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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549





FORM 10-Q







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

For Quarterly Period Ended: March 31, 2010

OR



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

Commission File Number: 001-34565





MONARCH
FINANCIAL HOLDINGS, INC.

(Exact name of registrant as specified in its charter)







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

1101 Executive Blvd.

Chesapeake, Virginia 23320

(757) 389-5111

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

Not Applicable

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





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

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

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



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

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

The number of shares of common stock outstanding as of May 10, 2010 was 5,875,534.









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##### Table of Contents

MONARCH FINANCIAL HOLDINGS, INC.

FORM 10-Q

MARCH 31, 2010

INDEX



|         |  |         |  |                                                                                                         |  |   
|-------- |  | ------- |  | ------------------------------------------------------------------------------------------------------- |  | --
|PART I.  |  |         |  | FINANCIAL INFORMATION                                                                                   |  |   
|         |  |         | 
|         |  | ITEM 1. |  | Consolidated Statements of Condition as of March 31, 2010 and December 31, 2009                         |  | 3 
|         |  |         | 
|         |  |         |  | Consolidated Statements of Income for the three months ended March 31, 2010 and March 31,
2009          |  | 4 
|         |  |         | 
|         |  |         |  | Consolidated Statements of Shareholders Equity for the periods ended March 31, 2010 and March 31, 2009 |  | 5 
|         |  |         | 
|         |  |         |  | Consolidated Statements of Cash Flows for the periods ended March 31, 2010 and March 31,
2009           |  | 6 
|         |  |         | 
|         |  |         |  | Notes to Consolidated Financial Statements                                                              |  | 7 
|         |  |         | 
|         |  | ITEM 2. |  | Managements Discussion and Analysis of Financial Condition and Results of
Operations                   |  | 17
|         |  |         | 
|         |  | ITEM 3. |  | Quantitative and Qualitative Disclosures about Market Risk                                              |  | 32
|         |  |         | 
|         |  | ITEM 4. |  | Controls and Procedures                                                                                 |  | 33
|         |  |         | 
|PART II. |  |         |  | OTHER INFORMATION                                                                                       |  |   
|         |  |         | 
|         |  | Item 1. |  | Legal Proceedings                                                                                       |  | 34
|         |  |         | 
|         |  | Item 2. |  | Changes in Securities                                                                                   |  | 34
|         |  |         | 
|         |  | Item 3. |  | Defaults Upon Senior Securities                                                                         |  | 34
|         |  |         | 
|         |  | Item 4. |  | Submissions of Matters to Vote of Security Holders                                                      |  | 34
|         |  |         | 
|         |  | Item 5. |  | Other Information                                                                                       |  | 34
|         |  |         | 
|         |  | Item 6. |  | Exhibits and Reports on Form 8-K                                                                        |  | 35



2



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PART IFINANCIAL INFORMATION



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

MONARCH FINANCIAL HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CONDITION



|                                                                                                                                                 |  |                        |             |   |                  |   |             |  
|------------------------------------------------------------------------------------------------------------------------------------------------ |  | ---------------------- | ----------- | - | ---------------- | - | ----------- | -
|                                                                                                                                                 |  | UnauditedMarch 31,2010 |             |   | December 31,2009 |  
|ASSETS:                                                                                                                                          |  |                        |             |   |                  |   |             |  
|Cash and due from banks                                                                                                                          |  | $                      | 15,802,552  |   |                  | $ | 17,129,674  |  
|Interest bearing bank balances                                                                                                                   |  |                        | 4,562,371   |   |                  |   | 2,541,566   |  
|Federal funds sold                                                                                                                               |  |                        | 7,040,000   |   |                  |   | 14,680,000  |  
|                                                                                                                                                 |  |                        |             |   |                  |   |             |  
|Total cash and cash equivalents                                                                                                                  |  |                        | 27,404,923  |   |                  |   | 34,351,240  |  
|                                                                                                                                                 |  |                       
|Investment securities available-for-sale, at fair value                                                                                          |  |                        | 8,412,989   |   |                  |   | 7,189,930   |  
|Loans held for sale                                                                                                                              |  |                        | 82,664,388  |   |                  |   | 78,997,713  |  
|                                                                                                                                                 |  |                       
|Loans held for investment, net of unearned income                                                                                                |  |                        | 556,784,112 |   |                  |   | 537,700,175 |  
|Less: allowance for loan losses                                                                                                                  |  |                        | (8,650,000  | ) |                  |   | (9,300,000  | )
|                                                                                                                                                 |  |                        |             |   |                  |   |             |  
|Loans, net                                                                                                                                       |  |                        | 548,134,112 |   |                  |   | 528,400,175 |  
|                                                                                                                                                 |  |                       
|Property and equipment, net                                                                                                                      |  |                        | 9,197,815   |   |                  |   | 8,973,042   |  
|Restricted equity securities                                                                                                                     |  |                        | 7,019,700   |   |                  |   | 7,019,700   |  
|Bank owned life insurance                                                                                                                        |  |                        | 7,119,833   |   |                  |   | 7,049,552   |  
|Goodwill                                                                                                                                         |  |                        | 775,000     |   |                  |   | 775,000     |  
|Intangible assets                                                                                                                                |  |                        | 773,812     |   |                  |   | 818,455     |  
|Other assets                                                                                                                                     |  |                        | 13,175,047  |   |                  |   | 15,994,236  |  
|                                                                                                                                                 |  |                        |             |   |                  |   |             |  
|Total assets                                                                                                                                     |  | $                      | 704,677,619 |   |                  | $ | 689,569,043 |  
|                                                                                                                                                 |  |                        |             |   |                  |   |             |  
|                                                                                                                                                 |  |                       
|LIABILITIES:                                                                                                                                     |  |                        |             |   |                  |   |             |  
|Deposits:                                                                                                                                        |  |                        |             |   |                  |   |             |  
|Demand deposits - non-interest bearing                                                                                                           |  | $                      | 93,571,182  |   |                  | $ | 76,168,818  |  
|Demand deposits - interest bearing                                                                                                               |  |                        | 19,980,473  |   |                  |   | 19,670,588  |  
|Savings deposits                                                                                                                                 |  |                        | 23,710,550  |   |                  |   | 22,812,721  |  
|Money market deposits                                                                                                                            |  |                        | 169,476,464 |   |                  |   | 157,308,562 |  
|Time deposits                                                                                                                                    |  |                        | 272,365,780 |   |                  |   | 264,078,199 |  
|                                                                                                                                                 |  |                        |             |   |                  |   |             |  
|Total deposits                                                                                                                                   |  |                        | 579,104,449 |   |                  |   | 540,038,888 |  
|                                                                                                                                                 |  |                       
|Borrowings:                                                                                                                                      |  |                        |             |   |                  |   |             |  
|Trust preferred subordinated debt                                                                                                                |  |                        | 10,000,000  |   |                  |   | 10,000,000  |  
|Federal Home Loan Bank advances                                                                                                                  |  |                        | 42,087,943  |   |                  |   | 66,158,774  |  
|                                                                                                                                                 |  |                        |             |   |                  |   |             |  
|Total borrowings                                                                                                                                 |  |                        | 52,087,943  |   |                  |   | 76,158,774  |  
|                                                                                                                                                 |  |                       
|Other liabilities                                                                                                                                |  |                        | 5,030,634   |   |                  |   | 5,356,227   |  
|                                                                                                                                                 |  |                        |             |   |                  |   |             |  
|Total liabilities                                                                                                                                |  |                        | 636,223,026 |   |                  |   | 621,553,889 |  
|                                                                                                                                                 |  |                        |             |   |                  |   |             |  
|                                                                                                                                                 |  |                       
|STOCKHOLDERS EQUITY:                                                                                                                            |  |                        |             |   |                  |   |             |  
|Preferred stock, $5 par value, 1,185,300 shares authorized; none issued                                                                          |  |                        |            |   |                  |   |            |  
|Noncumulative perpetual preferred stock, series B, liquidation value of $20.0 million, $5 par; 800,000 shares authorized, issued
and outstanding |  |                        | 4,000,000   |   |                  |   | 4,000,000   |  
|Common stock, $5 par value; 20,000,000 shares authorized; issued and outstanding - 5,876,534 and 5,865,534 shares, respectively                  |  |                        | 29,382,670  |   |                  |   | 29,327,670  |  
|Additional paid-in capital                                                                                                                       |  |                        | 22,165,549  |   |                  |   | 22,383,274  |  
|Retained earnings                                                                                                                                |  |                        | 13,090,109  |   |                  |   | 12,360,292  |  
|Accumulated other comprehensive loss                                                                                                             |  |                        | (300,053    | ) |                  |   | (162,939    | )
|                                                                                                                                                 |  |                        |             |   |                  |   |             |  
|Total Monarch Financial Holdings, Inc. stockholders equity                                                                                      |  |                        | 68,338,275  |   |                  |   | 67,908,297  |  
|Noncontrolling interest                                                                                                                          |  |                        | 116,318     |   |                  |   | 106,857     |  
|                                                                                                                                                 |  |                        |             |   |                  |   |             |  
|Total equity                                                                                                                                     |  |                        | 68,454,593  |   |                  |   | 68,015,154  |  
|                                                                                                                                                 |  |                        |             |   |                  |   |             |  
|                                                                                                                                                 |  |                       
|Total liabilities and stockholders equity                                                                                                       |  | $                      | 704,677,619 |   |                  | $ | 689,569,043 |  
|                                                                                                                                                 |  |                        |             |   |                  |   |             |  

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



3



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##### Table of Contents

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

MONARCH FINANCIAL HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF INCOME

(unaudited)



|                                                            |  |                          |            |   |      |   |            |  
|----------------------------------------------------------- |  | ------------------------ | ---------- | - | ---- | - | ---------- | -
|                                                            |  | 3 Months Ended March 31, |           
|                                                            |  | 2010                     |            |   | 2009 |  
|Interest income:                                            |  |                          |            |   |      |   |            |  
|Interest and fees on loans                                  |  | $                        | 8,470,927  |   |      | $ | 7,485,447  |  
|Interest on investment securities                           |  |                          | 54,546     |   |      |   | 64,335     |  
|Interest on federal funds sold                              |  |                          | 8,377      |   |      |   | 894        |  
|Dividends on equity securities                              |  |                          | 18,165     |   |      |   | 15,525     |  
|Interest on other bank accounts                             |  |                          | 376        |   |      |   | 636        |  
|                                                            |  |                          |            |   |      |   |            |  
|Total interest income                                       |  |                          | 8,552,391  |   |      |   | 7,566,837  |  
|                                                            |  |                          |            |   |      |   |            |  
|                                                            |  |                         
|Interest expense:                                           |  |                          |            |   |      |   |            |  
|Interest on deposits                                        |  |                          | 1,861,365  |   |      |   | 2,640,410  |  
|Interest on trust preferred subordinated debt               |  |                          | 121,500    |   |      |   | 76,687     |  
|Interest on borrowings                                      |  |                          | 182,698    |   |      |   | 260,534    |  
|                                                            |  |                          |            |   |      |   |            |  
|Total interest expense                                      |  |                          | 2,165,563  |   |      |   | 2,977,631  |  
|                                                            |  |                          |            |   |      |   |            |  
|                                                            |  |                         
|Net interest income                                         |  |                          | 6,386,828  |   |      |   | 4,589,206  |  
|                                                            |  |                         
|Provision for loan losses                                   |  |                          | 1,327,870  |   |      |   | 700,551    |  
|                                                            |  |                          |            |   |      |   |            |  
|                                                            |  |                         
|Net interest income after provision for loan losses         |  |                          | 5,058,958  |   |      |   | 3,888,655  |  
|                                                            |  |                          |            |   |      |   |            |  
|                                                            |  |                         
|Non-interest income:                                        |  |                          |            |   |      |   |            |  
|Mortgage banking income                                     |  |                          | 7,675,152  |   |      |   | 7,101,121  |  
|Investment and insurance commissions                        |  |                          | 74,320     |   |      |   | 284,005    |  
|Service charges and fees                                    |  |                          | 394,331    |   |      |   | 285,469    |  
|Other                                                       |  |                          | 133,777    |   |      |   | 171,791    |  
|                                                            |  |                          |            |   |      |   |            |  
|Total noninterest income                                    |  |                          | 8,277,580  |   |      |   | 7,842,386  |  
|                                                            |  |                          |            |   |      |   |            |  
|                                                            |  |                         
|Non-interest expenses:                                      |  |                          |            |   |      |   |            |  
|Salaries and employee benefits                              |  |                          | 7,924,546  |   |      |   | 7,141,002  |  
|Occupancy expenses                                          |  |                          | 692,476    |   |      |   | 574,659    |  
|Furniture and equipment expenses                            |  |                          | 375,949    |   |      |   | 323,142    |  
|Loan expense                                                |  |                          | 1,001,184  |   |      |   | 693,457    |  
|Data processing                                             |  |                          | 195,536    |   |      |   | 207,960    |  
|FDIC insurance                                              |  |                          | 248,836    |   |      |   | 255,501    |  
|Other                                                       |  |                          | 1,195,229  |   |      |   | 866,857    |  
|                                                            |  |                          |            |   |      |   |            |  
|Total noninterest expenses                                  |  |                          | 11,633,756 |   |      |   | 10,062,578 |  
|                                                            |  |                          |            |   |      |   |            |  
|                                                            |  |                         
|Income before income taxes                                  |  |                          | 1,702,782  |   |      |   | 1,668,463  |  
|                                                            |  |                         
|Income tax provision                                        |  |                          | (569,700   | ) |      |   | (514,400   | )
|                                                            |  |                          |            |   |      |   |            |  
|                                                            |  |                         
|Net income                                                  |  |                          | 1,133,082  |   |      |   | 1,154,063  |  
|                                                            |  |                         
|Less: Net income attributable to noncontrolling interests   |  |                          | (13,265    | ) |      |   | (93,792    | )
|                                                            |  |                          |            |   |      |   |            |  
|                                                            |  |                         
|Net income attributable to Monarch Financial Holdings, Inc. |  | $                        | 1,119,817  |   |      | $ | 1,060,271  |  
|                                                            |  |                         
|Preferred stock dividend and accretion of discount          |  |                          | (390,000   | ) |      |   | (183,750   | )
|                                                            |  |                          |            |   |      |   |            |  
|Net income available to common stockholders                 |  | $                        | 729,817    |   |      | $ | 876,521    |  
|                                                            |  |                          |            |   |      |   |            |  
|                                                            |  |                         
|Basic net income per share                                  |  | $                        | 0.13       |   |      | $ | 0.16       |  
|Diluted net income per share                                |  | $                        | 0.13       |   |      | $ | 0.16       |  

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



4



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##### Table of Contents

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

MONARCH FINANCIAL HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND COMPREHENSIVE INCOME

(unaudited)



|                                                                                                             |  |              |  |                   |            |         |           |            |          |  |          |                               |  |               |                |   |          |   |          |       |  |   |         |   |  |   |            |  
|------------------------------------------------------------------------------------------------------------ |  | ------------ |  | ----------------- | ---------- | ------- | --------- | ---------- | -------- |  | -------- | ----------------------------- |  | ------------- | -------------- | - | -------- | - | -------- | ----- |  | - | ------- | - |  | - | ---------- | -
|                                                                                                             |  |              |  | AdditionalPaid-In |            |         | Preferred |            | Retained |  |          | AccumulatedOtherComprehensive |  |               | Noncontrolling |   |          |   |         
|                                                                                                             |  | Common Stock |  |                   |            |         |           |           
|                                                                                                             |  | Shares       |  | Amount            |            | Capital |           |            | Stock    |  | Earnings |                               |  | Income (Loss) |                |   | Interest |   |          | Total | 
|Balance - December 31, 2008                                                                                  |  | 5,735,007    |  | $                 | 28,675,035 |         | $         | 8,065,602  |          |  | $        | 14,481,383                    |  | $             | 8,528,094      |   |          | $ | 27,302   |       |  | $ | 111,274 |   |  | $ | 59,888,690 |  
|Comprehensive income:                                                                                        |  |              |  |                   |            |         |           |            |          |  |          |                               |  |               |                |   |          |   |          |       |  |   |         |   |  |   |            |  
|Net income for three months ended March 31, 2009                                                             |  |              |  |                   |            |         |           |            |          |  |          |                               |  |               | 1,060,271      |   |          |   |          |       |  |   | 93,792  |   |  |   | 1,154,063  |  
|Unrealized gain (loss) on securities available-for-sale, net of reclassification adjustment and income taxes |  |              |  |                   |            |         |           |            |          |  |          |                               |  |               |                |   |          |   | (6,628   | )     |  |   |         |   |  |   | (6,628     | )
|                                                                                                             |  |              |  |                   |            |         |           |            |          |  |          |                               |  |               |                |   |          |   |          |       |  |   |         |   |  |   |            |  
|Total comprehensive income                                                                                   |  |              |  |                   |            |         |           |            |          |  |          |                               |  |               |                |   |          |   |          |       |  |   |         |   |  |   | 1,147,435  |  
|                                                                                                             |  |              |  |                   |            |         |           |            |          |  |          |                               |  |               |                |   |          |   |          |       |  |   |         |   |  |   |            |  
|Stock-based compensation expense                                                                             |  |              |  |                   |            |         |           | 78,800     |          |  |          |                               |  |               |                |   |          |   |          |       |  |   |         |   |  |   | 78,800     |  
|Stock options exercised                                                                                      |  | 24,256       |  |                   | 121,280    |         |           | (19,344    | )        |  |          |                               |  |               |                |   |          |   |          |       |  |   |         |   |  |   | 101,936    |  
|Accretion of discount on series A cumulative perpetual preferred warrants                                    |  |              |  |                   |            |         |           | (9,689     | )        |  |          | 9,689                         |  |               |                |   |          |   |          |       |  |   |         |   |  |   |           |  
|Cash dividend declared on series A cumulative perpetual preferred stock (5%)                                 |  |              |  |                   |            |         |           |            |          |  |          |                               |  |               | (183,750       | ) |          |   |          |       |  |   |         |   |  |   | (183,750   | )
|Distributions to noncontrolling interests                                                                    |  |              |  |                   |            |         |           |            |          |  |          |                               |  |               |                |   |          |   |          |       |  |   | (57,683 | ) |  |   | (57,683    | )
|                                                                                                             |  |              |  |                   |            |         |           |            |          |  |          |                               |  |               |                |   |          |   |          |       |  |   |         |   |  |   |            |  
|Balance - March 31, 2009                                                                                     |  | 5,759,263    |  | $                 | 28,796,315 |         | $         | 8,115,369  |          |  | $        | 14,491,072                    |  | $             | 9,404,615      |   |          | $ | 20,674   |       |  | $ | 147,383 |   |  | $ | 60,975,428 |  
|                                                                                                             |  |              |  |                   |            |         |           |            |          |  |          |                               |  |               |                |   |          |   |          |       |  |   |         |   |  |   |            |  
|                                                                                                             |  |              |  |                   |            |         |           |           
|Balance - December 31, 2009                                                                                  |  | 5,865,534    |  | $                 | 29,327,670 |         | $         | 22,383,274 |          |  | $        | 4,000,000                     |  | $             | 12,360,292     |   |          | $ | (162,939 | )     |  | $ | 106,857 |   |  | $ | 68,015,154 |  
|Comprehensive income:                                                                                        |  |              |  |                   |            |         |           |            |          |  |          |                               |  |               |                |   |          |   |          |       |  |   |         |   |  |   |            |  
|Net income for three months ended March 31, 2010                                                             |  |              |  |                   |            |         |           |            |          |  |          |                               |  |               | 1,119,817      |   |          |   |          |       |  |   | 13,265  |   |  |   | 1,133,082  |  
|Unrealized loss on interest rate swap                                                                        |  |              |  |                   |            |         |           |            |          |  |          |                               |  |               |                |   |          |   | (154,113 | )     |  |   |         |   |  |   | (154,113   | )
|Unrealized gain (loss) on securities available-for-sale, net of reclassification adjustment and income taxes |  |              |  |                   |            |         |           |            |          |  |          |                               |  |               |                |   |          |   | 16,999   |       |  |   |         |   |  |   | 16,999     |  
|                                                                                                             |  |              |  |                   |            |         |           |            |          |  |          |                               |  |               |                |   |          |   |          |       |  |   |         |   |  |   |            |  
|Total comprehensive income                                                                                   |  |              |  |                   |            |         |           |            |          |  |          |                               |  |               |                |   |          |   |          |       |  |   |         |   |  |   | 995,968    |  
|                                                                                                             |  |              |  |                   |            |         |           |            |          |  |          |                               |  |               |                |   |          |   |          |       |  |   |         |   |  |   |            |  
|Stock-based compensation expense                                                                             |  | 11,000       |  |                   | 55,000     |         |           | 42,275     |          |  |          |                               |  |               |                |   |          |   |          |       |  |   |         |   |  |   | 97,275     |  
|Cash dividend declared on series B noncumulative perpetual preferred stock (7.8%)                            |  |              |  |                   |            |         |           |            |          |  |          |                               |  |               | (390,000       | ) |          |   |          |       |  |   |         |   |  |   | (390,000   | )
|Redemption of warrants on series A cumulative perpetual preferred stock                                      |  |              |  |                   |            |         |           | (260,000   | )        |  |          |                               |  |               |                |   |          |   |          |       |  |   |         |   |  |   | (260,000   | )
|Contributions from noncontrolling interests                                                                  |  |              |  |                   |            |         |           |            |          |  |          |                               |  |               |                |   |          |   |          |       |  |   | 36,750  |   |  |   | 36,750     |  
|Distributions to noncontrolling interests                                                                    |  |              |  |                   |            |         |           |            |          |  |          |                               |  |               |                |   |          |   |          |       |  |   | (40,554 | ) |  |   | (40,554    | )
|                                                                                                             |  |              |  |                   |            |         |           |            |          |  |          |                               |  |               |                |   |          |   |          |       |  |   |         |   |  |   |            |  
|                                                                                                             |  |              |  |                   |            |         |           |           
|Balance - March 31, 2010                                                                                     |  | 5,876,534    |  | $                 | 29,382,670 |         | $         | 22,165,549 |          |  | $        | 4,000,000                     |  | $             | 13,090,109     |   |          | $ | (300,053 | )     |  | $ | 116,318 |   |  | $ | 68,454,593 |  
|                                                                                                             |  |              |  |                   |            |         |           |            |          |  |          |                               |  |               |                |   |          |   |          |       |  |   |         |   |  |   |            |  

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



5



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##### Table of Contents

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

MONARCH FINANCIAL HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)



|                                                                     |  |                          |             |   |      |   |             |  
|-------------------------------------------------------------------- |  | ------------------------ | ----------- | - | ---- | - | ----------- | -
|                                                                     |  | 3 Months Ended March 31, |            
|                                                                     |  | 2010                     |             |   | 2009 |  
|Operating activities:                                                |  |                          |             |   |      |   |             |  
|Net income attributable to Monarch Financial Holdings, Inc.          |  | $                        | 1,119,817   |   |      | $ | 1,060,271   |  
|Adjustments to reconcile to net cash from operating activities:      |  |                          |             |   |      |   |             |  
|Provision for loan losses                                            |  |                          | 1,327,870   |   |      |   | 700,551     |  
|Depreciation                                                         |  |                          | 265,999     |   |      |   | 245,937     |  
|Accretion of discounts and amortization of premiums, net             |  |                          | 3,747       |   |      |   | 3,037       |  
|Deferral of loan costs, net of deferred fees                         |  |                          | 156,101     |   |      |   | (34,234     | )
|Amortization of intangible assets                                    |  |                          | 44,643      |   |      |   | 44,643      |  
|Stock-based compensation                                             |  |                          | 97,275      |   |      |   | 78,800      |  
|Net income attributable to noncontrolling interests                  |  |                          | 13,265      |   |      |   | 93,792      |  
|Appreciation of bank-owned life insurance                            |  |                          | (70,281     | ) |      |   | (62,975     | )
|(Income) loss from rate lock commitments                             |  |                          | (24,472     | ) |      |   | 8,456       |  
|Net loss on disposition of property and equipment                    |  |                          | 777         |   |      |   |            |  
|Net (gain) loss on on sale of other real estate                      |  |                          | 49,022      |   |      |   | (2,136      | )
|Amortization of deferred gain                                        |  |                          | (40,863     | ) |      |   | (40,862     | )
|Changes in:                                                          |  |                          |             |   |      |   |             |  
|Loans held for sale                                                  |  |                          | (3,666,675  | ) |      |   | (26,399,399 | )
|Interest receivable                                                  |  |                          | (342,468    | ) |      |   | (114,479    | )
|Other assets                                                         |  |                          | 1,898,958   |   |      |   | 156,780     |  
|Other liabilities                                                    |  |                          | (438,843    | ) |      |   | 1,756,513   |  
|                                                                     |  |                          |             |   |      |   |             |  
|Net cash from operating activities                                   |  |                          | 393,872     |   |      |   | (22,505,305 | )
|                                                                     |  |                          |             |   |      |   |             |  
|Investing activities:                                                |  |                          |             |   |      |   |             |  
|Purchases of available-for-sale securities                           |  |                          | (1,749,619  | ) |      |   |            |  
|Proceeds from sales and maturities of available-for-sale securities  |  |                          | 548,569     |   |      |   | 36,949      |  
|Proceeds from sale of other real estate                              |  |                          | 738,085     |   |      |   | 72,136      |  
|Loan originations, net of principal repayments                       |  |                          | (20,726,601 | ) |      |   | (3,071,321  | )
|Purchases of premises and equipment                                  |  |                          | (491,549    | ) |      |   | (101,932    | )
|(Purchase) sale of restricted equity securities, net of redemptions  |  |                          |            |   |      |   | (2,238,200  | )
|                                                                     |  |                          |             |   |      |   |             |  
|Net cash from investing activities                                   |  |                          | (21,681,115 | ) |      |   | (5,302,368  | )
|                                                                     |  |                          |             |   |      |   |             |  
|Financing activities:                                                |  |                          |             |   |      |   |             |  
|Net increase (decrease) in noninterest-bearing deposits              |  |                          | 17,402,364  |   |      |   | (3,605,513  | )
|Net increase in interest-bearing deposits                            |  |                          | 21,663,197  |   |      |   | 29,235,064  |  
|Cash dividends paid on preferred stock                               |  |                          | (390,000    | ) |      |   | (116,795    | )
|Net increase (decrease) of FHLB advances and federal funds purchased |  |                          | (24,070,831 | ) |      |   | 8,490,190   |  
|Contributions from noncontrolling interests                          |  |                          | 36,750      |   |      |   |            |  
|Distributions to noncontrolling interests                            |  |                          | (40,554     | ) |      |   | (57,683     | )
|Redemption of stock warrants                                         |  |                          | (260,000    | ) |      |   |            |  
|Proceeds from issuance of common stock, net of issuance costs        |  |                          |            |   |      |   | 101,936     |  
|                                                                     |  |                          |             |   |      |   |             |  
|Net cash from financing activities                                   |  |                          | 14,340,926  |   |      |   | 34,047,199  |  
|                                                                     |  |                          |             |   |      |   |             |  
|CHANGE IN CASH AND CASH EQUIVALENTS                                  |  |                          | (6,946,317  | ) |      |   | 6,239,526   |  
|CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                       |  |                          | 34,351,240  |   |      |   | 8,596,342   |  
|                                                                     |  |                          |             |   |      |   |             |  
|CASH AND CASH EQUIVALENTS AT END OF PERIOD                           |  | $                        | 27,404,923  |   |      | $ | 14,835,868  |  
|                                                                     |  |                          |             |   |      |   |             |  
|                                                                     |  |                         
|SUPPLEMENTAL SCHEDULES AND CASH FLOW INFORMATION                     |  |                          |             |   |      |   |             |  
|Cash paid for:                                                       |  |                          |             |   |      |   |             |  
|Interest on deposits and other borrowings                            |  | $                        | 2,176,039   |   |      | $ | 2,576,024   |  
|Income taxes                                                         |  | $                        | 33,700      |   |      | $ | 800,000     |  
|Loans transferred to foreclosed real estate during the year          |  | $                        | 243,750     |   |      | $ | 465,408     |  
|Loans to facilitate sale of real estate                              |  | $                        | 735,057     |   |      | $ |            |  

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



6



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##### Table of Contents

MONARCH FINANCIAL HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. BASIS OF PRESENTATION

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

Recent Issued Accounting Standards

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

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

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

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



7



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##### Table of Contents

MONARCH FINANCIAL HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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

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

In May 2009, the FASB
issued guidance (ASC 855-10) that establishes general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. In particular, it sets
forth: a) the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements; b) the circumstances under
which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements; and c) the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. We
adopted the subsequent event guidance in the quarter ended June 30, 2009, which did not have a significant impact on our consolidated financial statements.

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

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

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

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



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##### Table of Contents

MONARCH FINANCIAL HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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

NOTE 2. GENERAL

We are a Virginia-chartered bank holding company engaged in business and consumer banking, investment and insurance sales, and mortgage
origination and brokerage. We were created on June 1, 2006 through a reorganization plan, under the laws of the Commonwealth of Virginia, in which Monarch Bank became our wholly-owned subsidiary. Monarch Bank was incorporated on May 1,
1998, and opened for business on April 14, 1999. Our corporate office and main office are located in the Greenbrier area of Chesapeake. In addition we have 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 two offices in Kitty Hawk and Nags Head.

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

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

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

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

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

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

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



9



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##### Table of Contents

MONARCH FINANCIAL HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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

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

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

NOTE 3. EARNINGS PER
SHARE (EPS)

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



|                                                            |  |                          |           |   |      |   |           |  
|----------------------------------------------------------- |  | ------------------------ | --------- | - | ---- | - | --------- | -
|                                                            |  | 3 months ended March 31, |          
|                                                            |  | 2010                     |           |   | 2009 |  
|Net income (numerator, basic and diluted)                   |  | $                        | 1,119,817 |   |      | $ | 1,060,271 |  
|Less: cumulative perpetual preferred dividend and accretion |  |                          | (390,000  | ) |      |   | (183,750  | )
|                                                            |  |                          |           |   |      |   |           |  
|Net income (numerator, basic and diluted)                   |  |                          | 729,817   |   |      |   | 876,521   |  
|Weighted average shares outstanding (denominator)           |  |                          | 5,700,238 |   |      |   | 5,617,287 |  
|                                                            |  |                          |           |   |      |   |           |  
|Income per common share - basic                             |  | $                        | 0.13      |   |      | $ | 0.16      |  
|                                                            |  |                          |           |   |      |   |           |  
|Weighted average shares - diluted (denominator)             |  |                          | 5,753,067 |   |      |   | 5,630,287 |  
|                                                            |  |                          |           |   |      |   |           |  
|Income per common share - diluted                           |  | $                        | 0.13      |   |      | $ | 0.16      |  
|                                                            |  |                          |           |   |      |   |           |  
|Dilutive effect- average number of shares                   |  |                          | 52,829    |   |      |   | 13,000    |  

For the three months
ended March 31, 2010 and 2009, average options to purchase 155,056 and 308,564 shares respectively, were not included in the computation of earnings per common share because they were anti-dilutive.

NOTE 4. FAIR VALUE ACCOUNTING

Fair Value Hierarchy and Fair Value Measurement

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



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



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



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



10



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##### Table of Contents

MONARCH FINANCIAL HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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

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



|                                           |  |                                                 |            |                                                             |   |                                            |  |                                         |            |  |   |          
|------------------------------------------ |  | ----------------------------------------------- | ---------- | ----------------------------------------------------------- | - | ------------------------------------------ |  | --------------------------------------- | ---------- |  | - | ---------
|                                           |  | Fair Value Measurements at Reporting Date Using
|Description                                |  | Fair Value                                      |            | Quoted Prices inActive Marketsfor IdenticalAssets (Level 1) |   | SignificantOtherObservableInputs (Level 2) |  | SignificantUnobservableInputs (Level 3)
|Assets at March 31, 2010                   |  |                                                 |            |                                                             |   |                                            |  |                                         |            |  |   |          
|Investment securities - available for sale |  | $                                               | 8,412,989  |                                                             | $ |                                           |  | $                                       | 8,412,989  |  | $ |         
|Restricted equity securities               |  |                                                 | 7,019,700  |                                                             |   |                                            |  |                                         |            |  |   | 7,019,700
|Loans held for sale                        |  |                                                 | 82,664,388 |                                                             |   |                                            |  |                                         | 82,664,388 |  |   |          
|Rate lock commitments, net                 |  |                                                 | 828,712    |                                                             |   |                                           |  |                                         |           |  |   | 828,712  
|                                           |  |                                                 |            |                                                             |   |                                            |  |                                         |            |  |   |          
|Total Assets                               |  | $                                               | 98,925,789 |                                                             | $ |                                           |  | $                                       | 91,077,377 |  | $ | 7,848,412
|                                           |  |                                                 |            |                                                             |   |                                            |  |                                         |            |  |   |          
|Derivative financial liability             |  | $                                               | 351,257    |                                                             | $ |                                           |  | $                                       | 351,257    |  | $ |         
|                                           |  |                                                 |            |                                                             |   |                                            |  |                                         |            |  |   |          
|                                           |  |                                                 |            |                                                            
|Assets at December 31, 2009                |  |                                                 |            |                                                             |   |                                            |  |                                         |            |  |   |          
|Investment securities - available for sale |  | $                                               | 7,189,930  |                                                             | $ |                                           |  | $                                       | 7,189,930  |  | $ |         
|Restricted equity securities               |  |                                                 | 7,019,700  |                                                             |   |                                            |  |                                         |            |  |   | 7,019,700
|Loans held for sale                        |  |                                                 | 78,997,713 |                                                             |   |                                            |  |                                         | 78,997,713 |  |   |          
|Rate lock commitments, net                 |  |                                                 | 804,240    |                                                             |   |                                           |  |                                         |           |  |   | 804,240  
|                                           |  |                                                 |            |                                                             |   |                                            |  |                                         |            |  |   |          
|Total Assets                               |  | $                                               | 94,011,583 |                                                             | $ |                                           |  | $                                       | 86,187,643 |  | $ | 7,823,940
|                                           |  |                                                 |            |                                                             |   |                                            |  |                                         |            |  |   |          
|Derivative financial liability             |  | $                                               | 197,143    |                                                             | $ |                                           |  | $                                       | 197,143    |  | $ |         
|                                           |  |                                                 |            |                                                             |   |                                            |  |                                         |            |  |   |          

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



|                               |  |      |           |      |   |          
|------------------------------ |  | ---- | --------- | ---- | - | ---------
|                               |  | 2010 |           | 2009
|Balance, January 1             |  | $    | 7,019,700 |      | $ | 3,575,450
|Issuances and settlements, net |  |      |          |      |   | 2,238,200
|Income ( loss)                 |  |      |          |      |   |         
|                               |  |      |           |      |   |          
|Balance, March 31              |  | $    | 7,019,700 |      | $ | 5,813,650
|                               |  |      |           |      |   |          

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



|                               |  |      |          |   |      |   |          |  
|------------------------------ |  | ---- | -------- | - | ---- | - | -------- | -
|                               |  | 2010 |          |   | 2009 |  
|Balance, January 1             |  | $    | 804,240  |   |      | $ | 645,484  |  
|Issuances and settlements, net |  |      | (804,240 | ) |      |   | (645,484 | )
|Income ( loss)                 |  |      | 828,712  |   |      |   | 637,028  |  
|                               |  |      |          |   |      |   |          |  
|Balance, March 31              |  | $    | 828,712  |   |      | $ | 637,028  |  
|                               |  |      |          |   |      |   |          |  



11



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##### Table of Contents

MONARCH FINANCIAL HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The following table provides quantitative disclosures about the fair value measurements
of our assets related to continuing operations which are measured at fair value on a nonrecurring basis as of March 31, 2010 and 2009:



|                                |  |                                                 |           |                                                             |   |                                            |  |                                         |   |  |   |          
|------------------------------- |  | ----------------------------------------------- | --------- | ----------------------------------------------------------- | - | ------------------------------------------ |  | --------------------------------------- | - |  | - | ---------
|                                |  | Fair Value Measurements at Reporting Date Using
|Description                     |  | Fair Value                                      |           | Quoted Prices inActive Marketsfor IdenticalAssets (Level 1) |   | SignificantOtherObservableInputs (Level 2) |  | SignificantUnobservableInputs (Level 3)
|At March 31, 2010               |  |                                                 |           |                                                             |   |                                            |  |                                         |   |  |   |          
|Real estate owned               |  | $                                               | 837,285   |                                                             | $ |                                           |  | $                                       |  |  | $ | 837,285  
|Restructured and impaired loans |  |                                                 | 5,243,827 |                                                             |   |                                           |  |                                         |  |  |   | 5,243,827
|At December 31, 2009            |  |                                                 |           |                                                             |   |                                            |  |                                         |   |  |   |          
|Real estate owned               |  | $                                               | 2,115,700 |                                                             | $ |                                           |  | $                                       |  |  | $ | 2,115,700
|Restructured and impaired loans |  |                                                 | 4,669,494 |                                                             |   |                                           |  |                                         |  |  |   | 4,669,494

For the three
months ended March 31, 2010, we recorded a loss on sale of the real estate owned of $49,023, and for the three months ended March 31, 2009, we recorded a gain on the sale of real estate owned of $2,136. These amounts are recorded within
other noninterest income for the periods indicated.

At the time a loan secured by real estate becomes real estate owned we
record the property at the lower of its carrying amount or fair value. Upon foreclosure and through liquidation, we evaluate the propertys fair value as compared to its carrying amount and record a valuation adjustment when the carrying amount
exceeds fair value. Any valuation adjustments at the time a loan becomes real estate owned is charged to the allowance for loan losses. Any subsequent valuation adjustments are applied to earnings in our consolidated statements of income. We
recorded a loss of $51,955 and $0 in the three months ended March 31, 2010 and March 31, 2009, respectively, due to valuation adjustments on real estate owned in our consolidated statements of income.

Fair Value Option for Financial Assets and Financial Liabilities

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

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

Fair Value of Financial Instruments

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



12



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MONARCH FINANCIAL HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|                                |  |                |             |                   |   |               |  |           |             |  |   |            
|------------------------------- |  | -------------- | ----------- | ----------------- | - | ------------- |  | --------- | ----------- |  | - | -----------
|                                |  | March 31, 2010 |             | December 31, 2009
|                                |  | CarryingValue  |             | FairValue         |   | CarryingValue |  | FairValue
|Financial Assets                |  |                |             |                   |   |               |  |           |             |  |   |            
|Cash and cash equivalents       |  | $              | 27,404,923  |                   | $ | 27,404,923    |  | $         | 34,351,240  |  | $ | 34,351,240 
|Investment securities           |  |                | 8,412,989   |                   |   | 8,421,989     |  |           | 7,189,930   |  |   | 7,189,930  
|Mortgage loans held for sale    |  |                | 82,664,388  |                   |   | 82,664,388    |  |           | 78,997,713  |  |   | 78,997,713 
|Loans held for investment (net) |  |                | 556,784,112 |                   |   | 579,960,551   |  |           | 528,400,175 |  |   | 550,274,264
|Accrued interest receivable     |  |                | 1,958,876   |                   |   | 1,958,876     |  |           | 1,616,408   |  |   | 1,616,408  
|Restricted equity securities    |  |                | 7,019,700   |                   |   | 7,019,700     |  |           | 7,019,700   |  |   | 7,019,700  
|Financial Liabilities           |  |                |             |                   |   |               |  |           |             |  |   |            
|                                |  |                |             |                  
|Financial Liabilities           |  |                |             |                   |   |               |  |           |             |  |   |            
|Deposit liabilities             |  | $              | 579,104,449 |                   | $ | 576,345,314   |  | $         | 540,038,888 |  | $ | 537,475,766
|Total borrowings                |  |                | 52,087,943  |                   |   | 51,731,541    |  |           | 76,158,774  |  |   | 75,538,504 
|Accrued interest payable        |  |                | 125,503     |                   |   | 125,503       |  |           | 135,980     |  |   | 135,980    
|Derivative financial liability  |  |                | 351,257     |                   |   | 351,257       |  |           | 197,143     |  |   | 197,143    

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

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

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

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

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

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

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

The carrying amounts of accrued interestapproximate fair value.

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

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

NOTE 5. COMPREHENSIVE
INCOME

Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net
income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are
components of comprehensive income. Components of other comprehensive income are unrealized gains and losses on available-for-sale securities and a derivative financial liability related to an interest rate swap. The following is a detail of
comprehensive income for the three months ended March 31, 2010 and 2009:



13



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##### Table of Contents

MONARCH FINANCIAL HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|                                                                                         |  |                              |           |   |      |   |           |  
|---------------------------------------------------------------------------------------- |  | ---------------------------- | --------- | - | ---- | - | --------- | -
|                                                                                         |  | Three months ended March 31, |          
|                                                                                         |  | 2010                         |           |   | 2009 |  
|Net Income                                                                               |  | $                            | 1,133,082 |   |      | $ | 1,154,063 |  
|Change in unrealized gains (losses) on securities available-for-sale, net of tax expense |  |                              | 16,999    |   |      |   | (6,628    | )
|Change in unrealized losses on a derivative financial liability, gross                   |  |                              | (154,113  | ) |      |   |          |  
|                                                                                         |  |                              |           |   |      |   |           |  
|Total comprehensive income                                                               |  |                              | 995,968   |   |      |   | 1,147,435 |  
|Less: Comprehensive income attributable to noncontrolling interests                      |  |                              | (13,265   | ) |      |   | (93,792   | )
|                                                                                         |  |                              |           |   |      |   |           |  
|Comprehensive income attributable to Monarch Financial Holdings, Inc.                    |  | $                            | 982,703   |   |      | $ | 1,053,643 |  
|                                                                                         |  |                              |           |   |      |   |           |  
|                                                                                         |  |                             
|Unrealized holding (losses) gains during the period                                      |  | $                            | 25,756    |   |      | $ | (10,043   | )
|                                                                                         |  |                              |           |   |      |   |           |  
|Total other comprehensive (loss) gain before income tax expense                          |  |                              | 25,756    |   |      |   | (10,043   | )
|Income tax benefit (expense)                                                             |  |                              | (8,757    | ) |      |   | 3,415     |  
|                                                                                         |  |                              |           |   |      |   |           |  
|Net unrealized (losses) gains                                                            |  | $                            | 16,999    |   |      | $ | (6,628    | )
|                                                                                         |  |                              |           |   |      |   |           |  

NOTE 6. STOCK-BASED COMPENSATION

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

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

NOTE 7. SEGMENT REPORTING

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

Segment information for the three months ended March 31, 2010 and 2009
is shown in the following table.



14



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MONARCH FINANCIAL HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Selected Financial Information



|                                                           |  |                            |             |   |                           |   |            |                          |  |   |             |   |  |   |             |  
|---------------------------------------------------------- |  | -------------------------- | ----------- | - | ------------------------- | - | ---------- | ------------------------ |  | - | ----------- | - |  | - | ----------- | -
|                                                           |  | Commercialand OtherBanking |             |   | MortgageBankingOperations |   |            | IntersegmentEliminations |  |   | Total       |  
|Three Months Ended March 31, 2010                          |  |                            |             |   |                           |   |            |                          |  |   |             |   |  |   |             |  
|Net interest income after provision for loan losses        |  | $                          | 5,058,958   |   |                           | $ | 458,550    |                          |  | $ | (458,550    | ) |  | $ | 5,058,958   |  
|Noninterest income                                         |  |                            | 579,667     |   |                           |   | 8,061,228  |                          |  |   | (363,315    | ) |  |   | 8,277,580   |  
|Noninterest expenses                                       |  |                            | (3,789,832  | ) |                           |   | (7,940,396 | )                        |  |   | 96,472      |   |  |   | (11,633,756 | )
|                                                           |  |                            |             |   |                           |   |            |                          |  |   |             |   |  |   |             |  
|Net income before income taxes and noncontrolling interest |  | $                          | 1,848,793   |   |                           | $ | 579,382    |                          |  | $ | (725,393    | ) |  | $ | 1,702,782   |  
|                                                           |  |                            |             |   |                           |   |            |                          |  |   |             |   |  |   |             |  
|                                                           |  |                            |             |  
|Three Months Ended March 31, 2009                          |  |                            |             |   |                           |   |            |                          |  |   |             |   |  |   |             |  
|Net interest income after provision for loan losses        |  | $                          | 3,888,655   |   |                           | $ | 876,521    |                          |  | $ | (876,521    | ) |  | $ | 3,888,655   |  
|Noninterest income                                         |  |                            | 1,478,412   |   |                           |   | 7,357,459  |                          |  |   | (993,485    | ) |  |   | 7,842,386   |  
|Noninterest expenses                                       |  |                            | (3,730,291  | ) |                           |   | (6,709,799 | )                        |  |   | 377,512     |   |  |   | (10,062,578 | )
|                                                           |  |                            |             |   |                           |   |            |                          |  |   |             |   |  |   |             |  
|Net income before income taxes and noncontrolling interest |  | $                          | 1,636,776   |   |                           | $ | 1,524,181  |                          |  | $ | (1,492,494  | ) |  | $ | 1,668,463   |  
|                                                           |  |                            |             |   |                           |   |            |                          |  |   |             |   |  |   |             |  
|                                                           |  |                            |             |  
|Segment Assets                                             |  |                            |             |   |                           |   |            |                          |  |   |             |   |  |   |             |  
|March 31, 2010                                             |  | $                          | 706,122,790 |   |                           | $ | 89,825,414 |                          |  | $ | (91,270,585 | ) |  | $ | 704,677,619 |  
|December 31, 2009                                          |  | $                          | 690,323,668 |   |                           | $ | 86,147,206 |                          |  | $ | (86,901,831 | ) |  | $ | 689,569,043 |  

NOTE 8. GOODWILL AND INTANGIBLE
ASSETS

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

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



|                                             |  |               |           |   |                  |   |           |  
|-------------------------------------------- |  | ------------- | --------- | - | ---------------- | - | --------- | -
|                                             |  | March 31,2010 |           |   | December 31,2009 |  
|Amortizable intangible assets                |  | $             | 1,250,000 |   |                  | $ | 1,250,000 |  
|Accumulated amortization - intangible assets |  |               | (476,188  | ) |                  |   | (431,545  | )
|                                             |  |               |           |   |                  |   |           |  
|Amortizable intangible assets, net           |  | $             | 773,812   |   |                  | $ | 818,455   |  
|                                             |  |               |           |   |                  |   |           |  
|                                             |  |              
|Goodwill                                     |  | $             | 775,000   |   |                  | $ | 775,000   |  
|                                             |  |               |           |   |                  |   |           |  

Amortization expense for intangible assets totaled $44,643 for each of the three month periods, ending
March 31, 2010 and 2009.



|                                                    |  |   |        
|--------------------------------------------------- |  | - | -------
|Estimated Amortization Expense:                     |  |   |        
|For the remaining months of the year ended 12/31/10 |  |   | 133,929
|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
|                                                    |  |   |        
|                                                    |  | $ | 773,812
|                                                    |  |   |        

NOTE 9. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES

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



15



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##### Table of Contents

MONARCH FINANCIAL HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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

Our credit exposure, if any, on the interest rate swap is limited to the net
favorable value (net of any collateral pledged) and interest payments of the swap by the counterparty. Conversely, when an interest rate swap is in a liability position we are required to post collateral to PNC which is evaluated monthly and
adjusted based on the fair value of the hedge on the last day of the month. The fair value of this swap instrument was a liability of $351 thousand at March 31, 2010 for which our collateral requirement on March 31, 2010, was $400
thousand.

NOTE 10. SUBSEQUENT EVENTS

On May 6, 2010, our Board of Directors declared a semi-annual cash dividend of $0.07 per share to our Common Shareholders of record
on May 20, 2010, to be paid on June 15, 2010.



16



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##### Table of Contents

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

MONARCH FINANCIAL
HOLDINGS, INC.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

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

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

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

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



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



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



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



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



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



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

A summary of our significant risk factors is set forth in Note 1 to the consolidated financial statements in our 2009 Form 10-K.

Net Income

Net income was $1,120 thousand at March 31, 2010, compared to $1,060 thousand at March 31, 2009, an increase of $60 thousand or
5.7%. Basic and diluted earnings per share were $0.13 for the first quarter of 2010 compared to $0.16 for the first quarter of 2009.

Two important and commonly used measures of profitability are return on assets (net income as a percentage of average total assets) and
return on equity (net income as a percentage of average stockholders equity). Our annualized return on assets was 0.67% compared to 0.69%, for the three months periods ended March 31, 2010 and 2009, respectively. Our annualized return on
equity for the first quarter of 2010 was 6.68% compared to 7.10% in 2009. When comparing the first quarter of 2010 to the same period in 2009, both of these measures declined due to a significant increase in provision expense in the first quarter of
2010.

Net interest income increased $1.8 million and non-interest income increased $435 thousand in the first quarter of
2010, compared to 2009. Higher loan yield coupled with lower interest costs associated with our deposits contributed to improvement in our net interest income and greater production efficiency from our mortgage division was the source of the
increase in non-interest income.



17



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##### Table of Contents

Our provision for loan losses increased $627 thousand through March 2010 compared to the
same period in 2009 due to a higher level of charged-off loans taken during the period. Non-interest expense increased $1.6 million for the quarter, with the areas of greatest non-interest expense growth in salaries and benefits and loan origination
expense.

Net Interest Income

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

Net interest income increased $1.8 million due to re-pricing
opportunities of both assets and liabilities in a low, but stable, rate environment. Interest rates have remained at a record low for an extended period, which has allowed us to realign our longer term liability costs with that of our assets. The
federal funds rate that is set by the Federal Reserve Banks Federal Open Market Committee has been 0.25% since December 2008. For comparable periods, the Wall Street Journal Prime Rate (WSJ), which generally moves with the federal
funds rate, was 3.25%. A stable, though low, rate environment has allowed us to renegotiate the pricing of our interest bearing liabilities and assets to terms which should be more favorable to us in the future when rates begin to rise.

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

Interest and fees on loans are the largest component of our interest income. At March 31, 2010, 99% or $418 million of our
commercial and mortgage portfolio was either a fixed rate or variable rate loan with a floor, compared to 82% or $302 million at March 31, 2009. The yield on our loan portfolio has increased to 5.73%, a 43 basis point increase through
March 31, 2010 compared to 5.32% for the same period in 2009. These changes coupled with loan growth have increased interest and fees on loans $985 thousand, quarter over quarter.

Concurrent with changes to our loan portfolio, we have replaced or re-priced, higher cost, liabilities with lower cost liabilities. At
March 2010, the blended cost on deposits has declined 88 basis points when compared to the first three months of 2009. The cost of our time deposits has decreased 132 basis points despite a $7 million increase in our time deposits outstanding. Total
interest expense declined $812 thousand in the first quarter of 2010 when compared to 2009.

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

Our net interest
rate spread on a tax-equivalent basis increased 103 basis points to 3.83% for first three months of 2010 when compared to 2.80% for the same period in 2009. Yield on earning assets increased 26 basis points to 5.51% in 2010 compared to 5.25% for the
first three months of 2009, while the cost of interest bearing liabilities decreased 77 basis points to 1.68% from 2.45%, 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 6.10% for the first quarter of 2010 compared to 5.70% for the same period in 2009.



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In July, 2006, we added additional capital through the issuance of $10,000,000 in trust
preferred securities. These securities are treated as subordinated debt and have been included in other borrowings. The cost on trust preferred securities increased to an average of 4.86% from 3.07% in the first quarter of 2010 compared to 2009.

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.

NET INTEREST INCOME ANALYSIS

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



|                                              |  |                             |             |   |                |   |              |  |      |                    |  |   |                    |   |              |   |           |  |      |  
|--------------------------------------------- |  | --------------------------- | ----------- | - | -------------- | - | ------------ |  | ---- | ------------------ |  | - | ------------------ | - | ------------ | - | --------- |  | ---- | -
|                                              |  | For Periods Ended March 31, |            
|                                              |  | 2010                        |             |   | 2009           |  
|                                              |  | AverageBalance              |             |   | Income/Expense |   | YieldRate(1) |  |      | AverageBalance (5) |  |   | Income/Expense (5) |   | YieldRate(1) |  
|ASSETS                                        |  |                             |             |   |                |   |              |  |      |                    |  |   |                    |   |              |   |           |  |      |  
|Securities, at amortized cost                 |  | $                           | 8,037,953   |   |                | $ | 54,546       |  | 2.75 | %                  |  | $ | 6,326,942          |   |              | $ | 64,335    |  | 4.12 | %
|Loans, net                                    |  |                             | 599,490,920 |   |                |   | 8,470,927    |  | 5.73 | %                  |  |   | 572,027,730        |   |              |   | 7,485,447 |  | 5.32 | %
|Federal funds sold                            |  |                             | 13,101,462  |   |                |   | 8,377        |  | 0.26 | %                  |  |   | 1,365,922          |   |              |   | 894       |  | 0.27 | %
|Dividend-earning restricted equity securities |  |                             | 7,019,700   |   |                |   | 18,165       |  | 1.05 | %                  |  |   | 4,762,508          |   |              |   | 15,525    |  | 1.33 | %
|Deposits in other banks                       |  |                             | 2,719,221   |   |                |   | 376          |  | 0.06 | %                  |  |   | 1,914,904          |   |              |   | 636       |  | 0.14 | %
|Bank owned life insurance (2)                 |  |                             | 7,078,127   |   |                |   | 106,484      |  | 6.10 | %                  |  |   | 6,813,427          |   |              |   | 95,417    |  | 5.70 | %
|                                              |  |                             |             |   |                |   |              |  |      |                    |  |   |                    |   |              |   |           |  |      |  
|Total earning assets                          |  |                             | 637,447,383 |   |                |   | 8,658,875    |  | 5.51 | %                  |  |   | 593,211,433        |   |              |   | 7,662,254 |  | 5.25 | %
|                                              |  |                             |             |   |                |   |              |  |      |                    |  |   |                    |   |              |   |           |  |      |  
|Less: Allowance for loan losses               |  |                             | (9,418,064  | ) |                |   |              |  |      |                    |  |   | (8,207,981         | ) |              |   |           |  |      |  
|Nonperforming loans                           |  |                             | 8,438,496   |   |                |   |              |  |      |                    |  |   | 7,671,602          |   |              |   |           |  |      |  
|Total nonearning assets                       |  |                             | 39,986,896  |   |                |   |              |  |      |                    |  |   | 32,966,660         |   |              |   |           |  |      |  
|                                              |  |                             |             |   |                |   |              |  |      |                    |  |   |                    |   |              |   |           |  |      |  
|Total assets                                  |  | $                           | 676,454,711 |   |                |   |              |  |      |                    |  | $ | 625,641,714        |   |              |   |           |  |      |  
|                                              |  |                             |             |   |                |   |              |  |      |                    |  |   |                    |   |              |   |           |  |      |  
|LIABILITIES and STOCKHOLDERS EQUITY          |  |                             |             |   |                |   |              |  |      |                    |  |   |                    |   |              |   |           |  |      |  
|Interest-bearing deposits:                    |  |                             |             |   |                |   |              |  |      |                    |  |   |                    |   |              |   |           |  |      |  
|Checking                                      |  | $                           | 19,006,338  |   |                | $ | 17,615       |  | 0.38 | %                  |  | $ | 14,903,732         |   |              | $ | 13,828    |  | 0.38 | %
|Regular savings                               |  |                             | 23,056,521  |   |                |   | 45,982       |  | 0.81 | %                  |  |   | 29,335,887         |   |              |   | 108,049   |  | 1.49 | %
|Money market savings                          |  |                             | 159,592,985 |   |                |   | 487,496      |  | 1.24 | %                  |  |   | 125,203,823        |   |              |   | 390,369   |  | 1.26 | %
|Certificates of deposit $100,000 and over     |  |                             | 82,504,438  |   |                |   | 375,130      |  | 1.84 | %                  |  |   | 97,122,567         |   |              |   | 659,847   |  | 2.76 | %
|Under $100,000                                |  |                             | 187,056,219 |   |                |   | 935,142      |  | 2.03 | %                  |  |   | 165,102,790        |   |              |   | 1,468,317 |  | 3.61 | %
|                                              |  |                             |             |   |                |   |              |  |      |                    |  |   |                    |   |              |   |           |  |      |  
|Total interest-bearing deposits               |  |                             | 471,216,501 |   |                |   | 1,861,365    |  | 1.60 | %                  |  |   | 431,668,799        |   |              |   | 2,640,410 |  | 2.48 | %
|Borrowings                                    |  |                             | 51,470,984  |   |                |   | 304,198      |  | 2.40 | %                  |  |   | 61,541,527         |   |              |   | 337,221   |  | 2.22 | %
|                                              |  |                             |             |   |                |   |              |  |      |                    |  |   |                    |   |              |   |           |  |      |  
|Total interest-bearing liabilities            |  |                             | 522,687,485 |   |                | $ | 2,165,563    |  | 1.68 | %                  |  |   | 493,210,326        |   |              | $ | 2,977,631 |  | 2.45 | %
|Noninterest-bearing liabilities               |  |                             |             |   |                |   |              |  |      |                    |  |   |                    |   |              |   |           |  |      |  
|Demand deposits                               |  |                             | 77,468,686  |   |                |   |              |  |      |                    |  |   | 65,898,695         |   |              |   |           |  |      |  
|Other noninterest-bearing liabilities         |  |                             | 8,320,790   |   |                |   |              |  |      |                    |  |   | 5,974,068          |   |              |   |           |  |      |  
|                                              |  |                             |             |   |                |   |              |  |      |                    |  |   |                    |   |              |   |           |  |      |  
|Total liabilities                             |  |                             | 608,476,961 |   |                |   |              |  |      |                    |  |   | 565,083,089        |   |              |   |           |  |      |  
|Stockholders equity                          |  |                             | 67,977,750  |   |                |   |              |  |      |                    |  |   | 60,558,625         |   |              |   |           |  |      |  
|                                              |  |                             |             |   |                |   |              |  |      |                    |  |   |                    |   |              |   |           |  |      |  
|Total liabilities and stockholders equity    |  | $                           | 676,454,711 |   |                |   |              |  |      |                    |  | $ | 625,641,714        |   |              |   |           |  |      |  
|                                              |  |                             |             |   |                |   |              |  |      |                    |  |   |                    |   |              |   |           |  |      |  
|Net interest income (2)                       |  |                             |             |   |                | $ | 6,493,312    |  |      |                    |  |   |                    |   |              | $ | 4,684,623 |  |      |  
|                                              |  |                             |             |   |                |   |              |  |      |                    |  |   |                    |   |              |   |           |  |      |  
|Interest rate spread (2)(3)                   |  |                             |             |   |                |   |              |  | 3.83 | %                  |  |   |                    |   |              |   |           |  | 2.80 | %
|                                              |  |                             |             |   |                |   |              |  |      |                    |  |   |                    |   |              |   |           |  |      |  
|Net interest margin (2)(4)                    |  |                             |             |   |                |   |              |  | 4.13 | %                  |  |   |                    |   |              |   |           |  | 3.20 | %
|                                              |  |                             |             |   |                |   |              |  |      |                    |  |   |                    |   |              |   |           |  |      |  



|(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%, wit $36,204 adjustment for 2010 and a $32,442 adjustment for 2009.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

|(5) | Loans, net for March 31, 2009 have been restated to exclude average nonperforming loans of $7,671,602 and average unearned fees of $237,984 from earning assets to
be consistent with the presentation for March 31, 2010.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Rate/Volume Analysis

The goal of a rate/volume analysis is to compare two or more periods to determine whether the difference between those periods is the
result of changes in rate, or volume, or some combination of the two. This is



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achieved through a what if analysis. We calculate what the potential income would have been in the new period if the prior period rate had remained unchanged, and compare that result
to what the 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.

RECONCILIATION OF NET INTEREST INCOME

TO TAX EQUIVALENT INTEREST INCOME



|                                         |  |                          |           |      |   |          
|---------------------------------------- |  | ------------------------ | --------- | ---- | - | ---------
|                                         |  | 3 Months Ended March 31,
|                                         |  | 2010                     |           | 2009
|                                         |  |                         
|Non-GAAP                                 |  |                          |           |      |   |          
|                                         |  |                         
|Interest income:                         |  |                          |           |      |   |          
|Total interest income                    |  | $                        | 8,552,391 |      | $ | 7,566,837
|Bank owned life insurance                |  |                          | 70,280    |      |   | 62,975   
|Tax equivalent adjustment (34% tax rate) |  |                          | 36,204    |      |   | 32,442   
|                                         |  |                          |           |      |   |          
|Adjusted income on earning assets        |  |                          | 8,658,875 |      |   | 7,662,254
|                                         |  |                          |           |      |   |          
|Interest expense:                        |  |                          |           |      |   |          
|Total interest expense                   |  |                          | 2,165,563 |      |   | 2,977,631
|                                         |  |                          |           |      |   |          
|Net interest income - adjusted           |  | $                        | 6,493,312 |      | $ | 4,684,623
|                                         |  |                          |           |      |   |          

Net interest income  adjusted increased $1.8
million, quarter over quarter; $1.4 million due to changes in interest rates and $427 thousand due to changes in average volume outstanding. Adjusted income on earning assets increased $997 thousand in the first three months of 2010 compared to 2009
due to a combination of increase volume and higher yields. Asset growth contributed $516 thousand while higher interest rates contributed an additional $481 thousand. Total interest expense decreased by $812 thousand, quarter over quarter; $901
thousand of this savings was the result of lower interest expense, $89 thousand of which was offset by liability growth.

Loans, net of unearned income and loans held for sale grew a combined $51.5 million, to $639.4 million at March 31, 2010 compared to
$587.9 million at March 31, 2009. Income from loans, which is the largest component of earning assets, increased $986 thousand. Commercial loan growth contributed $527 thousand to this increase and growth in mortgage loans, $130 thousand. In
addition, increased rates on commercial loans and mortgage loans added $309 thousand and $262 thousand to interest income. Declines in our consumer portfolio of both volume and rate decreased earnings $242 thousand.

Investment securities increased $2.1 million to $8.4 million at March 31, 2010 compared to $6.3 million at March 31, 2009.
During the same period, interest income from securities declined $9 thousand. A significant portion of our Agency securities have been called in the past year as market rates fell below the rate on these investments. Securities purchased to replace
those called have a much lower yield than the original bonds. Lower yields on investment purchases reduced earnings by $23 thousand which was only partially offset by volume increases.

Liquidity in the first quarter of 2010 was much stronger than the same period in 2009, resulting in a higher sustained level of federal
funds sold. Although period end federal funds at March 31, 2010 were only $7.0 million compared to $1.7 million, one year prior, average federal funds sold outstanding were $13.1 million through March 31, 2010, compared to $1.4 million
through March 31, 2009. The result was an increase in income of $7 thousand despite historically low federal funds rates.

Interest bearing deposits at period end March 31, 2010 were $485.5 million, an increase of $39.1 million compared to $446.4 million
in 2009. On average, interest bearing deposits increased $55.5 million to $435.1 million through March 31, 2010, compared to $379.6 million through March 31, 2009, while the average cost of those deposits has dropped from 3.33% to 2.20%.



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Interest cost on time deposits (CDs) declined $818 thousand in the first quarter
of 2010 compared to 2009. Interest cost savings of $876 thousand associated with rate were partially offset by $58 thousand in additional interest costs associated with growth. Management has maintained a sustained focus on growth in our local
market through competitive retail CD pricing. These efforts have resulted in a shift in the composition of our CD portfolio over time to lower cost CDs. On average, Jumbo CDs, time deposits in excess of $100 thousand, have decreased to 31% of our
total CDs through the first quarter ended March 31, 2010 compared to 37% through the same period in 2009.

Savings
interest cost declined $62 thousand during the first quarter ended March 31, 2010 due to a combination of declining rates and balances. Period end balances declined $6.6 million in the first quarter of 2010 compared to 2009 while average
outstanding balances declined $6.3 million. This balance decline is attributable to our tiered premium savings product. A tiered product offers interest rates based on specific pre-established threshold balances, so that clients
maintaining higher balances are paid higher interest. The offering rates for the upper tiers of this product have been reduced year over year, resulting in possible migration to money market and CD accounts. Declining balances resulted in a cost
savings of $20 thousand and lower offering rates contributed an additional $42 thousand in cost savings

Year over year growth
in money market accounts has reduced our interest expense $105 thousand. Our prime money market product is a highly competitive tiered product which rewards higher balance maintenance with higher interest payments. Period end money market balances
have increased $53.5 million and year to date average balances have increased $34.4 million, when comparing first quarter 2010 with first quarter 2009. A decline in rates between quarters created an interest cost savings potential of $8 thousand for
a net interest cost related to money market growth of $97 thousand.

Our borrowing costs declined $32 thousand in the first
three months of 2010 due to lower average outstanding balances. Although period end balances showed an increase in 2010 over 2009 of $5.5 million, average outstanding balances actually declined $10.0 million.

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 2010 compared to 2009.

Changes in Net Interest Income (Rate/Volume Analysis)

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



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|                          |  |                                                  |       |   |                       |   |       |        |  |   |      |  
|------------------------- |  | ------------------------------------------------ | ----- | - | --------------------- | - | ----- | ------ |  | - | ---- | -
|                          |  | RATE / VOLUME ANALYSIS                           |      
|                          |  | (in thousands)                                   |      
|                          |  | For the Three Months Ended March 31,2010 vs 2009 |      
|                          |  | InterestIncrease                                 |       |   | Change Attributableto |  
|                          |  | (Decrease)                                       |       |   | Rate                  |   |       | Volume | 
|Interest income           |  |                                                  |       |   |                       |   |       |        |  |   |      |  
|Loans:                    |  |                                                  |       |   |                       |   |       |        |  |   |      |  
|Commercial                |  | $                                                | 836   |   |                       | $ | 309   |        |  | $ | 527  |  
|Mortgage                  |  |                                                  | 392   |   |                       |   | 262   |        |  |   | 130  |  
|Consumer                  |  |                                                  | (242  | ) |                       |   | (70   | )      |  |   | (172 | )
|                          |  |                                                  |       |   |                       |   |       |        |  |   |      |  
|Total loans               |  |                                                  | 986   |   |                       |   | 501   |        |  |   | 485  |  
|                          |  |                                                  |       |   |                       |   |       |        |  |   |      |  
|Securities:               |  |                                                  |       |   |                       |   |       |        |  |   |      |  
|Federal agencies          |  |                                                  | (6    | ) |                       |   | (21   | )      |  |   | 15   |  
|Mortgage-backed           |  |                                                  | (3    | ) |                       |   | (1    | )      |  |   | (2   | )
|Other securities          |  |                                                  |      |   |                       |   | (1    | )      |  |   | 1    |  
|                          |  |                                                  |       |   |                       |   |       |        |  |   |      |  
|Total securities          |  |                                                  | (9    | ) |                       |   | (23   | )      |  |   | 14   |  
|                          |  |                                                  |       |   |                       |   |       |        |  |   |      |  
|Deposits in other banks   |  |                                                  | 2     |   |                       |   | (4    | )      |  |   | 6    |  
|Federal funds sold        |  |                                                  | 7     |   |                       |   |      |        |  |   | 7    |  
|Bank owned life insurance |  |                                                  | 11    |   |                       |   | 7     |        |  |   | 4    |  
|                          |  |                                                  |       |   |                       |   |       |        |  |   |      |  
|Total interest income     |  | $                                                | 997   |   |                       | $ | 481   |        |  | $ | 516  |  
|                          |  |                                                  |       |   |                       |   |       |        |  |   |      |  
|                          |  |                                                  |      
|Interest expense          |  |                                                  |       |   |                       |   |       |        |  |   |      |  
|Deposits:                 |  |                                                  |       |   |                       |   |       |        |  |   |      |  
|Demand                    |  | $                                                | 4     |   |                       |   |      |        |  |   | 4    |  
|Money market              |  |                                                  | 97    |   |                       |   | (8    | )      |  |   | 105  |  
|Savings                   |  |                                                  | (62   | ) |                       |   | (42   | )      |  |   | (20  | )
|Time                      |  |                                                  | (818  | ) |                       |   | (876  | )      |  |   | 58   |  
|                          |  |                                                  |       |   |                       |   |       |        |  |   |      |  
|Total deposits            |  |                                                  | (779  | ) |                       |   | (926  | )      |  |   | 147  |  
|Federal funds purchased   |  |                                                  | (1    | ) |                       |   | (1    | )      |  |   |     |  
|Other borrowings          |  |                                                  | (32   | ) |                       |   | 26    |        |  |   | (58  | )
|                          |  |                                                  |       |   |                       |   |       |        |  |   |      |  
|Total interest expense    |  |                                                  | (812  | ) |                       |   | (901  | )      |  |   | 89   |  
|                          |  |                                                  |       |   |                       |   |       |        |  |   |      |  
|Net interest income       |  | $                                                | 1,809 |   |                       | $ | 1,382 |        |  | $ | 427  |  
|                          |  |                                                  |       |   |                       |   |       |        |  |   |      |  

Non-Interest Income

Non-interest income increased $435 thousand to $8.5 million for the first quarter of 2010, a 5.5% increase over our 2009 quarter income
total of $7.8 million. Mortgage banking income increased $574 thousand or 8.1%, and service charges and fees increased $109 thousand or 38.1%, quarter over quarter, while investment and insurance income declined $201 thousand or 73.8%.



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NON-INTEREST INCOME



|                                              |  |                                     |           |   |      |   |          
|--------------------------------------------- |  | ----------------------------------- | --------- | - | ---- | - | ---------
|                                              |  | For the Three Months EndedMarch 31,
|                                              |  | 2010                                |           |   | 2009
|Mortgage banking income                       |  | $                                   | 7,675,152 |   |      | $ | 7,101,121
|Investment and insurance commissions          |  |                                     | 74,320    |   |      |   | 284,005  
|Service charges and fees                      |  |                                     | 394,331   |   |      |   | 285,469  
|Gain (loss) on sale of other real estate, net |  |                                     | (49,023   | ) |      |   | 2,136    
|Bank owned life insurance income              |  |                                     | 70,280    |   |      |   | 62,975   
|Title company income                          |  |                                     | 91,569    |   |      |   | 98,566   
|Other                                         |  |                                     | 20,951    |   |      |   | 8,114    
|                                              |  |                                     |           |   |      |   |          
|                                              |  | $                                   | 8,277,580 |   |      | $ | 7,842,386
|                                              |  |                                     |           |   |      |   |          

Mortgage banking income represents fees from
originating and selling residential mortgage loans as well as commercial mortgages through Monarch Mortgage and our wholly owned commercial mortgage banking subsidiary, Monarch Capital, LLC. The overwhelming majority of this growth has been in the
area of residential mortgages. Gross mortgage banking income increased in the first quarter of 2010 compared to 2009 despite lower, quarter over quarter, mortgage production. Through March 31, 2010, our residential mortgage operations closed
979 loans totaling $233.9 million; $145.2 million, or 62% of which were purchase money loans. In the first quarter of 2009 our residential mortgage operations closed 1,077 loans totaling $288.1 million. Our higher mortgage income on lower production
is the result of an increase in income we are receiving from the investors purchasing the loans in the first quarter of 2010. Production in the first quarter of 2010 was hindered in some of our mortgage markets due to an unprecedented amount of
snowfall. However, the continued low mortgage rate environment, coupled with first time home buyer incentives, has been beneficial in getting these markets reenergized. We believe our gross mortgage banking income will continue at the same pace
until interest rates begin to rise to levels that could discourage residential sales and would likely discourage refinancing by existing homeowners.

Investment and insurance commissions declined $210 thousand, quarter over quarter, as a result of changes we have made in delivery of
these products. In August 2009, we closed the joint venture we had through Monarch Investment, LLC, which was a multi-agent operation.

Service charges and fees on deposit accounts increased $109 thousand in the first quarter of 2010 compared to the same periods in 2009.
The primary components of service charges and fees are nonsufficient fund and overdraft fees, and ATM transaction fees. In April 2009 we modified our deposit service fees. In addition, we have an agreement with a third-party vendor to brand ATMs in
Food Lion grocery stores in southeast Virginia and northeast North Carolina. In return for supplying the cash for the machines and paying the machines cash servicing fees, we receive a portion of the transaction surcharge, and our customers
can withdraw cash from the machines without a fee or transaction surcharge. We have 10 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 quarter of 2010 or 2009. We have sold four properties in other real estate, net of
valuation adjustments for net losses of $49 thousand in the first three months of 2010 compared to one property, net of valuation adjustments for a net gain of $2 thousand in 2009.

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 $7 thousand in the first quarter of 2010 compared to 2009. The tax-effective income earnings are $106 for the first quarter of 2010 compared to $95 for the same period in 2009.

Through Monarch Investment, LLC, we own a 75% interest in a title company, Real Estate Security Agency, LLC (RESA), which is
being treated as a consolidated entity for accounting purposes. RESA showed a $7 thousand decline in income for the first quarter of 2010 when compared to 2009 due primarily to a reduced number of mortgage loans closed.



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##### Table of Contents

Non-interest Expense

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



|                                  |  |                                     |            |      |   |           
|--------------------------------- |  | ----------------------------------- | ---------- | ---- | - | ----------
|                                  |  | For the Three Months EndedMarch 31,
|                                  |  | 2010                                |            | 2009
|Salaries and employee benefits    |  | $                                   | 7,924,546  |      | $ | 7,141,001 
|Occupancy expenses                |  |                                     | 692,476    |      |   | 574,659   
|Furniture and equipment expense   |  |                                     | 375,948    |      |   | 323,142   
|Loan origination expenses         |  |                                     | 1,001,184  |      |   | 693,457   
|Data processing services          |  |                                     | 195,536    |      |   | 207,960   
|Telephone                         |  |                                     | 122,661    |      |   | 97,760    
|Stationary and supplies           |  |                                     | 152,875    |      |   | 86,718    
|Professional fees                 |  |                                     | 132,307    |      |   | 105,517   
|Marketing expense                 |  |                                     | 102,336    |      |   | 23,020    
|FDIC Insurance                    |  |                                     | 248,836    |      |   | 255,501   
|Virginia Franchise Tax            |  |                                     | 116,113    |      |   | 95,940    
|ATM expense                       |  |                                     | 49,862     |      |   | 62,370    
|Amortization of intangible assets |  |                                     | 44,643     |      |   | 44,643    
|Other                             |  |                                     | 474,433    |      |   | 350,890   
|                                  |  |                                     |            |      |   |           
|                                  |  | $                                   | 11,633,756 |      | $ | 10,062,578
|                                  |  |                                     |            |      |   |           

Total non-interest expenses increased $1.6 million in
the first quarter of 2010, an increase of 15.6% over the same periods in 2009. Salaries and employee benefits represent an approximate average of 69% of non-interest expense in the periods presented. Our full time equivalent employees, at
March 31, 2010 totaled 434, compared to 287 in 2009. Salary and benefits growth was in primarily in our mortgage operations, but we also expanded the Banks sales team and added staffing for our new banking office in Nags Head, NC. Over
fifty-five percent of our mortgage employees are paid commissions based on their production levels. Secondary increases are attributable to the following factors: 1) an increase in loan origination expense related to higher production by the bank
and higher vendor expenses for Monarch Mortgage; 2) growth and inflation-related increases in occupancy expenses; 3) increased marketing expense related to company newsletters and the addition of mortgage specific advertising in 2010; and 4) new
branch supply set-up and updated mortgage disclosure forms.

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



|                               |  |                                              |         |            |       |  
|------------------------------ |  | -------------------------------------------- | ------- | ---------- | ----- | -
|                               |  | IncreaseFor the Three 
Months EndedMarch 31, |        
|                               |  | Dollars                                      |         | Percentage |      
|Salaries and employee benefits |  | $                                            | 783,545 |            | 11.0  | %
|Loan origination expenses      |  |                                              | 307,727 |            | 44.4  | %
|Occupancy expenses             |  |                                              | 117,817 |            | 20.5  | %
|Marketing expense              |  |                                              | 79,316  |            | 344.6 | %
|Stationary and supplies        |  |                                              | 66,157  |            | 76.3  | %

Income Taxes

Our income tax provision was $570 thousand for the first quarter of 2010 compared to $514 thousand in the prior year. The effective tax
rate for the first three months of 2010 was 33.7% compared to 32.7% for the same period in 2009.



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##### Table of Contents

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

GENERAL

Total assets
were $704.7 million at March 31, 2010, a $15.1 million or 2.2% increase compared to assets of $689.6 million at December 31, 2009. On an annual basis total assets increased 11.1% at March 31, 2010 when compared to assets of $634.2
million at March 31, 2009. Total loans held for investment as of March 31, 2010 were $556.8 million, an increase of $19.1 million, or 3.5%, from $537.7 million at year-end 2009. On an annual basis, total loans held for investment increased
$49.6 million, or 9.9%, from $507.2 million in March 2009. Loans held for sale were $82.7 million, an increase of $3.7 million from $79.0 million at December 31, 2009. Investment securities were $8.4 million at March 31, 2010 compared to
$7.2 million at December 31, 2009, and $6.3 million at March 31, 2009. Cash and cash equivalents were $27.4 million, decreasing $7.0 million from $34.4 million at December 31, 2009, but increasing $12.6 million or 84.7% from $14.8
million one year prior.

Total deposits were $579.1 million at March 31, 2010, an increase of $39.1 million or 7.2% over
December 2009 and $57.4 million or 11.0% higher than March 31, 2009. Non-interest bearing demand deposits increased $17.4 million over December 2009 and on an annual basis $18.2 million over March 31, 2009. Interest bearing deposits
increased $21.7 million to $485.5 million compared to December 31, 2009. On an annual basis interest bearing deposits increased $39.1 million over March 31, 2009. Our interest bearing deposits are comprised of savings accounts, money
market accounts and certificates of deposits (CDs).

Savings deposits increased $898 thousand to $23.7 million at
March 31, 2010 compared to December 31, 2009. However, savings balances have declined $6.6 million compared to $30.3 million at March 31, 2009. In 2008, we introduced a multi-tiered savings product that rewarded higher balances with a
higher rate which resulted in notable increases in savings balances. However, over the past year we have lowered the rates on the higher tiers and the decline, year over year, is attributable to the rate sensitivity of those clients who initially
migrated to the product. Based on growth in our money market deposits, it is possible that these clients have migrated to that product in answer to their rate sensitive needs.

Total money market balances were $169.5 million at March 31, 2010, an increase of $12.2 million compared to $157.3 million at
December 31, 2009. On an annual basis, money market accounts have increased $53.5 million compared to $116.0 million at March 31, 2009. Until the last two quarters, weakened economic conditions had indicated a change in client preference
in favor of less volatile CDs rather than money market products. During that time the fact that our prime money market product remained very competitive compared to our peers had little impact on the balances in that product. However, progressive
improvement in consumer confidence has resulted in renewed interest in this attractive and competitive product.

CDs remain
popular with clients because of the rate stability inherent in a fixed product. This popularity has led to significant growth in our core CDs. Core CDs which are comprised of CDs with balances of less than $100 thousand, increased $9.8 million to
$189.3 million, when compared to $179.5 million at December 31, 2009. On an annual basis, core CDs have increased $14.1 million. Our Jumbo CDs, which are CDs with balances of $100 thousand or greater, declined $1.5 million to $83.1 at
March 31, 2010 compared to December 31, 2009, and $26.4 million compared to March 31, 2009. This decline was part of our deposit strategy for 2009. In early 2008, we had determined to use larger, out of market CDs that typically cost
less than in market CDs, to help buffer some of the effects of the steep decline in rates. With these CDs we could stay shorter on term and react more quickly to market conditions. As these CDs have matured, we have allowed a portion of them to
run off as we have replaced them with longer term in market CDs.

Stockholders equity was $68.3 million at
March 31, 2010, compared to $67.9 million at December 31, 2009. Components of the change in stockholders equity include net income of $1.1 million, increase in unrealized losses in other comprehensive income of $137 thousand, stock
based compensation totaling $97 thousand, repurchase of stock warrants of $260 thousand, and preferred stock dividend payment of $390 thousand.



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##### Table of Contents

Allowance and Provision for Loan Losses

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

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

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

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

While we believe we have sufficient allowance for our existing portfolio, there can be no assurances that an additional allowance for
losses on existing loans may not be necessary in the future. The allowance for loan losses totaled $8.7 million at March 31, 2010 and March 31, 2009. The ratio of the allowance for loan losses to total loans outstanding at March 31,
2010 and 2009 was 1.55% and 1.71%, respectively.

During the first quarter of 2010 we recorded $1.3 million in provision
expense, compared to $701 thousand for the same period in 2009. Gross charge-offs for the quarter were $2.0 million offset by recoveries of $64 thousand, compared to gross charge-offs of $88 thousand and recoveries of $2 thousand in the first
quarter of 2009. The table below summarizes the activity in the allowance for loans losses for the three month periods ending March 31, 2010 and 2009.



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##### Table of Contents

LOAN LOSS ALLOWANCE AND LOSS EXPERIENCE



|                                                                      |  |                                     |             |   |      |   |             |  
|--------------------------------------------------------------------- |  | ----------------------------------- | ----------- | - | ---- | - | ----------- | -
|                                                                      |  | For the Three Months EndedMarch 31, |            
|                                                                      |  | 2010                                |             |   | 2009 |  
|Balance, beginning of period                                          |  | $                                   | 9,300,000   |   |      | $ | 8,046,000   |  
|Provisions charged to operations                                      |  |                                     | 1,327,870   |   |      |   | 700,551     |  
|Loans charged-off                                                     |  |                                     | (2,041,948  | ) |      |   | (88,084     | )
|Recoveries                                                            |  |                                     | 64,078      |   |      |   | 1,533       |  
|                                                                      |  |                                     |             |   |      |   |             |  
|Balance, end of period                                                |  | $                                   | 8,650,000   |   |      | $ | 8,660,000   |  
|                                                                      |  |                                     |             |   |      |   |             |  
|Total loans held for investment outstanding                           |  |                                     | 556,784,112 |   |      |   | 507,195,679 |  
|Ratio of allowance for loan losses to total loans held for investment |  |                                     | 1.55        | % |      |   | 1.71        | %

Asset Quality and Non-Performing Loans

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

Non-performing loans include loans on which interest is no longer accrued, accruing loans that are contractually past due 90 days or more
as to principal and interest payments, and loans classified as troubled debt restructurings. Total non-performing loans as a percentage of total loans were 1.09% and 1.30% at March 31, 2010 and December 31, 2009, respectively.

We had non-performing assets totaling $7.4 million at March 31, 2010 compared to $9.7 million at December 31, 2009. Net
charge-offs for the first quarter and of 2010 were $2.0 million. Non-performing assets traditionally consist of nonaccrual loans, loans past due 90 days or more and still accruing interest, restructured loans and other real estate owned. All of
these loans have been identified as impaired according to applicable GAAP for impaired loans. We have provided specific reserves for our non-performing assets in our allowance for loan loss of $1.4 million at March 31, 2010 and $1.7 million at
December 31, 2009. We continue to demand a high level of credit quality on new loans.

NON-PERFORMING ASSETS



|                                                  |  |                |           |   |                   |   |           |  
|------------------------------------------------- |  | -------------- | --------- | - | ----------------- | - | --------- | -
|                                                  |  | March 31, 2010 |           |   | December 31, 2009 |  
|Loans 90 days past due and still accruing         |  | $              |          |   |                   | $ | 202,679   |  
|Nonaccrual loans                                  |  |                | 6,056,813 |   |                   |   | 6,811,331 |  
|Restructured loans                                |  |                | 538,000   |   |                   |   | 538,000   |  
|Other Real Estate                                 |  |                | 837,285   |   |                   |   | 2,115,700 |  
|                                                  |  |                |           |   |                   |   |           |  
|Total Non-performing Assets                       |  | $              | 7,432,098 |   |                   | $ | 9,667,710 |  
|                                                  |  |                |           |   |                   |   |           |  
|                                                  |  |               
|Non-performing loans to period end loans          |  |                | 1.18      | % |                   |   | 1.40      | %
|Non-performing assets to period end assets        |  |                | 1.05      | % |                   |   | 1.40      | %
|Allowance for loan losses to non-performing loans |  |                | 131.16    | % |                   |   | 123.15    | %



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##### Table of Contents

RESTRUCTURED LOANS



|                                                                         |  |               |          |   |                  |   |          |  
|------------------------------------------------------------------------ |  | ------------- | -------- | - | ---------------- | - | -------- | -
|                                                                         |  | March 31,2010 |          |   | December 31,2009 |  
|Investment in restructured loans                                         |  | $             | 699,240  |   |                  | $ | 699,240  |  
|Valuation allowance for restructured loans included in charged-off loans |  |               | (161,240 | ) |                  |   | (161,240 | )
|                                                                         |  |               |          |   |                  |   |          |  
|Restructured loans included in impaired loans                            |  | $             | 538,000  |   |                  | $ | 538,000  |  
|                                                                         |  |               |          |   |                  |   |          |  
|Recoveries of charged-off balances                                       |  | $             | 10,800   |   |                  | $ | 4,400    |  

Liquidity

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

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

Cash, cash equivalents and federal funds sold totaled $27.4 million as of March 31, 2010 compared to $34.4 million as of
December 31, 2009. At March 31, 2010, cash, securities classified as available for sale and federal funds sold were $35.2 million or 5.3% of total earning assets, compared to $41.5 million or 6.4% of total earning assets at
December 31, 2009.

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

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

We have lines of credit with the Federal Home Loan Bank of Atlanta (FHLB) that can equal up to 30% of our assets. Our primary
line of credit (Primary) totaled approximately $52.4 million with $40.8 million available at March 31, 2010. This line is currently reduced by $5.0 million, which has been pledged as collateral for public deposits.

In February 2009, we negotiated an additional line of credit with FHLB which is secured by a portion of our loans held for sale
(LHFS). We pledge these loans, which have been sold to FHLB approved investors, as collateral. In return, we are allowed to borrow up to 70% of these loans for 120 days. The investor remits the proceeds for the purchased loans directly
to FHLB, which then releases the collateral pledged. At March 31, 2010, assets pledged and advances outstanding totaled $46.1 million and $30.5 million, respectively with no excess line available.

Borrowings outstanding under the combined FHLB lines of credit were $42.1 million at March 31, 2010 and $66.2 million at
December 31, 2009. We had the following borrowing advances under our Primary line outstanding as of March 31, 2010, with the following final maturities:



|               |            |                 |               
|-------------- | ---------- | --------------- | --------------
|Advance Amount |            | Expiration Date
|$              | 10,000,000 |                 | November 2010 
|               | 1,550,349  |                 | September 2015
|               |            |                 |               
|$              | 11,550,349 |                 |               
|               |            |                 |               



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##### Table of Contents

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

Under our LHFS line we had four advances outstanding at
March 31, 2010. All advances mature in July 2010 and are broken down as follows:



|               |  |                 |            |                  |   |           
|-------------- |  | --------------- | ---------- | ---------------- | - | ----------
|Advance Date   |  | Current Balance |            | Original Balance
|March 4, 2010  |  | $               | 1,780,624  |                  | $ | 17,337,229
|March 12, 2010 |  | $               | 6,390,344  |                  | $ | 6,390,344 
|March 18, 2010 |  | $               | 9,366,955  |                  | $ | 9,366,955 
|March 25, 2010 |  | $               | 12,999,671 |                  | $ | 12,999,671
|               |  |                 |            |                  |   |           
|               |  | $               | 30,537,594 |                  | $ | 46,094,199
|               |  |                 |            |                  |   |           

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 March 31, 2010 and December 31, 2009 were a line of credit to secure public funds and commitments to extend credit and standby letters of credit issued to customers.
The line of credit to secure public funds was from the Federal Home Loan Bank for $5 million at March 31, 2010 and December 31, 2009.

We entered into an interest rate swap agreement with PNC Bank of Pittsburgh, PA on July 29, 2009, for our $10 million Trust
Preferred borrowings which carries a floating interest rate of 90 day LIBOR plus 160 basis points. Under the terms of this agreement, at the end of each quarter we will swap our floating rate for a fixed rate of 3.26%. The effective date of this
swap is March 31, 2010, with an expiration date of September 30, 2014. This swap will fix our interest cost on our $10 million Trust Preferred borrowings of 4.86% for five years.

Commitments to extend credit, which include rate lock commitments, amounted to $304.2 million at March 31, 2010 and $262.5 million
at December 31, 2009, represent legally binding agreements to lend to customers with fixed expiration dates or other termination clauses. Since many of the commitments are expected to expire without being funded, the total commitment amounts do
not necessarily represent future liquidity requirements.

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

Standby letters of credit are conditional commitments we issue guaranteeing
the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. We had $4.0 million in outstanding standby letters of credit at March 31, 2010 and $5.4 million at
December 31, 2009.

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



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##### Table of Contents

Capital Resources

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

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

The Bank, as a Virginia banking corporation, may pay dividends only out of retained earnings. In addition, regulatory authorities may
limit payment of dividends by any bank, when it is determined that such limitation is in the public interest and necessary to ensure financial soundness of the Bank. Regulatory agencies place certain restrictions on dividends paid and loans or
advances made by the Bank to the Company. The amount of dividends the Bank may pay to the Company, without prior approval, is limited to current year earnings plus retained net profits for the two preceding years. At March 31, 2010, the amount
available was approximately $6.0 million. We currently pay a quarterly dividend on our series B noncumulative, perpetual preferred stock of 7.8%, or $390,000 per quarter.

Quantitative measures established by regulation to ensure capital adequacy require that the Bank maintain minimum amounts and ratios (set
forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). Management believes, as of March 31, 2010, the Bank
meets all capital adequacy requirements to which it is subject.

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



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|                                                   |  |                        |        |       |                              |   |         |                                              |        |  |      |         |  |       |        |  |       |  
|-------------------------------------------------- |  | ---------------------- | ------ | ----- | ---------------------------- | - | ------- | -------------------------------------------- | ------ |  | ---- | ------- |  | ----- | ------ |  | ----- | -
|                                                   |  | Actual                 |        |       | For CapitalAdequacy Purposes |   |         | To Be WellCapitalized UnderPrompt Corrective |       
|                                                   |  | Amounts                |        | Ratio |                              |   | Amounts |                                              | Ratio  |  |      | Amounts |  | Ratio |       
|                                                   |  | (Dollars in Thousands) |       
|As of March 31, 2010                               |  |                        |        |       |                              |   |         |                                              |        |  |      |         |  |       |        |  |       |  
|Total Risk-Based Capital Ratio                     |  |                        |        |       |                              |   |         |                                              |        |  |      |         |  |       |        |  |       |  
|Consolidated company                               |  | $                      | 84,746 |       | 14.07                        | % |         | $                                            | 48,157 |  | 8.00 | %       |  |       | N/A    |  | N/A   |  
|Bank                                               |  | $                      | 72,597 |       | 12.06                        | % |         | $                                            | 48,157 |  | 8.00 | %       |  | $     | 60,197 |  | 10.00 | %
|(Total Risk-Based Capital to Risk-Weighted Assets) |  |                        |        |       |                              |   |         |                                              |        |  |      |         |  |       |        |  |       |  
|                                                   |  |                        |        |       |                              |  
|Tier 1 Risk-Based Capital Ratio                    |  |                        |        |       |                              |   |         |                                              |        |  |      |         |  |       |        |  |       |  
|Consolidated company                               |  | $                      | 77,206 |       | 12.82                        | % |         | $                                            | 24,095 |  | 4.00 | %       |  |       | N/A    |  | N/A   |  
|Bank                                               |  | $                      | 65,057 |       | 10.80                        | % |         | $                                            | 24,095 |  | 4.00 | %       |  | $     | 36,143 |  | 6.00  | %
|(Tier 1 Capital to Risk-Weighted Assets)           |  |                        |        |       |                              |   |         |                                              |        |  |      |         |  |       |        |  |       |  
|                                                   |  |                        |        |       |                              |  
|Tier 1 Leverage Ratio                              |  |                        |        |       |                              |   |         |                                              |        |  |      |         |  |       |        |  |       |  
|Consolidated company                               |  | $                      | 77,206 |       | 11.48                        | % |         | $                                            | 26,911 |  | 4.00 | %       |  |       | N/A    |  | N/A   |  
|Bank                                               |  | $                      | 65,057 |       | 9.67                         | % |         | $                                            | 26,911 |  | 4.00 | %       |  | $     | 33,639 |  | 5.00  | %
|(Tier 1 Capital to Average Assets)                 |  |                        |        |       |                              |   |         |                                              |        |  |      |         |  |       |        |  |       |  
|                                                   |  |                        |        |       |                              |  
|As of December 31, 2009                            |  |                        |        |       |                              |   |         |                                              |        |  |      |         |  |       |        |  |       |  
|Total Risk-Based Capital Ratio                     |  |                        |        |       |                              |   |         |                                              |        |  |      |         |  |       |        |  |       |  
|Consolidated company                               |  | $                      | 83,988 |       | 14.23                        | % |         | $                                            | 47,222 |  | 8.00 | %       |  |       | N/A    |  | N/A   |  
|Bank                                               |  | $                      | 65,580 |       | 11.11                        | % |         | $                                            | 47,222 |  | 8.00 | %       |  | $     | 59,028 |  | 10.00 | %
|(Total Risk-Based Capital to Risk-Weighted Assets) |  |                        |        |       |                              |   |         |                                              |        |  |      |         |  |       |        |  |       |  
|                                                   |  |                        |        |       |                              |  
|Tier 1 Risk-Based Capital Ratio                    |  |                        |        |       |                              |   |         |                                              |        |  |      |         |  |       |        |  |       |  
|Consolidated company                               |  | $                      | 76,585 |       | 12.97                        | % |         | $                                            | 23,625 |  | 4.00 | %       |  |       | N/A    |  | N/A   |  
|Bank                                               |  | $                      | 58,177 |       | 9.85                         | % |         | $                                            | 23,625 |  | 4.00 | %       |  | $     | 35,438 |  | 6.00  | %
|(Tier 1 Capital to Risk-Weighted Assets)           |  |                        |        |       |                              |   |         |                                              |        |  |      |         |  |       |        |  |       |  
|                                                   |  |                        |        |       |                              |  
|Tier 1 Leverage Ratio                              |  |                        |        |       |                              |   |         |                                              |        |  |      |         |  |       |        |  |       |  
|Consolidated company                               |  | $                      | 76,585 |       | 11.52                        | % |         | $                                            | 26,595 |  | 4.00 | %       |  |       | N/A    |  | N/A   |  
|Bank                                               |  | $                      | 58,177 |       | 8.75                         | % |         | $                                            | 26,595 |  | 4.00 | %       |  | $     | 33,244 |  | 5.00  | %
|(Tier 1 Capital to Average Assets)                 |  |                        |        |       |                              |   |         |                                              |        |  |      |         |  |       |        |  |       |  



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

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

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

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

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

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



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

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



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PART II - OTHER INFORMATION



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

None.



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

None.



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

Not applicable.



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

At the Annual Meeting of Shareholders on May 5, 2010, 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:
Lawton H. Baker, Jeffrey F. Benson and Robert M. Oman

ITEM 2: The ratification of the appointment of Goodman &
Company, LLP as the Companys independent certified public accountants for the year ending December 31, 2010 was approved.



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

None.



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

a. Exhibits

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

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

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

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

b. Form 8-K

Form 8-K filed March 3, 2010 to announce the retirement of Class II director, Mr. Cassell Basnight from the board of directors,
effective May 6, 2010.

Form 8-K filed April 22, 2010 to announce the Companys financial performance.

Form 8-K filed May 6, 2010 to announce the Companys first semi-annual Common Stock dividend.

Form 8-K filed May 6, 2010 to announce the appointment of principal officers.



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SIGNATURES

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



|                                                   |  |                   
|-------------------------------------------------- |  | ------------------
|MONARCH FINANCIAL HOLDINGS, INC.                   |  |                   
|                                                   | 
|/S/    BRAD E.
SCHWARTZ                            |  |                   
|Brad E. Schwartz                                   |  | Date: May 10, 2010
|Chief Executive Officer                            |  |                   
|                                                   | 
|/S/    LYNETTE P.
HARRIS                           |  |                   
|Lynette P. Harris                                  |  | Date: May 10, 2010
|Executive Vice President & Chief Financial Officer |  |                   



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