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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: September 30, 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                                                       |  | 6022                                                     |  | 20-4985388                          
|(State of other jurisdiction of Incorporation or organization) |  | (Primary Standard Industrial Classification Code Number) |  | (I.R.S. Employer Identification No.)

William F. Rountree, Jr.

1101 Executive Blvd.

Chesapeake, Virginia 23320

(757) 389-5112

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

Not Applicable

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





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

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

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



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

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

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

The number of shares of common stock outstanding as of November 13, 2009 was 5,792,914.









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MONARCH FINANCIAL HOLDINGS, INC.

FORM 10-Q

SEPTEMBER 30, 2009

INDEX



|         |  |         |  |                                                                                                                  |  |   
|-------- |  | ------- |  | ---------------------------------------------------------------------------------------------------------------- |  | --
|PART I.  |  |         |  | FINANCIAL INFORMATION                                                                                            |  |   
|         |  |         | 
|         |  | ITEM 1. |  | Consolidated Statements of Condition as of September 30, 2009 and December 31, 2008                              |  | 3 
|         |  |         | 
|         |  |         |  | Consolidated Statements of Income for the three and nine months ended September 30, 2009 and September 30, 2008  |  | 4 
|         |  |         | 
|         |  |         |  | Consolidated Statements of Shareholders Equity for the periods ended September 30, 2009 and September
 30, 2008 |  | 5 
|         |  |         | 
|         |  |         |  | Consolidated Statements of Cash Flows for the periods ended September 30, 2009 and September 30, 2008            |  | 6 
|         |  |         | 
|         |  |         |  | Notes to Consolidated Financial Statements                                                                       |  | 7 
|         |  |         | 
|         |  | ITEM 2. |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                            |  | 17
|         |  |         | 
|         |  | ITEM 3. |  | Quantitative and Qualitative Disclosures about Market Risk                                                       |  | 33
|         |  |         | 
|         |  | ITEM 4. |  | Controls and Procedures                                                                                          |  | 34
|         |  |         | 
|PART II. |  |         |  | OTHER INFORMATION                                                                                                |  |   
|         |  |         | 
|         |  | Item 1. |  | Legal Proceedings                                                                                                |  | 35
|         |  |         | 
|         |  | Item 2. |  | Changes in Securities                                                                                            |  | 35
|         |  |         | 
|         |  | Item 3. |  | Defaults Upon Senior Securities                                                                                  |  | 35
|         |  |         | 
|         |  | Item 4. |  | Submissions of Matters to Vote of Security Holders                                                               |  | 35
|         |  |         | 
|         |  | Item 5. |  | Other Information                                                                                                |  | 35
|         |  |         | 
|         |  | Item 6. |  | Exhibits and Reports on Form 8-K                                                                                 |  | 36



2



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##### Table of Contents

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

MONARCH FINANCIAL HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CONDITION



|                                                                                                                              |  |                   |             |   |                  |   |             |  
|----------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ----------- | - | ---------------- | - | ----------- | -
|                                                                                                                              |  | Unaudited         |             |   |                  |  
|                                                                                                                              |  | September 30,2009 |             |   | December 31,2008 |  
|ASSETS:                                                                                                                       |  |                   |             |   |                  |   |             |  
|Cash and due from banks                                                                                                       |  | $                 | 14,003,900  |   |                  | $ | 8,418,341   |  
|Interest bearing bank balances                                                                                                |  |                   | 4,406,911   |   |                  |   | 111,634     |  
|Federal funds sold                                                                                                            |  |                   | 7,748,985   |   |                  |   | 66,367      |  
|                                                                                                                              |  |                   |             |   |                  |   |             |  
|Total cash and cash equivalents                                                                                               |  |                   | 26,159,796  |   |                  |   | 8,596,342   |  
|                                                                                                                              |  |                  
|Investment securities held-to-maturity, at cost                                                                               |  |                   | 500,000     |   |                  |   | 500,000     |  
|Investment securities available-for-sale, at fair value                                                                       |  |                   | 5,762,087   |   |                  |   | 5,846,917   |  
|Loans held for sale                                                                                                           |  |                   | 71,232,195  |   |                  |   | 54,369,215  |  
|                                                                                                                              |  |                  
|Loans, net of unearned income                                                                                                 |  |                   | 522,333,696 |   |                  |   | 504,712,083 |  
|Less: allowance for loan losses                                                                                               |  |                   | (9,550,000  | ) |                  |   | (8,046,000  | )
|                                                                                                                              |  |                   |             |   |                  |   |             |  
|Loans, net                                                                                                                    |  |                   | 512,783,696 |   |                  |   | 496,666,083 |  
|                                                                                                                              |  |                  
|Property and equipment, net                                                                                                   |  |                   | 8,252,514   |   |                  |   | 8,386,430   |  
|Restricted equity securities                                                                                                  |  |                   | 7,016,750   |   |                  |   | 3,575,450   |  
|Bank owned life insurance                                                                                                     |  |                   | 6,980,571   |   |                  |   | 6,787,699   |  
|Goodwill                                                                                                                      |  |                   | 775,000     |   |                  |   | 775,000     |  
|Intangible assets                                                                                                             |  |                   | 863,098     |   |                  |   | 997,027     |  
|Other assets                                                                                                                  |  |                   | 11,448,756  |   |                  |   | 10,698,239  |  
|                                                                                                                              |  |                   |             |   |                  |   |             |  
|Total assets                                                                                                                  |  | $                 | 651,774,463 |   |                  | $ | 597,198,402 |  
|                                                                                                                              |  |                   |             |   |                  |   |             |  
|LIABILITIES:                                                                                                                  |  |                   |             |   |                  |   |             |  
|Deposits:                                                                                                                     |  |                   |             |   |                  |   |             |  
|Demand deposits - non-interest bearing                                                                                        |  | $                 | 84,389,135  |   |                  | $ | 78,894,120  |  
|Demand deposits - interest bearing                                                                                            |  |                   | 19,171,335  |   |                  |   | 15,363,332  |  
|Savings deposits                                                                                                              |  |                   | 27,684,407  |   |                  |   | 20,443,846  |  
|Money market deposits                                                                                                         |  |                   | 139,115,176 |   |                  |   | 129,287,002 |  
|Time deposits                                                                                                                 |  |                   | 269,731,556 |   |                  |   | 252,097,495 |  
|                                                                                                                              |  |                   |             |   |                  |   |             |  
|Total deposits                                                                                                                |  |                   | 540,091,609 |   |                  |   | 496,085,795 |  
|                                                                                                                              |  |                  
|Borrowings:                                                                                                                   |  |                   |             |   |                  |   |             |  
|Trust preferred subordinated debt                                                                                             |  |                   | 10,000,000  |   |                  |   | 10,000,000  |  
|Federal Home Loan Bank advances                                                                                               |  |                   | 33,081,780  |   |                  |   | 27,675,272  |  
|Federal funds purchased                                                                                                       |  |                   |            |   |                  |   | 385,000     |  
|                                                                                                                              |  |                   |             |   |                  |   |             |  
|Total borrowings                                                                                                              |  |                   | 43,081,780  |   |                  |   | 38,060,272  |  
|                                                                                                                              |  |                  
|Other liabilities                                                                                                             |  |                   | 5,452,356   |   |                  |   | 3,163,645   |  
|                                                                                                                              |  |                   |             |   |                  |   |             |  
|Total liabilities                                                                                                             |  |                   | 588,625,745 |   |                  |   | 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                        |  |                   | 14,510,815  |   |                  |   | 14,481,383  |  
|Common stock, $5 par value, 20,000,000 shares authorized, issued and outstanding 5,792,914 and 5,735,007 shares, respectively |  |                   | 28,964,570  |   |                  |   | 28,675,035  |  
|Additional paid-in capital                                                                                                    |  |                   | 8,229,998   |   |                  |   | 8,065,602   |  
|Retained earnings                                                                                                             |  |                   | 11,603,364  |   |                  |   | 8,528,094   |  
|Accumulated other comprehensive (loss) income                                                                                 |  |                   | (263,138    | ) |                  |   | 27,302      |  
|                                                                                                                              |  |                   |             |   |                  |   |             |  
|Total Monarch Financial Holdings, Inc. stockholders equity                                                                   |  |                   | 63,045,609  |   |                  |   | 59,777,416  |  
|Noncontrolling interest                                                                                                       |  |                   | 103,109     |   |                  |   | 111,274     |  
|                                                                                                                              |  |                   |             |   |                  |   |             |  
|Total equity                                                                                                                  |  |                   | 63,148,718  |   |                  |   | 59,888,690  |  
|                                                                                                                              |  |                   |             |   |                  |   |             |  
|Total liabilities and stockholders equity                                                                                    |  | $                 | 651,774,463 |   |                  | $ | 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 September 30, |            |   | 9 Months Ended September 30, |  
|                                                            |  | 2009                         |            |   | 2008                         |   |           | 2009 |  |   | 2008       |  
|Interest income:                                            |  |                              |            |   |                              |   |           |      |  |   |            |   |  |   |            |  
|Interest and fees on loans                                  |  | $                            | 7,960,150  |   |                              | $ | 7,670,563 |      |  | $ | 23,772,474 |   |  | $ | 22,822,737 |  
|Interest on investment securities                           |  |                              | 53,794     |   |                              |   | 141,123   |      |  |   | 181,539    |   |  |   | 367,649    |  
|Interest on federal funds sold                              |  |                              | 6,728      |   |                              |   | 5,560     |      |  |   | 9,987      |   |  |   | 17,444     |  
|Dividends on equity securities                              |  |                              | 41,705     |   |                              |   | 41,852    |      |  |   | 80,553     |   |  |   | 162,206    |  
|Interest on other bank accounts                             |  |                              | 494        |   |                              |   | 10,060    |      |  |   | 1,902      |   |  |   | 65,040     |  
|                                                            |  |                              |            |   |                              |   |           |      |  |   |            |   |  |   |            |  
|Total interest income                                       |  |                              | 8,062,871  |   |                              |   | 7,869,158 |      |  |   | 24,046,455 |   |  |   | 23,435,076 |  
|                                                            |  |                              |            |   |                              |   |           |      |  |   |            |   |  |   |            |  
|Interest expense:                                           |  |                              |            |   |                              |   |           |      |  |   |            |   |  |   |            |  
|Interest on deposits                                        |  |                              | 2,184,747  |   |                              |   | 2,962,457 |      |  |   | 7,149,718  |   |  |   | 9,471,758  |  
|Interest on trust preferred subordinated debt               |  |                              | 56,158     |   |                              |   | 112,460   |      |  |   | 205,216    |   |  |   | 384,789    |  
|Interest on borrowings                                      |  |                              | 285,887    |   |                              |   | 435,059   |      |  |   | 864,998    |   |  |   | 1,272,451  |  
|                                                            |  |                              |            |   |                              |   |           |      |  |   |            |   |  |   |            |  
|Total interest expense                                      |  |                              | 2,526,792  |   |                              |   | 3,509,976 |      |  |   | 8,219,932  |   |  |   | 11,128,998 |  
|                                                            |  |                              |            |   |                              |   |           |      |  |   |            |   |  |   |            |  
|Net interest income                                         |  |                              | 5,536,079  |   |                              |   | 4,359,182 |      |  |   | 15,826,523 |   |  |   | 12,306,078 |  
|Provision for loan losses                                   |  |                              | 1,546,788  |   |                              |   | 480,581   |      |  |   | 4,084,936  |   |  |   | 1,244,613  |  
|                                                            |  |                              |            |   |                              |   |           |      |  |   |            |   |  |   |            |  
|Net interest income after provision for loan losses         |  |                              | 3,989,291  |   |                              |   | 3,878,601 |      |  |   | 11,741,587 |   |  |   | 11,061,465 |  
|                                                            |  |                              |            |   |                              |   |           |      |  |   |            |   |  |   |            |  
|Non-interest income:                                        |  |                              |            |   |                              |   |           |      |  |   |            |   |  |   |            |  
|Mortgage banking income                                     |  |                              | 7,975,961  |   |                              |   | 3,988,190 |      |  |   | 23,902,036 |   |  |   | 11,995,944 |  
|Investment and insurance commissions                        |  |                              | 163,761    |   |                              |   | 294,671   |      |  |   | 677,433    |   |  |   | 991,095    |  
|Service charges and fees                                    |  |                              | 395,981    |   |                              |   | 357,395   |      |  |   | 1,052,808  |   |  |   | 1,021,517  |  
|Security gains, net                                         |  |                              |           |   |                              |   |          |      |  |   |           |   |  |   | 10,801     |  
|Gain (loss) on sale of assets, net                          |  |                              |           |   |                              |   |          |      |  |   | 302,269    |   |  |   | 24,410     |  
|Other                                                       |  |                              | 227,653    |   |                              |   | 173,174   |      |  |   | 591,746    |   |  |   | 607,211    |  
|                                                            |  |                              |            |   |                              |   |           |      |  |   |            |   |  |   |            |  
|Total noninterest income                                    |  |                              | 8,763,356  |   |                              |   | 4,813,430 |      |  |   | 26,526,292 |   |  |   | 14,650,978 |  
|                                                            |  |                              |            |   |                              |   |           |      |  |   |            |   |  |   |            |  
|Non-interest expenses:                                      |  |                              |            |   |                              |   |           |      |  |   |            |   |  |   |            |  
|Salaries and employee benefits                              |  |                              | 7,389,031  |   |                              |   | 4,714,837 |      |  |   | 22,354,849 |   |  |   | 14,222,938 |  
|Occupancy expenses                                          |  |                              | 642,842    |   |                              |   | 545,350   |      |  |   | 1,817,821  |   |  |   | 1,593,265  |  
|Furniture and equipment expenses                            |  |                              | 340,101    |   |                              |   | 330,712   |      |  |   | 975,298    |   |  |   | 951,103    |  
|Loan expense                                                |  |                              | 1,033,829  |   |                              |   | 386,727   |      |  |   | 2,540,723  |   |  |   | 1,311,311  |  
|Data processing                                             |  |                              | 186,930    |   |                              |   | 156,888   |      |  |   | 600,581    |   |  |   | 489,318    |  
|FDIC insurance                                              |  |                              | 255,000    |   |                              |   | 75,000    |      |  |   | 1,085,755  |   |  |   | 211,210    |  
|Other                                                       |  |                              | 1,109,730  |   |                              |   | 1,204,411 |      |  |   | 3,258,305  |   |  |   | 2,679,800  |  
|                                                            |  |                              |            |   |                              |   |           |      |  |   |            |   |  |   |            |  
|Total noninterest expenses                                  |  |                              | 10,957,463 |   |                              |   | 7,413,925 |      |  |   | 32,633,332 |   |  |   | 21,458,945 |  
|                                                            |  |                              |            |   |                              |   |           |      |  |   |            |   |  |   |            |  
|Income before income taxes                                  |  |                              | 1,795,184  |   |                              |   | 1,278,106 |      |  |   | 5,634,547  |   |  |   | 4,253,498  |  
|Income tax expense                                          |  |                              | (619,870   | ) |                              |   | (412,700  | )    |  |   | (1,833,770 | ) |  |   | (1,327,500 | )
|                                                            |  |                              |            |   |                              |   |           |      |  |   |            |   |  |   |            |  
|Net income                                                  |  |                              | 1,175,314  |   |                              |   | 865,406   |      |  |   | 3,800,777  |   |  |   | 2,925,998  |  
|Less: Net income attributable to noncontrolling interests   |  |                              | (22,532    | ) |                              |   | (93,073   | )    |  |   | (168,132   | ) |  |   | (258,437   | )
|                                                            |  |                              |            |   |                              |   |           |      |  |   |            |   |  |   |            |  
|Net income attributable to Monarch Financial Holdings, Inc. |  | $                            | 1,152,782  |   |                              | $ | 772,333   |      |  | $ | 3,632,645  |   |  | $ | 2,667,561  |  
|Preferred stock dividend and accretion of discount          |  |                              | (197,766   | ) |                              |   |          |      |  |   | (586,807   | ) |  |   |           |  
|                                                            |  |                              |            |   |                              |   |           |      |  |   |            |   |  |   |            |  
|Net income available to common stockholders                 |  | $                            | 955,016    |   |                              | $ | 772,333   |      |  | $ | 3,045,838  |   |  | $ | 2,667,561  |  
|                                                            |  |                              |            |   |                              |   |           |      |  |   |            |   |  |   |            |  
|Basic net income per share                                  |  | $                            | 0.17       |   |                              | $ | 0.14      |      |  | $ | 0.54       |   |  | $ | 0.52       |  
|Diluted net income per share                                |  | $                            | 0.17       |   |                              | $ | 0.14      |      |  | $ | 0.53       |   |  | $ | 0.51       |  

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 |            |   | RetainedEarnings |   |           | Series APerpetualPreferredStock |  | 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 |  
|Comprehensive income:                                                                                        |  |              |   |  |                          |            |   |                  |   |           |                                 |  |                                            |            |   |                        |   |            |       |   |          |   |  |   |          |   |  |   |            |  
|Net income for nine months ended September 30, 2008                                                          |  |              |   |  |                          |            |   |                  |   |           |                                 |  |                                            | 2,667,561  |   |                        |   |            |       |   |          |   |  |   | 258,437  |   |  |   | 2,925,998  |  
|Unrealized gain (loss) on securities available-for-sale, net of reclassification adjustment and income taxes |  |              |   |  |                          |            |   |                  |   |           |                                 |  |                                            |            |   |                        |   |            |       |   | (29,835  | ) |  |   |          |   |  |   | (29,835    | )
|                                                                                                             |  |              |   |  |                          |            |   |                  |   |           |                                 |  |                                            |            |   |                        |   |            |       |   |          |   |  |   |          |   |  |   |            |  
|Total comprehensive income                                                                                   |  |              |   |  |                          |            |   |                  |   |           |                                 |  |                                            |            |   |                        |   |            |       |   |          |   |  |   |          |   |  |   | 2,896,163  |  
|                                                                                                             |  |              |   |  |                          |            |   |                  |   |           |                                 |  |                                            |            |   |                        |   |            |       |   |          |   |  |   |          |   |  |   |            |  
|Stock-based compensation expense                                                                             |  | 69,060       |   |  |                          | 345,300    |   |                  |   | (109,940  | )                               |  |                                            |            |   |                        |   |            |       |   |          |   |  |   |          |   |  |   | 235,360    |  
|Stock options exercised                                                                                      |  | 17,905       |   |  |                          | 89,525     |   |                  |   | 15,329    |                                 |  |                                            |            |   |                        |   |            |       |   |          |   |  |   |          |   |  |   | 104,854    |  
|Private capital offering net of issuance costs                                                               |  | 774,110      |   |  |                          | 3,870,550  |   |                  |   | 2,896,956 |                                 |  |                                            |            |   |                        |   |            |       |   |          |   |  |   |          |   |  |   | 6,767,506  |  
|Distributions to noncontrolling interests                                                                    |  |              |   |  |                          |            |   |                  |   |           |                                 |  |                                            |            |   |                        |   |            |       |   |          |   |  |   | (206,390 | ) |  |   | (206,390   | )
|                                                                                                             |  |              |   |  |                          |            |   |                  |   |           |                                 |  |                                            |            |   |                        |   |            |       |   |          |   |  |   |          |   |  |   |            |  
|Balance - September 30, 2008                                                                                 |  | 5,688,580    |   |  | $                        | 28,442,900 |   |                  | $ | 7,810,466 |                                 |  | $                                          | 10,087,272 |   |                        | $ |           |       | $ | (46,696  | ) |  | $ | 109,749  |   |  | $ | 46,403,691 |  
|                                                                                                             |  |              |   |  |                          |            |   |                  |   |           |                                 |  |                                            |            |   |                        |   |            |       |   |          |   |  |   |          |   |  |   |            |  
|Balance - December 31, 2008                                                                                  |  | 5,735,007    |   |  | $                        | 28,675,035 |   |                  | $ | 8,065,602 |                                 |  | $                                          | 8,528,094  |   |                        | $ | 14,481,383 |       | $ | 27,302   |   |  | $ | 111,274  |   |  | $ | 59,888,690 |  
|Comprehensive income:                                                                                        |  |              |   |  |                          |            |   |                  |   |           |                                 |  |                                            |            |   |                        |   |            |       |   |          |   |  |   |          |   |  |   |            |  
|Net income for nine months ended September 30, 2009                                                          |  |              |   |  |                          |            |   |                  |   |           |                                 |  |                                            | 3,632,645  |   |                        |   |            |       |   |          |   |  |   | 168,132  |   |  |   | 3,800,777  |  
|Unrealized loss on interest rate swap                                                                        |  |              |   |  |                          |            |   |                  |   |           |                                 |  |                                            |            |   |                        |   |            |       |   | (319,473 | ) |  |   |          |   |  |   | (319,473   | )
|Unrealized gain (loss) on securities available-for-sale, net of reclassification adjustment and income taxes |  |              |   |  |                          |            |   |                  |   |           |                                 |  |                                            |            |   |                        |   |            |       |   | 29,033   |   |  |   |          |   |  |   | 29,033     |  
|Total comprehensive income                                                                                   |  |              |   |  |                          |            |   |                  |   |           |                                 |  |                                            |            |   |                        |   |            |       |   |          |   |  |   |          |   |  |   | 3,510,337  |  
|Stock-based compensation expense, net of forfeitures                                                         |  | (3,200       | ) |  |                          | (16,000    | ) |                  |   | 227,364   |                                 |  |                                            |            |   |                        |   |            |       |   |          |   |  |   |          |   |  |   | 211,364    |  
|Stock options exercised                                                                                      |  | 61,107       |   |  |                          | 305,535    |   |                  |   | (33,536   | )                               |  |                                            |            |   |                        |   |            |       |   |          |   |  |   |          |   |  |   | 271,999    |  
|Accretion of discount on cumulative perpetual preferred warrants                                             |  |              |   |  |                          |            |   |                  |   | (29,432   | )                               |  |                                            |            |   |                        |   | 29,432     |       |   |          |   |  |   |          |   |  |   |           |  
|Cash dividend declared on cumulative perpetual preferred stock (5%)                                          |  |              |   |  |                          |            |   |                  |   |           |                                 |  |                                            | (557,375   | ) |                        |   |            |       |   |          |   |  |   |          |   |  |   | (557,375   | )
|Distributions to noncontrolling interests                                                                    |  |              |   |  |                          |            |   |                  |   |           |                                 |  |                                            |            |   |                        |   |            |       |   |          |   |  |   | (176,297 | ) |  |   | (176,297   | )
|                                                                                                             |  |              |   |  |                          |            |   |                  |   |           |                                 |  |                                            |            |   |                        |   |            |       |   |          |   |  |   |          |   |  |   |            |  
|Balance - September 30, 2009                                                                                 |  | 5,792,914    |   |  | $                        | 28,964,570 |   |                  | $ | 8,229,998 |                                 |  | $                                          | 11,603,364 |   |                        | $ | 14,510,815 |       | $ | (263,138 | ) |  | $ | 103,109  |   |  | $ | 63,148,718 |  
|                                                                                                             |  |              |   |  |                          |            |   |                  |   |           |                                 |  |                                            |            |   |                        |   |            |       |   |          |   |  |   |          |   |  |   |            |  

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)



|                                                                     |  |                              |             |   |      |   |             |  
|-------------------------------------------------------------------- |  | ---------------------------- | ----------- | - | ---- | - | ----------- | -
|                                                                     |  | 9 Months Ended September 30, |            
|                                                                     |  | 2009                         |             |   | 2008 |  
|Operating activities:                                                |  |                              |             |   |      |   |             |  
|Net income attributable to Monarch Financial Holdings, Inc.          |  | $                            | 3,632,645   |   |      | $ | 2,667,561   |  
|Adjustments to reconcile to net cash from operating activities:      |  |                              |             |   |      |   |             |  
|Provision for loan losses                                            |  |                              | 4,084,936   |   |      |   | 1,244,613   |  
|Depreciation                                                         |  |                              | 742,335     |   |      |   | 712,147     |  
|Accretion of discounts and amortization of premiums, net             |  |                              | 9,878       |   |      |   | (23,784     | )
|Deferral of loan costs, net of deferred fees                         |  |                              | (33,185     | ) |      |   | (176,497    | )
|Amortization of intangible assets                                    |  |                              | 133,929     |   |      |   | 133,929     |  
|Stock-based compensation                                             |  |                              | 211,364     |   |      |   | 235,360     |  
|Net income attributable to noncontrolling interests                  |  |                              | 168,132     |   |      |   | 258,437     |  
|Appreciation of bank-owned life insurance                            |  |                              | (192,872    | ) |      |   | (180,361    | )
|Income from rate lock commitments                                    |  |                              | 934,796     |   |      |   | 478,635     |  
|Net gain on disposition of investment securities                     |  |                              |            |   |      |   | (10,801     | )
|Net gain on sale of assets                                           |  |                              | (302,269    | ) |      |   | (24,443     | )
|Net (gain) loss on sale of other real estate                         |  |                              | (111,366    | ) |      |   | 1,586       |  
|Amortization of deferred gain                                        |  |                              | (122,589    | ) |      |   | (122,589    | )
|Changes in:                                                          |  |                              |             |   |      |   |             |  
|Loans held for sale                                                  |  |                              | (16,862,980 | ) |      |   | (17,602,473 | )
|Interest receivable                                                  |  |                              | (60,611     | ) |      |   | 195,102     |  
|Other assets                                                         |  |                              | 607,552     |   |      |   | (3,421,894  | )
|Other liabilities                                                    |  |                              | 2,016,285   |   |      |   | 118,794     |  
|                                                                     |  |                              |             |   |      |   |             |  
|Net cash from operating activities                                   |  |                              | (5,144,020  | ) |      |   | (15,516,678 | )
|                                                                     |  |                              |             |   |      |   |             |  
|Investing activities:                                                |  |                              |             |   |      |   |             |  
|Purchases of available-for-sale securities                           |  |                              | (1,512,250  | ) |      |   | (12,461,254 | )
|Proceeds from maturities and calls of held-to-maturity securities    |  |                              |            |   |      |   | 21,600,000  |  
|Proceeds from sales and maturities of available-for-sale securities  |  |                              | 1,631,191   |   |      |   | 4,020,050   |  
|Proceeds from sale of other real estate                              |  |                              | 1,267,456   |   |      |   | 968,531     |  
|Loan originations, net of principal repayments                       |  |                              | (23,270,395 | ) |      |   | (82,364,097 | )
|Purchases of premises and equipment                                  |  |                              | (608,419    | ) |      |   | (1,243,097  | )
|(Purchase) sale of restricted equity securities, net of redemptions  |  |                              | (3,441,300  | ) |      |   | 1,090,950   |  
|                                                                     |  |                              |             |   |      |   |             |  
|Net cash from investing activities                                   |  |                              | (25,933,717 | ) |      |   | (68,388,917 | )
|                                                                     |  |                              |             |   |      |   |             |  
|Financing activities:                                                |  |                              |             |   |      |   |             |  
|Net increase in noninterest-bearing deposits                         |  |                              | 5,495,015   |   |      |   | 7,300,369   |  
|Net increase in interest-bearing deposits                            |  |                              | 38,510,799  |   |      |   | 101,699,429 |  
|Cash dividends paid on preferred stock                               |  |                              | (481,833    | ) |      |   |            |  
|Net increase (decrease) of FHLB advances and federal funds purchased |  |                              | 5,021,508   |   |      |   | (27,040,945 | )
|Distributions to noncontrolling interests                            |  |                              | (176,297    | ) |      |   | (206,390    | )
|Proceeds from issuance of common stock, net of issuance costs        |  |                              | 271,999     |   |      |   | 6,842,863   |  
|                                                                     |  |                              |             |   |      |   |             |  
|Net cash from financing activities                                   |  |                              | 48,641,191  |   |      |   | 88,595,326  |  
|                                                                     |  |                              |             |   |      |   |             |  
|CHANGE IN CASH AND CASH EQUIVALENTS                                  |  |                              | 17,563,454  |   |      |   | 4,689,731   |  
|CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                       |  |                              | 8,596,342   |   |      |   | 9,464,550   |  
|                                                                     |  |                              |             |   |      |   |             |  
|CASH AND CASH EQUIVALENTS AT END OF PERIOD                           |  | $                            | 26,159,796  |   |      | $ | 14,154,281  |  
|                                                                     |  |                              |             |   |      |   |             |  
|SUPPLEMENTAL SCHEDULES AND CASH FLOW INFORMATION                     |  |                              |             |   |      |   |             |  
|Cash paid for:                                                       |  |                              |             |   |      |   |             |  
|Interest on deposits and other borrowings                            |  | $                            | 7,792,214   |   |      | $ | 7,810,654   |  
|Income taxes                                                         |  | $                            | 3,250,000   |   |      | $ | 2,242,000   |  
|Loans transferred to foreclosed real estate during the year          |  | $                            | 1,700,158   |   |      | $ | 1,339,193   |  
|Loans to facilitate sale of real estate                              |  | $                            | 1,777,500   |   |      | $ |            |  

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



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##### Table of Contents

MONARCH FINANCIAL HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. BASIS OF PRESENTATION

In the opinion of management, the
accompanying unaudited consolidated financial statements contain all adjustments consisting of normal recurring accruals necessary to present fairly Monarch Financial Holdings, Inc.s financial position as of September 30, 2009; the
consolidated statements of income for the three and nine months ended September 30, 2009 and 2008; the consolidated statements of changes in shareholders equity for the nine months ended September 30, 2009 and 2008; and the
consolidated statements of cash flows for the nine months ended September 30, 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 and nine month period ended September 30, 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 to current year presentations.

Recent Issued Accounting Standards

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

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

In May 2009, the FASB issued guidance (ASC 855) that establishes
general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. In particular, it sets forth: a) the period after the balance sheet date
during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements; b) the circumstances under which an entity should recognize events or
transactions occurring after the balance sheet date in its financial statements; and c) the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. We adopted the subsequent event guidance in
the quarter ended June 30, 2009, which did not have a material impact on our financial condition or results of operations.

On April 9, 2009, FASB issued the following application guidance to enhance disclosures regarding fair value measurements and impairments of securities:

1. The first guidance relates to interim disclosures about fair value of financial instruments (ASC 825-10-50),which requires an entity to provide quantitative and qualitative disclosures about
fair value of any financial instruments for interim reporting periods as well as in annual financial statements. Prior to issuing this guidance, fair values for these assets and liabilities were only disclosed annually. We adopted the interim fair
value disclosure guidance in the quarter ended June 30, 2009, and the adoption did not have a material impact on our financial condition or results of operations. See Note 4 for further information.



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2. The second guidance relates torecognition and presentation of
other-than-temporary impairments(ASC 320-10-35), whichis intended to bring greater consistency to the timing of impairment recognition, and provide greater clarity to investors about the credit and non-credit components of
impaired debt securities that are not expected to be sold. Further, it replaces the existing requirement that the entitys management assert it has both the intent and ability to hold an impaired security until recovery with a requirement that
management assert: (a) it does not have the intent to sell the security; and (b) it is more likely than not it will not have to sell the security before recovery of its cost basis. It also requires increased and more timely
disclosures sought by investors regarding expected cash flows, credit losses, and an aging of securities with unrealized losses. We adopted ASC 320-10-35 for the quarter ended June 30, 2009, and the adoption did not have a material impact on
our financial condition or results of operations. See Note 4 for further information.

3.The third guidance relates to
determining fair value when the volume and level of activity for the asset or liability have significantly decreased and identifying transactions that are not orderly (ASC 820-10-35-15A). It reaffirms the objective of fair value measurement 
to reflect how much an asset would be sold for in an orderly transaction (as opposed to a distressed or forced transaction) at the date of the financial statements under current market conditions. Specifically, it reaffirms the need to use judgment
to ascertain if a formerly active market has become inactive and in determining fair values when markets have become inactive. It also requires an entity to base its conclusion about whether a transaction was not orderly on the weight of the
evidence. Adoption of this guidance did not have a material impact on our financial condition or results of operations.

In June 2008, the FASB issued guidance (ASC 260) addressing whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in
computing earnings per share under the two-class method (ASC 260-45-60).The guidance is effective for periods beginning after December 15, 2008, and did not have a material impact on our consolidated financial statements.

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

In April 2009, the FASB issued guidance
(ASC 805) to address application issues on initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. This guidance is effective for
assets and liabilities arising from contingencies in business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. We do not expect the
implementation of this guidance to have a material impact on our consolidated financial statements.

In December 2007, the
FASB issued guidance (ASC 810) 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. This guidance 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. Effective for fiscal years beginning after December 15, 2008, this guidance has not had a material impact
on our financial condition and results of operations.

In March 2008, the FASB issued guidance (ASC 815) which requires
enhanced disclosures about derivative instruments and hedged items that are accounted for under (ASC 815) and related interpretations. This guidance was effective for periods beginning after November 15, 2008, with early adoption permitted. The
expanded disclosure requirements for derivatives and hedged items and has not had a material impact on our consolidated financial position and 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 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 noncontrolling interest in Bankers Insurance, LLC, in a joint venture with the Virginia Bankers Association and many other community banks. Bankers
Insurance, LLC, is a full service property/casualty and life/health agency that ranks as one of the largest agencies in Virginia. Bankers Insurance, LLC, provides insurance to our customers and to the general public.

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

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

In May 2007, we expanded banking operations into northeastern North Carolina with the
opening of a 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, Bowie, Gaithersburg and Greenbelt, Maryland and Kitty
Hawk, Wilmington and Charlotte, North Carolina, and Greenwood, South Carolina.

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

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

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



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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 September 30, |           | 9 months ended September 30,
|                                                            |  | 2009                         |           |                              | 2008 |   | 2009      |  |   | 2008     
|Net income (numerator, basic and diluted)                   |  | $                            | 1,152,782 |                              |      | $ | 772,333   |  | $ | 3,632,645 |   |  | $ | 2,667,561
|Less: cumulative perpetual preferred dividend and accretion |  |                              | (197,766  | )                            |      |   |          |  |   | (586,807  | ) |  |   |         
|                                                            |  |                              |           |                              |      |   |           |  |   |           |   |  |   |          
|Net income (numerator, basic and diluted)                   |  |                              | 955,016   |                              |      |   | 772,333   |  |   | 3,045,838 |   |  |   | 2,667,561
|Weighted average shares outstanding (denominator)           |  |                              | 5,671,083 |                              |      |   | 5,561,773 |  |   | 5,650,780 |   |  |   | 5,088,633
|                                                            |  |                              |           |                              |      |   |           |  |   |           |   |  |   |          
|Income per common share - basic                             |  | $                            | 0.17      |                              |      | $ | 0.14      |  | $ | 0.54      |   |  | $ | 0.52     
|                                                            |  |                              |           |                              |      |   |           |  |   |           |   |  |   |          
|Weighted average shares - diluted (denominator)             |  |                              | 5,741,274 |                              |      |   | 5,690,731 |  |   | 5,704,082 |   |  |   | 5,250,089
|                                                            |  |                              |           |                              |      |   |           |  |   |           |   |  |   |          
|Income per common share - diluted                           |  | $                            | 0.17      |                              |      | $ | 0.14      |  | $ | 0.53      |   |  | $ | 0.51     
|                                                            |  |                              |           |                              |      |   |           |  |   |           |   |  |   |          
|Dilutive effect- average number of shares                   |  |                              | 70,191    |                              |      |   | 128,958   |  |   | 53,302    |   |  |   | 161,456  

NOTE 4. FAIR VALUE ACCOUNTING

Fair Value Hierarchy and Fair Value Measurement

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



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



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



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

The methods we use to determine fair value on an instrument specific basis are detailed in the section titled Valuation Methods
below.



10



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##### Table of Contents

The following table presents our assets and liabilities related to continuing operations,
which are measured at fair value on a recurring basis for each of the fair value hierarchy levels, as of September 30, 2009 and December 31, 2008:



|                                           |  |                                                 |           |                                                             |   |                                            |  |                                         |           |  |   |        
|------------------------------------------ |  | ----------------------------------------------- | --------- | ----------------------------------------------------------- | - | ------------------------------------------ |  | --------------------------------------- | --------- |  | - | -------
|                                           |  | Fair Value Measurements at Reporting Date Using
|Description                                |  | Fair Value                                      |           | Quoted Prices inActive Marketsfor IdenticalAssets (Level 1) |   | SignificantOtherObservableInputs (Level 2) |  | SignificantUnobservableInputs (Level 3)
|Assets at September 30, 2009               |  |                                                 |           |                                                             |   |                                            |  |                                         |           |  |   |        
|Investment securities - available for sale |  | $                                               | 5,762,087 |                                                             | $ |                                           |  | $                                       | 5,762,087 |  | $ |       
|Rate lock commitments, net                 |  |                                                 | 934,796   |                                                             |   |                                           |  |                                         |          |  |   | 934,796
|                                           |  |                                                 |           |                                                             |   |                                            |  |                                         |           |  |   |        
|Total Assets                               |  | $                                               | 6,696,883 |                                                             | $ |                                           |  | $                                       | 5,762,087 |  | $ | 934,796
|                                           |  |                                                 |           |                                                             |   |                                            |  |                                         |           |  |   |        
|Derivative financial liability             |  | $                                               | 319,473   |                                                             |   |                                            |  | $                                       | 319,473   |  |   |        
|                                           |  |                                                 |           |                                                            
|Assets at December 31, 2008                |  |                                                 |           |                                                             |   |                                            |  |                                         |           |  |   |        
|Investment securities - available for sale |  | $                                               | 5,846,917 |                                                             | $ |                                           |  | $                                       | 5,846,917 |  | $ |       
|Rate lock commitments, net                 |  |                                                 | 645,484   |                                                             |   |                                           |  |                                         |          |  |   | 645,484
|                                           |  |                                                 |           |                                                             |   |                                            |  |                                         |           |  |   |        
|Total Assets                               |  | $                                               | 6,492,401 |                                                             | $ |                                           |  | $                                       | 5,846,917 |  | $ | 645,484
|                                           |  |                                                 |           |                                                             |   |                                            |  |                                         |           |  |   |        

Derivative financial instruments are recorded at fair value, which is based on the
income approach using observable Level 2 marker inputs, reflecting market expectations of future interest rates as of the measurement date. Standard valuation techniques are used to calculate the present value of the future expected cash flows
assuming an orderly transaction. Valuation adjustments may be made to reflect both our credit risk and the counterparties credit quality in determining the fair value of the derivative. Level 2 inputs for the valuations are limited to
observable market prices for London Interbank Offered Rate (LIBOR) observable market prices for LIBOR swap rates, and three month LIBOR basis spreads at commonly quoted intervals. Our derivative financial liability consists of an interest rate swap
that qualifies as a cash flow hedge which had an unrealized loss of $319,473 at September 30, 2009 and $0 at December 30, 2008.

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



|                               |  |      |          |   |      |   |          |  
|------------------------------ |  | ---- | -------- | - | ---- | - | -------- | -
|                               |  | 2009 |          |   | 2008 |  
|Balance, January 1             |  | $    | 645,484  |   |      | $ | 132,138  |  
|Issuances and settlements, net |  |      | (645,484 | ) |      |   | (132,138 | )
|Income ( loss)                 |  |      | 934,796  |   |      |   | 478,635  |  
|                               |  |      |          |   |      |   |          |  
|Balance, September 30          |  | $    | 934,796  |   |      | $ | 478,635  |  
|                               |  |      |          |   |      |   |          |  
|                               |  |     
|Balance, July 1                |  | $    | 864,664  |   |      | $ | 392,474  |  
|Issuances and settlements, net |  |      | (864,664 | ) |      |   | (392,474 | )
|Income ( loss)                 |  |      | 934,796  |   |      |   | 478,635  |  
|                               |  |      |          |   |      |   |          |  
|Balance, September 30          |  | $    | 934,796  |   |      | $ | 478,635  |  
|                               |  |      |          |   |      |   |          |  



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##### Table of Contents

The following table provides quantitative disclosures about the fair value measurements of
our assets related to continuing operations which are measured at fair value on a nonrecurring basis as of September 30, 2009 and 2008:



|                      |  |                                                 |            |                                                             |   |                                            |  |                                         |            |  |   |          
|--------------------- |  | ----------------------------------------------- | ---------- | ----------------------------------------------------------- | - | ------------------------------------------ |  | --------------------------------------- | ---------- |  | - | ---------
|                      |  | Fair Value Measurements at Reporting Date Using
|Description           |  | Fair Value                                      |            | Quoted Prices inActive
Marketsfor IdenticalAssets (Level 1) |   | SignificantOtherObservableInputs (Level 2) |  | SignificantUnobservableInputs (Level 3)
|At September 30, 2009 |  |                                                 |            |                                                             |   |                                            |  |                                         |            |  |   |          
|Real estate owned     |  | $                                               | 1,077,000  |                                                             | $ |                                           |  | $                                       |           |  | $ | 1,077,000
|Loans held for sale   |  |                                                 | 71,232,195 |                                                             |   |                                           |  |                                         | 71,232,195 |  |   |         
|At December 31, 2008  |  |                                                 |            |                                                             |   |                                            |  |                                         |            |  |   |          
|Real estate owned     |  | $                                               | 532,932    |                                                             | $ |                                           |  | $                                       |           |  | $ | 532,932  
|Loans held for sale   |  |                                                 | 54,369,215 |                                                             |   |                                           |  |                                         | 54,369,215 |  |   |         

For the three and nine months ended September 30, 2009, the gain of real estate
owned totaled $94,911 and $111,366, respectively. For the three months ended September 30, 2008, the loss on real estate owned totaled $33,964 and for the nine months ended September 30, 2008, the loss on real estate owned was $1,586.
These amounts are recorded within other noninterest income for the periods indicated.

At the time a loan secured by real
estate becomes real estate owned we record the property at the lower of its carrying amount or fair value. Upon foreclosure and through liquidation, we evaluate the propertys fair value as compared to its carrying amount and record a valuation
adjustment when the carrying amount exceeds fair value. Any valuation adjustments at the time a loan becomes real estate owned is charged to the allowance for loan losses. Any subsequent valuation adjustments are applied to earnings in our
consolidated statements of income. We recorded a loss in the three and nine months ended September 30, 2009, of $24,750 due to valuation adjustments on real estate owned in our consolidated statements of income. We recorded a loss in the three
and nine months ended September 30, 2008 of $64,941 and 73,419, respectively, due to valuation adjustments.

Fair
Value Option for Financial Assets and Financial Liabilities

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

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

At September 30, 2009, we have not elected to implement fair value accounting for
any balance sheet items not already requiring such accounting.



12



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##### Table of Contents

Fair Value of Financial Instruments

The following table presents the carrying amounts and fair value of our financial instruments at September 30, 2009 and
December 31, 2008. GAAP defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties, other than through a forced or liquidation sale for purposes of
this disclosure. The carrying amounts in the table are included in the balance sheet under the indicated captions.



|                             |  |                    |             |                   |   |               |  |           |             |  |   |            
|---------------------------- |  | ------------------ | ----------- | ----------------- | - | ------------- |  | --------- | ----------- |  | - | -----------
|                             |  | September 30, 2009 |             | December 31, 2008
|                             |  | CarryingValue      |             | FairValue         |   | CarryingValue |  | FairValue
|Financial Assets             |  |                    |             |                   |   |               |  |           |             |  |   |            
|Cash and cash equivalents    |  | $                  | 26,159,796  |                   | $ | 26,159,796    |  | $         | 8,596,342   |  | $ | 8,596,342  
|Investment securities        |  |                    | 6,262,087   |                   |   | 6,264,172     |  |           | 6,346,917   |  |   | 6,365,177  
|Mortgage loans held for sale |  |                    | 71,232,195  |                   |   | 71,232,195    |  |           | 54,369,215  |  |   | 54,369,215 
|Loans (net)                  |  |                    | 512,783,696 |                   |   | 532,727,893   |  |           | 496,666,083 |  |   | 520,023,836
|Accrued interest receivable  |  |                    | 1,663,273   |                   |   | 1,663,273     |  |           | 1,602,662   |  |   | 1,602,662  
|Restricted equity securities |  |                    | 7,016,750   |                   |   | 7,016,750     |  |           | 3,575,450   |  |   | 3,575,450  
|                             |  |                    |             |                  
|Financial Liabilities        |  |                    |             |                   |   |               |  |           |             |  |   |            
|Deposit liabilities          |  | $                  | 540,091,609 |                   | $ | 538,563,961   |  | $         | 496,085,795 |  | $ | 496,213,772
|Total borrowings             |  |                    | 43,081,780  |                   |   | 42,866,489    |  |           | 38,060,272  |  |   | 37,249,427 
|Accrued interest payable     |  |                    | 225,683     |                   |   | 225,683       |  |           | 202,035     |  |   | 202,035    

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

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

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

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

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

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

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

The carrying amounts of accrued interestapproximate fair value.

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



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NOTE 5. COMPREHENSIVE INCOME

Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain
changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of
comprehensive income. The only component of other comprehensive income consists of unrealized gains and losses on available-for-sale securities. The following is a detail of comprehensive income for the three and nine months ended September 30,
2009 and 2008:



|                                                                                         |  |                                  |           |   |                                 |   |         |      |  |   |           |   |  |   |           |  
|---------------------------------------------------------------------------------------- |  | -------------------------------- | --------- | - | ------------------------------- | - | ------- | ---- |  | - | --------- | - |  | - | --------- | -
|                                                                                         |  | Three months ended September 30, |           |   | Nine months ended September 30, |  
|                                                                                         |  | 2009                             |           |   | 2008                            |   |         | 2009 |  |   | 2008      |  
|Net Income                                                                               |  | $                                | 1,175,314 |   |                                 | $ | 865,406 |      |  | $ | 3,800,777 |   |  | $ | 2,925,998 |  
|Change in unrealized gains (losses) on securities available-for-sale, net of tax expense |  |                                  | 20,071    |   |                                 |   | (29,598 | )    |  |   | 29,033    |   |  |   | (29,835   | )
|                                                                                         |  |                                  |           |   |                                 |   |         |      |  |   |           |   |  |   |           |  
|Total comprehensive income                                                               |  |                                  | 1,195,385 |   |                                 |   | 835,808 |      |  |   | 3,829,810 |   |  |   | 2,896,163 |  
|Less: Comprehensive income attributable to noncontrolling interests                      |  |                                  | (22,532   | ) |                                 |   | (93,073 | )    |  |   | (168,132  | ) |  |   | (258,437  | )
|                                                                                         |  |                                  |           |   |                                 |   |         |      |  |   |           |   |  |   |           |  
|Comprehensive income attributable to Monarch Financial Holdings, Inc.                    |  | $                                | 1,172,853 |   |                                 | $ | 742,735 |      |  | $ | 3,661,678 |   |  | $ | 2,637,726 |  
|                                                                                         |  |                                  |           |   |                                 |   |         |      |  |   |           |   |  |   |           |  
|Unrealized holding (losses) gains during the period                                      |  | $                                | 30,411    |   |                                 | $ | (44,845 | )    |  | $ | 43,989    |   |  | $ | (45,205   | )
|                                                                                         |  |                                  |           |   |                                 |   |         |      |  |   |           |   |  |   |           |  
|Total other comprehensive (loss) gain before income tax expense                          |  |                                  | 30,411    |   |                                 |   | (44,845 | )    |  |   | 43,989    |   |  |   | (45,205   | )
|Income tax benefit (expense)                                                             |  |                                  | (10,340   | ) |                                 |   | 15,247  |      |  |   | (14,956   | ) |  |   | 15,370    |  
|                                                                                         |  |                                  |           |   |                                 |   |         |      |  |   |           |   |  |   |           |  
|Net unrealized (losses) gains                                                            |  | $                                | 20,071    |   |                                 | $ | (29,598 | )    |  | $ | 29,033    |   |  | $ | (29,835   | )
|                                                                                         |  |                                  |           |   |                                 |   |         |      |  |   |           |   |  |   |           |  

NOTE 6. STOCK-BASED COMPENSATION

As of September 30, 2009, we have a stock-based compensation plan. Prior to January 1, 2006, we accounted for our plan using the
recognition and measurement principles under previously existing standards which did not call for stock-based employee compensation cost to be reflected in net income because the 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 ASC 718, (formerly Statement No. 123R Share-Based Payment) 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. This accounting treatment 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.

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 non-interest income
and non-interest expense, respectively. We do not have other reportable operating segments. (The accounting policies of the segment are the same as those described in the summary of significant accounting policies.) 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.



14



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Segment information for the three and nine months ended September 30, 2009 and 2008 is
shown in the following table.

Selected Financial Information



|                                                           |  |                            |             |   |                           |   |             |                          |  |   |             |   |  |   |             |  
|---------------------------------------------------------- |  | -------------------------- | ----------- | - | ------------------------- | - | ----------- | ------------------------ |  | - | ----------- | - |  | - | ----------- | -
|                                                           |  | Commercialand
OtherBanking |             |   | MortgageBankingOperations |   |             | IntersegmentEliminations |  |   | Total       |  
|Three Months Ended September 30, 2009                      |  |                            |             |   |                           |   |             |                          |  |   |             |   |  |   |             |  
|Net interest income after provision for loan losses        |  | $                          | 3,888,451   |   |                           | $ | 100,840     |                          |  | $ |            |   |  | $ | 3,989,291   |  
|Noninterest income                                         |  |                            | 1,334,627   |   |                           |   | 8,036,855   |                          |  |   | (608,126    | ) |  |   | 8,763,356   |  
|Noninterest expenses                                       |  |                            | (3,439,112  | ) |                           |   | (7,787,846  | )                        |  |   | 269,495     |   |  |   | (10,957,463 | )
|                                                           |  |                            |             |   |                           |   |             |                          |  |   |             |   |  |   |             |  
|Net income before income taxes and noncontrolling interest |  | $                          | 1,783,966   |   |                           | $ | 349,849     |                          |  | $ | (338,631    | ) |  | $ | 1,795,184   |  
|                                                           |  |                            |             |   |                           |   |             |                          |  |   |             |   |  |   |             |  
|                                                           |  |                            |             |  
|Three Months Ended September 30, 2008                      |  |                            |             |   |                           |   |             |                          |  |   |             |   |  |   |             |  
|Net interest income after provision for loan losses        |  | $                          | 3,912,676   |   |                           | $ | (270,093    | )                        |  | $ | 236,018     |   |  | $ | 3,878,601   |  
|Noninterest income                                         |  |                            | 747,967     |   |                           |   | 4,517,197   |                          |  |   | (451,734    | ) |  |   | 4,813,430   |  
|Noninterest expenses                                       |  |                            | (3,475,483  | ) |                           |   | (3,776,200  | )                        |  |   | (162,242    | ) |  |   | (7,413,925  | )
|                                                           |  |                            |             |   |                           |   |             |                          |  |   |             |   |  |   |             |  
|Net income before income taxes and noncontrolling interest |  | $                          | 1,185,160   |   |                           | $ | 470,904     |                          |  | $ | (377,958    | ) |  | $ | 1,278,106   |  
|                                                           |  |                            |             |   |                           |   |             |                          |  |   |             |   |  |   |             |  
|                                                           |  |                            |             |  
|Nine Months Ended September 30, 2009                       |  |                            |             |   |                           |   |             |                          |  |   |             |   |  |   |             |  
|Net interest income after provision for loan losses        |  | $                          | 11,640,747  |   |                           | $ | 100,840     |                          |  | $ |            |   |  | $ | 11,741,587  |  
|Noninterest income                                         |  |                            | 4,661,175   |   |                           |   | 24,081,642  |                          |  |   | (2,216,525  | ) |  |   | 26,526,292  |  
|Noninterest expenses                                       |  |                            | (10,736,718 | ) |                           |   | (22,406,226 | )                        |  |   | 509,612     |   |  |   | (32,633,332 | )
|                                                           |  |                            |             |   |                           |   |             |                          |  |   |             |   |  |   |             |  
|Net income before income taxes and noncontrolling interest |  | $                          | 5,565,204   |   |                           | $ | 1,776,256   |                          |  | $ | (1,706,913  | ) |  | $ | 5,634,547   |  
|                                                           |  |                            |             |   |                           |   |             |                          |  |   |             |   |  |   |             |  
|                                                           |  |                            |             |  
|Nine Months Ended September 30, 2008                       |  |                            |             |   |                           |   |             |                          |  |   |             |   |  |   |             |  
|Net interest income after provision for loan losses        |  | $                          | 11,291,869  |   |                           | $ | (810,374    | )                        |  | $ | 579,970     |   |  | $ | 11,061,465  |  
|Noninterest income                                         |  |                            | 3,032,007   |   |                           |   | 13,636,821  |                          |  |   | (2,017,850  | ) |  |   | 14,650,978  |  
|Noninterest expenses                                       |  |                            | (10,175,743 | ) |                           |   | (11,176,460 | )                        |  |   | (106,742    | ) |  |   | (21,458,945 | )
|                                                           |  |                            |             |   |                           |   |             |                          |  |   |             |   |  |   |             |  
|Net income before income taxes and noncontrolling interest |  | $                          | 4,148,133   |   |                           | $ | 1,649,987   |                          |  | $ | (1,544,622  | ) |  | $ | 4,253,498   |  
|                                                           |  |                            |             |   |                           |   |             |                          |  |   |             |   |  |   |             |  
|                                                           |  |                            |             |  
|Segment Assets                                             |  |                            |             |   |                           |   |             |                          |  |   |             |   |  |   |             |  
|September 30, 2009                                         |  | $                          | 653,545,436 |   |                           | $ | 97,697,312  |                          |  | $ | (99,468,285 | ) |  | $ | 651,774,463 |  
|September 30, 2008                                         |  | $                          | 595,365,222 |   |                           | $ | 40,186,681  |                          |  | $ | (40,717,126 | ) |  | $ | 594,834,777 |  

NOTE 8. GOODWILL AND INTANGIBLE ASSETS

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

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



|                                             |  |                   |           |   |                  |   |           |  
|-------------------------------------------- |  | ----------------- | --------- | - | ---------------- | - | --------- | -
|                                             |  | September 30,2009 |           |   | December 31,2008 |  
|Amortizable intangible assets                |  | $                 | 1,250,000 |   |                  | $ | 1,250,000 |  
|Accumulated amortization - intangible assets |  |                   | (386,902  | ) |                  |   | (252,973  | )
|                                             |  |                   |           |   |                  |   |           |  
|Amortizable intangible assets, net           |  | $                 | 863,098   |   |                  | $ | 997,027   |  
|                                             |  |                   |           |   |                  |   |           |  
|Goodwill                                     |  | $                 | 775,000   |   |                  | $ | 775,000   |  
|                                             |  |                   |           |   |                  |   |           |  



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Amortization expense for intangible assets totaled $44,643 and $133,929 for each of the
three and nine month periods, respectively, ending September 30, 2009 and 2008.



|                                                    |  |   |        
|--------------------------------------------------- |  | - | -------
|Estimated Amortization Expense:                     |  |   |        
|For the remaining months of the year ended 12/31/09 |  |   | 44,643 
|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
|                                                    |  |   |        
|                                                    |  | $ | 863,098
|                                                    |  |   |        

NOTE 9. PUBLIC OFFERING OF PREFERRED STOCK

On October 14, 2009, we filed a preliminary Form S-1 Registration Statement with the Securities and Exchange Commission to register
650,000 shares of Series B Noncumulative Convertible Perpetual Preferred Stock at $25.00 per share with a dividend rate to be determined. Estimated proceeds and costs are as follows:



|                                     |  |           |       |       |   |           
|------------------------------------ |  | --------- | ----- | ----- | - | ----------
|                                     |  | Per Share |       | Total
|Price to public                      |  | $         | 25.00 |       | $ | 16,250,000
|Underwriting discount (1)            |  | $         | 1.50  |       | $ | 943,750   
|Proceeds, before expenses, to us (1) |  | $         | 23.50 |       | $ | 15,306,250



|(1) | Scott & Stringfellow has agreed that the underwriting discount will be $0.875 per share for shares purchased by our directors, executive officers and others.
The total underwriting discount and commissions and total proceeds assume the purchase up to 50,000 shares by such persons.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

NOTE 10. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES

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

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

Our credit exposure, if any, on the interest rate swap is limited to the net favorable value (net
of any collateral pledged) and interest payments of the swap by the counterparty. Conversely, when an interest rate swap is in a liability position we are required to post collateral to PNC which is evaluated monthly and adjusted based on the fair
value of the hedge on the last day of the month. The fair value of this swap instrument was a liability of $319 thousand at September 30, 2009 for which our collateral requirement on September 30, 2009, was $350 thousand.

NOTE 11. SUBSEQUENT EVENTS

Management has considered events through November 13, 2009 in preparing the September 30, 2009 consolidated financial statements.



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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.

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

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

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



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



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



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



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



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



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

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

Net Income

Net income for the third quarter of 2009 was $1,153 thousand,
compared to $772 thousand for the same period in 2008. This represents a $380 thousand, or 49.3% increase, quarter over quarter. Basic and diluted earnings per share for the third quarter of 2009 were $0.17 compared to $0.14 for the third quarter of
2008.

We reported year-to-date net income of $3.6 million for the first nine months of 2009 compared to $2.7 million for the
same period in 2008, an increase of 36.2% or $965 thousand. Basic earnings per share were $0.54 compared to $0.52 and diluted earnings per share were $0.53 compared to $0.51, respectively.

Two important and commonly used measures of profitability are return on assets (net income as a percentage of average total assets) and
return on equity (net income as a percentage of average shareholders equity). Our annualized return on assets was 0.74% compared to 0.53%, and 0.75% compared to 0.65%, for the three months and nine months periods ended September 30, 2009
and 2008, respectively. Our annualized return on equity for the third quarter of 2009 was 7.25% compared to 6.67% in 2008 and 7.84% for the first nine month of 2009 compared to 8.79% in 2008.



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##### Table of Contents

The improvements, quarter over quarter and year over year, in net income were due to growth
in both net interest income and non-interest income. The impact of this growth was partially offset by slower growth in non-interest expense and a greater provision for loan losses expense.

Net interest income increased $1.2 million and non-interest income increased $3.9 million in the third quarter of 2009, compared to 2008.
For the first nine months of 2009 compared to 2008, net interest income increased $3.5 million and non-interest income increased $11.9 million. Lower interest costs associated with our deposits is a primary contributor to the improvement in net
interest income and increased production from our mortgage division is the source of the increase in non-interest income.

Non-interest expense increased $3.5 million for the quarter and $11.2 million for the first nine months of 2009 compare to the same periods in 2008. The areas of greatest non-interest expense growth were salaries and benefits, loan
origination expense, and FDIC insurance expense. Our provision for loan losses increased $1.1 million for the quarter and $2.8 million for the nine month period ended September 30, 2009 compared to 2008. This growth was due to higher loss
experience and an increase in watch-list loans.

Net Interest Income

Net interest income, a significant source of our revenue, is the excess of interest income over interest expense. Net interest income is
influenced by a number of factors, including the volume of interest-earning assets and interest bearing liabilities, the mix of interest-earning assets and interest bearing liabilities, the interest rates earned on earning assets, and the interest
rates paid to obtain funding to support the assets. For analytical purposes, net interest income is adjusted to a taxable equivalent basis to recognize the income tax savings on tax-exempt assets, such as bank owned life insurance (BOLI)
and state and municipal securities. A tax rate of 34% was used in adjusting interest on BOLI, tax-exempt securities and loans to a fully taxable equivalent basis. The difference between rates earned on interest-earning assets (with an adjustment
made to tax-exempt income to provide comparability with taxable income, i.e. the FTE adjustment) and the cost of the supporting funds is measured by net interest margin.

Net interest income showed marked improvement in both the third quarter and the first nine months of 2009 due to repricing opportunities of
both assets and liabilities in a low, but stable, rate environment. Interest rates have remained at a record low since December 2008, which has allowed us to realign our longer term liability costs with that of our assets. Historically, we are an
asset sensitive company with the majority of our loan portfolio indexed to the Wall Street Journal Prime Rate and set to re-price quickly. Our net interest income is negatively impacted when rates decline because repricing of our liabilities lags
behind that of our assets. Over the past year, we have renegotiated the majority of our commercial and mortgage loans to include rate floors which limits how low a rate can go, despite of how a loan is indexed. In addition, we have
repriced deposits as they mature to lower market rates.

The federal funds rate that is set by the Federal Reserve Banks
Federal Open Market Committee was 0.25% in the third quarter of 2009 compared to 2.00% for the same period in 2008. For comparable periods, the Wall Street Journal Prime Rate (WSJ), which generally moves with the federal funds rate, was
3.25% compared to 5.00%. A stable, though lower, rate environment has allowed us to renegotiate the pricing of our interest bearing liabilities and assets to terms which should be more favorable to us in the future when rates begin to rise.

Net interest income was $5.5 million for the third quarter and $15.8 million for the first nine months of 2009. Prior
years net interest income was $4.4 million and $12.3 million, respectively, for the third quarter and first nine months of 2008. Despite a 300bp decline in our primary pricing index, interest income increased $194 thousand for the quarter and
$611 thousand for the first nine months of 2009 compared to 2008. Growth in loan volume coupled with the addition of rate floors have kept interest income level with prior periods, while falling rates have resulted in lower interest expense for an
overall improvement in net interest income.

Establishing rate floors, which are the contractually defined minimum rate that
can be charged on variable rate loans, is one of the ways a traditionally asset sensitive lender can neutralize that sensitivity and buffer the impact of falling rates. Interest and fees on loans are the largest component of our interest income. At
September 30, 2009, $214.4 million, or 89% of our commercial and real estate loans had average floors of 5.68% compared to 37%, or $104.7 million, at an average rate of 5.21% at September 30, 2008. The addition of floors coupled with loan
growth have kept interest earnings level in spite of steep rate declines in an $86 million segment of our consumer loan portfolio, home equity loans, that cannot have floors and carry rates on or near WSJ prime.



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##### Table of Contents

Concurrent with the addition of loan floors, we have replaced the majority of our longer
term, higher cost, liabilities with lower cost liabilities. At September 2009, the blended cost on our time deposits had declined 108 basis points when compared to the first nine months of 2008. Total interest expense declined $983 thousand in the
third quarter of 2009 and $2.9 million in the first nine months when compared to 2008.

Our net interest rate spread on a
tax-equivalent basis increased 45 basis points to 3.12% for first nine months of 2009 when compared to 2.67% for the same period in 2008. Yield on earning assets decreased 75 basis points to 5.31% in 2009 compared to 6.06% for the first nine months
of 2008, while the cost of interest bearing liabilities decreased 120 basis points to 2.19% from 3.39%, 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 5.68% for the first nine months of 2009 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 an average of 2.95% from 5.36% in the first half 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.



19



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##### Table of Contents

NET INTEREST INCOME ANALYSIS

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



|                                              |  |                                 |             |   |         |   |            |  |      |             |  |   |             |   |         |   |            |  |      |  
|--------------------------------------------- |  | ------------------------------- | ----------- | - | ------- | - | ---------- |  | ---- | ----------- |  | - | ----------- | - | ------- | - | ---------- |  | ---- | -
|                                              |  | For Periods Ended September 30, |            
|                                              |  | 2009                            |             |   | 2008    |  
|                                              |  | Average                         |             |   | Income/ |   | Yield      |  |      | Average     |  |   | Income/     |   | Yield   |  
|                                              |  | Balance                         |             |   | Expense |   | Rate(1)    |  |      | Balance (5) |  |   | Expense (5) |   | Rate(1) |  
|ASSETS                                        |  |                                 |             |   |         |   |            |  |      |             |  |   |             |   |         |   |            |  |      |  
|Securities, at amortized cost                 |  | $                               | 6,260,901   |   |         | $ | 181,539    |  | 3.88 | %           |  | $ | 12,290,979  |   |         | $ | 367,649    |  | 4.00 | %
|Loans, net                                    |  |                                 | 585,918,470 |   |         |   | 23,772,474 |  | 5.42 | %           |  |   | 494,676,533 |   |         |   | 22,822,737 |  | 6.16 | %
|Federal funds sold                            |  |                                 | 5,340,746   |   |         |   | 9,987      |  | 0.25 | %           |  |   | 1,051,275   |   |         |   | 17,444     |  | 2.22 | %
|Dividend-earning restricted equity securities |  |                                 | 6,112,856   |   |         |   | 80,553     |  | 1.76 | %           |  |   | 4,332,645   |   |         |   | 162,206    |  | 5.00 | %
|Deposits in other banks                       |  |                                 | 2,470,322   |   |         |   | 1,902      |  | 0.10 | %           |  |   | 3,798,859   |   |         |   | 65,040     |  | 2.29 | %
|Bank owned life insurance (2)                 |  |                                 | 6,879,653   |   |         |   | 292,230    |  | 5.68 | %           |  |   | 6,630,381   |   |         |   | 273,274    |  | 5.51 | %
|                                              |  |                                 |             |   |         |   |            |  |      |             |  |   |             |   |         |   |            |  |      |  
|Total earning assets                          |  |                                 | 612,982,948 |   |         |   | 24,338,685 |  | 5.31 | %           |  |   | 522,780,672 |   |         |   | 23,708,350 |  | 6.06 | %
|                                              |  |                                 |             |   |         |   |            |  |      |             |  |   |             |   |         |   |            |  |      |  
|Less: Allowance for loan losses               |  |                                 | (8,560,372  | ) |         |   |            |  |      |             |  |   | (4,378,100  | ) |         |   |            |  |      |  
|Nonaccrual loans                              |  |                                 | 6,767,652   |   |         |   |            |  |      |             |  |   | 600,506     |   |         |   |            |  |      |  
|Total nonearning assets                       |  |                                 | 28,960,333  |   |         |   |            |  |      |             |  |   | 28,475,918  |   |         |   |            |  |      |  
|                                              |  |                                 |             |   |         |   |            |  |      |             |  |   |             |   |         |   |            |  |      |  
|Total assets                                  |  | $                               | 640,150,561 |   |         |   |            |  |      |             |  | $ | 547,478,996 |   |         |   |            |  |      |  
|                                              |  |                                 |             |   |         |   |            |  |      |             |  |   |             |   |         |   |            |  |      |  
|LIABILITIES and STOCKHOLDERS EQUITY          |  |                                 |             |   |         |   |            |  |      |             |  |   |             |   |         |   |            |  |      |  
|Interest-bearing deposits:                    |  |                                 |             |   |         |   |            |  |      |             |  |   |             |   |         |   |            |  |      |  
|Checking                                      |  | $                               | 16,395,957  |   |         | $ | 50,504     |  | 0.41 | %           |  | $ | 16,710,550  |   |         | $ | 121,729    |  | 0.97 | %
|Regular savings                               |  |                                 | 29,889,357  |   |         |   | 291,155    |  | 1.30 | %           |  |   | 6,228,006   |   |         |   | 29,540     |  | 0.63 | %
|Money market savings                          |  |                                 | 117,604,995 |   |         |   | 1,119,478  |  | 1.27 | %           |  |   | 128,880,070 |   |         |   | 2,708,259  |  | 2.81 | %
|Certificates of deposit                       |  |                                 |             |   |         |   |            |  |      |             |  |   |             |   |         |   |            |  |      |  
|$100,000 and over                             |  |                                 | 95,324,826  |   |         |   | 1,455,647  |  | 2.04 | %           |  |   | 126,529,066 |   |         |   | 3,008,377  |  | 3.18 | %
|Under $100,000                                |  |                                 | 175,835,490 |   |         |   | 4,232,934  |  | 3.22 | %           |  |   | 101,206,992 |   |         |   | 3,603,853  |  | 4.76 | %
|                                              |  |                                 |             |   |         |   |            |  |      |             |  |   |             |   |         |   |            |  |      |  
|Total interest-bearing deposits               |  |                                 | 435,050,625 |   |         |   | 7,149,718  |  | 2.20 | %           |  |   | 379,554,684 |   |         |   | 9,471,758  |  | 3.33 | %
|Borrowings                                    |  |                                 | 66,245,972  |   |         |   | 1,070,214  |  | 2.16 | %           |  |   | 59,109,988  |   |         |   | 1,657,240  |  | 3.75 | %
|                                              |  |                                 |             |   |         |   |            |  |      |             |  |   |             |   |         |   |            |  |      |  
|Total interest-bearing liabilities            |  |                                 | 501,296,597 |   |         | $ | 8,219,932  |  | 2.19 | %           |  |   | 438,664,672 |   |         | $ | 11,128,998 |  | 3.39 | %
|Noninterest-bearing liabilities               |  |                                 |             |   |         |   |            |  |      |             |  |   |             |   |         |   |            |  |      |  
|Demand deposits                               |  |                                 | 71,839,085  |   |         |   |            |  |      |             |  |   | 62,816,450  |   |         |   |            |  |      |  
|Other noninterest-bearing liabilities         |  |                                 | 5,047,719   |   |         |   |            |  |      |             |  |   | 5,481,517   |   |         |   |            |  |      |  
|                                              |  |                                 |             |   |         |   |            |  |      |             |  |   |             |   |         |   |            |  |      |  
|Total liabilities                             |  |                                 | 578,183,401 |   |         |   |            |  |      |             |  |   | 506,962,639 |   |         |   |            |  |      |  
|Stockholders equity                          |  |                                 | 61,967,160  |   |         |   |            |  |      |             |  |   | 40,516,357  |   |         |   |            |  |      |  
|                                              |  |                                 |             |   |         |   |            |  |      |             |  |   |             |   |         |   |            |  |      |  
|Total liabilities and stockholders equity    |  | $                               | 640,150,561 |   |         |   |            |  |      |             |  | $ | 547,478,996 |   |         |   |            |  |      |  
|                                              |  |                                 |             |   |         |   |            |  |      |             |  |   |             |   |         |   |            |  |      |  
|Net interest income (2)                       |  |                                 |             |   |         | $ | 16,118,753 |  |      |             |  |   |             |   |         | $ | 12,579,352 |  |      |  
|                                              |  |                                 |             |   |         |   |            |  |      |             |  |   |             |   |         |   |            |  |      |  
|Interest rate spread (2)(3)                   |  |                                 |             |   |         |   |            |  | 3.12 | %           |  |   |             |   |         |   |            |  | 2.67 | %
|                                              |  |                                 |             |   |         |   |            |  |      |             |  |   |             |   |         |   |            |  |      |  
|Net interest margin (2)(4)                    |  |                                 |             |   |         |   |            |  | 3.52 | %           |  |   |             |   |         |   |            |  | 3.21 | %
|                                              |  |                                 |             |   |         |   |            |  |      |             |  |   |             |   |         |   |            |  |      |  



|(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 $99,358 adjustment for 2009 and a $92,913 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 $26,815,990 and interim interest income of $1,211,085 have been reclassified from mortgage banking income to interest income and fees on loans
for September 30, 2008 to be consistent with the presentation for September 30, 2009.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Rate/Volume Analysis

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

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



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##### Table of Contents

RECONCILIATION OF NET INTEREST INCOME TO TAX EQUIVALENT NET INTEREST INCOME



|                                         |  |                              |           |                              |   |           |  |      |            |  |   |           
|---------------------------------------- |  | ---------------------------- | --------- | ---------------------------- | - | --------- |  | ---- | ---------- |  | - | ----------
|Non-GAAP                                 |  | 3 Months Ended September 30, |           | 9 Months Ended September 30,
|                                         |  | 2009                         |           | 2008                         |   | 2009      |  | 2008
|Interest income:                         |  |                              |           |                              |   |           |  |      |            |  |   |           
|Total interest income                    |  | $                            | 8,062,871 |                              | $ | 7,869,158 |  | $    | 24,046,455 |  | $ | 23,435,076
|Bank owned life insurance                |  |                              | 65,615    |                              |   | 61,120    |  |      | 192,872    |  |   | 180,361   
|Tax equivalent adjustment (34% tax rate) |  |                              | 33,802    |                              |   | 31,486    |  |      | 99,358     |  |   | 92,913    
|                                         |  |                              |           |                              |   |           |  |      |            |  |   |           
|Adjusted income on earning assets        |  |                              | 8,162,288 |                              |   | 7,961,764 |  |      | 24,338,685 |  |   | 23,708,350
|                                         |  |                              |           |                              |   |           |  |      |            |  |   |           
|Interest expense:                        |  |                              |           |                              |   |           |  |      |            |  |   |           
|Total interest expense                   |  |                              | 2,526,792 |                              |   | 3,509,976 |  |      | 8,219,932  |  |   | 11,128,998
|                                         |  |                              |           |                              |   |           |  |      |            |  |   |           
|Net interest income - adjusted           |  | $                            | 5,635,496 |                              | $ | 4,451,788 |  | $    | 16,118,753 |  | $ | 12,579,352
|                                         |  |                              |           |                              |   |           |  |      |            |  |   |           

Adjusted income on earning assets increased $630 thousand in first nine months of
2009 compared to 2008 because our growth earning assets offset reduced yields. Income from loans, which is the largest component of earning assets, increased $949 thousand, in spite of an earnings potential from growth of $3.5 million. During the
same period, interest income from securities declined $186 thousand; $168 thousand due to a smaller portfolio and $18 thousand due to lower rates. Interest on federal funds sold declined $8 thousand and BOLI increased $19 thousand in the first nine
months of 2009 compared to 2008.

Loans, net of unearned income and loans held for sale grew a combined $56.2 million, to
$593.6 million at September 30, 2009 compared to $537.4 million at September 30, 2008. Had interest rates in 2009 remained level with 2008 at this increase in volume, the year over year earnings potential from loans was $3.5 million.
Consumer loans, which include home equity products and loans held for sale, had a growth related earnings potential of $2.6 million, or 74.3% of the total category, but only yielded $1.1 million due to the negative impact of much lower rates.
Commercial loans had an earnings potential of $645 thousand and mortgage loans, $259 thousand. However, lower yields reduced this potential by $711 and $376 thousand for net losses of $66 thousand in commercial loans and $117 thousand in mortgage
loans.

In the third quarter of 2009, adjusted income on earning assets increased $201 thousand when compared to 2008 on a
growth related earnings potential of $707 thousand that was reduced due to lower interest rates by $507 thousand. The third quarter 2009 overall earnings potential on loans compared to actual income earned are similar to the nine months
analysis. In spite of quarterly growth in loans, lower yields have reduced earnings potential. However, in the third quarter lower rates on our consumer loans have absorbed $420 thousand of the $470 thousand in earnings adjustment due to rate.
Commercial and mortgage earnings have been impacted less by rate in the quarter due to the floors place on a large portion of these loans.

Investment income declined in both the third quarter and first nine months of 2009 compared to 2008. In the third quarter of 2009 investment income declined $87 thousand and for the first nine months of
2009 investment income has decreased $185 thousand due to both volume and rate reductions. A significant portion of our Federal Agency securities have been called in the past year as market rates fell below the rate on these investments. Securities
purchased to replace those called have a much lower yield than the original bonds.

Interest on federal funds sold and other
bank accounts as well as income on restricted securities decreased a combined total of $9 thousand in the third quarter and $153 thousand for the first nine months of 2009 compared to 2008. Income on restricted equity securities has declined,
despite higher average balances, because the Federal Home Loan Bank modified their stock release policy. In addition, they paid zero dividends until August of this year, at which time they declared a much smaller dividend.

Year to date Interest expense through September 30, 2009 has decreased $2.9 million compared to 2008. Interest on deposits has been the
primary source, contributing $2.3 million, other borrowings and federal funds purchased added expense savings of $574 and $13 thousand, respectively. Third quarter 2009 interest declined $983 thousand compared to prior year. Deposit interest expense
decreased $777 thousand, while other borrowings and federal funds dropped $203 thousand and three thousand, respectively.

On
average, interest bearing deposits increased $55.5 million to $435.1 million through September 30, 2009 compared to $379.6 million through September 30, 2008 while the average cost of those deposits has dropped from 3.33% to 2.20%.
Comparing quarter end balances, interest bearing deposits were $455.7 million at September 30, 2009, an increase of $30.4 million over $425.3 million at September 30, 2008. Based on period end, our deposit composition has changed along
with rates, which should contribute further to cost savings in the future.



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##### Table of Contents

Money market accounts contributed $1.6 million to our interest savings during the first nine
months of 2009 compared to 2008. The blended average rate on these deposits has decreased from 2.81% to 1.27%. Based on the Rate/Volume table below, $1.4 million of interest savings is due to rate and $219 thousand is attributable to volume, which
is inconsistent with the period end growth noted. For clarification purposes, both the Net Interest Income and the Rate/Volume tables utilize average balances for calculation purposes because an average takes into account both the level and duration
of a balance, creating a more accurate picture in most cases. The results then would indicate that money market accounts, on average, had declined over time. Although this has been the case, in mid-September 2009 we opened a $30.0 million brokered
money market account which carries a very low interest rate. Given its relative size, this account should provide interest savings benefits going forward.

Interest cost on time deposits (CDs) declined $923 thousand in the first nine months of 2009 compared to 2008. Interest cost savings of $2.0 million associated with rate were partially offset
by $1.1 million in additional interest costs associated with growth. The composition of our CD portfolio has shifted over time to lower cost CDs. On average, Jumbo CDs, time deposits in excess of $100 thousand, represented 55.6% or our total CDs in
September 2008 compared to 35.2% in September 2009. Management has focused, through two retail CD campaigns, on our local market. The first of these campaigns was offered in the fall of 2008, with the majority of those CDs maturing from August to
October of 2009, when we ran a second campaign. The short duration of the CDs offered has allowed us to manage the decline in rates over time more efficiently.

Interest cost in the third quarter of 2009 has followed the trends of the first nine months, when compared to the same period in 2008. Time deposit cost has declined $427 thousand through rate savings of
$774 thousand partially offset by growth cost of $347 thousand. Money market savings of $390 thousand has been achieved through $353 thousand in rate savings and $37 thousand in lower, on average, outstanding balances.

Savings interest cost for the third quarter and first nine months of 2009 increased $60 thousand and $261 thousand, respectively. We
introduced a new higher cost savings product in 2008 that has produced average year over year growth of $23.7 million.

Our
borrowing costs declined $574 thousand in the first nine months of 2009 due to lower rates, partially offset by higher balances. Quarter over quarter, borrowing costs have declined $203 thousand, $157 thousand of which is attributable to lower rates
and $46 thousand attributable to lower borrowings in the quarter.

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 third quarter and first nine months of 2009 compared to 2008.



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##### Table of Contents

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.

RATE / VOLUME ANALYSIS

(in thousands)



|                          |  |                                                      |       |   |                                                     |   |        |                            |      |   |                       |        |  |   |        |   |  |   |        |   |  |   |       |  
|------------------------- |  | ---------------------------------------------------- | ----- | - | --------------------------------------------------- | - | ------ | -------------------------- | ---- | - | --------------------- | ------ |  | - | ------ | - |  | - | ------ | - |  | - | ----- | -
|                          |  | For the Three Months Ended September 30,2009 vs 2008 |       |   | For the Nine Months Ended September 30,2009 vs 2008 |  
|                          |  | InterestIncrease(Decrease)                           |       |   | ChangeAttributable to                               |   |        | InterestIncrease(Decrease) |      |   | ChangeAttributable to |       
|                          |  | Rate                                                 |       |   | Volume                                              |   |        |                            | Rate |   |                       | Volume | 
|Interest income           |  |                                                      |       |   |                                                     |   |        |                            |      |   |                       |        |  |   |        |   |  |   |        |   |  |   |       |  
|Loans:                    |  |                                                      |       |   |                                                     |   |        |                            |      |   |                       |        |  |   |        |   |  |   |        |   |  |   |       |  
|Commercial                |  | $                                                    | 93    |   |                                                     | $ | (38    | )                          |      | $ | 131                   |        |  | $ | (66    | ) |  | $ | (711   | ) |  | $ | 645   |  
|Mortgage                  |  |                                                      | 75    |   |                                                     |   | (12    | )                          |      |   | 87                    |        |  |   | (117   | ) |  |   | (376   | ) |  |   | 259   |  
|Consumer                  |  |                                                      | 122   |   |                                                     |   | (420   | )                          |      |   | 542                   |        |  |   | 1,132  |   |  |   | (1,424 | ) |  |   | 2,556 |  
|                          |  |                                                      |       |   |                                                     |   |        |                            |      |   |                       |        |  |   |        |   |  |   |        |   |  |   |       |  
|Total loans               |  |                                                      | 290   |   |                                                     |   | (470   | )                          |      |   | 760                   |        |  |   | 949    |   |  |   | (2,511 | ) |  |   | 3,460 |  
|                          |  |                                                      |       |   |                                                     |   |        |                            |      |   |                       |        |  |   |        |   |  |   |        |   |  |   |       |  
|Securities:               |  |                                                      |       |   |                                                     |   |        |                            |      |   |                       |        |  |   |        |   |  |   |        |   |  |   |       |  
|Federal agencies          |  |                                                      | (73   | ) |                                                     |   | (3     | )                          |      |   | (70                   | )      |  |   | (182   | ) |  |   | (47    | ) |  |   | (135  | )
|Mortgage-backed           |  |                                                      | (3    | ) |                                                     |   | (1     | )                          |      |   | (2                    | )      |  |   | 11     |   |  |   | 14     |   |  |   | (3    | )
|Other securities          |  |                                                      | (11   | ) |                                                     |   | 1      |                            |      |   | (12                   | )      |  |   | (14    | ) |  |   | 15     |   |  |   | (29   | )
|                          |  |                                                      |       |   |                                                     |   |        |                            |      |   |                       |        |  |   |        |   |  |   |        |   |  |   |       |  
|Total securities          |  |                                                      | (87   | ) |                                                     |   | (3     | )                          |      |   | (84                   | )      |  |   | (185   | ) |  |   | (18    | ) |  |   | (167  | )
|                          |  |                                                      |       |   |                                                     |   |        |                            |      |   |                       |        |  |   |        |   |  |   |        |   |  |   |       |  
|Deposits in other banks   |  |                                                      | (10   | ) |                                                     |   | (27    | )                          |      |   | 17                    |        |  |   | (145   | ) |  |   | (157   | ) |  |   | 12    |  
|Federal funds sold        |  |                                                      | 1     |   |                                                     |   | (9     | )                          |      |   | 10                    |        |  |   | (8     | ) |  |   | (28    | ) |  |   | 20    |  
|Bank owned life insurance |  |                                                      | 6     |   |                                                     |   | 2      |                            |      |   | 4                     |        |  |   | 19     |   |  |   | 9      |   |  |   | 10    |  
|                          |  |                                                      |       |   |                                                     |   |        |                            |      |   |                       |        |  |   |        |   |  |   |        |   |  |   |       |  
|Total interest income     |  | $                                                    | 200   |   |                                                     | $ | (507   | )                          |      | $ | 707                   |        |  | $ | 630    |   |  | $ | (2,705 | ) |  | $ | 3,335 |  
|                          |  |                                                      |       |   |                                                     |   |        |                            |      |   |                       |        |  |   |        |   |  |   |        |   |  |   |       |  
|                          |  |                                                      |       |   |                                                     |  
|Interest expense          |  |                                                      |       |   |                                                     |   |        |                            |      |   |                       |        |  |   |        |   |  |   |        |   |  |   |       |  
|Deposits:                 |  |                                                      |       |   |                                                     |   |        |                            |      |   |                       |        |  |   |        |   |  |   |        |   |  |   |       |  
|Demand                    |  | $                                                    | (20   | ) |                                                     |   | (19    | )                          |      |   | (1                    | )      |  | $ | (71    | ) |  |   | (69    | ) |  |   | (2    | )
|Money market              |  |                                                      | (390  | ) |                                                     |   | (353   | )                          |      |   | (37                   | )      |  |   | (1,589 | ) |  |   | (1,370 | ) |  |   | (219  | )
|Savings                   |  |                                                      | 60    |   |                                                     |   | 5      |                            |      |   | 55                    |        |  |   | 261    |   |  |   | 55     |   |  |   | 206   |  
|Time                      |  |                                                      | (427  | ) |                                                     |   | (774   | )                          |      |   | 347                   |        |  |   | (923   | ) |  |   | (2,041 | ) |  |   | 1,118 |  
|                          |  |                                                      |       |   |                                                     |   |        |                            |      |   |                       |        |  |   |        |   |  |   |        |   |  |   |       |  
|Total deposits            |  |                                                      | (777  | ) |                                                     |   | (1,141 | )                          |      |   | 364                   |        |  |   | (2,322 | ) |  |   | (3,425 | ) |  |   | 1,103 |  
|Federal funds purchased   |  |                                                      | (3    | ) |                                                     |   | (2     | )                          |      |   | (1                    | )      |  |   | (13    | ) |  |   | (6     | ) |  |   | (7    | )
|Other borrowings          |  |                                                      | (203  | ) |                                                     |   | (157   | )                          |      |   | (46                   | )      |  |   | (574   | ) |  |   | (766   | ) |  |   | 192   |  
|                          |  |                                                      |       |   |                                                     |   |        |                            |      |   |                       |        |  |   |        |   |  |   |        |   |  |   |       |  
|Total interest expense    |  |                                                      | (983  | ) |                                                     |   | (1,300 | )                          |      |   | 317                   |        |  |   | (2,909 | ) |  |   | (4,197 | ) |  |   | 1,288 |  
|                          |  |                                                      |       |   |                                                     |   |        |                            |      |   |                       |        |  |   |        |   |  |   |        |   |  |   |       |  
|Net interest income       |  | $                                                    | 1,183 |   |                                                     | $ | 793    |                            |      | $ | 390                   |        |  | $ | 3,539  |   |  | $ | 1,492  |   |  | $ | 2,047 |  
|                          |  |                                                      |       |   |                                                     |   |        |                            |      |   |                       |        |  |   |        |   |  |   |        |   |  |   |       |  



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##### Table of Contents

Non-Interest Income

Non-interest income increased $3.9 million to $8.8 million for the third quarter of 2009, an 82.1% increase over our 2008 quarter income total of $4.8 million. Mortgage banking income, which increased
$4.0 million, was partially offset by decreases in title company and investment and insurance income. In the first nine months of 2009, non-interest income totaled $26.5 million compared to $14.7 million for the same period in 2008. This $11.8
million increase was fueled by $11.9 million in mortgage banking income, and combined gains on the sale of assets and other real estate of $391 thousand, offset by a $314 thousand decrease in investment and insurance income and a $209 thousand
decrease in other income.

NON-INTEREST INCOME



|                                              |  |                                         |           |      |                                        |           |      |  |      |            |  |   |            |  
|--------------------------------------------- |  | --------------------------------------- | --------- | ---- | -------------------------------------- | --------- | ---- |  | ---- | ---------- |  | - | ---------- | -
|                                              |  | For the Three Months EndedSeptember 30, |           |      | For the Nine Months EndedSeptember 30, |          
|                                              |  | 2009                                    |           | 2008 |                                        |           | 2009 |  | 2008 |           
|Mortgage banking income                       |  | $                                       | 7,975,961 |      | $                                      | 3,988,190 |      |  | $    | 23,902,036 |  | $ | 11,995,944 |  
|Investment and insurance commissions          |  |                                         | 163,761   |      |                                        | 294,671   |      |  |      | 677,433    |  |   | 991,095    |  
|Service charges and fees                      |  |                                         | 395,981   |      |                                        | 357,395   |      |  |      | 1,052,808  |  |   | 1,021,517  |  
|Security gains, net                           |  |                                         |          |      |                                        |          |      |  |      |           |  |   | 10,801     |  
|Gain (loss) on sale of other real estate, net |  |                                         | 94,911    |      |                                        | (33,964   | )    |  |      | 111,366    |  |   | (1,586     | )
|Bank owned life insurance income              |  |                                         | 65,615    |      |                                        | 61,120    |      |  |      | 192,872    |  |   | 180,361    |  
|Title company income                          |  |                                         | 42,800    |      |                                        | 126,238   |      |  |      | 248,067    |  |   | 179,545    |  
|Gain on sale of assets, net                   |  |                                         |          |      |                                        |          |      |  |      | 302,269    |  |   | 24,410     |  
|Other                                         |  |                                         | 24,327    |      |                                        | 19,780    |      |  |      | 39,441     |  |   | 248,891    |  
|                                              |  |                                         |           |      |                                        |           |      |  |      |            |  |   |            |  
|                                              |  | $                                       | 8,763,356 |      | $                                      | 4,813,430 |      |  | $    | 26,526,292 |  | $ | 14,650,978 |  
|                                              |  |                                         |           |      |                                        |           |      |  |      |            |  |   |            |  

Mortgage banking income represents fees from originating and selling residential
mortgage loans as well as commercial mortgages through Monarch Mortgage and our wholly owned commercial mortgage banking subsidiary, Monarch Capital, LLC. Gross mortgage income increased 100% in the third quarter and 99.3% year to date 2009 compared
to 2008. The majority of this growth has been in the area of residential mortgages. Our residential mortgage operations closed 1,066 loans totaling $265.5 million compared to 519 closings totaling $126.7 million in the third quarter of 2009 compared
to 2008. For the first nine months of 2009 our residential mortgage operations have closed 3,470 loans totaling $904.0 million compared to 1,650 loans totaling $431.4 million in 2008. In terms of both dollar volume and loans our residential mortgage
division has exceeded their total production for 2008 of 2,208 loans totaling $577.0 million. The current low mortgage rate environment, coupled with first time home buyer incentives, has contributed to the growth in this area. We believe our gross
mortgage banking income will continue at the same pace until interest rates begin to rise to levels that could discourage residential sales and would likely discourage refinancing by existing homeowners.

Investment and insurance commissions declined $131 thousand or 44.4% in the third quarter of 2009 and $314 thousand or 31.6% in for first
nine months of 2009 compared to 2008. Excluding nonrecurring income of $125 thousand which is included in the first nine months for 2008, investment and insurance income decreased $189 thousand or 21.8%, due to lower production and investment
balances.

Service charges and fees on deposit accounts increased $39 thousand in the third quarter of 2009 and $31 thousand
in the first nine months of 2009 when compared to the same periods in 2008. The primary components of service charges and fees are nonsufficient fund and overdraft fees, and ATM transaction fees. In April 2009 we modified our deposit service fees.
In addition, we have an agreement with a third-party vendor to brand ATMs in Food Lion grocery stores in southeast Virginia and northeast North Carolina. In return for supplying the cash for the machines and paying the machines cash servicing
fees, we receive a portion of the transaction surcharge, and our customers can withdraw cash from the machines without a fee or transaction surcharge. We have 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 nine
months of 2009. There were no security gains in the third quarter of 2008 and a total of three security gains year-to-date recorded on agency bond calls. We have sold six properties in other real estate, net of valuation adjustments for net gains of
$111 thousand in the first nine months of 2009 compared to one property, net of valuation adjustments for a net loss of $2 thousand in 2008.

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 $4 thousand in the third quarter and $13 thousand in the first nine months of 2009 compared to 2008. The tax-effective income earnings are $99 and $292 thousand for the third quarter and first nine months 2009 compared to $92 and $273
thousand for the same periods 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, and showed a decline in income for the third quarter of $83 thousand but an increase in the first nine months of $69 thousand when compared to
2008. RESA, which provides title insurance on residential and commercial real estate, has benefited from the overall increased activity in the residential mortgage industry, but has been hampered by lower volume in the third quarter of 2009.



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In June 2009, we sold two parcels of land on Hanbury Road, attached to our Great Bridge
office for a gain of $302,269. We have one vacant parcel of land remaining. A one-time gain for $217 thousand related to a change in ownership by Monarch Investment, LLC, resulting from the merger of BI Investments, LLC into Infinex Financial Group
is included in other income for the first nine months of 2008.

Non-interest Expense

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

NON-INTEREST EXPENSE



|                                  |  |                                         |            |                                        |   |           |  |      |            |  |   |           
|--------------------------------- |  | --------------------------------------- | ---------- | -------------------------------------- | - | --------- |  | ---- | ---------- |  | - | ----------
|                                  |  | For the Three Months EndedSeptember 30, |            | For the Nine Months EndedSeptember 30,
|                                  |  | 2009                                    |            | 2008                                   |   | 2009      |  | 2008
|Salaries and employee benefits    |  | $                                       | 7,389,031  |                                        | $ | 4,714,837 |  | $    | 22,354,849 |  | $ | 14,222,938
|Occupancy expenses                |  |                                         | 642,842    |                                        |   | 545,350   |  |      | 1,817,821  |  |   | 1,593,265 
|Furniture and equipment expense   |  |                                         | 340,101    |                                        |   | 330,712   |  |      | 975,298    |  |   | 951,103   
|Loan origination expenses         |  |                                         | 1,033,829  |                                        |   | 386,727   |  |      | 2,540,723  |  |   | 1,311,311 
|Data processing services          |  |                                         | 186,930    |                                        |   | 156,888   |  |      | 600,581    |  |   | 489,318   
|Telephone                         |  |                                         | 121,429    |                                        |   | 94,966    |  |      | 327,442    |  |   | 297,641   
|Stationary and supplies           |  |                                         | 128,418    |                                        |   | 89,458    |  |      | 332,878    |  |   | 275,222   
|Professional fees                 |  |                                         | 91,412     |                                        |   | 80,982    |  |      | 352,241    |  |   | 247,481   
|Marketing expense                 |  |                                         | 84,905     |                                        |   | 90,306    |  |      | 194,483    |  |   | 253,847   
|FDIC Insurance                    |  |                                         | 255,000    |                                        |   | 75,000    |  |      | 1,085,755  |  |   | 211,210   
|Virginia Franchise Tax            |  |                                         | 116,113    |                                        |   | 95,940    |  |      | 328,166    |  |   | 220,164   
|ATM expense                       |  |                                         | 57,631     |                                        |   | 53,665    |  |      | 189,128    |  |   | 169,859   
|Amortization of intangible assets |  |                                         | 44,643     |                                        |   | 44,643    |  |      | 133,929    |  |   | 133,929   
|Other                             |  |                                         | 465,179    |                                        |   | 654,451   |  |      | 1,400,038  |  |   | 1,081,657 
|                                  |  |                                         |            |                                        |   |           |  |      |            |  |   |           
|                                  |  | $                                       | 10,957,463 |                                        | $ | 7,413,925 |  | $    | 32,633,332 |  | $ | 21,458,945
|                                  |  |                                         |            |                                        |   |           |  |      |            |  |   |           

Total non-interest expenses increased $3.5 million in the third quarter and $11.2
million for the first nine months of 2009, an increase of 47.8% for the quarter and 52.1% year-to-date over the same periods in 2008. Salaries and employee benefits represent an approximate average of 67% of non-interest expense in all periods
presented. Our full time equivalent employees, at the end of nine months of 2009 totaled 351, compared to 273 in 2008. The primary source of our salary and benefits growth was in mortgage operations and increased production, as banking segment
salaries and benefits are level with 2008. Fifty-five percent of our mortgage employees are paid commissions based on their production levels, which have increased significantly. Secondary increases are attributable to the following factors: 1) an
increase in loan origination expense related to increased production by Monarch Mortgage; 2) an increase in FDIC insurance expense due to notably higher assessment rates and a one-time special assessment to cover the shortage created by failed
banks; 3) growth and inflation-related increases in occupancy expenses; and 4) increase in data processing services due to costs associated with updated technology and the establishment of a co-location processing site for disaster recovery
purposes.



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##### Table of Contents

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



|                               |  |                                                 |           |            |                                                |   |         |   |            |  |       |  
|------------------------------ |  | ----------------------------------------------- | --------- | ---------- | ---------------------------------------------- | - | ------- | - | ---------- |  | ----- | -
|                               |  | IncreaseFor the Three Months EndedSeptember 30, |           |            | IncreaseFor the Nine Months EndedSeptember 30, |  
|                               |  | Dollars                                         |           | Percentage |                                                |   | Dollars |   | Percentage | 
|Salaries and employee benefits |  | $                                               | 2,674,194 |            | 56.7                                           | % |         | $ | 8,131,911  |  | 57.2  | %
|Loan origination expenses      |  |                                                 | 647,102   |            | 167.3                                          | % |         |   | 1,229,412  |  | 93.8  | %
|FDIC Insurance                 |  |                                                 | 180,000   |            | 240.0                                          | % |         |   | 874,545    |  | 414.1 | %
|Occupancy expenses             |  |                                                 | 97,492    |            | 17.9                                           | % |         |   | 224,556    |  | 14.1  | %
|Data processing services       |  |                                                 | 30,042    |            | 19.1                                           | % |         |   | 111,263    |  | 22.7  | %
|Virginia Franchise Tax         |  |                                                 | 20,173    |            | 21.0                                           | % |         |   | 108,002    |  | 49.1  | %
|Professional fees              |  |                                                 | 10,430    |            | 12.9                                           | % |         |   | 104,760    |  | 42.3  | %

Income Taxes

Our income tax provision was $620 thousand for the third quarter of 2009 compared to $413 thousand in the prior year and $1.8 million for the first nine months of 2009 compared to $1.3 million in 2008.
The effective tax rate for the third quarter of 2009 compared to 2008 was 34.6% and 32.3%, respectively. The effective tax rate for the first nine months of 2009 was 32.5% compared to 31.2% for the same period in 2008.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

GENERAL

Total assets were $651.8 million at September 30, 2009 when
compared to assets of $597.2 million at December 31, 2008, a 9.1% increase. On an annual basis total assets increased 9.6% at September 30, 2009 when compared to assets of $594.8 million at September 30, 2008. Total loans held for
investment as of September 30, 2009 were $522.3 million, an increase of $17.6 million, or 3.5%, from $504.7 million at year-end 2008. On an annual basis, total loans held for investment increased $21.2 million, or 4.2%, from $501.0 million in
September 2008. Loans held for sale were $71.2 million, an increase of $16.8 million from $54.4 million at December 31, 2008, and on an annual basis loans held for sale increased $34.8 million from $36.4 million at September 30, 2008 due
to increased volume at our mortgage division. Investment securities were $6.2 million at September 30, 2009, down slightly from $6.3 million at year-end 2008. On an annual basis, investments securities decreased $11.5 million, or 64.8% over
September 30, 2008. Cash and cash equivalents were $26.2 million, an increase of $17.6 million, or 204.3% from $8.6 million at December 31, 2008.

Total deposits were $540.1 million at September 30, 2009, an increase of $44.0 million or 8.9% over December 2008 and $41.4 million or 8.3% higher than September 30, 2008. Non-interest bearing
demand deposits increased $5.4 million over December 2008 and on an annual basis $11.0 million over September 30, 2008. Interest bearing deposits increased $38.5 million to $455.7 million compared to December 31, 2008. On an annual basis
interest bearing deposits increased $30.4 million over September 30, 2008. Our interest bearing deposits are comprised of savings accounts, money market accounts and certificates of deposits (CDs).

In 2008, we introduced a multi-tiered savings product that rewards higher balances with a higher rate. With our new product, savings
balances began to show significant increases. At September 30, 2008, total savings accounts, at $14.3 million, were roughly 3.4% of our interest bearing deposit total. That number had grown to $20.4 million and 4.9% of interest bearing deposits
by December 2008 and is now at $27.7 million and 6.1% of total interest bearing deposits.

Total money market balances were
$139.1 million at September 30, 2009, an increase of $9.8 million compared to $129.3 million at December 31, 2008. On an annual basis, money market accounts have increased $28.6 million compared to $110.5 million at September 30,
2008. We had reported a decline in money market account balances in previous quarters. The increase noted in this quarter and the first nine months is due to our adding a low rate brokered money market account. The balance in the account was $30.0
million at September 30, 2009. Excluding this account, money market balances have declined $20.2 million at September 30, 2009 compared to December 31, 2008 and $1.4 million on an annual basis.



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CDs have risen in popularity with the lower rate environment and stock market volatility,
resulting in significant growth in that area. Our regular CD portfolio, which is comprised of CDs with balances of less than $100 thousand, was $185.8 million at September 30, 2009, compared to $156.6 million at December 31, 2008 and
$155.6 million at September 30, 2008. Our Jumbo CDs, which are CDs with balances of $100 thousand or greater, have declined $44.1 million to $83.9 at September 30, 2009 compared to September 30, 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 longer term in market CDs.

Stockholders equity was $63.5 million at September 30, 2009, compared to $60.0 million at December 31, 2008. Components of
the change in stockholders equity include net income of $3.6 million, increase in net unrealized gains on available-for-sale securities totaling $29 thousand, stock based compensation totaling $211 thousand, exercised stock options totaling
$272 thousand, net of a preferred stock dividend declaration of $557 thousand.



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Allowance and Provision for Loan Losses

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

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

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

The remaining loan loss allowance is allocated to the remaining loans on an overall portfolio basis based on
industry and or historical loss experience. The allowance is subject to regulatory examinations and determination as to adequacy, which may take into account such factors as the methodology used to calculate the allowance and the size of the
allowance in comparison to peer banks identified by regulatory agencies. Homogenous loans, such as consumer installment, residential mortgage loans, and home equity loans are not individually reviewed and are generally risk graded at the same
levels. The risk grade and reserves are established for each homogenous pool of loans based on the expected net charge offs from a current trend in delinquencies, losses or historical experience and general economic conditions.

While we believe we have sufficient allowance for our existing portfolio, there can be no assurances that an additional allowance for losses
on existing loans may not be necessary in the future. The allowance for loan losses totaled $9.5 million and $5.0 million at September 30, 2009 and September 30, 2008, respectively. The ratio of the allowance for loan losses to total loans
outstanding at September 30, 2009 and 2008 was 1.83% and 1.00%, respectively.



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During the third quarter and first nine months of 2009 we recorded $1.5 million and $4.1
million in provision expense, respectively, compared to $481 thousand and $1.2 million for the same periods in 2008. Gross charge-offs for the quarter were $1.1 million offset by recoveries of $23 thousand. For the first nine months of 2009, gross
charge-offs were $2.7 million and recoveries were $81 thousand. The table below summarizes the activity in the allowance for loans losses for the three month and nine month periods ending September 30, 2009 and 2008.

LOAN LOSS ALLOWANCE AND LOSS EXPERIENCE



|                                                                      |  |                                         |            |   |                                        |   |           |      |  |   |             |   |  |   |             |  
|--------------------------------------------------------------------- |  | --------------------------------------- | ---------- | - | -------------------------------------- | - | --------- | ---- |  | - | ----------- | - |  | - | ----------- | -
|                                                                      |  | For the Three Months EndedSeptember 30, |            |   | For the Nine Months EndedSeptember 30, |  
|                                                                      |  | 2009                                    |            |   | 2008                                   |   |           | 2009 |  |   | 2008        |  
|Balance, beginning of period                                          |  | $                                       | 9,030,000  |   |                                        | $ | 4,621,000 |      |  | $ | 8,046,000   |   |  | $ | 3,976,000   |  
|Provisions charged to operations                                      |  |                                         | 1,546,788  |   |                                        |   | 480,581   |      |  |   | 4,084,936   |   |  |   | 1,244,613   |  
|Loans charged-off                                                     |  |                                         | (1,050,104 | ) |                                        |   | (138,086  | )    |  |   | (2,662,197  | ) |  |   | (294,381    | )
|Recoveries                                                            |  |                                         | 23,316     |   |                                        |   | 27,505    |      |  |   | 81,261      |   |  |   | 64,768      |  
|                                                                      |  |                                         |            |   |                                        |   |           |      |  |   |             |   |  |   |             |  
|Balance, end of period                                                |  | $                                       | 9,550,000  |   |                                        | $ | 4,991,000 |      |  | $ | 9,550,000   |   |  | $ | 4,991,000   |  
|                                                                      |  |                                         |            |   |                                        |   |           |      |  |   |             |   |  |   |             |  
|Total loans held for investment outstanding                           |  |                                         |            |   |                                        |   |           |      |  |   | 522,333,696 |   |  |   | 501,052,390 |  
|Ratio of allowance for loan losses to total loans held for investment |  |                                         |            |   |                                        |   |           |      |  |   | 1.83        | % |  |   | 1.00        | %

Asset Quality and Non-Performing Loans

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

Non-performing loans include loans on which interest is no longer accrued, accruing loans that are contractually past due 90 days or more as to principal and interest payments, and loans classified as troubled debt restructurings. Total
non-performing loans as a percentage of total loans were 1.47% and 1.49% at September 30, 2009 and December 31, 2008, respectively.

We had non-performing assets totaling $8.8 million at September 30, 2009 compared to $8.0 million at December 31, 2008. Net charge-offs for the third quarter and first nine months of 2009 were
$1.0 million and $2.6 million, respectively. Non-performing assets traditionally consist of nonaccrual loans, loans past due 90 days or more and still accruing interest, restructured loans and other real estate owned. All of these loans have been
identified as impaired according to applicable GAAP for impaired loans. The majority of our non-performing assets in December 2008 were related to one secured relationship that has subsequently been reclassified to performing, due to a significant
infusion of cash by the borrower and provision of an external source of funding to help complete the project funded by the loan. We have provided specific reserves for our non-performing assets in our allowance for loan loss of $1.7 million at
September 30, 2009 and $4.2 million at December 31, 2008. We continue to demand a high level of credit quality on new loans.

NON-PERFORMING ASSETS



|                                                  |  |                    |           |   |                   |   |           |  
|------------------------------------------------- |  | ------------------ | --------- | - | ----------------- | - | --------- | -
|                                                  |  | September 30, 2009 |           |   | December 31, 2008 |  
|Loans 90 days past due and still accruing         |  | $                  | 837,271   |   |                   | $ |          |  
|Nonaccrual loans                                  |  |                    | 6,851,397 |   |                   |   | 7,506,337 |  
|Other Real Estate                                 |  |                    | 1,077,000 |   |                   |   | 532,932   |  
|                                                  |  |                    |           |   |                   |   |           |  
|Total Non-performing Assets                       |  | $                  | 8,765,668 |   |                   | $ | 8,039,269 |  
|                                                  |  |                    |           |   |                   |   |           |  
|                                                  |  |                   
|Non-performing loans to period end loans          |  |                    | 1.47      | % |                   |   | 1.49      | %
|Non-performing assets to period end assets        |  |                    | 1.34      | % |                   |   | 1.35      | %
|Allowance for loan losses to non-performing loans |  |                    | 124.22    | % |                   |   | 107.19    | %

Liquidity

Liquidity represents an institutions ability to meet present and future financial obligations through either the sale of existing assets or the acquisition of additional funds through short-term
borrowings. Our liquidity is provided from cash and amounts due from banks, federal funds sold, interest-bearing deposits in other banks, repayments from loans, increases in deposits, lines of credit from the Federal Home Loan Bank and five



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correspondent banks, and maturing investments. As a result of our management of liquid assets, and our ability to generate liquidity through liability funding, we believe that we maintain overall
liquidity sufficient to satisfy our depositors requirements and to meet clients credit needs. We also take into account any liquidity needs generated by off-balance sheet transactions such as commitments to extend credit, commitments to
purchase securities and standby letters of credit.

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

Cash, cash equivalents and federal funds sold totaled $26.2 million as of September 30, 2009 compared to $8.6 million as of
December 31, 2008. At September 30, 2009, cash, securities classified as available for sale and federal funds sold were $32.4 million or 5.2% of total earning assets, compared to $14.4 million or 2.7% of total earning assets at
December 31, 2008.

In the course of operations, due to fluctuations in loan and deposit levels, we occasionally find it
necessary to purchase federal funds on a short-term basis. We maintain unsecured federal funds line arrangements with five other banks, which allow us to purchase funds totaling $32 million. These lines mature and re-price daily. At
September 30, 2009 and December 31, 2008, we had $0 and $385 thousand, respectively, in federal funds purchased.

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

We have lines of credit with the Federal Home Loan Bank of Atlanta (FHLB) that can equal up to 30% of our assets. Our primary
line of credit (Primary) totaled approximately $78.0 million with $51.4 million available at September 30, 2009. This line is currently reduced by $5.0 million, which has been pledged as collateral for public deposits.

In February 2009, we negotiated an additional line of credit with FHLB which is secured by a portion of our loans held for sale
(LHFS). We pledge these loans, which have been sold to FHLB approved investors, as collateral. In return, we are allowed to borrow up to 70% of these loans for 120 days. The investor remits the proceeds for the purchased loans directly
to FHLB, which then releases the collateral pledged. At September 30, 2009, assets pledged and advances outstanding totaled $16.4 million and $11.5 million, respectively with no excess line available.

Borrowings outstanding under the combined FHLB lines of credit were $38.1 million at September 30, 2009 and $27.7 million at
December 31, 2008. We had the following borrowing advances under our Primary line outstanding as of September 30, 2009, with the following final maturities:



|               |            |                 |               
|-------------- | ---------- | --------------- | --------------
|Advance Amount |            | Expiration Date
|$              | 10,000,000 |                 | November 2009 
|               | 10,000,000 |                 | November 2010 
|               | 1,600,320  |                 | September 2015
|               |            |                 |               
|$              | 21,600,320 |                 |               
|               |            |                 |               

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

The advance maturing in 2010 bears a fixed interest rate of
3.97% and had a one-time conversion feature which expired 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 $25 thousand beginning December 2005, with a final payment of $1.0 million 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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Under our LHFS line we had two advances outstanding at September 30, 2009. Both
advances mature in January 2010 and are broken down as follows:



|                   |  |                 |            |                  |   |           
|------------------ |  | --------------- | ---------- | ---------------- | - | ----------
|Advance Date       |  | Current Balance |            | Original Balance
|September 10, 2009 |  | $               | 2,099,760  |                  | $ | 4,912,532 
|September 17, 2009 |  | $               | 9,381,700  |                  | $ | 9,381,700 
|                   |  |                 |            |                  |   |           
|                   |  | $               | 11,481,460 |                  | $ | 14,294,232
|                   |  |                 |            |                  |   |           

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

Off-Balance Sheet Arrangements

We enter into certain financial transactions in the ordinary course of performing traditional banking services that result in off-balance
sheet transactions. The off-balance sheet transactions recognized as of September 30, 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 September 30, 2009 and December 31, 2008.

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

Commitments
to extend credit, which amounted to $233.9 million at September 30, 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 September 30, 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 $5.9 million in outstanding standby letters of credit at September 30, 2009 and $6.1 million at December 31, 2008.

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

Capital Resources

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

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



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retained net profits for the two preceding years. At September 30, 2009, the amount available was approximately $10.0 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 the 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 the Treasury.

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 September 30, 2009, the Bank meets all capital adequacy requirements to which it is subject.

As of September 30, 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
September 30, 2009 and December 31, 2008.



|                                                   |  |                        |        |       |                              |   |         |                                                    |        |  |      |         |  |       |        |  |       |  
|-------------------------------------------------- |  | ---------------------- | ------ | ----- | ---------------------------- | - | ------- | -------------------------------------------------- | ------ |  | ---- | ------- |  | ----- | ------ |  | ----- | -
|                                                   |  | Actual                 |        |       | For CapitalAdequacy Purposes |   |         | To Be WellCapitalized
UnderPrompt CorrectiveAction |       
|                                                   |  | Amounts                |        | Ratio |                              |   | Amounts |                                                    | Ratio  |  |      | Amounts |  | Ratio |       
|                                                   |  | (Dollars in Thousands) |       
|As of Septmeber 30, 2009                           |  |                        |        |       |                              |   |         |                                                    |        |  |      |         |  |       |        |  |       |  
|Total Risk-Based Capital Ratio                     |  |                        |        |       |                              |   |         |                                                    |        |  |      |         |  |       |        |  |       |  
|Consolidated company                               |  | $                      | 78,798 |       | 13.89                        | % |         | $                                                  | 45,370 |  | 8.00 | %       |  |       | N/A    |  | N/A   |  
|Bank                                               |  | $                      | 64,198 |       | 11.32                        | % |         | $                                                  | 45,370 |  | 8.00 | %       |  | $     | 56,712 |  | 10.00 | %
|(Total Risk-Based Capital to Risk-Weighted Assets) |  |                        |        |       |                              |   |         |                                                    |        |  |      |         |  |       |        |  |       |  
|                                                   |  |                        |        |       |                              |  
|Tier 1 Risk-Based Capital Ratio                    |  |                        |        |       |                              |   |         |                                                    |        |  |      |         |  |       |        |  |       |  
|Consolidated company                               |  | $                      | 71,671 |       | 12.64                        | % |         | $                                                  | 22,670 |  | 4.00 | %       |  |       | N/A    |  | N/A   |  
|Bank                                               |  | $                      | 57,071 |       | 10.07                        | % |         | $                                                  | 22,670 |  | 4.00 | %       |  | $     | 34,005 |  | 6.00  | %
|(Tier 1 Capital to Risk-Weighted Assets)           |  |                        |        |       |                              |   |         |                                                    |        |  |      |         |  |       |        |  |       |  
|                                                   |  |                        |        |       |                              |  
|Tier 1 Leverage Ratio                              |  |                        |        |       |                              |   |         |                                                    |        |  |      |         |  |       |        |  |       |  
|Consolidated company                               |  | $                      | 71,671 |       | 11.17                        | % |         | $                                                  | 25,679 |  | 4.00 | %       |  |       | N/A    |  | N/A   |  
|Bank                                               |  | $                      | 57,071 |       | 8.89                         | % |         | $                                                  | 25,679 |  | 4.00 | %       |  | $     | 32,098 |  | 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)                 |  |                        |        |       |                              |   |         |                                                    |        |  |      |         |  |       |        |  |       |  



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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

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

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

Impacts of changing interest rates on loans and deposits are reflected
in our financial statements. We believe that our mortgage banking operation, Monarch Mortgage, provides somewhat of a natural interest rate hedge, in that we are interest rate sensitive to a downward change in the prime rate for short term periods.
When loan interest rates decline, our earnings will be negatively impacted in our banking operation, but the mortgage companys volume should increase as the demand for refinancing and purchase money mortgages increase. The reverse should occur
in a rising interest rate environment.



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ITEM 4. CONTROLS AND PROCEDURES

We maintain a system of internal controls and procedures designed to provide reasonable assurance as to the reliability of our published
financial statements and other disclosures included in this report. Within the 90 days prior to the date of this report, we carried out an evaluation, under the supervision and with the participation of our management, including the Companys
Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the Companys Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information relating to us (including our consolidated subsidiaries) required to be included in periodic SEC
filings. There have been no significant changes in our internal controls or in other factors that could significantly affect internal controls subsequent to the date we carried out our evaluation.



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PART II - OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 2. Changes in Securities

None.

Item 3. Defaults Upon Senior Securities

Not applicable.

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

None.

Item 5. Other Information

None.



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Item 6. Exhibits and Reports on Form 8-K



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

Exhibit 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
September 24, 2009 to announce the appointment of principal officer.

Form 8-K filed October 14, 2009 to announce
the compensatory arrangements of certain officers, and amendments to Articles of Incorporation or Bylaws.

Form 8-K filed
October 14, 2009 to announce the Company has filed a registration statement for up to 650,000 shares of preferred stock.

Form 8-K filed October 16, 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: November 13, 2009 |  | 
|President & Chief Executive Officer                |  |  |  |                         |  | 
|                                                   |  |  | 
|/s/ Brad E.
Schwartz.                              |  |  |  |                         |  | 
|Brad E. Schwartz                                   |  |  |  | Date: November 13, 2009 |  | 
|Executive Vice President & Chief Financial Officer |  |  |  |                         |  | 



37