SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-Q


[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2005

                                       OR

[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934

For the transition period from                  to

Commission File No.  0-31951
                     -------

                                 MONROE BANCORP
                                 --------------
             (Exact name of registrant as specified in its charter)

          Indiana                                         35-1594017
          -------                                         ----------
(State or other jurisdiction of               (IRS Employer Identification No.)
incorporation or organization)

                            210 East Kirkwood Avenue
                              Bloomington, IN 47408
                              ---------------------
                    (Address of principal executive offices)
                                   (Zip Code)

                                 (812) 336-0201
                                 --------------
              (Registrant's telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Sections 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X]     No [ ]

Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [X]     No [ ]

Outstanding Shares of Common Stock on July 31, 2005:  6,036,284

<PAGE>

                          MONROE BANCORP AND SUBSIDIARY
                                    FORM 10-Q

                                      INDEX

                                                                        Page No.
                                                                        --------

Part I. Financial Information:


     Item 1. Financial Statements:

               Consolidated Condensed Balance Sheets..........................3

               Consolidated Condensed Statements of Income - Six Months.......4

               Consolidated Condensed Statements of Income - Three Months.....5

               Consolidated Condensed Statement of Shareholders' Equity.......6

               Consolidated Condensed Statements of Cash Flows................7

               Notes to Consolidated Condensed Financial Statements...........8

     Item 2. Management's Discussion and Analysis of Financial
                Condition and Results of Operations..........................12

     Item 3. Quantitative and Qualitative Disclosures about Market Risk......22

     Item 4. Controls and Procedures.........................................24

Part II.  Other Information:

     Item 1. Legal Proceedings...............................................24

     Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.....24

     Item 3. Defaults Upon Senior Securities.................................24

     Item 4. Submission of Matters to a Vote of Security Holders.............25

     Item 5. Other Information...............................................25

     Item 6. Exhibits........................................................25

Signatures...................................................................27

Exhibit Index................................................................28

                                       2
<PAGE>

Part I. Financial Information

Item 1. Financial Statements

                          MONROE BANCORP AND SUBSIDIARY
                      Consolidated Condensed Balance Sheets
                  (Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
                                                                      June 30,    December 31,
                                                                        2005          2004
                                                                     (Unaudited)
                                                                      ---------    ---------
<S>                                                                   <C>          <C>
 Assets
         Cash and due from banks ..................................   $  29,215    $  20,961
         Interest-earning deposits ................................         395          435
                                                                      ---------    ---------
               Total cash and cash equivalents ....................      29,610       21,396
         Trading securities, at fair value ........................       3,250        3,223
         Investment securities:
              Available for sale ..................................     104,501       95,997
              Held to maturity ....................................       5,481       10,492
                                                                      ---------    ---------
                   Total investment securities ....................     109,982      106,489

         Loans ....................................................     499,576      474,345
         Allowance for loan losses ................................      (5,608)      (5,194)
                                                                      ---------    ---------
              Net loans ...........................................     493,968      469,151
         Loans held for sale ......................................       5,739        2,740
         Premises and equipment ...................................      12,205       11,575
         Federal Home Loan Bank of Indianapolis stock, at cost ....       2,494        2,439
         Other assets .............................................      18,480       16,957
                                                                      ---------    ---------
                         Total assets .............................   $ 675,728    $ 633,970
                                                                      =========    =========

Liabilities
         Deposits:
              Noninterest-bearing .................................   $  96,363    $  71,142
              Interest-bearing ....................................     433,196      412,392
                                                                      ---------    ---------
                   Total deposits .................................     529,559      483,534

         Borrowings ...............................................      90,438       97,378
         Other liabilities ........................................       6,763        5,674
                                                                      ---------    ---------
                         Total liabilities ........................     626,760      586,586

Commitments and Contingent Liabilities

Shareholders' Equity
         Common stock, no-par value
             Authorized, 18,000,000 shares
             Issued and outstanding - 6,036,284 and 6,035,110
                   shares, respectively ...........................         137          137
         Additional paid-in capital ...............................       1,596        1,592
         Retained earnings ........................................      48,202       46,267
         Accumulated other comprehensive income ...................        (553)        (198)
         Unearned ESOT shares .....................................        (414)        (414)
                                                                      ---------    ---------
                         Total shareholders' equity ...............      48,968       47,384
                                                                      ---------    ---------
                         Total liabilities and shareholders' equity   $ 675,728    $ 633,970
                                                                      =========    =========
</TABLE>
         See notes to consolidated condensed financial statements.

                                       3
<PAGE>

                          MONROE BANCORP AND SUBSIDIARY
                   Consolidated Condensed Statements of Income
                                   (Unaudited)
                  (Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
                                                                               Six Months Ended
                                                                                   June 30,
                                                                                2005      2004
                                                                               -------   -------
<S>                                                                            <C>       <C>
Interest Income
         Loans, including fees .............................................   $14,308   $12,077
         Trading securities ................................................        32        33
         Investment securities
              Taxable ......................................................     1,588     1,529
              Tax exempt ...................................................       216       316
         Federal funds sold ................................................        11         5
         Other interest income .............................................        19        24
                                                                               -------   -------
                         Total interest income .............................    16,174    13,984
                                                                               -------   -------

Interest Expense
         Deposits ..........................................................     4,655     3,006
         Short-term borrowings .............................................       519       145
         Other borrowings ..................................................       798       962
                                                                               -------   -------
                         Total interest expense ............................     5,972     4,113
                                                                               -------   -------
                         Net interest income ...............................    10,202     9,871
         Provision for loan losses .........................................       660       660
                                                                               -------   -------
                         Net interest income after provision for loan losses     9,542     9,211
                                                                               -------   -------

Noninterest Income
         Fiduciary activities ..............................................       762       677
         Service charges on deposit accounts ...............................     1,687     1,468
         Commission income .................................................       511       466
         Securities gains ..................................................        99       115
         Unrealized gains on trading securities ............................         5        61
         Net gains on loans sales ..........................................       575       510
         Debit card interchange fees .......................................       308       232
         Other operating income ............................................       567       456
                                                                               -------   -------
                         Total other income ................................     4,514     3,985
                                                                               -------   -------

Noninterest Expenses
         Salaries and employee benefits ....................................     5,219     5,087
         Net occupancy and equipment expense ...............................     1,282     1,239
         Advertising .......................................................       303       347
         Legal fees ........................................................       363       291
         Appreciation in directors' and executives'
              deferred compensation plans ..................................        34        64
         Other operating expense ...........................................     1,590     1,421
                                                                               -------   -------
                         Total other expenses ..............................     8,791     8,449
                                                                               -------   -------

                         Income before income tax ..........................     5,265     4,747
                         Income tax expense ................................     1,770     1,520
                                                                               -------   -------
                                         Net income ........................   $ 3,495   $ 3,227
                                                                               =======   =======

         Basic and diluted earnings per share ..............................   $  0.58   $  0.53
</TABLE>
         See notes to consolidated condensed financial statements.

                                       4
<PAGE>

                          MONROE BANCORP AND SUBSIDIARY
                   Consolidated Condensed Statements of Income
                                   (Unaudited)
                  (Dollars in thousands, except per share data)
<TABLE>
<CAPTION>

                                                                              Three Months Ended
                                                                                   June 30,
                                                                                2005      2004
                                                                               -------   -------
<S>                                                                            <C>       <C>
Interest Income
         Loans, including fees .............................................   $ 7,424   $ 6,160
         Trading securities ................................................        17        15
         Investment securities
              Taxable ......................................................       826       744
              Tax exempt ...................................................       103       146
         Federal funds sold ................................................         5         3
         Other interest income .............................................        11        13
                                                                               -------   -------
                         Total interest income .............................     8,386     7,081
                                                                               -------   -------

Interest Expense
         Deposits ..........................................................     2,532     1,536
         Short-term borrowings .............................................       274        68
         Other borrowings ..................................................       404       478
                                                                               -------   -------
                         Total interest expense ............................     3,210     2,082
                                                                               -------   -------
                         Net interest income ...............................     5,176     4,999
         Provision for loan losses .........................................       330       330
                                                                               -------   -------
                         Net interest income after provision for loan losses     4,846     4,669
                                                                               -------   -------

Noninterest Income
         Fiduciary activities ..............................................       386       342
         Service charges on deposit accounts ...............................       932       761
         Commission income .................................................       287       238
         Securities gains (losses) .........................................        33       (17)
         Unrealized gains (losses) on trading securities ...................        51        (5)
         Net gains on loans sales ..........................................       338       318
         Debit card interchange fees .......................................       158       125
         Other operating income ............................................       296       172
                                                                               -------   -------
                         Total other income ................................     2,481     1,934
                                                                               -------   -------

Noninterest Expenses
         Salaries and employee benefits ....................................     2,640     2,534
         Net occupancy and equipment expense ...............................       638       613
         Advertising .......................................................       184       199
         Legal fees ........................................................       183       164
         Appreciation (depreciation) in directors' and executives'
              deferred compensation plans ..................................        67       (10)
         Other operating expense ...........................................       811       770
                                                                               -------   -------
                         Total other expenses ..............................     4,523     4,270
                                                                               -------   -------

                         Income before income tax ..........................     2,804     2,333
                         Income tax expense ................................       952       759
                                                                               -------   -------
                                         Net income ........................   $ 1,852   $ 1,574
                                                                               =======   =======

         Basic and diluted earnings per share ..............................   $  0.31   $  0.26
</TABLE>
         See notes to consolidated condensed financial statements.

                                       5
<PAGE>

                          MONROE BANCORP AND SUBSIDIARY
            Consolidated Condensed Statement of Shareholders' Equity
                            For the Six Months Ended
                                  June 30, 2005
                                   (Unaudited)
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                                                                                              Unearned
                                    Common Stock                                              Accumulated     Employee
                                --------------------   Additional                                Other         Stock
                                  Shares                Paid in    Comprehensive  Retained   Comprehensive    Ownership
                                Outstanding   Amount    Capital        Income     Earnings       Loss        Trust Shares    Total
                                ----------------------------------------------------------------------------------------------------
<S>                              <C>           <C>      <C>           <C>         <C>           <C>           <C>          <C>
Balances January 1, 2005.......  6,035,110     $ 137    $ 1,592                   $ 46,267      $ (198)       $ (414)      $ 47,384

Comprehensive Income:
  Net income for the period....                                       $ 3,495        3,495                                    3,495
  Other comprehensive income
      -unrealized loss on
       securities..............                                          (355)                    (355)                        (355)
ESOT shares earned.............                               4                                                                   4
Repurchase of stock, at cost...     (3,826)                 (66)                                                                (66)
Stock options exercised........      5,000                   66                                                                  66
Cash dividend ($.26 per share)                                                      (1,560)                                  (1,560)
                                ----------------------------------------------------------------------------------------------------
Balances June 30, 2005.........  6,036,284     $ 137    $ 1,596       $ 3,140     $ 48,202      $ (553)       $ (414)      $ 48,968
                                ====================================================================================================
</TABLE>




See notes to consolidated condensed financial statements.

                                       6
<PAGE>

                          MONROE BANCORP AND SUBSIDIARY
                 Consolidated Condensed Statements of Cash Flows
                                   (Unaudited)
                             (Dollars in thousands)
<TABLE>
<CAPTION>
                                                                                  Six Months Ended
                                                                                      June 30,
                                                                                  2005        2004
                                                                                --------    --------
<S>                                                                             <C>         <C>
Operating Activities
       Net income ...........................................................   $  3,495    $  3,227
       Adjustments to reconcile net income to net cash provided
               by operating activities:
            Provision for loan losses .......................................        660         660
            Depreciation and amortization ...................................        506         436
            Deferred income tax .............................................       (169)       (430)
            Investment securities amortization, net .........................        117         255
            Securities gain .................................................        (98)       (138)
            Origination of loans held for sale ..............................    (41,150)    (35,992)
            Proceeds from sale of loans held for sale .......................     38,726      35,229
            Gain on sale of loans held for sale .............................       (575)       (511)
            ESOT compensation ...............................................          4          14
            Net change in:
                 Trading securities .........................................        (27)        (91)
                 Interest receivable and other assets .......................     (1,173)       (842)
                 Interest payable and other liabilities .....................      1,089         919
                                                                                --------    --------
                           Net cash provided by operating activities ........      1,405       2,736
                                                                                --------    --------

Investing Activities
       Purchase of securities available for sale ............................    (32,645)    (31,147)
       Proceeds from sales of securities available for sale .................     13,397       4,548
       Proceeds from paydowns and maturities of securities available for sale     10,215       6,780
       Proceeds from paydowns and maturities of securities held to maturity .      4,985      19,057
       Purchase of FHLB stock ...............................................        (55)        (55)
       Net change in loans ..................................................    (25,477)    (28,611)
       Purchase of premises and equipment ...................................     (1,136)       (502)
                                                                                --------    --------
                           Net cash used by investing activities ............    (30,716)    (29,930)
                                                                                --------    --------

Financing Activities
       Net change in:
            Noninterest-bearing, interest-bearing demand and savings deposits     37,970     (19,522)
            Certificates of deposit .........................................      8,055      29,389
            Borrowings ......................................................    (17,786)     10,435
       Proceeds from Federal Home Loan Bank advances ........................     15,000          --
       Repayments of Federal Home Loan Bank advances ........................     (4,154)     (2,908)
       Cash dividends paid ..................................................     (1,560)     (1,569)
       Stock options exercised ..............................................         66         175
       Repurchase of common stock ...........................................        (66)     (1,146)
                                                                                --------    --------
                           Net cash provided by financing activities ........     37,525      14,854
                                                                                --------    --------
Net Change in Cash and Cash Equivalents .....................................      8,214     (12,340)
Cash and Cash Equivalents, Beginning of Period ..............................     21,396      29,708
                                                                                --------    --------
Cash and Cash Equivalents, End of Period ....................................   $ 29,610    $ 17,368
                                                                                ========    ========

Supplemental cash flow disclosures
       Interest paid ........................................................   $  5,785    $  4,067
       Income tax paid ......................................................      1,780         965
</TABLE>

See notes to consolidated condensed financial statements.

                                       7
<PAGE>

                          MONROE BANCORP AND SUBSIDIARY
              Notes to Consolidated Condensed Financial Statements
                                  June 30, 2005
                                   (Unaudited)

Note 1: Basis of Presentation
-----------------------------
The consolidated condensed financial statements include the accounts of Monroe
Bancorp (the "Company") and its wholly owned subsidiary, Monroe Bank, a state
chartered bank (the "Bank") and the Bank's wholly owned subsidiary MB Portfolio
Management, Inc. A summary of significant accounting policies is set forth in
Note 1 of Notes to Financial Statements included in the December 31, 2004,
Annual Report to Shareholders. All significant intercompany accounts and
transactions have been eliminated in consolidation.

The interim consolidated condensed financial statements have been prepared in
accordance with instructions to Form 10-Q, and therefore do not include all
information and footnotes necessary for a fair presentation of financial
position, results of operations and cash flows in conformity with generally
accepted accounting principles.

The interim consolidated condensed financial statements at June 30, 2005, and
for the three and six months ended June 30, 2005 and 2004, have not been audited
by independent accountants, but reflect, in the opinion of management, all
adjustments (which include only normal recurring adjustments) necessary to
present fairly the financial position, results of operations and cash flows for
such periods.

The consolidated condensed balance sheet of the Company as of December 31, 2004
has been derived from the audited consolidated balance sheet of the Company as
of that date. Certain information and note disclosures normally included in the
Company's annual financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted. These consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Form 10-K annual report filed with the Securities and
Exchange Commission.

The results of operations for the period are not necessarily indicative of the
results to be expected for the year.


                                       8
<PAGE>

Note 2: Earnings Per Share
--------------------------
The number of shares used to compute basic and diluted earnings per share was as
follows:

                                                     Six months ended
                                               -----------------------------
                                               June 30, 2005   June 30, 2004
                                               -------------   -------------

Net income (in thousands) ..................    $     3,495     $     3,227
                                                ===========     ===========
Weighted average shares outstanding ........      6,036,254       6,081,004
Average unearned ESOT shares ...............        (34,451)        (40,030)
                                                -----------     -----------
Shares used to compute basic earnings
     per share .............................      6,001,803       6,040,974
Effect of dilutive securities- stock options         17,931          16,595
                                                -----------     -----------
Shares used to compute diluted earnings
     per share .............................      6,019,734       6,057,569
                                                ===========     ===========

Earnings per share, basic ..................    $      0.58     $      0.53
Earnings per share, diluted ................           0.58            0.53



                                                   Three months ended
                                               -----------------------------
                                               June 30, 2005   June 30, 2004
                                               -------------   -------------

Net income (in thousands) ..................    $     1,852     $     1,574
                                                ===========     ===========
Weighted average shares outstanding ........      6,036,284       6,068,087
Average unearned ESOT shares ...............        (33,793)        (39,698)
                                                -----------     -----------
Shares used to compute basic earnings
     per share .............................      6,002,491       6,028,389
Effect of dilutive securities- stock options         15,679          18,401
                                                -----------     -----------
Shares used to compute diluted earnings
     per share .............................      6,018,170       6,046,790
                                                ===========     ===========

Earnings per share, basic ..................    $      0.31     $      0.26
Earnings per share, diluted ................           0.31            0.26



Options to purchase 10,000 shares of common stock at $16.20 per share were
outstanding at June 30, 2005, but were not included in the computation of
diluted EPS for the three months ended June 30, 2005 because the options'
exercise price was greater than the average market price of the common shares.


Note 3: Stock Options
---------------------
The Company has a stock-based employee compensation plan, which is described
more fully in the Notes to Financial Statements included in the December 31,
2004 Annual Report to Shareholders. The Company accounts for this plan under the
recognition and measurement principles of APB Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations. No stock-based employee
compensation cost is reflected in net income, as all options granted under the
plan had an exercise price equal to the market value of the underlying common
stock on the grant date. The table on the following page illustrates the effect
on net income and earnings per share if the Company had applied the fair value
provisions of Statement of Financial

                                       9
<PAGE>

Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, to
stock-based employee compensation. Table dollar amounts are in thousands except
per share data.
<TABLE>
<CAPTION>
                                                        Six Months Ended   Six Months Ended
                                                         June 30, 2005      June 30, 2004
                                                        ----------------   ----------------
<S>                                                        <C>                <C>
Net income, as reported ................................   $   3,495          $   3,227
Less:  Total stock-based employee compensation cost
    determined under the fair value based method, net of
    income taxes .......................................           5                  7
                                                           ---------          ---------
Pro forma net income ...................................   $   3,490          $   3,220
                                                           =========          =========

Earnings per share:
     Basic - as reported ...............................   $    0.58          $    0.53
     Basic - pro forma .................................        0.58               0.53
     Diluted - as reported .............................        0.58               0.53
     Diluted - pro forma ...............................        0.58               0.53


                                                      Three Months Ended  Three Months Ended
                                                         June 30, 2005      June 30, 2004
                                                        ----------------   ----------------

Net income, as reported ................................   $   1,852          $   1,574
Less:  Total stock-based employee compensation cost
    determined under the fair value based method, net of
    income taxes .......................................           2                  3
                                                           ---------          ---------
Pro forma net income ...................................   $   1,850          $   1,571
                                                           =========          =========

Earnings per share:
     Basic - as reported ...............................   $    0.31          $    0.26
     Basic - pro forma .................................        0.31               0.26
     Diluted - as reported .............................        0.31               0.26
     Diluted - pro forma ...............................        0.31               0.26
</TABLE>


Note 4:  Reclassifications
--------------------------
Reclassifications of certain amounts in the 2004 consolidated condensed
financial statements have been made to conform to the 2005 presentation.

Note 5:  Contingencies
----------------------
The Bank is a plaintiff in an action to recover amounts due on mortgage loans to
a real estate developer and related entities. The borrower is in bankruptcy
proceedings and has been indicted by a federal grand jury. The trustee in the
borrower's bankruptcy petition has filed an action against the Bank and other
defendants for damages from fraudulent transfer and preference payments, and to
set aside certain mortgages granted to the Bank by the borrower. Furthermore, on
February 17, 2005, the loan officer who made the loans related to the legal
proceedings was indicted by a federal grand jury. Based upon current facts and
circumstances, it is not

                                       10
<PAGE>

possible at this time to predict the effect that these proceedings will have on
the financial statements of the Company.

The Company and Bank are from time-to-time subject to other claims and lawsuits
which arise primarily in the ordinary course of business. It is the opinion of
management that the disposition or ultimate resolution of such claims and
lawsuits will not have a material adverse effect on the consolidated financial
position of the Company.

Note 6:  Recent Accounting Pronouncements
-----------------------------------------

In April 2005, the SEC issued an amendment to SFAS No. 123(R), which allows
companies to implement SFAS 123(R) at the beginning of their next fiscal year,
instead of the next reporting period, that begins after June 15, 2005. The new
rule does not change the accounting required by SFAS No. 123(R), it only changes
the dates for compliance with the standard. Early adoption is permitted in
periods in which financial statements have not yet been issued. The Company
expects to adopt SFAS No. 123(R) on January 1, 2006. SFAS No. 123(R) eliminates
the ability to account for share-based compensation transactions using
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, and generally requires that such transactions be accounted for using
a fair value-based method.

In June 2005 the FASB Board decided not to provide additional guidance on the
meaning of other-than-temporary impairment, but directed the FASB staff to issue
a staff position (FSP) which will be re-titled FSP 115-1 "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments." The
final FSP will supersede EITF Issue No. 03-1, "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments," and
EITF Topic No. D-44, "Recognition of Other-Than-Temporary Impairment upon the
Planned Sale of a Security Whose Cost Exceeds Fair Value." FSP FAS 115-1 will
replace guidance in EITF Issue 03-1 on loss recognition with references to
existing other-than-temporary impairment guidance, such as FASB Statement No.
115, "Accounting for Certain Investments in Debt and Equity Securities." FSP FAS
115-1 will clarify that an investor should recognize an impairment loss no later
than when the impairment is deemed other than temporary, even if a decision to
sell has not been made.

FSP FAS 115-1 will be effective for other-than-temporary impairment analysis
conducted in periods beginning after September 15, 2005. The Company has
consistently followed the loss recognition guidance in SFAS No. 115, so the
adoption of FSP FAS 115-1 will not have any significant impact on the Company's
financial condition or results of operation.




                                       11
<PAGE>

Item 2.  Management's Discussion and Analysis of Financial Condition and
-------  Results of Operations
         ---------------------------------------------------------------

General
-------
Monroe Bancorp (the "Company") is a one-bank holding company formed under
Indiana law in 1984. The Company holds all of the outstanding stock of Monroe
Bank (the "Bank"), which was formed in 1892. Banking is the primary business
activity of the Company.

The Bank, with its primary offices located in Bloomington, Indiana, conducts
business from seventeen locations in Monroe, Jackson, Lawrence, Hamilton and
Hendricks counties in Indiana. Approximately 75 percent of the Bank's business
is in Monroe County and is concentrated in and around the city of Bloomington.

The Bank is a traditional community bank which provides a variety of financial
services to its customers, including:

o    accepting deposits;
o    making commercial, mortgage and personal loans;
o    originating fixed rate residential mortgage loans for sale into the
     secondary market;
o    providing personal and corporate trust services;
o    providing investment advisory and brokerage services; and
o    providing annuities and other investment products.

The majority of the Bank's revenue is derived from interest and fees on loans
and investments, and the majority of its expense is interest paid on deposits
and general and administrative expenses related to its business.

Critical Accounting Policies
----------------------------
The most significant accounting policies followed by the Company are presented
in Note 1 to the consolidated financial statements on pages 24 to 26 of the
December 31, 2004 Annual Report to Shareholders - Financial Review. Certain of
these policies are important to the portrayal of the Company's financial
condition, since they require management to make difficult, complex or
subjective judgments, some of which may relate to matters that are inherently
uncertain. Management has identified these policies in the Critical Accounting
Policies section of the Management's Discussion and Analysis on page 6 of the
2004 Annual Report to Shareholders -Financial Review. There have been no changes
in these critical accounting policies to date.

Non-GAAP Financial Measures
---------------------------
In January 2003, the United States Securities and Exchange Commission ("SEC")
issued Regulation G, "Conditions for Use of Non-GAAP Financial Measures." A
non-GAAP financial measure is a numerical measure of a company's historical or
future performance, financial position, or cash flow that excludes (includes)
amounts or adjustments that are included (excluded) in the most directly
comparable measure calculated in accordance with generally accepted accounting
principles ("GAAP"). Regulation G requires companies that present non-GAAP
financial measures to disclose a numerical reconciliation to the most directly
comparable measurement using GAAP as well as the reason why the non-GAAP measure
is an important measure.

Management has used the following two non-GAAP financial measures throughout
this quarterly report on Form 10-Q:

     o    In the "Net Interest Income / Net Interest Margin" section, the
          discussion is focused on tax-equivalent rates and margin. Management
          believes a discussion of the changes in tax-equivalent rates and
          margin is more relevant because it better explains changes in
          after-tax net income.
     o    In the "Noninterest Income / Noninterest Expense" section of this
          document, we report noninterest income and noninterest expense without
          the effect of unrealized gains and losses on securities in a grantor
          trust ("rabbi trust") which is a non-GAAP financial measure. Other
          income includes realized and unrealized securities gains and losses on
          trading securities (mutual funds) held in a grantor trust ("rabbi
          trust") in connection with the Company's Directors' and Executives'
          Deferred Compensation

                                       12
<PAGE>

          Plans. These securities are held as trading securities, and hence,
          unrealized gains and losses are recognized on the income statement.
          Any unrealized or realized loss on securities held in the rabbi trust
          net of any dividend or interest income earned on the securities in the
          rabbi trust (included in net interest income) are directly offset by a
          decrease to directors' fee/deferred executive compensation expense
          (included in other expense), and conversely, any net realized or
          unrealized gain combined with interest and dividends earned on the
          securities in the trust are directly offset by an increase to
          directors' fee/deferred executive compensation expense. These offsets
          are included in the line item identified on page 4 of the consolidated
          financial statements as "Appreciation (depreciation) on directors' and
          executives' deferred compensation plans." The activity in the rabbi
          trust has no effect on the Company's net income, therefore, management
          believes a more accurate comparison of current and prior year
          noninterest income and noninterest expense can be made if the rabbi
          trust realized and unrealized gains and losses and offsetting
          appreciation (depreciation) on the deferred compensation plans are
          removed.

Results of Operations
---------------------

Overview
--------
Net income for the second quarter of 2005 was $1,852,000, a 17.7 percent
increase from net income of $1,574,000 for the same quarter last year. Basic and
diluted earnings per share for the second quarter of 2005 were $0.31, up from
$0.26 per share for the second quarter of 2004.

Annualized return on average equity (ROE) for the second quarter of 2005
increased to 15.39 percent compared to 13.70 percent for second quarter of 2004.
The annualized return on average assets (ROA) was 1.14 percent for the second
quarter of 2005 compared to 1.05 percent for the same period of 2004.

Net income was $3,495,000 and $3,227,000 for the six months ended June 30, 2005
and 2004, respectively, an increase of $268,000 or 8.3 percent. Diluted earnings
per share for the six months ended June 30, 2005 were $0.58 compared to $0.53
for the same period in 2004

Annualized return on average equity (ROE) for the six months ended June 30, 2005
increased to 14.56 percent compared to 14.09 percent for same period of 2004.
The annualized return on average assets (ROA) was 1.09 percent for the six
months ended June 30, 2005 unchanged from the same period in 2004.

Growth in noninterest income and loans, improved asset quality and modest growth
in noninterest expense contributed to the growth in net income in 2005. Progress
continues to be made towards improving asset quality as indicated by several
measures of credit quality. At June 30, 2005, non-performing assets and 90-day
past due loans totaled $3,902,000 (0.58 percent of total assets) compared to
$4,053,000 (0.64 percent) at December 31, 2004 and $5,412,000 (0.89 percent of
total assets) at June 30, 2004, a 27.9 percent year-over-year reduction. The
Company also realized a significant improvement in its net loan charge-offs. Net
charge-offs for the six months ended of June 30, 2005 were $246,000 compared to
$421,000 for the same period of 2004.

The Company's loan delinquency ratio (loan balances past due 30 days or more as
a percent of total loans) was 0.98 percent at June 30, 2005, down from 1.14
percent at June 30, 2004.

The Company also opened a loan production office in Carmel, Indiana, at the
beginning of the second quarter, marking the Company's entry into the
rapidly-growing Hamilton County/northern Indianapolis market. The Company broke
ground on a new full-service banking center in Brownsburg, Indiana on July 8,
2005 and plans to break ground on a second banking center in Plainfield, Indiana
later in 2005.

Net Interest Income / Net Interest Margin
-----------------------------------------
The tables on the following pages present information to assist in analyzing net
interest income. The tables of Average Balance Sheets and Interest Rates present
the major components of interest-earning assets and interest-bearing
liabilities, related interest income and expense and the resulting yield or
cost. Interest income presented

                                       13
<PAGE>

in the table has been adjusted to a tax equivalent basis assuming a 40 percent
tax rate. The tax equivalent adjustment recognizes the income tax savings when
comparing taxable and tax-exempt assets.




























                                       14

<PAGE>
<TABLE>
<CAPTION>
                                                                             Average Balance Sheets and Interest Rates
                                                             -----------------------------------------------------------------------
                                                                Six Months Ended June 30, 2005      Six Months Ended June 30, 2004
                                                             -----------------------------------  ----------------------------------
                                                              Average               Average Rate  Average               Average Rate
                              ASSETS                          Balance     Interest  (annualized)  Balance     Interest  (annualized)
                                                              -------     --------  ------------  -------     --------  ------------
<S>                                                          <C>         <C>           <C>       <C>         <C>           <C>
Interest earning assets
     Securities
          Taxable .........................................  $  94,347   $   1,716     3.67%     $  87,270   $   1,600     3.69%
          Tax-exempt (1) ..................................     15,458         360     4.70%        18,649         528     5.70%
                                                             ---------   ---------               ---------   ---------
               Total securities ...........................    109,805       2,076     3.81%       105,919       2,128     4.04%

     Loans (2) ............................................    486,837      14,310     5.93%       439,476      12,079     5.53%
     FHLB Stock ...........................................      2,472          53     4.32%         2,367          55     4.67%
     Federal funds sold ...................................        819          11     2.71%           968           5     1.04%
     Interest-earning deposits ............................      1,476          33     4.55%         4,551          40     1.77%
                                                             ---------   ---------               ---------   ---------
                 Total interest earning assets ............    601,409      16,483     5.53%       553,281      14,308     5.20%
                                                             ---------   ---------               ---------   ---------

Noninterest earning assets
     Allowance for loan losses ............................     (5,435)                             (5,104)
     Premises and equipment & other assets ................     29,761                              28,735
     Cash and due from banks ..............................     18,771                              18,131
                                                             ---------                           ---------
               Total assets ...............................  $ 644,506                           $ 595,043
                                                             =========                           =========

               LIABILITIES AND SHAREHOLDERS' EQUITY

Interest-bearing liabilities
     Total interest-bearing deposits ......................    432,767       4,655     2.17%       378,607       3,006     1.60%
     Borrowed funds .......................................     81,359       1,317     3.26%        91,274       1,107     2.44%
                                                             ---------   ---------               ---------   ---------
          Total interest-bearing liabilities ..............    514,126       5,972     2.34%       469,881       4,113     1.76%
                                                             ---------   ---------               ---------   ---------


Noninterest-bearing liabilities
     Noninterest-bearing demand deposits ..................     75,656                              72,812
     Other liabilities ....................................      6,599                               6,278
     Shareholders' equity .................................     48,125                              46,072
                                                             ---------                           ---------
                 Total liabilities and shareholders' equity  $ 644,506                           $ 595,043
                                                             =========                           =========


Interest margin recap
Net interest income and interest rate spread
     T/E net interest income margin .......................                 10,511     3.19%                    10,195     3.44%
     T/E net interest margin as a percent of
          total average earning assets ....................                            3.51%                               3.71%
Tax equivalent adjustment (1) .............................                    309                                 324
                                                                         ---------                           ---------

      Net interest income .................................              $  10,202                           $   9,871
                                                                         =========                           =========
</TABLE>
(1)  Interest income on tax-exempt securities has been adjusted to a tax
     equivalent basis using a marginal income tax rate of 40%.
(2)  Nonaccrual loans are included in average loan balances and loan fees are
     included in interest income.

                                       15
<PAGE>
<TABLE>
<CAPTION>
                                                                             Average Balance Sheets and Interest Rates
                                                             -----------------------------------------------------------------------
                                                               Three Months Ended June 30, 2005    Three Months Ended June 30, 2004
                                                             -----------------------------------  ----------------------------------
                                                              Average               Average Rate  Average               Average Rate
                              ASSETS                          Balance     Interest  (annualized)  Balance     Interest  (annualized)
                                                              -------     --------  ------------  -------     --------  ------------
<S>                                                          <C>         <C>           <C>       <C>         <C>           <C>
Interest earning assets
     Securities
          Taxable .........................................   $  95,562  $     894     3.75%     $  89,912   $     782     3.50%
          Tax-exempt (1) ..................................      15,341        172     4.49%        17,880         242     5.45%
                                                             ---------   ---------               ---------   ---------
               Total securities ...........................     110,903      1,065     3.85%       107,792       1,024     3.82%

     Loans (2) ............................................     492,298      7,425     6.05%       447,285       6,162     5.54%
     FHLB Stock ...........................................       2,485         26     4.20%         2,381          23     3.89%
     Federal funds sold ...................................         686          5     2.92%         1,125           3     1.07%
     Interest-earning deposits ............................       1,102         17     6.31%         3,184          22     2.74%
                                                             ---------   ---------               ---------   ---------
                 Total interest earning assets ............     607,474      8,539     5.64%       561,767       7,234     5.18%
                                                             ---------   ---------               ---------   ---------

Noninterest earning assets
    Allowance for loan losses .............................     (5,535)                             (5,150)
     Premises and equipment & other assets ................     30,573                              29,006
     Cash and due from banks ..............................     19,772                              18,433
                                                             ---------                           ---------
               Total assets ...............................  $ 652,284                           $ 604,056
                                                             =========                           =========

               LIABILITIES AND SHAREHOLDERS' EQUITY

Interest-bearing liabilities
     Total interest-bearing deposits ......................  $ 440,137       2,531     2.31%     $ 384,387       1,536     1.61%
     Borrowed funds .......................................     79,208         679     3.44%        90,256         546     2.43%
                                                             ---------   ---------               ---------   ---------
          Total interest-bearing liabilities ..............    519,345       3,210     2.48%       474,643       2,082     1.76%
                                                             ---------   ---------               ---------   ---------


Noninterest-bearing liabilities
     Noninterest-bearing demand deposits ..................     77,524                              76,190
     Other liabilities ....................................      7,135                               7,012
     Shareholders' equity .................................     48,280                              46,211
                                                             ---------                           ---------
                 Total liabilities and shareholders' equity  $ 652,284                           $ 604,056
                                                             =========                           =========


Interest margin recap
Net interest income and interest rate spread
     T/E net interest income margin .......................              $   5,329     3.16%                 $   5,152     3.42%
     T/E net interest margin as a percent of
          total average earning assets ....................                            3.52%                               3.69%
Tax equivalent adjustment (1) .............................                    153                                 153
                                                                         ---------                           ---------

                Net interest income .......................              $   5,176                           $   4,999
                                                                         =========                           =========
</TABLE>
(1)  Interest income on tax-exempt securities has been adjusted to a tax
     equivalent basis using a marginal income tax rate of 40%.
(2)  Nonaccrual loans are included in average loan balances and loan fees are
     included in interest income.

                                       16
<PAGE>

Net Interest Income / Net Interest Margin (continued)
-----------------------------------------------------
Net interest income is the primary source of the Company's earnings. It is a
function of the net interest margin and the volume of average earning assets.
For the six months ended June 30, 2005, the tax-equivalent net interest margin
as a percent of average earning assets was 3.51 percent, a decrease from 3.71
percent for the same period last year. Average loan yields for the first six
months of 2005 increased by 40 basis points (0.40 percent) over the same period
in 2004 and deposit yields increased 57 basis points. Average tax-equivalent
securities yields for the first six months of 2005 declined by 23 basis points
over the same period in 2004, and borrowed funds yields increased 82 basis
points. Tax-equivalent net interest income was $10,202,000 for the six months
ended June 30, 2005 compared to $9,871,000 for the same period in 2004, an
increase of 3.4 percent.

The tax-equivalent net interest margin as a percent of average earning assets
was 3.52 percent for the quarter ended June 30, 2005, down from 3.69 percent for
the same quarter last year. Average second quarter 2005 loan yields increased by
51 basis points over second quarter 2004 yields and deposit yields increased 70
basis points in the same time period. Average second quarter 2005 tax-equivalent
securities yields increased by 3 basis points over the second quarter of 2004,
and borrowed funds yields increased 101 basis points. Tax-equivalent net
interest income was $5,176,000 for the three months ended June 30, 2005 compared
to $4,999,000 for the same period in 2004, an increase of 3.5 percent. Net
interest income increased, despite the decrease in the margin, due to strong
loan growth and improving yields in the investment portfolio.

During the first six months and the second quarter of 2005, deposit yields
increased more than loan yields because the Company is liability sensitive (i.e.
deposits reprice more quickly than loans). During the second quarter of 2005,
securities yields began to increase because maturing bonds are being replaced by
higher yielding bonds. As a result, the average tax-equivalent yield of maturing
investments can be equaled or exceeded when the funds are reinvested. Also, the
bond portfolio has always had a very short average life and management is in the
process of restructuring the portfolio towards a longer average life.

Noninterest Income / Noninterest Expense
----------------------------------------
Total noninterest income was $2,481,000 for the three months ended June 30, 2005
compared to $1,934,000 for the same period in 2004, an increase of $547,000.
Omitting the net realized and unrealized gains on rabbi trust securities in the
amount of $51,000 in the second quarter of 2005 and losses in the amount of
$22,000 in the second quarter of 2004, other income increased $474,000 or 24.2
percent during the second quarter of 2005 compared to the second quarter of
2004.

Significant changes in noninterest income occurred primarily in the following
areas:

     o    Service charges on deposit accounts were $932,000 during the second
          quarter of 2005 compared to $761,000 in the second quarter of 2004, an
          increase of $171,000. Growth primarily occurred in fees associated
          with overdrawn accounts (NSF fees).
     o    Second quarter 2004 other operating income included a loss of $81,000
          on other real estate owned (OREO). No losses on OREO properties were
          recognized during the second quarter of 2005.
     o    Commissions on platform annuity and mutual fund sales and full-service
          brokerage activity were $287,000 in the second quarter of 2005
          compared to $238,000 for the same period in 2004, and increase of
          $49,000 or 20.6 percent.
     o    Trust fee income totaled $386,000 for the second quarter of 2005
          compared to $342,000 for the second quarter of 2004, an increase of
          $44,000 or 12.9 percent. Assets under management by the Company's
          Wealth Management Group grew from $203,824,000 at June 30, 2004 to
          $233,688,000 at June 30, 2005, an increase of 12.8 percent.

Total noninterest income was $4,514,000 for the first six months of 2005
compared to $3,985,000 for the same period in 2004, an increase of $529,000.
Omitting the net realized and unrealized gains on rabbi trust securities in the
amount of $6,000 in the first six months of 2005 and gains in the amount of
$38,000 in the first six months of 2004, other income increased $561,000 or 14.2
percent during the second quarter of 2005 compared to the second quarter of
2004.

                                       17
<PAGE>

Significant changes in noninterest income occurred primarily in the following
areas:

     o    Service charges on deposit accounts were $1,687,000 during the first
          six months of 2005 compared to $1,468,000 in the same period of 2004,
          an increase of $219,000. Growth primarily occurred in fees associated
          with overdrawn accounts (NSF fees).
     o    Trust fee income totaled $762,000 for the first six months of 2005
          compared to $677,000 for the same period of 2004, an increase of
          $85,000 or 12.6 percent.
     o    Debit card interchange income totaled $308,000 for the six months
          ended June 30, 2005 compared to $232,000 for the same period in 2004,
          an increase of $76,000 or 32.8 percent, due to an increase in debit
          card use and an increase in the interchange fee structure.
     o    Gains on the sale of real estate loans in the secondary market were
          $575,000 for the first six months of 2005 compared to $510,000 for the
          same period of 2004, an increase of $65,000 or 12.8 percent.

For the quarter ended June 30, 2005, total noninterest expense was $4,523,000
compared to $4,270,000 for the same period in 2004. Omitting the appreciation in
the Directors' and Executives' Deferred Compensation Plan of $67,000 in the
second quarter of 2005 (which equals the sum of the interest and dividends
earned on the rabbi trust and the realized and unrealized gains or losses on the
securities in the trust) and depreciation of $10,000 during the second quarter
of 2004, noninterest expense increased $176,000 or 4.1 percent. No significant
changes occurred in noninterest expense accounts during the second quarter of
2005.

For the six months ended June 30, 2005, total noninterest expense was $8,791,000
compared to $8,449,000 for the same period in 2004. Omitting the appreciation in
the Directors' and Executives' Deferred Compensation Plan of $34,000 in the
first six months of 2005 and appreciation of $64,000 during the same period of
2004, noninterest expense increased $372,000 or 4.4 percent.

Significant changes in noninterest expense occurred primarily because legal fees
increased $72,000 or 24.7 percent due to an increase in legal fees associated
with legal actions related to loans made to a certain real estate developer who
filed bankruptcy in 2002.

Occupancy expense and salaries and employee benefit expense experienced modest
increases in the second quarter and first six months of 2005 compared to the
same periods in 2004. Occupancy expense increased by $25,000 or 4.1 percent
during the second quarter of 2005 and increased $43,000 or 3.5 percent for the
six months ended June 30, 2005. Salaries and employee benefit expense increased
by $106,000 or 4.2 percent during the second quarter of 2005 and $132,000 or 2.6
percent for the six months ended June 30, 2005. Growth in these expenses during
the second quarter increased due to the opening of a new loan production office
in Hendricks County, north of Indianapolis.

Income Taxes
------------
The Company records a provision for income taxes currently payable, along with a
provision for those taxes payable in the future. Such deferred taxes arise from
differences in timing of certain items for financial statement reporting rather
than income tax reporting. The major difference between the effective tax rate
applied to the Company's financial statement income and the federal and state
statutory rate of approximately 40 percent is interest on tax-exempt securities.

The Company's effective tax rate was 33.6 percent for the six months ended June
30, 2005 compared to 32.0 percent for the same period in 2004. The tax rate
increased primarily because municipal bond (tax-exempt) income represented a
lower percentage of total income in the first six months of 2005.

Financial Condition
-------------------

Assets and Liabilities
----------------------
Total assets of the Company at June 30, 2005 were $675,728,000 an increase of
6.6 percent or $41,758,000 compared to $633,970,000 at December 31, 2004. Loans
(including loans held for sale) grew to $505,315,000 at June 30, 2005 compared
to $477,085,000 at December 31, 2004, an increase of 5.9 percent. The Company's

                                       18
<PAGE>

Central Indiana operations provided 47.3 percent of the year-to-date loan
growth, with the remainder occurring in the Company's core market of Monroe
County and the surrounding counties. Growth primarily occurred in construction
and commercial real estate loans. Deposits increased to $529,559,000 at June 30,
2005 compared to $483,534,000 at December 31, 2004, an increase of 9.5 percent.
The increase in deposits resulted primarily from an increase in interest-bearing
demand deposit accounts of $14,082,000 and an increase in noninterest-bearing
demand deposits of $25,221,000. Cash and cash equivalents increased by
$8,214,000 at June 30, 2005 compared to December 31, 2004, primarily due to a
large outgoing cash letter on June 30th. Borrowings declined to $90,438,000 at
June 30, 2005 compared to $97,378,000 at December 31, 2004, a 7.1 percent
decrease. The decline in borrowings was primarily due to a decline in federal
funds purchased of $10,950,000 and repurchase agreements of $7,507,000. Federal
Home Loan Bank advances increased by $10,845,000.

Capital
-------
Shareholders' equity increased $1,584,000 at June 30, 2005 compared to December
31, 2004. This increase was a result of year-to-date net income of $3,495,000,
dividends paid of $1,560,000, other comprehensive income, consisting solely of
the change (decrease) in net unrecognized gains in the Company's
available-for-sale securities portfolio of $355,000, treasury stock purchased of
$66,000, options issued of $66,000 (exercise price) and ESOP shares earned of
$4,000.

The Company and the Bank are subject to various regulatory capital requirements
administered by the federal banking agencies and are assigned to a capital
category. The assigned capital category is largely determined by three ratios
that are calculated according to the regulations: total risk adjusted capital,
Tier 1 capital, and Tier 1 leverage ratios. The ratios are intended to measure
capital relative to assets and credit risk associated with those assets and
off-balance sheet exposures of the entity. The capital category assigned to an
entity can also be affected by qualitative judgments made by regulatory agencies
about the risk inherent in the entity's activities that are not part of the
calculated ratios.

There are five capital categories defined in the regulations ranging from well
capitalized to critically undercapitalized. Classification of a bank in any of
the undercapitalized categories can result in actions by regulators that could
have a material effect on a bank's operations. At June 30, 2005 and December 31,
2004, the Company and the Bank were categorized as well capitalized and met all
subject capital adequacy requirements. There are no conditions or events since
June 30, 2005 that management believes have changed the Company's or Bank's
classification.





                                       19
<PAGE>

The actual and required capital amounts and ratios are as follows:
<TABLE>
<CAPTION>
                                                                         Required for Adequate       To Be Well
                                                          Actual              Capital(1)           Capitalized(1)
                                                   ---------------------------------------------------------------
                                                    Amount      Ratio      Amount      Ratio     Amount      Ratio
                                                   ---------------------------------------------------------------
<S>                                                 <C>         <C>        <C>         <C>       <C>         <C>
     As of June 30, 2005
     Total capital(1)(to risk-weighted assets)
          Consolidated                              $55,129     11.15%     $39,555      8.0%         N/A      N/A
          Bank                                       55,018     11.20       39,309      8.0      $49,137     10.0%
     Tier I capital(1)(to risk-weighted assets)
          Consolidated                               49,521     10.02       19,777      4.0          N/A      N/A
          Bank                                       49,410     10.06       19,655      4.0       29,482      6.0
     Tier I capital(1)(to average assets)
          Consolidated                               49,521      7.59       26,091      4.0          N/A      N/A
          Bank                                       49,410      7.61       25,973      4.0       32,466      5.0

     As of December 31, 2004
     -----------------------
     Total capital(1)(to risk-weighted assets)
          Consolidated                              $52,776     11.46%     $36,852      8.0%         N/A      N/A
          Bank                                       52,565     11.49       36,606      8.0      $45,758     10.0%
     Tier I capital(1)(to risk-weighted assets)
          Consolidated                               47,582     10.33       18,426      4.0          N/A      N/A
          Bank                                       47,371     10.35       18,303      4.0       27,455      6.0
     Tier I capital(1)(to average assets)
          Consolidated                               47,582      7.58       25,107      4.0          N/A      N/A
          Bank                                       47,371      7.59       24,969      4.0       31,211      5.0
     (1) As defined by regulatory agencies
</TABLE>

Classification of Assets, Allowance for Loan Losses, and Nonperforming Loans
----------------------------------------------------------------------------
One of management's top priorities has been improving credit quality. Management
is pleased by the progress made in terms of credit quality over the past year.

The Bank currently classifies loans internally to assist management in
addressing collection and other risks. These classified loans represent credits
characterized by the distinct possibility that some loss will be sustained if
deficiencies are not corrected. As of June 30, 2005, the Bank had $7,769,000 of
loans internally classified compared to $9,505,000 at December 31, 2004, an 18.3
percent reduction. Loans internally classified have also decreased compared to
June 30, 2004, when the Bank had $10,702,000 of loans internally classified. The
allowance for loan losses was $5,608,000, or 1.12 percent of portfolio loans
(excluding loans held for sale) at June 30, 2005 compared to $5,194,000 or 1.09
percent, of portfolio loans at December 31, 2004. A portion of classified loans
are nonaccrual loans. The Bank had nonperforming loans (nonaccrual loans,
restructured loans and ninety days past due loans still accruing) totaling
$3,257,000, or 0.64 percent of total loans at June 30, 2005 compared to
$3,674,000 or 0.77 percent of total loans at December 31, 2004. June 30, 2005
nonperforming loans significantly decreased compared to June 30, 2004, when
nonperforming loans were $5,304,000, or 1.17 percent of total loans.

During the first six months of 2005, the Bank had net loan charge-offs totaling
$246,000 compared to $421,000 charged off for the same period in 2004. The
Company's loan delinquency ratio (loan balances past due 30 days or more as a
percent of total loans) was 0.98 percent at June 30, 2005, down from 1.14
percent at June 30 2004.

Liquidity
---------
Liquidity refers to the ability of a financial institution to generate
sufficient cash to fund current loan demand, meet savings deposit withdrawals
and pay operating expenses. The primary sources of liquidity are cash,
interest-bearing deposits in other financial institutions, marketable
securities, loan repayments, increased deposits and total institutional
borrowing capacity.

Cash Requirements
Management believes that the Company has adequate liquidity and adequate sources
for obtaining additional liquidity if needed. Short-term liquidity needs
resulting from normal deposit/withdrawal functions are provided by the Company
retaining a portion of cash generated from operations and through utilizing
federal funds and repurchase agreements. Long-term liquidity and other liquidity
needs are provided by the ability of the

                                       20
<PAGE>

Company to borrow from the Federal Home Loan Bank of Indianapolis (FHLB) and by
the ability to raise brokered CDs. FHLB advances were $48,875,000 at June 30,
2005 compared to $38,029,000 at December 31, 2004. At June 30, 2005, the Company
had excess borrowing capacity at the FHLB of $6,101,000 as limited by the
Company's board resolution in effect at that date. If the Company's borrowing
capacity were not limited by the board resolution, the Company would have excess
borrowing capacity of $34,802,000 based on collateral. In terms of managing the
Company's liquidity, management's primary focus is on increasing deposits to
fund future growth. However, the Board may increase its resolution limit on FHLB
advances if the Company needs additional liquidity. The Company's internal
Asset/Liability Committee (ALCO) meets regularly to review projected loan demand
and discuss appropriate funding sources to adequately manage the Company's gap
position and minimize interest rate risk.


At the bank holding company level, the Company primarily uses cash to pay
dividends to shareholders. The main source of funding for the holding company is
dividends from its subsidiary (the Bank). During the six months ended June 30,
2005, the Bank declared dividends to the holding company of $1,490,000. As of
July 1, 2005, the amount of dividends the Bank can pay to the parent company
without prior regulatory approval was $6,061,000, versus $4,024,000 at January
1, 2005. As discussed in Note 10 to the Consolidated Financial Statements (page
32 of the 2004 Annual Report to Shareholders-Financial Review) and Item 1 of the
December 31, 2004 Form 10-K, the Bank is subject to many regulations and, among
other things, may be limited in its ability to pay dividends or transfer funds
to the holding company. Accordingly, consolidated cash flows as presented in the
Consolidated Statements of Cash Flows on page 6 may not represent cash
immediately available to the holding company.

Sources and Uses of Cash
The following discussion relates to the Consolidated Statements of Cash Flows
(page 7 of the consolidated condensed financial statements). During the six
months ended June 30, 2005, $1,405,000 of cash was provided by operating
activities, compared to $2,736,000 during the same period in 2004. The decrease
in this area was primarily a result of more mortgages originated to be sold in
the secondary market in 2005. During the first six months of 2005, $30,716,000
was used for investing activities, compared to $29,930,000 in the same period of
2004. In the first six months of 2005, $37,525,000 of cash was provided by
financing activities, primarily from growth in noninterest-bearing demand and
savings deposits and FHLB advances, compared to $14,854,000 provided by
financing activities during the same period in 2004 with growth occurring
primarily in certificates of deposit and borrowings, which was partially offset
by a decline in noninterest bearing, interest-bearing demand and savings
accounts. Overall, net cash and cash equivalents increased $8,214,000 during the
six months ended June 30, 2005 compared to a decrease of $12,340,000 in the same
period of 2004.

Impact of Inflation and Changing Prices
---------------------------------------
The financial statements and related data presented herein have been prepared in
accordance with generally accepted accounting principles. These principles
require the measurement of financial position and operating results in terms of
historical dollars, without considering changes in the relative purchasing power
of money over time due to inflation.

The primary assets and liabilities of the Company are monetary in nature.
Consequently, interest rates generally have a more significant impact on
performance than the effects of inflation. Interest rates, however, do not
necessarily move in the same direction or with the same magnitude as the price
of goods and services. In a period of rapidly rising interest rates, the
liquidity and the maturity structure of the Company's assets and liabilities are
critical to the maintenance of acceptable performance levels. The Company
constantly monitors the liquidity and maturity structure of its assets and
liabilities, and believes active asset/liability management has been an
important factor in its ability to record consistent earnings growth through
periods of interest rate volatility.

Other
-----
The Securities and Exchange Commission maintains a Web site that contains
reports, proxy information statements, and other information regarding
registrants that file electronically with the Commission, including Monroe
Bancorp (ticker symbol MROE). The address is http://www.sec.gov.

                                       21
<PAGE>

Forward-Looking Statements
--------------------------
Portions of information in this Form 10-Q contain forward-looking statements
about the Company which we believe are within the meaning of the Private
Securities Litigation Reform Act of 1995. This Form 10-Q contains certain
forward-looking statements with respect to the financial condition, results of
operations, plans, objectives, future performance and business of the Company.
Forward-looking statements can be identified by the fact that they do not relate
strictly to historical or current facts. They often include the words "believe,"
"expect," "anticipate," "intend," "plan," "estimate" or words of similar
meaning, or future or conditional verbs such as "will," "would," "should,"
"could" or "may" or words of similar meaning. These forward-looking statements,
by their nature, are subject to risks and uncertainties. There are a number of
important factors that could cause future results to differ materially from
historical performance and these forward-looking statements. Factors that might
cause such a difference include, but are not limited to: (1) competitive
pressures among depository institutions; (2) changes in the interest rate
environment; (3) prepayment speeds, charge-offs and loan loss provisions; (4)
general economic conditions, either national or in the markets in which the
Company does business; (5) legislative or regulatory changes adversely affect
the business of the Company; and (6) changes in real estate values or the real
estate markets. Further information on other factors which could affect the
financial results of the Company are included in the Company's Form 10-K for the
year ended December 31, 2004 as filed with the Securities and Exchange
Commission.


Item 3.  Quantitative and Qualitative Disclosures about Market Risk
-------  ----------------------------------------------------------

Market risk of the Company encompasses exposure to both liquidity risk and
interest rate risk and is reviewed on an ongoing basis by management and
quarterly by the Asset/Liability Committee ("ALCO") and the Board of Directors.
Liquidity was addressed as part of the discussion entitled "Liquidity." The
Company's interest sensitivity position at June 30, 2005 remained consistent
with the Company's primary goal of maximizing interest margin while maintaining
a low exposure to interest rate risk.

Management uses several techniques to measure interest rate risk. Interest rate
risk exposure is measured using an interest rate sensitivity analysis to
determine the change in the net portfolio value ("NPV") of its cash flows from
assets and liabilities in the event of hypothetical changes in interest rates.
Management also forecasts the net interest income that the Bank's current
balance sheet would yield over the next twelve months assuming the same
hypothetical changes in interest rates. A third method used by the Bank to
measure interest rate risk is an interest rate sensitivity gap analysis. The gap
analysis is utilized to quantify the repricing characteristics of the Bank's
assets and liabilities.

Management believes that its forecast of changes in net interest income under
various rate shocks is the more valuable and easiest to interpret interest rate
risk measurement technique. Management believes that interested parties will
derive a better understanding of how the Company's intermediation activities
will perform under different rate scenarios from its presentation of projected
net interest income under various rate shocks. This should help users of the
information form clearer opinions of the Company's interest rate sensitivity.

The Company's Board of Directors adopted an interest rate risk policy which
established a 20 percent maximum increase or decrease in net interest income in
the event of a sudden and sustained 2 percent (200 basis point) increase or
decrease in interest rates.

The following table summarizes the results of management's forecast of net
interest income that would be generated by the Bank's June 30, 2005 balance
sheet under various rate shocks:

                                       22
<PAGE>

                         Projected Net Interest
                            Income Over the      $ Change in   % Change in
Change in Interest Rate   Next Twelve Months     Net Interest  Net Interest
   (Basis Points)           (in thousands)         Income         Income
---------------------------------------------------------------------------

       +300                    $21,690             $  (818)        (3.6) %
       +200                     21,997                (511)        (2.3)
       +100                     22,288                (220)        (1.0)
          0                     22,508                   0           --
       -100                     22,535                  27          0.1
       -200                     22,388                (120)        (0.5)


The following table summarizes the results of management's forecast of net
interest income that would be generated by the Bank's December 31, 2004 balance
sheet under various rate shocks:


                         Projected Net Interest
                            Income Over the      $ Change in   % Change in
Change in Interest Rate   Next Twelve Months     Net Interest  Net Interest
   (Basis Points)           (in thousands)         Income         Income
---------------------------------------------------------------------------

       +300                    $19,977             $  (118)        (0.6) %
       +200                     20,044                 (51)        (0.3)
       +100                     20,084                 (11)        (0.1)
          0                     20,095                  --           --
       -100                     19,835                (260)        (1.3)
       -200                     19,281                (814)        (4.1)


Management believes a 200 basis point (two percent) decrease in rates is highly
unlikely. Management also believes an increase in rates is more probable;
therefore, we will focus our discussion on the effects of a 100 basis point (one
percent) decrease in rates and an increase of 300 basis points (three percent).

The June 30, 2005 table above indicates that the Bank's projected net interest
income for the next twelve months would decline by 3.6 percent in the event of a
sudden and sustained 300 basis point increase in interest rates and increase by
0.1 percent in the event of an immediate 100 basis point decrease in interest
rates. The forecasts from both time periods indicate that the interest rate
sensitivities of Bank's assets and liabilities are relatively well matched over
the rate shock ranges between a drop of 100 basis points and an increase of 300
basis points. The forecasted changes in net interest income calculated as of
June 30, 2005, are within the approved guidelines established by the Board of
Directors.

However, the results do reflect that the Company has become somewhat more
liability sensitive over the six-month period. The increased liability
sensitivity, combined with the higher level of short term rates, contributes to
a situation where the Company's net interest income would increase in the event
of a modest rate decline (liabilities would reprice downward more quickly than
the Company's assets) and shrink modestly if rates were to move upward
(liabilities would reprice upward more quickly than the Company's assets).

Computations of prospective effects of hypothetical interest rate changes are
based on a number of assumptions, including relative levels of market interest
rates, loan prepayments and deposit run-off rates, and should not be relied upon
as indicative of actual results. These computations do not contemplate actions
management may undertake in response to changes in interest rates. The NPV
calculation is based on the net present value of discounted cash flows utilizing
certain prepayment assumptions and market interest rates.

                                       23
<PAGE>

Certain shortcomings are inherent in the method of computing the estimated net
interest income under hypothetical rate shocks. Actual results may differ from
that information presented in the table above should market conditions vary from
the assumptions used in preparation of the table information. If interest rates
remain or decrease below current levels, the proportion of adjustable rate loans
in the loan portfolio could decrease in future periods due to refinancing
activity. Also, in the event of an interest rate change, prepayment and early
withdrawal levels would likely be different from those assumed in the table.
Lastly, the ability of many borrowers to repay their adjustable rate debt may
decline during a rising interest rate environment.


Item 4.  Controls and Procedures.
------   -----------------------

Monroe Bancorp's management is responsible for establishing and maintaining
effective disclosure controls and procedures, as defined under Rules 13a-15(e)
and 15d-15(e) of the Securities Exchange Act of 1934. As of June 30, 2005, an
evaluation was performed under the supervision and with the participation of
management, including the Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of the Company's disclosure
controls and procedures. Based on that evaluation, the Chief Executive Officer
and Chief Financial Officer concluded that the Company's disclosure controls and
procedures as of June 30, 2005 were effective in ensuring material information
required to be disclosed in this Quarterly Report on Form 10-Q was recorded,
processed, summarized, and reported on a timely basis. Additionally, there were
no changes in the Company's internal control over financial reporting that
occurred during the quarter ended June 30, 2005 that have materially affected,
or are reasonably likely to materially affect, the Company's internal control
over financial reporting.


Part II - Other Information

Item 1.   Legal Proceedings.
-------   ------------------
          Except as set forth below, there are no material pending legal
          proceedings, other than routine litigation incidental to the business
          of the Company or the Bank, to which the Company or the Bank is a
          party or of which any of its property is subject. Further, there is no
          material legal proceeding in which any director, officer, principal
          shareholder, or affiliate of the Company, or any associate of such
          director, officer, principal shareholder or affiliate is a party, or
          has a material interest, adverse to the Company.

          The Bank is a plaintiff in an action to recover amounts due on
          mortgage loans to a real estate developer and related entities. The
          borrower is in bankruptcy proceedings and has recently been indicted
          by a federal grand jury. The trustee in the borrower's bankruptcy
          petition has filed an action against the Bank and other defendants for
          damages from fraudulent transfer and preference payments, and to set
          aside certain mortgages granted to the Bank by the borrower (Case No.
          02-21300-JKC-11, United States Bankruptcy Court Southern District of
          Indiana, Indianapolis Division, Plaintiff: Robert W. Leasure, Jr.,
          Trustee of Royal Haven Builders, Inc. and Eric H. Tauer). Furthermore,
          on February 17, 2005, the loan officer who made the loans related to
          the legal proceedings was indicted by a federal grand jury. Based upon
          current facts and circumstances, it is not possible at this time to
          predict the effect that these proceedings will have on the financial
          statements of the Company.

Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds.
-------   ------------------------------------------------------------
          Not applicable.

Item 3.   Defaults upon Senior Securities.
-------   --------------------------------
          Not applicable.

                                       24
<PAGE>

Item 4.   Submission of Matters to a Vote of Security Holders.
-------   ----------------------------------------------------

          (a)  On April 28, 2005, the Corporation held its annual meeting of
               shareholders.

          (b)  At the annual meeting, the following individuals were elected to
               a three-year term expiring in 2008: Mark D. Bradford, James D.
               Bremner, Steven R. Crider and Paul W. Mobley.

               The following individual's terms as directors continued after the
               meeting: Bradford J. Bomba, Jr. M.D., Timothy D. Ellis, Joyce
               Claflin Harrell, Harry F. McNaught, Jr. and Charles R. Royal, Jr.

          (c)  At the annual meeting, the first item was the election of four
               directors. The vote tabulation for the election of Mark D.
               Bradford was 5,058,668 "for" and 63,443 withheld; the vote
               tabulation for James D. Bremner was 5,106,867 "for" and 15,244
               withheld; the vote tabulation for Steven R. Crider was 5,101,033
               for and 21,078 withheld, and the vote tabulation for Paul W.
               Mobley was 4,984,314 "for" and 137,796 withheld.

               The second item was the ratification of BKD, LLP, Certified
               Public Accountants, as the Corporation's independent auditors for
               fiscal year ending December 31, 2005. This matter was approved by
               a vote of 5,103,718 shares "for", 2,861 shares against, and
               14,932 shares abstained.

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

          Not applicable.


Item 6.   Exhibits.
-------   ---------

Exhibit No:   Description of Exhibit:
-----------   -----------------------

3(i)      Monroe Bancorp Articles of Incorporation are incorporated by reference
          to registrant's Form 10 filed November 14, 2000.

3(ii)     Monroe Bancorp Bylaws are incorporated by reference to registrant's
          Form 10 filed November 14, 2000.

10(i)     1999 Directors' Stock Option Plan of Monroe Bancorp is incorporated by
          reference to registrant's Form 10 filed November 14, 2000.

10(ii)    1999 Management Stock Option Plan of Monroe Bancorp is incorporated by
          reference to registrant's Form 10 filed November 14, 2000.

10(iii)   Deferred Compensation Trust for Monroe Bancorp is incorporated by
          reference to registrant's Form 10 filed November 14, 2000.

10(iv)    Monroe County Bank Agreement for Supplemental Death or Retirement
          Benefits is incorporated by reference to registrant's Form 10 filed
          November 14, 2000.

10(v)     Monroe Bancorp Thrift Plan as Amended and Restated January 1, 2001 is
          incorporated by reference to registrant's Form 10-Q filed November 13,
          2002.

10(vi)    Monroe Bancorp Employee Stock Ownership Plan as Amended and Restated
          January 1, 2001 is incorporated by reference to registrant's Form 10-Q
          filed November 13, 2002.

10(vii)   Third Amendment to the Monroe Bancorp Employees' Stock Ownership Plan
          is incorporated by reference to registrant's Form 10-K filed March 29,
          2004.

                                       25
<PAGE>

10(viii)  Monroe Bancorp Directors' Deferred Compensation Plan as Amended and
          Restated Effective January 1, 1999 and First, Second and First
          Amendments are incorporated by reference to registrant's Form 10-K
          filed March 29, 2004.

10(ix)    Monroe Bancorp Executives' Deferred Compensation Plan as Amended and
          Restated Effective January 1, 1999 and First, Second and First
          Amendments are incorporated by reference to registrant's Form 10-K
          filed March 29, 2004.

10(x)     Form of agreement under the 1999 Management Stock Option Plan of
          Monroe Bancorp is incorporated by reference to registrant's Form 10-K
          filed March 15, 2005.

10(xi)    Schedule of Directors Compensation Arrangements is incorporated by
          reference to registrant's Form 8-K filed March 24, 2005.

10(xii)   Schedule of Executive Officers Compensation Arrangements is
          incorporated by reference to registrant's Form 10-K filed March 15,
          2005.

10(xiii)  Fourth Amendment to the Monroe Bancorp Employees' Stock Ownership Plan
          is filed by reference to registrant's Form 10-Q filed May 9, 2005.

31(i)     Rule 13a-14(a) Certification for Quarterly Report on Form 10-Q by
          Principal Executive Officer.

31(ii)    Rule 13a-14(a) Certification for Quarterly Report on Form 10-Q by
          Principal Financial Officer.

32(i)     Section 1350 Certification of Principal Executive Officer.

32(ii)    Section 1350 Certification of Principal Financial Officer.







                                       26
<PAGE>

                                   SIGNATURES

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

                                      MONROE BANCORP

     Date: August 8, 2005             By: /s/ Mark D. Bradford
           --------------                 ---------------------------------
                                          Mark D. Bradford, President and
                                          Chief Executive Officer
                                          (Principal Executive Officer)

     Date: August 8, 2005             By: /s/ Gordon M. Dyott
           --------------                 ---------------------------------
                                          Gordon M. Dyott, Exec. Vice President,
                                          Chief Financial Officer
                                          (Principal Financial Officer)


















                                       27
<PAGE>

                                  Exhibit Index
                                  -------------


Exhibit No:    Description of Exhibit:
-----------    -----------------------

3(i)           Monroe Bancorp Articles of Incorporation are incorporated by
               reference to registrant's Form 10 filed November 14, 2000.

3(ii)          Monroe Bancorp Bylaws are incorporated by reference to
               registrant's Form 10 filed November 14, 2000.

10(i)          1999 Directors' Stock Option Plan of Monroe Bancorp is
               incorporated by reference to registrant's Form 10 filed November
               14, 2000.

10(ii)         1999 Management Stock Option Plan of Monroe Bancorp is
               incorporated by reference to registrant's Form 10 filed November
               14, 2000.

10(iii)        Deferred Compensation Trust for Monroe Bancorp is incorporated by
               reference to registrant's Form 10 filed November 14, 2000.

10(iv)         Monroe County Bank Agreement for Supplemental Death or Retirement
               Benefits is incorporated by reference to registrant's Form 10
               filed November 14, 2000.

10(v)          Monroe Bancorp Thrift Plan as Amended and Restated January 1,
               2001 is incorporated by reference to registrant's Form 10-Q filed
               November 13, 2002.

10(vi)         Monroe Bancorp Employee Stock Ownership Plan as Amended and
               Restated January 1, 2001 is incorporated by reference to
               registrant's Form 10-Q filed November 13, 2002.

10(vii)        Third Amendment to the Monroe Bancorp Employees' Stock Ownership
               Plan is incorporated by reference to registrant's Form 10-K filed
               March 29, 2004

10(viii)       Monroe Bancorp Directors' Deferred Compensation Plan as Amended
               and Restated Effective January 1, 1999 and First, Second and
               First Amendments are incorporated by reference to registrant's
               Form 10-K filed March 29, 2004.

10(ix)         Monroe Bancorp Executives' Deferred Compensation Plan as Amended
               and Restated Effective January 1, 1999 and First, Second and
               First Amendments are incorporated by reference to registrant's
               Form 10-K filed March 29, 2004.

10(x)          Form of agreement under the 1999 Management Stock Option Plan of
               Monroe Bancorp is incorporated by reference to registrant's Form
               10-K filed March 15, 2005.

10(xi)         Schedule of Directors' Compensation Arrangements is incorporated
               by reference to registrant's Form 8-K filed March 24, 2005.

10(xii)        Schedule of Executive Officers Compensation Arrangements is
               incorporated by reference to registrant's form 10-K filed March
               15, 2005.

10(xiii)       Fourth Amendment to the Monroe Bancorp Employees' Stock Ownership
               Plan is incorporated by reference to registrant's form 10-Q filed
               May 9, 2005.

31(i)          Rule 13a-14(a) Certification for Quarterly Report on Form 10-Q by
               Principal Executive Officer.

                                       28
<PAGE>

31(ii)         Rule 13a-14(a) Certification for Quarterly Report on Form 10-Q by
               Principal Financial Officer.

32(i)          Section 1350 Certification of Principal Executive Officer.

32(ii)         Section 1350 Certification of Principal Financial Officer.

































                                       29