##### 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: March 31, 2009

OR



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

Commission File Number: 000-52032





MONARCH FINANCIAL HOLDINGS,
INC.

(Exact name of registrant as specified in its charter)







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



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

(757) 389-5112

(Registrants telephone number, including area code)

Not Applicable

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





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

Indicate by check mark whether the registrant 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   ̈    No   ̈

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

Large accelerated filer   ̈    Accelerated filer   ̈    Non-accelerated filer  x

Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ̈    No  x

APPLICABLE ONLY TO CORPORATE ISSUERS:

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

Common Stock, $5.00 Par Value  5,788,986 as of May 11, 2009.









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##### Table of Contents

MONARCH FINANCIAL HOLDINGS, INC.

FORM 10-Q

MARCH 31, 2009

INDEX



|         |  |         |  |                                                                                                         |  |   
|-------- |  | ------- |  | ------------------------------------------------------------------------------------------------------- |  | --
|PART I.  |  |         |  | FINANCIAL INFORMATION                                                                                   |  |   
|         |  |         | 
|         |  | ITEM 1. |  | Consolidated Statements of Condition as of March 31, 2009 and December 31, 2008                         |  | 3 
|         |  |         | 
|         |  |         |  | Consolidated Statements of Income for the three months ended March 31, 2009 and March 31, 2008          |  | 4 
|         |  |         | 
|         |  |         |  | Consolidated Statements of Shareholders Equity for the periods ended March 31, 2009 and March 31, 2008 |  | 5 
|         |  |         | 
|         |  |         |  | Consolidated Statements of Cash Flows for the periods ended March 31, 2009 and March 31, 2008           |  | 6 
|         |  |         | 
|         |  |         |  | Notes to Consolidated Financial Statements                                                              |  | 7 
|         |  |         | 
|         |  | ITEM 2. |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                   |  | 14
|         |  |         | 
|         |  | ITEM 3. |  | Quantitative and Qualitative Disclosures about Market Risk                                              |  | 24
|         |  |         | 
|         |  | ITEM 4. |  | Controls and Procedures                                                                                 |  | 26
|         |  |         | 
|PART II. |  |         |  | OTHER INFORMATION                                                                                       |  |   
|         |  |         | 
|         |  | Item 1. |  | Legal Proceedings                                                                                       |  | 27
|         |  |         | 
|         |  | Item 2. |  | Changes in Securities                                                                                   |  | 27
|         |  |         | 
|         |  | Item 3. |  | Defaults Upon Senior Securities                                                                         |  | 27
|         |  |         | 
|         |  | Item 4. |  | Submissions of Matters to Vote of Security Holders                                                      |  | 27
|         |  |         | 
|         |  | Item 5. |  | Other Information                                                                                       |  | 27
|         |  |         | 
|         |  | Item 6. |  | Exhibits and Reports on Form 8-K                                                                        |  | 28



2



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##### Table of Contents

PART IFINANCIAL INFORMATION



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

MONARCH FINANCIAL
HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CONDITION



|                                                                                                                              |  |                        |             |   |                  |   |             |  
|----------------------------------------------------------------------------------------------------------------------------- |  | ---------------------- | ----------- | - | ---------------- | - | ----------- | -
|                                                                                                                              |  | UnauditedMarch 31,2009 |             |   | December 31,2008 |  
|ASSETS:                                                                                                                       |  |                        |             |   |                  |   |             |  
|Cash and due from banks                                                                                                       |  | $                      | 9,406,965   |   |                  | $ | 8,418,341   |  
|Interest bearing bank balances                                                                                                |  |                        | 3,705,360   |   |                  |   | 111,634     |  
|Federal funds sold                                                                                                            |  |                        | 1,723,543   |   |                  |   | 66,367      |  
|                                                                                                                              |  |                        |             |   |                  |   |             |  
|Total cash and cash equivalents                                                                                               |  |                        | 14,835,868  |   |                  |   | 8,596,342   |  
|                                                                                                                              |  |                       
|Investment securities held-to-maturity, at cost                                                                               |  |                        | 500,000     |   |                  |   | 500,000     |  
|Investment securities available-for-sale, at fair value                                                                       |  |                        | 5,796,888   |   |                  |   | 5,846,917   |  
|Loans held for sale                                                                                                           |  |                        | 80,768,614  |   |                  |   | 54,369,215  |  
|                                                                                                                              |  |                       
|Loans, net of unearned income                                                                                                 |  |                        | 507,195,679 |   |                  |   | 504,712,083 |  
|Less: allowance for loan losses                                                                                               |  |                        | (8,660,000  | ) |                  |   | (8,046,000  | )
|                                                                                                                              |  |                        |             |   |                  |   |             |  
|Loans, net                                                                                                                    |  |                        | 498,535,679 |   |                  |   | 496,666,083 |  
|                                                                                                                              |  |                       
|Property and equipment, net                                                                                                   |  |                        | 8,242,425   |   |                  |   | 8,386,430   |  
|Restricted equity securities                                                                                                  |  |                        | 5,813,650   |   |                  |   | 3,575,450   |  
|Bank owned life insurance                                                                                                     |  |                        | 6,850,674   |   |                  |   | 6,787,699   |  
|Goodwill                                                                                                                      |  |                        | 775,000     |   |                  |   | 775,000     |  
|Intangible assets                                                                                                             |  |                        | 952,384     |   |                  |   | 997,027     |  
|Other assets                                                                                                                  |  |                        | 11,133,217  |   |                  |   | 10,698,239  |  
|                                                                                                                              |  |                        |             |   |                  |   |             |  
|Total assets                                                                                                                  |  | $                      | 634,204,399 |   |                  | $ | 597,198,402 |  
|                                                                                                                              |  |                        |             |   |                  |   |             |  
|LIABILITIES:                                                                                                                  |  |                        |             |   |                  |   |             |  
|Deposits:                                                                                                                     |  |                        |             |   |                  |   |             |  
|Noninterest-bearing                                                                                                           |  | $                      | 75,288,607  |   |                  | $ | 78,894,120  |  
|Interest-bearing                                                                                                              |  |                        | 446,426,739 |   |                  |   | 417,191,675 |  
|                                                                                                                              |  |                        |             |   |                  |   |             |  
|Total deposits                                                                                                                |  |                        | 521,715,346 |   |                  |   | 496,085,795 |  
|                                                                                                                              |  |                       
|Borrowings:                                                                                                                   |  |                        |             |   |                  |   |             |  
|Trust preferred subordinated debt                                                                                             |  |                        | 10,000,000  |   |                  |   | 10,000,000  |  
|Federal Home Loan Bank advances                                                                                               |  |                        | 36,550,462  |   |                  |   | 27,675,272  |  
|Federal funds purchased                                                                                                       |  |                        |            |   |                  |   | 385,000     |  
|                                                                                                                              |  |                        |             |   |                  |   |             |  
|Total borrowings                                                                                                              |  |                        | 46,550,462  |   |                  |   | 38,060,272  |  
|                                                                                                                              |  |                       
|Other liabilities                                                                                                             |  |                        | 4,963,163   |   |                  |   | 3,163,645   |  
|                                                                                                                              |  |                        |             |   |                  |   |             |  
|Total liabilities                                                                                                             |  |                        | 573,228,971 |   |                  |   | 537,309,712 |  
|                                                                                                                              |  |                        |             |   |                  |   |             |  
|                                                                                                                              |  |                       
|STOCKHOLDERS EQUITY:                                                                                                         |  |                        |             |   |                  |   |             |  
|Preferred stock, $5 par value, 1,985,300 shares authorized, none issued                                                       |  |                        |            |   |                  |   |            |  
|Cumulative perpetual preferred stock, series A, $1,000 par value, 14,700 shares issued and outstanding                        |  |                        | 14,491,072  |   |                  |   | 14,481,383  |  
|Common stock, $5 par value, 20,000,000 shares authorized, issued and outstanding 5,759,263 and 5,735,007 shares, respectively |  |                        | 28,796,315  |   |                  |   | 28,675,035  |  
|Additional paid-in capital                                                                                                    |  |                        | 8,115,369   |   |                  |   | 8,065,602   |  
|Retained earnings                                                                                                             |  |                        | 9,404,615   |   |                  |   | 8,528,094   |  
|Accumulated other comprehensive income                                                                                        |  |                        | 20,674      |   |                  |   | 27,302      |  
|                                                                                                                              |  |                        |             |   |                  |   |             |  
|Total Monarch Financial Holdings, Inc. shareholders equity                                                                   |  |                        | 60,828,045  |   |                  |   | 59,777,416  |  
|Noncontrolling interest                                                                                                       |  |                        | 147,383     |   |                  |   | 111,274     |  
|                                                                                                                              |  |                        |             |   |                  |   |             |  
|Total equity                                                                                                                  |  |                        | 60,975,428  |   |                  |   | 59,888,690  |  
|                                                                                                                              |  |                        |             |   |                  |   |             |  
|                                                                                                                              |  |                       
|Total liabilities and stockholders equity                                                                                    |  | $                      | 634,204,399 |   |                  | $ | 597,198,402 |  
|                                                                                                                              |  |                        |             |   |                  |   |             |  

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



3



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##### Table of Contents

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

MONARCH
FINANCIAL HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF INCOME

(unaudited)



|                                                            |  |                          |            |   |      |   |           |  
|----------------------------------------------------------- |  | ------------------------ | ---------- | - | ---- | - | --------- | -
|                                                            |  | 3 Months Ended March 31, |           
|                                                            |  | 2009                     |            |   | 2008 |  
|Interest income:                                            |  |                          |            |   |      |   |           |  
|Interest and fees on loans                                  |  | $                        | 7,485,447  |   |      | $ | 7,727,542 |  
|Interest on investment securities                           |  |                          | 64,335     |   |      |   | 119,535   |  
|Interest on federal funds sold                              |  |                          | 894        |   |      |   | 3,500     |  
|Dividends on equity securities                              |  |                          | 15,525     |   |      |   | 59,397    |  
|Interest on other bank accounts                             |  |                          | 636        |   |      |   | 18,090    |  
|                                                            |  |                          |            |   |      |   |           |  
|Total interest income                                       |  |                          | 7,566,837  |   |      |   | 7,928,064 |  
|                                                            |  |                          |            |   |      |   |           |  
|                                                            |  |                         
|Interest expense:                                           |  |                          |            |   |      |   |           |  
|Interest on deposits                                        |  |                          | 2,640,410  |   |      |   | 3,333,689 |  
|Interest on trust preferred subordinated debt               |  |                          | 76,687     |   |      |   | 162,536   |  
|Interest on borrowings                                      |  |                          | 260,534    |   |      |   | 504,001   |  
|                                                            |  |                          |            |   |      |   |           |  
|Total interest expense                                      |  |                          | 2,977,631  |   |      |   | 4,000,226 |  
|                                                            |  |                          |            |   |      |   |           |  
|                                                            |  |                         
|Net interest income                                         |  |                          | 4,589,206  |   |      |   | 3,927,838 |  
|                                                            |  |                         
|Provision for loan losses                                   |  |                          | 700,551    |   |      |   | 395,102   |  
|                                                            |  |                          |            |   |      |   |           |  
|                                                            |  |                         
|Net interest income after provision for loan losses         |  |                          | 3,888,655  |   |      |   | 3,532,736 |  
|                                                            |  |                          |            |   |      |   |           |  
|                                                            |  |                         
|Non-interest income:                                        |  |                          |            |   |      |   |           |  
|Mortgage banking income                                     |  |                          | 7,101,121  |   |      |   | 3,990,364 |  
|Investment and insurance commissions                        |  |                          | 284,005    |   |      |   | 329,054   |  
|Service charges and fees                                    |  |                          | 285,469    |   |      |   | 287,358   |  
|Security gains, net                                         |  |                          |           |   |      |   | 3,146     |  
|Other                                                       |  |                          | 171,791    |   |      |   | 103,815   |  
|                                                            |  |                          |            |   |      |   |           |  
|Total noninterest income                                    |  |                          | 7,842,386  |   |      |   | 4,713,737 |  
|                                                            |  |                          |            |   |      |   |           |  
|                                                            |  |                         
|Non-interest expenses:                                      |  |                          |            |   |      |   |           |  
|Salaries and employee benefits                              |  |                          | 7,141,002  |   |      |   | 4,605,422 |  
|Occupancy expenses                                          |  |                          | 574,659    |   |      |   | 490,776   |  
|Furniture and equipment expenses                            |  |                          | 323,142    |   |      |   | 297,590   |  
|Loan expense                                                |  |                          | 612,069    |   |      |   | 467,509   |  
|Data processing                                             |  |                          | 207,960    |   |      |   | 167,375   |  
|FDIC insurance                                              |  |                          | 255,501    |   |      |   | 57,600    |  
|Other                                                       |  |                          | 948,245    |   |      |   | 676,370   |  
|                                                            |  |                          |            |   |      |   |           |  
|Total noninterest expenses                                  |  |                          | 10,062,578 |   |      |   | 6,762,642 |  
|                                                            |  |                          |            |   |      |   |           |  
|                                                            |  |                         
|Income before income taxes                                  |  |                          | 1,668,463  |   |      |   | 1,483,831 |  
|                                                            |  |                         
|Income tax expense                                          |  |                          | (514,400   | ) |      |   | (468,200  | )
|                                                            |  |                          |            |   |      |   |           |  
|                                                            |  |                         
|Net income                                                  |  |                          | 1,154,063  |   |      |   | 1,015,631 |  
|                                                            |  |                         
|Less: Net income attributable to noncontrolling interest    |  |                          | (93,792    | ) |      |   | (47,430   | )
|                                                            |  |                          |            |   |      |   |           |  
|                                                            |  |                         
|Net income attributable to Monarch Financial Holdings, Inc. |  | $                        | 1,060,271  |   |      | $ | 968,201   |  
|                                                            |  |                          |            |   |      |   |           |  
|                                                            |  |                         
|Basic net income per share                                  |  | $                        | 0.16       |   |      | $ | 0.20      |  
|Diluted net income per share                                |  | $                        | 0.16       |   |      | $ | 0.20      |  

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



4



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##### Table of Contents

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

MONARCH
FINANCIAL HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

(unaudited)



|                                                                                                      |  |              |  |                          |            |  |                                 |           |                  |  |   |                                           |  |   |                        |   |  |       |         |   |  |   |         |   |  |   |            |  
|----------------------------------------------------------------------------------------------------- |  | ------------ |  | ------------------------ | ---------- |  | ------------------------------- | --------- | ---------------- |  | - | ----------------------------------------- |  | - | ---------------------- | - |  | ----- | ------- | - |  | - | ------- | - |  | - | ---------- | -
|                                                                                                      |  | Common Stock |  | AdditionalPaid-InCapital |            |  | Series APerpetualPreferredStock |           | RetainedEarnings |  |   | AccumulatedOtherComprehensiveIncome(Loss) |  |   | NoncontrollingInterest |   |  | Total |        
|                                                                                                      |  | Shares       |  | Amount                   |            |  |                                 |           |                  | 
|BalanceDecember 31, 2007                                                                             |  | 4,827,505    |  | $                        | 24,137,525 |  | $                               | 5,008,121 |                  |  | $ |                                          |  | $ | 7,419,711              |   |  | $     | (16,861 | ) |  | $ | 57,702  |   |  | $ | 36,606,198 |  
|Distributions to noncontrolling interests                                                             |  |              |  |                          |            |  |                                 |           |                  |  |   |                                           |  |   |                        |   |  |       |         |   |  |   | (11,660 | ) |  |   | (11,660    | )
|Comprehensive income:                                                                                 |  |              |  |                          |            |  |                                 |           |                  |  |   |                                           |  |   |                        |   |  |       |         |   |  |   |         |   |  |   |            |  
|Net income for three months ended March 31, 2008                                                      |  |              |  |                          |            |  |                                 |           |                  |  |   |                                           |  |   | 968,201                |   |  |       |         |   |  |   | 47,430  |   |  |   | 1,015,631  |  
|Unrealized gain on securities available-for-sale, net of reclassification adjustment and income taxes |  |              |  |                          |            |  |                                 |           |                  |  |   |                                           |  |   |                        |   |  |       | 56,894  |   |  |   |         |   |  |   | 56,894     |  
|                                                                                                      |  |              |  |                          |            |  |                                 |           |                  |  |   |                                           |  |   |                        |   |  |       |         |   |  |   |         |   |  |   |            |  
|Total comprehensive income                                                                            |  |              |  |                          |            |  |                                 |           |                  |  |   |                                           |  |   |                        |   |  |       |         |   |  |   |         |   |  |   | 1,072,525  |  
|                                                                                                      |  |              |  |                          |            |  |                                 |           |                  |  |   |                                           |  |   |                        |   |  |       |         |   |  |   |         |   |  |   |            |  
|Stock-based compensation expense                                                                      |  | 48,360       |  |                          | 241,800    |  |                                 | (171,383  | )                |  |   |                                           |  |   |                        |   |  |       |         |   |  |   |         |   |  |   | 70,417     |  
|                                                                                                      |  |              |  |                          |            |  |                                 |           |                  |  |   |                                           |  |   |                        |   |  |       |         |   |  |   |         |   |  |   |            |  
|BalanceMarch 31, 2008                                                                                |  | 4,875,865    |  | $                        | 24,379,325 |  | $                               | 4,836,738 |                  |  | $ |                                          |  | $ | 8,387,912              |   |  | $     | 40,033  |   |  | $ | 93,472  |   |  | $ | 37,737,480 |  
|                                                                                                      |  |              |  |                          |            |  |                                 |           |                  |  |   |                                           |  |   |                        |   |  |       |         |   |  |   |         |   |  |   |            |  
|                                                                                                      |  |              |  |                          |            |  |                                 |          
|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 |  
|Distributions to noncontrolling interests                                                             |  |              |  |                          |            |  |                                 |           |                  |  |   |                                           |  |   |                        |   |  |       |         |   |  |   | (57,683 | ) |  |   | (57,683    | )
|Comprehensive income:                                                                                 |  |              |  |                          |            |  |                                 |           |                  |  |   |                                           |  |   |                        |   |  |       |         |   |  |   |         |   |  |   |            |  
|Net income for three months ended March 31, 2009                                                      |  |              |  |                          |            |  |                                 |           |                  |  |   |                                           |  |   | 1,060,271              |   |  |       |         |   |  |   | 93,792  |   |  |   | 1,154,063  |  
|Unrealized loss on securities available-for-sale, net of reclassification adjustment and income taxes |  |              |  |                          |            |  |                                 |           |                  |  |   |                                           |  |   |                        |   |  |       | (6,628  | ) |  |   |         |   |  |   | (6,628     | )
|                                                                                                      |  |              |  |                          |            |  |                                 |           |                  |  |   |                                           |  |   |                        |   |  |       |         |   |  |   |         |   |  |   |            |  
|Total comprehensive income                                                                            |  |              |  |                          |            |  |                                 |           |                  |  |   |                                           |  |   |                        |   |  |       |         |   |  |   |         |   |  |   | 1,147,435  |  
|                                                                                                      |  |              |  |                          |            |  |                                 |           |                  |  |   |                                           |  |   |                        |   |  |       |         |   |  |   |         |   |  |   |            |  
|Stock-based compensation expense                                                                      |  |              |  |                          |            |  |                                 | 78,800    |                  |  |   |                                           |  |   |                        |   |  |       |         |   |  |   |         |   |  |   | 78,800     |  
|Stock options exercised, including tax benefit from exercise of options                               |  | 24,256       |  |                          | 121,280    |  |                                 | (19,344   | )                |  |   |                                           |  |   |                        |   |  |       |         |   |  |   |         |   |  |   | 101,936    |  
|Accretion of discount on cumulative perpetual preferred warrants                                      |  |              |  |                          |            |  |                                 | (9,689    | )                |  |   | 9,689                                     |  |   |                        |   |  |       |         |   |  |   |         |   |  |   |           |  
|Cash dividend declared on cumulative perpetual preferred stock (5%)                                   |  |              |  |                          |            |  |                                 |           |                  |  |   |                                           |  |   | (183,750               | ) |  |       |         |   |  |   |         |   |  |   | (183,750   | )
|                                                                                                      |  |              |  |                          |            |  |                                 |           |                  |  |   |                                           |  |   |                        |   |  |       |         |   |  |   |         |   |  |   |            |  
|BalanceMarch 31, 2009                                                                                |  | 5,759,263    |  | $                        | 28,796,315 |  | $                               | 8,115,369 |                  |  | $ | 14,491,072                                |  | $ | 9,404,615              |   |  | $     | 20,674  |   |  | $ | 147,383 |   |  | $ | 60,975,428 |  
|                                                                                                      |  |              |  |                          |            |  |                                 |           |                  |  |   |                                           |  |   |                        |   |  |       |         |   |  |   |         |   |  |   |            |  

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



5



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##### Table of Contents

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

MONARCH
FINANCIAL HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)



|                                                                     |  |                          |             |   |      |   |             |  
|-------------------------------------------------------------------- |  | ------------------------ | ----------- | - | ---- | - | ----------- | -
|                                                                     |  | 3 Months Ended March 31, |            
|                                                                     |  | 2009                     |             |   | 2008 |  
|Operating activities:                                                |  |                          |             |   |      |   |             |  
|Net income                                                           |  | $                        | 1,060,271   |   |      | $ | 968,201     |  
|Adjustments to reconcile to net cash from operating activities:      |  |                          |             |   |      |   |             |  
|Provision for loan losses                                            |  |                          | 700,551     |   |      |   | 395,102     |  
|Depreciation                                                         |  |                          | 245,937     |   |      |   | 225,359     |  
|Accretion of discounts and amortization of premiums, net             |  |                          | 3,037       |   |      |   | 153         |  
|Deferral of loan costs, net of deferred fees                         |  |                          | (34,234     | ) |      |   | (174,063    | )
|Amortization of intangible assets                                    |  |                          | 44,643      |   |      |   | 44,643      |  
|Stock-based compensation                                             |  |                          | 78,800      |   |      |   | 70,417      |  
|Net gain on disposition of investment securities                     |  |                          |            |   |      |   | (3,146      | )
|Net gain on disposition of property and equipment                    |  |                          |            |   |      |   | (10,000     | )
|Net gain on sale of other real estate                                |  |                          | (2,136      | ) |      |   |            |  
|Amortization of deferred gain                                        |  |                          | (40,862     | ) |      |   | (40,862     | )
|Changes in:                                                          |  |                          |             |   |      |   |             |  
|Loans held for sale                                                  |  |                          | (26,399,399 | ) |      |   | (11,748,754 | )
|Interest receivable                                                  |  |                          | (114,479    | ) |      |   | 282,762     |  
|Other assets                                                         |  |                          | 85,349      |   |      |   | (545,577    | )
|Other liabilities                                                    |  |                          | 1,692,739   |   |      |   | 129,741     |  
|                                                                     |  |                          |             |   |      |   |             |  
|Net cash from operating activities                                   |  |                          | (22,679,783 | ) |      |   | (10,406,024 | )
|                                                                     |  |                          |             |   |      |   |             |  
|Investing activities:                                                |  |                          |             |   |      |   |             |  
|Purchases of available-for-sale securities                           |  |                          |            |   |      |   | (1,044,610  | )
|Proceeds from maturities and calls of held-to-maturity securities    |  |                          |            |   |      |   | 1,917,858   |  
|Proceeds from sales and maturities of available-for-sale securities  |  |                          | 36,949      |   |      |   | 20,600,000  |  
|Loan originations, net of principal repayments                       |  |                          | (2,999,185  | ) |      |   | (42,246,304 | )
|Purchases of premises and equipment                                  |  |                          | (101,932    | ) |      |   | (779,782    | )
|(Purchase) sale of restricted equity securities, net of redemptions  |  |                          | (2,238,200  | ) |      |   | 1,646,100   |  
|                                                                     |  |                          |             |   |      |   |             |  
|Net cash from investing activities                                   |  |                          | (5,302,368  | ) |      |   | (19,906,738 | )
|                                                                     |  |                          |             |   |      |   |             |  
|Financing activities:                                                |  |                          |             |   |      |   |             |  
|Net increase (decrease) in noninterest-bearing deposits              |  |                          | (3,605,513  | ) |      |   | 3,906,466   |  
|Net increase in interest-bearing deposits                            |  |                          | 29,235,064  |   |      |   | 75,323,708  |  
|Net increase (decrease) of FHLB advances and federal funds purchased |  |                          | 8,490,190   |   |      |   | (40,371,981 | )
|Proceeds from issuance of common stock, net of issuance costs        |  |                          | 101,936     |   |      |   |            |  
|                                                                     |  |                          |             |   |      |   |             |  
|Net cash from financing activities                                   |  |                          | 34,221,677  |   |      |   | 38,858,193  |  
|                                                                     |  |                          |             |   |      |   |             |  
|CHANGE IN CASH AND CASH EQUIVALENTS                                  |  |                          | 6,239,526   |   |      |   | 8,545,431   |  
|CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                       |  |                          | 8,596,342   |   |      |   | 9,464,550   |  
|                                                                     |  |                          |             |   |      |   |             |  
|CASH AND CASH EQUIVALENTS AT END OF PERIOD                           |  | $                        | 14,835,868  |   |      | $ | 18,009,981  |  
|                                                                     |  |                          |             |   |      |   |             |  
|                                                                     |  |                         
|SUPPLEMENTAL SCHEDULES AND CASH FLOW INFORMATION                     |  |                          |             |   |      |   |             |  
|Cash paid for:                                                       |  |                          |             |   |      |   |             |  
|Interest on deposits and other borrowings                            |  | $                        | 2,576,024   |   |      | $ | 3,846,264   |  
|Income taxes                                                         |  | $                        | 800,000     |   |      | $ | 750,000     |  
|Loans transferred to foreclosed real estate during the year          |  | $                        | 465,408     |   |      | $ | 369,076     |  

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



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MONARCH FINANCIAL HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. BASIS OF PRESENTATION

In the opinion of management, the accompanying unaudited consolidated financial statements
contain all adjustments consisting of normal recurring accruals necessary to present fairly Monarch Financial Holdings, Inc.s financial position as of March 31, 2009; the consolidated statements of income for the three months ended
March 31, 2009 and 2008; the consolidated statements of changes in shareholders equity for the three months ended March 31, 2009 and 2008; and the consolidated statements of cash flows for the three months ended March 31, 2009
and 2008. These financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all of the disclosures and notes required by generally accepted accounting principles. The financial statements
include the accounts of Monarch Financial Holdings, Inc. and its subsidiaries, and all significant intercompany accounts and transactions have been eliminated. Operating results for the three month period ended March 31, 2009 are not
necessarily indicative of the results that may be expected for the year ended December 31, 2009. Certain prior year amounts have been reclassified to conform with current year presentations.

Recent Accounting Pronouncements

In December
2007, the FASB issued SFAS 160, Noncontrolling Interests in Consolidated Financial Statementsan Amendment to ARB No. 51,which establishes accounting and reporting standards for ownership interests in subsidiaries held by
parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parents ownership interest, and the valuation of retained noncontrolling equity investments when a
subsidiary is deconsolidated. SFAS 160 also establishes expanded disclosure requirements that clearly identify and distinguish between the interest of the parents owners and the interests of the noncontrolling owners of a subsidiary. SFAS 160
was effective for fiscal years beginning after December 15, 2008. The adoption of SFAS 160 has not had a material impact on our financial condition and results of operations.

In February, 2008, the FASB issued FASB Staff Position (FSP) FAS 140-3, Accounting for Transfers of Financial Assets and Repurchase
Financing Transactions (FSP 140-3). FSP 140-3 requires that an initial transfer of a financial asset and a repurchase financing that was entered into contemporaneously with, or in contemplation of, the initial transfer be evaluated together as
a linked transaction under SFAS 140, unless certain criteria are met. FSP 140-3 is effective for our financial statements for the year beginning on January 1, 2009, and earlier adoption is not permitted. The adoption of FAS 140-3 has not had a
material impact on our financial condition and results of operations.

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

In March 2008, the FASB issued
SFAS 161, Disclosures about Derivative Instruments and Hedging Activities; an amendment of SFAS 133. The standard requires enhanced disclosures about derivative instruments and hedged items that are accounted for under SFAS 133 and related
interpretations. The standard was effective for periods beginning after November 15, 2008, with early adoption permitted. The standard expands the disclosure requirements for derivatives and hedged items and has not had a material impact on our
consolidated financial position and results of operations.

On October 10, 2008, the FASB issued FSP FAS 157-3, Determining the
Fair Value of a Financial Asset When the Market for That Asset Is Not Active.The FSP clarifies the application of SFAS 157, Fair Value Measurements, in a market that is not active and provides an example to illustrate key considerations
in determining the fair value of a financial asset when the market for that financial asset is not active. The FSP is effective upon issuance, including prior periods for which financial statements have not been issued. The provisions of FSP FAS
157-3 did not have an impact on our consolidated financial position or results of operations.



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NOTE 2. GENERAL

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

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

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

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

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

In May 2007, we expanded banking
operations into northeastern North Carolina with the opening of a full service banking office in the town of Kitty Hawk, under the name of OBX Bank (OBX). OBX, which operates as 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 changed its name from Monarch Home Funding to Monarch Mortgage (MM). MM originates and sells conventional, FHA, VA and VHDA residential loans and offers additional mortgage products such as
construction-permanent loans for Monarch Banks loan portfolio. Their primary office is in Virginia Beach with additional offices in Chesapeake, Norfolk, Suffolk and Fredericksburg, Virginia, Rockville, Waldorf, Crofton, and College Park,
Maryland.

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

In 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.



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NOTE 3. EARNINGS PER SHARE (EPS)

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



|                                                  |  |                          |           |   |      |   |          
|------------------------------------------------- |  | ------------------------ | --------- | - | ---- | - | ---------
|                                                  |  | 3 months ended March 31,
|                                                  |  | 2009                     |           |   | 2008
|Net income (numerator, basic and diluted)         |  | $                        | 1,060,271 |   |      | $ | 968,201  
|Less: cumulative perpetual preferred dividend     |  |                          | (183,750  | ) |      |   |         
|                                                  |  |                          |           |   |      |   |          
|Net income (numerator, basic and diluted)         |  |                          | 876,521   |   |      |   | 968,201  
|Weighted average shares outstanding (denominator) |  |                          | 5,617,287 |   |      |   | 4,773,545
|                                                  |  |                          |           |   |      |   |          
|Income per common sharebasic                     |  | $                        | 0.16      |   |      | $ | 0.20     
|                                                  |  |                          |           |   |      |   |          
|Weighted average sharesdiluted (denominator)     |  |                          | 5,630,287 |   |      |   | 4,947,754
|                                                  |  |                          |           |   |      |   |          
|Income per common sharediluted                   |  | $                        | 0.16      |   |      | $ | 0.20     
|                                                  |  |                          |           |   |      |   |          
|Dilutive effect- average number of shares         |  |                          | 13,000    |   |      |   | 174,209  

NOTE 4. FAIR VALUE ACCOUNTING

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

Fair Value Measurements (SFAS 157)

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

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



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



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



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

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



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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 March 31, 2009 and December 31, 2008:



|                                         |  |                                                 |            |                                                             |   |                                             |  |                                        |           |  |   |          
|---------------------------------------- |  | ----------------------------------------------- | ---------- | ----------------------------------------------------------- | - | ------------------------------------------- |  | -------------------------------------- | --------- |  | - | ---------
|                                         |  | Fair Value Measurements at Reporting Date Using
|Description                              |  | Fair Value                                      |            | Quoted Prices inActive Markets forIdentical Assets(Level 1) |   | Significant OtherObservableInputs (Level 2) |  | SignificantUnobservableInputs(Level
3)
|Assets at March 31, 2009                 |  |                                                 |            |                                                             |   |                                             |  |                                        |           |  |   |          
|Investment securitiesavailable for sale |  | $                                               | 5,796,888  |                                                             | $ |                                            |  | $                                      | 5,796,888 |  | $ |         
|Restricted equity securities             |  |                                                 | 5,813,650  |                                                             |   |                                             |  |                                        |          |  |   | 5,813,650
|Rate lock commitments, net               |  |                                                 | 637,028    |                                                             |   |                                            |  |                                        | 637,028   |  |   |         
|                                         |  |                                                 |            |                                                             |   |                                             |  |                                        |           |  |   |          
|Total Assets                             |  | $                                               | 12,247,566 |                                                             | $ |                                            |  | $                                      | 6,433,916 |  | $ | 5,813,650
|                                         |  |                                                 |            |                                                             |   |                                             |  |                                        |           |  |   |          
|                                         |  |                                                 |            |                                                            
|Assets at December 31, 2008              |  |                                                 |            |                                                             |   |                                             |  |                                        |           |  |   |          
|Investment securitiesavailable for sale |  | $                                               | 5,846,917  |                                                             | $ |                                            |  | $                                      | 5,846,917 |  | $ |         
|Restricted equity securities             |  | $                                               | 3,575,450  |                                                             |   |                                             |  | $                                      |          |  |   | 3,575,450
|Rate lock commitments, net               |  |                                                 | 645,484    |                                                             |   |                                            |  |                                        | 645,484   |  |   |         
|                                         |  |                                                 |            |                                                             |   |                                             |  |                                        |           |  |   |          
|Total Assets                             |  | $                                               | 10,067,851 |                                                             | $ |                                            |  | $                                      | 6,492,401 |  | $ | 3,575,450
|                                         |  |                                                 |            |                                                             |   |                                             |  |                                        |           |  |   |          

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



|                                                          |  |      |           |      |   |            |  
|--------------------------------------------------------- |  | ---- | --------- | ---- | - | ---------- | -
|                                                          |  | 2009 |           | 2008 |  
|Balance, January 1                                        |  | $    | 3,575,450 |      | $ | 4,847,600  |  
|                                                          |  |     
|Total gains and losses (realized/unrealized) included in: |  |      |           |      |   |            |  
|Net income                                                |  |      |          |      |   |           |  
|Other comprehensive income                                |  |      |          |      |   |           |  
|Purchases, sales, issuances and settlements, net          |  |      | 2,238,200 |      |   | (1,646,100 | )
|Transfers into (out of) Level 3                           |  |      |          |      |   |           |  
|                                                          |  |      |           |      |   |            |  
|Balance, March 31                                         |  | $    | 5,813,650 |      | $ | 3,201,500  |  
|                                                          |  |      |           |      |   |            |  

The following table provides quantitative disclosures about the fair value measurements for our
assets related to continuing operations which are measured at fair value on a nonrecurring basis as of March 31, 2009 and 2008:



|                  |  |                                                 |         |                                                             |   |                                             |  |                                        |   |                                          |   |         |  |   |      
|----------------- |  | ----------------------------------------------- | ------- | ----------------------------------------------------------- | - | ------------------------------------------- |  | -------------------------------------- | - | ---------------------------------------- | - | ------- |  | - | -----
|                  |  | Fair Value Measurements at Reporting Date Using
|Description       |  | Fair Value                                      |         | Quoted Prices inActive Markets forIdentical Assets(Level 1) |   | Significant OtherObservableInputs (Level 2) |  | SignificantUnobservableInputs(Level 3) |   | Total gains(losses) forthree monthsended
|At March 31, 2009 |  |                                                 |         |                                                             |   |                                             |  |                                        |   |                                          |   |         |  |   |      
|Real estate owned |  | $                                               | 856,363 |                                                             | $ |                                            |  | $                                      |  |                                          | $ | 856,363 |  | $ | 2,136
|                  |  |                                                 |         |                                                             |  
|At March 31, 2008 |  |                                                 |         |                                                             |   |                                             |  |                                        |   |                                          |   |         |  |   |      
|Real estate owned |  | $                                               | 369,076 |                                                             | $ |                                            |  | $                                      |  |                                          | $ | 369,076 |  | $ |     

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. A recovery is recorded for the
quarter ended March 31, 2009, for private mortgage insurance reimbursement on one of our real estate owned properties. We had no losses to record due to valuation adjustments on real estate owned in our consolidated statements of income.



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

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

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

At March 31, 2009, we have not elected to implement fair value accounting for any balance sheet items as allowed by SFAS 159.

NOTE 5. COMPREHENSIVE INCOME

Accounting principles generally require that recognized revenue, expenses, gains and losses be
included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with
net income, are components of comprehensive income. The only component of other comprehensive income consists of unrealized gains and losses on available-for-sale securities. We account for comprehensive income in accordance with FASB Statement
No. 130, Reporting Comprehensive Income. The following is a detail of comprehensive income for the three months ended March 31, 2009 and 2008:



|                                                                                         |  |                              |           |   |      |   |           |  
|---------------------------------------------------------------------------------------- |  | ---------------------------- | --------- | - | ---- | - | --------- | -
|                                                                                         |  | Three months ended March 31, |          
|                                                                                         |  | 2009                         |           |   | 2008 |  
|Net Income                                                                               |  | $                            | 1,060,271 |   |      | $ | 968,201   |  
|Change in unrealized gains (losses) on securities available-for-sale, net of tax expense |  |                              | (6,628    | ) |      |   | 56,894    |  
|                                                                                         |  |                              |           |   |      |   |           |  
|Total comprehensive income                                                               |  | $                            | 1,053,643 |   |      | $ | 1,025,095 |  
|                                                                                         |  |                              |           |   |      |   |           |  
|                                                                                         |  |                             
|Unrealized holding (losses) gains during the period                                      |  | $                            | (10,043   | ) |      | $ | 86,204    |  
|                                                                                         |  |                              |           |   |      |   |           |  
|Total other comprehensive (loss) gain before income tax expense                          |  |                              | (10,043   | ) |      |   | 86,204    |  
|Income tax benefit (expense)                                                             |  |                              | 3,415     |   |      |   | (29,310   | )
|                                                                                         |  |                              |           |   |      |   |           |  
|Net unrealized (losses) gains                                                            |  | $                            | (6,628    | ) |      | $ | 56,894    |  
|                                                                                         |  |                              |           |   |      |   |           |  

NOTE 6. STOCK-BASED COMPENSATION

As of March 31, 2009, we had a stock-based compensation plan. Prior to January 1, 2006, we accounted for our plan under the recognition and
measurement principles of APB Opinion 25, Accounting for Stock Issued to Employees,and related interpretations. Under these older standards no stock-based employee compensation cost was reflected in net income, as all options granted under
the plan had an exercise price equal to the fair value of the underlying common stock on the date of the grant. On January 1, 2006, we adopted SFAS Statement No. 123R Share-Based Payment, (SFAS 123R) that addresses the
accounting for share-based payment transactions in which a company receives employee services in exchange for either equity instruments of the company or liabilities that are based on the fair value of the companys equity instruments or that
may be settled by the issuance of such equity instruments. SFAS 123R eliminates the ability to account for share-based compensation transactions using the intrinsic method and requires that such transactions be accounted for using a fair-value-based
method and recognized as expense in the consolidated statement of income.

In May 2006, our shareholders ratified the adoption of a new
stock-based compensation plan to succeed the Monarch Bank 1999 Incentive Stock Option Plan. The new Monarch Bank 2006 Equity Incentive Plan authorizes the compensation committee to grant options, stock appreciation rights, stock awards, performance
stock awards, and stock units to designated directors, officers, key employees, consultants and advisors to 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.



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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 annually on a pro-rata basis over the service period to vesting.

NOTE 7. SEGMENT REPORTING

Reportable segments include community banking and mortgage banking
services. Community banking involves making loans to and generating deposits from individuals and businesses in the markets where we have offices. Mortgage banking originates residential loans and subsequently sells them to investors. 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 noninterest income and noninterest expense, respectively. We do not have other reportable operating segments. The accounting policies of the segment are the same as those described in the
summary of significant accounting policies. 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 months ended March 31, 2009 and 2008 is shown in the following table.

Selected Financial Information



|                                                           |  |                            |             |   |                           |   |             |                          |  |   |              |   |  |   |             |  
|---------------------------------------------------------- |  | -------------------------- | ----------- | - | ------------------------- | - | ----------- | ------------------------ |  | - | ------------ | - |  | - | ----------- | -
|                                                           |  | Commercialand OtherBanking |             |   | MortgageBankingOperations |   |             | IntersegmentEliminations |  |   | Total        |  
|Three Months Ended March 31, 2009                          |  |                            |             |   |                           |   |             |                          |  |   |              |   |  |   |             |  
|Net interest income after provision for loan losses        |  | $                          | 3,888,655   |   |                           | $ | 876,521     |                          |  | $ | (876,521     | ) |  | $ | 3,888,655   |  
|Noninterest income                                         |  |                            | 1,478,412   |   |                           |   | 7,357,459   |                          |  |   | (993,485     | ) |  |   | 7,842,386   |  
|Noninterest expenses                                       |  |                            | (3,730,291  | ) |                           |   | (6,709,799  | )                        |  |   | 377,512      |   |  |   | (10,062,578 | )
|                                                           |  |                            |             |   |                           |   |             |                          |  |   |              |   |  |   |             |  
|Net income before income taxes and noncontrolling interest |  | $                          | 1,636,776   |   |                           | $ | 1,524,181   |                          |  | $ | (1,492,494   | ) |  | $ | 1,668,463   |  
|                                                           |  |                            |             |   |                           |   |             |                          |  |   |              |   |  |   |             |  
|                                                           |  |                            |             |  
|Three Months Ended March 31, 2008                          |  |                            |             |   |                           |   |             |                          |  |   |              |   |  |   |             |  
|Net interest income after provision for loan losses        |  | $                          | 3,310,414   |   |                           | $ | 82,055      |                          |  | $ | 140,267      |   |  | $ | 3,532,736   |  
|Noninterest income                                         |  |                            | 745,123     |   |                           |   | 4,117,625   |                          |  |   | (149,011     | ) |  |   | 4,713,737   |  
|Noninterest expenses                                       |  |                            | (3,347,358  | ) |                           |   | (3,437,034  | )                        |  |   | 21,750       |   |  |   | (6,762,642  | )
|                                                           |  |                            |             |   |                           |   |             |                          |  |   |              |   |  |   |             |  
|Net income before income taxes and minority interest       |  | $                          | 708,179     |   |                           | $ | 762,646     |                          |  | $ | 13,006       |   |  | $ | 1,483,831   |  
|                                                           |  |                            |             |   |                           |   |             |                          |  |   |              |   |  |   |             |  
|                                                           |  |                            |             |  
|Segment Assets                                             |  |                            |             |   |                           |   |             |                          |  |   |              |   |  |   |             |  
|March 31, 2009                                             |  | $                          | 634,758,896 |   |                           | $ | 103,437,019 |                          |  | $ | (103,991,516 | ) |  | $ | 634,204,399 |  
|December 31, 2008                                          |  | $                          | 597,478,596 |   |                           | $ | 76,045,662  |                          |  | $ | (76,325,856  | ) |  | $ | 597,198,402 |  

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.



12



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##### Table of Contents

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



|                                           |  |               |           |   |                  |   |           |  
|------------------------------------------ |  | ------------- | --------- | - | ---------------- | - | --------- | -
|                                           |  | March 31,2009 |           |   | December 31,2008 |  
|Amortizable intangible assets              |  | $             | 1,250,000 |   |                  | $ | 1,250,000 |  
|Accumulated amortizationintangible assets |  |               | (297,616  | ) |                  |   | (252,973  | )
|                                           |  |               |           |   |                  |   |           |  
|Amortizable intangible assets, net         |  | $             | 952,384   |   |                  | $ | 997,027   |  
|                                           |  |               |           |   |                  |   |           |  
|                                           |  |              
|Goodwill                                   |  |               | 775,000   |   |                  |   | 775,000   |  
|                                           |  |               |           |   |                  |   |           |  

Amortization expense for intangible assets for each of the three months period ending
March 31, 2009 and 2008 was $44,643.



|                                                    |  |   |        
|--------------------------------------------------- |  | - | -------
|Estimated Amortization Expense:                     |  |   |        
|For the remaining months of the year ended 12/31/09 |  |   | 133,929
|For the year ended 12/31/10                         |  |   | 178,572
|For the year ended 12/31/11                         |  |   | 178,572
|For the year ended 12/31/12                         |  |   | 178,572
|For the year ended 12/31/13                         |  |   | 178,572
|Thereafter                                          |  |   | 104,167
|                                                    |  |   |        
|                                                    |  | $ | 952,384
|                                                    |  |   |        



13



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##### Table of Contents

|ITEM 2. | 
|------- | 

MONARCH FINANCIAL HOLDINGS, INC.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

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

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



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



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



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



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



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



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

A summary of our significant risk factors is set forth in Note 1A to the consolidated financial statements in our 2008 Form 10-K.

Earnings Summary

We reported net income of $1,060,271 for the three months ending March 31,
2009, compared to $968,201 for the same period in 2008, an increase of $92,070 or 9.5%. Net interest income increased 16.8% or $661,368 to $4,589,206 during the first quarter of 2009, when compared to 2008. Noninterest income increased 66.4% to
$7,842,386 during the three months ended March 31, 2009 when compared to $4,713,737 for the same period in 2008. Noninterest expenses totaled $10,062,578, an increase of $3,299,936, or 48.8% for the first quarter of 2009 compared to 2008. Both
basic and diluted earnings per share of common stock were $0.16 for the first quarter of 2009 compared to $0.20 for 2008.

Profitability as
measured by our annualized return on average assets (ROA) was 0.69% compared to 0.77% for the three months ended March 31, 2009 and 2008, respectively. Another measure of our profitability, the annualized return on average equity (ROE) was
7.12% for the first quarter of 2009 compared to 10.49% for the same period in 2008.

Net Interest Income

Net interest income, which is our principal source of earnings, increased in the first quarter of 2009 due to asset growth outpacing liability growth.
Additionally, although interest rates are much lower than they were in the first quarter of 2008, they have stabilized, allowing us to manage our pricing more effectively. The Federal Funds rate which is set by the Federal Reserve Banks
Federal Open Market Committee, has been at a record low of 0.25% since December 2008. In contrast, the Federal Funds rate dropped 200 basis points from mid-December 2008 to 2.25% at March 31, 2008. The Wall Street Journal Prime Rate has
followed the Federal Funds rate trend with current rates at 3.25%, compared to 5.25% for the first quarter of 2008. We are asset sensitive, with the majority of our loan portfolio indexed on the Wall Street Journal Prime Rate and set to move
immediately with each rate change. At the same time a large portion of our funding liabilities reprice based on much longer maturity dates, creating margin compression in a swiftly declining rate environment. A stable, though lower, rate environment
coupled with healthy year over year growth has allowed us to better align our liability pricing with that of our assets in 2009.



14



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##### Table of Contents

Net interest income was $4,589,206 for the first quarter of 2009, compared to $3,927,838 for the same
period in 2008, an increase of $661,368 or 16.8%. The source of this increase was in the reduction of our cost of funds by 25.6% or $1,022,595, to $2,977,631 in 2009 compared to $4,000,226 in the first quarter of 2008.

Rate/Volume Analysis

Total interest income declined
$361,227 or 4.6% in the first quarter of 2009 compared to 2008. Interest and fees on loans, which includes loans held for sale, is the largest component of interest income. In the first three months of 2009, interest and fees on loans totaled
$7,485,447, a decrease of $242,095 or 3.1% despite average portfolio growth of $116.6 million over the same period in 2008.

Investment
income declined $55,200, or 46.2% primarily due to a $4.7 million drop in average portfolio holdings. Interest on federal funds sold and other bank accounts declined a combined total of $20,060 due to lower interest rates in the first quarter of
2009 compared to 2008. Income on restricted equity securities has declined, despite higher average balances because the Federal Home Loan Bank has modified their stock release policy and declared there would be no dividends in the first quarter of
2009.

In contrast to previous quarters, lower interest cost rather than higher interest income was the source of the improvement in our
net interest income. Interest expense on deposits was the primary contributor to lower interest costs, declining $693,279 or 20.8%, to $2,640,410, despite year over year average interest bearing deposit growth of $89.4 million.

The benefits of lower rates can be seen in our time deposits which grew an average $75.4 million but had a decline in interest cost of 1.8% or $39,888.
Money market interest expense declined 65.5% or $742,242, to $659,847 during the first quarter of 2009 due to a combination of lower rates and an average $11.1 million decline in outstanding balances. The cost of interest bearing demand accounts
also declined $11,518, or 45.4% in the first quarter of 2009 compared to 2008, despite a marginal increase in average outstanding balances.

Savings interest cost was $108,049, the first quarter of 2009 compared to $7,680, in 2008, an increase of $100,369. We introduced a new higher cost savings product in 2008 that has produced average year over year growth of $23.9 million.

Our borrowing costs declined 49.4% or $329,316, to $337,221, in the first three months of 2009 despite a year over year average increase
of $731 thousand, all due to lower rates.

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 first quarter of 2009 compared to 2008.

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.



15



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##### Table of Contents

|                          |  |                                                  |        |   |                       |        |        |   |  |   |       |  
|------------------------- |  | ------------------------------------------------ | ------ | - | --------------------- | ------ | ------ | - |  | - | ----- | -
|                          |  | (in thousands)                                   |       
|                          |  | For the Three Months Ended March 31,2009 vs 2008 |       
|                          |  | InterestIncrease(Decrease)                       |        |   | ChangeAttributable to |       
|                          |  |                                                  | Rate   |   |                       | Volume |       
|Interest income           |  |                                                  |        |   |                       |        |        |   |  |   |       |  
|Loans:                    |  |                                                  |        |   |                       |        |        |   |  |   |       |  
|Commercial                |  | $                                                | (318   | ) |                       | $      | (803   | ) |  | $ | 485   |  
|Mortgage                  |  |                                                  | (516   | ) |                       |        | (736   | ) |  |   | 220   |  
|Consumer                  |  |                                                  | 592    |   |                       |        | (271   | ) |  |   | 863   |  
|                          |  |                                                  |        |   |                       |        |        |   |  |   |       |  
|Total loans               |  |                                                  | (242   | ) |                       |        | (1,810 | ) |  |   | 1,568 |  
|                          |  |                                                  |        |   |                       |        |        |   |  |   |       |  
|Securities:               |  |                                                  |        |   |                       |        |        |   |  |   |       |  
|Federal agencies          |  |                                                  | (40    | ) |                       |        | (10    | ) |  |   | (30   | )
|Mortgage-backed           |  |                                                  | (3     | ) |                       |        |       |   |  |   | (3    | )
|Other securities          |  |                                                  | (13    | ) |                       |        | 3      |   |  |   | (16   | )
|                          |  |                                                  |        |   |                       |        |        |   |  |   |       |  
|Total securities          |  |                                                  | (56    | ) |                       |        | (7     | ) |  |   | (49   | )
|                          |  |                                                  |        |   |                       |        |        |   |  |   |       |  
|Deposits in other banks   |  |                                                  | (60    | ) |                       |        | (62    | ) |  |   | 2     |  
|Federal funds sold        |  |                                                  | (3     | ) |                       |        | (6     | ) |  |   | 3     |  
|Bank owned life insurance |  |                                                  | 5      |   |                       |        | 2      |   |  |   | 3     |  
|                          |  |                                                  |        |   |                       |        |        |   |  |   |       |  
|Total interest income     |  | $                                                | (356   | ) |                       | $      | (1,883 | ) |  | $ | 1,527 |  
|                          |  |                                                  |        |   |                       |        |        |   |  |   |       |  
|                          |  |                                                  |       
|Interest expense          |  |                                                  |        |   |                       |        |        |   |  |   |       |  
|Deposits:                 |  |                                                  |        |   |                       |        |        |   |  |   |       |  
|Demand                    |  | $                                                | (11    | ) |                       |        | (13    | ) |  |   | 2     |  
|Money market              |  |                                                  | (742   | ) |                       |        | (656   | ) |  |   | (86   | )
|Savings                   |  |                                                  | 100    |   |                       |        | 26     |   |  |   | 74    |  
|Time                      |  |                                                  | (41    | ) |                       |        | (765   | ) |  |   | 724   |  
|                          |  |                                                  |        |   |                       |        |        |   |  |   |       |  
|Total deposits            |  |                                                  | (694   | ) |                       |        | (1,408 | ) |  |   | 714   |  
|Federal funds purchased   |  |                                                  | (6     | ) |                       |        | (2     | ) |  |   | (4    | )
|Other borrowings          |  |                                                  | (323   | ) |                       |        | (338   | ) |  |   | 15    |  
|                          |  |                                                  |        |   |                       |        |        |   |  |   |       |  
|Total interest expense    |  |                                                  | (1,023 | ) |                       |        | (1,748 | ) |  |   | 725   |  
|                          |  |                                                  |        |   |                       |        |        |   |  |   |       |  
|Net interest income       |  | $                                                | 667    |   |                       | $      | (135   | ) |  | $ | 802   |  
|                          |  |                                                  |        |   |                       |        |        |   |  |   |       |  

Average Balances, Income and Expenses, Yields and Rates

Our net interest spread on a tax-equivalent basis increased 10 basis points to 2.72% for first quarter of 2009 when compared to 2.62% for the same period
in 2008. Yield on earning assets decreased 143 basis points to 5.18% in 2009 compared to 6.61% for the first quarter of 2008, while the cost of interest bearing liabilities decreased 153 basis points to 2.46% from 3.99%, respectively, for the same
period.

Bank Owned Life Insurance (BOLI) has been included in interest earning assets. We purchased $6,000,000 in BOLI during the fourth
quarter of 2005. The income on BOLI is not subject to Federal Income tax, giving it a tax-effective yield of 5.70% for the first three months of 2008 compared to 5.51% for the same period in 2008.

In July, 2006, we added additional capital through the issuance of $10,000,000 in trust preferred securities. These securities are treated as
subordinated debt and have been included in other borrowings. The cost on trust preferred securities decreased to 3.07% from 6.43% in the first quarter of 2009 compared to 2008.

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



16



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##### Table of Contents

AVERAGE BALANCES, INCOME AND EXPENSE, YIELDS AND RATES

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



|                                              |  |                             |             |   |                |   |              |  |      |                    |  |   |                    |   |              |   |           |  |      |  
|--------------------------------------------- |  | --------------------------- | ----------- | - | -------------- | - | ------------ |  | ---- | ------------------ |  | - | ------------------ | - | ------------ | - | --------- |  | ---- | -
|                                              |  | For Periods Ended March 31, |            
|                                              |  | 2009                        |             |   | 2008           |  
|                                              |  | AverageBalance              |             |   | Income/Expense |   | YieldRate(1) |  |      | AverageBalance (5) |  |   | Income/Expense (5) |   | YieldRate(1) |  
|ASSETS                                        |  |                             |             |   |                |   |              |  |      |                    |  |   |                    |   |              |   |           |  |      |  
|Securities, at amortized cost                 |  |                             |             |   |                |   |              |  |      |                    |  |   |                    |   |              |   |           |  |      |  
|Taxable                                       |  | $                           | 6,326,942   |   |                | $ | 64,335       |  | 4.14 | %                  |  | $ | 11,053,013         |   |              | $ | 119,535   |  | 4.35 | %
|                                              |  |                             |             |   |                |   |              |  |      |                    |  |   |                    |   |              |   |           |  |      |  
|Total securities                              |  |                             | 6,326,942   |   |                |   | 64,335       |  | 4.14 | %                  |  |   | 11,053,013         |   |              |   | 119,535   |  | 4.35 | %
|Loans, net                                    |  |                             | 579,937,316 |   |                |   | 7,485,447    |  | 5.25 | %                  |  |   | 463,365,000        |   |              |   | 7,727,542 |  | 6.71 | %
|Federal funds sold                            |  |                             | 1,365,922   |   |                |   | 894          |  | 0.27 | %                  |  |   | 409,836            |   |              |   | 3,500     |  | 3.43 | %
|Dividend-earning restricted equity securities |  |                             | 4,762,508   |   |                |   | 15,525       |  | 1.33 | %                  |  |   | 4,270,533          |   |              |   | 59,397    |  | 5.59 | %
|Deposits in other banks                       |  |                             | 1,914,904   |   |                |   | 636          |  | 0.14 | %                  |  |   | 2,241,375          |   |              |   | 18,090    |  | 3.25 | %
|Bank owned life insurance (2)                 |  |                             | 6,813,427   |   |                |   | 95,417       |  | 5.70 | %                  |  |   | 6,567,805          |   |              |   | 89,917    |  | 5.51 | %
|                                              |  |                             |             |   |                |   |              |  |      |                    |  |   |                    |   |              |   |           |  |      |  
|Total earning assets                          |  |                             | 601,121,019 |   |                |   | 7,662,254    |  | 5.18 | %                  |  |   | 487,907,562        |   |              |   | 8,017,981 |  | 6.61 | %
|                                              |  |                             |             |   |                |   |              |  |      |                    |  |   |                    |   |              |   |           |  |      |  
|Less: Allowance for loan losses               |  |                             | (8,207,981  | ) |                |   |              |  |      |                    |  |   | (3,987,509         | ) |              |   |           |  |      |  
|Total nonearning assets                       |  |                             | 32,728,676  |   |                |   |              |  |      |                    |  |   | 32,227,332         |   |              |   |           |  |      |  
|                                              |  |                             |             |   |                |   |              |  |      |                    |  |   |                    |   |              |   |           |  |      |  
|Total assets                                  |  | $                           | 625,641,714 |   |                |   |              |  |      |                    |  | $ | 516,147,385        |   |              |   |           |  |      |  
|                                              |  |                             |             |   |                |   |              |  |      |                    |  |   |                    |   |              |   |           |  |      |  
|LIABILITIES and SHAREHOLDERS EQUITY          |  |                             |             |   |                |   |              |  |      |                    |  |   |                    |   |              |   |           |  |      |  
|Interest-bearing deposits:                    |  |                             |             |   |                |   |              |  |      |                    |  |   |                    |   |              |   |           |  |      |  
|Checking                                      |  | $                           | 14,903,732  |   |                | $ | 13,828       |  | 0.38 | %                  |  | $ | 13,680,678         |   |              | $ | 25,346    |  | 0.75 | %
|Regular savings                               |  |                             | 29,335,887  |   |                |   | 108,049      |  | 1.50 | %                  |  |   | 5,468,450          |   |              |   | 7,680     |  | 0.56 | %
|Money market savings                          |  |                             | 125,203,823 |   |                |   | 390,369      |  | 1.27 | %                  |  |   | 136,323,229        |   |              |   | 1,132,611 |  | 3.34 | %
|Certificates of deposit                       |  |                             |             |   |                |   |              |  |      |                    |  |   |                    |   |              |   |           |  |      |  
|$100,000 and over                             |  |                             | 97,122,567  |   |                |   | 659,847      |  | 2.76 | %                  |  |   | 99,766,275         |   |              |   | 1,167,543 |  | 4.71 | %
|Under $100,000                                |  |                             | 165,102,790 |   |                |   | 1,468,317    |  | 3.62 | %                  |  |   | 87,060,151         |   |              |   | 1,000,509 |  | 4.62 | %
|                                              |  |                             |             |   |                |   |              |  |      |                    |  |   |                    |   |              |   |           |  |      |  
|Total interest-bearing deposits               |  |                             | 431,668,799 |   |                |   | 2,640,410    |  | 2.49 | %                  |  |   | 342,298,783        |   |              |   | 3,333,689 |  | 3.92 | %
|Borrowings                                    |  |                             | 61,541,527  |   |                |   | 337,221      |  | 2.23 | %                  |  |   | 60,810,457         |   |              |   | 666,537   |  | 4.41 | %
|                                              |  |                             |             |   |                |   |              |  |      |                    |  |   |                    |   |              |   |           |  |      |  
|Total interest-bearing liabilities            |  |                             | 493,210,326 |   |                | $ | 2,977,631    |  | 2.46 | %                  |  |   | 403,109,240        |   |              | $ | 4,000,226 |  | 3.99 | %
|Noninterest-bearing liabilities               |  |                             |             |   |                |   |              |  |      |                    |  |   |                    |   |              |   |           |  |      |  
|Demand deposits                               |  |                             | 65,898,695  |   |                |   |              |  |      |                    |  |   | 60,715,469         |   |              |   |           |  |      |  
|Other noninterest-bearing liabilities         |  |                             | 5,974,068   |   |                |   |              |  |      |                    |  |   | 15,199,725         |   |              |   |           |  |      |  
|                                              |  |                             |             |   |                |   |              |  |      |                    |  |   |                    |   |              |   |           |  |      |  
|Total liabilities                             |  |                             | 565,083,089 |   |                |   |              |  |      |                    |  |   | 479,024,434        |   |              |   |           |  |      |  
|Shareholders equity                          |  |                             | 60,558,625  |   |                |   |              |  |      |                    |  |   | 37,122,951         |   |              |   |           |  |      |  
|                                              |  |                             |             |   |                |   |              |  |      |                    |  |   |                    |   |              |   |           |  |      |  
|Total liabilities and shareholders equity    |  | $                           | 625,641,714 |   |                |   |              |  |      |                    |  | $ | 516,147,385        |   |              |   |           |  |      |  
|                                              |  |                             |             |   |                |   |              |  |      |                    |  |   |                    |   |              |   |           |  |      |  
|Net interest income (2)                       |  |                             |             |   |                | $ | 4,684,623    |  |      |                    |  |   |                    |   |              | $ | 4,017,755 |  |      |  
|                                              |  |                             |             |   |                |   |              |  |      |                    |  |   |                    |   |              |   |           |  |      |  
|Interest rate spread (2)(3)                   |  |                             |             |   |                |   |              |  | 2.72 | %                  |  |   |                    |   |              |   |           |  | 2.62 | %
|                                              |  |                             |             |   |                |   |              |  |      |                    |  |   |                    |   |              |   |           |  |      |  
|Net interest margin (2)(4)                    |  |                             |             |   |                |   |              |  | 3.17 | %                  |  |   |                    |   |              |   |           |  | 3.31 | %
|                                              |  |                             |             |   |                |   |              |  |      |                    |  |   |                    |   |              |   |           |  |      |  



|(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 $32,442 adjustment for 2009 and a $30,572 adjustment for 2008.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(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 held for sale of $29,201,197 and interim interest income of $334,982 have been reclassified from mortgage banking income to interest income and fees on loans for
March 31, 2008 to be consistent with the presentation for March 31, 2009.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Noninterest Income

Total noninterest income was $7,842,386 for the first quarter of 2009, compared to $4,713,737 for the same period in 2008, an increase of $3,128,649, or
66.4%. Mortgage banking revenue growth contributed $3,110,757, of this growth.



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|                                     |  |                                     |           |      |   |          
|------------------------------------ |  | ----------------------------------- | --------- | ---- | - | ---------
|                                     |  | For the Three Months EndedMarch 31,
|                                     |  | 2009                                |           | 2008
|Mortgage banking revenue             |  | $                                   | 7,101,121 |      | $ | 3,990,364
|Investment and insurance commissions |  |                                     | 284,005   |      |   | 329,054  
|Service charges and fees             |  |                                     | 285,469   |      |   | 287,358  
|Security gains, net                  |  |                                     |          |      |   | 3,146    
|Bank owned life insurance income     |  |                                     | 62,975    |      |   | 59,345   
|Title company income                 |  |                                     | 98,566    |      |   | 38,160   
|Other                                |  |                                     | 10,250    |      |   | 6,310    
|                                     |  |                                     |           |      |   |          
|                                     |  | $                                   | 7,842,386 |      | $ | 4,713,737
|                                     |  |                                     |           |      |   |          

Gross mortgage banking income from Monarch Mortgage and our wholly owned commercial mortgage
banking subsidiary, Monarch Capital, LLC, increased 78.0% in the first three months of 2009 compared to 2008. The majority of this growth has been in the area of residential mortgages. Through March 31, 2009 our residential mortgage operations
have closed 1,077 loans totaling $288.1 million compared to 572 closings totaling $154.6 million for the same period in 2008. The dollar volume of the pipeline of loans expected to close in the next 90 days is nearly double the number from 2008. The
current low mortgage rate environment, coupled with first time home buyer incentives has contributed to the growth in this area. Additionally, our subsidiary, Monarch Capital, LLC, which brokers large commercial mortgages on a commission basis,
generated $107,500 in revenue in the first three months of 2009 compared to $74,920 in 2008.

Investment and insurance commissions declined
$45,049 or 13.7% in the first three months of 2009 compared to 2008. On October 1, 2006, we formed a subsidiary called Virginia Asset Group, LLC (VAG), with an investment professional to sell insurance and non-deposit investment products.
Through Monarch Investment, LLC, we have a 51% ownership in VAG. Despite VAG being the top producer in their investment network for the quarter, investment sales in general have been adversely affected by the economic downturn and lower asset
valuations.

Service charges and fees on deposit accounts were relatively flat for the first quarter of 2009 compared to 2008. The primary
components of service charges and fees are ATM transaction fees, nonsufficient fund and overdraft fees. We have an agreement with a third-party vendor to brand ATMs in Food Lion grocery stores in southeast Virginia and northeast North Carolina. In
return for supplying the cash for the machines and paying the machines cash servicing fees, we receive a portion of the transaction surcharge and our customers can withdraw cash from the machines without a fee or transaction surcharge. We have
9 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 three months of 2009. There was one security gain recorded on an agency bond call for the same period in 2008.

Bank Owned Life Insurance (BOLI) is included in the net interest income calculation for yield analysis. We purchased $6.0 million in BOLI during the
fourth quarter of 2005. The income from BOLI, which is not subject to tax, increased $3,630 in the first quarter of 2009 compared to 2008. The tax-effective income earnings are $95,417 for the first three months of 2009 compared to $89,917 for the
same period in 2008.

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, which provides title insurance on residential real estate, has benefited from the increased activity in the residential mortgage industry.

Noninterest Expense

Total noninterest expenses were
$10,062,578 for the first quarter of 2009, an increase of $3,299,936 or 48.8% over the same period in 2008. Salaries and employee benefits which represent an approximate average of 70% of noninterest expense increased 55.1% or $2,535,579 of the
increase. Our full time equivalents, at the end of first quarter 2009 totaled 287, compared to 259 in 2008. The primary source of our salary and benefits growth was in mortgage operations and increased production as banking salaries and benefits are
level with 2008. Fifty-five percent of our mortgage employees are paid commissions based only on their production levels which have increased significantly. Secondary increases are attributable to the following factors: 1) an increase in regulatory



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fees due to notably higher FDIC assessment rates to cover the shortage created by failed banks 2) an increase in loan origination expense related to
increased production by Monarch Mortgage; 3) growth and inflation-related increases in occupancy expenses; 4) higher Virginia Franchise taxes due to a higher capital base; and 5) technology related increases in data processing expenses. Our
marketing expenses declined $38,067 during the period.



|                                  |  |                                     |            |      |   |          
|--------------------------------- |  | ----------------------------------- | ---------- | ---- | - | ---------
|                                  |  | For the Three Months EndedMarch 31,
|                                  |  | 2009                                |            | 2008
|Salaries and employee benefits    |  | $                                   | 7,141,001  |      | $ | 4,605,422
|Occupancy expenses                |  |                                     | 574,659    |      |   | 490,776  
|Furniture and equipment expense   |  |                                     | 323,142    |      |   | 297,590  
|Loan origination expenses         |  |                                     | 612,069    |      |   | 467,509  
|Data processing services          |  |                                     | 207,960    |      |   | 167,375  
|Telephone                         |  |                                     | 97,760     |      |   | 104,087  
|Stationary and supplies           |  |                                     | 86,718     |      |   | 97,655   
|Professional fees                 |  |                                     | 105,517    |      |   | 90,040   
|Marketing expense                 |  |                                     | 23,020     |      |   | 61,087   
|Regulatory Assessment             |  |                                     | 255,501    |      |   | 57,600   
|Virginia Franchise Tax            |  |                                     | 95,940     |      |   | 28,284   
|ATM expense                       |  |                                     | 62,370     |      |   | 59,157   
|Amortization of intangible assets |  |                                     | 44,643     |      |   | 44,643   
|Other                             |  |                                     | 432,278    |      |   | 191,417  
|                                  |  |                                     |            |      |   |          
|                                  |  | $                                   | 10,062,578 |      | $ | 6,762,642
|                                  |  |                                     |            |      |   |          

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



|                               |  |                                             |           |            |       |  
|------------------------------ |  | ------------------------------------------- | --------- | ---------- | ----- | -
|                               |  | IncreaseFor the Three Months EndedMarch 31, |          
|                               |  | Dollars                                     |           | Percentage |      
|Salaries and employee benefits |  | $                                           | 2,535,579 |            | 55.1  | %
|Regulatory Assessment          |  |                                             | 197,901   |            | 343.6 | %
|Loan origination expenses      |  |                                             | 144,560   |            | 30.9  | %
|Occupancy expenses             |  |                                             | 83,883    |            | 17.1  | %
|Virginia Franchise Tax         |  |                                             | 67,656    |            | 239.2 | %
|Data processing services       |  |                                             | 40,585    |            | 24.2  | %

Income Taxes

Our income tax provision was $514,400 for the first quarter of 2009 compared to $468,200 for the prior year. The effective tax rate for the first quarter of 2009 was 32.6%, compared to 32.6% for the same period in
2008.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

GENERAL

Total assets increased to $634,204,399 at March 31, 2009 when compared to assets of
$597,198,402, at December 31, 2008, a 6.2% increase. On an annual basis total assets increased 16.8% at March 31, 2009 when compared to assets of $543,206,355 at



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March 31, 2008. Total loans as of March 31, 2009 were $507.2 million, an increase of $2.5 million, or 0.5%, from $504.7 million at year-end 2008.
On an annual basis total loans increased $46.0 million, or 10.0%, from $461.2 million in March 2008. Mortgages held for sale were $80.8 million, an increase of $26.4 million from $54.4 million at December 31, 2008, and on an annual basis
mortgages held for sale increased $50.2 million from $30.5 million at March 31, 2008 due to increased volume at our mortgage division. Investment securities were $6.3 million at March 31, 2009, level with year-end 2008. On an annual basis,
investments securities decreased $3.3 million, or 34.4% over March 31, 2008. Cash and cash equivalents were $14.8 million, an increase of $6.2 million, or 72.6% from $8.6 million at December 31, 2008.

Deposits increased $25.6 million, or 5.2%, during the three months ended March 31, 2009. On an annualized basis deposits increased $52.8 million or
11.3%. Noninterest-bearing demand deposit accounts decreased $3.6 million to $75.3 million compared to December 31, 2008, but increased $5.3 million on an annual basis when compared to March 31, 2008. Interest bearing deposits increased
$29.2 million to $446.4 million compared to $417.2 million at December 31, 2008. On an annual basis interest bearing deposits increased $47.5 million over March 31, 2008. Money market deposits and certificates of deposits (CDs) are the
major categories of our interest-bearing deposits.

Total money market balances declined $13.3 million to $116.0 million at March 31,
2009 compared to December 31, 2008. On an annual basis, money market accounts have declined $17.5 million compared to $133.4 million at March 31, 2008. Money market accounts, as a percentage of interest-bearing deposits have been declining
in recent years. Depositors who traditionally considered money markets preferable to time deposits because of the combination of competitive rates and ease in getting to funds appear to have changed their deposit patterns. With the volatility of the
stock market, these depositors are more interested in preserving their funds, than putting them at risk so easy access to deposits has become less critical. In addition, our money market accounts are generally indexed to prime, which has declined to
historic low levels making the product less competitive.

Certificates of deposits (CDs) have risen in popularity with the changes noted in
money markets, resulting in significant growth in that area. Our regular CD portfolio, which is comprised of CDs with balances of less than $100 thousand, has ballooned to $175.1 million at March 31, 2009, compared to $85.4 million at
March 31, 2008. Approximately, $41.0 million of this $89.7 million increase is attributable to a CD campaign we ran in the fall of 2008. Our Jumbo CDs, which are CDs with balances of $100 thousand or greater, have declined $42.8 million to
$109.5 at March 31, 2009 compared to March 31, 2008. 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 have matured, we have allowed a portion of them to run off as we have replaced them with
in market CDs.

Stockholders equity was $61.0 million at March 31, 2009, compared to $60.0 million at December 31, 2008.
Components of the change in stockholders equity include net income of $1,060,271, reduction in net unrealized gains on available-for-sale securities totaling $6,628, stock based compensation totaling $78,800, exercised stock options totaling
$101,936, and a preferred stock dividend declaration of $183,750.

Asset Quality

We had nonperforming assets totaling $10.2 million at March 31, 2009. Net charge-offs for the first quarter of 2009 were $86 thousand. We charged-off
two loans totaling $88 thousand and had recoveries of $2 thousand. Nonperforming assets at December 31, 2008 totaled $8.0 million. Nonperforming assets traditionally consist of nonaccrual loans, loans past due 90 days or more and still accruing
interest, restructured loans and other real estate owned. The majority of our nonperforming assets in both periods presented were related to one secured relationship. All of these loans have been identified as impaired according to Financial
Accounting Statement No. 114 Accounting by Creditors for Impairment of a Loan and later amended by Financial Accounting Statement No. 118 Accounting by Creditors for Impairment of a LoanIncome Recognition and
Disclosures. We have provided specific reserves for our nonperforming assets in our allowance for loan loss of $3,275,725 at March 31, 2009 and $4,217,970 at December 31, 2008. We continue to demand a high level of credit quality on
new loans.



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|                                          |  |               |            |   |                  |   |           |  
|----------------------------------------- |  | ------------- | ---------- | - | ---------------- | - | --------- | -
|                                          |  | March 31,2009 |            |   | December 31,2008 |  
|Loans 90 days past due and still accruing |  | $             | 1,495,366  |   |                  | $ |          |  
|Nonaccrual loans                          |  |               | 7,891,277  |   |                  |   | 7,506,337 |  
|Other Real Estate                         |  |               | 856,363    |   |                  |   | 532,932   |  
|                                          |  |               |            |   |                  |   |           |  
|Total Nonperforming Assets                |  | $             | 10,243,006 |   |                  | $ | 8,039,269 |  
|                                          |  |               |            |   |                  |   |           |  
|                                          |  |              
|Nonperforming assets to period end assets |  |               | 1.62       | % |                  |   | 1.35      | %

Allowance for Loan Losses

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

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 $8,660,000 and $4,325,000 at March 31, 2009 and March 31, 2008,
respectively. The ratio of the allowance for loan losses to total loans outstanding at March 31, 2009 and 2008 was 1.71% and 0.94%, respectively.

During the first quarter of 2009 and 2008, we recorded $700,551 and $395,102 in provision expense, respectively. Loans charged-off during the first three months of 2009 totaled $88,084 and recoveries totaled $1,534.
Loans charged-off in the same period of 2008 totaled $57,294 and recoveries totaled $11,192 for a net charge-off of $46,102. The table below summarizes the activity in the allowance for loans losses for the three month periods ending March 31,
2009 and 2008.



|                                                              |  |                                     |             |   |      |   |             |  
|------------------------------------------------------------- |  | ----------------------------------- | ----------- | - | ---- | - | ----------- | -
|                                                              |  | For the Three Months EndedMarch 31, |            
|                                                              |  | 2009                                |             |   | 2008 |  
|Balance, beginning of period                                  |  | $                                   | 8,046,000   |   |      | $ | 3,976,000   |  
|Provisions charged to operations                              |  |                                     | 700,551     |   |      |   | 395,102     |  
|Loans charged-off                                             |  |                                     | (88,084     | ) |      |   | (57,294     | )
|Recoveries                                                    |  |                                     | 1,533       |   |      |   | 11,192      |  
|                                                              |  |                                     |             |   |      |   |             |  
|Balance, end of period                                        |  | $                                   | 8,660,000   |   |      | $ | 4,325,000   |  
|                                                              |  |                                     |             |   |      |   |             |  
|                                                              |  |                                    
|Total loans outstanding                                       |  |                                     | 507,195,679 |   |      |   | 461,158,472 |  
|Ratio of allowance for loan losses to total loans outstanding |  |                                     | 1.71        | % |      |   | 0.94        | %

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

Homogenous
loans, such as consumer installment, home equity loans, and smaller consumer loans are not individually reviewed and are generally risk graded at the same levels. The risk grade and reserves are established for each homogenous pool of loans and



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are based on the expected net charge-offs from a current trend in delinquencies, losses or historical experience and general economic conditions. Our
management believes that the allowance for loan losses is adequate to absorb any inherent losses on existing loans in the our loan portfolio at March 31, 2009.

Liquidity

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

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

We have a line of credit that can equal up to 40% of assets with the Federal Home Loan Bank of Atlanta (FHLB) that totaled approximately $102,809,794 with $76,159,505 available at March 31, 2009. This line is
currently reduced by $5.0 million, which has been pledged as collateral for public deposits. Should we ever desire to increase our line of credit beyond the current 40% limit, the FHLB would allow borrowings of up to 50% of total assets once we meet
specific eligibility requirements.

In February 2009, we negotiated an additional line of credit with FHLB which is secured by a portion of
our loans held for sale. We pledge these loans, which have been sold to FHLB approved investors, as collateral. In return, we are allowed to borrow up to 75% 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 March 31, 2009, assets pledged and advances outstanding totaled $19,866,977 and $14,900,173, respectively with no excess line available.

Borrowings outstanding under the combined FHLB lines of credit were $36,550,462 at March 31, 2009 and $27,675,272 at December 31, 2008. The
Company had the following borrowing advances outstanding as of March 31, 2009, with the following final maturities:



|               |            |                 |               
|-------------- | ---------- | --------------- | --------------
|Advance Amount |            | Expiration Date
|$              | 14,900,173 |                 | June 2009     
|               | 10,000,000 |                 | November 2009 
|               | 10,000,000 |                 | November 2010 
|               | 1,650,289  |                 | September 2015
|               |            |                 |               
|$              | 36,550,462 |                 |               
|               |            |                 |               

The advance maturing in June 2009 represents three advances under our new loans held for sale
line. All three advances mature in June 2009 and are broken down as follows:



|               |  |                |            |                 |   |           
|-------------- |  | -------------- | ---------- | --------------- | - | ----------
|Advance Date   |  | CurrentBalance |            | OriginalBalance
|March 12, 2009 |  | $              | 6,414,472  |                 | $ | 7,599,000 
|March 20, 2009 |  |                | 4,291,401  |                 |   | 4,291,401 
|March 26, 2009 |  |                | 4,194,300  |                 |   | 4,194,300 
|               |  |                |            |                 |   |           
|               |  | $              | 14,900,173 |                 | $ | 16,084,701
|               |  |                |            |                 |   |           

The advance maturing in November 2009 bears a fixed interest rate of 4.04% and has a one-time
conversion feature which expired November 17, 2008.

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

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



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In the course of operations, due to fluctuations in loan and deposit levels, we occasionally find it
necessary to purchase Federal Funds on a short-term basis. We also have federal funds lines of credit facilities established with five other banks in the total amount of $31,000,000. At March 31, 2009 there were no outstanding balances on these
lines. We also have access to the Federal Reserve Banks discount window should a liquidity crisis occur.

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

Off-Balance Sheet Arrangements

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 March 31, 2009 and December 31, 2008 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 March 31, 2009 and December 31, 2008.

Commitments to extend credit, which amounted to $233.9 million at March 31, 2009 and $166.3 million at December 31, 2008, 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 March 31, 2009 or December 31, 2008.

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 $6.1 million in outstanding standby letters of credit at both March 31, 2009 and December 31, 2008.

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

Capital Adequacy

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 March 31, 2009, the amount available was approximately $5.1 million. We are required, through our participation in the Troubled Asset Relief Program Capital Purchase Program to pay a quarterly 5% dividend on our
cumulative perpetual preferred stock, series A, to the United States Department of Treasury. In accordance with our acceptance of funds from the US Treasury, cash dividends on common stock are not permitted without prior approval from the US
Department of Treasury.

Loans and advances are limited to 15% of the Banks common stock and capital surplus. As of March 31,
2009, funds available for loans or advances by the Bank to the Company were approximately $3.7 million.



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##### Table of Contents

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
March 31, 2009, the Bank meets all capital adequacy requirements to which it is subject.

As of March 31, 2009 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 March 31, 2009 and December 31, 2008.



|                                                   |  |                        |        |       |                             |   |         |                                              |        |  |      |         |  |       |        |  |       |  
|-------------------------------------------------- |  | ---------------------- | ------ | ----- | --------------------------- | - | ------- | -------------------------------------------- | ------ |  | ---- | ------- |  | ----- | ------ |  | ----- | -
|                                                   |  | Actual                 |        |       | For CapitalAdequacyPurposes |   |         | To Be WellCapitalized UnderPrompt Corrective |       
|                                                   |  | Amounts                |        | Ratio |                             |   | Amounts |                                              | Ratio  |  |      | Amounts |  | Ratio |       
|                                                   |  | (Dollars in Thousands) |       
|As of March 31, 2009                               |  |                        |        |       |                             |   |         |                                              |        |  |      |         |  |       |        |  |       |  
|Total Risk-Based Capital Ratio                     |  |                        |        |       |                             |   |         |                                              |        |  |      |         |  |       |        |  |       |  
|Consolidated company                               |  | $                      | 75,502 |       | 14.78                       | % |         | $                                            | 40,878 |  | 8.00 | %       |  |       | N/A    |  | N/A   |  
|Bank                                               |  | $                      | 61,010 |       | 11.94                       | % |         | $                                            | 40,878 |  | 8.00 | %       |  | $     | 51,097 |  | 10.00 | %
|(Total Risk-Based Capital to Risk-Weighted Assets) |  |                        |        |       |                             |   |         |                                              |        |  |      |         |  |       |        |  |       |  
|                                                   |  |                        |        |       |                             |  
|Tier 1 Risk-Based Capital Ratio                    |  |                        |        |       |                             |   |         |                                              |        |  |      |         |  |       |        |  |       |  
|Consolidated company                               |  | $                      | 69,080 |       | 13.52                       | % |         | $                                            | 20,426 |  | 4.00 | %       |  |       | N/A    |  | N/A   |  
|Bank                                               |  | $                      | 54,588 |       | 10.69                       | % |         | $                                            | 20,426 |  | 4.00 | %       |  | $     | 30,639 |  | 6.00  | %
|(Tier 1 Capital to Risk-Weighted Assets)           |  |                        |        |       |                             |   |         |                                              |        |  |      |         |  |       |        |  |       |  
|                                                   |  |                        |        |       |                             |  
|Tier 1 Leverage Ratio                              |  |                        |        |       |                             |   |         |                                              |        |  |      |         |  |       |        |  |       |  
|Consolidated company                               |  | $                      | 69,080 |       | 10.93                       | % |         | $                                            | 25,272 |  | 4.00 | %       |  |       | N/A    |  | N/A   |  
|Bank                                               |  | $                      | 54,588 |       | 8.64                        | % |         | $                                            | 25,272 |  | 4.00 | %       |  | $     | 31,590 |  | 5.00  | %
|(Tier 1 Capital to Average Assets)                 |  |                        |        |       |                             |   |         |                                              |        |  |      |         |  |       |        |  |       |  
|                                                   |  |                        |        |       |                             |  
|As of December 31, 2008                            |  |                        |        |       |                             |   |         |                                              |        |  |      |         |  |       |        |  |       |  
|Total Risk-Based Capital Ratio                     |  |                        |        |       |                             |   |         |                                              |        |  |      |         |  |       |        |  |       |  
|Consolidated company                               |  | $                      | 74,241 |       | 14.79                       | % |         | $                                            | 40,156 |  | 8.00 | %       |  |       | N/A    |  | N/A   |  
|Bank                                               |  | $                      | 59,603 |       | 11.87                       | % |         | $                                            | 40,156 |  | 8.00 | %       |  | $     | 50,213 |  | 10.00 | %
|(Total Risk-Based Capital to Risk-Weighted Assets) |  |                        |        |       |                             |   |         |                                              |        |  |      |         |  |       |        |  |       |  
|                                                   |  |                        |        |       |                             |  
|Tier 1 Risk-Based Capital Ratio                    |  |                        |        |       |                             |   |         |                                              |        |  |      |         |  |       |        |  |       |  
|Consolidated company                               |  | $                      | 67,941 |       | 13.53                       | % |         | $                                            | 20,085 |  | 4.00 | %       |  |       | N/A    |  | N/A   |  
|Bank                                               |  | $                      | 53,303 |       | 10.62                       | % |         | $                                            | 20,085 |  | 4.00 | %       |  | $     | 30,115 |  | 6.00  | %
|(Tier 1 Capital to Risk-Weighted Assets)           |  |                        |        |       |                             |   |         |                                              |        |  |      |         |  |       |        |  |       |  
|                                                   |  |                        |        |       |                             |  
|Tier 1 Leverage Ratio                              |  |                        |        |       |                             |   |         |                                              |        |  |      |         |  |       |        |  |       |  
|Consolidated company                               |  | $                      | 67,941 |       | 11.76                       | % |         | $                                            | 23,108 |  | 4.00 | %       |  |       | N/A    |  | N/A   |  
|Bank                                               |  | $                      | 53,303 |       | 9.22                        | % |         | $                                            | 23,108 |  | 4.00 | %       |  | $     | 28,906 |  | 5.00  | %
|(Tier 1 Capital to Average Assets)                 |  |                        |        |       |                             |   |         |                                              |        |  |      |         |  |       |        |  |       |  



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

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

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



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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 the mortgage banking operations of
its division, 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 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.

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



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

We maintain a system of
internal controls and procedures designed to provide reasonable assurance as to the reliability of our published financial statements and other disclosures included in this report. Within the 90 days prior to the date of this report, we carried out
an evaluation, under the supervision and with the participation of our management, including 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 11  Refer to EPS calculation in
the Notes to Financial Statements

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

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

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



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

Form 8-K filed February 2, 2009 to
announce the Companys financial performance.

Form 8-K filed April 24, 2009 to announce the Companys financial
performance.



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SIGNATURES

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



|                                                   |  |  |  |                   
|-------------------------------------------------- |  |  |  | ------------------
|MONARCH FINANCIAL HOLDINGS, INC.                   |  |  |  |                   
|                                                   |  | 
|/s/ William F. Rountree, Jr.                       |  |  |  |                   
|William F. Rountree, Jr.                           |  |  |  | Date: May 11, 2009
|President & Chief Executive Officer                |  |  |  |                   
|                                                   |  | 
|/s/ Brad E. Schwartz.                              |  |  |  |                   
|Brad E. Schwartz                                   |  |  |  | Date: May 11, 2009
|Executive Vice President & Chief Financial Officer |  |  |  |                   



29