##### Table of Contents

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UNITED STATES

FEDERAL RESERVE BOARD OF GOVERNORS

Washington, DC 20551



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FORM 10-Q



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

For Quarterly Period Ended: March 31, 2007

OR



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

Commission File Number: 000-52032



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MONARCH FINANCIAL HOLDINGS, INC.

(Exact name of registrant as specified in its charter)



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



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

(757) 389-5112

(Registrants telephone number, including area code)

Not Applicable

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



---

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

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

Large accelerated filer ̈Accelerated filer ̈Non-accelerated filer  x

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

APPLICABLE ONLY TO CORPORATE ISSUERS:

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

Common Stock, $5.00 Par Value  4,078,956 as of May 8, 2007



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##### Table of Contents

MONARCH FINANCIAL HOLDINGS, INC.

FORM 10-Q

MARCH 31, 2007

INDEX



|         |  |         |  |                                                                                                         |  |     
|-------- |  | ------- |  | ------------------------------------------------------------------------------------------------------- |  | ----
|         |  |         |  |                                                                                                         |  | Page
|PART I.  |  |         |  | FINANCIAL INFORMATION                                                                                   |  |     
|         |  |         | 
|.        |  | ITEM 1. |  | Consolidated Statements of Condition as of March 31, 2007 and December 31, 2006                         |  | 3   
|         |  |         | 
|         |  |         |  | Consolidated Statements of Income for the three months ended March 31, 2007 and March 31, 2006          |  | 4   
|         |  |         | 
|         |  |         |  | Consolidated Statements of Stockholders Equity for the periods ended March 31, 2007 and March 31, 2006 |  | 5   
|         |  |         | 
|         |  |         |  | Consolidated Statement of Cash Flows for the periods ended March 31, 2007 and March 31, 2006            |  | 6   
|         |  |         | 
|         |  |         |  | Notes to Consolidated Financial Statements                                                              |  | 7   
|         |  |         | 
|         |  | ITEM 2. |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                   |  | 12  
|         |  |         | 
|         |  | ITEM 3. |  | Quantitative and Qualitative Disclosures about Market Risk                                              |  | 19  
|         |  |         | 
|         |  | ITEM 4. |  | Controls and Procedures                                                                                 |  | 20  
|         |  |         | 
|PART II. |  |         |  | OTHER INFORMATION                                                                                       |  |     
|         |  |         | 
|         |  | Item 1. |  | Legal Proceedings                                                                                       |  | 21  
|         |  |         | 
|         |  | Item 2. |  | Changes in Securities                                                                                   |  | 21  
|         |  |         | 
|         |  | Item 3. |  | Defaults Upon Senior Securities                                                                         |  | 21  
|         |  |         | 
|         |  | Item 4. |  | Submissions of Matters to Vote of Security Holders                                                      |  | 21  
|         |  |         | 
|         |  | Item 5. |  | Other Information                                                                                       |  | 21  
|         |  |         | 
|         |  | Item 6. |  | Exhibits and Reports on Form 8-K                                                                        |  | 21  



2



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##### Table of Contents

PART I
FINANCIAL INFORMATION



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

Consolidated Balance Sheets

Monarch Financial Holdings, Inc. and Subsidiaries



|                                                                                                                              |  |                         |             |   |                         |   |             |  
|----------------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | ----------- | - | ----------------------- | - | ----------- | -
|                                                                                                                              |  | UnauditedMarch 31, 2007 |             |   | AuditedDecember 31,2006 |  
|ASSETS:                                                                                                                       |  |                         |             |   |                         |   |             |  
|Cash and due from banks                                                                                                       |  | $                       | 8,284,332   |   |                         | $ | 9,504,743   |  
|Interest-bearing bank balances                                                                                                |  |                         | 10,321,512  |   |                         |   | 7,963,785   |  
|Federal funds sold                                                                                                            |  |                         | 972,544     |   |                         |   | 1,497,814   |  
|                                                                                                                              |  |                         |             |   |                         |   |             |  
|Total cash and cash equivalents                                                                                               |  |                         | 19,578,388  |   |                         |   | 18,966,342  |  
|Investment securities held-to-maturity, at cost                                                                               |  |                         | 23,578,506  |   |                         |   | 38,573,804  |  
|Investment securities available-for-sale, at fair value                                                                       |  |                         | 8,922,581   |   |                         |   | 11,454,863  |  
|Loans held for sale                                                                                                           |  |                         | 1,225,600   |   |                         |   | 606,400     |  
|Loans:                                                                                                                        |  |                         |             |   |                         |   |             |  
|Loans, net of unearned income                                                                                                 |  |                         | 338,509,580 |   |                         |   | 321,263,026 |  
|Less: allowance for loan losses                                                                                               |  |                         | (3,378,000  | ) |                         |   | (3,235,000  | )
|                                                                                                                              |  |                         |             |   |                         |   |             |  
|Loans, net                                                                                                                    |  |                         | 335,131,580 |   |                         |   | 318,028,026 |  
|Interest receivable                                                                                                           |  |                         | 1,625,660   |   |                         |   | 1,646,979   |  
|Property and equipment, net                                                                                                   |  |                         | 7,103,668   |   |                         |   | 6,684,765   |  
|Restricted equity securities                                                                                                  |  |                         | 3,978,900   |   |                         |   | 3,750,600   |  
|Bank owned life insurance                                                                                                     |  |                         | 6,358,152   |   |                         |   | 6,297,151   |  
|Other assets                                                                                                                  |  |                         | 1,974,670   |   |                         |   | 1,710,645   |  
|                                                                                                                              |  |                         |             |   |                         |   |             |  
|Total assets                                                                                                                  |  | $                       | 409,477,705 |   |                         | $ | 407,719,575 |  
|                                                                                                                              |  |                         |             |   |                         |   |             |  
|LIABILITIES:                                                                                                                  |  |                         |             |   |                         |   |             |  
|Deposits:                                                                                                                     |  |                         |             |   |                         |   |             |  
|Noninterest-bearing                                                                                                           |  | $                       | 59,001,106  |   |                         | $ | 62,685,326  |  
|Interest-bearing                                                                                                              |  |                         | 259,264,265 |   |                         |   | 251,428,149 |  
|                                                                                                                              |  |                         |             |   |                         |   |             |  
|Total deposits                                                                                                                |  |                         | 318,265,371 |   |                         |   | 314,113,475 |  
|Borrowings:                                                                                                                   |  |                         |             |   |                         |   |             |  
|Federal Home Loan Bank advances                                                                                               |  |                         | 44,560,139  |   |                         |   | 48,075,117  |  
|Trust preferred subordinated debt                                                                                             |  |                         | 10,000,000  |   |                         |   | 10,000,000  |  
|Federal funds purchased                                                                                                       |  |                         |            |   |                         |   |            |  
|                                                                                                                              |  |                         |             |   |                         |   |             |  
|Total borrowings                                                                                                              |  |                         | 54,560,139  |   |                         |   | 58,075,117  |  
|Other liabilities                                                                                                             |  |                         | 1,181,513   |   |                         |   | 1,489,330   |  
|                                                                                                                              |  |                         |             |   |                         |   |             |  
|Total liabilities                                                                                                             |  |                         | 374,007,023 |   |                         |   | 373,677,922 |  
|                                                                                                                              |  |                         |             |   |                         |   |             |  
|Minority interests in subsidiary                                                                                              |  |                         | 33,202      |   |                         |   | 27,619      |  
|                                                                                                                              |  |                        
|STOCKHOLDERS EQUITY:                                                                                                         |  |                         |             |   |                         |   |             |  
|Preferred stock, $5 par value, 2,000,000 shares authorized, none issued                                                       |  |                         |            |   |                         |   |            |  
|Common stock, $5 par value, 20,000,000 shares authorized, issued and outstanding 4,078,956 and 4,038,548 shares, respectively |  |                         | 20,394,780  |   |                         |   | 20,192,740  |  
|Additional paid-in capital                                                                                                    |  |                         | 9,966,787   |   |                         |   | 9,669,586   |  
|Accumulated earnings                                                                                                          |  |                         | 5,187,925   |   |                         |   | 4,261,537   |  
|Accumulated other comprehensive loss                                                                                          |  |                         | (112,012    | ) |                         |   | (109,829    | )
|                                                                                                                              |  |                         |             |   |                         |   |             |  
|Total stockholders equity                                                                                                    |  |                         | 35,437,480  |   |                         |   | 34,014,034  |  
|                                                                                                                              |  |                         |             |   |                         |   |             |  
|Total liabilities and stockholders equity                                                                                    |  | $                       | 409,477,705 |   |                         | $ | 407,719,575 |  
|                                                                                                                              |  |                         |             |   |                         |   |             |  

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



3



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##### Table of Contents

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

Consolidated Statements of Income

Monarch Financial Holdings, Inc. and Subsidiaries

Unaudited



|                                                    |  |                          |           |   |      |   |           |  
|--------------------------------------------------- |  | ------------------------ | --------- | - | ---- | - | --------- | -
|                                                    |  | 3 Months Ended March 31, |          
|                                                    |  | 2007                     |           |   | 2006 |  
|Interest income:                                    |  |                          |           |   |      |   |           |  
|Interest and fees on loans                          |  | $                        | 6,759,212 |   |      | $ | 5,039,086 |  
|Interest on investment securities                   |  |                          |           |   |      |   |           |  
|Taxable                                             |  |                          | 161,253   |   |      |   | 177,361   |  
|Interest on federal funds sold                      |  |                          | 5,086     |   |      |   | 23,020    |  
|Dividends on equity securities                      |  |                          | 36,322    |   |      |   | 28,095    |  
|Other interest income                               |  |                          | 17,317    |   |      |   | 65,929    |  
|                                                    |  |                          |           |   |      |   |           |  
|Total interest income                               |  |                          | 6,979,190 |   |      |   | 5,333,491 |  
|                                                    |  |                          |           |   |      |   |           |  
|Interest expense:                                   |  |                          |           |   |      |   |           |  
|Interest on deposits                                |  |                          | 2,757,625 |   |      |   | 2,043,017 |  
|Interest on trust preferred subordinated debt       |  |                          | 174,094   |   |      |   |          |  
|Interest on borrowings                              |  |                          | 277,786   |   |      |   | 125,468   |  
|                                                    |  |                          |           |   |      |   |           |  
|Total interest expense                              |  |                          | 3,209,505 |   |      |   | 2,168,485 |  
|                                                    |  |                          |           |   |      |   |           |  
|Net interest income                                 |  |                          | 3,769,685 |   |      |   | 3,165,006 |  
|Provision for loan losses                           |  |                          | 143,000   |   |      |   | 96,257    |  
|                                                    |  |                          |           |   |      |   |           |  
|Net interest income after provision for loan losses |  |                          | 3,626,685 |   |      |   | 3,068,749 |  
|                                                    |  |                          |           |   |      |   |           |  
|Noninterest income:                                 |  |                          |           |   |      |   |           |  
|Mortgage banking income                             |  |                          | 460,547   |   |      |   | 632,898   |  
|Service charges and fees                            |  |                          | 249,839   |   |      |   | 202,433   |  
|Investment and insurance commissions                |  |                          | 245,365   |   |      |   | 10,474    |  
|Other                                               |  |                          | 90,994    |   |      |   | 60,632    |  
|                                                    |  |                          |           |   |      |   |           |  
|Total noninterest income                            |  |                          | 1,046,745 |   |      |   | 906,437   |  
|                                                    |  |                          |           |   |      |   |           |  
|Noninterest expenses:                               |  |                          |           |   |      |   |           |  
|Salaries and employee benefits                      |  |                          | 2,008,312 |   |      |   | 1,632,425 |  
|Occupancy expenses                                  |  |                          | 279,948   |   |      |   | 231,849   |  
|Furniture and equipment expenses                    |  |                          | 147,207   |   |      |   | 122,723   |  
|Data processing services                            |  |                          | 153,951   |   |      |   | 131,032   |  
|Loan origination expenses                           |  |                          | 127,628   |   |      |   | 120,112   |  
|Advertising and marketing expenses                  |  |                          | 53,709    |   |      |   | 102,296   |  
|Professional fees                                   |  |                          | 61,058    |   |      |   | 47,059    |  
|Virginia franchise tax                              |  |                          | 96,170    |   |      |   | 63,700    |  
|Stationery and supplies                             |  |                          | 61,709    |   |      |   | 63,121    |  
|Other                                               |  |                          | 329,436   |   |      |   | 263,079   |  
|                                                    |  |                          |           |   |      |   |           |  
|Total noninterest expenses                          |  |                          | 3,319,128 |   |      |   | 2,777,396 |  
|                                                    |  |                          |           |   |      |   |           |  
|Income before income taxes and minority interests   |  |                          | 1,354,302 |   |      |   | 1,197,790 |  
|Minority interests in subsidiarys net income       |  |                          | (20,430   | ) |      |   |          |  
|                                                    |  |                          |           |   |      |   |           |  
|Net income before income taxes                      |  |                          | 1,333,872 |   |      |   | 1,197,790 |  
|Income tax expense                                  |  |                          | (407,484  | ) |      |   | (390,366  | )
|                                                    |  |                          |           |   |      |   |           |  
|Net income                                          |  | $                        | 926,388   |   |      | $ | 807,424   |  
|                                                    |  |                          |           |   |      |   |           |  
|Basic net income per share                          |  | $                        | 0.23      |   |      | $ | 0.21      |  
|                                                    |  |                         
|Diluted net income per share                        |  |                          | 0.22      |   |      |   | 0.19      |  

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



4



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##### Table of Contents

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

Consolidated Statements of Changes in Shareholders Equity

Monarch Financial Holdings, Inc. and
Subsidiaries

Unaudited



|                                                                               |  |              |  |                          |            |                     |   |                                            |  |   |           |  |   |          |   |  |   |            |  
|------------------------------------------------------------------------------ |  | ------------ |  | ------------------------ | ---------- | ------------------- | - | ------------------------------------------ |  | - | --------- |  | - | -------- | - |  | - | ---------- | -
|                                                                               |  | Common Stock |  | AdditionalPaid-InCapital |            | AccumulatedEarnings |   | AccumulatedOtherComprehensiveIncome (Loss) |  |   | Total     | 
|                                                                               |  | Shares       |  | Amount                   |            |                     |   |                                           
|BalanceDecember 31, 2005                                                      |  | 3,936,741    |  | $                        | 19,683,705 |                     | $ | 9,678,760                                  |  | $ | 635,079   |  | $ | (195,793 | ) |  | $ | 29,801,751 |  
|Net income for three months ended March 31, 2006                               |  |             |  |                          |           |                     |   |                                           |  |   | 807,424   |  |   |         |   |  |   | 807,424    |  
|Unrealized loss on available for sale securities, net of income taxes          |  |             |  |                          |           |                     |   |                                           |  |   |          |  |   | (50,015  | ) |  |   | (50,015    | )
|                                                                               |  |              |  |                          |            |                     |   |                                            |  |   |           |  |   |          |   |  |   |            |  
|Total comprehensive income                                                     |  |              |  |                          |            |                     |   |                                            |  |   |           |  |   |          |   |  |   | 757,409    |  
|                                                                               |  |              |  |                          |            |                     |   |                                            |  |   |           |  |   |          |   |  |   |            |  
|Stock options exercised                                                        |  | 1,250        |  |                          | 6,250      |                     |   | 62                                         |  |   |          |  |   |         |   |  |   | 6,312      |  
|                                                                               |  |              |  |                          |            |                     |   |                                            |  |   |           |  |   |          |   |  |   |            |  
|BalanceMarch 31, 2006                                                         |  | 3,937,991    |  | $                        | 19,689,955 |                     | $ | 9,678,822                                  |  | $ | 1,442,503 |  | $ | (245,808 | ) |  | $ | 30,565,472 |  
|                                                                               |  |              |  |                          |            |                     |   |                                            |  |   |           |  |   |          |   |  |   |            |  
|BalanceDecember 31, 2006                                                      |  | 4,038,548    |  | $                        | 20,192,740 |                     | $ | 9,669,586                                  |  | $ | 4,261,537 |  | $ | (109,829 | ) |  | $ | 34,014,034 |  
|Net income for three months ended March 31, 2007                               |  |             |  |                          |           |                     |   |                                           |  |   | 926,388   |  |   |         |   |  |   | 926,388    |  
|Unrealized gain on available for sale securities, net of income taxes          |  |             |  |                          |           |                     |   |                                           |  |   |          |  |   | (2,183   | ) |  |   | (2,183     | )
|                                                                               |  |              |  |                          |            |                     |   |                                            |  |   |           |  |   |          |   |  |   |            |  
|Total comprehensive income                                                     |  |              |  |                          |            |                     |   |                                            |  |   |           |  |   |          |   |  |   | 924,205    |  
|                                                                               |  |              |  |                          |            |                     |   |                                            |  |   |           |  |   |          |   |  |   |            |  
|Stock options exercised, including The realization of tax benefits of $171,632 |  | 39,408       |  |                          | 197,040    |                     |   | 218,398                                    |  |   |          |  |   |         |   |  |   | 415,438    |  
|Stock-based compensation expense                                               |  | 1,000        |  |                          | 5,000      |                     |   | 78,803                                     |  |   |          |  |   |         |   |  |   | 83,803     |  
|                                                                               |  |              |  |                          |            |                     |   |                                            |  |   |           |  |   |          |   |  |   |            |  
|BalanceMarch 31, 2007                                                         |  | 4,078,956    |  | $                        | 20,394,780 |                     | $ | 9,966,787                                  |  | $ | 5,187,925 |  | $ | (112,012 | ) |  | $ | 35,437,480 |  
|                                                                               |  |              |  |                          |            |                     |   |                                            |  |   |           |  |   |          |   |  |   |            |  

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



5



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##### Table of Contents

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

Consolidated Statements of Cash Flows

Monarch Financial Holdings, Inc. and Subsidiaries

Unaudited



|                                                                       |  |                          |             |   |      |   |             |  
|---------------------------------------------------------------------- |  | ------------------------ | ----------- | - | ---- | - | ----------- | -
|                                                                       |  | 3 Months Ended March 31, |            
|                                                                       |  | 2007                     |             |   | 2006 |  
|Operating activities:                                                  |  |                          |             |   |      |   |             |  
|Net income                                                             |  | $                        | 926,388     |   |      | $ | 807,424     |  
|Adjustments to reconcile to net cash provided by operating activities: |  |                          |             |   |      |   |             |  
|Provision for loan losses                                              |  |                          | 143,000     |   |      |   | 96,257      |  
|Provision for depreciation                                             |  |                          | 157,993     |   |      |   | 142,608     |  
|Accretion of discounts and amortization of premiums, net               |  |                          | (14,681     | ) |      |   | 1,086       |  
|Deferral of loan costs, net of deferred fees                           |  |                          | (6,080      | ) |      |   | 33,410      |  
|Stock-based compensation                                               |  |                          | 42,621      |   |      |   |            |  
|Changes in:                                                            |  |                          |             |   |      |   |             |  
|Mortgage loans held for sale                                           |  |                          | (619,200    | ) |      |   | 591,770     |  
|Interest receivable                                                    |  |                          | 21,319      |   |      |   | (30,799     | )
|Other assets                                                           |  |                          | (323,902    | ) |      |   | (22,198     | )
|Other liabilities                                                      |  |                          | (89,420     | ) |      |   | (537,226    | )
|                                                                       |  |                          |             |   |      |   |             |  
|Net cash provided from operating activities                            |  |                          | 238,038     |   |      |   | 1,082,332   |  
|                                                                       |  |                          |             |   |      |   |             |  
|Investing activities:                                                  |  |                          |             |   |      |   |             |  
|Purchases of held-to-maturity securities                               |  |                          | (19,983,100 | ) |      |   | (25,953,308 | )
|Purchases of available-for-sale securities                             |  |                          |            |   |      |   | (300,882    | )
|Proceeds from maturities and sales of available-for-sale securities    |  |                          | 2,522,054   |   |      |   | 666,900     |  
|Proceeds from maturities and calls of held-to-maturity securities      |  |                          | 35,000,000  |   |      |   | 20,000,000  |  
|Loan originations, net of principal repayments                         |  |                          | (17,240,474 | ) |      |   | (10,350,300 | )
|Purchases of property and equipment                                    |  |                          | (576,896    | ) |      |   | (522,554    | )
|Sale of restricted equity securities, net of redemptions               |  |                          | (228,300    | ) |      |   | (207,500    | )
|                                                                       |  |                          |             |   |      |   |             |  
|Net cash used by investing activities                                  |  |                          | (506,716    | ) |      |   | (16,667,644 | )
|                                                                       |  |                          |             |   |      |   |             |  
|Financing activities:                                                  |  |                          |             |   |      |   |             |  
|Net increase (decrease) in noninterest-bearing deposits                |  |                          | (3,684,220  | ) |      |   | 4,081,742   |  
|Net increase in interest-bearing deposits                              |  |                          | 7,836,116   |   |      |   | 13,261,450  |  
|Net decrease in federal funds purchased                                |  |                          |            |   |      |   | (1,000      | )
|FHLB advances, net of repayments                                       |  |                          | (3,514,978  | ) |      |   | (24,976     | )
|Proceeds from issuance of common stock, net of issuance costs          |  |                          | 243,806     |   |      |   | 6,312       |  
|                                                                       |  |                          |             |   |      |   |             |  
|Net cash from financing activities                                     |  |                          | 880,724     |   |      |   | 17,323,528  |  
|                                                                       |  |                          |             |   |      |   |             |  
|CHANGE IN CASH AND CASH EQUIVALENTS                                    |  |                          | 612,046     |   |      |   | 1,738,216   |  
|CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                       |  |                          | 18,966,342  |   |      |   | 15,275,674  |  
|                                                                       |  |                          |             |   |      |   |             |  
|CASH AND CASH EQUIVALENTS AT END OF PERIOD                             |  | $                        | 19,578,388  |   |      | $ | 17,013,890  |  
|                                                                       |  |                          |             |   |      |   |             |  
|SUPPLEMENTAL SCHEDULES AND CASH FLOW INFORMATION                       |  |                          |             |   |      |   |             |  
|Cash paid for:                                                         |  |                          |             |   |      |   |             |  
|Interest on deposits and other borrowings                              |  | $                        | 3,227,896   |   |      | $ | 2,133,131   |  
|Income taxes                                                           |  | $                        | 175,000     |   |      | $ | 975,000     |  

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



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MONARCH FINANCIAL HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. BASIS OF PRESENTATION

In the opinion of
management, the accompanying unaudited consolidated financial statements contain all adjustments consisting of normal recurring accruals necessary to present fairly Monarch Financial Holdings, Inc.s financial position as of March 31,
2007; the consolidated statements of income for the three months ended March 31, 2007 and 2006; the consolidated statements of changes in shareholders equity for the three months ended March 31, 2007 and 2006; and the consolidated
statements of cash flows for the three months ended March 31, 2007 and 2006. 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, 2007 are not necessarily indicative of the results that may be expected for the year ended December 31, 2007.

NOTE 2.GENERAL

Monarch Financial Holdings, Inc. (Monarch or the Company) is a Virginia chartered
Company that offers a full range of banking services, primarily to individuals and businesses in the Hampton Roads area of Virginia. On June 1, 2006, the Company was created through a reorganization plan, under the laws of the Commonwealth of
Virginia, in which Monarch Bank became a wholly-owned subsidiary of Monarch Financial Holdings, Inc. In addition, the number of authorized common stock shares increased to 20,000,000 and the shareholders of the Company became shareholders of the
Corporation in a stock-for-stock conversion. Monarch Bank was incorporated in Virginia on May 1, 1998, and commenced operations as a commercial bank on April 14, 1999, at its main office in the Greenbrier area in Chesapeake. In addition to
its main office, Monarch has eight other 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 two offices in downtown Norfolk.

Monarch Home Funding (MHF) originates and sells permanent
residential mortgage loans. MHF began operations as a mortgage broker in September 2000, originating conventional, FHA and VA residential loans. In the third quarter of 2003, MHF became a mortgage lender. As a mortgage lender, MHF can underwrite
mortgage loans for its customers, providing additional mortgage related products and services with much more efficiency. MHF originates conventional, FHA and VA residential loans and offers a construction-permanent loan program. Monarch Home Funding
was a Limited Liability Company prior to December 29, 2006, at which time it was merged into Monarch Bank and now operates as a division of Monarch Bank. MHF has three officesone in Chesapeake, one in Norfolk and one in Virginia Beach.

In August 2001, the Company formed Monarch Investment, LLC, for the purpose of selling annuities and investment securities and services.
The Company owns a 100% interest in Monarch Investment, LLC. The Company has invested in the formation of Bankers Investments Group, LLC, the parent company of BI Investments, LLC, a registered brokerage firm and investment advisor. BI Investments,
LLC, sells non-deposit investment products in various community banks in Virginia, which are owners in Bankers Investments Group, LLC, with the Virginia Bankers Association Management Services Division. In September 2006, Monarch Investment, LLC,
formed a subsidiary titled Virginia Asset Group, LLC. Virginia Asset Group, LLC, is owned 51% by Monarch Investment, LLC and 49% by Darin Ely.

In January 2003, the Company purchased a minority 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 Monarch Bank customers and to the general public.

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

In November 2004, the Company purchased a minority interest in Bankers Title of Hampton Roads,
LLC, in a joint venture with the Virginia Bankers Association and many other community banks in Virginia. In December 2006 Bankers Title of Hampton Roads, LLC, was merged into Bankers Title of Central Virginia, with the minority
interest now held in that name. Bankers Title, LLC, is a full service title insurance agency that provides title insurance products and services to Monarch Financial Holdings, Inc., Monarch Home Funding customers and to the general public.



7



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NOTE 3. EARNINGS PER SHARE (EPS)

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



|                                                  |  |                          |           |      |   |          
|------------------------------------------------- |  | ------------------------ | --------- | ---- | - | ---------
|                                                  |  | 3 months ended March 31,
|                                                  |  | 2007                     |           | 2006
|Net income (numerator, basic and diluted)         |  | $                        | 926,388   |      | $ | 807,424  
|Weighted average shares outstanding (denominator) |  |                          | 4,022,654 |      |   | 3,938,300
|                                                  |  |                          |           |      |   |          
|Income per common sharebasic                     |  | $                        | 0.23      |      | $ | 0.21     
|                                                  |  |                          |           |      |   |          
|Weighted average sharesdiluted (denominator)     |  |                          | 4,230,078 |      |   | 4,165,945
|                                                  |  |                          |           |      |   |          
|Income per common sharediluted                   |  | $                        | 0.22      |      | $ | 0.19     
|                                                  |  |                          |           |      |   |          

The dilutive effect of stock options is 207,424 and 227,645 shares for the three months ended
March 31, 2007 and 2006, respectively.

NOTE 4 COMPREHENSIVE INCOME

Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets
and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income. The
only component of other comprehensive income consists of unrealized gains and losses on available-for-sale securities. The Company accounts for comprehensive income in accordance with FASB Statement No. 130, Reporting Comprehensive Income. The
following is a detail of comprehensive income for the three months ended March 31, 2007 and 2006:



|                                                                                 |  |                            |         |   |      |   |         |  
|-------------------------------------------------------------------------------- |  | -------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                 |  | Three Months EndedMarch 31 |        
|                                                                                 |  | 2007                       |         |   | 2006 |  
|Net Income                                                                       |  | $                          | 926,388 |   |      | $ | 807,424 |  
|Change in unrealized losses on securities available-for-sale, net of tax expense |  |                            | (2,183  | ) |      |   | (50,015 | )
|                                                                                 |  |                            |         |   |      |   |         |  
|Total comprehensive income                                                       |  | $                          | 924,205 |   |      | $ | 757,409 |  
|                                                                                 |  |                            |         |   |      |   |         |  
|Unrealized holding losses during the period                                      |  | $                          | (3,308  | ) |      | $ | (75,780 | )
|Less reclassification adjustment for losses included in income                   |  |                            |        |   |      |   |        |  
|                                                                                 |  |                            |         |   |      |   |         |  
|Total other comprehensive loss before income tax benefit                         |  |                            | (3,308  | ) |      |   | (75,780 | )
|Income tax benefit                                                               |  |                            | 1,125   |   |      |   | 25,765  |  
|                                                                                 |  |                            |         |   |      |   |         |  
|Net unrealized losses                                                            |  | $                          | (2,183  | ) |      | $ | (50,015 | )
|                                                                                 |  |                            |         |   |      |   |         |  



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NOTE 5. STOCK-BASED COMPENSATION

As of March 31, 2007, the Company had a stock-based compensation plan. Prior to January 1, 2006, the Company accounted for the plan under the recognition and measurement principles of APB Opinion 25,
Accounting for Stock Issued to Employees,and related interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under the plan had an exercise price equal to the market value of the
underlying common stock on the date of the grant. On January 1, 2006, the Company adopted FAS Statement No. 123R Share-Based Payment, (FAS 123R) that addresses the accounting for share-based payment transactions in which a
company receives employee services in exchange for either equity instruments of the company or liabilities that are based on the fair value of the companys equity instruments or that may be settled by the issuance of such equity instruments.
FAS 123R eliminates the ability to account for share-based compensation transactions using the intrinsic method and requires that such transactions be accounted for using a fair-value-based method and recognized as expense in the consolidated
statement of income.

In May 2006, Company shareholders ratified the adoption of a new stock-based compensation plan to succeed the Monarch
Bank 1999 Incentive Stock Option Plan. The new Monarch Bank 2006 Equity Incentive Plan authorizes the compensation committee to grant options, stock appreciation rights, stock awards, performance stock awards, and stock units to designated
directors, officers, key employees, consultants and advisors to the Company and its subsidiaries. The Plan authorizes the Company to issue up to 420,000 shares of Company Common Stock plus the number of shares of Company 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, the Company has 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 three years from issue. Total compensation costs will be recognized annually on a pro-rata basis
over the vesting period.

NOTE 6. SEGMENT REPORTING

Reportable segments include community banking and mortgage banking services. Community banking involves making loans to and generating deposits from individuals and businesses in the markets where the Company has
offices. Mortgage banking originates residential loans and subsequently sells them to investors. The mortgage banking segment is a strategic business unit that offers different products and services. It is managed separately because the segment
appeals to different markets and, accordingly, requires different technology and marketing strategies. The segments most significant revenue and expense is noninterest income and noninterest expense, respectively. The Company does 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. All intersegment sales prices are market based. The assets and liabilities and operating
results of the Companys 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, 2007 and 2006 is shown in the following table. The Other category includes
corporate related items, results of insignificant operations and, as it relates to segment profit (loss), income and expense not allocated to reportable segments.



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|                                                      |  |                  |             |   |                 |   |           |                          |  |   |            |   |  |   |             |  
|----------------------------------------------------- |  | ---------------- | ----------- | - | --------------- | - | --------- | ------------------------ |  | - | ---------- | - |  | - | ----------- | -
|                                                      |  | CommunityBanking |             |   | MortgageBanking |   |           | IntersegmentEliminations |  |   | Total      |  
|Three Months Ended March 31, 2007                     |  |                  |             |   |                 |   |           |                          |  |   |            |   |  |   |             |  
|Net interest income after provision for loan losses   |  | $                | 3,657,073   |   |                 | $ | (30,388   | )                        |  | $ |           |   |  | $ | 3,626,685   |  
|Noninterest income                                    |  |                  | 601,128     |   |                 |   | 460,547   |                          |  |   | (14,930    | ) |  |   | 1,046,745   |  
|Noninterest expense                                   |  |                  | (2,978,176  | ) |                 |   | (458,729  | )                        |  |   | 43,500     |   |  |   | (3,393,405  | )
|                                                      |  |                  |             |   |                 |   |           |                          |  |   |            |   |  |   |             |  
|Net income before income taxes and minority interests |  | $                | 1,280,025   |   |                 | $ | (28,570   | )                        |  | $ | 28,570     |   |  | $ | 1,280,025   |  
|                                                      |  |                  |             |   |                 |   |           |                          |  |   |            |   |  |   |             |  
|Three Months Ended March 31, 2006                     |  |                  |             |   |                 |   |           |                          |  |   |            |   |  |   |             |  
|Net interest income after provision for loan losses   |  | $                | 3,119,255   |   |                 | $ | (50,506   | )                        |  | $ |           |   |  | $ | 3,068,749   |  
|Noninterest income                                    |  |                  | 398,522     |   |                 |   | 632,898   |                          |  |   | (124,983   | ) |  |   | 906,437     |  
|Noninterest expense                                   |  |                  | (2,324,487  | ) |                 |   | (496,409  | )                        |  |   | 43,500     |   |  |   | (2,777,396  | )
|                                                      |  |                  |             |   |                 |   |           |                          |  |   |            |   |  |   |             |  
|Net income before income taxes and minority interests |  | $                | 1,193,290   |   |                 | $ | 85,983    |                          |  | $ | (81,483    | ) |  | $ | 1,197,790   |  
|                                                      |  |                  |             |   |                 |   |           |                          |  |   |            |   |  |   |             |  
|Segment Assets                                        |  |                  |             |   |                 |   |           |                          |  |   |            |   |  |   |             |  
|2007                                                  |  | $                | 410,179,905 |   |                 | $ | 2,046,001 |                          |  | $ | (2,748,201 | ) |  | $ | 409,477,705 |  
|2006                                                  |  | $                | 349,342,946 |   |                 | $ | 4,563,681 |                          |  | $ | (5,188,871 | ) |  | $ | 348,717,756 |  

CRITICAL ACCOUNTING POLICIES

A summary of the Companys significant accounting policies is set forth in Note 2 to the Consolidated Financial Statements in the Companys 2006 Annual Report on Form 10-K.

The Companys financial statements are prepared in accordance with accounting principles generally accepted in the United States of America
(GAAP). The financial information contained within our statements is, to a significant extent, financial information that is based on measures of the financial effects of transactions and events that have already occurred. A variety of
factors could affect the ultimate value that is obtained when earning income, recognizing an expense, recovering an asset or relieving a liability. In addition, GAAP itself may change from one previously acceptable method to another method. Although
the economics of our transactions would be the same, the timing of events that would impact our transactions could change.

The financial
statements and related data presented herein were prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars, without considering the
changes in relative purchasing power of money over time due to inflation. The effect of changing prices on financial institutions is typically different from other industries as the Companys assets and liabilities are monetary in nature.
Interest rates are significantly impacted by inflation, but neither the timing nor the magnitude of the changes are directly related to price level indices.

In September 2006, the Securities and Exchange Commission (SEC) released Staff Accounting Bulletin 108 (SAB 108). SAB 108 expresses the SEC staffs views regarding the process of quantifying financial
statement misstatements. These interpretations were issued to address diversity in practice and the potential under current practice for the build up of improper amounts on the balance sheet. SAB 108 expresses the SEC staffs view
that a registrants materiality evaluation of an identified unadjusted error should quantify the effects of the error on each financial statement and related financial statement disclosures and that prior year misstatements should be considered
in quantifying misstatements in current year financial statements. SAB 108 also states that correcting prior year financial statements for immaterial errors would not require previously filed reports to be amended. Such correction may be
made the next time the registrant files the prior year financial statements. Registrants electing not to restate prior periods should reflect the effects of initially applying the guidance in SAB 108 in their annual financial statements
covering the first fiscal year ending after November 15, 2006. The cumulative effect of the initial application should be reported in the carrying



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amounts of assets and liabilities as of the beginning of that fiscal year and the offsetting adjustment should be made to the opening balance of retained
earnings for that year. Registrants should disclose the nature and amount of each individual error being corrected in the cumulative adjustment. The disclosure should also include when and how each error arose and the fact that the errors
had previously been considered immaterial. The SEC staff encourages early application of the guidance in SAB 108 for interim periods of the first fiscal year ending after November 15, 2006. The Company does not expect the implementation of
SAB 108 to have a material impact on its financial statements.

In February 2007, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Liabilities, including an amendment to FASB Statement No. 115, which permits entities to choose to measure many financial instruments and
certain other items at fair value and also establishes fair presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS
159 is effective for financial statements issued for fiscal years beginning November 15, 2007. The Company is assessing the impact, if any, that adoption will have on its financial statements.

In September 2006, the FASB issued SFAS 157, Fair Value Measurements. SFAS 157 defines fair value, establishes a framework for measuring
fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 does not require any new fair value measurements but may change current practice for some entities. This Statement is
effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those years. The Company does not expect the implementation of SFAS 157 to have a material impact on its financial
statements.

In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes  an
interpretation of FASB Statement No. 109 (FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprises financial statements in accordance with SFAS 109. The Interpretation prescribes a
recognition threshold and measurement principles for the financial statement recognition and measurement of tax positions taken or expected to be taken on a tax return. This Interpretation also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure, and transition. The Company adopted the provisions of FIN 48 effective January 1, 2007. The effect of applying provisions of the Interpretation to the Companys financial
statements was immaterial.

In March 2006, the FASB issued SFAS 156, Accounting for Servicing of Financial Assets-an amendment
of FASB Statement No. 140. SFAS 156 requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into certain servicing contracts. The
Statement also requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable. SFAS 156 permits an entity to choose between the amortization and fair value methods for
subsequent measurements. At initial adoption, the Statement permits a one-time reclassification of available-for-sale securities to trading securities by entities with recognized servicing rights. SFAS 156 also requires separate
presentation of servicing assets and servicing liabilities subsequently measured at fair value in the statement of financial position and additional disclosures for all separately recognized servicing assets and servicing liabilities. This
Statement is effective as of the beginning of an entitys first fiscal year that begins after September 15, 2006. The Company does not expect the implementation of SFAS 156 to have a material impact on its financial statements.

In February 2006, the FASB issued SFAS 155, Accounting for Certain Hybrid Financial Instruments  an amendment of FASB Statements
No. 133 and 140. SFAS 155 permits fair value measurement of any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation. The Statement also clarifies which interest-only strips
and principal-only strips are not subject to the requirements of Statement 133. It establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid
financial instruments that contain an embedded derivative requiring bifurcation. SFAS 155 also clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives. Finally, SFAS 155 amends Statement 140
to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. SFAS 155 is effective for all
financial instruments acquired or issued after the beginning of an entitys first fiscal year that begins after September 15, 2006. The Company does not expect the implementation of SFAS 155 to have a material impact on its financial
statements.

Refer to the Companys December 31, 2006 Annual Report on Form 10-K for previously announced accounting
pronouncements.



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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 the Companys financial condition and results of operations. The discussion and analysis should be read in conjunction with the Consolidated Financial Statements and supplemental financial data.

This report contains forward-looking statements with respect to the financial condition, results of operations and business of the Company. These
forward-looking statements involve risks and uncertainties and are based on the beliefs and assumptions of management of the Company 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 the Company is 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 business and income for the Company.
|- |  | --------------------------------------------------------------------------------------------------------------------------------



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

A summary of the Companys significant risk factors is set forth in Note 1A in the Companys 2006 Form 10-K.

Earnings Summary

Monarch Financial Holdings, Inc. reported net income of $926,388 for the three months ending
March 31, 2007, compared to $807,424 for the same period in 2006, an increase of $118,964, or 14.7%. Net interest income increased 19.1% or $604,679, to $3,769,685, during the first three months of 2007, when compared to 2006. Noninterest
income was $1,046,745, an increase of $140,308, or 15.5% and noninterest expenses totaled $3,393,405, an increase of $616,009, or 22.2%. Basic and diluted earnings per share of common stock were $0.23 and $0.22 for the first three months of 2007 and
$0.21 and $0.19 for 2006.

For the three months ended March 31, 2007, profitability as measured by Monarchs annualized return on
average assets (ROA) was 1.01% compared to 1.04% for the same period in 2006. Another measure of the Companys profitability, the annualized return on average equity (ROE) was 10.80% for the first quarter of 2007 and 2006.

Net Interest Income

Net interest income represents a
principal source of earnings for the Company. In 2007 increases in net interest income are attributable primarily to the overall growth of the Company, coupled with higher rates on larger average outstanding balances and increases in the net
interest margin. The Federal Reserve Banks Open Market Committee had been steadily increasing short-term interest rates since June 2004 until June 2006. These increases resulted in a Federal Funds rate of 5.25% at March 31, 2007 as
compared to 4.75% at March 31, 2006. These increases in the Federal Funds target rate raised the Wall Street Journal Prime Rate to 8.25% at March 31, 2007 versus 7.75% at March 31, 2006. A majority of the Companys loans use the
Wall Street Journal Prime Rate as their rate index, and increases in this rate increase interest income.

Net interest income was
$3,769,685 for the first quarter of 2007, a 19.1%, or a $604,679 increase over the first quarter of 2006. Total interest and fees on loans, the largest component of net interest income, increased 34.1%, or $1,720,126, to $6,759,212, compared to
$5,039,086 for the same period in 2006. Interest on investment securities declined $16,108 or 9.1% for the first quarter of 2007 compared to 2006 due to declining portfolio balances. Interest on federal funds sold decreased $17,934 to $5,086 while
interest on deposits in other banks declined $48,612 to $17,317 in the first three months of 2007 compared to 2006. With the inverted yield curve, offering rates on new investments and overnight balances have remained low so the Company has elected
to utilize funds from the maturities in these products to fund our higher yielding loan portfolio. Dividends on restricted equity securities totaled $36,322 compared to $28,095 in the first three months of 2007 compared to the same period in 2006,
as a result of higher balances of stock in the Federal Reserve and the Federal Home Loan Bank of Atlanta.



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Interest expense on deposits increased $714,608, or 35.0% for the quarter of 2007 compared to 2006. The
increase in deposit expense is due to the increase in average outstanding deposits, arising from the overall growth of the Company and an increase in the overall rates paid on deposits. Interest expense on borrowings totaled $277,786, a 121.4%
increase for the first three months of 2007 compared to 2006. Increased borrowing needs due to funding loan growth coupled with higher rates contributed to the increase. The Company issued trust preferred subordinated debt in the third quarter of
2006 which provided a funding source for loans and increased interest expense $174,094 for the first quarter of 2007.

Average Balances, Income and
Expenses, Yields and Rates

The net interest spread on a tax-equivalent basis for first three months of 2007 decreased 9 basis points to
3.49% when compared to 3.58% for the same period in 2006. The yield on earning assets increased to 8.09% in 2007 compared to 7.30% for the first three months of 2006, while the cost of interest bearing liabilities increased to 4.60% compared to
3.72%, respectively, for the same period. This resulted in a lower interest rate spread. However, interest margin increased for the same period due to the higher growth in earning assets compared to liabilities. The net interest margin for the first
quarter of 2007 was 4.42% compared to 4.38% for the same period in 2006.

Bank Owned Life Insurance (BOLI) has been included in interest
earning assets. The Company purchased $6,000,000 in BOLI during the fourth quarter of 2005. The income on BOLI is not subject to Federal Income tax, giving it a tax-effective yield of 5.9%.

In July, 2006, Monarch 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 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.



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AVERAGE BALANCES, INCOME AND EXPENSE, YIELDS AND RATES



|                                              |  |                             |             |   |                |   |              |  |      |                |  |   |                |   |              |   |           |  |      |  
|--------------------------------------------- |  | --------------------------- | ----------- | - | -------------- | - | ------------ |  | ---- | -------------- |  | - | -------------- | - | ------------ | - | --------- |  | ---- | -
|                                              |  | For Periods Ended March 31, |            
|                                              |  | 2007                        |             |   | 2006           |  
|                                              |  | AverageBalance              |             |   | Income/Expense |   | YieldRate(1) |  |      | AverageBalance |  |   | Income/Expense |   | YieldRate(1) |  
|ASSETS                                        |  |                             |             |   |                |   |              |  |      |                |  |   |                |   |              |   |           |  |      |  
|Securities, at amortized cost                 |  |                             |             |   |                |   |              |  |      |                |  |   |                |   |              |   |           |  |      |  
|Taxable                                       |  | $                           | 15,344,155  |   |                | $ | 161,253      |  | 4.26 | %              |  | $ | 17,798,418     |   |              | $ | 177,361   |  | 4.04 | %
|                                              |  |                             |             |   |                |   |              |  |      |                |  |   |                |   |              |   |           |  |      |  
|Total securities                              |  |                             | 15,344,155  |   |                |   | 161,253      |  | 4.26 | %              |  |   | 17,798,418     |   |              |   | 177,361   |  | 4.04 | %
|Loans, net                                    |  |                             | 328,697,139 |   |                |   | 6,759,212    |  | 8.34 | %              |  |   | 267,444,242    |   |              |   | 5,039,086 |  | 7.64 | %
|Federal funds sold                            |  |                             | 394,997     |   |                |   | 5,086        |  | 5.22 | %              |  |   | 2,170,450      |   |              |   | 23,020    |  | 4.30 | %
|Dividend-earning restricted equity securities |  |                             | 2,598,882   |   |                |   | 36,322       |  | 5.67 | %              |  |   | 1,749,314      |   |              |   | 28,095    |  | 6.51 | %
|Deposits in other banks                       |  |                             | 1,321,184   |   |                |   | 17,317       |  | 5.32 | %              |  |   | 6,132,489      |   |              |   | 65,929    |  | 4.36 | %
|Bank owned life insurance (2)                 |  |                             | 6,321,563   |   |                |   | 92,425       |  | 5.93 | %              |  |   | 6,079,040      |   |              |   | 88,467    |  | 5.90 | %
|                                              |  |                             |             |   |                |   |              |  |      |                |  |   |                |   |              |   |           |  |      |  
|Total earning assets                          |  |                             | 354,677,920 |   |                |   | 7,071,615    |  | 8.09 | %              |  |   | 301,373,953    |   |              |   | 5,421,958 |  | 7.30 | %
|                                              |  |                             |             |   |                |   |              |  |      |                |  |   |                |   |              |   |           |  |      |  
|Less: Allowance for loan losses               |  |                             | (3,276,789  | ) |                |   |              |  |      |                |  |   | (2,723,145     | ) |              |   |           |  |      |  
|Total nonearning assets                       |  |                             | 19,626,262  |   |                |   |              |  |      |                |  |   | 17,598,237     |   |              |   |           |  |      |  
|                                              |  |                             |             |   |                |   |              |  |      |                |  |   |                |   |              |   |           |  |      |  
|Total assets                                  |  | $                           | 371,027,393 |   |                |   |              |  |      |                |  | $ | 316,249,045    |   |              |   |           |  |      |  
|                                              |  |                             |             |   |                |   |              |  |      |                |  |   |                |   |              |   |           |  |      |  
|                                              |  |                             |             |   |                |  
|LIABILITIES and STOCKHOLDERS EQUITY          |  |                             |             |   |                |   |              |  |      |                |  |   |                |   |              |   |           |  |      |  
|Interest-bearing deposits:                    |  |                             |             |   |                |   |              |  |      |                |  |   |                |   |              |   |           |  |      |  
|Checking                                      |  | $                           | 9,695,337   |   |                | $ | 7,062        |  | 0.30 | %              |  | $ | 10,333,795     |   |              | $ | 5,275     |  | 0.21 | %
|Regular savings                               |  |                             | 6,401,288   |   |                |   | 9,552        |  | 0.61 | %              |  |   | 9,050,619      |   |              |   | 14,396    |  | 0.65 | %
|Money market savings                          |  |                             | 145,094,331 |   |                |   | 1,650,481    |  | 4.61 | %              |  |   | 131,687,999    |   |              |   | 1,319,433 |  | 4.06 | %
|Certificates of deposit                       |  |                             |             |   |                |   |              |  |      |                |  |   |                |   |              |   |           |  |      |  
|$100,000 and over                             |  |                             | 43,170,531  |   |                |   | 541,265      |  | 5.08 | %              |  |   | 28,574,786     |   |              |   | 290,118   |  | 4.12 | %
|Under $100,000                                |  |                             | 47,763,624  |   |                |   | 549,265      |  | 4.66 | %              |  |   | 43,466,585     |   |              |   | 413,795   |  | 3.86 | %
|                                              |  |                             |             |   |                |   |              |  |      |                |  |   |                |   |              |   |           |  |      |  
|Total interest-bearing deposits               |  |                             | 252,125,111 |   |                |   | 2,757,625    |  | 4.44 | %              |  |   | 223,113,784    |   |              |   | 2,043,017 |  | 3.71 | %
|Borrowings                                    |  |                             | 30,758,951  |   |                |   | 451,880      |  | 5.96 | %              |  |   | 13,053,748     |   |              |   | 125,468   |  | 3.90 | %
|                                              |  |                             |             |   |                |   |              |  |      |                |  |   |                |   |              |   |           |  |      |  
|Total interest-bearing liabilities            |  |                             | 282,884,062 |   |                | $ | 3,209,505    |  | 4.60 | %              |  |   | 236,167,532    |   |              | $ | 2,168,485 |  | 3.72 | %
|Noninterest-bearing liabilities               |  |                             |             |   |                |   |              |  |      |                |  |   |                |   |              |   |           |  |      |  
|Demand deposits                               |  |                             | 51,226,688  |   |                |   |              |  |      |                |  |   | 48,656,978     |   |              |   |           |  |      |  
|Other noninterest-bearing liabilities         |  |                             | 2,148,166   |   |                |   |              |  |      |                |  |   | 1,111,675      |   |              |   |           |  |      |  
|                                              |  |                             |             |   |                |   |              |  |      |                |  |   |                |   |              |   |           |  |      |  
|Total liabilities                             |  |                             | 336,258,916 |   |                |   |              |  |      |                |  |   | 285,936,185    |   |              |   |           |  |      |  
|Shareholders equity                          |  |                             | 34,768,477  |   |                |   |              |  |      |                |  |   | 30,312,860     |   |              |   |           |  |      |  
|                                              |  |                             |             |   |                |   |              |  |      |                |  |   |                |   |              |   |           |  |      |  
|Total liabilities and stockholders equity    |  | $                           | 371,027,393 |   |                |   |              |  |      |                |  | $ | 316,249,045    |   |              |   |           |  |      |  
|                                              |  |                             |             |   |                |   |              |  |      |                |  |   |                |   |              |   |           |  |      |  
|Net interest income (2)                       |  |                             |             |   |                | $ | 3,862,110    |  |      |                |  |   |                |   |              | $ | 3,253,473 |  |      |  
|                                              |  |                             |             |   |                |   |              |  |      |                |  |   |                |   |              |   |           |  |      |  
|Interest rate spread (2)(3)                   |  |                             |             |   |                |   |              |  | 3.48 | %              |  |   |                |   |              |   |           |  | 3.58 | %
|                                              |  |                             |             |   |                |   |              |  |      |                |  |   |                |   |              |   |           |  |      |  
|Net interest margin (2)(4)                    |  |                             |             |   |                |   |              |  | 4.42 | %              |  |   |                |   |              |   |           |  | 4.38 | %
|                                              |  |                             |             |   |                |   |              |  |      |                |  |   |                |   |              |   |           |  |      |  

---

|(1) | Yields are annualized and based on average daily balances.
|--- | ----------------------------------------------------------

|(2) | Income and yields are reported on a taxable equivalent basis assuming a federal tax rate of 34%, with a 31,425 adjustment for 2007 and a $30,079 adjustment for 2006.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

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



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##### Table of Contents

Noninterest Income

Total noninterest income was $1,046,745 for the first three months of 2007, an increase of $140,308 or 15.5%, compared to $906,437 for the same period in 2006. Gross mortgage banking income from Monarch Home Funding,
and the Companys commercial mortgage banking subsidiary, Monarch Capital, LLC, declined 27.2% or $172,351 to $460,547 during the period. The mortgage market has been impacted by the softening of the new and existing home sale market in the
Companys primary trade area, with increases in mortgage interest rates and a more competitive environment. The Company has taken action to reorganize the structure of its mortgage operations. The Companys subsidiary, Monarch Home
Funding, LLC, was merged into, and became a division of, Monarch Bank in late December 2006. In addition, during the first quarter of 2007, the Company began outsourcing its mortgage processing and underwriting activities, which will lower fixed
costs moving forward.

Service charges and fees on deposit accounts totaled $249,839 for the first three months of 2007, which represents a
23.4% increase over the same period in 2006. The primary components in this increase were deposit account growth and ATM transaction fees. The Company has 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, the Company receives a portion of the transaction surcharge and the Companys customers can withdraw
cash from the machines without a fee or transaction surcharge. A portion of the ATM fee increase was also due to fees generated at the Companys 8 ATMs located at the banking center sites. The third-party vendor relationship plus the
Companys 8 office ATMs, creates a network that now includes 50 active ATMs.

Investment and insurance commissions were $245,365 for
the first quarter of 2007, compared to $10,474 for the same period in 2006. This increase is due to the formation of the Companys subsidiary, Virginia Asset Group, LLC (VAG), in September 2006. The Company has a 51% ownership in VAG, which
sells insurance and non-deposit investment products.

Other noninterest income increased $30,362, to $90,994 in the first three months of
2007 compared to $60,632 for the same period in 2006. A large component of other noninterest income is Bank Owned Life Insurance (BOLI). The Company purchased $6.0 million in BOLI during the fourth quarter of 2005. The income from BOLI, which was
$61,000 in the first quarter of 2007 and $58,388 in the first quarter of 2006, is not subject to tax, yielding tax-effective income of $92,425 and $88,467 for the same periods, respectively.

There were no security sales in the first quarter of 2007 or 2006.

Noninterest Expense

Total noninterest expenses for the first three months of 2007 totaled $3,319,128, an increase of
$541,732, or 19.5%, compared to $2,777,396 for the same period in 2006. This increase is attributable to following factors: 1) an increase in salaries and employee benefits of $375,887 primarily arising from additional salaries due to one new
banking office, the addition of new production and support staff, a one time adjustment to retirement expense, and higher employee benefit costs; 2) an increase of $72,583 in occupancy plus furniture and equipment expenses related to the additional
banking office and an additional commercial office; 3) a $41,100 increase in regulatory fees and franchise taxes; 4) a reduction of $48,587 in advertising expense due to hiring an in-house marketing person; and 4) $100,749 in other expenses related
to the Companys growth.

Income Taxes

The income tax provision was $407,484 for the first quarter of 2007 compared to $390,366 for the prior year. The effective tax rate for the first quarter of 2007 was 30.5%, compared to 32.6% for the same period in 2006.



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##### Table of Contents

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

GENERAL

Total assets increased less than 1.0% to
$409,477,705 at March 31, 2007 when compared to assets of $407,719,575 at December 31, 2006. On an annual basis total assets increased 17.4% at March 31, 2007 when compared to assets of $348,717,756 at March 31, 2006. Total loans
as of March 31, 2007 were $338.5 million, an increase of $17.2 million, or 5.4%, from $321.3 million at year-end 2006. On an annual basis total loans increased $64.9 million, or 23.7%, from $273.6 million in March 2006. Mortgages held for sale
increased $600 thousand to $1.2 million, or 100.0% from $600 thousand at December 31, 2006. Investment securities were $32.5 million at March 31, 2007, compared to $50.0 million at year-end 2006. On an annual basis, investments securities
decreased $9.4 million, or 22.4% over March 2006. Cash and cash equivalents were $19.6 million, a decrease of $600 thousand, or 3.2% from $19.0 million at December 31, 2006.

Deposits increased $4.2 million, or 1.3%, during the three months ended March 31, 2007. On an annualized basis deposits increased $27.9 million or
9.6%. Noninterest-bearing demand deposit accounts decreased $3.7 million to $59.0 million, a 5.9% decrease over December 31, 2006 and $583 thousand on an annual basis when compared to March 31, 2006. Interest-bearing deposits totaled
$259.3 million at March 31, 2007, compared to $251.4 million at year-end 2006. Money market deposits continue to be a major component of the interest-bearing deposits.

Stockholders equity was $35.4 million at March 31, 2006, compared to $34.0 million at December 31, 2006. Components of the change in
stockholders equity include net income of $926,388, increases in net unrealized losses on available-for-sale securities totaling $2,183, stock based compensation totaling $83,803, and exercised stock options, including the realization of tax
benefits, totaling $415,438.

Asset Quality

The Company had no nonperforming assets at March 31, 2007. There were no charge-offs or recoveries during the first quarter of 2007. There were no nonperforming assets at December 31, 2006. Nonperforming assets traditionally
consist of nonaccrual loans, loans past due 90 days or more and still accruing interest, restructured loans and other real estate owned. There were no impaired loans at March 31, 2007 and December 31, 2006. The Company continues to demand
a high level of credit quality on new loans.

Allowance for Loan Losses

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

While the Company believes it has sufficient allowance for its 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 $3,378,000 and $2,783,000 at March 31, 2007 and March 31, 2006, respectively. The ratio of the allowance for loan losses to total loans outstanding at
March 31, 2007 and 2006 was 1.00% and 1.02%, respectively.

During the first three months of 2007 and 2006, the Company recorded $143,000 and $96,257
in provision expense, respectively. There were no loans charged-off during the first quarter of 2007 or 2006. Charge-offs are charged directly to the allowance when they occur. Since it began business in 1999, the Company has recorded total
charge-offs of approximately $52,000. There were no recoveries in the first quarter of 2007 and one recovery totaling $1,743 in the first quarter of 2006. The table below summarizes the activity in the allowance for loans losses for the three month
periods ending March 31, 2007 and 2006.



16



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##### Table of Contents

Activity in the allowance for loan losses for the three months ended March 31, was as follows:



|                                  |  |      |           |      |   |          
|--------------------------------- |  | ---- | --------- | ---- | - | ---------
|                                  |  | 2007 |           | 2006
|Balance, January 1                |  | $    | 3,235,000 |      | $ | 2,685,000
|Provisions charged against income |  |      | 143,000   |      |   | 96,257   
|Recoveries of loans charged off   |  |      | 0         |      |   | 1,743    
|Loans charged off                 |  |      | 0         |      |   | 0        
|                                  |  |      |           |      |   |          
|Balance at end of period          |  | $    | 3,378,000 |      | $ | 2,783,000
|                                  |  |      |           |      |   |          

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

Homogenous loans, such as consumer installment, home equity loans, and smaller consumer loans are not individually reviewed and are generally risk graded at the same levels. The risk grade and reserves are established
for each homogenous pool of loans and are based on the expected net charge-offs from a current trend in delinquencies, losses or historical experience and general economic conditions. The Company has no material delinquencies in these types of
loans, and has not, since inception, had a trend or an indication of a trend that would guide the Company in expected material losses in these types of homogenous pools of loans. Management believes that the allowance for loan losses is adequate to
absorb any inherent losses on existing loans in the Companys loan portfolio at March 31, 2007.

Liquidity

Management monitors and plans the Companys liquidity position for future periods. Liquidity is provided from cash and due from banks,
interest-bearing deposits in other banks, repayments from loans, increases in deposits, lines of credit from four correspondent banks and two federal agency banks and a planned structured continuous maturity of investments. Management believes that
these factors provide sufficient and timely liquidity for the foreseeable future.

Management also takes 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.

The Company has a line of credit that can equal up to 40% of assets with the Federal Home Loan Bank of Atlanta (FHLB) that totaled approximately $76,208,923 with $26,648,784 available at March 31, 2007. This line is currently reduced
by $5.0 million, which has been pledged as collateral for public deposits. Should the Company ever desire to increase their line of credit beyond the current 40% limit, the FHLB would allow borrowings of up to 50% of total assets once the Company
meets specific eligibility requirements.

Borrowings outstanding under the FHLB line of credit were $44,560,139 at March 31, 2007 and
$48,075,117 at December 31, 2006. The Company had two borrowing advances outstanding as of March 31, 2007, with the following final maturities:



|               |  |                
|-------------- |  | ---------------
|Advance Amount |  | Expiration Date
|$42,710,000    |  | April 2007     
|1,850,139      |  | September 2015 
|               |  |                
|$44,560,139    |  |                
|               |  |                

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



17



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##### Table of Contents

The advance maturing in 2007 is a daily rate credit that matures April 2, 2007. The rate on
March 31, 2007 was 5.66%. The Company uses borrowings at the end of each quarter to increase its investment securities that are not subject to taxation by the Commonwealth of Virginia. The Company is not subject to state income tax but is
subject to Virginia Franchise Tax, which is calculated on its capital level, less certain deductions. One deduction is the average balances of bonds that are not subject to taxation by the Commonwealth of Virginia, primarily certain qualified U.S.
Government Agency bonds. The Company has found that it can save more in taxes than it pays in interest expense. Shortly before the end of each calendar quarter, the Company purchases FHLB discount notes that mature soon after the quarter-end. The
proceeds from the maturity of the discount note are used to repay the borrowings. The Company only enters into this type of agreement near the end of the quarter since that is the period used in the franchise tax calculation.

In the course of operations, due to fluctuations in loan and deposit levels, the Company occasionally finds it necessary to purchase Federal Funds on a
short-term basis. The Company also has federal funds lines of credit facilities established with three other banks in the total amount of $15,000,000. At March 31, 2007 there were no outstanding balances on these lines. The Company also has
access to the Federal Reserve Banks discount window should a liquidity crisis occur.

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

Off-Balance Sheet Arrangements

The Company enters 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, 2007 and December 31, 2006 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 Federal Home Loan Bank for $5 million at March 31, 2007 and December 31, 2006.

Commitments to extend credit, which amounted to $181.5 million at March 31, 2007 and $158.6 million at December 31, 2006, 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.

There were no commitments by the Company to purchase securities on March 31, 2007 or December 31, 2006.

Standby letters of credit are conditional commitments issued by the Company guaranteeing the performance of a customer to a third party.
Those guarantees are primarily issued to support public and private borrowing arrangements. At March 31, 2007 and December 31, 2006, the Company had $4.5 million and $4.7 million, respectively, in outstanding standby letters of credit.

The Company has ten non-cancelable leases for premises. The original lease terms are from one to thirty years and have various renewal and
option dates.

Capital Adequacy

The
Company is 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 the Companys financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that
involve quantitative measures of assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.

Management reviews the adequacy of the Companys capital on an ongoing basis with
reference to the size, composition, and quality of the Companys resources and compliance with regulatory requirements and industry standards. Management seeks to maintain a capital structure that will assure an adequate level of capital to
support anticipated asset growth and absorb potential losses.



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##### Table of Contents

Federal regulatory risk-based capital ratio guidelines require percentages to be applied to various
assets including off-balance sheet assets in relation to their perceived risk. Tier 1 capital consists of stockholders equity and minority interests in consolidated subsidiaries, less net unrealized gains on available-for-sale securities. Tier
2 capital, a component of total capital, consists of a portion of the allowance for loan losses, certain components of nonpermanent preferred stock and subordinated debt. The $10 million in trust preferred securities issued by Monarch in July 2006
qualified as Tier 1 capital. Monarchs ratios exceed regulatory requirements. As of March 31, 2007 the Company had a Tier 1 risk-based capital ratio of 11.82% and a Total risk-based capital ratio of 12.70%. At December 31, 2006 these
ratios were 12.18% and 13.07%, respectively.



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

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

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

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

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

Impacts of changing interest rates on loans and deposits are reflected in the Companys
financial statements. Management believes that the investment and insurance activities of Virginia Asset Group and mortgage banking operations of its division, Monarch Home Funding, provide somewhat of a natural interest rate hedge, in that the
Company is interest rate sensitive in the three-month period. When loan interest rates decline, the Companys earnings will be negatively impacted in the three-month period but the mortgage companys volume should increase as the demand
for refinancing increases. The reverse should occur in rising interest rate.

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



19



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##### Table of Contents

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

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



20



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##### Table of Contents

PART II
OTHER INFORMATION

Item 1.
Legal Proceedings

In the course of its operations, Monarch Financial Holdings, Inc. and its subsidiary are not
aware of any material pending or threatened litigation, unasserted claims and/or assessments through March 31, 2007 or subsequent thereto.

Item 2.
Changes in Securities

None.

Item 3.
Defaults Upon Senior Securities

Not applicable.

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

None.

Item 5.
Other Information

None.

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 pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
| | ------- | -------------------------------------------------------------------------------------



| | Exhibit | 32.2  Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
| | ------- | -------------------------------------------------------------------------------------------------------------



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



| | Form | 8-K filed January 24, 2007 to announce the Companys quarterly and annual financial performance.
| | ---- | ------------------------------------------------------------------------------------------------



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SIGNATURES

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



|                                                   |  |  |  |                   |  | 
|-------------------------------------------------- |  |  |  | ----------------- |  | 
|MONARCH FINANCIAL HOLDINGS, INC.                   |  |  |  |                   |  | 
|                                                   |  |  | 
|/s/ William F. Rountree, Jr.                       |  |  |  |                   |  | 
|William F. Rountree, Jr.                           |  |  |  | Date: May 8, 2007 |  | 
|President & Chief Executive Officer                |  |  |  |                   |  | 
|                                                   |  |  | 
|/s/ Brad E. Schwartz.                              |  |  |  |                   |  | 
|Brad E. Schwartz                                   |  |  |  | Date: May 8, 2007 |  | 
|Executive Vice President & Chief Financial Officer |  |  |  |                   |  | 



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