------- |  | ------------- | ----------- | ----------------- | - | ------------- |  | --------- | ----------- |  | - | -----------
|                                |  | June 30, 2010 |             | December 31, 2009
|                                |  | CarryingValue |             | FairValue         |   | CarryingValue |  | FairValue
|Financial Assets                |  |               |             |                   |   |               |  |           |             |  |   |            
|Cash and cash equivalents       |  | $             | 39,347,325  |                   | $ | 39,347,325    |  | $         | 34,351,240  |  | $ | 34,351,240 
|Investment securities           |  |               | 8,457,177   |                   |   | 8,457,177     |  |           | 7,189,930   |  |   | 7,189,930  
|Mortgage loans held for sale    |  |               | 149,527,404 |                   |   | 149,527,404   |  |           | 78,997,713  |  |   | 78,997,713 
|Loans held for investment (net) |  |               | 546,221,564 |                   |   | 570,184,998   |  |           | 528,400,175 |  |   | 550,274,264
|Accrued interest receivable     |  |               | 1,943,971   |                   |   | 1,943,971     |  |           | 1,616,408   |  |   | 1,616,408  
|Restricted equity securities    |  |               | 7,296,150   |                   |   | 7,296,150     |  |           | 7,019,700   |  |   | 7,019,700  
|                                |  |               |             |                  
|Financial Liabilities           |  |               |             |                   |   |               |  |           |             |  |   |            
|Deposit liabilities             |  | $             | 643,488,362 |                   | $ | 610,542,937   |  | $         | 540,038,888 |  | $ | 537,475,766
|Total borrowings                |  |               | 70,635,684  |                   |   | 71,085,625    |  |           | 76,158,774  |  |   | 75,538,504 
|Accrued interest payable        |  |               | 111,840     |                   |   | 111,840       |  |           | 135,980     |  |   | 135,980    
|Derivative financial liability  |  |               | 634,356     |                   |   | 634,356       |  |           | 197,143     |  |   | 197,143    

The following notes
summarize the significant assumptions used in estimating the fair value of financial instruments:

Short-term financial
instruments are valued at their carrying amounts included in the Banks balance sheet, which are reasonable estimates of fair value due to the relatively short period to maturity of the instruments. This approach applies to cash and cash
equivalents and overnight borrowings.



12



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Loans are valued on the basis of estimated future receipts of principal and interest,
which are discounted at various rates. Loan prepayments are assumed to occur at the same rate as in previous periods when interest rates were at levels similar to current levels. Future cash flows for homogeneous categories of consumer loans, such
as motor vehicle loans, are estimated on a portfolio basis and discounted at current rates offered for similar loan terms to new borrowers with similar credit profiles.

Investment securities are valued at quoted market prices if available. For unquoted securities, the fair value is estimated by the
Bank on the basis of financial and other information.

Restricted equity securities are estimated based on the basis of
financial and other information.

The fair value of demand deposits and deposits with no defined maturity is taken to
be the amount payable on demand at the reporting date. The fair value of fixed-maturity deposits is estimated using rates currently offered for deposits of similar remaining maturities. The intangible value of long-term relationships with
depositors is not taken into account in estimating the fair values disclosed.

The fair value of short- term borrowingsis based on discounting expected cash flows at the interest rate of debt with the same or similar remaining maturities and collateral requirements.

The carrying amounts of accrued interestapproximate fair value.

The fair value of the derivative financial liability is based on the income approach using observable market inputs, reflecting
market inputs of future interest rates as of the measurement date. Consideration is given to our credit risk as well as the counterpartys credit quality in determining the fair value of the derivative.

It is not practicable to separately estimate the fair values for off-balance-sheet credit commitments, including standby letters of
credit and guarantees written, due to the lack of cost-effective reliable measurement methods for these instruments.

NOTE 5. COMPREHENSIVE
INCOME

Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net
income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are
components of comprehensive income. Components of other comprehensive income are unrealized gains and losses on available-for-sale securities and a derivative financial liability related to an interest rate swap. The following is a detail of
comprehensive income for the three and six months ended June 30, 2010 and 2009:



|                                                                                                  |  |                             |           |   |                           |   |           |      |  |   |           |   |  |   |           |  
|------------------------------------------------------------------------------------------------- |  | --------------------------- | --------- | - | ------------------------- | - | --------- | ---- |  | - | --------- | - |  | - | --------- | -
|                                                                                                  |  | Three months ended June 30, |           |   | Six months ended June 30, |  
|                                                                                                  |  | 2010                        |           |   | 2009                      |   |           | 2010 |  |   | 2009      |  
|Net Income                                                                                        |  | $                           | 1,588,795 |   |                           | $ | 1,471,400 |      |  | $ | 2,721,877 |   |  | $ | 2,625,463 |  
|Change in unrealized gains (losses) on securities available-for-sale, net of tax expense          |  |                             | 43,259    |   |                           |   | 15,590    |      |  |   | 60,258    |   |  |   | 8,962     |  
|Change in unrealized gains on mandatory delivery of loan available- for- sale, net of tax expense |  |                             | 14,562    |   |                           |   |          |      |  |   | 14,562    |   |  |   |          |  
|Change in unrealized losses on a derivative financial liability, net of tax                       |  |                             | (67,408   | ) |                           |   |          |      |  |   | (221,521  | ) |  |   |          |  
|                                                                                                  |  |                             |           |   |                           |   |           |      |  |   |           |   |  |   |           |  
|Total comprehensive income                                                                        |  |                             | 1,579,208 |   |                           |   | 1,486,990 |      |  |   | 2,575,176 |   |  |   | 2,634,425 |  
|Less: Comprehensive income attributable to noncontrolling interests                               |  |                             | (35,887   | ) |                           |   | (51,808   | )    |  |   | (49,152   | ) |  |   | (145,600  | )
|                                                                                                  |  |                             |           |   |                           |   |           |      |  |   |           |   |  |   |           |  
|Comprehensive income attributable to Monarch Financial Holdings, Inc.                             |  | $                           | 1,543,321 |   |                           | $ | 1,435,182 |      |  | $ | 2,526,024 |   |  | $ | 2,488,825 |  
|                                                                                                  |  |                             |           |   |                           |   |           |      |  |   |           |   |  |   |           |  
|                                                                                                  |  |                             |           |  
|Unrealized holding gains securities available for sale                                            |  | $                           | 65,544    |   |                           | $ | 23,621    |      |  | $ | 91,300    |   |  | $ | 13,578    |  
|Income tax expense                                                                                |  |                             | (22,285   | ) |                           |   | (8,031    | )    |  |   | (31,042   | ) |  |   | (4,616    | )
|                                                                                                  |  |                             |           |   |                           |   |           |      |  |   |           |   |  |   |           |  
|Net unrealized gains                                                                              |  | $                           | 43,259    |   |                           | $ | 15,590    |      |  | $ | 60,258    |   |  | $ | 8,962     |  
|                                                                                                  |  |                             |           |   |                           |   |           |      |  |   |           |   |  |   |           |  

NOTE 6. STOCK-BASED COMPENSATION

In May 2006, our stockholders 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 (2006EIP) 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 us to issue up to 630,000 split-adjusted shares of our Common Stock plus the number of shares of our Common Stock outstanding under
the 1999 Plan. The Plan also provides that no award may be granted more than 10 years after the May 2006 ratification date.



13



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

NOTE 7. SEGMENT REPORTING

Reportable segments include community banking and retail mortgage banking services. Community banking involves making loans to and
generating deposits from individuals and businesses in the markets where we have offices. Retail mortgage banking originates residential loans and subsequently sells them to investors. Our 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
non-interest income and non-interest expense, respectively. We do not have other reportable operating segments. (The accounting policies of the segment are the same as those described in the summary of significant accounting policies in Note 1 of
our annual 10-K.) All intersegment sales prices are market based. The assets and liabilities and operating results of our other wholly owned subsidiary, Monarch Capital, LLC, is included in the mortgage banking segment. Monarch Capital, LLC,
provides commercial mortgage brokerage services.

Segment information for the three and six months ended June 30, 2010
and 2009 is shown in the following table.

Selected Financial Information



|                                                           |  |                            |             |   |                           |   |             |                          |  |   |              |   |  |   |             |  
|---------------------------------------------------------- |  | -------------------------- | ----------- | - | ------------------------- | - | ----------- | ------------------------ |  | - | ------------ | - |  | - | ----------- | -
|                                                           |  | Commercialand OtherBanking |             |   | MortgageBankingOperations |   |             | IntersegmentEliminations |  |   | Total        |  
|Three Months Ended June 30, 2010                           |  |                            |             |   |                           |   |             |                          |  |   |              |   |  |   |             |  
|Net interest income after provision for loan losses        |  | $                          | 5,736,664   |   |                           | $ | 737,885     |                          |  | $ | (737,885     | ) |  | $ | 5,736,664   |  
|Noninterest income                                         |  |                            | 1,224,547   |   |                           |   | 11,503,253  |                          |  |   | (1,040,404   | ) |  |   | 11,687,396  |  
|Noninterest expenses                                       |  |                            | (4,555,458  | ) |                           |   | (10,751,728 | )                        |  |   | 221,252      |   |  |   | (15,085,934 | )
|                                                           |  |                            |             |   |                           |   |             |                          |  |   |              |   |  |   |             |  
|Net income before income taxes and noncontrolling interest |  | $                          | 2,405,753   |   |                           | $ | 1,489,410   |                          |  | $ | (1,557,037   | ) |  | $ | 2,338,126   |  
|                                                           |  |                            |             |   |                           |   |             |                          |  |   |              |   |  |   |             |  
|                                                           |  |                            |             |  
|Three Months Ended June 30, 2009                           |  |                            |             |   |                           |   |             |                          |  |   |              |   |  |   |             |  
|Net interest income after provision for loan losses        |  | $                          | 3,863,641   |   |                           | $ | 1,201,479   |                          |  | $ | (1,201,479   | ) |  | $ | 3,863,641   |  
|Noninterest income                                         |  |                            | 2,013,734   |   |                           |   | 8,687,328   |                          |  |   | (614,914     | ) |  |   | 10,086,148  |  
|Noninterest expenses                                       |  |                            | (3,732,913  | ) |                           |   | (7,908,581  | )                        |  |   | (137,395     | ) |  |   | (11,778,889 | )
|                                                           |  |                            |             |   |                           |   |             |                          |  |   |              |   |  |   |             |  
|Net income before income taxes and noncontrolling interest |  | $                          | 2,144,462   |   |                           | $ | 1,980,226   |                          |  | $ | (1,953,788   | ) |  | $ | 2,170,900   |  
|                                                           |  |                            |             |   |                           |   |             |                          |  |   |              |   |  |   |             |  
|                                                           |  |                            |             |  
|Six Months Ended June 30, 2010                             |  |                            |             |   |                           |   |             |                          |  |   |              |   |  |   |             |  
|Net interest income after provision for loan losses        |  | $                          | 10,795,622  |   |                           | $ | 1,196,435   |                          |  | $ | (1,196,435   | ) |  | $ | 10,795,622  |  
|Noninterest income                                         |  |                            | 1,804,214   |   |                           |   | 19,564,481  |                          |  |   | (1,403,719   | ) |  |   | 19,964,976  |  
|Noninterest expenses                                       |  |                            | (8,345,290  | ) |                           |   | (18,692,124 | )                        |  |   | 317,724      |   |  |   | (26,719,690 | )
|                                                           |  |                            |             |   |                           |   |             |                          |  |   |              |   |  |   |             |  
|Net income before income taxes and noncontrolling interest |  | $                          | 4,254,546   |   |                           | $ | 2,068,792   |                          |  | $ | (2,282,430   | ) |  | $ | 4,040,908   |  
|                                                           |  |                            |             |   |                           |   |             |                          |  |   |              |   |  |   |             |  
|                                                           |  |                            |             |  
|Six Months Ended June 30, 2009                             |  |                            |             |   |                           |   |             |                          |  |   |              |   |  |   |             |  
|Net interest income after provision for loan losses        |  | $                          | 7,752,296   |   |                           | $ | 2,078,000   |                          |  | $ | (2,078,000   | ) |  | $ | 7,752,296   |  
|Noninterest income                                         |  |                            | 3,494,282   |   |                           |   | 16,044,787  |                          |  |   | (1,608,399   | ) |  |   | 17,930,670  |  
|Noninterest expenses                                       |  |                            | (7,465,340  | ) |                           |   | (14,618,380 | )                        |  |   | 240,117      |   |  |   | (21,843,603 | )
|                                                           |  |                            |             |   |                           |   |             |                          |  |   |              |   |  |   |             |  
|Net income before income taxes and noncontrolling interest |  | $                          | 3,781,238   |   |                           | $ | 3,504,407   |                          |  | $ | (3,446,282   | ) |  | $ | 3,839,363   |  
|                                                           |  |                            |             |   |                           |   |             |                          |  |   |              |   |  |   |             |  
|                                                           |  |                            |             |  
|Segment Assets                                             |  |                            |             |   |                           |   |             |                          |  |   |              |   |  |   |             |  
|June 30, 2010                                              |  | $                          | 792,017,466 |   |                           | $ | 158,936,806 |                          |  | $ | (160,580,968 | ) |  | $ | 790,373,304 |  
|December 31, 2009                                          |  | $                          | 690,323,668 |   |                           | $ | 86,147,206  |                          |  | $ | (86,901,831  | ) |  | $ | 689,569,043 |  



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NOTE 8. GOODWILL AND INTANGIBLE ASSETS

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

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



|                                             |  |              |           |   |                  |   |           |  
|-------------------------------------------- |  | ------------ | --------- | - | ---------------- | - | --------- | -
|                                             |  | June 30,2010 |           |   | December 31,2009 |  
|Amortizable intangible assets                |  | $            | 1,250,000 |   |                  | $ | 1,250,000 |  
|Accumulated amortization - intangible assets |  |              | (520,831  | ) |                  |   | (431,545  | )
|                                             |  |              |           |   |                  |   |           |  
|Amortizable intangible assets, net           |  | $            | 729,169   |   |                  | $ | 818,455   |  
|                                             |  |              |           |   |                  |   |           |  
|                                             |  |             
|Goodwill                                     |  | $            | 775,000   |   |                  | $ | 775,000   |  
|                                             |  |              |           |   |                  |   |           |  

Amortization expense for intangible assets totaled $44,643 and $89,286 for each of the three and six month
periods, ending June 30, 2010 and 2009.



|                                                    |  |   |        
|--------------------------------------------------- |  | - | -------
|Estimated Amortization Expense:                     |  |   |        
|For the remaining months of the year ended 12/31/10 |  |   | 89,286 
|For the year ended 12/31/11                         |  |   | 178,572
|For the year ended 12/31/12                         |  |   | 178,572
|For the year ended 12/31/13                         |  |   | 178,572
|Thereafter                                          |  |   | 104,167
|                                                    |  |   |        
|                                                    |  | $ | 729,169
|                                                    |  |   |        

NOTE 9. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES

We entered into an interest rate swap agreement with PNC Bank (PNC) of Pittsburgh, PA on July 29, 2009, for our $10
million Trust preferred borrowing, which carries a floating interest rate of 90 day London Interbank Offered Rate (LIBOR) plus 160 basis points. The terms of this hedge allows us to mitigate our exposure to interest-rate fluctuations by swapping our
floating rate obligation for a fixed rate obligation. The notional amount of the swap agreement is $10 million, and has an expiration date of September 30, 2014. Under the terms of our agreement, at the end of each quarter we will swap our
floating rate for a fixed rate of 3.26%. Including the additional 160 basis points, the effective fixed rate of interest cost will be 4.86% on our $10 million Trust Preferred borrowing for five years.

The fixed-rate payment feature of this swap is structured to mirror the provisions of the hedged borrowing agreement. This swap qualifies
as a cash flow hedge and the underlying liability is carried at fair value in other liabilities, with the changes in fair value of the instrument included in Stockholders Equity in accumulated other comprehensive income.

Our credit exposure, if any, on the interest rate swap is limited to the net favorable value (net of any collateral pledged) and interest
payments of the swap by the counterparty. Conversely, when an interest rate swap is in a liability position we are required to post collateral to PNC which is evaluated monthly and adjusted based on the fair value of the hedge on the last day of the
month. The fair value of this swap instrument was a liability of $634 thousand at June 30, 2010 for which our collateral requirement on June 30, 2010, was $650 thousand.

On June 15, 2010, we began participating in a mandatory delivery program for mortgage loans. Prior to that date we
managed our interest rate risk by locking in the interest rate for each mortgage loan with our correspondent investors and borrowers at the same time, which is a best efforts delivery system. Under the mandatory delivery
system, loans with interest rate locks are paired with the purchase of a notional security bearing similar attributes. In interim periods prior to the loans delivery to an investor, a net gain or loss on the pairing of the loans and securities is
recorded, net of tax in other comprehensive income. The loan and the security are matched at the time the loan is delivered to an investor and a gain or loss on the pairing is then



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recorded on our income statement. At June 30, 2010 management has elected to limit our exposure to this form of delivery to $25 million. At June 30, 2010 we had gross loans of
$2,647,960 paired with notional securities of $1,750,000 for an unrealized gain of $21,565.



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##### Table of Contents

ITEM 2.

MONARCH FINANCIAL HOLDINGS, INC.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

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

We generate a significant amount of our income from the net interest income earned by Monarch Bank. Net interest income is the difference
between interest income and interest expense. Interest income depends on the amount of interest-earning assets outstanding during the period and the interest rates thereon. Monarch Banks cost of money is a function of the average amount of
deposits and borrowed money outstanding during the period and the interest rates paid thereon. The quality of the assets further influences the amount of interest income lost on non-accrual loans and the amount of additions to the allowance for loan
losses.

We also generate income from non-interest sources. Non-interest income sources include bank related service charges,
fee income from residential and commercial mortgage sales, fee income from the sale of investment and insurance services, income from bank owned life insurance (BOLI) policies, as well as gains or losses from the sale of investment
securities.

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



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



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



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



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



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



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

A summary of our significant risk factors is set forth in Part1, Item 1A Risk Factors our 2009 Form 10-K.

Net Income

Net income
for the quarter ended June 30, 2010 was $1,553 thousand compared to $1,420 at June 30, 2009, an increase of $133 thousand or 9.4%. Net income for the first half of 2010 was $2,673 thousand, an increase of $193 thousand or 7.8% over $2,480
thousand for the same period in 2009. Basic and diluted earnings per share were $0.20 for the second quarter of 2010 and $0.33 for the first six months of 2010. Basic earnings per share were $0.22 and $0.37 for the second quarter and first six
months of 2009, respectively, while diluted earnings per share were $0.21 and $0.37 for the same periods.

Two important and
commonly used measures of profitability are return on assets (net income as a percentage of average total assets) and return on equity (net income as a percentage of average stockholders equity). Our annualized return on assets
(ROA) was 0.82% compared to 0.85%, for the three months periods ended June 30, 2010 and 2009, respectively, and our ROA for the first half of 2010 was 0.75% compared to 0.76%, one year prior. Our annualized return on equity
(ROE) for the second quarter of 2010 was 9.05% compared to 9.15% in 2009. Our ROE for the first six months of 2010 was 7.88% compared to 8.15% for the same period in 2009. The decline noted in ROA for both periods is attributable, in
part, to growth in nonearning assets and to higher levels of noninterest expense, relative to income. The decline in ROE is attributable to higher levels of noninterest expense relative to income. In addition, provision expense was higher during the
first six months of 2010 compared to 2009. Both trends would result in lower net income relative to average assets and average equity.



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Net interest income increased $1.5 million and $3.3 million in the second quarter and first
six months of 2010, respectively, when compared to the same periods in 2009. Non-interest income increased $1.6 million in the second quarter of 2010 and $2.0 million in the first half of 2010, compared to 2009. Higher loan yield coupled with lower
interest costs associated with our deposits contributed to improvement in our net interest income and higher levels of pricing and production from our mortgage division was the source of the increase in non-interest income.

Our provision for loan losses decreased $333 thousand in the second quarter of 2010 compared to 2009. However, our provision expense
increased $295 thousand for the first six months of 2010 compared to the same period in 2009. Non-interest expense increased $3.3 million for the quarter and $4.9 million for the first six months of 2010 compared to 2009, with the areas of greatest
non-interest expense growth in salaries and benefits and loan origination expense.

Net Interest Income

Net interest income, is a significant source of our revenue, and is the excess of interest income over interest expense. Net interest
income is influenced by a number of factors, including the volume of interest-earning assets and interest bearing liabilities, the mix of interest-earning assets and interest bearing liabilities, the interest rates earned on earning assets, and the
interest rates paid to obtain funding to support the assets.

Net interest income increased $1.5 million and $3.3 million in
the second quarter and first half of 2010 due to re-pricing opportunities of both assets and liabilities in a low, but stable, rate environment. Interest rates have remained at a record low for an extended period, which has allowed us to realign our
longer term liability costs with that of our assets. The federal funds rate that is set by the Federal Reserve Banks Federal Open Market Committee has been 0.25% since December 2008. For comparable periods, the Wall Street Journal Prime Rate
(WSJ), which generally moves with the federal funds rate, was 3.25%. A stable, though low, rate environment has allowed us to renegotiate the pricing of our interest bearing liabilities and assets to terms which should be more favorable
to us in the future when rates begin to rise.

Over the past two years, we have taken steps to buffer our sensitivity to
changes in rate. Historically, we have been an asset sensitive company, with the majority of our loan portfolio indexed to the Wall Street Journal Prime Rate and set to re-price quickly. This asset sensitivity meant our net interest income was
negatively impacted when rates declined because repricing of our liabilities lagged behind that of our assets. The steps we have taken to neutralize this sensitivity include renegotiating the majority of our commercial and mortgage loans to either
short term fixed rates loans or to variable rate loans which include rate floors, limiting how low a rate can go, no matter how a loan is indexed. In addition, we have re-priced deposits as they matured, replacing them to lower market
rate products.

Interest and fees on loans are the largest component of our interest income. At June 30, 2010, 98% or
$420 million of our commercial and mortgage portfolio was either a fixed rate or variable rate loan with a floor, compared to 92% or $350 million at June 30, 2009. The yield on our loan portfolio was 5.74% in the second quarter and 5.73%,
year-to-date; a 19 and 30, basis point increase, respectively, through June 30, 2010 compared to 5.55% and 5.43% for the same periods in 2009. These changes coupled with loan growth have increased interest and fees on loans $1.1 million,
quarter over quarter, and $2.1 million mid-year to mid-year.

Concurrent with changes to our loan portfolio, we have replaced
or re-priced, higher cost, liabilities with lower cost liabilities. At June 2010, the blended cost on deposits has declined 65 basis points for the quarter and 77 basis points in the first six months when compared to 2009. The cost of our time
deposits decreased 88 basis points for the quarter and 109 basis points, year-to-date, despite a $6.5 million increase in our time deposits outstanding. Total interest expense declined $445 thousand in the second quarter and $1.3 million in the
first six months of 2010 when compared to 2009.

For analytical purposes, net interest income is adjusted to a taxable
equivalent basis to recognize the income tax savings on tax-exempt assets, such as bank owned life insurance (BOLI) and state and municipal securities. A tax rate of 34% was used in adjusting interest on BOLI, tax-exempt securities and
loans to a fully taxable equivalent basis. The difference between rates earned on interest-earning assets (with an adjustment made to tax-exempt income to provide comparability with taxable income, i.e. the FTE adjustment) and the cost
of the supporting funds is measured by net interest margin.



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Our net interest rate spread on a tax-equivalent basis increased 55 and 79 basis points,
respectively, to 3.87% and 3.85% for second quarter and first six months of 2010, respectively, when compared to 3.32% and 3.06% for the same periods in 2009. Yield on earning assets decreased 1 basis point to 5.42% from 5.43%, quarter over quarter,
but increased 12 basis points to 5.46% from 5.34% for the first half of 2010 compared to 2009. The cost of interest bearing liabilities decreased 57 and 67 basis points, respectively, in the second quarter and year-to-date 2010 compared to 2009.

Bank Owned Life Insurance (BOLI) has been included in interest earning assets. We purchased $6,000,000 in BOLI during the
fourth quarter of 2005. The income on BOLI is not subject to Federal Income tax, giving it a tax-effective yield of 6.10% for the second quarter and first half of 2010 compared to 5.68% for the same periods in 2009.

In July, 2006, we added additional capital through the issuance of $10,000,000 in trust preferred securities. These securities are
treated as subordinated debt and have been included in other borrowings. The cost on trust preferred securities increased to an average of 4.86% from 2.55% in the first six months of 2010 compared to 2009.

The following tables set 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.



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NET INTEREST INCOME ANALYSIS

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



|                                              |  |                                         |             |   |                |   |              |  |      |                    |  |   |                    |   |              |   |           |  |      |  
|--------------------------------------------- |  | --------------------------------------- | ----------- | - | -------------- | - | ------------ |  | ---- | ------------------ |  | - | ------------------ | - | ------------ | - | --------- |  | ---- | -
|                                              |  | For Three Months Periods Ended June 30, |            
|                                              |  | 2010                                    |             |   | 2009           |  
|                                              |  | AverageBalance                          |             |   | Income/Expense |   | YieldRate(1) |  |      | AverageBalance (5) |  |   | Income/Expense (5) |   | YieldRate(1) |  
|ASSETS                                        |  |                                         |             |   |                |   |              |  |      |                    |  |   |                    |   |              |   |           |  |      |  
|Securities, at amortized cost                 |  | $                                       | 8,542,932   |   |                | $ | 49,029       |  | 2.30 | %                  |  | $ | 6,272,638          |   |              | $ | 63,410    |  | 4.05 | %
|Loans, net                                    |  |                                         | 658,154,957 |   |                |   | 9,416,922    |  | 5.74 | %                  |  |   | 601,928,848        |   |              |   | 8,326,877 |  | 5.55 | %
|Federal funds sold                            |  |                                         | 26,400,329  |   |                |   | 15,906       |  | 0.24 | %                  |  |   | 3,904,195          |   |              |   | 2,365     |  | 0.24 | %
|Dividend-earning restricted equity securities |  |                                         | 7,152,662   |   |                |   | 29,087       |  | 1.63 | %                  |  |   | 6,540,079          |   |              |   | 23,323    |  | 1.43 | %
|Deposits in other banks                       |  |                                         | 4,445,237   |   |                |   | 1,513        |  | 0.14 | %                  |  |   | 2,854,465          |   |              |   | 772       |  | 0.11 | %
|Bank owned life insurance (2)                 |  |                                         | 7,146,637   |   |                |   | 108,774      |  | 6.10 | %                  |  |   | 6,880,936          |   |              |   | 97,396    |  | 5.68 | %
|                                              |  |                                         |             |   |                |   |              |  |      |                    |  |   |                    |   |              |   |           |  |      |  
|Total earning assets                          |  |                                         | 711,842,754 |   |                |   | 9,621,231    |  | 5.42 | %                  |  |   | 628,381,161        |   |              |   | 8,514,143 |  | 5.43 | %
|                                              |  |                                         |             |   |                |   |              |  |      |                    |  |   |                    |   |              |   |           |  |      |  
|Less: Allowance for loan losses               |  |                                         | (7,840,207  | ) |                |   |              |  |      |                    |  |   | (8,330,003         | ) |              |   |           |  |      |  
|Nonperforming loans                           |  |                                         | 4,420,305   |   |                |   |              |  |      |                    |  |   | 7,152,143          |   |              |   |           |  |      |  
|Total nonearning assets                       |  |                                         | 47,503,822  |   |                |   |              |  |      |                    |  |   | 32,752,636         |   |              |   |           |  |      |  
|                                              |  |                                         |             |   |                |   |              |  |      |                    |  |   |                    |   |              |   |           |  |      |  
|Total assets                                  |  | $                                       | 755,926,674 |   |                |   |              |  |      |                    |  | $ | 659,955,937        |   |              |   |           |  |      |  
|                                              |  |                                         |             |   |                |   |              |  |      |                    |  |   |                    |   |              |   |           |  |      |  
|LIABILITIES and STOCKHOLDERS EQUITY          |  |                                         |             |   |                |   |              |  |      |                    |  |   |                    |   |              |   |           |  |      |  
|Interest-bearing deposits:                    |  |                                         |             |   |                |   |              |  |      |                    |  |   |                    |   |              |   |           |  |      |  
|Checking                                      |  | $                                       | 20,849,406  |   |                | $ | 17,255       |  | 0.33 | %                  |  | $ | 17,421,099         |   |              | $ | 18,153    |  | 0.42 | %
|Regular savings                               |  |                                         | 22,937,278  |   |                |   | 42,558       |  | 0.74 | %                  |  |   | 31,860,010         |   |              |   | 107,312   |  | 1.35 | %
|Money market savings                          |  |                                         | 189,777,411 |   |                |   | 569,326      |  | 1.20 | %                  |  |   | 112,266,112        |   |              |   | 348,331   |  | 1.24 | %
|Certificates of deposit                       |  |                                         |             |   |                |   |              |  |      |                    |  |   |                    |   |              |   |           |  |      |  
|$100,000 and over                             |  |                                         | 81,279,028  |   |                |   | 317,898      |  | 1.57 | %                  |  |   | 96,939,468         |   |              |   | 427,043   |  | 1.77 | %
|Under $100,000                                |  |                                         | 199,136,029 |   |                |   | 956,545      |  | 1.93 | %                  |  |   | 178,007,302        |   |              |   | 1,423,722 |  | 3.21 | %
|                                              |  |                                         |             |   |                |   |              |  |      |                    |  |   |                    |   |              |   |           |  |      |  
|Total interest-bearing deposits               |  |                                         | 513,979,152 |   |                |   | 1,903,582    |  | 1.49 | %                  |  |   | 436,493,991        |   |              |   | 2,324,561 |  | 2.14 | %
|Borrowings                                    |  |                                         | 74,846,088  |   |                |   | 367,263      |  | 1.97 | %                  |  |   | 77,505,826         |   |              |   | 390,948   |  | 2.02 | %
|                                              |  |                                         |             |   |                |   |              |  |      |                    |  |   |                    |   |              |   |           |  |      |  
|Total interest-bearing liabilities            |  |                                         | 588,825,240 |   |                | $ | 2,270,845    |  | 1.55 | %                  |  |   | 513,999,817        |   |              | $ | 2,715,509 |  | 2.12 | %
|Noninterest-bearing liabilities               |  |                                         |             |   |                |   |              |  |      |                    |  |   |                    |   |              |   |           |  |      |  
|Demand deposits                               |  |                                         | 85,419,379  |   |                |   |              |  |      |                    |  |   | 71,766,671         |   |              |   |           |  |      |  
|Other noninterest-bearing liabilities         |  |                                         | 12,858,435  |   |                |   |              |  |      |                    |  |   | 12,747,041         |   |              |   |           |  |      |  
|                                              |  |                                         |             |   |                |   |              |  |      |                    |  |   |                    |   |              |   |           |  |      |  
|Total liabilities                             |  |                                         | 687,103,054 |   |                |   |              |  |      |                    |  |   | 598,513,529        |   |              |   |           |  |      |  
|Stockholders equity                          |  |                                         | 68,823,620  |   |                |   |              |  |      |                    |  |   | 61,442,408         |   |              |   |           |  |      |  
|                                              |  |                                         |             |   |                |   |              |  |      |                    |  |   |                    |   |              |   |           |  |      |  
|Total liabilities and stockholders equity    |  | $                                       | 755,926,674 |   |                |   |              |  |      |                    |  | $ | 659,955,937        |   |              |   |           |  |      |  
|                                              |  |                                         |             |   |                |   |              |  |      |                    |  |   |                    |   |              |   |           |  |      |  
|Net interest income (2)                       |  |                                         |             |   |                | $ | 7,350,386    |  |      |                    |  |   |                    |   |              | $ | 5,798,634 |  |      |  
|                                              |  |                                         |             |   |                |   |              |  |      |                    |  |   |                    |   |              |   |           |  |      |  
|Interest rate spread (2)(3)                   |  |                                         |             |   |                |   |              |  | 3.87 | %                  |  |   |                    |   |              |   |           |  | 3.32 | %
|                                              |  |                                         |             |   |                |   |              |  |      |                    |  |   |                    |   |              |   |           |  |      |  
|Net interest margin (2)(4)                    |  |                                         |             |   |                |   |              |  | 4.14 | %                  |  |   |                    |   |              |   |           |  | 3.70 | %
|                                              |  |                                         |             |   |                |   |              |  |      |                    |  |   |                    |   |              |   |           |  |      |  



|(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 $36,984 adjustment for 2010 and a $33,114 adjustment for 2009.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(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.
|--- | ------------------------------------------------------------------------------------------------

|(5) | Loans, net for June 30, 2009 have been restated to exclude average nonperforming loans of $7,152,143 and average unearned fees of $251,515 from earning assets to
be consistent with the presentation for June 30, 2010.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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NET INTEREST INCOME ANALYSIS

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



|                                              |  |                                       |             |   |                |   |              |  |      |                    |  |   |                    |   |              |   |            |  |      |  
|--------------------------------------------- |  | ------------------------------------- | ----------- | - | -------------- | - | ------------ |  | ---- | ------------------ |  | - | ------------------ | - | ------------ | - | ---------- |  | ---- | -
|                                              |  | For Six Months Periods Ended June 30, |            
|                                              |  | 2010                                  |             |   | 2009           |  
|                                              |  | AverageBalance                        |             |   | Income/Expense |   | YieldRate(1) |  |      | AverageBalance (5) |  |   | Income/Expense (5) |   | YieldRate(1) |  
|ASSETS                                        |  |                                       |             |   |                |   |              |  |      |                    |  |   |                    |   |              |   |            |  |      |  
|Securities, at amortized cost                 |  | $                                     | 8,291,838   |   |                | $ | 103,575      |  | 2.52 | %                  |  | $ | 6,299,640          |   |              | $ | 127,745    |  | 4.09 | %
|Loans, net                                    |  |                                       | 628,984,993 |   |                |   | 17,887,849   |  | 5.73 | %                  |  |   | 587,060,889        |   |              |   | 15,812,324 |  | 5.43 | %
|Federal funds sold                            |  |                                       | 19,787,633  |   |                |   | 24,283       |  | 0.25 | %                  |  |   | 2,642,070          |   |              |   | 3,259      |  | 0.25 | %
|Dividend-earning restricted equity securities |  |                                       | 7,086,549   |   |                |   | 47,252       |  | 1.34 | %                  |  |   | 5,656,204          |   |              |   | 38,848     |  | 1.39 | %
|Deposits in other banks                       |  |                                       | 3,586,997   |   |                |   | 1,889        |  | 0.11 | %                  |  |   | 2,387,280          |   |              |   | 1,408      |  | 0.12 | %
|Bank owned life insurance (2)                 |  |                                       | 7,112,571   |   |                |   | 215,258      |  | 6.10 | %                  |  |   | 6,847,368          |   |              |   | 192,813    |  | 5.68 | %
|                                              |  |                                       |             |   |                |   |              |  |      |                    |  |   |                    |   |              |   |            |  |      |  
|Total earning assets                          |  |                                       | 674,850,581 |   |                |   | 18,280,106   |  | 5.46 | %                  |  |   | 610,893,451        |   |              |   | 16,176,397 |  | 5.34 | %
|                                              |  |                                       |             |   |                |   |              |  |      |                    |  |   |                    |   |              |   |            |  |      |  
|Less: Allowance for loan losses               |  |                                       | (8,624,777  | ) |                |   |              |  |      |                    |  |   | (8,269,329         | ) |              |   |            |  |      |  
|Nonperforming loans                           |  |                                       | 6,688,786   |   |                |   |              |  |      |                    |  |   | 7,410,437          |   |              |   |            |  |      |  
|Total nonearning assets                       |  |                                       | 43,816,895  |   |                |   |              |  |      |                    |  |   | 34,069,812         |   |              |   |            |  |      |  
|                                              |  |                                       |             |   |                |   |              |  |      |                    |  |   |                    |   |              |   |            |  |      |  
|Total assets                                  |  | $                                     | 716,731,485 |   |                |   |              |  |      |                    |  | $ | 644,104,371        |   |              |   |            |  |      |  
|                                              |  |                                       |             |   |                |   |              |  |      |                    |  |   |                    |   |              |   |            |  |      |  
|LIABILITIES and STOCKHOLDERS EQUITY          |  |                                       |             |   |                |   |              |  |      |                    |  |   |                    |   |              |   |            |  |      |  
|Interest-bearing deposits:                    |  |                                       |             |   |                |   |              |  |      |                    |  |   |                    |   |              |   |            |  |      |  
|Checking                                      |  | $                                     | 19,932,964  |   |                | $ | 34,870       |  | 0.35 | %                  |  | $ | 16,169,369         |   |              | $ | 31,981     |  | 0.40 | %
|Regular savings                               |  |                                       | 22,996,570  |   |                |   | 88,540       |  | 0.78 | %                  |  |   | 30,604,921         |   |              |   | 215,361    |  | 1.42 | %
|Money market savings                          |  |                                       | 174,768,580 |   |                |   | 1,056,822    |  | 1.22 | %                  |  |   | 118,699,228        |   |              |   | 738,700    |  | 1.25 | %
|Certificates of deposit                       |  |                                       |             |   |                |   |              |  |      |                    |  |   |                    |   |              |   |            |  |      |  
|$100,000 and over                             |  |                                       | 81,888,348  |   |                |   | 693,028      |  | 1.71 | %                  |  |   | 97,030,522         |   |              |   | 1,086,890  |  | 2.26 | %
|Under $100,000                                |  |                                       | 193,129,494 |   |                |   | 1,891,687    |  | 1.98 | %                  |  |   | 171,590,694        |   |              |   | 2,892,039  |  | 3.40 | %
|                                              |  |                                       |             |   |                |   |              |  |      |                    |  |   |                    |   |              |   |            |  |      |  
|Total interest-bearing deposits               |  |                                       | 492,715,956 |   |                |   | 3,764,947    |  | 1.54 | %                  |  |   | 434,094,734        |   |              |   | 4,964,971  |  | 2.31 | %
|Borrowings                                    |  |                                       | 63,223,108  |   |                |   | 671,461      |  | 2.14 | %                  |  |   | 69,567,776         |   |              |   | 728,169    |  | 2.11 | %
|                                              |  |                                       |             |   |                |   |              |  |      |                    |  |   |                    |   |              |   |            |  |      |  
|Total interest-bearing liabilities            |  |                                       | 555,939,064 |   |                | $ | 4,436,408    |  | 1.61 | %                  |  |   | 503,662,510        |   |              | $ | 5,693,140  |  | 2.28 | %
|Noninterest-bearing liabilities               |  |                                       |             |   |                |   |              |  |      |                    |  |   |                    |   |              |   |            |  |      |  
|Demand deposits                               |  |                                       | 82,817,224  |   |                |   |              |  |      |                    |  |   | 68,856,298         |   |              |   |            |  |      |  
|Other noninterest-bearing liabilities         |  |                                       | 9,572,176   |   |                |   |              |  |      |                    |  |   | 10,183,738         |   |              |   |            |  |      |  
|                                              |  |                                       |             |   |                |   |              |  |      |                    |  |   |                    |   |              |   |            |  |      |  
|Total liabilities                             |  |                                       | 648,328,464 |   |                |   |              |  |      |                    |  |   | 582,702,546        |   |              |   |            |  |      |  
|Stockholders equity                          |  |                                       | 68,403,021  |   |                |   |              |  |      |                    |  |   | 61,401,825         |   |              |   |            |  |      |  
|                                              |  |                                       |             |   |                |   |              |  |      |                    |  |   |                    |   |              |   |            |  |      |  
|Total liabilities and stockholders equity    |  | $                                     | 716,731,485 |   |                |   |              |  |      |                    |  | $ | 644,104,371        |   |              |   |            |  |      |  
|                                              |  |                                       |             |   |                |   |              |  |      |                    |  |   |                    |   |              |   |            |  |      |  
|Net interest income (2)                       |  |                                       |             |   |                | $ | 13,843,698   |  |      |                    |  |   |                    |   |              | $ | 10,483,257 |  |      |  
|                                              |  |                                       |             |   |                |   |              |  |      |                    |  |   |                    |   |              |   |            |  |      |  
|Interest rate spread (2)(3)                   |  |                                       |             |   |                |   |              |  | 3.85 | %                  |  |   |                    |   |              |   |            |  | 3.06 | %
|                                              |  |                                       |             |   |                |   |              |  |      |                    |  |   |                    |   |              |   |            |  |      |  
|Net interest margin (2)(4)                    |  |                                       |             |   |                |   |              |  | 4.14 | %                  |  |   |                    |   |              |   |            |  | 3.46 | %
|                                              |  |                                       |             |   |                |   |              |  |      |                    |  |   |                    |   |              |   |            |  |      |  



|(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 $73,188 adjustment for 2010 and a $65,556 adjustment for 2009.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(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.
|--- | ------------------------------------------------------------------------------------------------

|(5) | Loans, net for June 30, 2009 have been restated to exclude average nonperforming loans of $7,410,437 and average unearned fees of $244,787 from earning assets to
be consistent with the presentation for June 30, 2010.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Rate/Volume Analysis

The goal of a rate/volume analysis is to compare two or more periods to determine whether the difference between those periods is the
result of changes in rate, or volume, or some combination of the two. This is achieved through a what if analysis. We calculate what the potential income would have been in the new period if the prior period rate had remained unchanged,
and compare that result to what the income would have been in the prior period if the current rates were in effect. Through the analysis of these income potentials, we are able to determine how much of the change between periods is the impact of
differing rates and how much is volume driven.

For discussion purposes, our Rate/Volume Analysis and
Average Balances, Income and Expenses, Yields and Rates tables include tax equivalent income on bank owned life insurance (BOLI) that is not in compliance with Generally Accepted Accounting Principals (GAAP). The following table is a
reconciliation of our income statement presentation to these tables.



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RECONCILIATION OF NET INTEREST INCOME

TO TAX EQUIVALENT INTEREST INCOME

Non-GAAP



|                                         |  |                         |           |                         |   |           |  |      |            |  |   |           
|---------------------------------------- |  | ----------------------- | --------- | ----------------------- | - | --------- |  | ---- | ---------- |  | - | ----------
|                                         |  | 3 Months Ended June 30, |           | 6 Months Ended June 30,
|                                         |  | 2010                    |           | 2009                    |   | 2010      |  | 2009
|Interest income:                         |  |                         |           |                         |   |           |  |      |            |  |   |           
|Total interest income                    |  | $                       | 9,512,457 |                         | $ | 8,416,747 |  | $    | 18,064,848 |  | $ | 15,983,584
|Bank owned life insurance                |  |                         | 71,790    |                         |   | 64,282    |  |      | 142,070    |  |   | 127,257   
|Tax equivalent adjustment (34% tax rate) |  |                         | 36,984    |                         |   | 33,114    |  |      | 73,188     |  |   | 65,556    
|                                         |  |                         |           |                         |   |           |  |      |            |  |   |           
|Adjusted income on earning assets        |  |                         | 9,621,231 |                         |   | 8,514,143 |  |      | 18,280,106 |  |   | 16,176,397
|                                         |  |                         |           |                         |   |           |  |      |            |  |   |           
|Interest expense:                        |  |                         |           |                         |   |           |  |      |            |  |   |           
|Total interest expense                   |  |                         | 2,270,845 |                         |   | 2,715,509 |  |      | 4,436,408  |  |   | 5,693,140 
|                                         |  |                         |           |                         |   |           |  |      |            |  |   |           
|Net interest income - adjusted           |  | $                       | 7,350,386 |                         | $ | 5,798,634 |  | $    | 13,843,698 |  | $ | 10,483,257
|                                         |  |                         |           |                         |   |           |  |      |            |  |   |           

Net interest income  adjusted (NIIA)
increased $1.6 million, quarter over quarter and $3.4 million in a six month comparative. The second quarter increase was due to a relative even combination of rate and growth; $843 thousand due to changes in interest rate and $709 thousand due to
changes in average volume outstanding. Growth in NIIA for the first six months of 2010 compared to 2009 was driven more by rate changes, which contributed $2.2 million to income, than growth, which added $1.1 million to income.

Closer review of the components of NIIA indicates that the benefit to income from earning assets was achieved primarily through growth
while the cost savings achieved on interest bearing liabilities was achieved through changes in rate. Adjusted income on earning assets increased $1.1 million in the second quarter and $2.1 million in the first six months of 2010 compared to 2009.
Asset growth contributed $943 thousand and $1.5 million in the second quarter and first six months, respectively, while higher interest rates contributed an additional $164 thousand and $636 thousand for the same periods. Total interest expense
decreased by $445 thousand, quarter over quarter; and $1.3 million, in the first six months of 2010. Savings due to lower rates of $679 thousand for the quarter and $1.6 million for the first half of 2010 were partially offset by increased cost due
to growth of $234 thousand and $328 thousand for the same periods.

Loans, net of unearned income and loans held for sale grew
a combined $92.2 million, to $704.3 million at June 30, 2010 compared to $612.1 million at June 30, 2009. Income from loans, which is the largest component of earning assets, increased $1.1 million for the quarter and $2.1 million,
year-to-date. Commercial loan growth contributed $1.1 million in the second quarter and the income gains achieved by consumer loans were offset by the income reduction in mortgage loans. The income growth in commercial loans was due to both, higher
volume and higher rates, although volume contributed $844 thousand, compared to $245 thousand due to rate improvement. Year-to-date income growth from commercial loans was driven primarily by volume, with a contribution of $1.4 million and
secondarily by rate, with a contribution of $555 thousand.

Investment securities increased $2.7 million to $8.5 million at
June 30, 2010 compared to $5.8 million at June 30, 2009. During the same period, interest income from securities declined $23 thousand. A significant portion of our Agency securities have been called in the past year as market rates fell
below the rate on these investments. Securities purchased to replace those called have a much lower yield than the original bonds. Lower yields on investment purchases reduced earnings by $31 thousand for the quarter and $54 thousand year-to-date.
These reductions due to rate were only partially offset by income of $16 thousand and $31 thousand for the quarter and first six months, respectively, due to volume increases.

Liquidity in the first half of 2010 was much stronger than the same period in 2009, resulting in a higher sustained level of federal
funds sold. Although period end federal funds at June 30, 2010 were only $10.0 million compared to $7.5 million, one year prior, average federal funds sold outstanding were $19.8 million through June 30, 2010, compared to $2.6 million
through June 30, 2009. The result was an increase in income of $14 thousand in the quarter and $21 thousand in the first six months, despite historically low federal funds rates.

Interest bearing deposits at period end June 30, 2010 were $539.0 million, an increase of $96.4 million compared to $442.6 million
in 2009. On average, interest bearing deposits increased $58.6 million to $492.7 million through June 30, 2010, compared to $434.1 million through June 30, 2009, while the average cost of those deposits has dropped from 2.31% to 1.54%.



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Interest cost on time deposits (CDs) declined $577 thousand in the second
quarter and $1.4 million in the first six months of 2010 compared to 2009. Interest cost savings in both periods was due to lower interest rates. Management has maintained a sustained focus on growth in our local market through competitive retail CD
pricing.

Savings interest cost declined $64 thousand and $126 thousand during the second quarter and first half of 2010 due
to a combination of declining rates and balances. Period end balances declined $6.6 million in the six months of 2010 compared to 2009 while average outstanding balances declined $7.6 million. This balance decline is attributable to our
tiered premium savings product. A tiered product offers interest rates based on specific pre-established threshold balances, so that clients maintaining higher balances are paid higher interest. The offering rates for the upper tiers of
this product have been reduced year over year, resulting in possible migration to money market and CD accounts.

Year-over-year period end growth in money market accounts is $106.1 million while average outstanding balances have increased $56.1
million. This significant increase in volume has added to interest expense in both the quarter and year-to-date, despite lower offering rates. Our prime money market product is a highly competitive tiered product which rewards higher balance
maintenance with higher interest payments. The net increase in interest expense due to money market accounts was $221 thousand in the quarter and $318 thousand in the first six months of 2010.

Our borrowing costs declined $24 thousand and $58 thousand in the three and six months ended June 30, 2010 due to lower average
outstanding balances.

The following table sets forth an analysis of the impact of changes in rate and volume on our interest
bearing assets and liabilities for the second quarter and first half of 2010 compared to 2009.

Changes in Net Interest Income (Rate/Volume
Analysis)

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



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|                          |  |                                                 |       |   |                                               |   |      |                  |  |   |                       |   |  |      |        |   |        |   |        |   |  |   |       |  
|------------------------- |  | ----------------------------------------------- | ----- | - | --------------------------------------------- | - | ---- | ---------------- |  | - | --------------------- | - |  | ---- | ------ | - | ------ | - | ------ | - |  | - | ----- | -
|                          |  | RATE / VOLUME ANALYSIS                          |      
|                          |  | (in thousands)                                  |      
|                          |  | For the Three Months Ended June 30,2010 vs 2009 |       |   | For the Six Months Ended June 30,2010 vs 2009 |  
|                          |  | InterestIncrease                                |       |   | ChangeAttributable to                         |   |      | InterestIncrease |  |   | ChangeAttributable to |  
|                          |  | (Decrease)                                      |       |   | Rate                                          |   |      | Volume           |  |   | (Decrease)            |   |  | Rate |        |   | Volume |  
|Interest income           |  |                                                 |       |   |                                               |   |      |                  |  |   |                       |   |  |      |        |   |        |   |        |   |  |   |       |  
|Loans:                    |  |                                                 |       |   |                                               |   |      |                  |  |   |                       |   |  |      |        |   |        |   |        |   |  |   |       |  
|Commercial                |  | $                                               | 1,089 |   |                                               | $ | 245  |                  |  | $ | 844                   |   |  | $    | 1,924  |   |        | $ | 555    |   |  | $ | 1,369 |  
|Mortgage                  |  |                                                 | (27   | ) |                                               |   | (77  | )                |  |   | 50                    |   |  |      | 367    |   |        |   | 180    |   |  |   | 187   |  
|Consumer                  |  |                                                 | 28    |   |                                               |   | 19   |                  |  |   | 9                     |   |  |      | (215   | ) |        |   | (54    | ) |  |   | (161  | )
|                          |  |                                                 |       |   |                                               |   |      |                  |  |   |                       |   |  |      |        |   |        |   |        |   |  |   |       |  
|Total loans               |  |                                                 | 1,090 |   |                                               |   | 187  |                  |  |   | 903                   |   |  |      | 2,076  |   |        |   | 681    |   |  |   | 1,395 |  
|                          |  |                                                 |       |   |                                               |   |      |                  |  |   |                       |   |  |      |        |   |        |   |        |   |  |   |       |  
|Securities:               |  |                                                 |       |   |                                               |   |      |                  |  |   |                       |   |  |      |        |   |        |   |        |   |  |   |       |  
|Federal agencies          |  |                                                 | (12   | ) |                                               |   | (30  | )                |  |   | 18                    |   |  |      | (18    | ) |        |   | (51    | ) |  |   | 33    |  
|Mortgage-backed           |  |                                                 | (3    | ) |                                               |   | (1   | )                |  |   | (2                    | ) |  |      | (6     | ) |        |   | (3     | ) |  |   | (3    | )
|Other securities          |  |                                                 |      |   |                                               |   |     |                  |  |   |                      |   |  |      | 1      |   |        |   |       |   |  |   | 1     |  
|                          |  |                                                 |       |   |                                               |   |      |                  |  |   |                       |   |  |      |        |   |        |   |        |   |  |   |       |  
|Total securities          |  |                                                 | (15   | ) |                                               |   | (31  | )                |  |   | 16                    |   |  |      | (23    | ) |        |   | (54    | ) |  |   | 31    |  
|                          |  |                                                 |       |   |                                               |   |      |                  |  |   |                       |   |  |      |        |   |        |   |        |   |  |   |       |  
|Deposits in other banks   |  |                                                 | 6     |   |                                               |   |     |                  |  |   | 6                     |   |  |      | 7      |   |        |   | (6     | ) |  |   | 13    |  
|Federal funds sold        |  |                                                 | 14    |   |                                               |   |     |                  |  |   | 14                    |   |  |      | 21     |   |        |   |       |   |  |   | 21    |  
|Bank owned life insurance |  |                                                 | 12    |   |                                               |   | 8    |                  |  |   | 4                     |   |  |      | 23     |   |        |   | 15     |   |  |   | 8     |  
|                          |  |                                                 |       |   |                                               |   |      |                  |  |   |                       |   |  |      |        |   |        |   |        |   |  |   |       |  
|Total interest income     |  | $                                               | 1,107 |   |                                               | $ | 164  |                  |  | $ | 943                   |   |  | $    | 2,104  |   |        | $ | 636    |   |  | $ | 1,468 |  
|                          |  |                                                 |       |   |                                               |   |      |                  |  |   |                       |   |  |      |        |   |        |   |        |   |  |   |       |  
|Interest expense          |  |                                                 |       |   |                                               |   |      |                  |  |   |                       |   |  |      |        |   |        |   |        |   |  |   |       |  
|Deposits:                 |  |                                                 |       |   |                                               |   |      |                  |  |   |                       |   |  |      |        |   |        |   |        |   |  |   |       |  
|Demand                    |  | $                                               | (1    | ) |                                               |   | (4   | )                |  |   | 3                     |   |  | $    | 3      |   |        |   | (4     | ) |  |   | 7     |  
|Money market              |  |                                                 | 221   |   |                                               |   | (12  | )                |  |   | 233                   |   |  |      | 318    |   |        |   | (22    | ) |  |   | 340   |  
|Savings                   |  |                                                 | (64   | ) |                                               |   | (39  | )                |  |   | (25                   | ) |  |      | (126   | ) |        |   | (81    | ) |  |   | (45   | )
|Time                      |  |                                                 | (577  | ) |                                               |   | (613 | )                |  |   | 36                    |   |  |      | (1,394 | ) |        |   | (1,487 | ) |  |   | 93    |  
|                          |  |                                                 |       |   |                                               |   |      |                  |  |   |                       |   |  |      |        |   |        |   |        |   |  |   |       |  
|Total deposits            |  |                                                 | (421  | ) |                                               |   | (668 | )                |  |   | 247                   |   |  |      | (1,199 | ) |        |   | (1,594 | ) |  |   | 395   |  
|Federal funds purchased   |  |                                                 |      |   |                                               |   |     |                  |  |   |                      |   |  |      |       |   |        |   |       |   |  |   |      |  
|Other borrowings          |  |                                                 | (24   | ) |                                               |   | (11  | )                |  |   | (13                   | ) |  |      | (58    | ) |        |   | 9      |   |  |   | (67   | )
|                          |  |                                                 |       |   |                                               |   |      |                  |  |   |                       |   |  |      |        |   |        |   |        |   |  |   |       |  
|Total interest expense    |  |                                                 | (445  | ) |                                               |   | (679 | )                |  |   | 234                   |   |  |      | (1,257 | ) |        |   | (1,585 | ) |  |   | 328   |  
|                          |  |                                                 |       |   |                                               |   |      |                  |  |   |                       |   |  |      |        |   |        |   |        |   |  |   |       |  
|Net interest income       |  | $                                               | 1,552 |   |                                               | $ | 843  |                  |  | $ | 709                   |   |  | $    | 3,361  |   |        | $ | 2,221  |   |  | $ | 1,140 |  
|                          |  |                                                 |       |   |                                               |   |      |                  |  |   |                       |   |  |      |        |   |        |   |        |   |  |   |       |  

Non-Interest Income

Non-interest income was $11.7 million for the second quarter of 2010, an increase of $1.6 million or 15.9% over the $10.1 million in
non-interest income for the same period in 2009. Year-to-date 2010 non-interest income was $20.0 million, compared to $17.9 million, one year prior. Mortgage banking income continues to be the driver in non-interest income growth. Non-interest
income is broken out into more detail in the following table:

NON-INTEREST INCOME



|                                              |  |                                    |            |                                  |      |   |            |  |   |            |   |  |   |           
|--------------------------------------------- |  | ---------------------------------- | ---------- | -------------------------------- | ---- | - | ---------- |  | - | ---------- | - |  | - | ----------
|                                              |  | For the Three Months EndedJune 30, |            | For the Six Months EndedJune 30,
|                                              |  | 2010                               |            |                                  | 2009 |   | 2010       |  |   | 2009      
|Mortgage banking income                       |  | $                                  | 11,024,864 |                                  |      | $ | 8,824,954  |  | $ | 18,700,016 |   |  | $ | 15,926,075
|Investment and insurance commissions          |  |                                    | 67,585     |                                  |      |   | 229,667    |  |   | 141,905    |   |  |   | 513,672   
|Service charges and fees                      |  |                                    | 429,025    |                                  |      |   | 371,358    |  |   | 823,356    |   |  |   | 656,827   
|Gain on sale of assets                        |  |                                    |           |                                  |      |   | 302,269    |  |   |           |   |  |   | 302,269   
|Gain (loss) on sale of other real estate, net |  |                                    | (52,973    | )                                |      |   | 14,319     |  |   | (101,996   | ) |  |   | 16,455    
|Bank owned life insurance income              |  |                                    | 71,790     |                                  |      |   | 64,282     |  |   | 142,070    |   |  |   | 127,257   
|Title company income                          |  |                                    | 137,772    |                                  |      |   | 106,701    |  |   | 229,341    |   |  |   | 205,267   
|Other                                         |  |                                    | 9,333      |                                  |      |   | 172,598    |  |   | 30,284     |   |  |   | 182,848   
|                                              |  |                                    |            |                                  |      |   |            |  |   |            |   |  |   |           
|                                              |  | $                                  | 11,687,396 |                                  |      | $ | 10,086,148 |  | $ | 19,964,976 |   |  | $ | 17,930,670
|                                              |  |                                    |            |                                  |      |   |            |  |   |            |   |  |   |           



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Mortgage banking income represents fees from originating and selling residential mortgage
loans as well as commercial mortgages through Monarch Mortgage and our wholly owned commercial mortgage banking subsidiary, Monarch Capital, LLC. The overwhelming majority of this growth has been in the area of residential mortgages. Gross mortgage
banking income increased in the second quarter and first half of 2010 compared to 2009 due to higher production in both periods. Through June 30, 2010, our residential mortgage operations originated 2,537 loans totaling $977.8 million.
Including in these originations were 1,861 purchase money loans totaling $414.0 million. In the first half of 2009 our residential mortgage operations originated 2,404 loans totaling $638.6 million. Our mortgage team made up for a slow start in the
first quarter of 2010, by originating 1,558 loans totaling $358.0 million in the second quarter. This compares to 1,327 loans totaling $350.5 million in the first quarter of 2009. We believe our gross mortgage banking income will continue to grow at
the same pace until interest rates begin to rise to levels that could discourage residential sales and would likely discourage refinancing by existing homeowners.

Investment and insurance commissions declined $162 thousand, quarter over quarter, and $372 thousand in the first six months of 2010
compared to 2009, as a result of changes we have made in delivery of these products. In August 2009, we closed the joint venture we had through Monarch Investment, LLC, which was a multi-agent operation.

Service charges and fees on deposit accounts increased $58 thousand in the quarter and $166 thousand in the first six months of 2010
compared to the same periods in 2009. The primary components of service charges and fees are nonsufficient fund and overdraft fees, and ATM transaction fees. In April 2009 we modified our deposit service fees. In addition, we have an agreement with
a third-party vendor to brand ATMs in Food Lion grocery stores in southeast Virginia and northeast North Carolina. In return for supplying the cash for the machines and paying the machines cash servicing fees, we receive a portion of the
transaction surcharge, and our customers can withdraw cash from the machines without a fee or transaction surcharge. We have 11 ATMs located at our banking center sites. Combined with our third-party vendor relationship, our network includes over 50
active branded ATMs.

There were no security gains or losses in the first half of 2010 or 2009. In the second quarter of 2009
we sold two parcels of land on Hanbury Road, attached to our Great Bridge office for a gain of $302,269.

We sold four
properties in other real estate in each of the first two quarters of 2010 for a total of eight properties, year-to-date, and recorded losses, net of valuation adjustments of $102 thousand, compared to one property in each quarter in 2009, for a
total of two properties with gains, net of valuation adjustments of $16 thousand.

BOLI is included in the net interest income
calculation for yield analysis. We purchased $6.0 million in BOLI during the fourth quarter of 2005. The income from BOLI, which is not subject to tax, increased $8 thousand quarter-over-quarter, $15 thousand, year-to-date in 2010 compared to 2009.
The tax-effective income earnings are $109 for the second quarter of 2010 compared to $97 for the same period in 2009 and $215 thousand in the first half of 2010 compared to $193 thousand for the same period in 2009.

Through Monarch Investment, LLC, we own a 75% interest in a title company, Real Estate Security Agency, LLC (RESA), which is being
treated as a consolidated entity for accounting purposes. RESA showed an increase of income for the second quarter and first half of 2010 when compared to 2009 of $31 thousand and $24 thousand, respectively.



25



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##### Table of Contents

Non-interest Expense

The following table summarizes our non-interest expense for the periods indicated:

NON-INTEREST EXPENSE



|                                  |  |                                    |            |                                  |   |            |  |      |            |  |   |           
|--------------------------------- |  | ---------------------------------- | ---------- | -------------------------------- | - | ---------- |  | ---- | ---------- |  | - | ----------
|                                  |  | For the Three Months EndedJune 30, |            | For the Six Months EndedJune 30,
|                                  |  | 2010                               |            | 2009                             |   | 2010       |  | 2009
|Salaries and employee benefits    |  | $                                  | 4,319,728  |                                  | $ | 3,567,276  |  | $    | 8,555,279  |  | $ | 7,216,935 
|Commissions and incentives        |  |                                    | 5,999,672  |                                  |   | 4,257,540  |  |      | 9,688,667  |  |   | 7,748,883 
|Loan origination expenses         |  |                                    | 1,475,466  |                                  |   | 894,825    |  |      | 2,476,650  |  |   | 1,506,894 
|Occupancy expenses                |  |                                    | 811,554    |                                  |   | 600,320    |  |      | 1,504,030  |  |   | 1,174,979 
|Furniture and equipment expense   |  |                                    | 401,786    |                                  |   | 312,055    |  |      | 777,734    |  |   | 635,197   
|FDIC Insurance                    |  |                                    | 258,238    |                                  |   | 575,254    |  |      | 507,074    |  |   | 830,755   
|Marketing expense                 |  |                                    | 287,507    |                                  |   | 163,824    |  |      | 499,248    |  |   | 296,100   
|Data processing services          |  |                                    | 222,533    |                                  |   | 205,691    |  |      | 418,069    |  |   | 413,651   
|Professional fees                 |  |                                    | 209,538    |                                  |   | 155,312    |  |      | 341,845    |  |   | 260,829   
|Stationary and supplies           |  |                                    | 172,965    |                                  |   | 117,742    |  |      | 325,840    |  |   | 204,460   
|Telephone                         |  |                                    | 131,720    |                                  |   | 108,253    |  |      | 254,381    |  |   | 206,013   
|Virginia Franchise Tax            |  |                                    | 126,908    |                                  |   | 116,113    |  |      | 243,021    |  |   | 212,053   
|Postage and shipping              |  |                                    | 96,744     |                                  |   | 66,300     |  |      | 183,006    |  |   | 117,844   
|Early extinguishment of debt      |  |                                    | 145,000    |                                  |   |           |  |      | 145,000    |  |   |          
|ATM expense                       |  |                                    | 54,060     |                                  |   | 69,127     |  |      | 103,922    |  |   | 131,497   
|Travel expense                    |  |                                    | 43,253     |                                  |   | 35,224     |  |      | 92,715     |  |   | 50,101    
|Amortization of intangible assets |  |                                    | 44,643     |                                  |   | 44,643     |  |      | 89,286     |  |   | 89,286    
|Insurance                         |  |                                    | 33,758     |                                  |   | 32,794     |  |      | 75,143     |  |   | 63,694    
|Title expense                     |  |                                    | 16,895     |                                  |   | 25,008     |  |      | 30,349     |  |   | 38,423    
|Other                             |  |                                    | 233,966    |                                  |   | 431,588    |  |      | 408,431    |  |   | 646,009   
|                                  |  |                                    |            |                                  |   |            |  |      |            |  |   |           
|                                  |  | $                                  | 15,085,934 |                                  | $ | 11,778,889 |  | $    | 26,719,690 |  | $ | 21,843,603
|                                  |  |                                    |            |                                  |   |            |  |      |            |  |   |           

Total non-interest expenses increased $3.3 million in
the second quarter of 2010, an increase of 28.1% over the same period in 2009, and $4.9 million in the first six months of 2010, an increase of 22.3% over prior year. Employee compensation; in the form of salaries, benefits, commissions and
incentives, represent an approximate average of 68% of non-interest expense in the periods presented. Our full time equivalent employees, at June 30, 2010 totaled 441, compared to 321 in 2009. Employee compensation growth was primarily in
commissions and incentives, through our mortgage operations, but we also expanded the Banks sales team and added staffing for two new banking offices; in the Hilltop area of Virginia Beach and in Nags Head, NC. Over fifty-five percent of our
mortgage employees are paid commissions based on their production levels. Secondary increases are attributable to the following factors: 1) an increase in loan origination expense related to higher production by the bank and higher vendor expenses
for Monarch Mortgage; 2) growth and inflation-related increases in occupancy, equipment, and data service expenses; 3) increased marketing expense related to company newsletters and the addition of mortgage specific advertising in 2010; and 4) new
branch supply set-up and updated mortgage disclosure forms.

FDIC insurance decreased in the second quarter and year-to-date
2010 when compared to the same periods in 2009 due to a one-time special assessment in that year.

The following summary
identifies, in descending order, non-interest expenses with the most significant quarter-over-quarter increase.



|                                |  |                                    |           |            |                                  |   |         |   |            |  |      |  
|------------------------------- |  | ---------------------------------- | --------- | ---------- | -------------------------------- | - | ------- | - | ---------- |  | ---- | -
|                                |  | Increase                           |           |            | Increase                         |  
|                                |  | For the Three Months EndedJune 30, |           |            | For the Six Months EndedJune 30, |  
|                                |  | Dollars                            |           | Percentage |                                  |   | Dollars |   | Percentage | 
|Commissions and incentives      |  | $                                  | 1,742,132 |            | 40.9                             | % |         | $ | 1,939,784  |  | 25.0 | %
|Salaries and employee benefits  |  |                                    | 752,452   |            | 21.1                             | % |         |   | 1,338,344  |  | 18.5 | %
|Loan origination expenses       |  |                                    | 580,641   |            | 64.9                             | % |         |   | 969,756    |  | 64.4 | %
|Occupancy expenses              |  |                                    | 211,234   |            | 35.2                             | % |         |   | 329,051    |  | 28.0 | %
|Furniture and equipment expense |  |                                    | 89,731    |            | 28.8                             | % |         |   | 142,537    |  | 22.4 | %



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##### Table of Contents

Income Taxes

Our income tax provision was $749 thousand for the quarter and $1.3 million for the first six months of 2010 compared to $700 thousand and
$1.2 million for the same periods, respectively, in 2009. The effective tax rate for the quarter was 32.0% and 32.6% for the first half of 2010, compare to 32.2% and 31.6% for the same periods in 2009.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

GENERAL

Total assets
were $790.4 million at June 30, 2010, a $100.8 million or 14.6% increase compared to assets of $689.6 million at December 31, 2009. On an annual basis total assets increased $124.3 million, an 18.7% increase when compared to assets of
$666.1 million at June 30, 2009. The primary driver of this growth was in loans held for sale which increased $70.5 million or 89.3% to $149.5 million at June 30, 2010 compared to $79.0 million at December 31, 2009. On an annual basis
loans held for sale increased $53.0 million or 55.0% compared to $96.5 million at June 30, 2009. The secondary source of asset growth was total loans held for investment which increased $17.1 million to $554.8 million as of June 30, 2010,
a 3.4% increase over year-end 2009 totals of $537.7 million. On an annual basis, total loans held for investment increased $39.2 million, or 7.6%, from $515.6 million in June 2009. Investment securities were $8.4 million at June 30, 2010
compared to $7.2 million at December 31, 2009, and $5.8 million at June 30, 2009. Property and equipment increased $7.3 million or 81.7% to $16.3 million at June 30, 2010 compared to $9.0 million at year-end 2009 and $8.1 million or a
99.9% increase over $8.1 million at June 30, 2009. Cash and cash equivalents were $39.3 million, increasing $4.9 million from $34.4 million at December 31, 2009, and $16.8 million or 74.7% from $22.5 million one year prior.

Loans held for sale represent mortgage loans that have been closed and are awaiting investor purchase. A majority of our mortgage loans
are pre-sold and only remain on our books for thirty to forty-five days. Therefore; outstanding balances are dependent on the current mortgage market and may fluctuate significantly between periods. The significant growth noted at June 30, 2010
compared to year-end 2009 and June 30, 2009 is a product of a low rate environment coupled with record production by our mortgage division.

In April 2010, we purchased a building which, when renovated, will become our new corporate headquarters in Chesapeake, Virginia. We also
purchased a piece of land which, when complete, will be the new home of our Ghent office in Norfolk, Virginia. In May 2010 we opened a new office in the Hilltop area of Virginia Beach, Virginia, which is a leased location. These purchases and the
renovation and furnishing of our leased location were the primary source of the increase in property and equipment.

Total
liabilities were $721.1 million at June 30, 2010, and increase of $99.5 million or 16.0% over year-end 2009 liabilities of $621.6 million and $117.4 million or 19.5% increase over $603.7 million at June 30, 2009. All of our liability
growth was in deposits. Total deposits increased $103.4 million or 19.2% to $643.5 million at June 30, 2010, when compared to $540.0 million at year-end 2009 and increased $116.9 million or 22.2% compared to $526.6 million, one year prior.
Total borrowings declined $5.5 million to $70.6 million at June 30, 2010, a 7.3% decrease from $76.1 million at December 31, 2009 and a $1.6 million or 2.2% decrease from $72.2 million at June 30, 2009.

Non-interest bearing demand deposits increased $28.3 million over December 2009 to $104.5 million and on an annual basis $20.5 million
over June 30, 2009. Interest bearing demand deposits were $22.1 million, and increase of $2.3 million and $5.2 million when compared to December 31, 2009 and June 30, 2009 totals of $19.7 million and $16.9 million, respectively. We
are primarily a business bank and, as such, have focused our efforts on obtaining company operating and escrow accounts, which are demand deposit accounts. Escrow accounts ordinarily house mortgage funds, which makes them sensitive to the growth of
the current mortgage environment. Our focus on the business sector, coupled with the growth in escrow accounts, has resulted in significant growth in demand deposits.

Our interest bearing deposits are comprised of savings accounts, money market accounts and certificates of deposits (CDs).
Savings deposits and CDs at June 30, 2010, have increased compared to year-end 2009, but decreased when compared to one year prior. Money market accounts have shown marked growth in 2010 compared to both, 2009 year-end and prior year.



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Savings deposits increased $92 thousand to $22.9 million at June 30, 2010 compared to
December 31, 2009. However, savings balances have declined $6.6 million compared to $29.5 million at June 30, 2009. In 2008, we introduced a multi-tiered savings product that rewarded higher balances with a higher rate which resulted in
notable increases in savings balances. However, over the past year we have lowered the rates on the higher tiers and the decline, year over year, is attributable to the rate sensitivity of those clients who initially migrated to the product. Based
on growth in our money market deposits, it is possible that these clients have migrated to that product in answer to their rate sensitive needs.

Total money market balances were $214.5 million at June 30, 2010, an increase of $57.2 million compared to $157.3 million at
December 31, 2009. On an annual basis, money market accounts have increased $106.1 million compared to $108.4 million at June 30, 2009. Early in the recession, money market accounts had lost favor with many of our clients preferring fixed
rate products such as CDs. During that time the fact that our prime money market product remained very competitive compared to our peers had little impact on the balances in that product. However, progressive improvement in consumer confidence has
resulted in renewed interest in this attractive and competitive product.

CDs remain popular with clients because of the rate
stability inherent in a fixed product. This popularity has led to significant growth in our core CDs. Core CDs which are comprised of CDs with balances of less than $100 thousand, increased $26.3 million to $205.8 million, when compared to $179.5
million at December 31, 2009. On an annual basis, core CDs have increased $19.0 million. Our Jumbo CDs, which are CDs with balances of $100 thousand or greater, declined $10.9 million to $73.7 at June 30, 2010 compared to December 31,
2009, and $27.3 million compared to June 30, 2009. This decline was part of our deposit strategy for 2009. In early 2008, we had determined to use larger, out of market CDs that typically cost less than in market CDs, to help buffer some of the
effects of the steep decline in rates. With these CDs we could stay shorter on term and react more quickly to market conditions. As these CDs mature, we have allowed a portion of them to run off and have replaced them with longer term in
market CDs.

Stockholders equity was $69.2 million at June 30, 2010, compared to $67.9 million at December 31,
2009. Components of the change in stockholders equity include net income of $2.7 million, increase in unrealized losses in other comprehensive income of $147 thousand, stock based compensation totaling $176 thousand, repurchase of stock
warrants of $260 thousand, preferred stock dividend payment of $780 thousand, and common stock dividend payment of $411 thousand.



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Allowance and Provision for Loan Losses

Our allowance for loan losses is to provide for losses inherent in the loan portfolio. Our management is responsible for determining the
level of the allowance for loan losses, subject to review by the board of directors. Among other factors, management considers our historical loss experience, the size and composition of our loan portfolio, the value and adequacy of collateral and
guarantors, non-performing credits including impaired loans and our risk-rating-based loan watch-list, and national and local economic conditions on a quarterly basis.

The economy of our trade area is well diversified. There are additional risks of future loan losses that cannot be precisely quantified
or attributed to particular loans or classes of loans. Since those factors include general economic trends as well as conditions affecting individual borrowers, the allowance for loan losses is an estimate. The sum of these elements is our
managements recommended level for the allowance. The unallocated portion of the allowance is based on loss factors that cannot be associated with specific loans or loan categories. These factors include managements subjective evaluation
of such conditions as credit quality trends, collateral values, portfolio concentrations, specific industry conditions in the regional economy, regulatory examination results, external audit and loan review findings, recent loss experiences in
particular portfolio segments, etc. The unallocated portion of the allowance for loan losses reflects managements attempt to ensure that the overall reserve appropriately reflects a margin for the imprecision necessarily inherent in estimates
of credit losses.

We developed a methodology to determine an allowance to absorb probable loan losses inherent in the
portfolio based on evaluations of the collectability 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. Based on managements evaluation, estimated loan loss allowances are assigned to the individual
loans which present a greater risk of loan loss. 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 fair value of the underlying collateral. We evaluate the collectability of both principal and interest when assessing the need for a loss accrual. A composite allowance
factor that considers our and other peer bank loss experience ratios, delinquency trends, economic conditions, and portfolio composition are applied to the total of commercial and commercial real estate loans not specifically evaluated.

The residual loan loss allowance is allocated to the remaining loans on an overall portfolio basis based on industry and or historical
loss experience. The allowance is subject to regulatory examinations and determination as to adequacy, which may take into account such factors as the methodology used to calculate the allowance and the size of the allowance in comparison to peer
banks identified by regulatory agencies. Homogenous loans, such as consumer installment, residential mortgage loans, and home equity 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 based on the expected net charge offs from a current trend in delinquencies, losses or historical experience and general economic conditions.

While we believe we have sufficient allowance for our existing portfolio, there can be no assurances that an additional allowance for
losses on existing loans may not be necessary in the future. The allowance for loan losses totaled $8.6 million at June 30, 2010 and $9.0 million June 30, 2009. The ratio of the allowance for loan losses to total loans outstanding at
June 30, 2010 and 2009 was 1.55% and 1.75%, respectively.

During the second quarter of 2010 we recorded $1.5 million and
during the first half of 2010 we recorded $2.8 million in provision expense, compared to $1.8 million and $2.5 million, respectively, for the same periods in 2009. Gross charge-offs for the quarter were $1.7 million and $3.7 million, year-to-date
2010, offset by recoveries of $126 thousand and $190 thousand. In 2009, gross charge-offs were $1.5 million for the quarter and $1.6 million, year-to-date, offset by recoveries of $56 thousand and $58 thousand. The table below summarizes the
activity in the allowance for loans losses for the three and six month periods ending June 30, 2010 and 2009.



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LOAN LOSS ALLOWANCE AND LOSS EXPERIENCE



|                                                                      |  |                                    |            |   |                                   |   |            |      |  |   |             |   |  |   |             |  
|--------------------------------------------------------------------- |  | ---------------------------------- | ---------- | - | --------------------------------- | - | ---------- | ---- |  | - | ----------- | - |  | - | ----------- | -
|                                                                      |  | For the Three Months EndedJune 30, |            |   | For the Six Months Ended
June 30, |  
|                                                                      |  | 2010                               |            |   | 2009                              |   |            | 2010 |  |   | 2009        |  
|Balance, beginning of period                                          |  | $                                  | 8,650,000  |   |                                   | $ | 8,660,000  |      |  | $ | 9,300,000   |   |  | $ | 8,046,000   |  
|Provisions charged to operations                                      |  |                                    | 1,504,948  |   |                                   |   | 1,837,597  |      |  |   | 2,832,818   |   |  |   | 2,538,148   |  
|Loans charged-off                                                     |  |                                    | (1,705,563 | ) |                                   |   | (1,524,009 | )    |  |   | (3,747,511  | ) |  |   | (1,612,093  | )
|Recoveries                                                            |  |                                    | 125,615    |   |                                   |   | 56,412     |      |  |   | 189,693     |   |  |   | 57,945      |  
|                                                                      |  |                                    |            |   |                                   |   |            |      |  |   |             |   |  |   |             |  
|Balance, end of period                                                |  | $                                  | 8,575,000  |   |                                   | $ | 9,030,000  |      |  | $ | 8,575,000   |   |  | $ | 9,030,000   |  
|                                                                      |  |                                    |            |   |                                   |   |            |      |  |   |             |   |  |   |             |  
|                                                                      |  |                                    |            |  
|Total loans held for investment outstanding                           |  |                                    |            |   |                                   |   |            |      |  |   | 554,796,564 |   |  |   | 515,627,252 |  
|Ratio of allowance for loan losses to total loans held for investment |  |                                    |            |   |                                   |   |            |      |  |   | 1.55        | % |  |   | 1.75        | %

Asset Quality and Non-Performing Loans

We identify specific credit exposures through periodic analysis of our loan portfolio and monitor general exposures from
economic trends, market values and other external factors. We maintain an allowance for loan losses, which is available to absorb losses inherent in the loan portfolio. The allowance is increased by the provision for losses and by recoveries from
losses. Charged-off loan balances are subtracted from the allowance. The adequacy of the allowance for loan losses is determined on a quarterly basis. Various factors as defined in the previous section "Allowance and Provision for Loan Losses" are
considered in determining the adequacy of the allowance. Loans are generally placed on non-accrual status after they are past due for 90 days.

Non-performing loans include loans on which interest is no longer accrued, accruing loans that are contractually past due 90 days or more
as to principal and interest payments, and loans classified as troubled debt restructurings. Total non-performing loans as a percentage of total loans were 1.22% and 1.40% at June 30, 2010 and December 31, 2009, respectively.

We had non-performing assets totaling $8.2 million at June 30, 2010 compared to $9.7 million at December 31, 2009. Net
charge-offs for the second quarter and first half of 2010 were $1.6 million and $3.6 million, respectively. Non-performing assets traditionally consist of nonaccrual loans, loans past due 90 days or more and still accruing interest, restructured
loans and other real estate owned. All of these loans have been identified as impaired according to applicable GAAP for impaired loans. We have provided specific reserves for our non-performing assets in our allowance for loan loss of $991 thousand
at June 30, 2010 and $1.7 million at December 31, 2009. We continue to demand a high level of credit quality on new loans.

NON-PERFORMING ASSETS



|                                                  |  |               |           |   |                   |   |           |  
|------------------------------------------------- |  | ------------- | --------- | - | ----------------- | - | --------- | -
|                                                  |  | June 30, 2010 |           |   | December 31, 2009 |  
|Loans 90 days past due and still accruing         |  | $             | 870,375   |   |                   | $ | 202,679   |  
|Nonaccrual loans                                  |  |               | 5,349,352 |   |                   |   | 6,811,331 |  
|Restructured loans                                |  |               | 538,000   |   |                   |   | 538,000   |  
|Other Real Estate                                 |  |               | 1,417,086 |   |                   |   | 2,115,700 |  
|                                                  |  |               |           |   |                   |   |           |  
|Total Non-performing Assets                       |  | $             | 8,174,813 |   |                   | $ | 9,667,710 |  
|                                                  |  |               |           |   |                   |   |           |  
|                                                  |  |              
|Non-performing loans to period end loans          |  |               | 1.22      | % |                   |   | 1.40      | %
|Non-performing assets to period end assets        |  |               | 1.03      | % |                   |   | 1.40      | %
|Allowance for loan losses to non-performing loans |  |               | 126.89    | % |                   |   | 123.15    | %



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RESTRUCTED LOANS



|                                                                         |  |               |          |   |                   |   |          |  
|------------------------------------------------------------------------ |  | ------------- | -------- | - | ----------------- | - | -------- | -
|                                                                         |  | June 30, 2010 |          |   | December 31, 2009 |  
|Investment in restructured loans                                         |  | $             | 699,240  |   |                   | $ | 699,240  |  
|Valuation allowance for restructured loans included in charged-off loans |  |               | (161,240 | ) |                   |   | (161,240 | )
|                                                                         |  |               |          |   |                   |   |          |  
|Restructured loans included in impaired loans                            |  | $             | 538,000  |   |                   | $ | 538,000  |  
|                                                                         |  |               |          |   |                   |   |          |  
|Recoveries of charged-off balances                                       |  | $             | 13,000   |   |                   | $ | 4,400    |  

Liquidity

Liquidity represents an institutions ability to meet present and future financial obligations through either the sale of existing
assets or the acquisition of additional funds through short-term borrowings. Our liquidity is provided from cash and amounts due from banks, federal funds sold, interest-bearing deposits in other banks, repayments from loans, increases in deposits,
lines of credit from the Federal Home Loan Bank and five correspondent banks, and maturing investments. As a result of our management of liquid assets, and our ability to generate liquidity through liability funding, we believe that we maintain
overall liquidity sufficient to satisfy our depositors requirements and to meet clients credit needs. We also take into account any liquidity needs generated by off-balance sheet transactions such as commitments to extend credit,
commitments to purchase securities and standby letters of credit.

We monitor and plan our liquidity position for future
periods. Liquidity strategies are implemented and monitored by our Asset/Liability Committee (ALCO). The Committee uses a simulation and budget model to assess current and future liquidity needs.

Cash, cash equivalents and federal funds sold totaled $39.3 million as of June 30, 2010 compared to $34.4 million as of
December 31, 2009. At June 30, 2010, cash, securities classified as available for sale and federal funds sold were $47.8 million or 6.5% of total earning assets, compared to $41.5 million or 6.4% of total earning assets at
December 31, 2009.

In the course of operations, due to fluctuations in loan and deposit levels, we occasionally find it
necessary to purchase federal funds on a short-term basis. We maintain unsecured federal funds line arrangements with five other banks, which allow us to purchase funds totaling $32 million. These lines mature and re-price daily. At June 30,
2010 and December 31, 2009, we had $0 in federal funds purchased.

We also have access to the Federal Reserve Bank of
Richmonds discount window should a liquidity crisis occur. We have not used this facility in the past and consider it a backup source of funds.

We have lines of credit with the Federal Home Loan Bank of Atlanta (FHLB) that can equal up to 30% of our assets. Our primary
line of credit (Primary) totaled approximately $60.7 million with $54.2 million available at June 30, 2010. This line is currently reduced by $5.0 million, which has been pledged as collateral for public deposits.

In February 2009, we negotiated an additional line of credit with FHLB which is secured by a portion of our loans held for sale
(LHFS). We pledge these loans, which have been sold to FHLB approved investors, as collateral. In return, we are allowed to borrow up to 70% of these loans for 120 days. The investor remits the proceeds for the purchased loans directly
to FHLB, which then releases the collateral pledged. At June 30, 2010, we had assets pledged totaling $81.8 million and advances outstanding totaled $59.1 million, with $22.6 million excess line available.

Borrowings outstanding under the combined FHLB lines of credit were $60.6 million at June 30, 2010 and $66.2 million at
December 31, 2009. We had the following borrowing advances under our Primary line outstanding as of June 30, 2010, with the following final maturities:



|                 |  |                
|---------------- |  | ---------------
|Advance Amount   |  | Expiration Date
|1,525,362        |  | September 2015 
|                 |  |                
|$      1,525,362 |  |                
|                 |  |                



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The advance maturing in 2015 is a principal reducing credit that matures on March 28,
2015. Terms include 39 quarterly principal payments of $25 thousand beginning December 2005, with a final payment of $1.0 million in March 2015. We are utilizing this advance to match-fund several long term fixed rate loans. The interest rate for
this advance is fixed at 4.96%.

Under our LHFS line we had four advances outstanding at June 30, 2010. All advances
mature in July 2010 and are broken down as follows:



| |               |              |   |                 |  |                  |            |  |  | 
| | ------------- | ------------ | - | --------------- |  | ---------------- | ---------- |  |  | 
| |               | Advance Date |   | Current Balance |  | Original Balance |            | 
| | June 17, 2010 |              | $ | 5,110,322       |  | $                | 24,277,151 | 
| | June 25, 2010 |              | $ | 15,000,000      |  | $                | 15,000,000 | 
| | June 30, 2010 |              | $ | 39,000,000      |  | $                | 39,000,000 | 
| |               |              |   |                 |  |                  |            | 
| |               |              | $ | 59,110,322      |  | $                | 78,277,151 | 
| |               |              |   |                 |  |                  |            | 

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

Off-Balance Sheet Arrangements

We enter into certain financial transactions in the ordinary course of performing traditional banking services that result in off-balance
sheet transactions. The off-balance sheet transactions recognized as of June 30, 2010 and December 31, 2009 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 the Federal Home Loan Bank for $5 million at June 30, 2010 and December 31, 2009.

We entered into an interest rate swap agreement with PNC Bank of Pittsburgh, PA on July 29, 2009, for our $10 million Trust
Preferred borrowings which carries a floating interest rate of 90 day LIBOR plus 160 basis points. Under the terms of this agreement, at the end of each quarter we will swap our floating rate for a fixed rate of 3.26%. The effective date of this
swap is September 30, 2009, with an expiration date of September 30, 2014. This swap will fix our interest cost on our $10 million Trust Preferred borrowings of 4.86% for five years.

Commitments to extend credit, which include rate lock commitments, amounted to $407.5 million at June 30, 2010 and $262.5 million at
December 31, 2009, represent legally binding agreements to lend to customers with fixed expiration dates or other termination clauses. Since many of the commitments are expected to expire without being funded, the total commitment amounts do
not necessarily represent future liquidity requirements.

We did not have any outstanding commitments to purchase securities
on June 30, 2010 or December 31, 2009.

Standby letters of credit are conditional commitments we issue guaranteeing
the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. We had $4.2 million in outstanding standby letters of credit at June 30, 2010 and $5.3 million at
December 31, 2009.

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

Capital Resources

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



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

The Bank, as a Virginia banking corporation, may pay dividends only out of retained earnings. In addition,
regulatory authorities may limit payment of dividends by any bank, when it is determined that such limitation is in the public interest and necessary to ensure financial soundness of the Bank. Regulatory agencies place certain restrictions on
dividends paid and loans or advances made by the Bank to the Company. The amount of dividends the Bank may pay to the Company, without prior approval, is limited to current year earnings plus retained net profits for the two preceding years. At
June 30, 2010, the amount available was approximately $6.8 million. We currently pay a quarterly dividend on our series B noncumulative, perpetual preferred stock of 7.8%, or $390,000 per quarter. In addition, we paid our first common stock
dividend in June 2010 of $411,287.

Quantitative measures established by regulation to ensure capital adequacy require that
the Bank maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined).
Management believes, as of June 30, 2010, the Bank meets all capital adequacy requirements to which it is subject.

As of
June 30, 2010, the Bank was categorized as well capitalized, the highest level of capital adequacy. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage
ratios as set forth in the table. The Banks actual capital amounts and ratios are also presented in the table as of June 30, 2010 and December 31, 2009.



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|                                                   |  |                        |        |       |                              |   |         |                                              |        |  |      |         |  |       |        |  |       |  
|-------------------------------------------------- |  | ---------------------- | ------ | ----- | ---------------------------- | - | ------- | -------------------------------------------- | ------ |  | ---- | ------- |  | ----- | ------ |  | ----- | -
|                                                   |  | Actual                 |        |       | For CapitalAdequacy Purposes |   |         | To Be WellCapitalized UnderPrompt Corrective |       
|                                                   |  | Amounts                |        | Ratio |                              |   | Amounts |                                              | Ratio  |  |      | Amounts |  | Ratio |       
|                                                   |  | (Dollars in Thousands) |       
|As of June 30, 2010                                |  |                        |        |       |                              |   |         |                                              |        |  |      |         |  |       |        |  |       |  
|Total Risk-Based Capital Ratio                     |  |                        |        |       |                              |   |         |                                              |        |  |      |         |  |       |        |  |       |  
|Consolidated company                               |  | $                      | 86,154 |       | 13.36                        | % |         | $                                            | 51,590 |  | 8.00 | %       |  |       | N/A    |  | N/A   |  
|Bank                                               |  | $                      | 78,417 |       | 12.16                        | % |         | $                                            | 51,590 |  | 8.00 | %       |  | $     | 64,488 |  | 10.00 | %
|(Total Risk-Based Capital to Risk-Weighted Assets) |  |                        |        |       |                              |   |         |                                              |        |  |      |         |  |       |        |  |       |  
|                                                   |  |                        |        |       |                              |  
|Tier 1 Risk-Based Capital Ratio                    |  |                        |        |       |                              |   |         |                                              |        |  |      |         |  |       |        |  |       |  
|Consolidated company                               |  | $                      | 78,085 |       | 12.11                        | % |         | $                                            | 25,792 |  | 4.00 | %       |  |       | N/A    |  | N/A   |  
|Bank                                               |  | $                      | 70,349 |       | 10.91                        | % |         | $                                            | 25,792 |  | 4.00 | %       |  | $     | 38,689 |  | 6.00  | %
|(Tier 1 Capital to Risk-Weighted Assets)           |  |                        |        |       |                              |   |         |                                              |        |  |      |         |  |       |        |  |       |  
|                                                   |  |                        |        |       |                              |  
|Tier 1 Leverage Ratio                              |  |                        |        |       |                              |   |         |                                              |        |  |      |         |  |       |        |  |       |  
|Consolidated company                               |  | $                      | 78,085 |       | 10.38                        | % |         | $                                            | 30,096 |  | 4.00 | %       |  |       | N/A    |  | N/A   |  
|Bank                                               |  | $                      | 70,349 |       | 9.35                         | % |         | $                                            | 30,096 |  | 4.00 | %       |  | $     | 37,620 |  | 5.00  | %
|(Tier 1 Capital to Average Assets)                 |  |                        |        |       |                              |   |         |                                              |        |  |      |         |  |       |        |  |       |  
|                                                   |  |                        |        |       |                              |  
|As of December 31, 2009                            |  |                        |        |       |                              |   |         |                                              |        |  |      |         |  |       |        |  |       |  
|Total Risk-Based Capital Ratio                     |  |                        |        |       |                              |   |         |                                              |        |  |      |         |  |       |        |  |       |  
|Consolidated company                               |  | $                      | 83,988 |       | 14.23                        | % |         | $                                            | 47,222 |  | 8.00 | %       |  |       | N/A    |  | N/A   |  
|Bank                                               |  | $                      | 65,580 |       | 11.11                        | % |         | $                                            | 47,222 |  | 8.00 | %       |  | $     | 59,028 |  | 10.00 | %
|(Total Risk-Based Capital to Risk-Weighted Assets) |  |                        |        |       |                              |   |         |                                              |        |  |      |         |  |       |        |  |       |  
|                                                   |  |                        |        |       |                              |  
|Tier 1 Risk-Based Capital Ratio                    |  |                        |        |       |                              |   |         |                                              |        |  |      |         |  |       |        |  |       |  
|Consolidated company                               |  | $                      | 76,585 |       | 12.97                        | % |         | $                                            | 23,625 |  | 4.00 | %       |  |       | N/A    |  | N/A   |  
|Bank                                               |  | $                      | 58,177 |       | 9.85                         | % |         | $                                            | 23,625 |  | 4.00 | %       |  | $     | 35,438 |  | 6.00  | %
|(Tier 1 Capital to Risk-Weighted Assets)           |  |                        |        |       |                              |   |         |                                              |        |  |      |         |  |       |        |  |       |  
|                                                   |  |                        |        |       |                              |  
|Tier 1 Leverage Ratio                              |  |                        |        |       |                              |   |         |                                              |        |  |      |         |  |       |        |  |       |  
|Consolidated company                               |  | $                      | 76,585 |       | 11.52                        | % |         | $                                            | 26,595 |  | 4.00 | %       |  |       | N/A    |  | N/A   |  
|Bank                                               |  | $                      | 58,177 |       | 8.75                         | % |         | $                                            | 26,595 |  | 4.00 | %       |  | $     | 33,244 |  | 5.00  | %
|(Tier 1 Capital to Average Assets)                 |  |                        |        |       |                              |   |         |                                              |        |  |      |         |  |       |        |  |       |  



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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the risk of loss in a financial instrument arising from adverse changes in market rates or prices such as
interest rates, foreign currency exchange rates, commodity prices and equity prices. Our primary market risk exposure is interest rate risk. The ongoing monitoring and management of this risk is an important component of our asset/liability
management process, which is governed by policies established by our board of directors that are reviewed and approved annually. Our board of directors delegates responsibility for carrying out asset/liability management policies to the
Asset/Liability Management Committee (ALCO). In this capacity, this committee develops guidelines and strategies that govern our asset/liability management related activities, based upon estimated market risk sensitivity, policy limits
and overall market interest rate levels and trends.

Interest rate risk represents the sensitivity of earnings to changes in
market interest rates. As interest rates change, the interest income and expense streams associated with our financial instruments also change, affecting net interest income, the primary component of our earnings. The Asset/Liability Management
Committee uses the results of a detailed and dynamic simulation model to quantify the estimated exposure of net interest income to sustained interest rate changes. While this committee routinely monitors simulated net interest income sensitivity
over a rolling 12 month horizon, it also employs additional tools to monitor potential longer-term interest rate risk.

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

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

Impacts of changing interest rates on loans and deposits are reflected
in our financial statements. We believe that our mortgage banking operation, Monarch Mortgage, provides somewhat of a natural interest rate hedge, in that we are interest rate sensitive to a downward change in the prime rate for short term periods.
When loan interest rates decline, our earnings will be negatively impacted in our banking operation, 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.



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ITEM 4. CONTROLS AND PROCEDURES

We maintain a system of internal controls and procedures designed to provide reasonable assurance as to the reliability of our published
financial statements and other disclosures included in this report. Within the 90 days prior to the date of this report, we carried out an evaluation, under the supervision and with the participation of our management, including 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 our disclosure controls and procedures are effective in timely alerting them to material information relating to us (including our consolidated subsidiaries) required to be included in periodic SEC
filings. There have been no significant changes in our internal controls or in other factors that could significantly affect internal controls subsequent to the date we carried out our evaluation.



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PART II - OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 2. Changes in Securities

None.

Item 3. Defaults Upon Senior Securities

Not applicable.

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

None.

Item 5. Other Information

None.



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Item 6. Exhibits and Reports on Form 8-K



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

Exhibit 4.8 
2006 Equity Incentive Plan

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

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

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

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



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

Form 8-K filed
May 26, 2010 to announce the Companys quarterly dividend on preferred stock.

Form 8-K filed May 26, 2010 to
announce the Companys submission of matters to the vote of security holders.

Form 8-K filed June 18, 2010 to
announce the amendment and restatement of the Company bylaws to delineate powers and authority.

Form 8-K filed July 21,
2010 to announce the Companys results of operations and financial condition.

Form 8-K filed July 23, 2010 to
announce the Companys quarterly dividend on preferred stock.

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/ Brad E. Schwartz                               |  |  |  |                     
|Brad E. Schwartz                                   |  |  |  | Date: August 9, 2010
|Chief Executive Officer                            |  |  |  |                     
|                                                   |  | 
|/s/ Lynette P. Harris.                             |  |  |  |                     
|Lynette P. Harris                                  |  |  |  | Date: August 9, 2010
|Executive Vice President & Chief Financial Officer |  |  |  |                     



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