Monarch Financial Holdings, Inc. 2009 Annual Report - Monarch Bank

Monarch Financial Holdings, Inc.2009 Annual Report[ believe in the butterfly ]

$700Total Assets$690$70Equity Capital$68$600$60$500$50$400$40$300$30$200$20$100$102005 2006 2007 2008 2009in millions2005 2006 2007 2008 2009in millionsTotal Loans Held For Investment, netTotal Deposits$600$500$528$600$500$540$400$400$300$300$200$200$100$1002005 2006 2007 2008 2009in millions2005 2006 2007 2008 2009in millions$5,000Net Income$4,856$0.70Diluted Net Income Per Share$.66$4,000$0.60$0.50$3,000$0.40$2,000$0.30$1,000$0.20$0.102005 2006 2007 2008 2009in thousands2005 2006 2007 2008 2009[ Mission Statement ]Building Lasting Relationshipsthrough Exceptional Service

Monarch Financial Holding, Inc. [ Selected Consolidated Financial Data ]At or for the Years Ended December 31,Summary of OperationsInterest incomeInterest expenseNet interest incomeProvision for loan lossesNet interest income after provision for loan lossesNon-interest incomeNon-interest expenseIncome before income taxesIncome tax expenseNet income attributable to non controlling interestsNet incomeNet income available to common stockholders2009 2008 2007 2006 2005$ 32,51810,42122,0975,18416,91335,63445,0347,5132,453(204)$ 4,856$ 3,793(Dollars in thousands, except per share data)$ 30,86714,71616,1515,01411,13719,80429,0231,918505(281)$ 1,132$ 1,107$ 30,93914,48716,45297615,4768,19218,8124,8561,533(165)$ 3,158$ 3,158$ 25,11010,86114,24955913,6903,58611,8705,4061,7866$ 3,626$ 3,626$ 15,5275,50710,0209159,1053,1509,0883,1671,065-$ 2,102$ 2,102Per Share and Shares Outstanding (1) (2)Net income, basicNet income, dilutedBook value at period endBasic weighted average shares outstandingDiluted weighted average shares outstanding$ 0.67$ 0.66$ 8.175,661,2845,784,592$ 0.21$ 0.21$ 7.865,213,0965,292,232$ 0.66$ 0.63$ 7.574,814,7385,019,221$ 0.76$ 0.72$ 7.024,759,4485,026,364$ 0.48$ 0.46$ 6.314,388,7204,583,951Balance Sheet DataTotal assetsTotal loans held for investment, net (HFI)Total deposits$ 689,569528,400540,039$ 597,198496,666496,086$ 503,164415,177389,704$ 407,720318,028314,113$ 331,174260,581273,073Selected Performance RatiosReturn on average assetsReturn on average equityNet interest margin (tax adjusted)Non-interest income to operating revenueEfficiency ratio (3)0.75%7.55%3.64%61.72%77.70%0.20%2.66%3.15%55.08%80.20%0.76%8.86%4.27%33.24%76.33%1.05%11.38%4.43%20.10%66.55%0.82%8.14%4.15%23.92%69.01%Asset Quality RatiosNon-performing loans to period-end loans (HFI)Non-performing assets to total assetsAllowance for loan losses to period-end loans (HFI)Allowance for loan losses to non-performing loans (4)1.40%1.40%1.73%123.15%1.49%1.35%1.59%107.19%0.10%0.08%0.95%958.07%0.03%0.02%1.01%n/m0.00%0.00%1.02%n/mCapitalEquity to assets ratioTotal risk-based capital ratioTotal stockholders’ equity9.85%14.23%$67,90810.01%14.79%$59,7777.26%10.05%$36,5488.34%13.07%$34,0099.00%10.74%$29,796(1) Adjusted to give effect for all stock splits and stock dividends.(2) Computed based on the weighted average number of shares outstanding during each period.(3) Efficiency ratio is non-interest expense divided by the sum of net interest income and non-interest income.(4) “n/m” means not meaningful.

Boards of Directors [ Corporate Board of Directors ]Jeff BensonChairmanPartner - OvertonFamily PartnershipLawton Baker,Vice-ChairmanCPA & PresidentBaker & McNiff,Certified PublicAccountantsCassell BasnightSenior Partner, AttorneyBasnight, Kinser,Telfeyan & Leftwich, P.C.Joe CovingtonPresidentCovington & AssociatesRealtors, Inc.Neal CrawfordPresidentMonarch BankTaylor GrissomVice President& Co-FounderVisuTel, Inc. /Blue Water Pools, LLCBob OmanPresidentOman FuneralHomes, Inc.Beth PattersonPresidentWaypoint Advisors, LLCWilliam Rountree, Jr.President & CEOMonarch FinancialHoldings, Inc.Dwight SchaubachPresidentSchaubach CompaniesBrad SchwartzChief Executive OfficerMonarch BankCOO/CFOMonarch FinancialHoldings, Inc.[ believe in the butterfly ] closed over $1.1 Billion in mortgage loans I The investment we made in Monarch Mortgage in 2007 was a major driver of our profit growth in 2009 IThe Monarch Mortgage team who closedthe loan to reach our $1 billion goal(from left to right): Mary Ozga, Nate Brown,Paula Butler, Ellen Lenihan, John Francos,Pam Housand, Alison Rodriguez,Tim Miller, Debbie Lane, Terri Hortonand Tricia Permito. Not Pictured: Liz Hale

Letter to Our Valued Shareholders [ 2009 Annual Report ]Despite tough economic conditions we are extremely pleased to report a great year of performance for your company in 2009. Our people metthe many challenges of this past year, and through their efforts we were able to produce four consecutive record quarters of profitability anda full year of record earnings.Contributing to our success was the strong income contribution from our Monarch Mortgage team. We are especially proud of this talented andprofessional group of individuals who closed over $1.1 Billion in mortgage loans during the year and drove record mortgage profits despite a difficulthousing market. The investment we made in Monarch Mortgage in 2007 was a major driver of our profit growth in 2009.During the year Bauer Financial, an independent company that rates banks according to their financial strength, increased our ranking to the top“Superior” 5-Star rating from our long held “Excellent” 4-Star rating. Ratings range from zero to five, with five being the highest. We are not sure howmany banks saw their ratings increase this past year, but we are guessing not too many had stars added.During 2009 we raised $20 million in additional capital through the issuance of convertible preferred stock. This offering was over-subscribed,meaning we had more buyers than shares to offer, even after we increased the number of shares available. Even better news is we repaid 100%of our TARP preferred stock in late 2009, with the U.S. taxpayer earning a 6.61% total return for their investment in Monarch. We were the first bankin our market to repay the TARP investment. Our capital position remains strong and will allow us to take advantage of potential growth andacquisition opportunities.The year was not easy for banks, with 140 bank failures and over 700 banks now on the regulators “troubled bank” list. Banks historically fail whentheir lending and underwriting fails, producing large loan losses that destroy their capital and force their closure. When you add in the systemic riskcreated by declines in residential and commercial real estate values, declines in consumer and business spending and confidence, and the rise inunemployment, you affect even the most conservatively run banks. While our markets are more vibrant than many areas of our country, we werenot immune to these economic pressures. But we can assure you we are not on that list!Asset quality held up well during the year as we continued to set-aside profits for potential and actual loan losses. Non-performing assets were1.40% of total assets at year end, which was less than half of what our peer banks across the country and in our markets held. While continuing to workwith our clients, we remained aggressive when dealing with and recognizing actual and potential loan losses, setting aside over $5 million in provisionexpense for a second year in a row. Unfortunately, we feel we have at least one more year in the credit cycle where the costs of non-performing loanswill continue to impact shareholder returns.Many banks are touting a new financial term called “Pre-tax pre-provision income,” which are the earnings they can generate if you exclude creditcosts and taxes. Most of the banks touting this new term are losing money and trying to focus the attention away from their actual bottom line.Credit costs and tax expenses are a cost of doing business as a profitable bank, but the metric does show the earnings power of a bank. For Monarchwe increased our pre-tax pre-provision income from $6.9 million in 2008 to $12.7 million in 2009, a remarkable 83% increase. This was done throughmortgage banking expansion, loan and deposit growth, improvements in deposit and loan pricing, increased bank fee income and a continued focuson expense management.Like our somewhat contrarian mortgage investment in 2007, we felt 2009 would be a great year to invest in our franchise for the future. We openedour second office for OBX Bank in Nags Head, North Carolina, and secured a new banking office for Monarch Bank in the deposit-rich Hilltop market inVirginia Beach, which will open in April 2010. Our mortgage expansion continued through the year with new offices and mortgage bankers addedin all four states in which we operate. We added over 100 new employees in 2009, with the majority being commissioned mortgage bankers.There remains incredible opportunity for client acquisition and staffing growth due to problems at many of our competitors, and we want to takeadvantage of that market vacuum and continue our “smart growth” strategy. New clients dissatisfied with their current banking relationship combinedwith top-quality banking talent looking for a safe and strong home are a great combination. Our primary strategic goal in 2009 was to make Monarchstronger so we could support these growth opportunities.increased our ranking to the top “Superior” 5-Star rating I opened our second office for OBX Bank in Nags Head, North Carolina I secured a new banking office in Hilltop market in Virginia Beach

We were named one of the “Best Places to Work” in Hampton Roads in 2009, an accomplishment of which we are extremely proud. We have alwaysput our people first in building our family-friendly culture, and this award recognizes this care and dedication to our people. We are a company of firstnames, and we are finally becoming an employer of choice in our markets.We are excited about the people that joined us in 2009 and those that are scheduled to join us in 2010. Our business is a people business, with mostof our clients doing business with a person vs. the name on the company door. Not only did we hire a number of top quality bankers in 2009, we haveannounced or will soon announce the hiring of several top-notch experienced bankers for Hampton Roads and the Outer Banks.Community bank stocks continued to trend down in 2009, with MNRK thankfully holding steady year over year. It is extremely frustrating to reportimproved financial performance and other positive events and see no upward movement in our stock price. Since we cannot control the overall market,our only option is to remain focused on building a great company and telling our story. When community bank stocks are again in favor for investors,we hope to deliver some long overdue stock price appreciation. We know our goal is to create long-term shareholder value and we take that missionvery seriously.We would like to recognize the dedication of Mr. Cassell Basnight, a founder of our company, who served as Chairman of the Board of Directorsfrom our inception in 1998 to 2006. Along with two others, he had the original idea to form Monarch Bank, and we operated out of the “attic” in his lawoffice during our organization period. He has served Monarch faithfully for twelve years now, and we wish him well in his retirement. His guidance andleadership will be missed.I also want to thank the incredible support we receive from our six Boards of Directors comprising our Corporate Board, our City boards inChesapeake, Virginia Beach, and Norfolk, our OBX Bank board, and our Hampton Roads Leadership Board. All of these talented groups of business andcivic leaders assist us in generating business activity and keep us close to our markets as our extended eyes and ears on the streets. It is only throughtheir commitment to serve that we have prospered and we are grateful for all they do.Giving back to the community is a trademark of Monarch, and during economic downturns the community needs our help more than ever. I ampleased to report our annual community sponsored golf tournament to support local children’s charities was again a great success in 2009, with over50 children’s charities supported since we began the tournament and over $800,000 in distributions made. With this tournament, other communitysponsorships, and the time given by our staff to support local charities and churches, we continue to make a difference in our communities.You will notice three signatures on this year’s letter. A leadership transition began this past year with Brad Schwartz being named CEO of MonarchBank and Neal Crawford being named President. Neal and Brad have each been with Monarch for over six years and have done a remarkable jobin driving our success. As we move forward with this transition, I want to assure you that “Tree” is not going anywhere and will continue to provideleadership and direction for Monarch for many years to come.The butterfly gained strength in 2009 and we have a bright future. We will be opportunistic in the coming years and keep a balanced focus onlong-term financial performance and franchise growth. Remember to think of Monarch and all of our companies and recommend us to your friends,family, neighbors and business associates.William Rountree, Jr.President & CEOMonarch Financial Holdings, Inc.Brad SchwartzChief Executive OfficerMonarch BankNeal CrawfordPresidentMonarch Bankover 50 children’s charities supported since we began the tournament and over $800,000 in distributions I we are an employer of choice in our markets named to 2009 list of “Best Places to Work”8th Annual Monarch BankCharitable Golf Tournamentprofited over $140,000 tobenefit local children’s charitiesin our community. (left to right):William “Tree” Rountree, Jr.,Mike Kelly, Jeff Benson, DwightSchaubach, Neal Crawford,Brad Schwartz, Mike Crockfordand Jon Wheeler

Monarch Leadership [ Executive Management ]William Rountree, Jr.President & CEOMonarch FinancialHoldings, Inc.Brad SchwartzChief Executive OfficerMonarch BankNeal CrawfordPresidentMonarch BankMary AndersonFirst Vice PresidentHuman ResourcesManagerJim FerberPresidentReal Estate& Construction GroupLynette HarrisSenior Vice President& Chief Financial OfficerMonarch BankBarbara LaneExecutive Vice President& Senior OperationsManagerAndy LockExecutive Vice President& Chief Credit OfficerBarry MathiasChesapeakePresidentDavid McGlaughonOBX BankPresidentWill MorrisonMonarch MortgageExecutive Vice President& Chief Operating OfficerNancy PorterSenior Vice PresidentMarketing & SalesDon PriceNorfolkPresidentCraig ReillyVirginia BeachPresidentJeremy StarkeySenior Vice PresidentMonarch CapitalManaging DirectorTed YoderMonarch MortgagePresidentI four consecutive record quarters of profitability and a full year of record earnings [ believe in the butterfly ]Hampton Roads business journalInside Business named Monarchto its 2009 list of “Best Places to Work.”(top row from left to right):Debbie Mast and Nicole Crandall;(front row from left to right):William “Tree” Rountree, Jr.,Neal Crawford, Brad Schwartz,Lisa Randall, Dan Gonzalez,Kristin Mizal, Chaytor Midgett,Vera Chavis and Mary Anderson

Boards of Directors [ City boards in Chesapeake, Norfolk, Virginia Beach ]Chesapeake BoardKevin L. Hubbard, ChairmanHubbard & Hartley, P.C.W. Michael BryantOBBCO Safety & Supply, Inc.Mark R. ChristianEsprit Décor Floor Covering, Inc.Brian M. ClementsLandVentures, LLC / TitleVentures, LLCFloyd M. Cross, Jr.Standard Calibrations, Inc.Stacy CummingsPriority Auto GroupDouglas W. DavisDavis Law Group, P.C.Vernon “Richard” Divers, Jr.Savage & McPherson Insurance AgencyMarlene T. DowDow Construction and Development, Inc.Jance C. GaffneyEastern Oxygen & Medical Equipment, Inc.Glenn B. HeardHeard Concrete Construction CorporationDaniel J. HugebackDiamond Glazing, Inc.Dennis R. JonesPHI, Inc./Creative Technologies, Inc.H. Lynn KefferCrossroads Fuel Service, Inc.James “Jimmy” E. Reece IIJimmy Reece Inc. /Rose & Womble Realty Co.Barbara L. Smith, CPA, CVACherry, Bekaert & Holland, L.L.P.Norfolk BoardBarclay C. Winn, ChairmanWinn Nursery of Virginia, Inc.Jon M. AhernSykes, Bourdon, Ahern & Levy, P.C.Edward “Ed” J. AmorossoMcPhillips, Roberts & Deans, P.L.C.David J. BenjackChesapeake Drywall & Acoustics, Inc.Webster M. Chandler IIINancy Chandler Associates, Inc.Erik S. CooperCooper Realty, Inc.R. Gatewood Dashiell IIIR. G. Electric Co., Inc.John W. DomanskiAccurate Marine Environmental, Inc.Robert S. FriedmanHarbor Group Management CompanyFrank T. “Buddy” GadamsMarathon Development Group, Inc.Marc H. Glickman M.D.Vascular & Transplant SpecialistsDavid F. HostT. Parker Host, Inc.Richard “Rick” H. Jackson, Jr.Jackson Property CompanyMichael W. McCabeHarvey Lindsay Commercial Real EstateWilliam “Shep” S. Miller IIIKITCO Fiber OpticsHarrison J. PerrinePerrine Investments, L.L.C.D. Scott PritchettSnow Jr. & King, Inc.John “Randy” Randolph StokesStokes, Timms, Bell & Vaiden, P.C.Kenneth G. TrinderEOS Surfaces, LLCEdward D. WhitmoreNorfolk Tug Co.Lauren V. Wolcott, CPALauren V. Wolcott, CPA, P.C.Virginia Beach BoardVirginia “Ginny” Sancilio Cross, ChairmanAshdon Builders, Inc.Randal “Randy” K. Bregman4 Ever Summer ChartersEric N. BucklewTaylor Commercial Real EstateBrian “Scott” S. BurgessHoffman Beverage CompanyDennis R. Deans, CPAMcPhillips, Roberts & Deans, P.C.Dennis M. EllmerPriority Auto GroupChristopher “Chris” J. EttelVB HomesRobert “Bob” J. Eveleigh, CPALillian Vernon CorporationBernie J. Grablowsky, Ph.D.United Property AssociatesJohn L. HookCommonwealth Title & Abstract Corp.Michael “Mike” A. Inman, EsquireInman & Strickler, P.L.C.James “Jim” P. KaridesJames P. Karides, P.C., t/a Karides GroupMichael H. Levinson, EsquireMichael H Levinson & AssociatesAubrey “Gene” Eugene Loving Jr.Max MediaWilliam “Joe” H. McCutcheon, Jr.McQ Builders LLCAlfred “Al” B. MidgettWater Furnace InternationalGordon E. Parker, Jr.Heritage Business StrategiesHarry R. Purkey, Jr.Attorney at LawAdam W. RittHoy Construction, Inc.Marc V. SauterZoës RestaurantWayne C. SawyerVictory Lap, L.L.C.Jeffrey “Jeff” WermersWermers Development, Inc.Jon S. WheelerWheeler InterestsWilliam “Bill” H. WilliardNationwide