##### Table of Contents





UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549





FORM 10-Q







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

For Quarterly Period Ended: June 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                                                       |  | 20-4985388                         
|(State of other jurisdiction of Incorporation or organization) |  | (I.R.S. Employer Identification No.
|                                                               | 
|1101 Executive Drive, Chesapeake, Virginia                     |  | 23320                              
|(Address of principal executive offices)                       |  | (Zip Code)                         

(757) 389-5112

(Registrants telephone number, including area code)

Not Applicable

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





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

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

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

Large accelerated filer   ̈    Accelerated filer   ̈    Non-accelerated filer  x

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

APPLICABLE ONLY TO CORPORATE ISSUERS:

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

Common Stock, $5.00 Par Value  5,788,986 as of
August 7, 2009.









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##### Table of Contents

MONARCH FINANCIAL HOLDINGS, INC.

FORM 10-Q

JUNE 30, 2009

INDEX



|         |  |         |  |                                                                                                       |  |   
|-------- |  | ------- |  | ----------------------------------------------------------------------------------------------------- |  | --
|PART I.  |  |         |  | FINANCIAL INFORMATION                                                                                 |  |   
|         |  |         | 
|         |  | ITEM 1. |  | Consolidated Statements of Condition as of June 30, 2009 and December 31, 2008                        |  | 3 
|         |  |         | 
|         |  |         |  | Consolidated Statements of Income for the three and six months ended June 30, 2009 and June 30, 2008  |  | 4 
|         |  |         | 
|         |  |         |  | Consolidated Statements of Shareholders Equity for the periods ended June 30, 2009 and June 30, 2008 |  | 5 
|         |  |         | 
|         |  |         |  | Consolidated Statements of Cash Flows for the periods ended June 30, 2009 and June 30, 2008           |  | 6 
|         |  |         | 
|         |  |         |  | Notes to Consolidated Financial Statements                                                            |  | 7 
|         |  |         | 
|         |  | ITEM 2. |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                 |  | 16
|         |  |         | 
|         |  | ITEM 3. |  | Quantitative and Qualitative Disclosures about Market Risk                                            |  | 28
|         |  |         | 
|         |  | ITEM 4. |  | Controls and Procedures                                                                               |  | 29
|         |  |         | 
|PART II. |  |         |  | OTHER INFORMATION                                                                                     |  |   
|         |  |         | 
|         |  | Item 1. |  | Legal Proceedings                                                                                     |  | 30
|         |  |         | 
|         |  | Item 2. |  | Changes in Securities                                                                                 |  | 30
|         |  |         | 
|         |  | Item 3. |  | Defaults Upon Senior Securities                                                                       |  | 30
|         |  |         | 
|         |  | Item 4. |  | Submissions of Matters to Vote of Security Holders                                                    |  | 30
|         |  |         | 
|         |  | Item 5. |  | Other Information                                                                                     |  | 30
|         |  |         | 
|         |  | Item 6. |  | Exhibits and Reports on Form 8-K                                                                      |  | 31



2



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##### Table of Contents

PART IFINANCIAL INFORMATION



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

MONARCH FINANCIAL
HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CONDITION



|                                                                                                                              |  |                       |             |   |                  |   |             |  
|----------------------------------------------------------------------------------------------------------------------------- |  | --------------------- | ----------- | - | ---------------- | - | ----------- | -
|                                                                                                                              |  | UnauditedJune 30,2009 |             |   | December 31,2008 |  
|ASSETS:                                                                                                                       |  |                       |             |   |                  |   |             |  
|Cash and due from banks                                                                                                       |  | $                     | 6,632,383   |   |                  | $ | 8,418,341   |  
|Interest bearing bank balances                                                                                                |  |                       | 8,386,173   |   |                  |   | 111,634     |  
|Federal funds sold                                                                                                            |  |                       | 7,500,000   |   |                  |   | 66,367      |  
|                                                                                                                              |  |                       |             |   |                  |   |             |  
|Total cash and cash equivalents                                                                                               |  |                       | 22,518,556  |   |                  |   | 8,596,342   |  
|Investment securities held-to-maturity, at cost                                                                               |  |                       | 500,000     |   |                  |   | 500,000     |  
|Investment securities available-for-sale, at fair value                                                                       |  |                       | 5,262,348   |   |                  |   | 5,846,917   |  
|Loans held for sale                                                                                                           |  |                       | 96,500,298  |   |                  |   | 54,369,215  |  
|Loans, net of unearned income                                                                                                 |  |                       | 515,627,252 |   |                  |   | 504,712,083 |  
|Less: allowance for loan losses                                                                                               |  |                       | (9,030,000  | ) |                  |   | (8,046,000  | )
|                                                                                                                              |  |                       |             |   |                  |   |             |  
|Loans, net                                                                                                                    |  |                       | 506,597,252 |   |                  |   | 496,666,083 |  
|Property and equipment, net                                                                                                   |  |                       | 8,154,465   |   |                  |   | 8,386,430   |  
|Restricted equity securities                                                                                                  |  |                       | 7,010,600   |   |                  |   | 3,575,450   |  
|Bank owned life insurance                                                                                                     |  |                       | 6,914,956   |   |                  |   | 6,787,699   |  
|Goodwill                                                                                                                      |  |                       | 775,000     |   |                  |   | 775,000     |  
|Intangible assets                                                                                                             |  |                       | 907,741     |   |                  |   | 997,027     |  
|Other assets                                                                                                                  |  |                       | 10,941,893  |   |                  |   | 10,698,239  |  
|                                                                                                                              |  |                       |             |   |                  |   |             |  
|Total assets                                                                                                                  |  | $                     | 666,083,109 |   |                  | $ | 597,198,402 |  
|                                                                                                                              |  |                       |             |   |                  |   |             |  
|LIABILITIES:                                                                                                                  |  |                       |             |   |                  |   |             |  
|Deposits:                                                                                                                     |  |                       |             |   |                  |   |             |  
|Noninterest-bearing                                                                                                           |  | $                     | 83,977,026  |   |                  | $ | 78,894,120  |  
|Interest-bearing                                                                                                              |  |                       | 442,636,758 |   |                  |   | 417,191,675 |  
|                                                                                                                              |  |                       |             |   |                  |   |             |  
|Total deposits                                                                                                                |  |                       | 526,613,784 |   |                  |   | 496,085,795 |  
|Borrowings:                                                                                                                   |  |                       |             |   |                  |   |             |  
|Trust preferred subordinated debt                                                                                             |  |                       | 10,000,000  |   |                  |   | 10,000,000  |  
|Federal Home Loan Bank advances                                                                                               |  |                       | 62,206,477  |   |                  |   | 27,675,272  |  
|Federal funds purchased                                                                                                       |  |                       |            |   |                  |   | 385,000     |  
|                                                                                                                              |  |                       |             |   |                  |   |             |  
|Total borrowings                                                                                                              |  |                       | 72,206,477  |   |                  |   | 38,060,272  |  
|Other liabilities                                                                                                             |  |                       | 4,831,522   |   |                  |   | 3,163,645   |  
|                                                                                                                              |  |                       |             |   |                  |   |             |  
|Total liabilities                                                                                                             |  |                       | 603,651,783 |   |                  |   | 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                        |  |                       | 14,500,883  |   |                  |   | 14,481,383  |  
|Common stock, $5 par value, 20,000,000 shares authorized, issued and outstanding 5,788,986 and 5,735,007 shares, respectively |  |                       | 28,944,930  |   |                  |   | 28,675,035  |  
|Additional paid-in capital                                                                                                    |  |                       | 8,160,806   |   |                  |   | 8,065,602   |  
|Retained earnings                                                                                                             |  |                       | 10,638,416  |   |                  |   | 8,528,094   |  
|Accumulated other comprehensive income                                                                                        |  |                       | 36,264      |   |                  |   | 27,302      |  
|                                                                                                                              |  |                       |             |   |                  |   |             |  
|Total Monarch Financial Holdings, Inc. shareholders equity                                                                   |  |                       | 62,281,299  |   |                  |   | 59,777,416  |  
|Noncontrolling interest                                                                                                       |  |                       | 150,027     |   |                  |   | 111,274     |  
|                                                                                                                              |  |                       |             |   |                  |   |             |  
|Total equity                                                                                                                  |  |                       | 62,431,326  |   |                  |   | 59,888,690  |  
|                                                                                                                              |  |                       |             |   |                  |   |             |  
|Total liabilities and stockholders equity                                                                                    |  | $                     | 666,083,109 |   |                  | $ | 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 June 30, |            |   | 6 Months Ended June 30, |  
|                                                            |  | 2009                    |            |   | 2008                    |   |           | 2009 |  |   | 2008       |  
|Interest income:                                            |  |                         |            |   |                         |   |           |      |  |   |            |   |  |   |            |  
|Interest and fees on loans                                  |  | $                       | 8,326,877  |   |                         | $ | 7,424,632 |      |  | $ | 15,812,324 |   |  | $ | 15,152,174 |  
|Interest on investment securities                           |  |                         | 63,410     |   |                         |   | 106,991   |      |  |   | 127,745    |   |  |   | 226,526    |  
|Interest on federal funds sold                              |  |                         | 2,365      |   |                         |   | 8,384     |      |  |   | 3,259      |   |  |   | 11,884     |  
|Dividends on equity securities                              |  |                         | 23,323     |   |                         |   | 60,957    |      |  |   | 38,848     |   |  |   | 120,354    |  
|Interest on other bank accounts                             |  |                         | 772        |   |                         |   | 36,890    |      |  |   | 1,408      |   |  |   | 54,980     |  
|                                                            |  |                         |            |   |                         |   |           |      |  |   |            |   |  |   |            |  
|Total interest income                                       |  |                         | 8,416,747  |   |                         |   | 7,637,854 |      |  |   | 15,983,584 |   |  |   | 15,565,918 |  
|                                                            |  |                         |            |   |                         |   |           |      |  |   |            |   |  |   |            |  
|Interest expense:                                           |  |                         |            |   |                         |   |           |      |  |   |            |   |  |   |            |  
|Interest on deposits                                        |  |                         | 2,324,561  |   |                         |   | 3,175,612 |      |  |   | 4,964,971  |   |  |   | 6,509,301  |  
|Interest on trust preferred subordinated debt               |  |                         | 72,371     |   |                         |   | 109,793   |      |  |   | 149,058    |   |  |   | 272,329    |  
|Interest on borrowings                                      |  |                         | 318,577    |   |                         |   | 333,391   |      |  |   | 579,111    |   |  |   | 837,392    |  
|                                                            |  |                         |            |   |                         |   |           |      |  |   |            |   |  |   |            |  
|Total interest expense                                      |  |                         | 2,715,509  |   |                         |   | 3,618,796 |      |  |   | 5,693,140  |   |  |   | 7,619,022  |  
|                                                            |  |                         |            |   |                         |   |           |      |  |   |            |   |  |   |            |  
|                                                            |  |                         |            |  
|Net interest income                                         |  |                         | 5,701,238  |   |                         |   | 4,019,058 |      |  |   | 10,290,444 |   |  |   | 7,946,896  |  
|                                                            |  |                         |            |  
|Provision for loan losses                                   |  |                         | 1,837,597  |   |                         |   | 368,930   |      |  |   | 2,538,148  |   |  |   | 764,032    |  
|                                                            |  |                         |            |   |                         |   |           |      |  |   |            |   |  |   |            |  
|                                                            |  |                         |            |  
|Net interest income after provision for loan losses         |  |                         | 3,863,641  |   |                         |   | 3,650,128 |      |  |   | 7,752,296  |   |  |   | 7,182,864  |  
|                                                            |  |                         |            |   |                         |   |           |      |  |   |            |   |  |   |            |  
|                                                            |  |                         |            |  
|Non-interest income:                                        |  |                         |            |   |                         |   |           |      |  |   |            |   |  |   |            |  
|Mortgage banking income                                     |  |                         | 8,824,954  |   |                         |   | 4,017,390 |      |  |   | 15,926,075 |   |  |   | 8,007,754  |  
|Investment and insurance commissions                        |  |                         | 229,667    |   |                         |   | 409,066   |      |  |   | 513,672    |   |  |   | 696,424    |  
|Service charges and fees                                    |  |                         | 371,358    |   |                         |   | 335,068   |      |  |   | 656,827    |   |  |   | 664,122    |  
|Security gains, net                                         |  |                         |           |   |                         |   | 7,655     |      |  |   |           |   |  |   | 10,801     |  
|Gain on sale of assets, net                                 |  |                         | 302,269    |   |                         |   | 14,410    |      |  |   | 302,269    |   |  |   | 24,410     |  
|Other                                                       |  |                         | 357,900    |   |                         |   | 340,222   |      |  |   | 531,827    |   |  |   | 434,037    |  
|                                                            |  |                         |            |   |                         |   |           |      |  |   |            |   |  |   |            |  
|Total noninterest income                                    |  |                         | 10,086,148 |   |                         |   | 5,123,811 |      |  |   | 17,930,670 |   |  |   | 9,837,548  |  
|                                                            |  |                         |            |   |                         |   |           |      |  |   |            |   |  |   |            |  
|                                                            |  |                         |            |  
|Non-interest expenses:                                      |  |                         |            |   |                         |   |           |      |  |   |            |   |  |   |            |  
|Salaries and employee benefits                              |  |                         | 7,824,816  |   |                         |   | 4,902,679 |      |  |   | 14,965,818 |   |  |   | 9,508,101  |  
|Occupancy expenses                                          |  |                         | 600,320    |   |                         |   | 557,139   |      |  |   | 1,174,979  |   |  |   | 1,047,915  |  
|Furniture and equipment expenses                            |  |                         | 312,055    |   |                         |   | 322,801   |      |  |   | 635,197    |   |  |   | 620,391    |  
|Loan expense                                                |  |                         | 894,825    |   |                         |   | 457,075   |      |  |   | 1,506,894  |   |  |   | 924,584    |  
|Data processing                                             |  |                         | 205,691    |   |                         |   | 165,055   |      |  |   | 413,651    |   |  |   | 332,430    |  
|FDIC insurance                                              |  |                         | 575,254    |   |                         |   | 78,610    |      |  |   | 830,755    |   |  |   | 136,210    |  
|Other                                                       |  |                         | 1,365,928  |   |                         |   | 799,019   |      |  |   | 2,316,309  |   |  |   | 1,475,389  |  
|                                                            |  |                         |            |   |                         |   |           |      |  |   |            |   |  |   |            |  
|Total noninterest expenses                                  |  |                         | 11,778,889 |   |                         |   | 7,282,378 |      |  |   | 21,843,603 |   |  |   | 14,045,020 |  
|                                                            |  |                         |            |   |                         |   |           |      |  |   |            |   |  |   |            |  
|                                                            |  |                         |            |  
|Income before income taxes                                  |  |                         | 2,170,900  |   |                         |   | 1,491,561 |      |  |   | 3,839,363  |   |  |   | 2,975,392  |  
|                                                            |  |                         |            |  
|Income tax expense                                          |  |                         | (699,500   | ) |                         |   | (446,600  | )    |  |   | (1,213,900 | ) |  |   | (914,800   | )
|                                                            |  |                         |            |   |                         |   |           |      |  |   |            |   |  |   |            |  
|                                                            |  |                         |            |  
|Net income                                                  |  |                         | 1,471,400  |   |                         |   | 1,044,961 |      |  |   | 2,625,463  |   |  |   | 2,060,592  |  
|                                                            |  |                         |            |  
|Less: Net income attributable to noncontrolling interests   |  |                         | (51,808    | ) |                         |   | (117,934  | )    |  |   | (145,600   | ) |  |   | (165,364   | )
|                                                            |  |                         |            |   |                         |   |           |      |  |   |            |   |  |   |            |  
|                                                            |  |                         |            |  
|Net income attributable to Monarch Financial Holdings, Inc. |  | $                       | 1,419,592  |   |                         | $ | 927,027   |      |  | $ | 2,479,863  |   |  | $ | 1,895,228  |  
|                                                            |  |                         |            |  
|Preferred stock dividend and accretion of discount          |  |                         | (195,601   | ) |                         |   |          |      |  |   | (389,041   | ) |  |   |           |  
|                                                            |  |                         |            |   |                         |   |           |      |  |   |            |   |  |   |            |  
|Net income available to common stockholders                 |  | $                       | 1,223,991  |   |                         | $ | 927,027   |      |  | $ | 2,090,822  |   |  | $ | 1,895,228  |  
|                                                            |  |                         |            |   |                         |   |           |      |  |   |            |   |  |   |            |  
|                                                            |  |                         |            |  
|Basic net income per share                                  |  | $                       | 0.22       |   |                         | $ | 0.19      |      |  | $ | 0.37       |   |  | $ | 0.39       |  
|Diluted net income per share                                |  | $                       | 0.21       |   |                         | $ | 0.18      |      |  | $ | 0.37       |   |  | $ | 0.38       |  

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)



|                                                                                                             |  |              |  |        |            |                          |   |           |                  |  |   |                                 |   |                                           |   |            |                        |   |         |       |  |   |          |   |  |   |            |  
|------------------------------------------------------------------------------------------------------------ |  | ------------ |  | ------ | ---------- | ------------------------ | - | --------- | ---------------- |  | - | ------------------------------- | - | ----------------------------------------- | - | ---------- | ---------------------- | - | ------- | ----- |  | - | -------- | - |  | - | ---------- | -
|                                                                                                             |  |              |  |        |            | AdditionalPaid-InCapital |   |           | RetainedEarnings |  |   | Series APerpetualPreferredStock |   | AccumulatedOtherComprehensiveIncome(Loss) |   |            | NoncontrollingInterest |   |         | Total | 
|                                                                                                             |  | Common Stock |  |        |            |                          |   |          
|                                                                                                             |  | Shares       |  | Amount |            |                          |   |           |                  | 
|BalanceDecember 31, 2007                                                                                    |  | 4,827,505    |  | $      | 24,137,525 |                          | $ | 5,008,121 |                  |  | $ | 7,419,711                       |   |                                           | $ |           |                        | $ | (16,861 | )     |  | $ | 57,702   |   |  | $ | 36,606,198 |  
|Distributions to noncontrolling interests                                                                    |  |              |  |        |            |                          |   |           |                  |  |   |                                 |   |                                           |   |            |                        |   |         |       |  |   | (129,594 | ) |  |   | (129,594   | )
|Comprehensive income:                                                                                        |  |              |  |        |            |                          |   |           |                  |  |   |                                 |   |                                           |   |            |                        |   |         |       |  |   |          |   |  |   |            |  
|Net income for six months ended June 30, 2008                                                                |  |              |  |        |            |                          |   |           |                  |  |   | 1,895,228                       |   |                                           |   |            |                        |   |         |       |  |   | 165,364  |   |  |   | 2,060,592  |  
|Unrealized gain (loss) on securities available-for-sale, net of reclassification adjustment and income taxes |  |              |  |        |            |                          |   |           |                  |  |   |                                 |   |                                           |   |            |                        |   | (9,276  | )     |  |   |          |   |  |   | (9,276     | )
|                                                                                                             |  |              |  |        |            |                          |   |           |                  |  |   |                                 |   |                                           |   |            |                        |   |         |       |  |   |          |   |  |   |            |  
|Total comprehensive income                                                                                   |  |              |  |        |            |                          |   |           |                  |  |   |                                 |   |                                           |   |            |                        |   |         |       |  |   |          |   |  |   | 2,051,316  |  
|                                                                                                             |  |              |  |        |            |                          |   |           |                  |  |   |                                 |   |                                           |   |            |                        |   |         |       |  |   |          |   |  |   |            |  
|Stock-based compensation expense                                                                             |  | 45,560       |  |        | 227,800    |                          |   | (86,641   | )                |  |   |                                 |   |                                           |   |            |                        |   |         |       |  |   |          |   |  |   | 141,159    |  
|Private capital offering net of issuance costs                                                               |  | 774,110      |  |        | 3,870,550  |                          |   | 2,896,956 |                  |  |   |                                 |   |                                           |   |            |                        |   |         |       |  |   |          |   |  |   | 6,767,506  |  
|                                                                                                             |  |              |  |        |            |                          |   |           |                  |  |   |                                 |   |                                           |   |            |                        |   |         |       |  |   |          |   |  |   |            |  
|BalanceJune 30, 2008                                                                                        |  | 5,647,175    |  | $      | 28,235,875 |                          | $ | 7,818,436 |                  |  | $ | 9,314,939                       |   |                                           | $ |           |                        | $ | (26,137 | )     |  | $ | 93,472   |   |  | $ | 45,436,585 |  
|                                                                                                             |  |              |  |        |            |                          |   |           |                  |  |   |                                 |   |                                           |   |            |                        |   |         |       |  |   |          |   |  |   |            |  
|                                                                                                             |  |              |  |        |            |                          |   |          
|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 |  
|Distributions to noncontrolling interests                                                                    |  |              |  |        |            |                          |   |           |                  |  |   |                                 |   |                                           |   |            |                        |   |         |       |  |   | (106,847 | ) |  |   | (106,847   | )
|Comprehensive income:                                                                                        |  |              |  |        |            |                          |   |           |                  |  |   |                                 |   |                                           |   |            |                        |   |         |       |  |   |          |   |  |   |            |  
|Net income for six months ended June 30, 2009                                                                |  |              |  |        |            |                          |   |           |                  |  |   | 2,479,863                       |   |                                           |   |            |                        |   |         |       |  |   | 145,600  |   |  |   | 2,625,463  |  
|Unrealized gain (loss) on securities available-for-sale, net of reclassification adjustment and income taxes |  |              |  |        |            |                          |   |           |                  |  |   |                                 |   |                                           |   |            |                        |   | 8,962   |       |  |   |          |   |  |   | 8,962      |  
|                                                                                                             |  |              |  |        |            |                          |   |           |                  |  |   |                                 |   |                                           |   |            |                        |   |         |       |  |   |          |   |  |   |            |  
|Total comprehensive income                                                                                   |  |              |  |        |            |                          |   |           |                  |  |   |                                 |   |                                           |   |            |                        |   |         |       |  |   |          |   |  |   | 2,634,425  |  
|                                                                                                             |  |              |  |        |            |                          |   |           |                  |  |   |                                 |   |                                           |   |            |                        |   |         |       |  |   |          |   |  |   |            |  
|Stock-based compensation expense                                                                             |  |              |  |        |            |                          |   | 157,600   |                  |  |   |                                 |   |                                           |   |            |                        |   |         |       |  |   |          |   |  |   | 157,600    |  
|Stock options exercised                                                                                      |  | 53,979       |  |        | 269,895    |                          |   | (42,896   | )                |  |   |                                 |   |                                           |   |            |                        |   |         |       |  |   |          |   |  |   | 226,999    |  
|Accretion of discount on cumulative perpetual preferred warrants                                             |  |              |  |        |            |                          |   | (19,500   | )                |  |   |                                 |   |                                           |   | 19,500     |                        |   |         |       |  |   |          |   |  |   |           |  
|Cash dividend declared on cumulative perpetual preferred stock (5%)                                          |  |              |  |        |            |                          |   |           |                  |  |   | (369,541                        | ) |                                           |   |            |                        |   |         |       |  |   |          |   |  |   | (369,541   | )
|                                                                                                             |  |              |  |        |            |                          |   |           |                  |  |   |                                 |   |                                           |   |            |                        |   |         |       |  |   |          |   |  |   |            |  
|BalanceJune 30, 2009                                                                                        |  | 5,788,986    |  | $      | 28,944,930 |                          | $ | 8,160,806 |                  |  | $ | 10,638,416                      |   |                                           | $ | 14,500,883 |                        | $ | 36,264  |       |  | $ | 150,027  |   |  | $ | 62,431,326 |  
|                                                                                                             |  |              |  |        |            |                          |   |           |                  |  |   |                                 |   |                                           |   |            |                        |   |         |       |  |   |          |   |  |   |            |  

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



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##### Table of Contents

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

MONARCH FINANCIAL HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)



|                                                                     |  |                         |             |   |      |   |             |  
|-------------------------------------------------------------------- |  | ----------------------- | ----------- | - | ---- | - | ----------- | -
|                                                                     |  | 6 Months Ended June 30, |            
|                                                                     |  | 2009                    |             |   | 2008 |  
|Operating activities:                                                |  |                         |             |   |      |   |             |  
|Net income                                                           |  | $                       | 2,479,863   |   |      | $ | 1,895,228   |  
|Adjustments to reconcile to net cash from operating activities:      |  |                         |             |   |      |   |             |  
|Provision for loan losses                                            |  |                         | 2,538,148   |   |      |   | 764,032     |  
|Depreciation                                                         |  |                         | 490,400     |   |      |   | 470,622     |  
|Accretion of discounts and amortization of premiums, net             |  |                         | 6,104       |   |      |   | 9,284       |  
|Deferral of loan costs, net of deferred fees                         |  |                         | (28,397     | ) |      |   | (164,822    | )
|Amortization of intangible assets                                    |  |                         | 89,286      |   |      |   | 89,286      |  
|Stock-based compensation                                             |  |                         | 157,600     |   |      |   | 141,159     |  
|Net income attributable to noncontrolling interests                  |  |                         | 145,600     |   |      |   | 165,364     |  
|Appreciation of bank-owned life insurance                            |  |                         | (127,257    | ) |      |   | (119,241    | )
|Net gain on disposition of investment securities                     |  |                         |            |   |      |   | (10,801     | )
|Net gain on sale of assets                                           |  |                         | (302,269    | ) |      |   | (24,410     | )
|Net gain on on sale of other real estate                             |  |                         | (16,455     | ) |      |   | (32,378     | )
|Amortization of deferred gain                                        |  |                         | (81,726     | ) |      |   | (81,726     | )
|Changes in:                                                          |  |                         |             |   |      |   |             |  
|Loans held for sale                                                  |  |                         | (42,131,083 | ) |      |   | (20,733,231 | )
|Interest receivable                                                  |  |                         | (193,540    | ) |      |   | 277,835     |  
|Other assets                                                         |  |                         | 214,300     |   |      |   | (3,663,922  | )
|Other liabilities                                                    |  |                         | 1,678,145   |   |      |   | 845,618     |  
|                                                                     |  |                         |             |   |      |   |             |  
|Net cash from operating activities                                   |  |                         | (35,081,281 | ) |      |   | (20,172,103 | )
|                                                                     |  |                         |             |   |      |   |             |  
|Investing activities:                                                |  |                         |             |   |      |   |             |  
|Purchases of available-for-sale securities                           |  |                         |            |   |      |   | (2,544,610  | )
|Proceeds from maturities and calls of held-to-maturity securities    |  |                         |            |   |      |   | 21,100,000  |  
|Proceeds from sales and maturities of available-for-sale securities  |  |                         | 592,044     |   |      |   | 2,207,520   |  
|Proceeds from sale of other real estate                              |  |                         | 279,582     |   |      |   | 827,855     |  
|Loan originations, net of principal repayments                       |  |                         | (12,670,809 | ) |      |   | (68,632,805 | )
|Purchases of premises and equipment                                  |  |                         | (258,435    | ) |      |   | (1,152,573  | )
|(Purchase) sale of restricted equity securities, net of redemptions  |  |                         | (3,435,150  | ) |      |   | 234,600     |  
|                                                                     |  |                         |             |   |      |   |             |  
|Net cash from investing activities                                   |  |                         | (15,492,768 | ) |      |   | (47,960,013 | )
|                                                                     |  |                         |             |   |      |   |             |  
|Financing activities:                                                |  |                         |             |   |      |   |             |  
|Net increase in noninterest-bearing deposits                         |  |                         | 5,082,906   |   |      |   | 8,847,466   |  
|Net increase in interest-bearing deposits                            |  |                         | 25,445,083  |   |      |   | 65,974,635  |  
|Cash dividends paid on preferred stock                               |  |                         | (298,083    | ) |      |   |            |  
|Net increase (decrease) of FHLB advances and federal funds purchased |  |                         | 34,146,205  |   |      |   | (9,005,963  | )
|Distributions to noncontrolling interests                            |  |                         | (106,847    | ) |      |   | (129,594    | )
|Proceeds from issuance of common stock, net of issuance costs        |  |                         | 226,999     |   |      |   | 6,767,506   |  
|                                                                     |  |                         |             |   |      |   |             |  
|Net cash from financing activities                                   |  |                         | 64,496,263  |   |      |   | 72,454,050  |  
|                                                                     |  |                         |             |   |      |   |             |  
|CHANGE IN CASH AND CASH EQUIVALENTS                                  |  |                         | 13,922,214  |   |      |   | 4,321,934   |  
|CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                       |  |                         | 8,596,342   |   |      |   | 9,464,550   |  
|                                                                     |  |                         |             |   |      |   |             |  
|CASH AND CASH EQUIVALENTS AT END OF PERIOD                           |  | $                       | 22,518,556  |   |      | $ | 13,786,484  |  
|                                                                     |  |                         |             |   |      |   |             |  
|                                                                     |  |                        
|SUPPLEMENTAL SCHEDULES AND CASH FLOW INFORMATION                     |  |                         |             |   |      |   |             |  
|Cash paid for:                                                       |  |                         |             |   |      |   |             |  
|Interest on deposits and other borrowings                            |  | $                       | 5,317,788   |   |      | $ | 7,810,654   |  
|Income taxes                                                         |  | $                       | 2,160,000   |   |      | $ | 2,242,000   |  
|Loans transferred to foreclosed real estate during the year          |  | $                       | 532,158     |   |      | $ | 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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MONARCH FINANCIAL HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. BASIS OF PRESENTATION

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

In June
2008, the FASB issued FSP 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.This FSP addresses 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 (EPS under the two-class method described in paragraph 60 and 61 of SFAS No. 128, Earnings Per
Share.The FSP is effective for periods beginning after December 15, 2008, and did not have a significant impact on the Companys consolidated financial statements.

In May 2009, the FASB issued SFAS 165, Subsequent Events.This Statement introduces the concept of financial statements being
available to be issued.It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date, alerting users of financial statements that an entity has not evaluated subsequent events
after that date in the set of financial statements being presented. This Statement is effective for periods ending after June 15, 2009, and did not have a significant impact on the Companys consolidated financial statements.

In June 2009, the FASB issued 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 Statement is effective for periods beginning after November 15, 2009, and is not expected to have a significant effect on
the Companys consolidated financial statements.

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

In April 2009, the FASB issued FSP FAS 141(R)-1, Accounting for Assets
Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies.FSP FAS 141(R)-1 amends and clarifies SFAS 141(R) 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. The FSP 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 SFAS 141(R) to have a material impact on our consolidated financial statements.



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In April 2009, the FASB issued FSP FAS 157-4, 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. FSP FAS 157-4 provides additional guidance for estimating fair value in accordance with SFAS 157 when the volume and
level of activity for the asset or liability have significantly decreased. The FSP also includes guidance on identifying circumstances that indicate a transaction is not orderly. FSP FAS 157-4 is effective for interim and annual periods ending after
June 15, 2009, and shall be applied prospectively. Earlier adoption is permitted for periods ending after March 15, 2009. Adoption of FSP FAS 157-4 did not have a material impact on our consolidated financial statements.

In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments. FSP FAS
107-1 and APB 28-1 amends SFAS No. 107, Disclosures about Fair Value of Financial Instruments, to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as
well as in annual financial statements. In addition, the FSP amends APB Opinion No. 28, Interim Financial Reporting, to require those disclosures in summarized financial information at interim reporting periods. The FSP is
effective for interim periods ending after June 15, 2009, with earlier adoption permitted for periods ending after March 15, 2009. Adoption of FSP FAS 107-1 and APB 28-1 did not have a material impact on our consolidated financial
statements. However, the required disclosures are incorporated herein.

In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2,
Recognition and Presentation of Other-Than-Temporary Impairments. FSP FAS 115-2 and FAS 124-2 amend other-than-temporary impairment guidance for debt securities to make guidance more operational and to improve the presentation and
disclosure of other-than-temporary impairments on debt and equity securities. The FSP does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. FSP FAS 115-1 and FAS 124-2 are
effective for interim and annual periods ending after June 15, 2009, with earlier adoption permitted for periods ending after March 15, 2009. Adoption of FSP FAS 115-2 and FAS 124-2 did not have a material impact on our consolidated
financial statements.

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

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

We adopted the Securities and Exchange Commissions (SEC) Staff Accounting Bulletin (SAB) No. 109, Written Loan Commitments Recorded
at Fair Value Through Earnings (SAB 109) for loan commitments measured at fair value through earnings which were issued or modified since adoption on January 1, 2008. SAB 109 requires that the expected net future cash flows related to
servicing of a loan be included in the measurement of all written loan commitments that are accounted for at fair value through earnings. The adoption of SAB 109 generally has resulted in higher fair values being recorded upon initial recognition of
derivative interest rate lock commitments.

In March 2008, the FASB issued SFAS 161, Disclosures about Derivative Instruments and
Hedging Activities; an amendment of SFAS 133. The standard requires enhanced disclosures about derivative instruments and hedged items that are accounted for under SFAS 133 and related interpretations. The standard



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was effective for periods beginning after November 15, 2008, with early adoption permitted. The standard expands the disclosure requirements for
derivatives and hedged items and has not had a material impact on our consolidated financial position and results of operations.

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

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

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

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

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

In June 2007, we announced the expansion of our mortgage operations through the acquisition of a team of experienced mortgage bankers, and our mortgage division changed its name from Monarch Home Funding to Monarch Mortgage (MM). MM
originates and sells conventional, FHA, VA and VHDA residential loans and offers additional mortgage products such as construction-permanent loans for Monarch Banks loan portfolio. Their primary office is in Virginia Beach with additional
offices in Chesapeake, Norfolk, Suffolk and Fredericksburg, Virginia, Rockville, Waldorf, Crofton, and College Park, Maryland and Charlotte, North 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.



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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.

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 June 30, |           | 6 months ended June 30,
|                                                            |  | 2009                    |           |                         | 2008 |   | 2009      |  |   | 2008     
|Net income (numerator, basic and diluted)                   |  | $                       | 1,419,592 |                         |      | $ | 927,027   |  | $ | 2,479,863 |   |  | $ | 1,895,228
|Less: cumulative perpetual preferred dividend and accretion |  |                         | (195,601  | )                       |      |   |          |  |   | (389,041  | ) |  |   |         
|                                                            |  |                         |           |                         |      |   |           |  |   |           |   |  |   |          
|Net income (numerator, basic and diluted)                   |  |                         | 1,223,991 |                         |      |   | 927,027   |  |   | 2,090,822 |   |  |   | 1,895,228
|Weighted average shares outstanding (denominator)           |  |                         | 5,663,381 |                         |      |   | 4,928,380 |  |   | 5,640,461 |   |  |   | 4,849,463
|                                                            |  |                         |           |                         |      |   |           |  |   |           |   |  |   |          
|Income per common sharebasic                               |  | $                       | 0.22      |                         |      | $ | 0.19      |  | $ | 0.37      |   |  | $ | 0.39     
|                                                            |  |                         |           |                         |      |   |           |  |   |           |   |  |   |          
|Weighted average sharesdiluted (denominator)               |  |                         | 5,734,206 |                         |      |   | 5,109,992 |  |   | 5,693,308 |   |  |   | 5,037,299
|                                                            |  |                         |           |                         |      |   |           |  |   |           |   |  |   |          
|Income per common sharediluted                             |  | $                       | 0.21      |                         |      | $ | 0.18      |  | $ | 0.37      |   |  | $ | 0.38     
|                                                            |  |                         |           |                         |      |   |           |  |   |           |   |  |   |          
|Dilutive effect- average number of shares                   |  |                         | 70,825    |                         |      |   | 181,612   |  |   | 52,847    |   |  |   | 187,836  

NOTE 4. FAIR VALUE ACCOUNTING

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

Fair Value Measurements (SFAS 157)

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

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



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



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



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

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



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



|                                         |  |                                                 |           |                                                             |   |                                             |  |                                        |           |  |   |        
|---------------------------------------- |  | ----------------------------------------------- | --------- | ----------------------------------------------------------- | - | ------------------------------------------- |  | -------------------------------------- | --------- |  | - | -------
|                                         |  | Fair Value Measurements at Reporting Date Using
|Description                              |  | Fair Value                                      |           | Quoted Prices inActive Markets forIdentical Assets(Level 1) |   | Significant OtherObservableInputs (Level 2) |  | SignificantUnobservableInputs(Level
3)
|Assets at June 30, 2009                  |  |                                                 |           |                                                             |   |                                             |  |                                        |           |  |   |        
|Investment securitiesavailable for sale |  | $                                               | 5,262,348 |                                                             | $ |                                            |  | $                                      | 5,262,348 |  | $ |       
|Rate lock commitments, net               |  |                                                 | 864,664   |                                                             |   |                                            |  |                                        |          |  |   | 864,664
|                                         |  |                                                 |           |                                                             |   |                                             |  |                                        |           |  |   |        
|Total Assets                             |  | $                                               | 6,127,012 |                                                             | $ |                                            |  | $                                      | 5,262,348 |  | $ | 864,664
|                                         |  |                                                 |           |                                                             |   |                                             |  |                                        |           |  |   |        
|                                         |  |                                                 |           |                                                            
|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
|                                         |  |                                                 |           |                                                             |   |                                             |  |                                        |           |  |   |        

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  |  |      | 219,180 |      |   | 260,336
|Transfers into (out of) Level 3 |  |      |        |      |   |       
|                                |  |      |         |      |   |        
|Balance, June 30                |  | $    | 864,664 |      | $ | 392,474
|                                |  |      |         |      |   |        
|Balance, April 1                |  | $    | 637,028 |      | $ | 326,485
|Issuances and settlements, net  |  |      | 227,636 |      |   | 65,989 
|Transfers into (out of) Level 3 |  |      |        |      |   |       
|                                |  |      |         |      |   |        
|Balance, June 30                |  | $    | 864,664 |      | $ | 392,474
|                                |  |      |         |      |   |        

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



|                     |  |                                                 |            |                                                             |   |                                             |  |                                        |            |  |   |        
|-------------------- |  | ----------------------------------------------- | ---------- | ----------------------------------------------------------- | - | ------------------------------------------- |  | -------------------------------------- | ---------- |  | - | -------
|                     |  | Fair Value Measurements at Reporting Date Using
|Description          |  | Fair Value                                      |            | Quoted Prices inActive Markets forIdentical Assets(Level 1) |   | Significant OtherObservableInputs (Level 2) |  | SignificantUnobservableInputs(Level
3)
|At June 30, 2009     |  |                                                 |            |                                                             |   |                                             |  |                                        |            |  |   |        
|Real estate owned    |  | $                                               | 801,963    |                                                             | $ |                                            |  | $                                      |           |  | $ | 801,963
|Loans held for sale  |  |                                                 | 96,500,298 |                                                             |   |                                            |  |                                        | 96,500,298 |  |   |       
|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 six months ended June 30, 2009, the gain of real estate owned totaled
$14,319 and $16,455, respectively. For the three and six months ended June 30, 2008, the gain on real estate owned totaled $32,378.

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 had no losses to record due to valuation adjustments on real estate owned in our consolidated statements of income.



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

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

Additionally, the transition provisions of SFAS 159 permits 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 June 30, 2009, we have not elected to implement fair value accounting for any balance sheet items not already requiring such accounting, as allowed by SFAS 159.

Fair Value of Financial Instruments (SFAS 107)

The following table presents the carrying amounts and fair value of our financial instruments at June 30, 2009 and December 31, 2008. FASB Statement No. 107, Disclosures about Fair Value of
Financial Instruments,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. The
carrying amounts in the table are included in the balance sheet under the indicated captions.



|                             |  |                |             |                   |   |                |  |            |             |  |   |            
|---------------------------- |  | -------------- | ----------- | ----------------- | - | -------------- |  | ---------- | ----------- |  | - | -----------
|                             |  | June 30, 2009  |             | December 31, 2008
|                             |  | Carrying Value |             | Fair Value        |   | Carrying Value |  | Fair Value
|Financial Assets             |  |                |             |                   |   |                |  |            |             |  |   |            
|Cash and cash equivalents    |  | $              | 22,518,556  |                   | $ | 22,518,556     |  | $          | 8,596,342   |  | $ | 8,596,342  
|Investment securities        |  |                | 5,762,348   |                   |   | 5,770,403      |  |            | 6,346,917   |  |   | 6,365,177  
|Mortgage loans held for sale |  |                | 96,500,298  |                   |   | 96,500,298     |  |            | 54,369,215  |  |   | 54,369,215 
|Loans (net)                  |  |                | 506,597,252 |                   |   | 526,880,472    |  |            | 496,666,083 |  |   | 520,023,836
|Accrued interest receivable  |  |                | 1,796,202   |                   |   | 1,796,202      |  |            | 1,602,662   |  |   | 1,602,662  
|Restricted equity securities |  |                | 7,010,600   |                   |   | 7,010,600      |  |            | 3,575,450   |  |   | 3,575,450  
|                             |  |                |             |                  
|Financial Liabilities        |  |                |             |                   |   |                |  |            |             |  |   |            
|Deposit liabilities          |  | $              | 526,613,784 |                   | $ | 525,338,397    |  | $          | 496,085,795 |  | $ | 496,213,772
|Total borrowings             |  |                | 62,206,477  |                   |   | 61,579,922     |  |            | 38,060,272  |  |   | 37,249,427 
|Accrued interest payable     |  |                | 173,317     |                   |   | 173,317        |  |            | 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 short-term 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.



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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.

NOTE 5. COMPREHENSIVE INCOME

Accounting principles generally require that recognized revenue,
expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity section of the balance
sheet, such items, along with net income, are components of comprehensive income. The only component of other comprehensive income consists of unrealized gains and losses on available-for-sale securities. We account for comprehensive income in
accordance with FASB Statement No. 130, Reporting Comprehensive Income. The following is a detail of comprehensive income for the three and six months ended June 30, 2009 and 2008:



|                                                                                         |  |                            |           |   |                          |   |          |      |  |   |           |   |  |   |           |  
|---------------------------------------------------------------------------------------- |  | -------------------------- | --------- | - | ------------------------ | - | -------- | ---- |  | - | --------- | - |  | - | --------- | -
|                                                                                         |  | Three months endedJune 30, |           |   | Six months endedJune 30, |  
|                                                                                         |  | 2009                       |           |   | 2008                     |   |          | 2009 |  |   | 2008      |  
|Net Income                                                                               |  | $                          | 1,419,592 |   |                          | $ | 927,027  |      |  | $ | 2,479,863 |   |  | $ | 1,895,228 |  
|Change in unrealized gains (losses) on securities available-for-sale, net of tax expense |  |                            | 15,590    |   |                          |   | (66,170  | )    |  |   | 8,962     |   |  |   | (9,276    | )
|                                                                                         |  |                            |           |   |                          |   |          |      |  |   |           |   |  |   |           |  
|Total comprehensive income                                                               |  | $                          | 1,435,182 |   |                          | $ | 860,857  |      |  | $ | 2,488,825 |   |  | $ | 1,885,952 |  
|                                                                                         |  |                            |           |   |                          |   |          |      |  |   |           |   |  |   |           |  
|Unrealized holding (losses) gains during the period                                      |  | $                          | 23,621    |   |                          | $ | (100,253 | )    |  | $ | 13,578    |   |  | $ | (14,049   | )
|                                                                                         |  |                            |           |   |                          |   |          |      |  |   |           |   |  |   |           |  
|Total other comprehensive (loss) gain before income tax expense                          |  |                            | 23,621    |   |                          |   | (100,253 | )    |  |   | 13,578    |   |  |   | (14,049   | )
|Income tax benefit (expense)                                                             |  |                            | (8,031    | ) |                          |   | 34,083   |      |  |   | (4,616    | ) |  |   | 4,773     |  
|                                                                                         |  |                            |           |   |                          |   |          |      |  |   |           |   |  |   |           |  
|Net unrealized (losses) gains                                                            |  | $                          | 15,590    |   |                          | $ | (66,170  | )    |  | $ | 8,962     |   |  | $ | (9,276    | )
|                                                                                         |  |                            |           |   |                          |   |          |      |  |   |           |   |  |   |           |  

NOTE 6. STOCK-BASED COMPENSATION

As of June 30, 2009, we have a stock-based compensation plan. Prior to January 1, 2006, we accounted for our plan under the recognition and
measurement principles of APB Opinion 25, Accounting for Stock Issued to Employees,and related interpretations. Under these older standards no stock-based employee compensation cost was reflected in net income, as all options
granted under the plan had an exercise price equal to the fair value of the underlying common stock on the date of the grant. On January 1, 2006, we adopted SFAS Statement No. 123R Share-Based Payment, (SFAS 123R) that
addresses the accounting for share-based payment transactions in which a company receives employee services in exchange for either equity instruments of the company or liabilities that are based on the fair value of the companys equity
instruments or that may be settled by the issuance of such equity instruments. SFAS 123R eliminates the ability to account for share-based compensation transactions using the intrinsic method and requires that such transactions be accounted for
using a fair-value-based method and recognized as expense in the consolidated statement of income.

In May 2006, our shareholders ratified
the adoption of a new stock-based compensation plan to succeed the Monarch Bank 1999 Incentive Stock Option Plan. The new Monarch Bank 2006 Equity Incentive Plan authorizes the compensation committee to grant options, stock appreciation rights,
stock awards, performance stock awards, and stock units to designated directors, officers, key employees, consultants and advisors to the Company and its subsidiaries. The Plan authorizes us to issue up to 630,000 split-adjusted shares of our Common
Stock plus the number of shares of our Common Stock outstanding under the 1999 Plan. The Plan also provides that no award may be granted more than 10 years after the May 2006 ratification date.

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.



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NOTE 7. SEGMENT REPORTING

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

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

Selected Financial Information



|                                                           |  |                            |            |   |                           |   |             |                          |  |   |            |   |  |   |             |  
|---------------------------------------------------------- |  | -------------------------- | ---------- | - | ------------------------- | - | ----------- | ------------------------ |  | - | ---------- | - |  | - | ----------- | -
|                                                           |  | Commercialand OtherBanking |            |   | MortgageBankingOperations |   |             | IntersegmentEliminations |  |   | Total      |  
|Three Months Ended June 30, 2009                           |  |                            |            |   |                           |   |             |                          |  |   |            |   |  |   |             |  
|Net interest income after provision for loan losses        |  | $                          | 3,863,641  |   |                           | $ |            |                          |  | $ |           |   |  | $ | 3,863,641   |  
|Noninterest income                                         |  |                            | 2,013,734  |   |                           |   | 8,687,328   |                          |  |   | (614,914   | ) |  |   | 10,086,148  |  
|Noninterest expenses                                       |  |                            | (3,732,913 | ) |                           |   | (7,908,581  | )                        |  |   | (137,395   | ) |  |   | (11,778,889 | )
|                                                           |  |                            |            |   |                           |   |             |                          |  |   |            |   |  |   |             |  
|Net income before income taxes and noncontrolling interest |  | $                          | 2,144,462  |   |                           | $ | 778,747     |                          |  | $ | (752,309)  |   |  | $ | 2,170,900   |  
|                                                           |  |                            |            |   |                           |   |             |                          |  |   |            |   |  |   |             |  
|                                                           |  |                            |            |  
|Three Months Ended June 30, 2008                           |  |                            |            |   |                           |   |             |                          |  |   |            |   |  |   |             |  
|Net interest income after provision for loan losses        |  | $                          | 3,733,797  |   |                           | $ | (287,354    | )                        |  | $ | 203,685    |   |  | $ | 3,650,128   |  
|Noninterest income                                         |  |                            | 1,528,525  |   |                           |   | 4,230,297   |                          |  |   | (635,011   | ) |  |   | 5,123,811   |  
|Noninterest expenses                                       |  |                            | (3,359,613 | ) |                           |   | (3,956,515  | )                        |  |   | 33,750     |   |  |   | (7,282,378  | )
|                                                           |  |                            |            |   |                           |   |             |                          |  |   |            |   |  |   |             |  
|Net income before income taxes and minority interest       |  | $                          | 1,902,709  |   |                           | $ | (13,572     | )                        |  | $ | (397,576   | ) |  | $ | 1,491,561   |  
|                                                           |  |                            |            |   |                           |   |             |                          |  |   |            |   |  |   |             |  
|                                                           |  |                            |            |  
|Six Months Ended June 30, 2009                             |  |                            |            |   |                           |   |             |                          |  |   |            |   |  |   |             |  
|Net interest income after provision for loan losses        |  | $                          | 7,752,296  |   |                           | $ |            |                          |  | $ |           |   |  | $ | 7,752,296   |  
|Noninterest income                                         |  |                            | 3,494,282  |   |                           |   | 16,044,787  |                          |  |   | (1,608,399 | ) |  |   | 17,930,670  |  
|Noninterest expenses                                       |  |                            | (7,465,340 | ) |                           |   | (14,618,380 | )                        |  |   | 240,117    |   |  |   | (21,843,603 | )
|                                                           |  |                            |            |   |                           |   |             |                          |  |   |            |   |  |   |             |  
|Net income before income taxes and noncontrolling interest |  | $                          | 3,781,238  |   |                           | $ | 1,426,407   |                          |  | $ | (1,368,282 | ) |  | $ | 3,839,363   |  
|                                                           |  |                            |            |   |                           |   |             |                          |  |   |            |   |  |   |             |  
|                                                           |  |                            |            |  
|Six Months Ended June 30, 2008                             |  |                            |            |   |                           |   |             |                          |  |   |            |   |  |   |             |  
|Net interest income after provision for loan losses        |  | $                          | 7,379,193  |   |                           | $ | (540,281    | )                        |  | $ | 343,952    |   |  | $ | 7,182,864   |  
|Noninterest income                                         |  |                            | 3,039,013  |   |                           |   | 8,364,651   |                          |  |   | (1,566,116 | ) |  |   | 9,837,548   |  
|Noninterest expenses                                       |  |                            | (6,700,260 | ) |                           |   | (7,400,260  | )                        |  |   | 55,500     |   |  |   | (14,045,020 | )
|                                                           |  |                            |            |   |                           |   |             |                          |  |   |            |   |  |   |             |  
|Net income before income taxes and minority interest       |  | $                          | 3,717,946  |   |                           | $ | 424,110     |                          |  | $ | (1,166,664 | ) |  | $ | 2,975,392   |  
|                                                           |  |                            |            |   |                           |   |             |                          |  |   |            |   |  |   |             |  

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.



14



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



|                                           |  |              |           |   |                  |   |           |  
|------------------------------------------ |  | ------------ | --------- | - | ---------------- | - | --------- | -
|                                           |  | June 30,2009 |           |   | December 31,2008 |  
|Amortizable intangible assets              |  | $            | 1,250,000 |   |                  | $ | 1,250,000 |  
|Accumulated amortizationintangible assets |  |              | (342,259  | ) |                  |   | (252,973  | )
|                                           |  |              |           |   |                  |   |           |  
|Amortizable intangible assets, net         |  | $            | 907,741   |   |                  | $ | 997,027   |  
|                                           |  |              |           |   |                  |   |           |  
|Goodwill                                   |  | $            | 775,000   |   |                  | $ | 775,000   |  
|                                           |  |              |           |   |                  |   |           |  

Amortization expense for intangible assets totaled $44,643 and $89,286 for each of the three and
six month periods, respectively, ending June 30, 2009 and 2008.



|                                                    |  |   |        
|--------------------------------------------------- |  | - | -------
|Estimated Amortization Expense:                     |  |   |        
|For the remaining months of the year ended 12/31/09 |  |   | 89,286 
|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
|                                                    |  |   |        
|                                                    |  | $ | 907,741
|                                                    |  |   |        

NOTE 9. SUBSEQUENT EVENTS

Management has considered events through August 7, 2009, in preparing the June 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.

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



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



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



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



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



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



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

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

Earnings Summary

We reported net income of $1,419,592 and $2,479,863 for the three and six months ending June 30,
2009, compared to $927,027 and $1,895,228 for the same period in 2008. This represents an increase of $492,565, or 53.1% for the quarter and $584,635, or 30.8% for the first six months ended June 30, 2009 compared to 2008. Net interest income
increased 41.9% or $1,682,180 during the second quarter and 29.5% or $2,343,548 during the first six months of 2009 compared to 2008. Noninterest income totaled $10,086,148 for the second quarter of 2009, an increase of $4,962,337, or 96.8% over the
second quarter of 2008. For the first six months of 2009 noninterest income was $17,930,670, an 82.3% or $8,093,122 increase over the same period in 2008. Noninterest expenses totaled $11,778,889, an increase of $4,496,511, or 61.7% for the second
quarter of 2009 compared to 2008 and $21,843,603 for the first half of 2009 a 55.5% or $7,798,583, increase over the first half of 2008. Basic and diluted earnings per share of common stock for the second quarter of 2009 were $0.22 and $0.21
compared to $0.19 and $0.18 in 2008. Both basic and diluted earnings per share of common stock for the first six months of 2009 were $0.37 compared to $0.39 and $0.38, respectively, in the first six months of 2008.

Profitability as measured by our annualized return on average assets (ROA) was 0.85% compared to 0.68% for the three months ended and 0.76% compared to
0.72% for the six months ended June 30, 2009 and 2008, respectively. Another measure of our profitability, the annualized return on average equity (ROE) was 9.17% for the second quarter of 2009 compared to 9.73% for the same period in 2008. ROE
for the first six months of 2009 was 8.16% compared to 10.10% for the first six months of 2008.

Net Interest Income

Net interest income showed marked improvement in both the second quarter and the first six 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 deposits and liabilities costs with that of our assets. Historically, we are an
asset sensitive company with the



16



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##### Table of Contents

majority of our loan portfolio indexed on the Wall Street Journal Prime Rate and set to move immediately. 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 a large number of relationships in our commercial and mortgage loan portfolio to include rate floors which limits
how low a rate can go, in spite of how a loan is indexed. In addition, we have repriced deposits as they mature to lower market rates.

In
the first six months 2009, the Federal Funds rate that is set by the Federal Reserve Banks Federal Open Market Committee was 0.25% compared to the same period in 2008 when it declined 225 basis points from 4.25% to 2.00%. The Wall Street
Journal Prime Rate, which generally moves with the Federal Funds rate, has been at 3.25% since mid-December, compared to rates of 7.25% to 5.00% during the first half of 2008. 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 $5,701,238 for the second quarter and $10,290,444 for the first six months 2009. Prior years net interest income was $4,019,058 and $7,946,896, respectively, for the second quarter and first six months of 2008.
This notable improvement of 41.9% or $1,682,180 and 29.5% or $2,343,548, when comparing the second quarter and first half of 2009 to 2008, is driven primarily by a reduction in liability costs. Total interest expense declined $903,287 in the second
quarter of 2009 and $1,925,882 in the first six months when compared to 2008. Total interest income increased $778,893 to $8,416,747 in the second quarter and $417,666 to $15,983,584 in the first six months of 2009 compared to 2008.

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.



|                                         |  |                         |           |                         |   |           |  |      |            |  |   |           
|---------------------------------------- |  | ----------------------- | --------- | ----------------------- | - | --------- |  | ---- | ---------- |  | - | ----------
|Non-GAAP                                 |  | 3 Months Ended June 30, |           | 6 Months Ended June 30,
|                                         |  | 2009                    |           | 2008                    |   | 2009      |  | 2008
|Interest income:                         |  |                         |           |                         |   |           |  |      |            |  |   |           
|Total interest income                    |  | $                       | 8,416,747 |                         | $ | 7,637,854 |  | $    | 15,983,584 |  | $ | 15,565,918
|Bank owned life insurance                |  |                         | 64,282    |                         |   | 59,896    |  |      | 127,257    |  |   | 119,241   
|Tax equivalent adjustment (34% tax rate) |  |                         | 33,114    |                         |   | 30,855    |  |      | 65,556     |  |   | 61,427    
|                                         |  |                         |           |                         |   |           |  |      |            |  |   |           
|Adjusted income on earning assets        |  |                         | 8,514,143 |                         |   | 7,728,605 |  |      | 16,176,397 |  |   | 15,746,586
|                                         |  |                         |           |                         |   |           |  |      |            |  |   |           
|Interest expense:                        |  |                         |           |                         |   |           |  |      |            |  |   |           
|Total interest expense                   |  |                         | 2,715,509 |                         |   | 3,618,796 |  |      | 5,693,140  |  |   | 7,619,022 
|                                         |  |                         |           |                         |   |           |  |      |            |  |   |           
|Net interest incomeadjusted             |  | $                       | 5,798,634 |                         | $ | 4,109,809 |  | $    | 10,483,257 |  | $ | 8,127,564 
|                                         |  |                         |           |                         |   |           |  |      |            |  |   |           

Total adjusted income on earning assets for the second quarter of 2009 was $8,514,143, an increase
of $785,538 over the same period in 2008. The driver of this increase was interest and fees on loans, which grew $902,245 or 12.2% over 2008. Based on the following table, this quarter over quarter increase was volume driven, with additional income
of $1,451,000 that was reduced by 37.8% or $549 thousand due to lower rates. Consumer loans, which includes our loans held for sale, was the largest area of growth and had the greatest impact from rates. Consumer loan growth was in loans held for
sale, but the negative impact to rate resulted from our home equity loan products which were tied to Wall Street Journal Prime.

During the
first half of 2009 compared to 2008, total adjusted income on earning assets increased $429,811 to $16,176,397 with interest and fees on loans the primary growth source. Potential income from growth of $2,920,000 was reduced 77.4%, or $2,260,000,
due to significantly lower rates when comparing periods. As with the second quarter 2009 growth, consumer loans were the primary driver of increased interest and fees with similar amounts of the same loan growth and rate compression in both
quarters. Comparison of



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##### Table of Contents

our earning asset performance for the quarter to that of the first six months indicates a slowing of the impact of the lower rates.

Investment income declined in both the second quarter and first six months of 2009 compared to 2008. In the second quarter of 2008 investment income
declined $43,581 or 40.7% and for the first half of 2009 investment income has decreased $98,781 or 43.6% 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 carrying rate on these investments. Securities purchased to replace those called have a much lower yield than the original bond. Interest on federal funds sold and other bank accounts declined a combined total of $42,137 in the
second quarter and $62,197 for the first six months of 2009 compared to 2008. Income on restricted equity securities has declined, despite higher average balances, because the Federal Home Loan Bank has modified their stock release policy and
declared there would be no dividends in the first half of 2009.

Interest expense for the second quarter of 2009 was $2,715,509, a decrease
of $903,287 over the same period in 2008. In spite of the growth in our interest bearing deposit base, we were able to achieve a savings of $851,051 in interest expense when compared to 2008. Growth that would have cost an additional $195 thousand
was offset by a rate benefit of $1.0 million. The cost savings due to lower rates is notable in our demand, money market and time deposits and growth is notable in time deposits under $100,000 and regular savings accounts.

For the first six months of 2009 interest expense declined 25.3% of $1,925,882 to $5,693,140 compared to $7,619,022 in 2008. Deposit cost decreased
$1,544,330 despite year over year growth of $53,036,005. This growth was primarily in time deposits which increased $51,874,787. The additional potential for expense created by this growth was $968 thousand which was offset by a savings due to lower
rates of $1.5 million.

Savings interest cost for the first half of 2009 was $215,361, an increase of $202,245 over our 2008 expense of
$13,116. We introduced a new higher cost savings product in 2008 that has produced average year over year growth of $25.0 million.

Our
borrowing costs declined 4.4% or $14,814 for the quarter and $258,281 in the first six months of 2009 despite a year over year average increase of $10.0 million, all due to lower rates.

The following table sets forth an analysis of the impact of changes in rate and volume on our interest bearing assets and liabilities for the first
quarter of 2009 compared to 2008.

Changes in Net Interest Income (Rate/Volume Analysis)

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



18



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##### Table of Contents

|                          |  |                                                 |       |   |                                               |        |        |                            |  |      |                       |   |        |   |        |   |  |   |        |   |  |   |       |  
|------------------------- |  | ----------------------------------------------- | ----- | - | --------------------------------------------- | ------ | ------ | -------------------------- |  | ---- | --------------------- | - | ------ | - | ------ | - |  | - | ------ | - |  | - | ----- | -
|                          |  | (in thousands)                                  |      
|                          |  | For the Three Months Ended June 30,2009 vs 2008 |       |   | For the Six Months Ended June 30,2009 vs 2008 |       
|                          |  | InterestIncrease(Decrease)                      |       |   | ChangeAttributable to                         |        |        | InterestIncrease(Decrease) |  |      | ChangeAttributable to |  
|                          |  |                                                 |       |  
|                          |  |                                                 | Rate  |   |                                               | Volume |        |                            |  | Rate |                       |   | Volume |  
|Interest income           |  |                                                 |       |   |                                               |        |        |                            |  |      |                       |   |        |   |        |   |  |   |        |   |  |   |       |  
|Loans:                    |  |                                                 |       |   |                                               |        |        |                            |  |      |                       |   |        |   |        |   |  |   |        |   |  |   |       |  
|Commercial                |  | $                                               | 16    |   |                                               | $      | (177   | )                          |  | $    | 193                   |   |        | $ | (158   | ) |  | $ | (707   | ) |  | $ | 549   |  
|Mortgage                  |  |                                                 | 311   |   |                                               |        | 70     |                            |  |      | 241                   |   |        |   | (191   | ) |  |   | (518   | ) |  |   | 327   |  
|Consumer                  |  |                                                 | 575   |   |                                               |        | (442   | )                          |  |      | 1,017                 |   |        |   | 1,009  |   |  |   | (1,035 | ) |  |   | 2,044 |  
|                          |  |                                                 |       |   |                                               |        |        |                            |  |      |                       |   |        |   |        |   |  |   |        |   |  |   |       |  
|Total loans               |  |                                                 | 902   |   |                                               |        | (549   | )                          |  |      | 1,451                 |   |        |   | 660    |   |  |   | (2,260 | ) |  |   | 2,920 |  
|                          |  |                                                 |       |   |                                               |        |        |                            |  |      |                       |   |        |   |        |   |  |   |        |   |  |   |       |  
|Securities:               |  |                                                 |       |   |                                               |        |        |                            |  |      |                       |   |        |   |        |   |  |   |        |   |  |   |       |  
|Federal agencies          |  |                                                 | (29   | ) |                                               |        | (8     | )                          |  |      | (21                   | ) |        |   | (70    | ) |  |   | (17    | ) |  |   | (53   | )
|Mortgage-backed           |  |                                                 | (3    | ) |                                               |        | 5      |                            |  |      | (8                    | ) |        |   | (4     | ) |  |   | 13     |   |  |   | (17   | )
|Other securities          |  |                                                 | (12   | ) |                                               |        | (5     | )                          |  |      | (7                    | ) |        |   | (25    | ) |  |   | (11    | ) |  |   | (14   | )
|                          |  |                                                 |       |   |                                               |        |        |                            |  |      |                       |   |        |   |        |   |  |   |        |   |  |   |       |  
|Total securities          |  |                                                 | (44   | ) |                                               |        | (8     | )                          |  |      | (36                   | ) |        |   | (99    | ) |  |   | (15    | ) |  |   | (84   | )
|                          |  |                                                 |       |   |                                               |        |        |                            |  |      |                       |   |        |   |        |   |  |   |        |   |  |   |       |  
|Deposits in other banks   |  |                                                 | (73   | ) |                                               |        | (44    | )                          |  |      | (29                   | ) |        |   | (135   | ) |  |   | (122   | ) |  |   | (13   | )
|Federal funds sold        |  |                                                 | (6    | ) |                                               |        | (5     | )                          |  |      | (1                    | ) |        |   | (9     | ) |  |   | (17    | ) |  |   | 8     |  
|Bank owned life insurance |  |                                                 | 6     |   |                                               |        | 3      |                            |  |      | 3                     |   |        |   | 12     |   |  |   | 5      |   |  |   | 7     |  
|                          |  |                                                 |       |   |                                               |        |        |                            |  |      |                       |   |        |   |        |   |  |   |        |   |  |   |       |  
|Total interest income     |  | $                                               | 785   |   |                                               | $      | (603   | )                          |  | $    | 1,388                 |   |        | $ | 429    |   |  | $ | (2,409 | ) |  | $ | 2,838 |  
|                          |  |                                                 |       |   |                                               |        |        |                            |  |      |                       |   |        |   |        |   |  |   |        |   |  |   |       |  
|Interest expense          |  |                                                 |       |   |                                               |        |        |                            |  |      |                       |   |        |   |        |   |  |   |        |   |  |   |       |  
|Deposits:                 |  |                                                 |       |   |                                               |        |        |                            |  |      |                       |   |        |   |        |   |  |   |        |   |  |   |       |  
|Demand                    |  | $                                               | (39   | ) |                                               |        | (28    | )                          |  |      | (11                   | ) |        | $ | (51    | ) |  |   | (50    | ) |  |   | (1    | )
|Money market              |  |                                                 | (457  | ) |                                               |        | (435   | )                          |  |      | (22                   | ) |        |   | (1,199 | ) |  |   | (1,015 | ) |  |   | (184  | )
|Savings                   |  |                                                 | 102   |   |                                               |        | 45     |                            |  |      | 57                    |   |        |   | 202    |   |  |   | 63     |   |  |   | 139   |  
|Time                      |  |                                                 | (457  | ) |                                               |        | (628   | )                          |  |      | 171                   |   |        |   | (497   | ) |  |   | (1,465 | ) |  |   | 968   |  
|                          |  |                                                 |       |   |                                               |        |        |                            |  |      |                       |   |        |   |        |   |  |   |        |   |  |   |       |  
|Total deposits            |  |                                                 | (851  | ) |                                               |        | (1,046 | )                          |  |      | 195                   |   |        |   | (1,545 | ) |  |   | (2,467 | ) |  |   | 922   |  
|Federal funds purchased   |  |                                                 | (2    | ) |                                               |        | (1     | )                          |  |      | (1                    | ) |        |   | (9     | ) |  |   | (3     | ) |  |   | (6    | )
|Other borrowings          |  |                                                 | (50   | ) |                                               |        | (137   | )                          |  |      | 87                    |   |        |   | (372   | ) |  |   | (612   | ) |  |   | 240   |  
|                          |  |                                                 |       |   |                                               |        |        |                            |  |      |                       |   |        |   |        |   |  |   |        |   |  |   |       |  
|Total interest expense    |  |                                                 | (903  | ) |                                               |        | (1,184 | )                          |  |      | 281                   |   |        |   | (1,926 | ) |  |   | (3,082 | ) |  |   | 1,156 |  
|                          |  |                                                 |       |   |                                               |        |        |                            |  |      |                       |   |        |   |        |   |  |   |        |   |  |   |       |  
|Net interest income       |  | $                                               | 1,688 |   |                                               | $      | 581    |                            |  | $    | 1,107                 |   |        | $ | 2,355  |   |  | $ | 673    |   |  | $ | 1,682 |  
|                          |  |                                                 |       |   |                                               |        |        |                            |  |      |                       |   |        |   |        |   |  |   |        |   |  |   |       |  

Average Balances, Income and Expenses, Yields and Rates

Our net interest spread on a tax-equivalent basis increased 35 basis points to 2.99% for first half of 2009 when compared to 2.64% for the same period in
2008. Yield on earning assets decreased 97 basis points to 5.27% in 2009 compared to 6.24% for the first six months of 2008, while the cost of interest bearing liabilities decreased 132 basis points to 2.28% from 3.60%, 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 six months of 2009 compared to 5.50% 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

AVERAGE BALANCES, INCOME AND EXPENSE, YIELDS AND RATES

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



|                                              |  |                            |             |   |                |   |              |  |      |                    |  |   |                    |   |              |   |            |  |      |  
|--------------------------------------------- |  | -------------------------- | ----------- | - | -------------- | - | ------------ |  | ---- | ------------------ |  | - | ------------------ | - | ------------ | - | ---------- |  | ---- | -
|                                              |  | For Periods Ended June 30, |            
|                                              |  | 2009                       |             |   | 2008           |  
|                                              |  | AverageBalance             |             |   | Income/Expense |   | YieldRate(1) |  |      | AverageBalance (5) |  |   | Income/Expense (5) |   | YieldRate(1) |  
|ASSETS                                        |  |                            |             |   |                |   |              |  |      |                    |  |   |                    |   |              |   |            |  |      |  
|Securities, at amortized cost                 |  | $                          | 6,299,640   |   |                | $ | 127,745      |  | 4.09 | %                  |  | $ | 10,526,544         |   |              | $ | 226,526    |  | 4.33 | %
|Loans, net                                    |  |                            | 594,716,113 |   |                |   | 15,812,324   |  | 5.36 | %                  |  |   | 480,290,362        |   |              |   | 15,152,174 |  | 6.34 | %
|Federal funds sold                            |  |                            | 2,642,070   |   |                |   | 3,259        |  | 0.25 | %                  |  |   | 993,684            |   |              |   | 11,884     |  | 2.41 | %
|Dividend-earning restricted equity securities |  |                            | 5,656,204   |   |                |   | 38,848       |  | 1.39 | %                  |  |   | 4,127,325          |   |              |   | 120,354    |  | 5.86 | %
|Deposits in other banks                       |  |                            | 2,387,280   |   |                |   | 1,408        |  | 0.12 | %                  |  |   | 4,642,015          |   |              |   | 54,980     |  | 2.38 | %
|Bank owned life insurance (2)                 |  |                            | 6,847,368   |   |                |   | 192,813      |  | 5.68 | %                  |  |   | 6,600,108          |   |              |   | 180,668    |  | 5.50 | %
|                                              |  |                            |             |   |                |   |              |  |      |                    |  |   |                    |   |              |   |            |  |      |  
|Total earning assets                          |  |                            | 618,548,675 |   |                |   | 16,176,397   |  | 5.27 | %                  |  |   | 507,180,038        |   |              |   | 15,746,586 |  | 6.24 | %
|                                              |  |                            |             |   |                |   |              |  |      |                    |  |   |                    |   |              |   |            |  |      |  
|Less: Allowance for loan losses               |  |                            | (8,269,329  | ) |                |   |              |  |      |                    |  |   | (4,086,072         | ) |              |   |            |  |      |  
|Total nonearning assets                       |  |                            | 33,825,025  |   |                |   |              |  |      |                    |  |   | 26,676,234         |   |              |   |            |  |      |  
|                                              |  |                            |             |   |                |   |              |  |      |                    |  |   |                    |   |              |   |            |  |      |  
|Total assets                                  |  | $                          | 644,104,371 |   |                |   |              |  |      |                    |  | $ | 529,770,200        |   |              |   |            |  |      |  
|                                              |  |                            |             |   |                |   |              |  |      |                    |  |   |                    |   |              |   |            |  |      |  
|LIABILITIES and STOCKHOLDERS EQUITY          |  |                            |             |   |                |   |              |  |      |                    |  |   |                    |   |              |   |            |  |      |  
|Interest-bearing deposits:                    |  |                            |             |   |                |   |              |  |      |                    |  |   |                    |   |              |   |            |  |      |  
|Checking                                      |  | $                          | 16,169,369  |   |                | $ | 31,981       |  | 0.40 | %                  |  | $ | 16,439,296         |   |              | $ | 82,536     |  | 1.01 | %
|Regular savings                               |  |                            | 30,604,921  |   |                |   | 215,361      |  | 1.42 | %                  |  |   | 5,607,991          |   |              |   | 13,116     |  | 0.47 | %
|Money market savings                          |  |                            | 118,699,228 |   |                |   | 738,700      |  | 1.25 | %                  |  |   | 132,539,173        |   |              |   | 1,938,107  |  | 2.94 | %
|Certificates of deposit                       |  |                            |             |   |                |   |              |  |      |                    |  |   |                    |   |              |   |            |  |      |  
|$100,000 and over                             |  |                            | 97,030,522  |   |                |   | 1,086,890    |  | 2.26 | %                  |  |   | 123,654,399        |   |              |   | 2,562,796  |  | 4.17 | %
|Under $100,000                                |  |                            | 171,590,694 |   |                |   | 2,892,039    |  | 3.40 | %                  |  |   | 91,298,937         |   |              |   | 1,912,746  |  | 4.21 | %
|                                              |  |                            |             |   |                |   |              |  |      |                    |  |   |                    |   |              |   |            |  |      |  
|Total interest-bearing deposits               |  |                            | 434,094,734 |   |                |   | 4,964,971    |  | 2.31 | %                  |  |   | 369,539,796        |   |              |   | 6,509,301  |  | 3.54 | %
|Borrowings                                    |  |                            | 69,567,776  |   |                |   | 728,169      |  | 2.11 | %                  |  |   | 55,592,703         |   |              |   | 1,109,721  |  | 4.01 | %
|                                              |  |                            |             |   |                |   |              |  |      |                    |  |   |                    |   |              |   |            |  |      |  
|Total interest-bearing liabilities            |  |                            | 503,662,510 |   |                | $ | 5,693,140    |  | 2.28 | %                  |  |   | 425,132,499        |   |              | $ | 7,619,022  |  | 3.60 | %
|Noninterest-bearing liabilities               |  |                            |             |   |                |   |              |  |      |                    |  |   |                    |   |              |   |            |  |      |  
|Demand deposits                               |  |                            | 68,856,298  |   |                |   |              |  |      |                    |  |   | 61,454,242         |   |              |   |            |  |      |  
|Other noninterest-bearing liabilities         |  |                            | 10,183,738  |   |                |   |              |  |      |                    |  |   | 5,464,346          |   |              |   |            |  |      |  
|                                              |  |                            |             |   |                |   |              |  |      |                    |  |   |                    |   |              |   |            |  |      |  
|Total liabilities                             |  |                            | 582,702,546 |   |                |   |              |  |      |                    |  |   | 492,051,087        |   |              |   |            |  |      |  
|Stockholders equity                          |  |                            | 61,401,825  |   |                |   |              |  |      |                    |  |   | 37,719,113         |   |              |   |            |  |      |  
|                                              |  |                            |             |   |                |   |              |  |      |                    |  |   |                    |   |              |   |            |  |      |  
|Total liabilities and stockholders equity    |  | $                          | 644,104,371 |   |                |   |              |  |      |                    |  | $ | 529,770,200        |   |              |   |            |  |      |  
|                                              |  |                            |             |   |                |   |              |  |      |                    |  |   |                    |   |              |   |            |  |      |  
|Net interest income (2)                       |  |                            |             |   |                | $ | 10,483,257   |  |      |                    |  |   |                    |   |              | $ | 8,127,564  |  |      |  
|                                              |  |                            |             |   |                |   |              |  |      |                    |  |   |                    |   |              |   |            |  |      |  
|Interest rate spread (2)(3)                   |  |                            |             |   |                |   |              |  | 2.99 | %                  |  |   |                    |   |              |   |            |  | 2.64 | %
|                                              |  |                            |             |   |                |   |              |  |      |                    |  |   |                    |   |              |   |            |  |      |  
|Net interest margin (2)(4)                    |  |                            |             |   |                |   |              |  | 3.42 | %                  |  |   |                    |   |              |   |            |  | 3.22 | %
|                                              |  |                            |             |   |                |   |              |  |      |                    |  |   |                    |   |              |   |            |  |      |  



|(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 $65,556 adjustment for 2009 and a $61,427 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 $25,670,319 and interim interest income of $754,973 have been reclassified from mortgage banking income to interest income and fees on loans for June 30,
2008 to be consistent with the presentation for June 30, 2009.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Noninterest Income

Total noninterest income was $10,086,148 for the second quarter of 2009, compared to $5,123,811 for the same period in 2008, an increase of $4,962,337, or
96.8%. For the first half of 2009 total noninterest income increased $8,093,122 or 82.3% to $17,930,670 compared to $9,837,548 for the same period in 2008. Mortgage banking revenue growth contributed the majority of this growth in both periods
presented.



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##### Table of Contents

|                                       |  |                                    |            |                                  |   |           |  |      |            |  |   |          
|-------------------------------------- |  | ---------------------------------- | ---------- | -------------------------------- | - | --------- |  | ---- | ---------- |  | - | ---------
|                                       |  | For the Three Months EndedJune 30, |            | For the Six Months EndedJune 30,
|                                       |  | 2009                               |            | 2008                             |   | 2009      |  | 2008
|Mortgage banking income                |  | $                                  | 8,824,954  |                                  | $ | 4,017,390 |  | $    | 15,926,075 |  | $ | 8,007,754
|Investment and insurance commissions   |  |                                    | 229,667    |                                  |   | 409,066   |  |      | 513,672    |  |   | 696,424  
|Service charges and fees               |  |                                    | 371,358    |                                  |   | 335,068   |  |      | 656,827    |  |   | 664,122  
|Security gains, net                    |  |                                    |           |                                  |   | 7,655     |  |      |           |  |   | 10,801   
|Gain on sale of other real estate, net |  |                                    | 14,319     |                                  |   | 32,378    |  |      | 16,455     |  |   | 32,378   
|Bank owned life insurance income       |  |                                    | 64,282     |                                  |   | 59,896    |  |      | 127,257    |  |   | 119,241  
|Title company income                   |  |                                    | 106,701    |                                  |   | 15,146    |  |      | 205,267    |  |   | 53,307   
|Gain on sale of assets, net            |  |                                    | 302,269    |                                  |   | 14,410    |  |      | 302,269    |  |   | 24,410   
|Other                                  |  |                                    | 172,598    |                                  |   | 232,802   |  |      | 182,848    |  |   | 229,111  
|                                       |  |                                    |            |                                  |   |           |  |      |            |  |   |          
|                                       |  | $                                  | 10,086,148 |                                  | $ | 5,123,811 |  | $    | 17,930,670 |  | $ | 9,837,548
|                                       |  |                                    |            |                                  |   |           |  |      |            |  |   |          

Gross mortgage banking income from Monarch Mortgage and our wholly owned commercial mortgage
banking subsidiary, Monarch Capital, LLC, increased 119.7% in the second quarter and 98.9% first six months of 2009 compared to 2008. The majority of this growth has been in the area of residential mortgages. Through June 30, 2009 our
residential mortgage operations have closed 2,404 loans totaling $968.1 million compared to 1,131 closings totaling $304.8 million for the same period 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.

Investment and insurance commissions declined $179,399 or 43.9% in the second quarter of 2009 and $182,752 or 26.2% in for first six months of 2009
compared to 2008. Excluding nonrecurring income of $125,000 which is included in both periods presented for 2008, investment and insurance income decreased $54,399 or 19.2% and $57,752 or 10.1% in the second quarter and first half of 2009 compare to
2008 due to lower production and investment balances. On October 1, 2006, we formed a subsidiary called Virginia Asset Group, LLC (VAG), with an investment professional to sell insurance and non-deposit investment products. Through Monarch
Investment, LLC, we have a 51% ownership in VAG.

Service charges and fees on deposit accounts increased $36,290 in the second quarter of
2009 but decreased $7,295 in the first six 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
half of 2009. There were two security gains in the second quarter of 2008 for a total of three security gains year-to-date recorded on agency bond calls.

Bank Owned Life Insurance (BOLI) is included in the net interest income calculation for yield analysis. We purchased $6.0 million in BOLI during the fourth quarter of 2005. The income from BOLI, which is not subject
to tax, increased $4,386 in the second quarter and $8,016 for the first six months of 2009 compared to 2008. The tax-effective income earnings are $97,397 and $192,813 for the second quarter and first half of 2009 compared to $90,752 and $180,668
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. RESA, which provides title insurance on residential real estate, has benefited from the increased activity in the residential mortgage industry.

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.



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##### Table of Contents

Noninterest Expense

Total noninterest expenses were $11,778,889 for the second quarter and $21,843,603 for the first six months of 2009, an increase of $4,496,511 or 61.7% for the quarter and $7,798,583 or 55.5% year-to-date over the
same periods in 2008. Salaries and employee benefits represent an approximate average of 67% of noninterest expense in all periods presented. Our full time equivalents, at the end of first half of 2009 totaled 321, compared to 272 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 FDIC insurance expense due to notably higher assessment rates and a one-time special assessment to cover the
shortage created by failed banks 2) an increase in loan origination expense related to increased production by Monarch Mortgage; 3) growth and inflation-related increases in occupancy expenses; and 4) increase in legal expenses related to loan
collection and disposition of other real estate owned.



|                                  |  |                                    |            |                                  |   |           |  |      |            |  |   |           
|--------------------------------- |  | ---------------------------------- | ---------- | -------------------------------- | - | --------- |  | ---- | ---------- |  | - | ----------
|                                  |  | For the Three Months EndedJune 30, |            | For the Six Months EndedJune 30,
|                                  |  | 2009                               |            | 2008                             |   | 2009      |  | 2008
|Salaries and employee benefits    |  | $                                  | 7,824,816  |                                  | $ | 4,902,679 |  | $    | 14,965,818 |  | $ | 9,508,101 
|Occupancy expenses                |  |                                    | 600,320    |                                  |   | 557,139   |  |      | 1,174,979  |  |   | 1,047,915 
|Furniture and equipment expense   |  |                                    | 312,055    |                                  |   | 322,801   |  |      | 635,197    |  |   | 620,391   
|Loan origination expenses         |  |                                    | 894,825    |                                  |   | 457,075   |  |      | 1,506,894  |  |   | 924,584   
|Data processing services          |  |                                    | 205,691    |                                  |   | 165,055   |  |      | 413,651    |  |   | 332,430   
|Telephone                         |  |                                    | 108,253    |                                  |   | 98,587    |  |      | 206,013    |  |   | 202,675   
|Stationary and supplies           |  |                                    | 117,742    |                                  |   | 86,818    |  |      | 204,460    |  |   | 185,764   
|Professional fees                 |  |                                    | 155,312    |                                  |   | 76,459    |  |      | 260,829    |  |   | 166,499   
|Marketing expense                 |  |                                    | 86,558     |                                  |   | 103,745   |  |      | 109,578    |  |   | 163,541   
|FDIC Insurance                    |  |                                    | 575,254    |                                  |   | 78,610    |  |      | 830,755    |  |   | 136,210   
|Virginia Franchise Tax            |  |                                    | 116,113    |                                  |   | 95,940    |  |      | 212,053    |  |   | 124,224   
|ATM expense                       |  |                                    | 69,127     |                                  |   | 57,036    |  |      | 131,497    |  |   | 116,194   
|Amortization of intangible assets |  |                                    | 44,643     |                                  |   | 44,643    |  |      | 89,286     |  |   | 89,286    
|Other                             |  |                                    | 668,180    |                                  |   | 235,791   |  |      | 1,102,593  |  |   | 427,206   
|                                  |  |                                    |            |                                  |   |           |  |      |            |  |   |           
|                                  |  | $                                  | 11,778,889 |                                  | $ | 7,282,378 |  | $    | 21,843,603 |  | $ | 14,045,020
|                                  |  |                                    |            |                                  |   |           |  |      |            |  |   |           

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



|                               |  |                                             |           |            |                                           |   |         |   |            |  |       |  
|------------------------------ |  | ------------------------------------------- | --------- | ---------- | ----------------------------------------- | - | ------- | - | ---------- |  | ----- | -
|                               |  | Increase For the Three Months EndedJune 30, |           |            | Increase For the Six Months EndedJune 30, |  
|                               |  | Dollars                                     |           | Percentage |                                           |   | Dollars |   | Percentage | 
|Salaries and employee benefits |  | $                                           | 2,922,137 |            | 59.6                                      | % |         | $ | 5,457,717  |  | 57.4  | %
|FDIC Insurance                 |  |                                             | 496,644   |            | 631.8                                     | % |         |   | 694,545    |  | 509.9 | %
|Loan origination expenses      |  |                                             | 437,750   |            | 95.8                                      | % |         |   | 582,310    |  | 63.0  | %
|Occupancy expenses             |  |                                             | 43,181    |            | 7.8                                       | % |         |   | 127,064    |  | 12.1  | %
|Professional fees              |  |                                             | 78,853    |            | 103.1                                     | % |         |   | 94,330     |  | 56.7  | %

Income Taxes

Our income tax provision was $699,500 for the second quarter of 2009 compared to $446,600 in the prior year and $1,213,900 for the first six months of 2009 compared to $914,800 in 2008. The effective tax rate for the
second quarter of 2009 compared to 2008 was 33.0% and 32.5%, respectively. The effective tax rate for the first half of 2009 was 32.9% compared to 32.6% for the same period in 2008.



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##### Table of Contents

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

GENERAL

Total assets were $666,083,109 at
June 30, 2009 when compared to assets of $597,198,402, at December 31, 2008, an 11.5% increase. On an annual basis total assets increased 15.1% at June 30, 2009 when compared to assets of $578,594,188 at June 30, 2008. Total
loans as of June 30, 2009 were $515.6 million, an increase of $10.9 million, or 2.2%, from $504.7 million at year-end 2008. On an annual basis total loans increased $28.2 million, or 5.8%, from $487.4 million in June 2008. Loans held for sale
were $96.5 million, an increase of $42.1 million from $54.4 million at December 31, 2008, and on an annual basis mortgages held for sale increased $57.0 million from $39.5 million at June 30, 2008 due to increased volume at our mortgage
division. Investment securities were $5.8 million at June 30, 2009, down slightly from $6.3 million at year-end 2008. On an annual basis, investments securities decreased $4.4 million, or 43.4% over June 30, 2008. Cash and cash equivalents
were $22.5 million, an increase of $13.9 million, or 161.6% from $8.6 million at December 31, 2008.

Total deposits were $526,613,784
at June 30, 2009, an increase of $30,527,989 or 6.2% over December 2008 and $62,087,404 or 13.4% higher than June 30, 2008. Noninterest bearing demand deposits increased $5,082,906 over December 2008 and on an annualized basis $9,051,399
over June 30, 2008. On an annualized basis deposits increased $62.1 million or 13.4%. Interest bearing deposits increased $25,445,083 to $442,636,758 million compared to December 31, 2008. On an annual basis interest bearing deposits
increased $53,036,005 million over June 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. In June 2008 total savings accounts, at $5.8 million, were roughly 1.5% 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
$29.5 million and 6.7% of total interest bearing deposits.

Total money market balances were $108.4 million at June 30, 2009, a
decline of $20.9 million compared to $129.3 million at December 31, 2008. On an annual basis, money market accounts have declined $21.0 million compared to $129.4 million at June 30, 2008. Although, through runoff, money market accounts
have been declining in recent years; analysis of the change from December 2008 to June 2009 and the change from June 2008 to June 2009 indicates the current decline may be more a function of seasonality. In addition, our June 30, 2009 balance
is reasonably comparable to September 2008 when we reported money market balances of $110.4 million. Our product remains competitive in the marketplace, especially with high dollar depositors but deposit trends have changed with the current
recession. Many depositors who traditionally considered the flexibility of money markets preferable to time deposits appear to have developed a preference for a more restrictive product. In addition, our money market accounts are generally indexed
to prime, which has declined to historic low levels making the product less competitive.

Certificates of deposits (CDs) have risen in
popularity with the changes noted in money markets, resulting in significant growth in that area. Our regular CD portfolio, which is comprised of CDs with balances of less than $100 thousand, is $186.8 million at June 30, 2009, compared to
$104.5 million at June 30, 2008. Approximately, $29.0 million of this $82.3 million increase is attributable to a CD campaign we ran in the fall of 2008. Our Jumbo CDs, which are CDs with balances of $100 thousand or greater, have declined
$30.4 million to $101.0 at June 30, 2009 compared to June 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 in market CDs.

Stockholders equity was $62.4 million at June 30, 2009, compared to $60.0 million at
December 31, 2008. Components of the change in stockholders equity include net income of $2,479,863, increase in net unrealized gains on available-for-sale securities totaling $8,962, stock based compensation totaling $157,600, exercised
stock options totaling $226,999, net of a preferred stock dividend declaration of $369,541.



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##### Table of Contents

Asset Quality

We had nonperforming assets totaling $5.1 million at June 30, 2009. Net charge-offs for the second quarter and first half of 2009 were $1.5 million and $1.6 million, respectively. Nonperforming assets at June 30, 2009 totaled $5.1
compared to $8.0 million at December 31, 2008. Nonperforming assets traditionally consist of nonaccrual loans, loans past due 90 days or more and still accruing interest, restructured loans and other real estate owned. All of these loans have
been identified as impaired according to Financial Accounting Statement No. 114 Accounting by Creditors for Impairment of a Loan and later amended by Financial Accounting Statement No. 118 Accounting by
Creditors for Impairment of a LoanIncome Recognition and Disclosure. The majority of our nonperforming 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 nonperforming assets in our allowance for loan loss of $1,193,028
at June 30, 2009 and $4,217,970 at December 31, 2008. We continue to demand a high level of credit quality on new loans.



|                                          |  |              |           |   |                  |   |           |  
|----------------------------------------- |  | ------------ | --------- | - | ---------------- | - | --------- | -
|                                          |  | June 30,2009 |           |   | December 31,2008 |  
|Loans 90 days past due and still accruing |  | $            | 469,791   |   |                  | $ |          |  
|Nonaccrual loans                          |  |              | 3,819,497 |   |                  |   | 7,506,337 |  
|Other Real Estate                         |  |              | 801,963   |   |                  |   | 532,932   |  
|                                          |  |              |           |   |                  |   |           |  
|Total Nonperforming Assets                |  | $            | 5,091,251 |   |                  | $ | 8,039,269 |  
|                                          |  |              |           |   |                  |   |           |  
|Nonperforming assets to period end assets |  |              | 0.76      | % |                  |   | 1.35      | %

Allowance for Loan Losses

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

While we believe we have sufficient allowance for our existing portfolio, there can be no assurances that an additional
allowance for losses on existing loans may not be necessary in the future. The allowance for loan losses totaled $9,030,000 and $4,621,000 at June 30, 2009 and June 30, 2008, respectively. The ratio of the allowance for loan losses to
total loans outstanding at June 30, 2009 and 2008 was 1.75% and 0.95%, respectively.

During the second quarter and first six months
of 2009 we recorded $1,837,597 and $2,538,148 in provision expense, respectively, compared to $368,930 and $764,032 for the same periods in 2008. Gross charge-offs for the quarter were $1,524,009 offset by recoveries of $56,412. For the first half
of 2009, gross charge-offs were $1,612,093 and recoveries were $57,945. The table below summarizes the activity in the allowance for loans losses for the three month and six month periods ending June 30, 2009 and 2008.



|                                                              |  |                                    |            |   |                                  |   |           |      |  |   |             |   |  |   |             |  
|------------------------------------------------------------- |  | ---------------------------------- | ---------- | - | -------------------------------- | - | --------- | ---- |  | - | ----------- | - |  | - | ----------- | -
|                                                              |  | For the Three Months EndedJune 30, |            |   | For the Six Months EndedJune 30, |  
|                                                              |  | 2009                               |            |   | 2008                             |   |           | 2009 |  |   | 2008        |  
|Balance, beginning of period                                  |  | $                                  | 8,660,000  |   |                                  | $ | 4,325,000 |      |  | $ | 8,046,000   |   |  | $ | 3,976,000   |  
|Provisions charged to operations                              |  |                                    | 1,837,597  |   |                                  |   | 368,930   |      |  |   | 2,538,148   |   |  |   | 764,032     |  
|Loans charged-off                                             |  |                                    | (1,524,009 | ) |                                  |   | (99,001   | )    |  |   | (1,612,093  | ) |  |   | (156,295    | )
|Recoveries                                                    |  |                                    | 56,412     |   |                                  |   | 26,071    |      |  |   | 57,945      |   |  |   | 37,263      |  
|                                                              |  |                                    |            |   |                                  |   |           |      |  |   |             |   |  |   |             |  
|Balance, end of period                                        |  | $                                  | 9,030,000  |   |                                  | $ | 4,621,000 |      |  | $ | 9,030,000   |   |  | $ | 4,621,000   |  
|                                                              |  |                                    |            |   |                                  |   |           |      |  |   |             |   |  |   |             |  
|Total loans outstanding                                       |  |                                    |            |   |                                  |   |           |      |  |   | 515,627,252 |   |  |   | 487,359,596 |  
|Ratio of allowance for loan losses to total loans outstanding |  |                                    |            |   |                                  |   |           |      |  |   | 1.75        | % |  |   | 0.95        | %



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

Homogenous loans, such as
consumer installment, home equity loans, and smaller consumer loans are not individually reviewed and are generally risk graded at the same levels. The risk grade and reserves are established for each homogenous pool of loans and are based on the
expected net charge-offs from a current trend in delinquencies, losses or historical experience and general economic conditions. Our management believes that the allowance for loan losses is adequate to absorb any inherent losses on existing loans
in our loan portfolio at June 30, 2009.

Liquidity

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

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

We have 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 $89,646,602 with $53,021,297 available at June 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 June 30, 2009, assets pledged and advances outstanding totaled $43,687,392 and $30,581,172, respectively with no excess line available.

Borrowings outstanding under the combined FHLB lines of credit were $62,206,477 at June 30, 2009 and $27,675,272 at December 31, 2008. We had
the following borrowing advances under our Primary line outstanding as of June 30, 2009, with the following final maturities:



|               |            |                 |               
|-------------- | ---------- | --------------- | --------------
|Advance Amount |            | Expiration Date
|$              | 10,000,000 |                 | September 2009
|               | 10,000,000 |                 | November 2009 
|               | 10,000,000 |                 | November 2010 
|               | 1,625,305  |                 | September 2015
|               |            |                 |               
|$              | 31,625,305 |                 |               
|               |            |                 |               

The advance maturing September 2009 is from our daily investment account and carries a variable
rate that changes daily. The interest rate on June 30, 2009 for this advance was 0.43%.

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.



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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 $25k beginning December 2005, with a final payment of $1,025,500 in September 2015. We are utilizing this advance to match-fund several long term fixed rate loans. The interest rate for this advance
is fixed at 4.96%.

Under our LHFS line we had four advances outstanding at June 2009. All four advances mature in October 2009 and are
broken down as follows:



|              |  |                |            |                 |   |           
|------------- |  | -------------- | ---------- | --------------- | - | ----------
|Advance Date  |  | CurrentBalance |            | OriginalBalance
|June 4, 2009  |  | $              | 3,643,171  |                 | $ | 21,455,785
|June 11, 2009 |  | $              | 6,854,435  |                 | $ | 6,854,435 
|June 18, 2009 |  |                | 11,759,636 |                 |   | 11,759,636
|June 25, 2009 |  |                | 8,323,930  |                 |   | 8,323,930 
|              |  |                |            |                 |   |           
|              |  | $              | 30,581,172 |                 | $ | 48,393,786
|              |  |                |            |                 |   |           

In the course of operations, due to fluctuations in loan and deposit levels, we occasionally find
it necessary to purchase Federal Funds on a short-term basis. We also have federal funds lines of credit facilities established with four other banks in the total amount of $23,000,000. At June 30, 2009 there were no outstanding balances on
these lines. We also have access to the Federal Reserve Banks discount window should a liquidity crisis occur.

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

Off-Balance Sheet Arrangements

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

Commitments to extend credit, which amounted to $228.6 million at June 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 June 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 $6.5 million in outstanding standby letters of credit at June 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 Adequacy

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



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##### Table of Contents

amounts and classification are also subject to qualitative judgments by the regulators about components (such as interest rate risk), risk weighting, and
other factors.

The Bank, as a Virginia banking corporation, may pay dividends only out of retained earnings. In addition, regulatory
authorities may limit payment of dividends by any bank, when it is determined that such limitation is in the public interest and necessary to ensure financial soundness of the Bank. Regulatory agencies place certain restrictions on dividends paid
and loans or advances made by the Bank to the Company. The amount of dividends the Bank may pay to the Company, without prior approval, is limited to current year earnings plus retained net profits for the two preceding years. At June 30, 2009,
the amount available was approximately $6.4 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 June 30, 2009, the Bank meets all
capital adequacy requirements to which it is subject.

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



|                                                   |  |                        |        |       |                             |   |         |                                              |        |  |      |         |  |       |        |  |       |  
|-------------------------------------------------- |  | ---------------------- | ------ | ----- | --------------------------- | - | ------- | -------------------------------------------- | ------ |  | ---- | ------- |  | ----- | ------ |  | ----- | -
|                                                   |  | Actual                 |        |       | For CapitalAdequacyPurposes |   |         | To Be WellCapitalized UnderPrompt Corrective |       
|                                                   |  | Amounts                |        | Ratio |                             |   | Amounts |                                              | Ratio  |  |      | Amounts |  | Ratio |       
|                                                   |  | (Dollars in Thousands) |       
|As of June 30, 2009                                |  |                        |        |       |                             |   |         |                                              |        |  |      |         |  |       |        |  |       |  
|Total Risk-Based Capital Ratio                     |  |                        |        |       |                             |   |         |                                              |        |  |      |         |  |       |        |  |       |  
|Consolidated company                               |  | $                      | 78,029 |       | 13.66                       | % |         | $                                            | 45,693 |  | 8.00 | %       |  |       | N/A    |  | N/A   |  
|Bank                                               |  | $                      | 63,114 |       | 11.05                       | % |         | $                                            | 45,693 |  | 8.00 | %       |  | $     | 57,117 |  | 10.00 | %
|(Total Risk-Based Capital to Risk-Weighted Assets) |  |                        |        |       |                             |   |         |                                              |        |  |      |         |  |       |        |  |       |  
|                                                   |  |                        |        |       |                             |  
|Tier 1 Risk-Based Capital Ratio                    |  |                        |        |       |                             |   |         |                                              |        |  |      |         |  |       |        |  |       |  
|Consolidated company                               |  | $                      | 70,872 |       | 12.41                       | % |         | $                                            | 22,840 |  | 4.00 | %       |  |       | N/A    |  | N/A   |  
|Bank                                               |  | $                      | 55,958 |       | 9.80                        | % |         | $                                            | 22,840 |  | 4.00 | %       |  | $     | 34,260 |  | 6.00  | %
|(Tier 1 Capital to Risk-Weighted Assets)           |  |                        |        |       |                             |   |         |                                              |        |  |      |         |  |       |        |  |       |  
|                                                   |  |                        |        |       |                             |  
|Tier 1 Leverage Ratio                              |  |                        |        |       |                             |   |         |                                              |        |  |      |         |  |       |        |  |       |  
|Consolidated company                               |  | $                      | 70,872 |       | 10.86                       | % |         | $                                            | 26,088 |  | 4.00 | %       |  |       | N/A    |  | N/A   |  
|Bank                                               |  | $                      | 55,958 |       | 8.58                        | % |         | $                                            | 26,088 |  | 4.00 | %       |  | $     | 32,610 |  | 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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##### Table of Contents

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

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

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

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.

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



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##### Table of Contents

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

We maintain a system of
internal controls and procedures designed to provide reasonable assurance as to the reliability of our published financial statements and other disclosures included in this report. Within the 90 days prior to the date of this report, 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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##### Table of Contents

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
|------- | ----------------------------------------------------

At
the Annual Meeting of Shareholders on May 7, 2009, the following items were submitted to the security holders of the Bank:

ITEM 1: Election of Directors. The following persons were elected as directors of the Company to serve a three-year term: Taylor B. Grissom, Elizabeth T. Patterson, and Brad E. Schwartz.

ITEM 2: Executive Compensation. The non-binding vote on executive compensation was approved.

ITEM 3: The ratification of the appointment of Goodman & Company, LLP as the Companys independent certified public accountants for the
year ending December 31, 2009 was approved.



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

None.



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##### Table of Contents

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



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

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

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

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

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



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

Form 8-K filed May 8, 2009 to announce the
appointment of principal officers.

Form 8-K filed June 4, 2009 to announce other events.

Form 8-K filed July 20, 2009 to announce the Companys financial performance.



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##### Table of Contents

SIGNATURES

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



|                                                   |  |  |  |                     
|-------------------------------------------------- |  |  |  | --------------------
|MONARCH FINANCIAL HOLDINGS, INC.                   |  |  |  |                     
|                                                   |  | 
|/s/ William F. Rountree, Jr.                       |  |  |  |                     
|William F. Rountree, Jr.                           |  |  |  | Date: August 7, 2009
|President & Chief Executive Officer                |  |  |  |                     
|                                                   |  | 
|/s/ Brad E. Schwartz.                              |  |  |  |                     
|Brad E. Schwartz                                   |  |  |  | Date: August 7, 2009
|Executive Vice President & Chief Financial Officer |  |  |  |                     



32