Monarch Financial Holdings, Inc. - FORM 10-Q

Attached files

file	filename
EX-31.1 - EXHIBIT 31.1 - Monarch Financial Holdings, Inc.	copyofmnrk-06302015xex311.htm
EX-31.2 - EXHIBIT 31.2 - Monarch Financial Holdings, Inc.	copyofmnrk-06302015xex312.htm
EX-32.1 - EXHIBIT 32.1 - Monarch Financial Holdings, Inc.	copyofmnrk-06302015xex321.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

_______________________________________________________

FORM 10-Q

_______________________________________________________



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

For Quarterly Period Ended: June 30, 2015



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

Commission File Number: 001-34565

_______________________________________________________

MONARCH FINANCIAL HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

_______________________________________________________



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

1435 Crossways Blvd.

Chesapeake, Virginia 23320

(Address of Principal Executive Offices, Zip Code)

(757) 389-5111

(Registrant's telephone number, including area code, of agent for service)

Not Applicable

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

_______________________________________________________

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

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

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



Large accelerated filer	¨	Accelerated filer	ý
Non-accelerated filer	¨	Smaller reporting company	¨

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

The number of shares of common stock outstanding as of August 3, 2015 was 10,779,945.

Table of Contents

MONARCH FINANCIAL HOLDINGS, INC.

FORM 10-Q

June 30, 2015

INDEX



PART I.	FINANCIAL INFORMATION
	ITEM 1.	Financial Statements
		Consolidated Statements of Condition as of June 30, 2015 and December 31, 2014	4
		Consolidated Statements of Income for the three and six months ended June 30, 2015 and June 30, 2014	5
		Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2015 and June 30, 2014	6
		Consolidated Statements of Stockholders' Equity for the six months ended June 30, 2015 and June 30, 2014	7
		Consolidated Statements of Cash Flows for the six months ended June 30, 2015 and June 30, 2014	8
		Notes to Unaudited Consolidated Financial Statements	9
	ITEM 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	31
	ITEM 3.	Quantitative and Qualitative Disclosures about Market Risk	58
	ITEM 4.	Controls and Procedures	60
PART II.	OTHER INFORMATION
	Item 1.	Legal Proceedings	61
	Item 1A.	Risk Factors	61
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	61
	Item 3.	Defaults Upon Senior Securities	61
	Item 4.	Mine Safety Disclosures	61
	Item 5.	Other Information	61
	Item 6.	Exhibits	62

Table of Contents

PART I—FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

MONARCH FINANCIAL HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CONDITION



	(Unaudited)
	June 30, 2015			December 31, 2014
ASSETS:
Cash and due from banks	$	15,318,732		$	14,503,072
Interest bearing bank balances	84,224,624			49,790,751
Federal funds sold	2,377,184			1,135,151
Total cash and cash equivalents	101,920,540			65,428,974
Investment securities available-for-sale, at fair value	17,338,416			23,725,362
Mortgage loans held for sale, net at fair value	193,948,066			147,690,276
Loans held for investment, net of unearned income	792,961,642			772,589,535
Less: allowance for loan losses	(8,676,361		)	(8,948,837		)
Loans, net	784,285,281			763,640,698
Property and equipment, net	30,117,050			30,247,464
Restricted equity securities	4,706,000			3,632,500
Bank owned life insurance	10,464,611			9,656,803
Goodwill	775,000			775,000
Other real estate owned, net of valuation allowance	—			144,000
Other assets	27,119,674			21,795,897
Total assets	$	1,170,674,638		$	1,066,736,974
LIABILITIES:
Deposits:
Demand deposits—non-interest bearing	$	293,441,635		$	235,301,171
Demand deposits—interest bearing	54,580,231			66,681,905
Savings deposits	19,431,123			20,003,086
Money market savings	379,716,129			369,221,343
Time deposits	231,854,039			228,206,408
Total deposits	979,023,157			919,413,913
Borrowings:
Trust preferred subordinated debt	10,000,000			10,000,000
Federal Home Loan Bank advances	46,025,500			11,075,497
Total borrowings	56,025,500			21,075,497
Other liabilities	22,166,764			18,710,247
Total liabilities	1,057,215,421			959,199,657
STOCKHOLDERS’ EQUITY:
Common stock, $5 par value; 20,000,000 shares authorized; issued and outstanding - 10,777,965 shares (includes non-vested shares of 341,450) at June 30, 2015 and 10,652,475 shares (includes non-vested shares of 279,750) at December 31, 2014	52,182,575			51,863,625
Additional paid-in capital	8,845,632			8,335,538
Retained earnings	52,411,915			47,354,407
Accumulated other comprehensive loss	(65,407		)	(102,237		)
Total Monarch Financial Holdings, Inc. stockholders’ equity	113,374,715			107,451,333
Non-controlling interest	84,502			85,984
Total equity	113,459,217			107,537,317
Total liabilities and stockholders’ equity	$	1,170,674,638		$	1,066,736,974

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

Table of Contents

ITEM 1. FINANCIAL STATEMENTS (CONTINUED)

MONARCH FINANCIAL HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)



	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2015			2014			2015			2014
Interest income:
Interest and fees on loans held for investment	$	10,032,923		$	9,089,071		$	19,873,259		$	18,567,963
Interest on mortgage loans held for sale	1,746,435			1,274,498			3,053,472			2,047,230
Interest on investment securities	78,784			91,929			167,699			167,978
Interest on federal funds sold	7,207			24,179			15,460			64,557
Dividends on equity securities	41,713			22,410			80,713			52,410
Interest on other bank accounts	116,754			54,905			218,783			90,937
Total interest income	12,023,816			10,556,992			23,409,386			20,991,075
Interest expense:
Interest on deposits	738,767			839,303			1,406,827			1,673,716
Interest on trust preferred subordinated debt	47,867			123,359			94,282			245,696
Interest on borrowings	23,467			14,224			46,073			28,586
Total interest expense	810,101			976,886			1,547,182			1,947,998
Net interest income	11,213,715			9,580,106			21,862,204			19,043,077
Provision for loan losses	250,000			—			500,000			—
Net interest income after provision for loan losses	10,963,715			9,580,106			21,362,204			19,043,077
Non-interest income:
Mortgage banking income	22,240,973			17,369,228			43,304,652			29,571,390
Service charges and fees	558,790			538,579			1,075,344			1,008,791
Title income	241,919			167,454			474,690			272,488
Investment and insurance income	400,542			335,887			744,668			781,359
Gain on disposition of property and equipment	44,848			—			79,859			—
Other	139,192			87,725			213,214			173,496
Total non-interest income	23,626,264			18,498,873			45,892,427			31,807,524
Non-interest expenses:
Salaries and employee benefits	10,097,518			8,492,446			19,691,794			16,764,007
Commissions and incentives	10,805,166			6,770,022			20,250,304			10,780,986
Loan origination expense	1,930,961			2,060,570			4,389,624			3,423,711
Occupancy expense	2,389,884			2,395,088			4,678,392			4,671,791
Marketing expense	902,932			797,908			1,649,159			1,319,749
Data processing expense	599,568			476,806			1,229,318			956,084
Telephone	353,163			293,451			678,909			604,588
Professional fees	545,518			333,735			804,119			583,574
Foreclosed property expense	52,080			35,860			105,406			42,999
Other expenses	1,476,723			1,351,098			2,854,320			2,606,128
Total non-interest expenses	29,153,513			23,006,984			56,331,345			41,753,617
Income before income taxes	5,436,466			5,071,995			10,923,286			9,096,984
Income tax provision	(1,961,763		)	(1,767,500		)	(3,955,103		)	(3,238,740		)
Net income	3,474,703			3,304,495			6,968,183			5,858,244
Less: Net income attributable to non-controlling interests	(50,874		)	(120,921		)	(83,147		)	(137,405		)
Net income attributable to Monarch Financial Holdings, Inc.	$	3,423,829		$	3,183,574		$	6,885,036		$	5,720,839
Basic net income per share	$	0.32		$	0.30		$	0.64		$	0.54
Diluted net income per share	$	0.32		$	0.30		$	0.64		$	0.54

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

Table of Contents

ITEM 1. FINANCIAL STATEMENTS (CONTINUED)

MONARCH FINANCIAL HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)



	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2015			2014			2015			2014
Net Income	$	3,474,703		$	3,304,495		$	6,968,183		$	5,858,244
Other comprehensive income (loss):
Change in unrealized gain on interest rate swap, net of income taxes	—			49,422			—			96,300
Change in unrealized (loss)gain on securities available for sale, net of income taxes	(46,585		)	103,882			30,941			161,436
Change in unrealized gain on supplemental executive's retirement plan, net of income taxes	3,049			1,287			6,098			2,574
Change in unrealized loss on mutual fund	(7,447		)	—			(209		)	—
Other comprehensive income (loss)	(50,983		)	154,591			36,830			260,310
Total comprehensive income	3,423,720			3,459,086			$	7,005,013		$	6,118,554
Less: Comprehensive income attributable to non-controlling interests	(50,874		)	(120,921		)	(83,147		)	(137,405		)
Comprehensive income attributable to Monarch Financial Holdings, Inc.	$	3,372,846		$	3,338,165		$	6,921,866		$	5,981,149

Unrealized gain on interest rate swap	$	—		$	76,035		$	—		$	148,155
Income tax expense	—			(26,613		)	—			(51,855		)
Net unrealized gain on interest rate swap	$	—		$	49,422		$	—		$	96,300

Unrealized holding (loss)gain on securities available for sale	$	(71,669	)	$	159,818		$	47,602		$	248,363
Income tax (expense)benefit	25,084			(55,936		)	(16,661		)	(86,927		)
Net unrealized (loss)gain on securities available for sale	$	(46,585	)	$	103,882		$	30,941		$	161,436

Unrealized gain on supplemental executive's retirement plan	$	4,691		$	1,980		$	9,381		$	3,960
Income tax expense	(1,642		)	(693		)	(3,283		)	(1,386		)
Net unrealized gain on supplemental executive's retirement plan	$	3,049		$	1,287		$	6,098		$	2,574

Unrealized loss on mutual fund	$	(7,447	)	$	—		$	(209	)	$	—
Income tax expense	—			—			—			—
Net unrealized loss on mutual fund	$	(7,447	)	$	—		$	(209	)	$	—

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

Table of Contents

ITEM 1. FINANCIAL STATEMENTS (CONTINUED)

MONARCH FINANCIAL HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(unaudited)



	Common Stock					Additional Paid-In Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Non-controlling Interest			Total
	Shares		Amount			Additional Paid-In Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Non-controlling Interest			Total
Balance—December 31, 2013	10,286,363		$	51,431,815		$	7,068,715	$	39,437,119		$	(419,496	)	$	227,445		$	97,745,598
Net income for the six months ended June 30, 2014								5,720,839						137,405			5,858,244
Other comprehensive income											260,310						260,310
Stock-based compensation expense, net of forfeitures and income taxes	(1,200	)	(6,000		)	425,049											419,049
Stock options exercised	25,456		127,280			88,452											215,732
Cash dividend declared on common stock ($0.15 per share)								(1,592,010		)							(1,592,010		)
Common stock issued through dividend reinvestment	14,139		70,695			92,844											163,539
Cash in lieu of fractional shares						12											12
Contributions from non-controlling interests														99			99
Distributions to non-controlling interests														(240,211		)	(240,211		)
Balance - June 30, 2014	10,324,758		$	51,623,790		$	7,675,072	$	43,565,948		$	(159,186	)	$	124,738		$	102,830,362

Balance—December 31, 2014	10,372,725		$	51,863,625		$	8,335,538	$	47,354,407		$	(102,237	)	$	85,984		$	107,537,317
Net income for the six months ended June 30, 2015								6,885,036						83,147			6,968,183
Other comprehensive income											36,830						36,830
Stock-based compensation expense, net of forfeitures and income taxes	—		—			343,922											343,922
Stock options exercised, including income tax benefit	63,790		318,950			166,172											485,122
Cash dividend declared on common stock ($0.17 per share)								(1,827,528		)							(1,827,528		)
Distributions to non-controlling interests														(84,629		)	(84,629		)
Balance - June 30, 2015	10,436,515		$	52,182,575		$	8,845,632	$	52,411,915		$	(65,407	)	$	84,502		$	113,459,217

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

Table of Contents

ITEM 1. FINANCIAL STATEMENTS (CONTINUED)

MONARCH FINANCIAL HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)



	Six Months Ended June 30,
	2015			2014
Operating activities:
Net income	$	6,968,183		$	5,858,244
Adjustments to reconcile net income to net cash used in operating activities:
Provision for loan losses	500,000			—
Depreciation	1,473,345			1,415,329
Accretion of discounts and amortization of premiums, net	1,621			3,048
Deferral of loan fees, net of deferred (costs)	130,721			(82,379		)
Amortization of intangible assets	—			89,286
Stock-based compensation	343,922			419,049
Appreciation of bank-owned life insurance	(149,874		)	(116,679		)
Net gain on disposition of property and equipment	(79,859		)	—
Net loss on sale of other real estate	51,035			33,263
Deferred income tax expense	450,073			1,409,203
Changes in:
Loans held for sale	(46,257,790		)	(56,866,461		)
Interest receivable	(34,422		)	170,105
Other assets	(5,195,771		)	(5,823,518		)
Other liabilities	2,950,731			3,969,510
Net cash used in operating activities	(38,848,085		)	(49,522,000		)
Investing activities:
Purchases of available-for-sale securities	(2,000,000		)	(8,347,950		)
Proceeds from sales and maturities of available-for-sale securities	8,432,927			33,642,499
Proceeds from sale of other real estate	342,965			268,700
Proceeds from sale of property and equipment	82,011			—
Purchase of bank owned life insurance	(657,934		)	—
Purchases of premises and equipment	(1,393,726		)	(3,970,751		)
(Purchase) Redemption of restricted equity securities	(1,073,500		)	514,550
Loan originations, net of principal repayments	(21,525,304		)	12,459,632
Net cash (used in) provided by investing activities	(17,792,561		)	34,566,680
Financing activities:
Net increase in non-interest-bearing deposits	58,140,464			33,456,579
Net increase (decrease) in interest-bearing deposits	1,468,780			(35,281,955		)
Cash dividends paid on common stock	(1,827,528		)	(1,592,010		)
Net increase (decrease) in FHLB advances and federal funds purchased	34,950,003			(49,993		)
Contributions from non-controlling interests	—			99
Distributions to non-controlling interests	(84,629		)	(240,211		)
Proceeds from issuance of common stock, net of issuance costs	—			163,539
Proceeds from exercise of stock options	485,122			175,806
Cash in lieu of fractional shares	—			12
Net cash provided by (used in) financing activities	93,132,212			(3,368,134		)
CHANGE IN CASH AND CASH EQUIVALENTS	36,491,566			(18,323,454		)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR	65,428,974			104,911,322
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	101,920,540		$	86,587,868
SUPPLEMENTAL SCHEDULES AND CASH FLOW INFORMATION
Cash paid for:
Interest on deposits and other borrowings	$	1,412,555		$	1,950,828
Income taxes	$	3,882,000		$	1,923,000
Loans transferred to foreclosed real estate during the year	$	250,000		$	144,000
Unrealized gain on securities available for sale	$	47,602		$	248,363
Unrealized gain on interest rate swap	$	—		$	148,155
Unrealized gain on supplemental executive's retirement plan	$	9,381		$	3,960
Unrealized loss on mutual fund	$	(209	)	$	—

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

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MONARCH FINANCIAL HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. BASIS OF PRESENTATION

In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments consisting of normal recurring accruals necessary to present fairly Monarch Financial Holdings, Inc.’s financial position as of June 30, 2015; the consolidated statements of income for the three and six months ended June 30, 2015 and 2014; the consolidated statements of comprehensive income for the three and six months ended June 30, 2015 and 2014; the consolidated statement of changes in stockholders’ equity for the six months ended June 30, 2015 and 2014; and the consolidated statements of cash flows for the six months ended June 30, 2015 and 2014. These financial statements have been prepared in accordance with the instructions to Form 10-Q and therefore, do not include all of the disclosures required by generally accepted accounting principles. The financial statements include the accounts of Monarch Financial Holdings, Inc. and its subsidiaries, and all significant inter-company accounts and transactions have been eliminated. Operating results for the three and six month period ended June 30, 2015 are not necessarily indicative of the results that may be expected for the year ended December 31, 2015.

Recent Accounting Pronouncements

In June 2014, the FASB issued ASU No. 2014-11, “Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures.” This ASU aligns the accounting for repurchase-to-maturity transactions and repurchase agreements executed as a repurchase financing with the accounting for other typical repurchase agreements. The new guidance eliminates sale accounting for repurchase-to-maturity transactions and supersedes the guidance under which a transfer of a financial asset and a contemporaneous repurchase financing could be accounted for on a combined basis as a forward agreement. The amendments in the ASU also require a new disclosure for transactions economically similar to repurchase agreements in which the transferor retains substantially all of the exposure to the economic return on the transferred financial assets throughout the term of the transaction. Additional disclosures will be required for the nature of collateral pledged in repurchase agreements and similar transactions accounted for as secured borrowings. The amendments in this ASU are effective for the first interim or annual period beginning after December 15, 2014; however, the disclosure for transactions accounted for as secured borrowings is required to be presented for annual periods beginning after December 15, 2014, and interim periods beginning after March 15, 2015. Early adoption is not permitted. The adoption of the new guidance did not have a material impact on our consolidated financial statements.

In June 2014, the FASB issued ASU No. 2014-12, “Compensation - Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period.” The new guidance applies to reporting entities that grant employees share-based payments in which the terms of the award allow a performance target to be achieved after the requisite service period. The amendments in the ASU require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. Existing guidance in “Compensation - Stock Compensation (Topic 718),” should be applied to account for these types of awards. The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Early adoption is permitted and reporting entities may choose to apply the amendments in the ASU either on a prospective or retrospective basis. The Company is currently assessing the impact that ASU 2014-12 will have on its consolidated financial statements.

In August 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.” This update is intended to provide guidance about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. Management is required under the new guidance to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date the financial statements are issued when preparing financial statements for each interim and annual reporting period. If conditions or events are identified, the ASU specifies the process that must be followed by management and also clarifies the timing and content of going concern footnote disclosures in order to reduce diversity in practice. The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2016. Early adoption is permitted. The Company does not expect the adoption of ASU 2014-15 to have a material impact on its consolidated financial statements.

In November 2014, the FASB issued ASU No. 2014-16, “Derivatives and Hedging (Topic 815): Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity.” The amendments in ASU do not change the current criteria in U.S. GAAP for determining when separation of certain embedded derivative features in a hybrid financial instrument is required. The amendments clarify how current U.S. GAAP should be interpreted in evaluating the economic characteristics and risks of a host contract in a hybrid financial instrument that is issued in the form of a share. Specifically, the amendments clarify that an entity should consider all relevant terms and features, including the embedded derivative

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feature being evaluated for bifurcation, in evaluating the nature of the host contract. Furthermore, the amendments clarify that no single term or feature would necessarily determine the economic characteristics and risks of the host contract. Rather, the nature of the host contract depends upon the economic characteristics and risks of the entire hybrid financial instrument. The amendments in this ASU also clarify that, in evaluating the nature of a host contract, an entity should assess the substance of the relevant terms and features (i.e., the relative strength of the debt-like or equity-like terms and features given the facts and circumstances) when considering how to weight those terms and features. The amendments in this ASU are effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption, including adoption in an interim period, is permitted. The Company does not expect the adoption of ASU 2014-16 to have a material impact on its consolidated financial statements.

In January 2015, the FASB issued ASU No. 2015-01, “Income Statement-Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items.” The amendments in this ASU eliminate from U.S. GAAP the concept of extraordinary items. Subtopic 225-20, Income Statement - Extraordinary and Unusual Items, required that an entity separately classify, present, and disclose extraordinary events and transactions. Presently, an event or transaction is presumed to be an ordinary and usual activity of the reporting entity unless evidence clearly supports its classification as an extraordinary item. If an event or transaction meets the criteria for extraordinary classification, an entity is required to segregate the extraordinary item from the results of ordinary operations and show the item separately in the income statement, net of tax, after income from continuing operations. The entity also is required to disclose applicable income taxes and either present or disclose earnings-per-share data applicable to the extraordinary item. The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. The Company does not expect the adoption of ASU 2015-01 to have a material impact on its consolidated financial statements.

In February 2015, the FASB issued ASU No. 2015-02, “Consolidation (Topic 810): Amendments to the Consolidation Analysis.” The amendments in this ASU are intended to improve targeted areas of consolidation guidance for legal entities such as limited partnerships, limited liability corporations, and securitization structures (collateralized debt obligations, collateralized loan obligations, and mortgage-backed security transactions). In addition to reducing the number of consolidation models from four to two, the new standard simplifies the FASB Accounting Standards Codification™ and improves current GAAP by placing more emphasis on risk of loss when determining a controlling financial interest, reducing the frequency of the application of related-party guidance when determining a controlling financial interest in a variable interest entity (VIE), and changing consolidation conclusions for public and private companies in several industries that typically make use of limited partnerships or VIEs. The amendments in this ASU are effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. ASU 2015-02 may be applied retrospectively in previously issued financial statements for one or more years with a cumulative-effect adjustment to retained earnings as of the beginning of the first year restated. The Company does not expect the adoption of ASU 2015-02 to have a material impact on its consolidated financial statements.

In April 2015, the FASB issued ASU No. 2015-03, “Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs.” The amendments in this ASU are intended to simplify the presentation of debt issuance costs. These amendments require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU. The amendments in this ASU are effective for public business entities for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption is permitted for financial statements that have not been previously issued. The Company does not expect the adoption of ASU 2015-03 to have a material impact on its consolidated financial statements.

In April 2015, the FASB issued ASU No. 2015-05, “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement.” The amendments in this ASU provide guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The amendments do not change the accounting for a customer’s accounting for service contracts. As a result of the amendments, all software licenses within the scope of Subtopic 350-40 will be accounted for consistent with other licenses of intangible assets. The amendments in this ASU are effective for public business entities for annual periods, including interim periods within those annual periods, beginning after December 15, 2015. Early adoption is permitted. An entity can elect to adopt the amendments either: (1) prospectively to all arrangements entered into or materially modified after the effective date; or (2) retrospectively. The Company is currently assessing the impact that ASU 2015-05 will have on its consolidated financial statements.

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In May 2015, the FASB issued ASU No. 2015-08, “Business Combinations (Topic 805): Pushdown Accounting - Amendments to SEC Paragraphs Pursuant to Staff Accounting Bulletin No. 115.” The amendments in ASU 2015-08 amend various SEC paragraphs pursuant to the issuance of Staff Accounting Bulletin No. 115, Topic 5: Miscellaneous Accounting, regarding various pushdown accounting issues, and did not have a material impact on our (consolidated) financial statements.

NOTE 2. GENERAL

Monarch Financial Holdings, Inc. (the "Company" "Monarch") is a Virginia-chartered, single bank holding company engaged in business and consumer banking, investment and insurance sales, and mortgage origination and brokerage. The Company was created on June 1, 2006 through a reorganization plan, under the laws of the Commonwealth of Virginia, in which Monarch Bank (the "Bank") became a wholly-owned subsidiary. Monarch Bank was incorporated on May 1, 1998, and opened for business on April 14, 1999. The Company's corporate office and main office are both located in the Greenbrier area of Chesapeake. In addition there are nine other Virginia banking offices – in the Great Bridge area in Chesapeake, the Lynnhaven area, the Town Center area, the Oceanfront area, the Kempsville area, and the Hilltop area in Virginia Beach, the Ghent area and in the downtown area in Norfolk, and the New Town area in Williamsburg. In North Carolina our banking division operates as OBX Bank through two offices in Kitty Hawk and Nags Head. In July 2014 the Company closed its branch located in Suffolk, Virginia.

In August 2001, we formed Monarch Investment, LLC, to enable us to offer additional services to our clients. The Bank owns 100% of Monarch Investment, LLC. In August 2012, the Company formed an affiliation with Raymond James Financial Services, Inc., a broker-dealer headquartered in St. Petersburg, Florida, and launched Monarch Bank Private Wealth ("MBPW"). MBPW is a division of Monarch Bank that offers private banking to high net worth individuals. In addition, through its affiliation with Raymond James Financial Services, Inc., MBPW is able to offer these same individuals financial planning, trust and investment services. Monarch Investment, LLC, continues to provide non-deposit investment services under the name of Monarch Investments.

In January 2003, Monarch Investment, LLC, purchased a non-controlling 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 insurance agency that ranks as one of the largest agencies in Virginia. Bankers Insurance, LLC, provides insurance to our customers and to the general public.

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

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

In June 2007, we announced the expansion of mortgage operations through the acquisition of a team of experienced mortgage bankers, and the formation of a division operating as Monarch Mortgage ("MM"). MM originates and sells conventional, FHA, VA and VHDA residential loans and offers additional mortgage products such as construction-permanent loans for the Bank’s loan portfolio. Monarch Mortgage's primary office is in Virginia Beach with additional offices in Alexandria, Chesapeake, Fairfax, Fredericksburg, Glen Allen, Norfolk, Newport News, Richmond, Roanoke, and Woodbridge, Virginia; Annapolis, Crofton, Dunkirk, Frederick, Greenbelt, Rockville, Towson and Waldorf, Maryland; Charlotte, Fayetteville, Kitty Hawk, Mooresville, Nags Head, and Wilmington, North Carolina; and Greenwood, and Greenville, South Carolina.

In July 2007, Monarch Investment, LLC, purchased a 50.01% ownership in Coastal Home Mortgage, LLC, from another bank. This joint venture provides residential loan services through Monarch Mortgage. The 49.99% ownership is shared by two companies involved in commercial and residential construction in the Hampton Roads area.

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

In March 2010, Monarch Investment, LLC, formed Regional Home Mortgage, LLC, in Chesapeake, Virginia. Monarch Investment, LLC, owned 51% and TREG Funding, LLC owned 49% of the company, which was formed for the primary purpose of providing residential mortgages to clients of TREG Funding, LLC. TREG Funding, LLC is associated with The Real Estate Group, a leading realty firm in Chesapeake and Virginia Beach, Virginia. This Company was liquidated as of September 31, 2014.

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In March 2011, Monarch Investment, LLC, formed Crossways Holdings, LLC, in Chesapeake, Virginia. Crossways Holdings, LLC is a single member limited liability company, formed for the purpose of acquiring, maintaining, utilizing and disposing of assets for Monarch Bank.

In January 2015, Monarch Investment, LLC, purchased a non-controlling interest in Atlantic Real Estate Capital, a commercial real estate brokerage business located in Richmond, Virginia.

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.



	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2015		2014		2015		2014
Net income available to common shareholders (numerator, basic)	$	3,423,829	$	3,183,574	$	6,885,036	$	5,720,839
Weighted average shares outstanding - basic (denominator)	10,760,159		10,620,869		10,744,430		10,596,786
Income per common share—basic	$	0.32	$	0.30	$	0.64	$	0.54
Net income (numerator, diluted)	$	3,423,829	3,183,574		6,885,036		5,720,839
Weighted average shares—diluted (denominator)	10,771,660		10,660,217		10,766,776		10,636,968
Income per common share—diluted	$	0.32	$	0.30	$	0.64	$	0.54
Dilutive effect-average number of common shares	11,501		39,348		22,346		40,182

There were no options to purchase common stock excluded from the computation of earnings per common share for the three and six months ended June 30, 2015 or June 30, 2014.

NOTE 4. OTHER COMPREHENSIVE INCOME

The following table presents the changes in accumulated other comprehensive income (loss), by category, net of tax:



	Unrealized Loss on Supplemental Executive's Retirement Plan			Unrealized Gains (Loss) on Securities			Unrealized Loss on Interest Rate Swap			Unrealized Gain on Mutual Fund			Accumulated Other Comprehensive Income (Loss)
Balance at April 1, 2015	$	(131,118	)	$	109,247		$	—		$	7,447		$	(14,424	)
Net change for the quarter ended June 30, 2015	3,049			(46,585		)	—			(7,447		)	(50,983		)
Balance at June 30, 2015	$	(128,069	)	$	62,662		$	—		$	—		$	(65,407	)

Balance at December 31, 2014	$	(134,167	)	$	31,721		$	—		$	209		$	(102,237	)
Net change for the six months ended June 30, 2015	6,098			30,941			—			(209		)	36,830
Balance at June 30, 2015	$	(128,069	)	$	62,662		$	—		$	—		$	(65,407	)

Balance at April 1, 2014	$	(138,028	)	$	(76,090	)	$	(99,659	)	$	—		$	(313,777	)
Net change for the quarter ended June 30, 2014	1,287			103,882			49,422			—			154,591
Balance at June 30, 2014	$	(136,741	)	$	27,792		$	(50,237	)	$	—		$	(159,186	)

Balance at December 31, 2013	$	(139,315	)	$	(133,644	)	$	(146,537	)	$	—		$	(419,496	)
Net change for the six months ended June 30, 2014	2,574			161,436			96,300			—			260,310
Balance at June 30, 2014	$	(136,741	)	$	27,792		$	(50,237	)	$	—		$	(159,186	)

An unrealized loss of $7,447 on Mutual Funds associated with the Company's Executive Benefits Plan was recorded in other comprehensive income in the second quarter of 2015. Year to date, an unrealized loss of $209 on Mutual Funds associated with the Company's Executive Benefits Plan was recorded in other comprehensive income. Expenses of $3,049 and $6,098 related to

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the SERP were re-classed out of other comprehensive income into salaries and employee benefits expense in earnings during the second quarter and first six months ended June 30, 2015. Expenses of $1,287 and $2,574 related to the SERP were re-classed out of other comprehensive income into salaries and employee benefits expense in earnings during the second quarter and first six months ended June 30, 2014.

NOTE 5. INVESTMENT SECURITIES

Securities available-for-sale consist of the following:



	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
June 30, 2015
U.S. government agency obligations	$	13,187,546	$	53,506	$	(32,204	)	$	13,208,848
Mortgage-backed securities	1,150,793		8,538		(2,334		)	1,156,997
Municipal securities	2,903,674		85,049		(16,152		)	2,972,571
	$	17,242,013	$	147,093	$	(50,690	)	$	17,338,416

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
December 31, 2014
U.S. government agency obligations	$	20,498,822	$	41,548	$	(86,495	)	$	20,453,875
Mortgage-backed securities	1,271,166		13,449		(982		)	1,283,633
Municipal securities	1,906,572		97,807		(16,525		)	1,987,854
	$	23,676,560	$	152,804	$	(104,002	)	$	23,725,362

Monarch did not own any held-to-maturity securities at June 30, 2015 or December 31, 2014.

The amortized cost and fair value of securities by contractual maturity date at June 30, 2015 were as follows:



Securities available-for-sale:	Amortized Cost		Fair Value
Due in one year or less	$	—	$	—
Due from one to five years	14,287,546		14,314,006
Due from five to ten years	1,312,337		1,336,723
Due after ten years	1,642,130		1,687,687
Total	$	17,242,013	$	17,338,416

There were eleven investments in our securities portfolio with unrealized losses as of June 30, 2015.



As of June 30, 2015	Less than 12 months					12 months or more					Total
	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
U.S. government agency obligations	$	494,260	$	(5,740	)	$	3,973,536	$	(26,464	)	$	4,467,796	$	(32,204	)
Mortgage-backed securities	309,796		(2,334		)	—		—			309,796		(2,334		)
Municipal securities	—		—			500,895		(16,152		)	500,895		(16,152		)
Total	$	804,056	$	(8,074	)	$	4,474,431	$	(42,616	)	$	5,278,487	$	(50,690	)

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There were twenty-four investments in our securities portfolio that had unrealized losses as of December 31, 2014.



As of December 31, 2014	Less than 12 months					12 months or more					Total
	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
U.S. government agency obligations	$	7,482,955	$	(18,941	)	$	6,433,135	$	(67,554	)	$	13,916,090	$	(86,495	)
Mortgage-backed securities	338,707		(982		)	—		—			338,707		(982		)
Municipal securities	—		—			502,135		(16,525		)	502,135		(16,525		)
Total	$	7,821,662	$	(19,923	)	$	6,935,270	$	(84,079	)	$	14,756,932	$	(104,002	)

As of June, 30, 2015, nine investments have been in a continuous unrealized loss position for more than twelve months. They are as follows:



	Count	Amortized Cost		Fair Value
U.S. government agency obligations	8	$	4,000,000	$	3,973,536
Municipal securities	1	517,047		500,895
Total	9	$	4,517,047	$	4,474,431

At December 31, 2014, fourteen investments had been in a continuous unrealized loss position for more than twelve months. They were as follows:



	Count	Amortized Cost		Fair Value
U.S. government agency obligations	13	$	6,500,689	$	6,433,135
Municipal securities	1	518,660		502,135
Total	14	$	7,019,349	$	6,935,270

We have the ability to carry these investments to the final maturity of the instruments. Other-than-temporarily impaired (“OTTI”) guidance for investments states that an impairment is OTTI if any of the following conditions exist: the entity intends to sell the security; it is more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis; or, the entity does not expect to recover the security’s entire amortized cost basis (even if the entity does not intend to sell). An impaired security identified as OTTI should be separated and losses should be recognized in earnings.

We believe the unrealized losses in our portfolio are temporary impairments, caused by liquidity discounts and increases in the risk premiums required by market participants, rather than adverse changes in cash flows or fundamental weaknesses in the credit quality of the issuer or underlying assets as of June 30, 2015. There were no losses related to OTTI recognized in accumulated other comprehensive loss at either June 30, 2015 or December 31, 2014.

NOTE 6. LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSS

The following table provides a breakdown, by class of our loans held for investment at June 30, 2015 and December 31, 2014.

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Loans held for Investment



	June 30, 2015			December 31, 2014
Commercial	$	141,487,772		$	138,430,999
Real estate
Construction	175,253,142			172,502,330
Residential (1-4 family)	115,106,251			109,404,283
Home equity lines	63,241,585			67,487,000
Multifamily	17,011,090			21,809,189
Commercial	273,184,540			256,966,820
Real estate subtotal	643,796,608			628,169,622
Consumers
Consumer and installment loans	7,807,746			5,968,990
Overdraft protection loans	77,049			96,736
Loans to individuals subtotal	7,884,795			6,065,726
Total gross loans	793,169,175			772,666,347
Unamortized loan fees net of deferred costs	(207,533		)	(76,812		)
Loans held for investment, net of unearned income	792,961,642			772,589,535
Allowance for loan losses	(8,676,361		)	(8,948,837		)
Total net loans	$	784,285,281		$	763,640,698

We have certain lending policies and procedures in place designed to balance loan growth and income with an acceptable level of risk. Management reviews and approves these policies and procedures on a regular basis. A reporting system supplements the review process by providing management with frequent reports related to loan production, loan quality, credit concentrations, policy exceptions, loan delinquencies and non-performing and potential problem loans. Diversification in the loan portfolio is a means of managing risk associated with fluctuations in economic conditions.

Our loan portfolio is divided into three loan types; commercial, real estate and consumer. Some of these loan types are further broken down into segments. The commercial loan portfolio, which is not broken down further, includes commercial and industrial loans which are usually secured by the assets being financed or other business assets. The real estate portfolio is broken down into construction, residential 1-4 family, home equity lines, multifamily, and commercial real estate loan segments. The consumer loan portfolio is segmented into consumer and installment loans and overdraft protection loans.

Commercial loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably and prudently expand their business. Underwriting standards are designed to promote relationship banking rather than transactional banking. Once it is determined the borrower’s management possesses sound ethics and solid business acumen, we examine current and projected cash flows to determine the ability of the borrower to repay their obligations as agreed. Commercial and industrial loans are primarily made based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial and industrial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and normally incorporate a personal guarantee; however, some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.

Commercial real estate loans are subject to underwriting standards and processes similar to commercial loans, in addition to those of real estate loans. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally largely dependent on the successful operation or sale of the income producing property securing the loan, or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The properties securing our commercial real estate portfolio are diverse in terms of type. This diversity helps reduce our exposure to adverse economic events that could affect any single market or industry. Management monitors and evaluates commercial real estate loans based on purpose, collateral, geography, cash flow, loan to value, and risk grade criteria. As a general rule, we avoid financing special purpose projects unless other underwriting factors are present to help mitigate risk. In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans. At June 30, 2015 approximately 40% and at December 31, 2014, approximately 44% of the outstanding principal balance of our commercial real estate loans portfolio was secured by owner-occupied properties.

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With respect to loans to developers and builders, secured by non-owner occupied properties we may originate from time to time, we generally require the borrower to have an existing relationship with the Company and a record of success. Construction loans are underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analysis of absorption and lease rates and financial analysis of the developers and property owners. Construction loans are generally based upon estimates of costs and value associated with the complete project. These estimates may be inaccurate. Construction loans often involve the disbursement of considerable funds with repayment substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from the Company until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, supply and demand, government regulation of real property, general economic conditions and the availability of long-term financing.

We generally require multifamily real estate loan borrowers to have an existing relationship with the Company, a record of success and guarantor financial strength, commensurate with the project size. The underlying feasibility of a multifamily project is stress tested for sensitivity to both capitalization and interest rate changes. Each project is underwritten separately and additional underwriting standards are required for the guarantors, which include, but are not limited to, a maximum loan-to-value percentage, global cash flow analysis and contingent liability analysis. Sources of repayment for these types of loans may be rent rolls or sales of the developed property, either by unit or as a whole.

Consumer and residential loan originations utilize analytics to supplement the underwriting process. To monitor and manage consumer loan risk, policies and procedures are developed and modified, as needed. This monitoring, coupled with relatively small loan amounts that are spread across many individual borrowers, minimizes risk. Additionally, trend, sensitivity analysis, shock analysis and outlook reports are reviewed by management on a regular basis. Underwriting standards for home equity loans are heavily influenced by statutory requirements, which include, but are not limited to, a maximum loan-to-value percentage, collection remedies, the number of such loans a borrower can have at one time and documentation requirements.

We perform periodic reviews on various segments of our loan portfolio in addition to presenting our larger loan relationships for loan committee review. We utilize an independent company to perform a periodic review to evaluate and validate our credit risk program. Results of these reviews are presented to management and our board. Additionally, we are subject to annual examination by our regulators. The loan review process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as our policies and procedures.

We have an established methodology to determine the adequacy of the allowance for loan losses that assesses the risks and losses inherent in the loan portfolio. This methodology begins with a look at the three loan types; commercial, real estate, and consumer. Loans within the commercial and real estate categories are evaluated on an individual or relationship basis and assigned a risk grade based on the characteristics of the loan or relationship. Loans within the consumer type are assigned risk grades and evaluated as a pool, unless specifically identified through delinquency or other signs of credit deterioration, at which time the identified loan would be individually evaluated.

We designate loans within our loans held for investment portfolio as either “pass” or “watch list” based on nine numerical risk grades which are assigned to the loans. A loan classified as "pass" is fundamentally sound with risk factors that are considered reasonable and acceptable. Loans classified as "watch list" fall into two categories; special mention and substandard. Special mention loans are the highest level of "watch list". These loans have the capacity to perform but contain certain characteristics that require continual supervision and attention from the lender. Loans classified as substandard typically have a well-defined weakness or weaknesses that could jeopardize the orderly liquidation of the debt, leaving the Bank with potential exposure to loss. The numeric designations in the "pass" category, from highest to lowest are: minimal, modest, average, acceptable, and acceptable with care. The "watch list" category from highest to lowest are: special mention, substandard, doubtful and loss.



“Pass”	“Watch List”
1 Minimal	6 Special mention
2 Modest	7 Substandard
3 Average	8 Doubtful
4 Acceptable	9 Loss
5 Acceptable with care

Special mention loans and substandard loans may or may not be classified as nonaccrual, based on current performance. A loan risk graded as doubtful is classified as nonaccrual. A loan risk graded as loss is generally charged-off when identified. There were no loans classified as doubtful or loss at June 30, 2015 or December 31, 2014. Watch list graded loans or relationships are evaluated individually to determine if all, or a portion, of our investment in the borrower is at risk. If a risk is quantified, a specific

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loss allowance is assigned to the identified loan or relationship. We evaluate our investment in the borrower using either the present value of expected future cash flows, discounted at the historical effective interest rate of the loan, or for a collateral-dependent loan, the fair value of the underlying collateral.

We evaluate additional risk inherent in our satisfactory risk grade groups through a methodology that looks at these loans on a pool basis by loan segment which is further delineated by purpose. Each segment is assigned an expected loss factor based on a moving average “look-back” at our historical losses for that particular segment. In 2014, we reexamined our loss history and determined a five year "look back" or twenty quarter history would be a more prudent approach to modeling historical losses than our previous sixteen quarter "look-back". At September 30, 2014 we began extending our "look-back" period by one quarter to reach our target of twenty quarters or five years at June 30, 2015. At June 30, 2015, having reached our twenty quarter target, this adjustment to our "look-back" period resulted in a $321,325 decrease in the unallocated component of the allowance for loan losses. We believe this methodology provides an accurate evaluation of the potential risk in our portfolio because delineation by purpose establishes a direct correlation to areas of weakness and strength within the portfolio.

Additional metrics, in the form of environmental risk factors, may be applied to a specific class or risk grade of loans within the portfolio based on local or national trends, identifiable events or other economic factors. For the periods presented, five internal and four external environmental factors were applied to the general risk grade groups. The five internal factors are specific to Monarch with regard to lending policies and practices, nature, volume and term of various portfolios, experience level and depth of management, changes in loan quality and concentrations of credits. The four external environmental factors focus on legal and regulatory impacts, changes in economic conditions, competitive pressures and uncertainties surrounding pending governmental actions and their impact on areas within our footprint. The assumptions used to determine the allowance are reviewed to ensure their theoretical foundation, data integrity, computational processes, and reporting practices are appropriate and properly documented.

We utilize various sources in assessing the economic conditions in our target markets and areas of concentration. We track unemployment trends in both Hampton Roads and Virginia compared to the national average. We monitor trends in our industry and among our peers through reports such as the Uniform Bank Performance Report which are made available to us through the Federal Financial Institutions Examination Council. Additionally, we utilize various industry sources that include information published by CB Richard Ellis, an international firm specializing in commercial real estate reporting and Costar, a provider of commercial real estate information and analytics to monitor local, state and national trends.

We evaluate the adequacy of our allowance for loan losses monthly. A degree of imprecision or uncertainty is inherent in our allowance estimates because it requires that we incorporate a range of probable outcomes which may change from period to period. It requires that we exercise judgment as to the risks inherent in our portfolios, economic uncertainties, historical loss and other subjective factors, including industry trends. No single statistic or measurement determines the adequacy of the allowance for loan loss. Changes in the allowance for loan loss and the related provision expense can materially affect net income.

The following table segregates our portfolio between pass and watch list loans, delineated by segments, within loan type for June 30, 2015 and December 31, 2014. The "Weighted Average Risk Grade" looks at the dollar value per risk grade within a segment compared to the total value of that segment. All segments fall within the average to acceptable range.

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	June 30, 2015
			Watch List						Weighted Average Risk Grade
	Pass		Special Mention		Substandard		Total		Weighted Average Risk Grade
Commercial	$	139,826,706	$	1,030,495	$	630,571	$	141,487,772	3.35
Real estate
Construction	173,982,189		696,510		574,443		175,253,142		3.22
Residential (1-4 family)	110,045,957		1,076,204		3,984,090		115,106,251		3.82
Home equity lines	61,888,353		—		1,353,232		63,241,585		4.14
Multifamily	17,011,090		—		—		17,011,090		3.59
Commercial	271,946,819		843,806		393,915		273,184,540		3.49
Real estate subtotal	634,874,408		2,616,520		6,305,680		643,796,608		3.56
Consumers
Consumer and installment loans	7,737,896		—		69,850		7,807,746		4.03
Overdraft protection loans	74,283		—		2,766		77,049		4.58
Loans to individuals subtotal	7,812,179		—		72,616		7,884,795		4.03
Total gross loans	$	782,513,293	$	3,647,015	$	7,008,867	$	793,169,175	3.51

	December 31, 2014
			Watch List						Weighted Average Risk Grade
	Pass		Special Mention		Substandard		Total		Weighted Average Risk Grade
Commercial	$	135,292,747	$	1,588,289	$	1,549,963	$	138,430,999	3.31
Real estate
Construction	171,136,553		93,397		1,272,380		172,502,330		3.26
Residential (1-4 family)	101,860,683		177,735		7,365,865		109,404,283		3.93
Home equity lines	66,282,828		102,575		1,101,597		67,487,000		4.12
Multifamily	19,616,130		2,193,059		—		21,809,189		3.53
Commercial	253,525,106		2,029,203		1,412,511		256,966,820		3.54
Real estate subtotal	612,421,300		4,595,969		11,152,353		628,169,622		3.59
Consumers
Consumer and installment loans	5,893,286		—		75,704		5,968,990		4.04
Overdraft protection loans	96,736		—		—		96,736		4.64
Loans to individuals subtotal	5,990,022		—		75,704		6,065,726		4.05
Total gross loans	$	753,704,069	$	6,184,258	$	12,778,020	$	772,666,347	3.55

An aging of our loan portfolio by class as of June 30, 2015 and December 31, 2014 is as follows:

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Age Analysis of Past Due Loans
	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Recorded Investment > 90 days and Accruing		Recorded Investment Nonaccrual Loans
June 30, 2015
Commercial	$	127,483	$	509,334	$	—	$	636,817	$	140,850,955	$	—	$	628,580
Real estate
Construction	109,063		—		—		109,063		175,144,079		—		109,063
Residential (1-4 family)	—		—		753,467		753,467		114,352,784		—		1,053,472
Home equity lines	280,419		—		244,190		524,609		62,716,976		—		244,190
Multifamily	—		—		—		—		17,011,090		—		—
Commercial	—		—		230,994		230,994		272,953,546		—		230,994
Real estate subtotal	389,482		—		1,228,651		1,618,133		642,178,475		—		1,637,719
Consumers
Consumer and installment loans	126,701		—		—		126,701		7,681,045		—		—
Overdraft protection loans	—		—		—		—		77,049		—		—
Loans to individuals subtotal	126,701		—		—		126,701		7,758,094		—		—
Total gross loans	$	643,666	$	509,334	$	1,228,651	$	2,381,651	$	790,787,524	$	—	$	2,266,299

December 31, 2014
Commercial	$	—	$	—	$	582,059	$	582,059	$	137,848,940	$	—	$	582,059
Real estate
Construction	248,420		—		100,000		348,420		172,153,910		—		212,552
Residential (1-4 family)	761,696		2,412,128		1,252,644		4,426,468		104,977,815		174,976		1,427,931
Home equity lines	109,456		—		249,915		359,371		67,127,629		—		249,915
Multifamily	—		—		—		—		21,809,189		—		—
Commercial	—		166,618		230,994		397,612		256,569,208		—		230,994
Real estate subtotal	1,119,572		2,578,746		1,833,553		5,531,871		622,637,751		174,976		2,121,392
Consumers
Consumer and installment loans	139,446		—		—		139,446		5,829,544		—		1,121
Overdraft protection loans	—		—		—		—		96,736		—		—
Loans to individuals subtotal	139,446		—		—		139,446		5,926,280		—		1,121
Total gross loans	$	1,259,018	$	2,578,746	$	2,415,612	$	6,253,376	$	766,412,971	$	174,976	$	2,704,572

We currently have seven loans totaling $2,591,472 that are classified as restructured loans: one commercial real estate loan totaling $1,329,584, five residential 1-4 family loans totaling $1,192,038, and one consumer loan for $69,850. At June 30, 2015, two of the residential 1-4 family loans totaling $362,735 included in our restructured loans are classified as nonaccrual. The remaining five loans are performing. We restructured one loan during the second quarter of 2015, and restructured three loans during the same period of 2014. We did not have any defaults on restructured loans within twelve months of restructuring during the quarter ended June 30, 2015 or 2014.

Additional information on restructured loans in our portfolio as of June 30, 2015 is as follows:

Troubled Debt Restructurings



	Number of Contracts	Pre-Modification Outstanding Recorded Investment	Post-Modification Outstanding Recorded Investment
Quarter Ended June 30, 2015	One	$237,782	$237,782
Six Months Ended June 30, 2015	One	$237,782	$237,782

Troubled Debt Restructurings That Subsequently Defaulted



	Number of Contracts	Recorded Investment
Quarter Ended June 30, 2015	None	—
Six Months Ended June 30, 2015	None	—

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A summary of the activity in the allowance for loan losses account is as follows:



Allocation of the Allowance for Loan Losses
				Real Estate
June 30, 2015	Commercial			Construction			Residential			Home Equity			Multifamily			Commercial
Allowance for loan losses:
Beginning balance	$	1,157,867		$	1,678,022		$	2,456,418		$	1,911,634		$	85,056		$	1,458,664
Charge-offs	(207,059		)	(17,500		)	(658,953		)	—			—			—
Recoveries	3,600			36,561			19,719			53,025			—			—
Provision	707,959			(41,341		)	21,232			(296,862		)	(18,713		)	166,921
Ending balance	$	1,662,367		$	1,655,742		$	1,838,416		$	1,667,797		$	66,343		$	1,625,585

Individually evaluated for impairment	$	939,399		$	77,298		$	537,578		$	475,740		$	—		$	330,057
Collectively evaluated for impairment	722,968			1,578,444			1,300,838			1,192,057			66,343			1,295,528
Loans:
Ending balance	$	141,487,772		$	175,253,142		$	115,106,251		$	63,241,585		$	17,011,090		$	273,184,540
Ending balance: individually evaluated for impairment	1,110,092			1,270,953			4,365,870			1,353,232			—			2,099,953
Ending balance: collectively evaluated for impairment	$	140,377,680		$	173,982,189		$	110,740,381		$	61,888,353		$	17,011,090		$	271,084,587



	Consumers
	Consumer and Installment loans			Overdraft Protection		Unallocated			Total
Allowance for loan losses:
Beginning balance	$	104,661		$	260	$	96,255		$	8,948,837
Charge-offs	(1,869		)	—		—			(885,381		)
Recoveries	—			—		—			112,905
Provision	3,323			23		(42,542		)	500,000
Ending balance	$	106,115		$	283	$	53,713		$	8,676,361

Individually evaluated for impairment	$	69,850		$	—	$	—		$	2,429,922
Collectively evaluated for impairment	36,265			283		53,713			6,246,439
Loans:
Ending balance	$	7,807,746		$	77,049	$	—		$	793,169,175
Ending balance: individually evaluated for impairment	69,850			2,766		—			10,272,716
Ending balance: collectively evaluated for impairment	$	7,737,896		$	74,283	$	—		$	782,896,459

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				Real Estate
December 31, 2014	Commercial			Construction			Residential			Home Equity			Multifamily		Commercial
Allowance for loan losses:
Beginning balance	$	1,219,255		$	1,978,320		$	1,685,502		$	2,132,916		$	59,586	$	1,305,131
Charge-offs	(21,789		)	(190,812		)	(163,048		)	(174,319		)	—		—
Recoveries	205,200			79,922			31,505			122,809			—		—
Provision	(244,799		)	(189,408		)	902,459			(169,772		)	25,470		153,533
Ending balance	$	1,157,867		$	1,678,022		$	2,456,418		$	1,911,634		$	85,056	$	1,458,664

Individually evaluated for impairment	$	441,265		$	100,159		$	1,261,490		$	547,172		$	—	$	335,033
Collectively evaluated for impairment	716,602			1,577,863			1,194,928			1,364,462			85,056		1,123,631
Loans:
Ending balance	$	138,430,999		$	172,502,330		$	109,404,283		$	67,487,000		$	21,809,189	$	256,966,820
Ending balance: individually evaluated for impairment	1,549,963			1,272,380			7,198,325			1,101,597			—		3,130,893
Ending balance: collectively evaluated for impairment	$	136,881,036		171,229,950			$	102,205,958		$	66,385,403		$	21,809,189	$	253,835,927



	Consumers
	Consumer and Installment loans		Overdraft Protection			Unallocated			Total
Allowance for loan losses:
Beginning balance	$	99,271	$	688		$	580,700		$	9,061,369
Charge-offs	—		(2,000		)	—			(551,968		)
Recoveries	—		—			—			439,436
Provision	5,390		1,572			(484,445		)	—
Ending balance	$	104,661	$	260		$	96,255		$	8,948,837

Individually evaluated for impairment	$	74,582	$	—		—			$	2,759,701
Collectively evaluated for impairment	30,079		260			96,255			6,189,136
Loans:
Ending balance	$	5,968,990	$	96,736		$	—		$	772,666,347
Ending balance: individually evaluated for impairment	75,704		—			—			14,328,862
Ending balance: collectively evaluated for impairment	$	5,893,286	$	96,736		$	—		$	758,337,485

A loan is considered impaired when, based on current information and events; it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. All amounts due according to the contractual terms means that both the contractual interest payments and the contractual principal payments of a loan will be collected as scheduled in the loan agreement. In addition to loans 90 days past due and still accruing, nonaccrual loans and restructured loans, all loans risk graded doubtful or substandard qualify, by definition, as impaired.

There were three residential real estate properties totaling $665,190 in the process of foreclosure at June 30, 2015 and one residential real estate property totaling $182,256 in process of foreclosure at December 31, 2014.

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The following table sets forth our impaired loans at June 30, 2015 and December 31, 2014.



Impaired Loans
	With No Related Allowance
	Recorded Investment		Unpaid Principal Balance		Average Recorded Investment		Interest Income Recognized
June 30, 2015
Commercial	$	25,978	$	25,978	$	33,228	$	852
Real estate
Construction	1,040,390		1,040,390		966,577		30,607
Residential (1-4 family)	2,622,287		2,782,112		2,673,004		47,644
Home equity lines	444,716		444,716		445,194		7,381
Multifamily	—		—		—		—
Commercial	539,375		539,375		545,281		17,868
Consumers
Consumer and installment loans	—		715		199		—
Overdraft protection loans	2,766		2,766		2,916		360
Total	$	4,675,512	$	4,836,052	$	4,666,399	$	104,712
December 31, 2014
Commercial	$	—	$	—	$	—	$	—
Real estate
Construction	935,467		935,467		954,181		56,004
Residential (1-4 family)	2,704,883		2,880,739		3,067,193		119,011
Home equity lines	115,925		115,925		115,324		3,962
Multifamily	—		—		—		—
Commercial	1,430,533		1,430,533		1,317,972		79,891
Consumers
Consumer and installment loans	1,122		2,729		3,088		—
Overdraft protection loans	—		—		—		—
Total	$	5,187,930	$	5,365,393	$	5,457,758	$	258,868

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	With Related Allowance
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
June 30, 2015
Commercial	$	1,084,114	$	1,084,114	$	939,399	$	1,309,774	$	26,100
Real estate
Construction	230,563		254,598		77,298		231,899		5,183
Residential (1-4 family)	1,743,583		1,746,842		537,578		1,742,161		35,470
Home equity lines	908,516		914,240		475,740		902,466		14,150
Multifamily	—		—		—		—		—
Commercial	1,560,578		1,560,578		330,057		1,560,678		26,901
Consumers
Consumer and installment loans	69,850		69,850		69,850		72,550		1,268
Overdraft protection loans	—		—		—		—		—
Total	$	5,597,204	$	5,630,222	$	2,429,922	$	5,819,528	$	109,072
December 31, 2014
Commercial	$	1,549,963	$	1,549,963	$	441,265	$	1,618,461	$	93,073
Real estate
Construction	336,913		441,459		100,159		408,460		12,358
Residential (1-4 family)	4,493,442		4,535,549		1,261,490		4,564,008		232,522
Home equity lines	985,672		985,672		547,172		988,494		46,161
Multifamily	—		—		—		—		—
Commercial	1,700,360		1,700,360		335,033		1,721,563		79,323
Consumers
Consumer and installment loans	74,582		74,582		74,582		79,632		2,792
Overdraft protection loans	—		—		—		—		—
Total	$	9,140,932	$	9,287,585	$	2,759,701	$	9,380,618	$	466,229

NOTE 7. FAIR VALUE ACCOUNTING

Fair Value Hierarchy and Fair Value Measurement

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


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


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


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

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The following table presents our assets and liabilities related to continuing operations, which are measured at fair value on a recurring basis for each of the fair value hierarchy levels, as of June 30, 2015 and December 31, 2014:



	Fair Value Measurements at Reporting Date Using
	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Description
Assets at June 30, 2015
Investment securities—available for sale
U.S. government agency obligations	$	13,208,848	$	—	$	13,208,848	$	—
Mortgage-backed securities	1,156,997		—		1,156,997		—
Municipal securities	2,972,571		—		2,972,571		—
Mortgage loans held for sale	193,948,066		—		193,948,066		—
Derivative financial asset	4,622,913		—		4,622,913		—
Derivative financial liability	$	679,709	$	—	$	679,709	$	—
Assets at December 31, 2014
Investment securities—available for sale
U.S. government agency obligations	$	20,453,875	$	—	$	20,453,875	$	—
Mortgage-backed securities	1,283,633		—		1,283,633		—
Municipal securities	1,987,854		—		1,987,854		—
Mortgage loans held for sale	147,690,276		—		147,690,276		—
Derivative financial asset	1,514,083		—		1,514,083		—
Derivative financial liability	$	1,195,405	$	—	$	1,195,405	$	—

The following table provides quantitative disclosures about the fair value measurements of our assets related to continuing operations which are measured at fair value on a nonrecurring basis as of June 30, 2015 and December 31, 2014.



	Fair Value Measurements at Reporting Date Using
Description	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
At June 30, 2015
Real estate owned
Real estate construction	$	—	$	—	$	—	$	—
Restructured and impaired loans, net	3,167,282		—		—		3,167,282
At December 31, 2014
Real estate owned
Real estate construction	$	144,000	$	—	$	—	$	144,000
Restructured and impaired loans, net	6,381,231		—		—		6,381,231

There were no residential real estate properties classified as other real estate at June 30, 2015, and one property valued at $144,000 at December 31, 2014.

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The following table displays quantitative information about Level 3 Fair Value Measurements for June 30, 2015 and December 31, 2014.



	Fair Value Measurement at June 30, 2015
	Fair Value		Valuation Technique	Unobservable Inputs	Weighted Average
Commercial	$	144,715	Market comparables	Discount applied to market comparables (1)	58	%
Real Estate
Construction	153,265		Market comparables	Discount applied to market comparables (1)	35	%
Residential (1-4 family)	1,206,005		Market comparables	Discount applied to market comparables (1)	17	%
Home equity lines	432,776		Market comparables	Discount applied to market comparables (1)	22	%
Multifamily	—		—	—	—
Commercial	1,230,521		Market comparables	Discount applied to market comparables (1)	11	%
Consumer
Consumer and installment loans	—		—	—	—
Total restructures and impaired loans	$	3,167,282
Real estate owned	$	—	—	Discount applied to market comparables (1)	—



	Fair Value Measurement at December 31, 2014
	Fair Value		Valuation Technique	Unobservable Inputs	Weighted Average
Commercial	$	1,108,698	Market comparables	Discount applied to market comparables (1)	34	%
Real Estate
Construction	236,754		Market comparables	Discount applied to market comparables (1)	36	%
Residential (1-4 family)	3,231,952		Market comparables	Discount applied to market comparables (1)	22	%
Home equity lines	438,500		Market comparables	Discount applied to market comparables (1)	22	%
Multifamily	—		—	—	—
Commercial	1,365,327		Market comparables	Discount applied to market comparables (1)	13	%
Consumer
Consumer and installment loans	—		—	—	—
Total restructures and impaired loans	$	6,381,231
Real estate owned	$	144,000	Market comparables	Discount applied to market comparables (1)	11	%

(1) A discount percentage is applied based on age of independent appraisals, current market conditions, and experience within the local markets.

For the three months ended June 30, 2015, we recorded a gain of $6,135 and a loss of $18,291 on the sale of other real estate owned. For the six months ended June 30, 2015, a gain of $6,135 and a loss of $57,170 were recorded for a net loss of $51,035. For the three and six months ended June 30 2014, we reported a loss of $33,263. Gains or losses on sale of other real estate owned are included in foreclosed property expense.

At the time a loan secured by real estate becomes real estate owned, we record the property at fair value net of estimated selling costs. Upon foreclosure and through liquidation, we evaluate the property’s fair value as compared to its carrying amount and record a valuation adjustment when the carrying amount exceeds fair value. Any valuation adjustments at the time a loan becomes real estate owned is charged to the allowance for loan losses. Any subsequent valuation adjustments are applied to earnings in our consolidated statements of income. No valuation adjustments related to other real estate owned were recorded in the three and six months ended June 30, 2015 or 2014. Adjustments, when necessary, are included in foreclosed property expense.

Valuation Methods

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

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

Investment securities – available-for-sale are valued at quoted market prices, if available. For securities for which no quoted market price is available, we estimate the fair value on the basis of quotes for similar instruments or other available information.

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Investment securities classified as available-for-sale are reported at their estimated fair value with unrealized gains and losses reported in accumulated other comprehensive income. To the extent that the cost basis of investment securities exceeds the fair value and the unrealized loss is considered to be other than temporary, an impairment charge is recognized and the amount recorded in accumulated other comprehensive income or loss is reclassified to earnings as a realized loss. The specific identification method is used in computing realized gains or losses.

Mortgage loans held for sale are recorded at their fair value when originated and reevaluated quarterly, based on our expected return from the secondary market.

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

The carrying amounts of accrued interest approximate fair value.

Interest rate lock commitments ("IRLC") are recorded at fair value, which is based on estimated future receipts net of estimated future expenses when the underlying loan is sold on the secondary market, using observable Level 2 market inputs, reflecting current market inputs as of the measurement date.

Restricted equity securities are recorded at cost, which approximates fair value.

Bank owned life insurance represents insurance policies on officers of the Bank. The cash values of the policies are estimated using information provided by insurance carriers. These policies are carried at their cash surrender value, which approximates the fair value.

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

The fair value of Level 2 borrowings is determined based on quoted prices from FHLB for borrowings with similar characteristics and maturities. The determination of the fair value of Level 3 borrowings is made using pricing models and discounted cash flow models, and includes management judgment and estimation, which may be significant.

Derivative financial instruments are recorded at fair value using observable Level 2 market inputs related to:

•Loans held for sale forward sales commitments are recorded at their fair value based on the estimated number of days remaining in the IRLC at the measurement date and expected return from the secondary market. Forward mortgage loan sales commitments are recorded at their fair value based on the gain or loss that would occur if the loan were paired off with an investor at measurement date. A derivative asset of $4,622,913 and a derivative liability of $679,709 related to loans held for sale were recorded at June 30, 2015. At December 31, 2014, a derivative asset of $1,514,083 and a derivative liability of $1,195,405 were recorded.

Real Estate Owned is carried at the fair value less estimated selling costs. Upon foreclosure and through liquidation, we evaluate the property's fair value as compared to its carrying amount and record a valuation adjustment when the carrying amount exceeds fair value less selling costs. Any valuation adjustments at the time a loan becomes real estate owned is charged to the allowance for loan losses. Fair value is determined through an appraisal conducted by an independent, licensed appraiser outside of the Bank using observable market data (Level 2). When evaluating fair value, management may discount the appraisal further if, based on their understanding of the market conditions, it is determined the collateral is further impaired below the appraisal value (Level 3). Any subsequent valuation adjustments are applied to earnings in our consolidated statements of income. We did not record any losses due to valuation adjustments for the three months and six months ended June 30, 2015 or 2014. We recorded no losses due to valuation adjustments on real estate owned within foreclosed property expense in the year ended December 31, 2014.

Restructured and Impaired Loans measurement is generally based on the present value of expected future cash flows discounted at the loan's effective interest rate, unless in the case of collateral-dependent loans, the observable market price, or the fair value of the collateral can be readily determined. The value of real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser outside of the Bank using observable market data (Level 2). When evaluating fair value, management may discount the appraisal further if, based on their understanding of the market conditions, it is determined the collateral is further impaired below the appraised value (Level 3). The value of

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business equipment is based upon an outside appraisal if deemed significant, or the net book value on the applicable business’ financial statements if not considered significant using observable market data. Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3). Restructured and impaired loans are periodically reevaluated to determine if additional adjustments to the carrying value are necessary.

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

Fair Value of Financial Instruments

The following table presents the carrying amounts and fair value of our financial instruments at June 30, 2015 and December 31, 2014. GAAP defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties, other than through a forced or liquidation sale for purposes of this disclosure. The carrying amounts in the table are included in the balance sheet under the indicated captions.



			Fair Value Measurements at June 30, 2015 using
	Carrying Value		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Carrying Value		Level 1		Level 2		Level 3		Balance
Assets
Cash and cash equivalents	$	101,920,540	$	101,920,540	$	—	$	—	$	101,920,540
Investment securities available for sale	17,338,416		—		17,338,416		—		17,338,416
Mortgage loans held for sale	193,948,066		—		193,948,066		—		193,948,066
Loans held for investment (net)	784,285,281		—		—		800,572,485		800,572,485
Accrued interest receivable	2,122,302		—		2,122,302		—		2,122,302
Restricted equity securities	4,706,000		—		4,706,000		—		4,706,000
Bank owned life insurance	10,464,611		—		10,464,611		—		10,464,611
Derivative financial assets	4,622,913		—		4,622,913		—		4,622,913
Liabilities
Deposits	$	979,023,157	$	—	$	976,454,770	$	—	$	976,454,770
Borrowings	56,025,500		—		46,035,219		5,721,861		51,757,080
Accrued interest payable	177,907		—		177,907		—		177,907
Derivative financial liabilities	679,709		—		679,709		—		679,709

			Fair Value Measurements at December 31, 2014 using
	Carrying Value		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Carrying Value		Level 1		Level 2		Level 3		Balance
Assets
Cash and cash equivalents	$	65,428,974	$	65,428,974	$	—	$	—	$	65,428,974
Investment securities available for sale	23,725,362		—		23,725,362		—		23,725,362
Loans held for sale	147,690,276		—		147,690,276		—		147,690,276
Loans held for investment (net)	763,640,698		—		—		776,974,812		776,974,812
Accrued interest receivable	2,087,880		—		2,087,880		—		2,087,880
Restricted equity securities	3,632,500		—		3,632,500		—		3,632,500
Bank owned life insurance	9,656,803		—		9,656,803		—		9,656,803
Derivative financial assets	1,514,083				1,514,083				1,514,083
Liabilities
Deposits	$	919,413,913	$	—	$	917,008,847	$	—	$	917,008,847
Borrowings	21,075,497		—		11,109,566		5,641,087		16,750,653
Accrued interest payable	43,280		—		43,280		—		43,280
Derivative financial liability	1,195,405		—		1,195,405		—		1,195,405

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NOTE 8. STOCK-BASED COMPENSATION

In May 2014, Monarch stockholders ratified the adoption of the Monarch Bank 2014 Equity Incentive Plan ("2014EIP"), a stock-based compensation plan which succeeds the Monarch Bank 2006 Equity Incentive Plan (“2006EIP”). The 2006EIP had succeeded the Monarch Bank 1999 Incentive Stock Option Plan ("1999ISO") and was the only plan under which equity-based compensation could be awarded. Like the 2006EIP, the 2014EIP 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 advisers to the Company and its subsidiaries.

The 2014EIP authorized the Company to issue up to 1,000,000 shares of Monarch Common Stock plus the number of shares of our Common Stock outstanding under the predecessor plans. The Plan also provides that no award may be granted more than 10 years after the May 2014 ratification date.

As of June 30, 2015, 1,132,959 shares were available for grants under all plans. A total of 418,137 shares are subject to outstanding awards under the 2006EIP and 1999ISO, including 31,087 stock options and 387,050 shares of non-vested restricted stock. The stock options outstanding as of June 30, 2015 have a weighted average exercise price of $7.84 and a weighted average remaining term of 3 months and are fully vested. Restricted stock typically vests over a 60 month period. Total compensation costs are recognized over the service period to vesting.

No additional options were granted in the periods covered. There were 55,755 and 73,027 options exercised in the second quarter and first half of 2015. No options on shares were forfeited in the second quarter and first half of 2015.

Compensation expense related to our restricted stock totaled $192,060 and $343,922 in the second quarter and first half of 2015. Remaining vesting periods are between 6 and 54 months with unrecognized remaining compensation expense of $1,976,807. We issued 0 and 72,800 shares of restricted stock in the second quarter and first half of 2015. Shares vested were 1,200 and 2,400 for the second quarter and first half of 2015. Shares forfeited were 6,700 and 11,100 for the second quarter and first half of 2015.

NOTE 9. SEGMENT REPORTING

Reportable segments include community banking and retail mortgage banking services. Community banking involves making loans to and generating deposits from individuals and businesses in the markets where we have offices. Retail mortgage banking originates residential loans and subsequently sells them to investors. Our mortgage banking segment is a strategic business unit that offers different products and services. It is managed separately because the segment appeals to different markets and, accordingly, requires different technology and marketing strategies.

Funding for retail mortgage banking services' loans held for sale (LHFS) portfolio is provided by community banking services. The outstanding LHFS balance and related interest earned for the bank's interim holding period of these loans is recorded in the community banking segment. This interim interest income was $1,746,435 and $3,053,472 in the second quarter and first half of 2015, respectively. In the second quarter and first half of 2014 interest income was $1,274,498 and $2,047,230 , respectively. In the event of early payment default, Monarch has recorded a reserve for loan repurchases which totaled $3,222,710 at June 30, 2015 and $3,013,396 at December 31, 2014. Our reserve for loan repurchases is not a part of our loan loss reserve and is carried in other liabilities. This reserve, which is an estimate of the potential for losses based on investor contracts, is not an indication that losses will occur and is periodically analyzed and adjusted through income.

The retail mortgage banking segment’s most significant revenue and expense is non-interest income and non-interest expense, respectively. We do not have other reportable operating segments. (The accounting policies of the segments are the same as those described in the summary of significant accounting policies in Note 1 of our annual 10-K.) All inter-segment sales prices are market based. The assets and liabilities and operating results of our other wholly owned subsidiary, Monarch Capital, LLC, are included in the mortgage banking segment. Monarch Capital, LLC, provides commercial mortgage brokerage services.

Segment information for the three and six months ended June 30, 2015 and 2014 is shown in the following tables.

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Selected Financial Information



	Commercial and Other Banking			Mortgage Banking Operations			Inter-segment Eliminations			Total
Quarter Ended June 30, 2015
Income:
Interest income	$	11,700,295		$	323,521		$	—		$	12,023,816
Non-interest income	1,891,160			22,240,973			(505,869		)	23,626,264
Total operating income	13,591,455			22,564,494			(505,869		)	35,650,080
Expenses:
Interest expense	(810,101		)	(505,869		)	505,869			(810,101		)
Provision for loan losses	(250,000		)	—			—			(250,000		)
Personnel expense	(4,771,234		)	(16,131,450		)	—			(20,902,684		)
Other non-interest expenses	(4,496,694		)	(3,754,135		)	—			(8,250,829		)
Total operating expenses	(10,328,029		)	(20,391,454		)	505,869			(30,213,614		)
Income before income taxes	3,263,426			2,173,040			—			5,436,466
Provision for income taxes	(1,177,947		)	(783,816		)	—			(1,961,763		)
Less: Net income attributable to non-controlling interests	(15,122		)	(35,752		)	—			(50,874		)
Net income attributable to Monarch Financial Holdings, Inc.	$	2,070,357		$	1,353,472		$	—		$	3,423,829

Quarter Ended June 30, 2014
Income:
Interest income	$	10,397,287		$	159,705		$	—		$	10,556,992
Non-interest income	1,304,304			17,369,228			(174,659		)	18,498,873
Total operating income	11,701,591			17,528,933			(174,659		)	29,055,865
Expenses:
Interest expense	(976,886		)	—			—			(976,886		)
Personnel expense	(3,930,738		)	(11,327,260		)	(4,470		)	(15,262,468		)
Other non-interest expenses	(3,970,887		)	(3,952,758		)	179,129			(7,744,516		)
Total operating expenses	(8,878,511		)	(15,280,018		)	174,659			(23,983,870		)
Income before income taxes	2,823,080			2,248,915			—			5,071,995
Provision for income taxes	(983,793		)	(783,707		)	—			(1,767,500		)
Less: Net income attributable to non-controlling interests	(6,857		)	(114,064		)	—			(120,921		)
Net income attributable to Monarch Financial Holdings, Inc.	$	1,832,430		$	1,351,144		$	—		$	3,183,574

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	Commercial and Other Banking			Mortgage Banking Operations			Inter-segment Eliminations			Total
Six Months Ended June 30, 2015
Income:
Interest income	$	22,783,587		$	625,799		$	—		$	23,409,386
Non-interest income	3,476,283			43,304,652			(888,508		)	45,892,427
Total operating income	26,259,870			43,930,451			(888,508		)	69,301,813
Expenses:
Interest expense	(1,547,182		)	(888,508		)	888,508			(1,547,182		)
Provision for loan losses	(500,000		)	—			—			(500,000		)
Personnel expense	(9,444,701		)	(30,497,397		)	—			(39,942,098		)
Other non-interest expenses	(8,483,066		)	(7,906,181		)	—			(16,389,247		)
Total operating expenses	(19,974,949		)	(39,292,086		)	888,508			(58,378,527		)
Income before income taxes	6,284,921			4,638,365			—			10,923,286
Provision for income taxes	(2,275,644		)	(1,679,459		)	—			(3,955,103		)
Less: Net income attributable to non-controlling interests	(31,027		)	(52,120		)	—			(83,147		)
Net income attributable to Monarch Financial Holdings, Inc.	$	3,978,250		$	2,906,786		$	—		$	6,885,036

Six Months Ended June 30, 2014
Income:
Interest income	$	20,723,919		$	267,156		$	—		$	20,991,075
Non-interest income	2,526,025			29,571,390			(289,891		)	31,807,524
Total operating income	23,249,944			29,838,546			(289,891		)	52,798,599
Expenses:
Interest expense	(1,947,998		)	—			—			(1,947,998		)
Personnel expense	(7,602,757		)	(19,937,330		)	(4,906		)	(27,544,993		)
Other non-interest expenses	(7,315,501		)	(7,187,920		)	294,797			(14,208,624		)
Total operating expenses	(16,866,256		)	(27,125,250		)	289,891			(43,701,615		)
Income before income taxes	6,383,688			2,713,296			—			9,096,984
Provision for income taxes	(2,272,743		)	(965,997		)	—			(3,238,740		)
Less: Net income attributable to non-controlling interests	(6,541		)	(130,864		)	—			(137,405		)
Net income attributable to Monarch Financial Holdings, Inc.	$	4,104,404		$	1,616,435		$	—		$	5,720,839



Segment Assets
June 30, 2015	$	1,169,578,999	$	22,113,950	$	(21,018,311	)	$	1,170,674,638
December 31, 2014	$	1,062,825,141	$	15,071,113	$	(11,159,280	)	$	1,066,736,974



Capital Expenditures
June 30, 2015	$	1,072,483	$	321,243	$	—	$	1,393,726
December 31, 2014	$	3,932,268	$	352,505	$	—	$	4,284,773

NOTE 10. GOODWILL AND INTANGIBLE ASSETS

Goodwill and intangible assets with indefinite lives are recorded at cost and are reviewed at least annually for impairment based on evidence of certain impairment indicators. Intangible assets with identifiable lives are amortized over their estimated useful lives. The were no intangible assets at June 30, 2015.

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



	June 30, 2015		December 31, 2014
Goodwill	$	775,000	$	775,000

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Goodwill is related the acquisition of a Maryland mortgage office plus certain other mortgage related assets in August 2007. Intangible assets related to this acquisition were fully amortized in 2014. Amortization expense for intangible assets totaled $0 for the six months ending June 30, 2015. Amortization expense for intangible assets totaled $44,643 and $89,286 for the three and six month periods ending June 30, 2014.

NOTE 11. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES

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

The fixed-rate payment feature of this swap was structured to mirror the provisions of the hedged borrowing agreement. This swap qualified as a cash flow hedge and the underlying liability was carried at fair value in other liabilities, with the changes in fair value of the instrument included in Stockholders’ Equity in accumulated other comprehensive income. This swap expired on September 30, 2014 and was not renewed.

In August 2014 we began participating in a mandatory delivery program for mortgage loans. Under the mandatory delivery program we committed to deliver a block of loans to an investor at a preset cost prior to the close of such loans. This differs from a best efforts delivery which sets the cost to the investor on a loan by loan basis. Mandatory delivery creates a higher level of risk for us but is not binding to the client. Our client could decide, at any time between the time of the rate lock and the actual closing on their mortgage loan, not to proceed with the commitment. There is a higher occurrence of this during periods of volatility.

To mitigate this risk, we pair the rate lock commitment with the sale of a notional security bearing similar attributes. At the time the loan is delivered to the investor, matched securities are repurchased. Gains or losses associated with this pairing are recorded in mortgage banking income on our income statement as incurred. Our Board approved mandatory delivery policy only allows us to commit $50 million to the program at any given time. We utilize the services of Optimal Blue to help monitor and manage our rate lock activities in this program. We reported a gain related to our mandatory delivery program in the second quarter of 2015 of $585 thousand that was recorded in mortgage banking income. Year to date 2015 we have reported a gain related to our mandatory delivery program of $191 thousand. We did not participate in a mandatory delivery program in the first half of 2014.

NOTE 12. LOW INCOME HOUSING TAX CREDITS

The Company has invested in one housing equity fund at June 30, 2015 and December 31, 2014. The general purpose of this fund is to encourage and assist participants in investing in low-income residential rental properties located in the Commonwealth of Virginia, develop and implement strategies to maintain projects as low-income housing, deliver Federal Low Income Housing Credits to investors, allocate tax losses and other possible tax benefits to investors, and to preserve and protect project assets. The Company accounts for this investment under the proportional amortization method and at June 30, 2015 and December 31, 2014, the investment in this fund, recorded in other assets on the consolidated balance sheet, was $472,238 and $500,000, respectively, with $27,762 of tax credits and other tax benefits related to these investments recognized on the consolidated statements of income for the periods ending June 30, 2015 and 2014. Total projected tax credits to be received for 2015 are $23,037, which is based on the most recent quarterly estimates received from the fund. Additional capital calls expected for the fund totals $494,500 at June 30, 2015 and December 31, 2014, and are included in other liabilities on the consolidated balance sheets.

NOTE 13. SUBSEQUENT EVENT

On July 23, 2015 we announced that the Board of Monarch Financial Holdings, Inc., had approved a quarterly common stock cash dividend. The quarterly cash dividend is $0.09 per share for common shareholders of record on August 7, 2015, payable on August 31, 2015.

ITEM 2.

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MONARCH FINANCIAL HOLDINGS, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

The following discussion supplements and provides information about the major components of the results of operations, financial condition, liquidity and capital resources of the Company. This discussion and analysis should be read in conjunction with the Consolidated Financial Statements and supplemental financial data.

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

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

This report contains forward-looking statements with respect to our financial condition, results of operations and business. These forward-looking statements include statements regarding our profitability, liquidity, allowance for loan losses, interest rate sensitivity, market risk, growth strategy, and financial and other goals. The words “believes,” “expects,” “may,” “will,” “should,” “projects,” “contemplates,” “anticipates,” “forecasts,” “intends,” or other similar words or terms are intended to identify forward-looking statements.

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


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


•	Changes in interest rates could reduce income.


•	Competitive pressures among financial institutions may increase.


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


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


•	Adverse changes may occur in the securities market.


•	Other factors described from time to time in our reports with the Securities and Exchange Commission.

This section should be read in conjunction with the description of our “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2014.

CRITICAL ACCOUNTING POLICIES

Critical accounting policies are those applications of accounting principles or practices that require considerable judgment, estimation, or sensitivity analysis by management. In the financial service industry, examples, though not an all inclusive list, of disclosures that may fall within this definition are the determination of the adequacy of the allowance for loan losses, valuation of derivatives or securities without a readily determinable market value, and the valuation of the fair value of intangibles and goodwill. Except for the determination of the adequacy of the allowance for loan losses, derivative financial instrument estimations and fair value estimations related to foreclosed real estate, we do not believe there are other practices or policies that require significant sensitivity analysis, judgments, or estimations.

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Our financial statements are prepared in accordance with 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.

Our critical accounting policies are listed below. A summary of our significant accounting policies is set forth in Item 8, Note 1 of our Annual Report on Form 10-K for the year ended December 31, 2014.

Allowance for Loan Losses

Our allowance for loan losses is an estimate of the losses that may be sustained in our loan portfolio. The allowance is based on GAAP guidance which requires that losses be accrued when they have a probability of occurring and are estimable and that losses be accrued based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance.

Our allowance for loan losses has three basic components: the formula allowance, the specific allowance and the unallocated allowance. Each of these components is determined based upon estimates that can and do change when the actual events occur. The formula allowance uses a historical loss view as an indicator of future losses along with various economic factors and, as a result, could differ from the loss incurred in the future. However, since this history is updated with the most recent loss information, the errors that might otherwise occur may be mitigated. The specific allowance uses various techniques to arrive at an estimate of loss for specifically identified loans. Historical loss information, expected cash flows and fair value of collateral are used to estimate these losses. The unallocated allowance captures losses whose impact on the portfolio have occurred but have yet to be recognized in either the formula or specific allowance. The use of these values is inherently subjective, and our actual losses could be greater or less than the estimates.

Derivative Financial Instruments

We use derivatives to manage risks related to interest rate movements. Interest rate swap contracts designated and qualifying as cash flow hedges are reported at fair value. The gain or loss on the effective portion of the hedge initially is included as a component of other comprehensive income and is subsequently reclassified into earnings when interest on the related debt is paid. We document our risk management strategy and hedge effectiveness at the inception of and during the term of each hedge. Our interest rate risk management strategy is to stabilize cash flow requirements by maintaining interest rate swap contracts to convert variable-rate debt to a fixed rate. We did not hold any interest rate swap contracts at June 30, 2015 or December 31, 2014. We do not hold or issue derivative financial instruments for trading purposes.

Commitments to fund mortgage loans are Interest Rate Lock Commitment ("IRLC") to be sold into the secondary market and forward commitments for the future delivery of these mortgage loans are free standing derivatives. The fair value of the interest rate lock is recorded at the end of the financial reporting period and adjusted for the expected exercise of the commitment before the loan is funded. In order to hedge the change in interest rates resulting from its commitments to fund the loans, the Company enters into forward commitments for the future delivery of mortgage loans. Fair value of these mortgage derivatives are estimated based on changes in mortgage interest rates from the date the interest on the loan is locked. Changes in the fair value of these derivatives are included in net gains on sale of loans.

Periodically, we participate in a “mandatory” delivery program for mortgage loans. Under the mandatory delivery system, loans with interest rate locks are paired with the sale of a notional security bearing similar attributes. Interim income or loss on the pairing of the loans and securities is recorded in mortgage banking income on our income statement. In addition, at the time the loan is delivered to an investor, matched securities are repurchased and a gain or loss on the pairing is recorded in mortgage banking income on our income statement. Management has elected to limit Company exposure to this form of delivery to $50 million in outstanding loans. We had $43.3 million in the mandatory delivery program at June 30, 2015 and $48.6 million at December 31, 2014.

Fair Value Measurements

Under GAAP we are permitted to choose or required to measure many financial instruments and certain other items at fair value. The estimation of fair value is significant to certain assets, including loans held-for-sale, available-for-sale securities, and foreclosed real estate owned. These assets are recorded at fair value or lower of cost or fair value, as applicable. The fair values of loans held-for-sale are based on commitments from investors. The fair values of available-for-sale securities are based on published market or dealer quotes for similar securities. The fair values of rate lock commitments are based on net fees currently

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charged to enter into similar agreements. The fair value of foreclosed real estate owned is estimated based on current appraisals, but may be further adjusted based upon our evaluation of the fair value of similar properties.

Fair values can be volatile and may be influenced by a number of factors, including market interest rates, prepayment speeds, discount rates, and market conditions, among others. Since these factors can change significantly and rapidly, fair values are difficult to predict and subject to material changes that could impact our financial condition and results of operation.

RESULTS OF OPERATIONS

Net Income

Our consolidated financial statements include the accounts of the Company, the Bank and its subsidiaries, after all significant inter-company transactions have been eliminated. Net income attributable to our non-controlling interests of $51 thousand and $121 thousand in the second quarter and year to date net income of $83 thousand and $137 thousand were deducted for the respective periods ended June 30, 2015 and 2014, to arrive at net income attributable to Monarch Financial Holdings, Inc. The ensuing references and ratios are related to net income attributable to Monarch Financial Holdings, Inc., (hereon referred to as "net income") after net income attributable to non-controlling interests has been deducted.

Net Income Attributable to Monarch Financial Holdings, Inc.



	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2015			2014			2015			2014
Net income	$	3,474,703		$	3,304,495		$	6,968,183		$	5,858,244
Less: Net income attributable to non-controlling interests	(50,874		)	(120,921		)	(83,147		)	(137,405		)
Net income attributable to Monarch Financial Holdings, Inc.	$	3,423,829		$	3,183,574		$	6,885,036		$	5,720,839

Net income for the quarter ended June 30, 2015 was $3.4 million, an increase of $240 thousand or 7.5% over the same quarter in 2014. Net income for the first six months of 2015 was $6.9 million, an increase of $1.2 million of 20.4% over year. Basic and diluted earnings per share for the second quarter of 2015 and 2014 were $0.32 and $0.30, respectively. Basic and diluted earnings per share for the first half of 2015 was $0.64 compared to $0.54, one year prior. Two important and commonly used measures of profitability are return on assets (net income as a percentage of average total assets) and return on equity (net income as a percentage of average stockholders’ equity). Our annualized return on assets (“ROA”) for the three and six months ended June 30, 2015 was 1.22% and 1.26%, respectively, compared to 1.29% and 1.18% in 2014. Our annualized return on equity (“ROE”) for the second quarter of 2015 was 12.28% compared to 12.63% in 2014. Our ROE for the first six months of 2015 was 12.62% compared to 11.57% for 2014.

Net interest income increased $1.6 million or 17.1% in the second quarter of 2015 compared to 2014. Non-interest income increased $5.1 million or 27.7% for the same respective periods. Non-interest expense increased $6.1 million or 26.7% in the second quarter of 2015 compared to 2014. For the first half of 2015 net interest income increased $2.8 million or 14.8% over 2014. In the first six months of 2015 non-interest income increased $14.1 million or 44.3% and non-interest expense increased $14.6 million or 34.9% over the same period in 2014. A combination of higher interest income and lower interest expense was the source of net interest income growth in both the quarter and year to date. Strong mortgage production was the primary source of growth in non-interest income and non-interest expense.

We recorded a loan loss provision of $250 thousand in the second quarter of 2015 and $500 thousand year to date. We did not record a provision in 2014. We reported net charge offs of $217 thousand in the second quarter and $772 thousand in the first half of 2015 compared to net charge offs of $143 thousand in the second quarter of 2014 and recoveries in excess of charge offs of $9 thousand in the first half of 2014.

Net Interest Income

Net interest income, which is the excess of interest income over interest expense, is a major source of banking revenue. A number of factors influence net interest income, including the interest rates earned on earning assets, and the interest rates paid to obtain funding to support the assets, the average volume of interest-earning assets and interest bearing liabilities, and the mix of interest-earning assets and interest bearing liabilities.

Interest rates have been at a record low since December 2008, when the federal funds rate set by the Federal Reserve Bank’s Federal Open Market Committee was reduced to 0.25%. Wall Street Journal Prime Rate (“WSJ”), which generally moves with the federal funds rate, has been 3.25% since December 2008, as well. With rates low but stable, we believe we have been able to

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position our balance sheet to respond quickly in the future when rates begin to rise, and thereby buffer the potential impact of those rising rates.

Net interest income was $11.2 million in the second quarter of 2015 compared to $9.6 million in 2014, an increase of $1.6 million or 17.1%. Interest income was $12.0 million in second quarter of 2015, an increase of $1.5 million or 13.9% over interest income of $10.6 million in the second quarter of 2014. Interest expense declined $167 thousand or 17.1% to $810 thousand in the second quarter of 2015 compared to $977 thousand in the second quarter of 2014. In the first half of 2015 net interest income was $21.8 million, an increase of $2.8 million compared to $19.0 million in the first half of 2014. Interest income was $23.4 million and interest expense was $1.5 million in the first six months of 2015 compared to interest income of $21.0 million and interest expense of $1.9 million in the first half of 2014.

Our greatest earning assets are loans which are comprised of two major portfolio classifications: mortgage loans held for sale and loans held for investment. Both portfolios provided interest income growth in the second quarter and first six months of 2015 compared to 2014.

Mortgage loans held for sale, which are residential mortgages originated by our mortgage division and sold to investors, earn interest while on our books but at rates typically lower than our loans held for investment portfolio. This portfolio is also subject to greater fluctuations in outstanding balances due to a combination of market demand, economic conditions and the prevailing mortgage rates. Due to a slight dip in mortgage rates, market demand was higher in the first half of 2015 compared to prior year. Interest income on our mortgage loans held for sale was $1.7 million in the second quarter of 2015 compared to $1.3 million, one year prior. Average volume increased $63 million to $180 million in the second quarter of 2015 compared to $117 million in average volume in the second quarter of 2014. In the first six months of 2015, average volume was $158 million, an increase of $64 million over the first six months of 2014 and interest income was $3.1 million compared to $2.1 million in 2014. Average yield declined 49 basis points to 3.88% in the second quarter of 2015 compared to 4.37% in 2014. Year to date, average yield declined 50 basis points to 3.89% compared to 4.39% in 2014.

Loans held for investment are commercial, real estate, and consumer loans originated and maintained on the Bank's books. Average loan volume was $773 million in the second quarter of 2015, an increase of $74 million compared to $699 million in the second quarter of 2014. Year to date 2015, average loans held for investment increased $70 million to $769 million when compared to $699 million in 2014. Interest income increased $944 thousand in the quarter and $1.3 million in the first six months of 2015 compared to 2014. Average yield declined 1 basis point in the quarter to 5.21% compared to 5.22% in 2014. Average yield declined 15 basis in the first half of 2015 to 5.21% from 5.36% one year prior. In 2014 a non-recurring interest income adjustment of $417 thousand contributed to the higher six month yield.

Interest expense declined $166 thousand or 17.1% in the second quarter and $401 thousand or 20.6% in the first half of 2015 compared to 2014. This decrease was due lower interest expense on interest bearing liabilities. Despite higher average deposit volume our interest expense declined. Additionally, the interest we paid on our trust preferred subordinated debt declined. Interest expense on interest bearing deposits declined $100 thousand or 11.9% to $739 thousand in the quarter and $267 thousand or 16.0% in the first half of 2015 compared to 2014. Interest expense on trust preferred subordinated debt declined $76 thousand, to $48 thousand, in the quarter and $152 thousand, to $94 thousand, in the first half of 2015 compared to 2014. Average volume on our interest bearing deposits increased $62 million in the quarter driven by growth in our money market accounts and time deposits. At the same time, average interest cost on interest bearing deposits declined 10 basis point, to 0.42% from 0.52%, driven by lower interest rates across all products. As stated previously, we lowered interest rates on all products throughout 2014 but have begun moderate increases to rates in 2015. In the second quarter of 2015, despite $16 million in additional average volume in borrowings, interest expense on these products declined $66 thousand, driven by a 389 basis point decline in rate from 4.93% to 1.04%. Year to date, average borrowings have increased $13 million, while interest cost declined 379 basis points from 4.95% to 1.16%. The maturity of an interest rate swap on our $10 million trust preferred subordinated debt, which swapped a variable rate instrument for a fixed rate instrument, was the source of the rate decline. The expired fixed rate was 4.96% and the variable rate was the three month London Interbank Offering Rate ("LIBOR") plus 160 basis points or 1.87% in the second quarter and 1.86% in the first six months of 2015. There was also a shift in the borrowing mix in the quarter due to lower rates on short term borrowing at the FHLB which impacted yield.

For analytical purposes, net interest income is adjusted to a taxable equivalent basis to recognize the income tax savings on tax-exempt assets, such as bank owned life insurance (“BOLI”) and state and municipal securities. A tax rate of 35% was used in both 2015 and 2014 when adjusting interest on BOLI and tax-exempt securities to a fully taxable equivalent basis. The difference between rates earned on interest-earning assets (with an adjustment made to tax-exempt income to provide comparability with taxable income, i.e. the “FTE” adjustment) and the cost of the supporting funds is measured by net interest margin.

Our net interest rate spread on a tax-equivalent basis increased 14 basis points in the second quarter of 2015 to 4.15% from 4.01% in 2014. Our net interest margin for the second quarter of 2015 was 4.28%, an increase over 2014 of 10 basis points from

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4.18%. For the first six months of 2015 our net interest rate spread on a tax-equivalent basis increased 11 basis points to 4.16% from 4.05% in 2014 and our net interest margin increased 8 basis points to 4.30% from 4.22%.

Bank Owned Life Insurance (BOLI) has been included in interest earning assets. We purchased $6.0 million in BOLI during the fourth quarter of 2005. We purchased an additional $2.0 million in BOLI during the third quarter of 2014 and an additional $658 thousand in BOLI in the first half of 2015. Income on BOLI is not subject to federal income tax, giving it a tax-effective yield of 4.92% for the second quarter of 2015 compared to 4.85% in 2014. Year to date, the tax-effective yield on BOLI declined 24 basis points to 4.62% from 4.85%.

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

NET INTEREST INCOME ANALYSIS

(in thousands)



For the Three Months Ended June 30,
	2015							2014							2013
	Average Balance			Income/ Expense		Yield Rate (1)		Average Balance			Income/ Expense		Yield Rate (1)		Average Balance			Income/ Expense		Yield Rate (1)
ASSETS
Securities, at amortized cost (2)	$	19,064		$	84	1.77	%	$	23,835		$	97	1.64	%	$	16,451		$	63	1.53	%
Loans, held for investment	772,717			10,033		5.21	%	698,851			9,089		5.22	%	676,894			9,040		5.36	%
Mortgage loans, held for sale	180,485			1,746		3.88	%	116,851			1,274		4.37	%	200,733			1,774		3.54	%
Federal funds sold	13,176			7		0.21	%	40,547			24		0.24	%	44,727			25		0.23	%
Dividend-earning restricted equity securities	3,781			42		4.46	%	3,160			22		2.84	%	3,786			69		7.33	%
Deposits in other banks	62,634			117		0.75	%	36,817			55		0.60	%	15,020			10		0.27	%
Bank owned life insurance (2)	10,262			126		4.92	%	7,491			91		4.85	%	7,261			91		5.03	%
Total earning assets	1,062,119			12,155		4.59	%	927,552			10,652		4.61	%	964,872			11,072		4.60	%
Less: Allowance for loan losses	(8,732		)					(9,148		)					(10,823		)
Nonperforming loans	6,040							8,180							3,143
Other non-earning assets	67,322							66,419							75,153
Total assets	$	1,126,749						$	993,003						$	1,032,345
LIABILITIES and STOCKHOLDERS’ EQUITY
Interest-bearing deposits:
Demand	$	57,726		$	19	0.13	%	$	50,993		$	21	0.17	%	$	51,755		$	24	0.19	%
Savings	19,451			14		0.29	%	24,191			25		0.41	%	22,395			23		0.41	%
Money market savings	395,907			355		0.36	%	370,020			359		0.39	%	335,915			364		0.43	%
Time deposits	231,992			351		0.61	%	198,415			434		0.88	%	282,828			610		0.87	%
Total interest-bearing deposits	705,076			739		0.42	%	643,619			839		0.52	%	692,893			1,021		0.59	%
Borrowings	27,437			71		1.04	%	11,150			137		4.95	%	15,866			163		4.12	%
Total interest-bearing liabilities	732,513			$	810	0.44	%	654,769			$	976	0.60	%	708,759			$	1,184	0.67	%
Non-interest-bearing liabilities
Demand deposits	264,068							223,598							205,779
Other non-interest-bearing liabilities	18,344							13,544							26,169
Total liabilities	1,014,925							891,911							940,707
Stockholders’ equity	111,824							101,092							91,638
Total liabilities and stockholders’ equity	$	1,126,749						$	993,003						$	1,032,345
Net interest income (2)				$	11,345						$	9,676						$	9,888
Interest rate spread (2)(3)						4.15	%						4.01	%						3.93	%
Net interest margin (2)(4)						4.28	%						4.18	%						4.11	%


(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 35%, with a $49,352 adjustment for 2015 and a $36,968 adjustment for 2014 and a $37,153 adjustment for 2013.


(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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For the Six Months Ended June 30,
	2015							2014							2013
	Average Balance			Income/ Expense		Yield Rate (1)		Average Balance			Income/ Expense		Yield Rate (1)		Average Balance			Income/ Expense		Yield Rate (1)
ASSETS
Securities, at amortized cost (2)	$	20,080		$	178	1.79	%	$	25,807		$	178	1.39	%	$	16,188		$	125	1.56	%
Loans, held for investment	769,196			19,873		5.21	%	698,748			18,568		5.36	%	669,591			18,015		5.43	%
Mortgage loans, held for sale	158,407			3,053		3.89	%	93,978			2,047		4.39	%	258,142			4,507		3.52	%
Federal funds sold	14,820			15		0.20	%	56,344			65		0.23	%	26,833			30		0.23	%
Dividend-earning restricted equity securities	3,707			81		4.41	%	3,390			52		3.12	%	6,147			144		4.71	%
Deposits in other banks	59,615			219		0.74	%	33,555			91		0.55	%	15,032			18		0.24	%
Bank owned life insurance (2)	10,075			231		4.62	%	7,462			180		4.85	%	7,232			181		5.03	%
Total earning assets	1,035,900			23,650		4.60	%	919,284			21,181		4.65	%	999,165			23,020		4.65	%
Less: Allowance for loan losses	(8,811		)					(9,116		)					(10,923		)
Nonperforming loans	5,996							7,231							3,238
Other non-earning assets	65,735							64,572							76,025
Total assets	$	1,098,820						$	981,971						$	1,067,505
LIABILITIES and STOCKHOLDERS’ EQUITY
Interest-bearing deposits:
Demand	$	56,259		$	36	0.13	%	$	50,134		$	40	0.16	%	$	51,242		$	51	0.20	%
Savings	19,689			27		0.28	%	23,471			47		0.40	%	22,523			47		0.42	%
Money market savings	380,277			630		0.33	%	370,700			708		0.39	%	336,538			746		0.45	%
Time deposits	236,354			714		0.61	%	199,373			879		0.89	%	274,174			1,207		0.89	%
Total interest-bearing deposits	692,579			1,407		0.41	%	643,678			1,674		0.52	%	684,477			2,051		0.60	%
Borrowings	24,261			140		1.16	%	11,162			274		4.96	%	69,531			571		1.66	%
Total interest-bearing liabilities	716,840			$	1,547	0.44	%	654,840			$	1,948	0.60	%	754,008			$	2,622	0.70	%
Non-interest-bearing liabilities
Demand deposits	255,110							214,465							196,759
Other non-interest-bearing liabilities	16,867							12,926							26,695
Total liabilities	988,817							882,231							977,462
Stockholders’ equity	110,003							99,740							90,043
Total liabilities and stockholders’ equity	$	1,098,820						$	981,971						$	1,067,505
Net interest income (2)				$	22,103						$	19,233						$	20,398
Interest rate spread (2)(3)						4.16	%						4.05	%						3.95	%
Net interest margin (2)(4)						4.30	%						4.22	%						4.12	%


(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 35%, with a $91,179 adjustment for 2015 and a $73,323 adjustment for 2014 and a $73,683 adjustment for 2013.


(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.

Rate/Volume Analysis

The goal of a rate/volume analysis is to compare two or more periods to determine whether the difference between those periods is the result of changes in rate, or volume, or some combination of the two. This is achieved through a “what if” analysis. We calculate what the potential income would have been in the new period if the prior period rate had remained unchanged, and compare that result to what the income would have been in the prior period if the current rates were in effect. Through the analysis

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of these income potentials, we are able to determine how much of the change between periods is the impact of differing rates and how much is volume driven.

For discussion purposes, our “Rate/Volume Analysis” and “Net Interest Income Analysis” tables include tax equivalent income on bank owned life insurance (BOLI) and municipal securities that are not in compliance with Generally Accepted Accounting Principals (GAAP). The following table is a reconciliation of our income statement presentation to these tables.

RECONCILIATION OF NET INTEREST INCOME

TO TAX EQUIVALENT INTEREST INCOME



Non-GAAP	For the Three Months Ended June 30,
	2015		2014		2013
Interest income:
Total interest income	$	12,023,816	$	10,556,992	$	10,975,487
Bank owned life insurance	81,919		58,905		59,230
Tax equivalent adjustment (35% tax rate)
Bank owned life insurance	44,111		31,718		31,893
Municipal securities	5,241		5,250		5,260
Adjusted income on earning assets	12,155,087		10,652,865		11,071,870
Interest expense:
Total interest expense	810,101		976,886		1,183,923
Net interest income—adjusted	$	11,344,986	$	9,675,979	$	9,887,947



Non-GAAP	For the Six Months Ended June 30,
	2015		2014		2013
Interest income:
Total interest income	$	23,409,386	$	20,991,075	$	22,829,357
Bank owned life insurance	149,874		116,678		117,312
Tax equivalent adjustment (35% tax rate)
Bank owned life insurance	80,701		62,827		63,168
Municipal securities	10,478		10,496		10,515
Adjusted income on earning assets	23,650,439		21,181,076		23,020,352
Interest expense:
Total interest expense	1,547,182		1,947,998		2,621,605
Net interest income—adjusted	$	22,103,257	$	19,233,078	$	20,398,747

Adjusted net interest income increased $1.7 million in the second quarter of 2015 compared to 2014 and $2.9 million in the first half of 2015 compared to 2014. Interest income increased $1.5 million quarter over quarter and $2.5 million year over year, while interest expense declined $166 thousand in the quarter and $401 thousand year to date.

Changes in Net Interest Income (Rate/Volume Analysis)

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

The primary contributor to the increase interest income was growth in volume for both our mortgage loans held for sale and loans held for investment. Quarter over quarter, an additional $1.5 million in interest income and year to date an additional $2.4 million in interest income was volume driven .

Interest expense declined $166 thousand in the second quarter and $401 thousand in the first six months of 2015 due to lower rates net of increased volume. Lower rates in all deposit categories reduced interest expense $188 thousand in the quarter and $427 thousand in the first six months of 2015 compare to 2014. Growth in money markets and time deposits partially offset

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this decline for a net reduction in interest expense on deposits of $100 thousand in the quarter and $267 thousand, year to date. Lower rates on borrowings resulted in a $164 thousand decline in interest expense that was partially offset by volume growth for a net decline in interest expense of $66 thousand in the quarter. Year to date, lower rates on borrowings resulted in a $307 thousand decline in interest expense that was partially offset due to volume increases for a net decline in interest expense of $134 thousand.

In the second quarter and first half of 2014 compared to 2013 net interest income declined $212 thousand and $1.2 million, respectively. Volume declines in our mortgage loans held for sale was the driver in this reduction. These declines outpaced the growth in loans held for investment and savings achieved on our interest bearing liabilities through both rate and volume.

The following table analyzes the changes in both rate and volume components of net interest income on a tax equivalent basis.

RATE / VOLUME ANALYSIS

(in thousands)



	For the Three Months Ended June 30,
	2015 vs. 2014									2014 vs. 2013
	Interest Increase (Decrease)			Change Attributable to						Interest Increase (Decrease)			Change Attributable to
	Interest Increase (Decrease)			Rate			Volume			Interest Increase (Decrease)			Rate			Volume
Interest income
Securities	$	(13	)	$	8		$	(21	)	$	34		$	4		$	30
Loans held for investment	944			(15		)	959			49			(240		)	289
Mortgage loans held for sale	472			(157		)	629			(499		)	354			(853		)
Federal funds sold	(17		)	(2		)	(15		)	(1		)	1			(2		)
Dividend-earning restricted equity securities	20			15			5			(47		)	(37		)	(10		)
Deposits in other banks	62			16			46			45			21			24
Bank owned life insurance	35			1			34			—			(3		)	3
Total interest income	$	1,503		$	(134	)	$	1,637		$	(419	)	$	100		$	(519	)

Interest expense
Deposits:
Demand	$	(2	)	(5		)	3			$	(3	)	(3		)	—
Savings	(11		)	(7		)	(4		)	2			—			2
Money market	(4		)	(28		)	24			(5		)	(40		)	35
Time	(83		)	(148		)	65			(176		)	9			(185		)
Total deposits	(100		)	(188		)	88			(182		)	(34		)	(148		)
Borrowings	(66		)	(164		)	98			(25		)	29			(54		)
Total interest expense	(166		)	(352		)	186			(207		)	(5		)	(202		)
Net interest income	$	1,669		$	218		$	1,451		$	(212	)	$	105		$	(317	)

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	For the Six Months Ended June 30,
	2015 vs. 2014									2014 vs. 2013
	Interest Increase (Decrease)			Change Attributable to						Interest Increase (Decrease)			Change Attributable to
	Interest Increase (Decrease)			Rate			Volume			Interest Increase (Decrease)			Rate			Volume
Interest income
Securities	$	—		$	44		$	(44	)	$	53		$	(15	)	$	68
Loans held for investment	1,305			(526		)	1,831			553			(224		)	777
Mortgage loans held for sale	1,006			(259		)	1,265			(2,460		)	917			(3,377		)
Federal funds sold	(50		)	(7		)	(43		)	35			1			34
Dividend-earning restricted equity securities	29			24			5			(92		)	(40		)	(52		)
Deposits in other banks	128			40			88			73			37			36
Bank owned life insurance	51			(9		)	60			(1		)	(7		)	6
Total interest income	$	2,469		$	(693	)	$	3,162		$	(1,839	)	$	669		$	(2,508	)

Interest expense
Deposits:
Demand	$	(4	)	(9		)	5			$	(11	)	(10		)	(1		)
Savings	(78		)	(96		)	18			(38		)	(109		)	71
Money market	(20		)	(13		)	(7		)	—			(4		)	4
Time	(165		)	(309		)	144			(328		)	44			(372		)
Total deposits	(267		)	(427		)	160			(377		)	(79		)	(298		)
Borrowings	(134		)	(307		)	173			(297		)	(153		)	(144		)
Total interest expense	(401		)	(734		)	333			(674		)	(232		)	(442		)
Net interest income	$	2,870		$	41		$	2,829		$	(1,165	)	$	901		$	(2,066	)

Non-Interest Income

Non-interest income was $23.6 million in the second quarter and $45.9 million in the first half of 2015 compared to 2014. This represents an increase of $5.1 million, or 27.7% in the quarter and $14.1 million, or 44.3%, year over year. Mortgage banking income, which is our largest source of non-interest income, was the primary source of the changes. Non-interest income is broken out into more detail in the following table.

NON-INTEREST INCOME



	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2015		2014		2015		2014
Mortgage banking income	$	22,240,973	$	17,369,228	$	43,304,652	$	29,571,390
Service charges and fees	558,790		538,579		1,075,344		1,008,791
Title company income	241,919		167,454		474,690		272,488
Bank owned life insurance income	81,919		58,905		149,874		116,678
Investment and insurance commissions	400,542		335,887		744,668		781,359
Gain on sale of assets	44,848		—		79,859		—
Other	57,273		28,820		63,340		56,818
	$	23,626,264	$	18,498,873	$	45,892,427	$	31,807,524

Mortgage banking income represents fees from originating and selling residential mortgage loans as well as commercial mortgages through Monarch Mortgage and our wholly owned commercial mortgage banking subsidiary, Monarch Capital, LLC. Mortgage banking income grew in the second quarter and first half of 2015 compared to 2014 due to higher loan volume. The following table summarizes mortgage loan production for the first six months of 2015 compared to 2014.

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Mortgage Banking Income
	2015					2014
	Number	Dollar Volume (000s)		Purchase		Number	Dollar Volume (000s)		Purchase
First Quarter	1,840	$	487,423	53.0	%	1,103	$	271,233	80.8	%
Second Quarter	2,355	605,400		66.0	%	1,677	446,863		85.0	%
Third Quarter	—	—		—	%	1,715	440,784		83.7	%
Fourth Quarter	—	$	—	—	%	1,698	$	445,846	69.1	%
Year to Date	4,195	$	1,092,823	53.0	%	6,193	$	1,604,726	79.5	%

Investment and insurance income increased $64 thousand in the second quarter but declined $37 thousand in the first six months due to production fluctuations. Income from Monarch Bank Private Wealth ("MBPW") is derived from a combination of new business and fees on existing business. Differing production levels can impact the income produced in between periods. MBPW offers products and services and asset management through affiliation with Raymond James Financial Services, Inc.

Service charges and fees on deposit accounts increased $20 thousand in the second quarter and $67 thousand in the first half of 2015 compared to 2014. The primary components of service charges and fees are non-sufficient fund and overdraft fees and ATM transaction fees and merchant service fees. Income growth is attributable to increases in our demand deposit products, year over year and increased merchant service income. We offer a credit card product through a third party vendor which has added to fee income. Monarch 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, we receive a portion of the transaction surcharge, and our customers can withdraw cash from the machines without a fee or transaction surcharge. We have 12 ATMs located at our banking center sites. Combined with our third-party vendor relationship, our network includes 50 active branded ATMs.

Through Monarch Investment, LLC, we own a 75% interest in a title company, Real Estate Security Agency, LLC (RESA), which is being treated as a consolidated entity for accounting purposes. RESA income increased $74 thousand in the second quarter and $202 thousand in the first six months of 2015 compared to 2014 driven by higher home buying activities in 2015.

Income from bank owned life insurance ("BOLI") increased $23 thousand in the quarter and $33 thousand in the first half of 2015 compared to 2014 due to the purchase of additional insurance discussed previously. Gains on the sale of assets in the quarter of $45 thousand and $80 thousand, year to date, were due to the sale of bank autos.

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Non-interest Expense

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

NON-INTEREST EXPENSE



	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2015		2014		2015			2014
Salaries and employee benefits	$	10,097,518	$	8,492,446	$	19,691,794		$	16,764,007
Commissions and incentives	10,805,166		6,770,022		20,250,304			10,780,986
Loan expense	1,930,961		2,060,570		4,389,624			3,423,711
Occupancy expenses, net of rental income	1,488,406		1,531,668		2,935,239			3,035,515
Furniture and equipment expense	901,478		863,420		1,743,153			1,636,276
Marketing expense	902,932		797,908		1,649,159			1,319,749
Data processing services	599,568		476,806		1,229,318			956,084
Professional fees	545,518		333,735		804,119			583,574
Telephone	353,163		293,451		678,909			604,588
FDIC Insurance	151,562		147,082		286,303			279,348
Stationery and supplies	112,955		131,485		227,941			237,603
Virginia Franchise Tax	224,481		207,869		432,351			409,820
Postage and shipping	94,331		106,283		195,064			241,413
Travel expense	213,714		124,205		342,707			210,656
ATM expense	93,592		88,959		183,992			166,705
Amortization of intangibles	—		44,643		—			89,286
Insurance expense	117,620		55,146		228,359			111,240
Title expense	39,880		23,093		78,375			37,552
Other real estate expense	39,924		2,597		56,326			9,736
Rental income, other real estate	—		—		(1,955		)	—
(Gain) loss on sale of other real estate, net	12,156		33,263		51,035			33,263
Other	428,588		422,333		879,228			822,505
	$	29,153,513	$	23,006,984	$	56,331,345		$	41,753,617

Total non-interest expenses increased $6.1 million to $29.1 million in the quarter and $14.6 million to $56.3 million in the first half of 2015 compared to 2014. Net overhead expense, which is the difference between non-interest income and non-interest expense, declined $1.0 million in the quarter and $493 thousand in the first half of 2015 compared to 2014.

Employee compensation; in the form of salaries, benefits, commissions and incentives, represent approximately 72% of non-interest expense in the second quarter of 2015 compared to 66% in 2014. In the first six months of 2015 these expenses represent 71% of non-interest expense compared to 66% in 2014. The number of full time equivalent employees at June 30, 2015 totaled 645 compared to 659 one year prior. Salaries and benefits increased $1.6 million or 19%, quarter over quarter and $2.9 million or 18% in the first six months compared to prior year, driven by annual salary increases, higher employment taxes and health insurance costs. Additionally, a change in the compensation mix of several highly compensated employees resulted in higher salary expense. Commissions and incentives have increased $4.0 million in the quarter and $9.5 million in the first six month of 2015 driven by higher mortgage loans held for sale production. A significant number of our mortgage division employees are commission based.

We are committed to providing our clients with optimal service through our employees, facilities and technology. To that end we evaluate our branch locations, aesthetics, potential areas for expansion and operations continuously. Costs associated with occupancy expense, furniture and equipment fluctuate due to this commitment. Late in the second quarter of 2015, we expanded our downtown Norfolk office to incorporate a MBPW office. Additionally, in the first quarter of 2015 we relocated our Towne Center office to better serve our client base. Technology is an ever changing landscape that requires a significant investment to protect our clients' information and provide them with cutting edge banking options. We continuously evaluate and upgrade technology security. Branding and giving back to the community through participation in community projects is important to us as is reflected by our marketing expense. The need for specialized expertise in legal and accounting due to changes in the compliance, regulatory and tax environment has resulted in higher professional fees. Loan expense is driven by the mortgage volume noted previously.

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We do not have any properties in other real estate at June 30, 2015. One property was in other real estate at the end of the first quarter and a second property was moved into other real estate during the second quarter. Both properties were sold in the second quarter. One property sold at a loss of $18,291 and the other sold at a gain of $6,135. Year to date, three properties have been sold for a net loss of $51,035. One property was sold in the second quarter and first six months of 2014 at a loss of $33,263. There were no valuation adjustments recorded in either year to date. Rental income on other real estate was $0 in the second quarter $2 thousand in the first half of 2015 and $0 for the same periods in 2014. Expenses related to the maintenance and sale of other real estate were $40 thousand in the second quarter and $56 thousand in the first half of 2015 compared to $3 thousand and $10 thousand in the second quarter and first half of 2014.

The following summary identifies non-interest expenses with the most significant quarter-over-quarter change.



	Change - Increase (Decrease) For the Three Months Ended June 30, 2015				Change - Increase (Decrease) For the Six Months Ended June 30, 2015
	Dollars		Percentage		Dollars		Percentage
Commissions and incentives	$	4,035,144	59.6	%	$	9,469,318	87.8	%
Salaries and employee benefits	1,605,072		18.9	%	2,927,787		17.5	%
Professional fees	211,783		63.5	%	220,545		37.8	%
Data processing	122,762		25.7	%	273,234		28.6	%
Marketing expense	105,024		13.2	%	329,410		25.0	%

Income Taxes

Our federal income tax provision was $1.8 million in the second quarter of 2015 compared to $1.7 million in the second quarter of 2014. Year to date, our federal income tax provisions was $3.7 million compared to $3.0 million in 2014. State income tax provision for the states of Maryland, North Carolina and South Carolina totaled $112 thousand and $82 thousand in the second quarter of 2015 and 2014, respectively. In the first six months of 2015 state taxes were $218 thousand compared to $200 thousand in 2014.

BOLI income and certain municipal securities are not subject to federal income tax. We had tax exempt income of $92 thousand in the second quarter and $169 thousand in the first half of 2015 compared to $69 thousand and $136 thousand in the second quarter and first half of 2014.

Certain expenses related to marketing are non-deductible for tax purposes. These non-deductible expenses totaled $152 thousand and $273 thousand in the second quarter and first half of 2015. They totaled $151 thousand and $227 thousand in the second quarter and first six months of 2014.

The table below presents a summary of income taxes and the effective tax rate for quarters ended June 30, 2015 and 2014.



Income Tax Summary
	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2015			2014			2015			2014
Income tax provision	$	1,961,763		$	1,767,500		$	3,955,103		$	3,238,740
Less: state tax provision	112,238			82,007			218,078			199,847
Federal tax provision	$	1,849,525		$	1,685,493		$	3,737,025		$	3,038,893

Net income before tax	$	5,436,466		$	5,071,995		$	10,923,286		$	9,096,984

Effective federal tax rate	34.0		%	33.2		%	34.2		%	33.4		%

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

GENERAL

Total assets were $1.171 billion at June 30, 2015, a $103.9 million or 9.7% increase compared to assets of $1.067 billion at December 31, 2014. Total cash and cash equivalents increased $36.5 million or 55.8%. Mortgage loans held for sale increased

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$46.3 million or 31.3% and loans held for investment increased $20.4 million or 2.6%. Restricted equity securities increased $1.1 million or 29.6% and investment securities declined $6.4 million or 26.9%.

Cash and cash equivalents, which fluctuate daily based on our liquidity levels and mortgage settlement activity, increased $36.5 million. This increase is due to a $34.4 million increase in interest bearing bank balances and a $1.2 million increase in federal funds sold.

Our mortgage loans held for sale portfolio represents mortgage loans that have been closed and are awaiting investor funding. A majority of our mortgage loans are pre-sold. These loans typically remain on our books for thirty to forty-five days. Outstanding balances, which are dependent on the current mortgage market, the timing of closings, and investor turn around, may fluctuate significantly between periods. With higher levels of production the outstanding balances during the first half of 2015 increased $46.3 million. Our loans held for investment portfolio which is comprised primarily of commercial loans and real estate loans increased $20.4 million in the first half of 2015. The majority of this growth was in commercial loans and residential (1-4 family) real estate.

During the first six months of 2015, we purchased an additional $658 thousand in bank owned life insurance (BOLI). Income from BOLI is not subject to federal income tax. Restricted equity securities include stock in the Federal Reserve, Federal Home Loan Bank and other bankers' banks. The level of stock we retain is subject to evaluation by the various entities and may result in a periodic increase or decrease in share level. Our stock in the Federal Home Loan Bank increased due to borrowing levels. Investment securities declined $6.4 million due to maturities and calls, net of purchases.

Total liabilities were $1.06 billion at June 30, 2015, an increase of $98.0 million or 10.2% from December 31, 2014 liabilities of $959.2 million. Total deposits, which are our primary liability source, increased $59.6 million to $979.0 million at June 30, 2015 compared to $919.4 million at year-end 2014. Total borrowings increased $35.0 million at June 30, 2015 compared to December 31, 2014.

Non-interest bearing demand deposits increased $58.1 million or 24.7% in the first half of 2015. Money market accounts increased $10.5 million and time deposits increased $3.6 million. Interest bearing demand deposits declined $12.1 million and savings deposits declined $572 thousand.

Our non-interest bearing deposits represent 30.0% and 25.6% of our total deposits at June 30, 2015 and December 31, 2014, respectively. Commercial and small business checking accounts comprise the largest percentage of non-interest bearing demand deposits. At June 30, 2015, commercial checking accounts increased $36.5 million over December 31, 2014 and at $179.4 million were 61% of non-interest bearing demand. Small business checking accounts increased $2.8 million to $65.4 million, 22% of non-interest bearing demand. We are primarily a business bank and, as such, have focused our efforts on obtaining company operating accounts, which are demand deposit accounts. Attorney escrow accounts at $24.0 million represented 8% of non-interest bearing deposits at June 30, 2015 and increased $9.5 million compared to December 31, 2014. Escrow accounts ordinarily house real estate funds, which makes them sensitive to the growth within the real estate market. Our focus on the business sector, coupled with the growth in business operating accounts, has resulted in continued growth in demand deposits.

Interest bearing demand deposits declined $12.1 million from December 31, 2014, primarily in commercial checking. Interest bearing demand deposits represent 8.0% of interest bearing deposits. Money market and time deposits ("CDs") represent roughly 89.2% and savings deposits represent roughly 2.8%, of interest bearing deposits. Money market deposits, which were $379.7 million at June 30, 2015, increased $10.5 million since December 31, 2014. Brokered money market deposit accounts are included in our money market totals at both June 30, 2015 and December 31, 2014 and declined $9.6 million since year end. Excluding these accounts, non-brokered money market balances increased $20.1 million since year end 2014. This increase is related to a short term deposit made by a single client near the end of the first quarter. A portion of these funds have been disbursed over the the second quarter and will continue to be disbursed over the next quarter, having a negative impact on deposit growth. Excluding this deposit, money market account balances declined $17 million in the quarter. We have been managing money market account growth through pricing of our multi-tiered money market product, while keeping rates attractive and highly competitive in the market. Given the runoff, we recently began increasing the rates on our money market accounts in an attempt to remain competitive with other banks in the area and retain deposits. Money market accounts are the most suitable product for individuals who typically invest in non-bank products because rates are higher than demand and savings accounts but they have withdrawal features more flexible than CDs. Therefore, our money market balances have the potential to be adversely impacted in the future when the economy is more stable and investors return to higher, but riskier, rate alternatives.

Outstanding CDs increased $3.6 million to $231.9 million at June 30, 2015 compared to December 31, 2014. Included in CDs are brokered CDs which are used along with our brokered money market accounts and Federal Home Loan Bank ("FHLB") borrowings to fund our loans held for sale portfolio. The majority of these brokered CDs are Certificate of Deposit Account Registry Service^® (“CDARS”), which are typically short term, with maturities of between 4 and 13 weeks. However, we also house certain municipal deposits in CDARS because of the additional deposit insurance protection offered by the product. Brokered

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deposits increased $17.9 million at June 30, 2015 compared to December 31, 2014. Our remaining CD portfolio has continued to decline, by design. CD shoppers typically expect higher interest rates. We have focused on relationship pricing for CDs, with non- clients receiving lower rates for CDs than existing clients, thereby encouraging relationships which are beneficial to both the Bank and our clients.

Borrowings at the FHLB increased $35 million at June 30, 2014 compared to December 31, 2014. We utilize this borrowing source to fund our loans held for sale portfolio along with CDARs. At quarter end, we shifted a portion of our loans held for sale funding to FHLB in order to extend the funding period while obtaining lower than deposit market rates, as a way to manage our net interest margin.

Excluding brokered deposits, our loans held for investment to deposit ratio was 93.5% and 95.0% for June 30, 2015 and December 31, 2014, respectively.

Stockholders’ equity was $113.5 million at June 30, 2015, compared to $107.5 million at December 31, 2014. Components of the increase in stockholders’ equity include net income of $7.0 million, increase in unrealized losses in other comprehensive income of $37 thousand, exercised stock options of $485 thousand, stock based compensation expense totaling $344 thousand, common stock dividend payments of $1.8 million, and distributions to non-controlling interests of $84 thousand.

Loans Held for Investment

Our lending activities are our principal source of income. Loans held for investment, net of unearned income, increased $20.6 million or 2.7% in the first half of 2015. Our allowance for loan losses declined $272 thousand after a provision of $500 thousand and net charge offs of $772 thousand.

The following table provides a breakdown, by segment of our loans held for investment at June 30, 2015 and December 31, 2014.

LOANS HELD FOR INVESTMENT



	June 30, 2015			December 31, 2014
Commercial	$	141,487,772		$	138,430,999
Real estate
Construction	175,253,142			172,502,330
Residential (1-4 family)	115,106,251			109,404,283
Home equity lines	63,241,585			67,487,000
Multifamily	17,011,090			21,809,189
Commercial	273,184,540			256,966,820
Real estate subtotal	643,796,608			628,169,622
Consumers
Consumer and installment loans	7,807,746			5,968,990
Overdraft protection loans	77,049			96,736
Loans to individuals subtotal	7,884,795			6,065,726
Total gross loans	793,169,175			772,666,347
Unamortized loan fees, net of deferred costs	(207,533		)	(76,812		)
Loans held for investment, net of unearned income	792,961,642			772,589,535
Allowance for loan losses	(8,676,361		)	(8,948,837		)
Total net loans	$	784,285,281		$	763,640,698

Allowance and Provision for Loan Losses

We have certain lending policies and procedures in place, designed to balance loan growth and income with an acceptable level of risk, which management reviews and approves on a regular basis. Our review process is supported by a series of reports related to loan production, loan quality, credit concentrations, policy exceptions, loan delinquencies and non-performing and potential problem loans. We also utilize diversification in our loan portfolio as a means of managing risk.

Inherent losses in our loan portfolio are supported by our allowance for loan losses. Management is responsible for determining the level of the allowance for loan losses, subject to review by our Board of Directors. Among other factors, we

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consider our historical loss experience, the size and composition of our loan portfolio, the value and adequacy of collateral and guarantors, non-performing credits including impaired loans and our risk-rating-based loan watch list, and local and national economic conditions. The economy of our trade area is well diversified. There are additional risks of future loan losses that cannot be precisely quantified or attributed to particular loans or classes of loans. Since those factors include general economic trends as well as conditions affecting individual borrowers, the allowance for loan losses is an estimate.

To determine the total allowance for loan losses, we estimate the reserves needed by analyzing loans on both, a pooled basis and individually. Our allowance for loan losses consists of amounts applicable to the following three loan types: commercial, real estate, and consumer. In addition, loans within these types are evaluated as a group or on an individual or relationship basis and assigned a risk grade based on the underlying characteristics. Loans are pooled by loan segment with loan type and losses modeled utilizing historical experience by segment, other known and inherent risks, and quantitative techniques which management has determined fit the characteristics of the loan type or segment within that type. We utilize a moving average historical loss "look back" period of twenty quarters.

The commercial loan type includes commercial and industrial loans which are usually secured by the assets being financed or other business assets such as accounts receivable or inventory and normally incorporate a personal guarantee; however, some short-term loans may be made on an unsecured basis. Commercial loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably and prudently expand their business.

The real estate loan type includes all loans secured by real estate. This type is further broken down into segments. These segments are: construction loans, residential 1-4 family loans, home equity lines, multifamily loans, and commercial real estate loans. Construction and multifamily loans are underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analysis of absorption and lease rates and financial analysis of the developers and property owners. Construction loans are generally based upon estimates of costs and value associated with the completed project. Residential 1-4 family and home equity loan originations utilize analytics to supplement the underwriting process. Commercial real estate loans are subject to underwriting standards and processes similar to commercial loans, in addition to those of real estate loans. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate.

Commercial and real estate portfolio loans are evaluated on an individual or relationship basis and assigned a risk grade at the time the loan is made. Additionally, we perform periodic reviews of the loan or relationship to determine if there have been any changes in the original underwriting which would change the risk grade and/or impact the borrower’s ability to repay the loan.

The consumer loan portfolio includes two classes: consumer and installment loans and overdraft protection loans. These loans, which are in relatively small loan amounts, are spread across many individual borrowers. We utilize analytics to supplement general underwriting. Loans within the consumer type are assigned risk grades and evaluated as a pool, unless specifically identified through delinquency or other signs of credit deterioration, at which time the identified loan is individually evaluated. Additionally, loans that have been specifically identified as a credit risk due to circumstances that may affect the ability of the borrower to repay interest and/or principal are analyzed on an individual basis. Adverse circumstances may include loss of repayment source, deterioration in the estimated value of collateral, elevated trends of delinquencies, and charge-offs.

We evaluate the adequacy of the allowance for loan losses monthly in order to maintain the allowance at a level that is sufficient to absorb probable credit losses. Such factors as the level and trend of interest rates and the condition of the national and local economies are also considered. From time to time, events or economic factors may affect the loan portfolio, causing management to provide additional amounts to, or release balances from, the allowance for loan losses. Our allowance for loan losses is sensitive to risk ratings assigned to individually evaluated loans, economic assumptions, and delinquency trends driving statistically modeled reserves.

There are nine numerical risk grades which are assigned to loans. These risk grades are as follows:



“Pass”	“Watch List”
1 Minimal	6 Special mention
2 Modest	7 Substandard
3 Average	8 Doubtful
4 Acceptable	9 Loss
5 Acceptable with care

The following is a breakdown between pass and watch list loans at June 30, 2015 and December 31, 2014. There were no loans risk graded Doubtful (8) or Loss (9) included in our portfolio at June 30, 2015 or December 31, 2014.

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PASS AND WATCH LIST LOANS



	June 30, 2015
			Watch List					Weighted Average Risk Grade
	Pass		Special Mention		Substandard		Total	Weighted Average Risk Grade
Commercial	$	139,826,706	$	1,030,495	$	630,571	141,487,772	3.35
Real estate
Construction	173,982,189		696,510		574,443		175,253,142	3.22
Residential (1-4 family)	110,045,957		1,076,204		3,984,090		115,106,251	3.82
Home equity lines	61,888,353		—		1,353,232		63,241,585	4.14
Multifamily	17,011,090		—		—		17,011,090	3.59
Commercial	271,946,819		843,806		393,915		273,184,540	3.49
Real estate subtotal	634,874,408		2,616,520		6,305,680		643,796,608	3.56
Consumers
Consumer and installment loans	7,737,896		—		69,850		7,807,746	4.03
Overdraft protection loans	74,283		—		2,766		77,049	4.58
Loans to individuals subtotal	7,812,179		—		72,616		7,884,795	4.03
Total gross loans	$	782,513,293	$	3,647,015	$	7,008,867	793,169,175	3.51



	December 31, 2014
			Watch List						Weighted Average Risk Grade
	Pass		Special Mention		Substandard		Total		Weighted Average Risk Grade
Commercial	$	135,292,747	$	1,588,289	$	1,549,963	$	138,430,999	3.31
Real estate
Construction	171,136,553		93,397		1,272,380		172,502,330		3.26
Residential (1-4 family)	101,860,683		177,735		7,365,865		109,404,283		3.93
Home equity lines	66,282,828		102,575		1,101,597		67,487,000		4.12
Multifamily	19,616,130		2,193,059		—		21,809,189		3.53
Commercial	253,525,106		2,029,203		1,412,511		256,966,820		3.54
Real estate subtotal	612,421,300		4,595,969		11,152,353		628,169,622		3.59
Consumers
Consumer and installment loans	5,893,286		—		75,704		5,968,990		4.04
Overdraft protection loans	96,736		—		—		96,736		4.64
Loans to individuals subtotal	5,990,022		—		75,704		6,065,726		4.05
Total gross loans	$	753,704,069	$	6,184,258	$	12,778,020	$	772,666,347	3.55

Additional regulatory guidance with regard to the specifications of the special mention (6) risk grade, stipulates that loans with this risk grade be treated as transitory and should not remain special mention for more than one year. We continue to monitor and evaluate loans in our special mention risk grade on a monthly basis.

We evaluate the collectability of both principal and interest when assessing the need for a loss accrual. (For additional discussion on this evaluation refer to Note 1 and Note 3 of our 2014 Annual Report on Form10-K.)

We evaluate additional risk inherent in our satisfactory risk grade groups through a methodology that looks at these loans on a pool basis by loan segment which is further delineated by purpose. Each segment is assigned an expected loss factor based on a moving average “look-back” at our historical losses for that particular segment. In 2014, we reexamined our loss history and determined a five year "look back" or twenty quarter history would be a more prudent approach to modeling historical losses than our previous four year "look back". Therefore, at September 30, 2014 we began extending our "look-back" period. At June 30, 2015 our model includes a twenty quarter or five year "look back". This methodology provides a supportable means of evaluating the potential risk in our portfolio because the delineation by purpose establishes a stronger focus on areas of weakness and strength within the portfolio.

This evaluation includes, but is not limited to, the application of a loss factor which is arrived at by using a multi-year moving average “look back” at our historical losses. This loss factor is multiplied by the outstanding principal of loans not individually evaluated for impairment to arrive at an overall loss estimate. Environmental factors may also be applied to a class or classes of loans based on management’s subjective evaluation of such conditions as credit quality trends, collateral values, portfolio

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concentrations, specific industry conditions in the regional economy, regulatory examination results, external audit and loan review findings, and recent loss experiences in particular portfolio classes. Any unallocated portion of the allowance for loan losses reflects management’s attempt to ensure that the overall reserve appropriately reflects a margin for the imprecision necessarily inherent in estimates of credit losses.

The allowance is subject to regulatory examinations and determination as to adequacy. This examination may take into account such factors as the methodology used to calculate the allowance and the size of the allowance in comparison to peer banks identified by regulatory agencies.

We recorded a $250 thousand provision for loan losses in the second quarter of 2015 and a $500 thousand provision in the first half of 2015. There were no provisions for loan losses in 2014. Based on the current economic environment and the composition of our loan portfolio, the level of our charged-off loans combined with our loss experience, we consider our loan loss allowance sufficient to meet the losses inherent in our portfolio.

Loans charged off during second quarter of 2015 totaled $286,927 compared to $184,601 for the same period in 2014. Recoveries totaled $69,735 in the second quarter of 2015 compared to $41,378 for the same period in 2014. Year to date, loans charged off totaled $885,381 in 2015 compared to $197,155 in 2014 and recoveries totaled $112,905 in 2015 compared to $205,663 in 2014. The ratio of net charge-offs to average outstanding loans for the second quarter of 2015 was 0.03% compared to 0.02% in 2014. Year to date, the ratio of net charge-offs to average outstanding loans in 2015 was 0.10% compared to 0.0%. A total of $858,015 in specific reserves for loans charged off in the first half of 2015 were included in our December 31, 2014 loan loss allowance. Specific reserves totaling $63,366 were included in our December 31, 2013 loan loss allowance for loans charged off in the first six months of 2014.

In the second quarter of 2015, approximately $285 thousand in loans charged off were related to business failure and $2 thousand were related to residential properties. In the second quarter of 2014, approximately $122 thousand in loans charged off were related to business failure and $63 thousand were related to residential properties. In the first half of 2015, approximately $850 thousand in loans charged off were related to business failure and $35 thousand were related to residential properties. In the first half of 2014, approximately $134 thousand in loans charged off were related to business failure and $63 thousand were related to residential properties.

The allowance for loan losses totaled $8,676,361 at June 30, 2015, a decrease of $272,476 from December 31, 2014. The ratio of the allowance to loans held for investment, less unearned income, was 1.09% at June 30, 2015, and 1.16% at December 31, 2014. We believe the allowance for loan losses is adequate to absorb any inherent losses on existing loans in our loan portfolio at June 30, 2015. The allowance to loans ratio is supported by the level of non-performing loans, the seasoning of the loan portfolio, and the experience of the lending staff in the market.

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LOAN LOSS ALLOWANCE AND LOSS EXPERIENCE



	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2015			2014			2015			2014
Balance, beginning of period	$	8,643,553		$	9,213,100		$	8,948,837		$	9,061,369
Loans charged-off
Commercial	(173,059		)	(14,789		)	(207,059		)	(14,789		)
Real estate
Construction	—			(106,812		)	(17,500		)	(106,812		)
Residential (1-4 family)	(111,999		)	(63,000		)	(658,953		)	(75,554		)
Home equity lines	—			—			—			—
Multifamily	—			—			—			—
Commercial	—			—			—			—
Consumers							—
Consumer and installment loans	(1,869		)	—			(1,869		)	—
Overdraft protection loans	—			—			—			—
Loans charged-off total	(286,927		)	(184,601		)	(885,381		)	(197,155		)
Recoveries
Commercial	1,300			3,300			3,600			91,600
Real estate
Construction	22,900			7,341			36,561			15,931
Residential (1-4 family)	15,940			12,254			19,719			20,639
Home equity lines	29,595			18,483			53,025			77,493
Multifamily	—			—			—			—
Commercial	—			—			—			—
Consumers
Consumer and installment loans	—			—			—			—
Overdraft protection loans	—			—			—			—
Loan recoveries total	69,735			41,378			112,905			205,663
Net Charge Offs	(217,192		)	(143,223		)	(772,476		)	8,508
Provisions charged to operations	250,000			—			500,000			—
Balance, end of period	$	8,676,361		$	9,069,877		$	8,676,361		$	9,069,877

A summary of our allowance as of June 30, 2015 and December 31, 2014 by segment is as follows:

ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES



	June 30, 2015
	Amount			Percentage of loans in each category to total loans
Commercial	$	1,662,367		17.8	%
Real estate
Construction	1,655,742			22.1	%
Residential (1-4 family)	1,838,416			14.5	%
Home equity lines	1,667,797			8.0	%
Multifamily	66,343			2.1	%
Commercial	1,625,585			34.5	%
Consumers
Consumer and installment loans	106,115			1.0	%
Overdraft protection loans	283			—	%
Unallocated	53,713
	$	8,676,361		100.0	%
Total loans held for investment outstanding *	$	792,961,642
Ratio of allowance for loan losses to total loans held for investment	1.09		%

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	December 31, 2014
	Amount			Percentage of loans in each category to total loans
Commercial	$	1,157,867		17.9	%
Real estate
Construction	1,678,022			22.3	%
Residential (1-4 family)	2,456,418			14.2	%
Home equity lines	1,911,634			8.7	%
Multifamily	85,056			2.8	%
Commercial	1,458,664			33.3	%
Consumers
Consumer and installment loans	104,661			0.8	%
Overdraft protection loans	260			—	%
Unallocated	96,255
	$	8,948,837		100.0	%
Total loans held for investment outstanding *	$	772,589,535
Ratio of allowance for loan losses to total loans held for investment	1.16		%



*	Total loans held for investment outstanding includes unamortized loan costs, net of deferred fees of $207,533 at June 30, 2015 and $76,812 at December 31, 2014.

Asset Quality and Non-Performing Loans

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

Non-performing loans include loans on which interest is no longer accrued, accruing loans that are contractually past due 90 days or more as to principal and interest payments, and loans classified as troubled debt restructurings. Based on this definition total non-performing loans as a percentage of total loans were 0.57% and 0.73% at June 30, 2015 and December 31, 2014. However, all but two of our troubled debt restructure loans were performing at June 30, 2015 and all but one of our troubled debt restructure loans was performing at December 31, 2014. Excluding performing troubled debt restructure this percentage declines to 0.29% and 0.37% at June 30, 2015 and December 31, 2014, respectively. Non-performing assets at June 30, 2015 and December 31, 2014 are presented below.

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NON-PERFORMING ASSETS



	Non-Performing Loans
	Over 90 Days and Accruing		Nonaccrual Loans		Non-accruing Restructured Loans		Accruing Restructured Loans		Total Non-Performing Loans		Other Real Estate Owned		Total Non-Performing Assets
	Over 90 Days and Accruing		Nonaccrual Loans		Non-accruing Restructured Loans		Accruing Restructured Loans		Total Non-Performing Loans		Other Real Estate Owned		Total Non-Performing Assets
June 30, 2015
Commercial	$	—	$	628,580	$	—	$	—	$	628,580	$	—	$	628,580
Real estate
Construction	—		109,063		—		—		109,063		—		109,063
Residential (1-4 family)	—		690,737		362,735		829,303		1,882,775		—		1,882,775
Home equity lines	—		244,190		—		—		244,190		—		244,190
Multifamily	—		—		—		—		—		—		—
Commercial	—		230,994		—		1,329,584		1,560,578		—		1,560,578
Consumers
Consumer and installment loans	—		—		—		69,850		69,850		—		69,850
Overdraft protection loans	—		—		—		—		—		—		—
Total	$	—	$	1,903,564	$	362,735	$	2,228,737	$	4,495,036	$	—	$	4,495,036

December 31, 2014
Commercial	$	—	$	582,059	$	—	$	—	$	582,059	$	—	$	582,059
Real estate
Construction	—		212,552		—		—		212,552		144,000		356,552
Residential (1-4 family)	174,976		1,244,531		183,400		1,336,990		2,939,897		—		2,939,897
Home equity lines	—		249,915		—		—		249,915		—		249,915
Multifamily	—		—		—		—		—		—		—
Commercial	—		230,994		—		1,332,589		1,563,583		—		1,563,583
Consumers
Consumer and installment loans	—		1,121		—		74,582		75,703		—		75,703
Overdraft protection loans	—		—		—		—		—		—		—
Total	$	174,976	$	2,521,172	$	183,400	$	2,744,161	$	5,623,709	$	144,000	$	5,767,709



	June 30, 2015		December 31, 2014
Asset Quality Ratios:
Non-accruing nonperforming loans to period end loans	0.29	%	0.37	%
Non-accruing nonperforming assets to total assets	0.19	%	0.28	%
Nonperforming assets to period end assets	0.38	%	0.54	%
Allowance for loan losses to non-accruing nonperforming loans	382.84	%	310.77	%
Nonperforming loans to period end loans	0.57	%	0.73	%

Restructured loans are loans for which it has been determined the borrower is in financial distress and a concession has been made to those terms that would not otherwise have been considered. Restructured loans are evaluated in accordance with applicable accounting guidance as impaired loans. In addition, if it is determined the borrower is unable to perform under the modified terms, further steps, such as a full charge-off or foreclosure may be taken. We did not have any commitments to lend additional funds on restructured loans at June 30, 2015 or December 31, 2014.

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TROUBLED DEBT RESTRUCTURING



	Residential 1-4 Family			Real Estate Construction			Consumer			Total

June 30, 2015
Balance beginning of the period	$	1,520,390		$	1,332,589		$	74,582		$	2,927,561
Investment in restructured loans
Additions (payments received) during the period	155,517			(3,005		)	(4,732		)	147,780
Charge-off during the period	(483,869		)	—			—			(483,869		)
Moved to other real estate	—			—			—			—
Valuation allowance for restructured loans included in charged-off loans	—			—			—			—
Additions during the period	—			—			—			—
Restructured loans included in impaired loans end of the period	$	1,192,038		$	1,329,584		$	69,850		$	2,591,472

December 31, 2014
Balance beginning of the period	$	263,624		$	4,568,883		$	83,792		$	4,916,299
Investment in restructured loans
Additions (payments received) during the period	1,256,766			(3,236,294		)	(9,210		)	(1,988,738		)
Charge-off during the period	—			—			—			—
Moved to other real estate	—			—			—			—
Valuation allowance for restructured loans included in charged-off loans	—			—			—			—
Additions during the period	—			—			—			—
Restructured loans included in impaired loans end of the period	$	1,520,390		$	1,332,589		$	74,582		$	2,927,561

Recoveries of charged-off balance
June 30, 2015	$	—		$	—		$	—		$	—
December 31, 2014	$	—		$	—		$	—		$	—

Other Real Estate

Other real estate is real estate properties acquired through or in lieu of loan foreclosure. At foreclosure, these properties are recorded at their fair value less estimated selling costs as a nonperforming asset, with any write-downs to the carrying value of our investment charged to the allowance for loan loss. After foreclosure, periodic evaluations are performed to determine if any decrease in the fair value less estimated selling costs has occurred. Further adjustments to this fair value are charged to operations, in non-interest expense, when identified. Expenses associated with the maintenance of other real estate are charged to operations, foreclosed property expense, as incurred. When a property is sold, any gain or loss on the sale is recorded as gain or loss on foreclosed property in non-interest expense.

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OTHER REAL ESTATE



	June 30, 2015
	Balance			Number
January 1,	$	144,000		1
Balance moved into other real estate	250,000			2
	394,000			3
Write down of property charged to operations	—
Payments received after foreclosure	—
Properties sold	(394,000		)	(3	)
Balance at June 30, 2015	$	—		—
Gross gains of sale of other real estate	$	—
Gross losses on sale of other real estate	(51,035		)
Write down of property charged to operations	—
Rental income, other real estate	1,955
Other real estate expense	(56,326		)
Foreclosed property (expense) income	$	(105,406	)

	December 31, 2014
	Balance			Number
January 1,	$	301,963		1
Balance moved into other real estate	942,285			3
	1,244,248			4
Write down of property charged to operations	—
Payments received after foreclosure	—
Properties sold	(1,100,248		)	(3	)
Balance at December 31, 2014	$	144,000		1
Gross gains of sale of other real estate	$	—
Gross losses on sale of other real estate	(6,976		)
Write down of property charged to operations	—
Rental income, other real estate	9,620
Other real estate expense	(80,580		)
Foreclosed property (expense) income	$	(77,936	)

Liquidity

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

We monitor and plan our liquidity position for future periods. Liquidity strategies are implemented and monitored by our Asset/Liability Committee (“ALCO”).

Cash, cash equivalents and federal funds sold totaled $101.9 million as of June 30, 2015 compared to $65.4 million as of December 31, 2014. At June 30, 2015, cash, interest bearing bank balances, securities classified as available for sale and federal funds sold were $119.3 million or 10.2% of total assets, compared to $89.1 million or 8.4% of total assets at December 31, 2014.

In the course of operations, due to fluctuations in loan and deposit levels, we occasionally find it necessary to purchase federal funds on a short-term basis. We maintain unsecured federal funds line arrangements with five other banks, which allow us to purchase funds totaling $68.0 million. These lines mature and re-price daily. At June 30, 2015 and December 31, 2014, we had $0 in federal funds purchased outstanding.

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

We are also members of the Promontory Network and have access to a program through their Certificate of Deposit Account Registry Service^® (“CDARS”) to use their CDARS One Way Buy^SM to purchase cost-effective funding without collateralization (and in lieu of generating funds through “traditional” brokered CDs or the Federal Home Loan Bank). These funds are accessed through a weekly auction. The auction typically takes place on Wednesdays, with next day settlement. There are seven maturities available ranging from 4 weeks to 5 years. If we are allotted funds in the auction, we incur no transaction fees or commissions. Although the process to compete for these deposits is different from the process for traditional brokered CDs, they are still considered brokered for Call Report purposes. These funds, which are included in our Jumbo CDs, are subject to discretionary limitations on volume that we normally would impose on traditional brokered deposits. Based on our “well capitalized” status, we are able to draw up to 30% of assets or $351.2 million from this program at June 30, 2015. We had $79.8 million on our balance sheet from this program at June 30, 2015 and $64.5 million at December 31, 2014.

We have lines of credit with the Federal Home Loan Bank of Atlanta (“FHLB”) that can equal up to 30% of our assets. Our line of credit totaled approximately $105.8 million with $51.8 million available at June 30, 2015. This line is currently reduced by $8.0 million, which has been pledged as collateral for public deposits.

Borrowings outstanding under the combined FHLB lines of credit were $46.0 million at June 30, 2015 and $11.1 million at December 31, 2014. We had the following borrowing advances under our Primary line outstanding as of June 30, 2015 with the following final maturities:



Advance Amount		Expiration Date
$	1,025,500	9/28/2015
$	1,025,500

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



Advance Amount		Expiration Date
$15,000,000		8/31/2015
$10,000,000		12/3/2015
$ 5,000,000		8/3/2015
$15,000,000		7/8/2015
$45,000,000

These advances are short term fixed rate credit with interest rates ranging from 0.19% to 0.30%. We utilized these advances to fund our mortgage loans available for sale.

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

Off-Balance Sheet Arrangements

We enter into certain financial transactions in the ordinary course of performing traditional banking services that result in off-balance sheet transactions. The off-balance sheet transactions recognized as of June 30, 2015 and December 31, 2014 were a line of credit to secure public funds and commitments to extend credit and standby letters of credit issued to customers. The line of credit to secure public funds was from the Federal Home Loan Bank for $8 million at June 30, 2015 and December 31, 2014.



	Commitments
	June 30, 2015		December 31, 2014
Commitments to grant loans	$	175,905,431	$	205,003,879
Interest rate lock commitments	$	146,708,377	$	79,415,083
Unfunded commitments under lines of credit and similar arrangements	$	144,955,082	$	148,660,017
Standby letters of credit and guarantees written	$	33,467,814	$	29,328,041

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The table above summarizes our off-balance sheet commitments at June 30, 2015 and December 31, 2014. Commitments to extend credit and unfunded commitments under existing lines of credit 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. Standby letters of credit are conditional commitments we issue guaranteeing the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements.

We did not have any outstanding commitments to purchase securities at June 30, 2015 or December 31, 2014.

We have thirty-eight non-cancellable leases for premises. The original lease terms are from one to thirty years and have various renewal and option dates.

Capital Resources

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

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

The Bank, as a Virginia banking corporation, may pay dividends only out of retained earnings. In addition, regulatory authorities may limit payment of dividends by any bank, when it is determined that such limitation is in the public interest and necessary to ensure financial soundness of the Bank. Regulatory agencies place certain restrictions on dividends paid and loans or advances made by the Bank to the Company. The amount of dividends the Bank may pay to the Company, without prior approval, is limited to current year earnings plus retained net profits for the two preceding years. At June 30, 2015, the amount available was approximately $21.6 million. We paid our first common stock cash dividend in 2010. We began paying common stock cash dividends on a quarterly basis in the first quarter of 2012. We paid semi-annual cash dividends on our common stock in 2011. Below is a table of our cash dividend history.

In June 2012, we received approval from the Securities and Exchange Commission to begin a Dividend Reinvestment Program ("DRP"). The DRP, which is available to existing shareholders, allows for dividends to be reinvested in Monarch stock. In addition, shareholders may purchase additional shares on a quarterly basis.

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COMMON STOCK DIVIDENDS



Payment Date	Per Share Dividend		Total Dividend
2015
June 12, 2015	$	0.09	$	969,267
February 28, 2015	$	0.08	$	858,261
2014
November 28, 2014	$	0.08	$	851,749
August 29, 2014	$	0.08	$	850,803
June 13, 2014	$	0.08	$	849,563
February 28, 2014	$	0.07	$	742,447
2013
November 30, 2013	$	0.07	$	733,448
August 30, 2013	$	0.06	$	628,325
May 31, 2013	$	0.06	$	624,443
February 28, 2013	$	0.05	$	453,880
2012
November 30, 2012	$	0.05	$	332,754
August 31, 2012	$	0.05	$	302,161
May 31, 2012	$	0.05	$	299,174
February 28, 2012	$	0.04	$	240,000
2011
November 30, 2011	$	0.08	$	475,531
June 22, 2011	$	0.08	$	477,227

Basel III

The Dodd-Frank Act contains a number of provisions dealing with capital adequacy of insured depository institutions and their holding companies, which has resulted in more stringent capital requirements. Under the Collins Amendment to the Dodd-Frank Act, federal regulators established minimum leverage and risk-based capital requirements for banks and bank holding companies on a consolidated basis. In July 2013, the Federal Reserve published the Basel III Capital Rules establishing a new comprehensive capital framework for U.S. banking organizations. The rules implement the Basel Committee’s December 2010 framework known as “Basel III” for strengthening international capital standards as well as certain provisions of the Dodd-Frank Act.

The Basel III Capital Rules substantially revise the risk-based capital requirements applicable to bank holding companies and depository institutions, including the Company and the Bank, compared to the current U.S. risk-based capital rules. The Basel III Capital Rules define the components of capital and address other issues affecting the numerator in banking institutions’ regulatory capital ratios. The Basel III Capital Rules also address risk weights and other issues affecting the denominator in banking institutions’ regulatory capital ratios and replace the existing risk-weighting approach, which was derived from the Basel I capital accords of the Basel Committee, with a more risk-sensitive approach based, in part, on the standardized approach in the Basel Committee’s 2004 “Basel II” capital accords. The Basel III Capital Rules also implement the requirements of Section 939A of the Dodd-Frank Act to remove references to credit ratings from the federal banking agencies’ rules. The Basel III Capital Rules were effective for the Company and the Bank, subject to a phase-in period, on January 1, 2015.

The Basel III Capital Rules (i) introduce a new capital measure called “Common Equity Tier 1” (“CET1”), (ii) specify that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments meeting specified requirements, (iii) define CET1 narrowly by requiring that most deductions/adjustments to regulatory capital measures be made to CET1 and not to the other components of capital and (iv) expand the scope of the deductions/adjustments as compared to existing regulations.

When fully phased in on January 1, 2019, the Basel III Capital Rules will require the Company and the Bank to maintain

(i) a minimum ratio of CET1 to risk-weighted assets of at least 4.5%, plus a 2.5% “capital conservation buffer” (which is added to the 4.5% CET1 ratio as that buffer is phased in, effectively resulting in a minimum ratio of CET1 to risk-weighted assets of at least 7% upon full implementation), (ii) a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the

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capital conservation buffer (which is added to the 6.0% Tier 1 capital ratio as that buffer is phased in, effectively resulting in a minimum Tier 1 capital ratio of 8.5% upon full implementation), (iii) a minimum ratio of total capital (that is, Tier 1 plus Tier 2) to risk-weighted assets of at least 8.0%, plus the capital conservation buffer (which is added to the 8.0% total capital ratio as that buffer is phased in, effectively resulting in a minimum total capital ratio of 10.5% upon full implementation), and (iv) a minimum leverage ratio of 4%, calculated as the ratio of Tier 1 capital to average assets (as compared to a current minimum leverage ratio of 3% for banking organizations that either have the highest supervisory rating or have implemented the appropriate federal regulatory authority’s risk-adjusted measure for market risk).

Under the Basel III Capital Rules, the initial minimum capital ratios as of January 1, 2015, will be as follows:

• 4.5% CET1 to risk-weighted assets.

• 6.0% Tier 1 capital to risk-weighted assets.

• 8.0% Total capital to risk-weighted assets.

The implementation of the capital conservation buffer will begin on January 1, 2016 at the 0.625% level and be phased in over a four-year period (increasing by that amount on each subsequent January 1, until it reaches 2.5% on January 1, 2019).

As of June 30, 2015, the Bank was categorized as “well capitalized,” the highest level of capital adequacy. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based, Common Equity risk-based, and Tier 1 leverage ratios as set forth in the table. The Bank’s actual capital amounts and ratios are also presented in the table as of June 30, 2015 and December 31, 2014.

RISK BASED CAPITAL



	Actual				For Capital Adequacy Purposes				To Be Well Capitalized Under Prompt Corrective
	Amounts		Ratio		Amounts		Ratio		Amounts		Ratio
	(Dollars in Thousands)
As of June 30, 2015
Total Risk-Based Capital Ratio
Consolidated company	$	131,341	13.62	%	$	77,160	8.00	%	N/A		N/A
Bank	$	130,340	13.52	%	$	77,135	8.00	%	$	96,418	10.00	%
(Total Risk-Based Capital to Risk-Weighted Assets)
Tier 1 Risk-Based Capital Ratio
Consolidated company	$	122,665	12.72	%	$	57,870	6.00	%	N/A		N/A
Bank	$	121,664	12.62	%	$	57,851	6.00	%	$	77,135	8.00	%
(Tier 1 Capital to Risk-Weighted Assets)
Common Equity Risk-Based Capital (CET1)
Consolidated company	$	122,665	12.72	%	$	43,402	4.50	%	N/A		N/A
Bank	$	121,664	12.62	%	$	43,388	4.50	%	$	62,672	6.50	%
(Total Common Equity to Risk-Weighted Assets)
Tier 1 Leverage Ratio
Consolidated company	$	122,665	10.90	%	$	45,039	4.00	%	N/A		N/A
Bank	$	121,664	10.81	%	$	45,026	4.00	%	$	56,283	5.00	%
(Tier 1 Capital to Average Assets)
As of December 31, 2014
Total Risk-Based Capital Ratio
Consolidated company	$	125,728	13.79	%	$	72,925	8.00	%	N/A		N/A
Bank	$	125,807	13.81	%	$	72,900	8.00	%	$	91,125	10.00	%
(Total Risk-Based Capital to Risk-Weighted Assets)
Tier 1 Risk-Based Capital Ratio
Consolidated company	$	116,779	12.81	%	$	36,462	4.00	%	N/A		N/A
Bank	$	116,858	12.82	%	$	36,450	4.00	%	$	54,675	6.00	%
(Tier 1 Capital to Risk-Weighted Assets)
Tier 1 Leverage Ratio
Consolidated company	$	116,779	11.44	%	$	40,821	4.00	%	N/A		N/A
Bank	$	116,858	11.45	%	$	40,821	4.00	%	$	51,026	5.00	%
(Tier 1 Capital to Average Assets)

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

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

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

The impact of changing interest rates on loans and deposits is reflected in our financial statements. We believe that our mortgage banking operation, Monarch Mortgage, provides somewhat of a natural interest rate hedge, in that we are interest rate sensitive to a downward change in the prime rate for short term periods. When loan interest rates decline, our earnings will be negatively impacted in our banking operation, but the mortgage company’s volume should increase as the demand for refinancing and purchase money mortgages increase. The reverse should occur in a rising interest rate environment. There have been no material changes in interest rates in the second quarter of June 30, 2015 compared to December 31, 2014.

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ITEM 4. CONTROLS AND PROCEDURES

We maintain a system of internal controls and procedures designed to provide reasonable assurance as to the reliability of our published financial statements and other disclosures included in this report. As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information relating to us (including our consolidated subsidiaries) required to be included in periodic SEC filings. There have been no changes in the Company's internal control over financial reporting during the Company's second quarter ended June 30, 2015 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

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PART II—OTHER INFORMATION

Item 1. Legal Proceedings

In the ordinary course of our operations, we become party to various legal proceedings. Currently, we are not party to any material legal proceedings, and no such proceedings are, to management’s knowledge, threatened against us.

Item 1A. Risk Factors

Our operations are subject to many risks that could adversely affect our future financial condition and performance and, therefore, the market value of our securities, including the risk factors that are outlined in our 2014 Annual Report on Form 10-K. There have been no material changes in our risk factors from those disclosed.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

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Item 6. Exhibits



31.1 –	Certification of CEO pursuant to Rule 13a-14(a).
31.2 –	Certification of Principal Financial Officer pursuant to Rule 13a-14(a).
32.1 –	Certification of CEO and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.0 –	Financial statements and schedules in interactive data format.

SIGNATURES

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

MONARCH FINANCIAL HOLDINGS, INC.




/s/ Brad E. Schwartz	Date: August 7, 2015
Brad E. Schwartz Chief Executive Officer
/s/ Lynette P. Harris.	Date: August 7, 2015
Lynette P. Harris Executive Vice President & Chief Financial Officer

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Exhibit 31.1

SECTION 302 CERTIFICATION

I, Brad E. Schwartz, certify that:


1.	I have reviewed this quarterly report on Form 10-Q of Monarch Financial Holdings, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):

(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: August 7, 2015 /s/ Brad E. Schwartz _______________

Brad E. Schwartz

Chief Executive Officer

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Exhibit 31.2

SECTION 302 CERTIFICATION

I, Lynette P. Harris, certify that:


1.	I have reviewed this quarterly report on Form 10-Q of Monarch Financial Holdings, Inc.;

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: August 7, 2015 /s/ Lynette P. Harris. ___________________

Lynette P. Harris

Executive Vice President & Chief Financial Officer

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Exhibit 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of Monarch Financial Holdings, Inc. (the "Company") for the period ending June 30, 2015 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned Chief Executive Officer and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that based on their knowledge and belief:

(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Brad E. Schwartz ______________

Brad E. Schwartz,

Chief Executive Officer

/s/ Lynette P. Harris. ___________________

Lynette P. Harris

Executive Vice President & Chief Financial Officer

Date: August 7, 2015

Monarch Financial Holdings, Inc. - FORM 10-Q - August 7, 2015

Attached files

Monarch Financial Holdings, Inc. Reports