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 September 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                   (IRS Employer Identification No.)
of 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 [ ]

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

Outstanding Shares of Common Stock on October 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 - Nine 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.....................11

    Item 3.    Quantitative and Qualitative Disclosures about Market Risk.....21

    Item 4.    Controls and Procedures........................................23

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............24

    Item 5.    Other Information..............................................24

    Item 6.  Exhibits.........................................................24

Signatures....................................................................26

Exhibit Index.................................................................27

                                       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>
                                                                     September 30, December 31,
                                                                          2005         2004
                                                                      (Unaudited)
                                                                       ---------    ---------
<S>                                                                    <C>          <C>
Assets
          Cash and due from banks ..................................   $  24,371    $  20,961
          Interest-earning deposits ................................         407          435
                                                                       ---------    ---------
                Total cash and cash equivalents ....................      24,778       21,396
          Trading securities, at fair value ........................       3,330        3,223
          Investment securities:
               Available for sale ..................................     105,228       95,997
               Held to maturity ....................................       5,114       10,492
                                                                       ---------    ---------
                    Total investment securities ....................     110,342      106,489

          Loans ....................................................     508,421      474,345
          Allowance for loan losses ................................      (5,523)      (5,194)
                                                                       ---------    ---------
               Net loans ...........................................     502,898      469,151
          Loans held for sale ......................................       3,331        2,740
          Premises and equipment ...................................      12,468       11,575
          Federal Home Loan Bank of Indianapolis stock, at cost ....       2,545        2,439
          Other assets .............................................      18,876       16,957
                                                                       ---------    ---------
                          Total assets .............................   $ 678,568    $ 633,970
                                                                       =========    =========

Liabilities
          Deposits:
               Noninterest-bearing .................................   $  92,258    $  71,142
               Interest-bearing ....................................     447,565      412,392
                                                                       ---------    ---------
                    Total deposits .................................     539,823      483,534

          Borrowings ...............................................      82,371       97,378
          Other liabilities ........................................       6,535        5,674
                                                                       ---------    ---------
                          Total liabilities ........................     628,729      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 ...............................       1,602        1,592
          Retained earnings ........................................      49,330       46,267
          Accumulated other comprehensive loss .....................        (819)        (198)
          Unearned ESOT shares .....................................        (411)        (414)
                                                                       ---------    ---------
                          Total shareholders' equity ...............      49,839       47,384
                                                                       ---------    ---------
                          Total liabilities and shareholders' equity   $ 678,568    $ 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>
                                                                                Nine Months Ended
                                                                                  September 30,
                                                                                  2005      2004
                                                                                -------   -------
<S>                                                                             <C>       <C>
Interest Income
          Loans, including fees .............................................   $22,366   $18,399
          Trading securities ................................................        50        48
          Investment securities
               Taxable ......................................................     2,415     2,262
               Tax exempt ...................................................       347       453
          Federal funds sold ................................................        17         5
          Other interest income .............................................        25        27
                                                                                -------   -------
                          Total interest income .............................    25,220    21,194
                                                                                -------   -------

Interest Expense
          Deposits ..........................................................     7,479     4,633
          Short-term borrowings .............................................       892       320
          Other borrowings ..................................................     1,317     1,416
                                                                                -------   -------
                          Total interest expense ............................     9,688     6,369
                                                                                -------   -------
                          Net interest income ...............................    15,532    14,825
          Provision for loan losses .........................................       900       990
                                                                                -------   -------
                          Net interest income after provision for loan losses    14,632    13,835
                                                                                -------   -------

Noninterest Income
          Fiduciary activities ..............................................     1,158     1,034
          Service charges on deposit accounts ...............................     2,601     2,206
          Commission income .................................................       752       703
          Securities gains ..................................................        94       212
          Unrealized gains on trading securities ............................        71        48
          Net gains on loans sales ..........................................     1,021       781
          Debit card interchange fees .......................................       473       361
          Other operating income ............................................       873       725
                                                                                -------   -------
                          Total other income ................................     7,043     6,070
                                                                                -------   -------

Noninterest Expenses
          Salaries and employee benefits ....................................     8,100     7,618
          Net occupancy and equipment expense ...............................     1,943     1,847
          Advertising .......................................................       479       489
          Legal fees ........................................................       470       396
          Appreciation in directors' and executives'
               deferred compensation plans ..................................       126        64
          Other operating expense ...........................................     2,390     2,157
                                                                                -------   -------
                          Total other expenses ..............................    13,508    12,571
                                                                                -------   -------

                          Income before income tax ..........................     8,167     7,334
                          Income tax expense ................................     2,764     2,357
                                                                                -------   -------
                                           Net income .......................   $ 5,403   $ 4,977
                                                                                =======   =======

          Basic and diluted earnings per share ..............................   $  0.82   $  0.75
</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
                                                                                   September 30,
                                                                                 2005       2004
                                                                                -------    -------
<S>                                                                             <C>        <C>
Interest Income
          Loans, including fees .............................................   $ 8,058    $ 6,322
          Trading securities ................................................        18         15
          Investment securities
               Taxable ......................................................       828        733
               Tax exempt ...................................................       131        137
          Federal funds sold ................................................         6          -
          Other interest income .............................................         5          3
                                                                                -------    -------
                          Total interest income .............................     9,046      7,210
                                                                                -------    -------

Interest Expense
          Deposits ..........................................................     2,824      1,627
          Short-term borrowings .............................................       373        175
          Other borrowings ..................................................       519        454
                                                                                -------    -------
                          Total interest expense ............................     3,716      2,256
                                                                                -------    -------
                          Net interest income ...............................     5,330      4,954
          Provision for loan losses .........................................       240        330
                                                                                -------    -------
                          Net interest income after provision for loan losses     5,090      4,624
                                                                                -------    -------

Noninterest Income
          Fiduciary activities ..............................................       396        357
          Service charges on deposit accounts ...............................       914        738
          Commission income .................................................       241        237
          Securities gains  (losses) ........................................        (5)        96
          Unrealized gains (losses) on trading securities ...................        66        (12)
          Net gains on loans sales ..........................................       445        271
          Debit card interchange fees .......................................       165        129
          Other operating income ............................................       306        268
                                                                                -------    -------
                          Total other income ................................     2,528      2,084
                                                                                -------    -------

Noninterest Expenses
          Salaries and employee benefits ....................................     2,880      2,530
          Net occupancy and equipment expense ...............................       661        607
          Advertising .......................................................       176        142
          Legal fees ........................................................       107        105
          Appreciation in directors' and executives'
               deferred compensation plans ..................................        91          -
          Other operating expense ...........................................       801        738
                                                                                -------    -------
                          Total other expenses ..............................     4,716      4,122
                                                                                -------    -------

                          Income before income tax ..........................     2,902      2,586
                          Income tax expense ................................       994        836
                                                                                -------    -------
                                           Net income .......................   $ 1,908    $ 1,750
                                                                                =======    =======

          Basic earnings per share ..........................................   $  0.29    $  0.27
          Diluted earnings per share ........................................      0.29    $  0.26
</TABLE>
          See notes to consolidated condensed financial statements.

                                       5
<PAGE>

                          MONROE BANCORP AND SUBSIDIARY
            Consolidated Condensed Statement of Shareholders' Equity
                            For the Nine Months Ended
                               September 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..........                                    $ 5,403        5,403                                 5,403
  Other comprehensive income
      -unrealized loss on securities.                                       (621)                   (621)                      (621)
ESOT shares earned...................                           10                                                   3           13
Repurchase of stock, at cost.........    (3,826)               (66)                                                             (66)
Stock options exercised..............     5,000                 66                                                               66
Cash dividend ($.35 per share).......                                                  (2,340)                               (2,340)
                                      ---------------------------------------------------------------------------------------------
Balances September 30, 2005.......... 6,036,284    $ 137   $ 1,602       $ 4,782     $ 49,330     $ (819)       $ (411)    $ 49,839
                                      =============================================================================================
See notes to consolidated condensed financial statements.
</TABLE>

                                       6
<PAGE>

                          MONROE BANCORP AND SUBSIDIARY
                 Consolidated Condensed Statements of Cash Flows
                                   (Unaudited)
                             (Dollars in thousands)
<TABLE>
<CAPTION>
                                                                                   Nine Months Ended
                                                                                     September 30,
                                                                                    2005        2004
                                                                                  --------    --------
<S>                                                                               <C>         <C>
Operating Activities
         Net income ...........................................................   $  5,403    $  4,977
         Adjustments to reconcile net income to net cash provided
                 by operating activities:
              Provision for loan losses .......................................        900         990
              Depreciation and amortization ...................................        758         681
              Deferred income tax .............................................       (268)       (160)
              Investment securities amortization, net .........................        170         361
              Securities gain .................................................        (82)       (234)
              Origination of loans held for sale ..............................    (68,753)    (53,448)
              Proceeds from sale of loans held for sale .......................     69,183      52,688
              Gain on sale of loans held for sale .............................     (1,021)       (781)
              ESOT compensation ...............................................         13          25
              Net change in:
                   Trading securities .........................................       (107)        (91)
                   Interest receivable and other assets .......................     (1,328)       (852)
                   Interest payable and other liabilities .....................        861       2,570
                                                                                  --------    --------
                             Net cash provided by operating activities ........      5,729       6,726
                                                                                  --------    --------

Investing Activities
         Purchase of securities available for sale ............................    (40,036)    (48,293)
         Proceeds from sales of securities available for sale .................     14,354       8,452
         Proceeds from paydowns and maturities of securities available for sale     15,457      11,846
         Proceeds from paydowns and maturities of securities held to maturity .      5,340      25,033
         Purchase of FHLB stock ...............................................       (106)        (82)
         Net change in loans ..................................................    (34,647)    (32,458)
         Purchase of premises and equipment ...................................     (1,651)       (628)
                                                                                  --------    --------
                             Net cash used by investing activities ............    (41,289)    (36,130)
                                                                                  --------    --------

Financing Activities
         Net change in:
              Noninterest-bearing, interest-bearing demand and savings deposits     31,000          99
              Certificates of deposit .........................................     25,289      27,241
              Borrowings ......................................................    (13,811)      4,944
         Proceeds from Federal Home Loan Bank advances ........................     18,000           -
         Repayments of Federal Home Loan Bank advances ........................    (19,196)     (4,947)
         Cash dividends paid ..................................................     (2,340)     (2,347)
         Stock options exercised ..............................................         66         175
         Repurchase of common stock ...........................................        (66)     (1,232)
                                                                                  --------    --------
                             Net cash provided by financing activities ........     38,942      23,933
                                                                                  --------    --------
Net Change in Cash and Cash Equivalents .......................................      3,382      (5,471)
Cash and Cash Equivalents, Beginning of Period ................................     21,396      29,708
                                                                                  --------    --------
Cash and Cash Equivalents, End of Period ......................................   $ 24,778    $ 24,237
                                                                                  ========    ========

Supplemental cash flow disclosures
         Interest paid ........................................................   $  9,463    $  6,266
         Income tax paid ......................................................      2,945       1,760
</TABLE>

            See notes to consolidated condensed financial statements.

                                       7
<PAGE>

                          MONROE BANCORP AND SUBSIDIARY
              Notes to Consolidated Condensed Financial Statements
                               September 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 September 30, 2005,
and for the three and nine months ended September 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:

                                              Nine months ended September 30,
                                          --------------------------------------
                                                   2005           2004
                                               -----------    -----------
Net income (in thousands) ..................   $     5,403    $     4,977
                                               ===========    ===========
Weighted average shares outstanding ........     6,639,888      6,672,819
Average unearned ESOT shares ...............       (37,170)       (43,184)
                                               -----------    -----------
Shares used to compute basic earnings
     per share .............................     6,602,718      6,629,635
Effect of dilutive securities- stock options        19,787         18,588
                                               -----------    -----------
Shares used to compute diluted earnings
     per share .............................     6,622,505      6,648,223
                                               ===========    ===========

Earnings per share, basic ..................   $      0.82    $      0.75
Earnings per share, diluted ................          0.82           0.75


                                             Three months ended September 30,
                                          --------------------------------------
                                                   2005           2004
                                               -----------    -----------
Net income (in thousands) ..................   $     1,908    $     1,750
                                               ===========    ===========
Weighted average shares outstanding ........     6,639,912      6,640,247
Average unearned ESOT shares ...............       (35,725)       (41,494)
                                               -----------    -----------
Shares used to compute basic earnings
     per share .............................     6,604,187      6,598,753
Effect of dilutive securities- stock options        19,906         19,344
                                               -----------    -----------
Shares used to compute diluted earnings
     per share .............................     6,624,093      6,618,097
                                               ===========    ===========

Earnings per share, basic ..................   $      0.29    $      0.27
Earnings per share, diluted ................          0.29           0.26


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 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.

                                       9
<PAGE>

<TABLE>
<CAPTION>
                                                             Nine Months Ended   Nine Months Ended
                                                             September 30, 2005  September 30, 2004
                                                             ------------------  ------------------
<S>                                                              <C>                <C>
Net income, as reported ................................         $   5,403          $   4,977
Less:  Total stock-based employee compensation cost
    determined under the fair value based method, net of
    income taxes .......................................                 2                 10
                                                                 ---------          ---------
Pro forma net income ...................................         $   5,401          $   4,967
                                                                 =========          =========

Earnings per share:
     Basic - as reported ...............................         $    0.82          $    0.75
     Basic - pro forma .................................              0.82               0.75
     Diluted - as reported .............................              0.82               0.75
     Diluted - pro forma ...............................              0.82               0.75


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

Net income, as reported ................................         $   1,908          $   1,750
Less:  Total stock-based employee compensation cost
    determined under the fair value based method, net of
    income taxes .......................................                (2)                 3
                                                                 ---------          ---------
Pro forma net income ...................................         $   1,910          $   1,747
                                                                 =========          =========

Earnings per share:
     Basic - as reported ...............................         $    0.29          $    0.27
     Basic - pro forma .................................              0.29               0.26
     Diluted - as reported .............................              0.29               0.26
     Diluted - pro forma ...............................              0.29               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 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

                                       10
<PAGE>

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 September 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 September 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.

Note 7:  Subsequent Events
--------------------------
On October 20, 2005, the Company announced the authorization of a 10 percent
stock dividend payable to shareholders of record as of November 7, 2005.
Accordingly, all share and per share data have been restated, as applicable, to
give effect to the stock dividend.


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

General / Business Summary
--------------------------
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.
However, the Company's anticipated continued development of additional banking
business in Hendricks County, and other markets in the greater Indianapolis
area, is expected to gradually reduce this concentration.

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;

                                       11
<PAGE>

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.

Management believes that the Company's culture of community involvement, service
quality, and customer focus has played a significant role in the Company's
growth and success. Management also believes that other significant factors
contributing to the Company's growth include, but are not limited to; the
attractiveness of the Company's primary markets, an involved Board that sets
high performance standards and a focus on maintaining credit quality.

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 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 pages 4 and 5 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

                                       12
<PAGE>

     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 third quarter of 2005 was $1,908,000, a 9.0 percent increase
from net income of $1,750,000 for the same quarter last year. Basic and diluted
earnings per share for the third quarter of 2005 were $0.29, up from $0.27 per
basic share and $0.26 per diluted share for the third quarter of 2004.

Annualized return on average equity (ROE) for the third quarter of 2005
increased to 15.24 percent compared to 15.14 percent for third quarter of 2004.
The annualized return on average assets (ROA) was 1.13 percent for the third
quarter of 2005 compared to 1.14 percent for the same period of 2004.

Net income was $5,403,000 and $4,977,000 for the nine months ended September 30,
2005 and 2004, respectively, an increase of $426,000 or 8.6 percent. Basic and
diluted earnings per share for the nine months ended September 30, 2005 were
$0.82 compared to $0.75 for the same period in 2004.

Annualized return on average equity (ROE) for the nine months ended September
30, 2005 increased to 14.85 percent compared to 14.42 percent for same period of
2004. The annualized return on average assets (ROA) was 1.11 percent for the
nine months ended September 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.
Partially offsetting that growth was a year over year $118,000 decrease in gains
on securities sold. Progress continues to be made towards improving asset
quality as indicated by several measures of credit quality. At September 30,
2005, non-performing assets and 90-day past due loans totaled $2,604,000 (0.38
percent of total assets) compared to $4,053,000 (0.64 percent) at December 31,
2004 and $4,654,000 (0.75 percent of total assets) at September 30, 2004, a 44.0
percent year-over-year reduction. The Company also realized a significant
improvement in its net loan charge-offs. Net charge-offs for the nine months
ended of September 30, 2005 were $571,000 compared to $1,180,000 for the same
period of 2004. Based on the reduction in charge-offs and management's ongoing
evaluation of the adequacy of the allowance for loan losses, the Company has
reduced its provision for loan losses to $900,000 for the first nine months of
2005 compared to $990,000 for the same period in 2004, and to $240,000 for the
three months ended September 30, 2005 compared to $330,000 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 0.48 percent at September 30, 2005, down from 1.13
percent at September 30, 2004.

The Company also opened a loan production office in Carmel, Indiana, at the
beginning of the second quarter of 2005, marking the Company's entry into the
rapidly-growing Hamilton County/northern Indianapolis market. At September 30,
2005, the Carmel loan production office had booked $31,000,000 of loans. The
Company also plans on opening a new full-service banking center in Brownsburg,
Indiana in late 2005 or early 2006, with another banking center in Plainfield,
Indiana to open later in 2006.

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 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.

                                       13
<PAGE>
<TABLE>
<CAPTION>
                                                                        Average Balance Sheets and Interest Rates
                                                       ---------------------------------------------------------------------------
                                                       Nine Months Ended September 30, 2005   Nine Months Ended September 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 .................................... $  94,445   $   2,610      3.70%       $  88,257   $   2,367      3.58%
          Tax-exempt (1) .............................    16,492         578      4.69%          18,341         755      5.50%
                                                       ---------   ---------                  ---------   ---------
               Total securities ......................   110,937       3,189      3.84%         106,598       3,122      3.91%

     Loans (2) .......................................   493,625      22,369      6.06%         445,219      18,404      5.52%
     FHLB Stock ......................................     2,492          81      4.35%           2,380          81      4.55%
     Federal funds sold ..............................       793          17      2.87%             643           5      1.04%
     Interest-earning deposits .......................     1,231          41      4.45%           3,464          45      1.74%
                                                       ---------   ---------                  ---------   ---------
                 Total interest earning assets .......   609,078      25,696      5.64%         558,304      21,657      5.18%
                                                       ---------   ---------                  ---------   ---------

Noninterest earning assets
    Allowance for loan losses ........................    (5,473)                                (5,087)
    Premises and equipment & other assets ............    30,175                                 29,044
    Cash and due from banks ..........................    19,099                                 18,628
                                                       ---------                              ---------
               Total assets .......................... $ 652,879                              $ 600,889
                                                       =========                              =========

             LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities
     Total interest-bearing deposits .................   434,170       7,479      2.30%         379,012       4,634      1.63%
     Borrowed funds ..................................    86,623       2,209      3.41%          95,243       1,735      2.43%
                                                       ---------   ---------                  ---------   ---------
          Total interest-bearing liabilities .........   520,793       9,688      2.49%         474,255       6,369      1.79%
                                                       ---------   ---------                  ---------   ---------


Noninterest-bearing liabilities
     Noninterest-bearing demand deposits .............    76,642                                 74,312
     Other liabilities ...............................     6,783                                  6,205
     Shareholders' equity ............................    48,661                                 46,117
                                                       ---------                              ---------
                 Total liabilities and shareholders'
                 equity............................... $ 652,879                              $ 600,889
                                                       =========                              =========


Interest margin recap
Net interest income and interest rate spread
     T/E net interest income margin ..................                16,008      3.15%                      15,288      3.39%
     T/E net interest margin as a percent of
          total average earning assets ...............                            3.51%                                  3.66%
Tax equivalent adjustment (1) ........................                   476                                    463
                                                                   ---------                              ---------

      Net interest income ............................             $  15,532                              $  14,825
                                                                   =========                              =========
</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.

                                       14
<PAGE>

<TABLE>
<CAPTION>
                                                                        Average Balance Sheets and Interest Rates
                                                       ---------------------------------------------------------------------------
                                                      Three Months Ended September 30, 2005  Three Months Ended September 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 .................................... $  94,638   $     892      3.74%       $  90,211   $     766      3.38%
          Tax-exempt (1) .............................    18,528         218      4.68%          17,732         230      5.16%
                                                       ---------   ---------                  ---------   ---------
               Total securities ......................   113,166       1,111      3.89%         107,943         996      3.67%

     Loans (2) .......................................   506,977       8,061      6.31%         456,581       6,323      5.51%
     FHLB Stock ......................................     2,533          28      4.39%           2,407          27      4.46%
     Federal funds sold ..............................       741           6      3.21%               -           -
     Interest-earning deposits .......................       748           8      4.42%           1,313           3      0.91%
                                                       ---------   ---------                  ---------   ---------
                 Total interest earning assets .......   624,165       9,214      5.86%         568,244       7,349      5.15%
                                                       ---------   ---------                  ---------   ---------

Noninterest earning assets
    Allowance for loan losses ........................    (5,546)                                (5,054)
    Premises and equipment & other assets ............    30,991                                 29,624
    Cash and due from banks ..........................    19,743                                 19,611
                                                       ---------                              ---------
               Total assets .......................... $ 669,353                              $ 612,425
                                                       =========                              =========

             LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities
     Total interest-bearing deposits ................. $ 436,930       2,822      2.56%       $ 379,813       1,627      1.70%
     Borrowed funds ..................................    96,981         893      3.65%         103,093         629      2.43%
                                                       ---------   ---------                  ---------   ---------
          Total interest-bearing liabilities .........   533,911       3,715      2.76%         482,906       2,256      1.86%
                                                       ---------   ---------                  ---------   ---------


Noninterest-bearing liabilities
     Noninterest-bearing demand deposits .............    78,580                                 77,279
     Other liabilities ...............................     7,185                                  6,263
     Shareholders' equity ............................    49,677                                 45,977
                                                       ---------                              ---------
                 Total liabilities and shareholders'
                 equity............................... $ 669,353                              $ 612,425
                                                       =========                              =========


Interest margin recap
Net interest income and interest rate spread
     T/E net interest income margin ..................             $   5,499      3.10%                   $   5,093      3.29%
     T/E net interest margin as a percent of
          total average earning assets ...............                            3.50%                                  3.57%
Tax equivalent adjustment (1) ........................                   168                                    139
                                                                   ---------                              ---------

                Net interest income ..................             $   5,331                              $   4,954
                                                                   =========                              =========
</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>

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 nine months ended September 30, 2005, the tax-equivalent net interest
margin as a percent of average earning assets was 3.51 percent, a decrease from
3.66 percent for the same period last year. Average loan yields for the first
nine months of 2005 increased by 54 basis points (0.54 percent) over the same
period in 2004 and deposit yields increased 67 basis points. Average
tax-equivalent securities yields for the first nine months of 2005 declined by 7
basis points over the same period in 2004, and borrowed funds yields increased
98 basis points. Tax-equivalent net interest income was $16,008,000 for the nine
months ended September 30, 2005 compared to $15,288,000 for the same period in
2004, an increase of 4.7 percent.

The tax-equivalent net interest margin as a percent of average earning assets
was 3.50 percent for the quarter ended September 30, 2005, down from 3.57
percent for the same quarter last year. Average third quarter 2005 loan yields
increased by 80 basis points over third quarter 2004 yields and deposit yields
increased 86 basis points in the same time period. Average third quarter 2005
tax-equivalent securities yields increased by 22 basis points over the third
quarter of 2004, and borrowed funds yields increased 122 basis points.
Tax-equivalent net interest income was $5,499,000 for the three months ended
September 30, 2005 compared to $5,093,000 for the same period in 2004, an
increase of 8.0 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 nine months and the third 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 third quarter of 2005,
securities yields increased 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,
management is in the process of restructuring the portfolio towards a longer
average life.

Noninterest Income / Noninterest Expense
----------------------------------------
Total noninterest income was $2,528,000 for the three months ended September 30,
2005 compared to $2,084,000 for the same period in 2004, an increase of
$444,000. Omitting the net realized and unrealized gains on rabbi trust
securities in the amount of $77,000 in the third quarter of 2005 and losses in
the amount of $12,000 in the third quarter of 2004, other income increased
$355,000 or 16.9 percent during the third quarter of 2005 compared to the same
period of 2004.

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

o    Service charges on deposit accounts increased $176,000 or 23.9 percent.
     Growth primarily occurred in fees associated with overdrawn accounts.
o    Net gains on loan sales increased $174,000 or 64.2 percent. The results
     reflect the Company's increased emphasis on business development calling
     efforts as the market transitions from a strong refinance market to a
     market where purchase transactions are a larger percentage of the available
     volume.

Total noninterest income was $7,043,000 for the nine months ended September 30,
2005 compared to $6,070,000 for the same period in 2004, an increase of
$973,000. Omitting the net realized and unrealized gains on rabbi trust
securities in the amount of $83,000 in the first nine months of 2005 and gains
in the amount of $25,000 in the first nine months of 2004, other income
increased $915,000 or 15.1 percent.

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

o    Service charges on deposit accounts increased $395,000 or 17.9 percent.
     Growth primarily occurred in fees associated with overdrawn accounts (NSF
     fees).
o    Trust fee income increased $124,000 or 12.0 percent primarily due to growth
     in trust assets.
o    Debit card interchange increased $112,000 or 31.0 percent, due to an
     increase in debit card use and an increase in the interchange fee
     structure.

                                       16
<PAGE>

o        Net gains on loans sales increased $240,000 or 30.7 percent.
         Refinancing activity was still brisk during the first quarter of 2005
         and during the second and third quarters, the Company increased its
         business development efforts to take advantage of a strong market for
         home purchases.

For the quarter ended September 30, 2005, total noninterest expense was
$4,716,000 compared to $4,122,000 for the same period in 2004. Omitting the
appreciation in the Directors' and Executives' Deferred Compensation Plan of
$91,000 in the third 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) noninterest expense increased $503,000 or
12.2 percent. The most significant cause of this increase occurred because
salaries and employee benefits increased $350,000 or 13.8 percent. The increase
occurred primarily due to an increase in the number of full-time equivalent
employees.

For the nine months ended September 30, 2005, total noninterest expense was
$13,508,000 compared to $12,571,000 for the same period in 2004. Omitting the
appreciation in the Directors' and Executives' Deferred Compensation Plan of
$126,000 in the first nine months of 2005 and appreciation of $64,000 during the
same period of 2004, noninterest expense increased $875,000 or 7.5 percent.

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

o    Salaries and employee benefit expense increased by $482,000 or 6.3 percent
     for the nine months ended September 30, 2005.
o    Occupancy expense increased by $96,000 or 5.2 percent for the nine months
     ended September 30, 2005.

Both of these areas increased due to general growth of the Company.

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 33.9 percent for the nine months ended
September 30, 2005 compared to 32.1 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 2005.

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

Assets and Liabilities
----------------------
Total assets of the Company at September 30, 2005 were $678,568,000 an increase
of 7.0 percent or $44,598,000 compared to $633,970,000 at December 31, 2004.
Loans (including loans held for sale) grew to $511,752,000 at September 30, 2005
compared to $477,085,000 at December 31, 2004, an increase of 7.3 percent. The
Company's Central Indiana operations (Hendricks and Hamilton counties and other
markets in the greater Indianapolis area) provided 48.6 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
$539,823,000 at September 30, 2005 compared to $483,534,000 at December 31,
2004, an increase of 11.6 percent. The increase in deposits resulted primarily
from an increase in non-interest bearing demand deposits of $21,116,000, an
increase in interest-bearing demand deposit accounts of $10,762,000 and an
increase in time deposits of $25,289,000. The increase in time deposits
primarily resulted from the bank obtaining brokered time deposits in the amount
of $25,080,000 for the first time during the third quarter of 2005. Borrowings
declined to $82,371,000 at September 30, 2005 compared to $97,378,000 at
December 31, 2004, a 15.4 percent decrease. The decline in borrowings was
primarily due to a decline in federal funds purchased of $16,875,000.

                                       17
<PAGE>

Capital
-------
Shareholders' equity increased $2,455,000 at September 30, 2005 compared to
December 31, 2004. This increase was a result of year-to-date net income of
$5,403,000, dividends paid of $2,340,000, other comprehensive income, consisting
solely of the change (decrease) in net unrecognized gains in the Company's
available-for-sale securities portfolio of $621,000, treasury stock purchased of
$66,000, options issued of $66,000 (exercise price) and ESOP shares earned of
$13,000.

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 September 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 September 30, 2005 that management believes have changed the
Company's or Bank's classification.











                                       18
<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 September 30, 2005
           ------------------------
           Total capital(1)(to risk-weighted
              assets)
               Consolidated                         $    56,158    11.22%   $   39,555     8.0%           N/A    N/A
               Bank                                      56,066    11.28        39,309     8.0    $    49,137    10.0%
           Tier I capital(1)(to risk-weighted
              assets)
               Consolidated                              50,635    10.12        19,777     4.0            N/A    N/A
               Bank                                      50,543    10.16        19,655     4.0         29,482     6.0
           Tier I capital(1)(to average
              assets)
               Consolidated                              50,635     7.56        26,091     4.0            N/A    N/A
               Bank                                      50,543     7.59        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 September 30, 2005, the Bank had
$5,686,000 of loans internally classified compared to $9,505,000 at December 31,
2004, a 40.2 percent reduction. Loans internally classified have also decreased
compared to September 30, 2004, when the Bank had $10,734,000 of loans
internally classified. The allowance for loan losses was $5,523,000, or 1.09
percent of portfolio loans (excluding loans held for sale) at September 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 $2,495,000, or 0.49 percent of total loans at September 30,
2005 compared to $3,703,000 or 0.78 percent of total loans at December 31, 2004.
September 30, 2005 nonperforming assets also decreased compared to September 30,
2004, when nonperforming assets were $4,464,000, or 0.98 percent of total loans.

During the first nine months of 2005, the Bank had net loan charge-offs totaling
$571,000 compared to $1,180,000 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 0.48 percent at September 30, 2005, down from 1.13
percent at September 30 2004.

                                       19
<PAGE>

Nonperforming loans and loan delinquency ratios improved at September 30, 2005
primarily due to the sale of properties securing loans made to a real estate
developer who filed bankruptcy in 2003 and to parties affiliated with the
developer, plus the sale of properties securing two other nonperforming loans.

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 Company to borrow from the Federal Home
Loan Bank of Indianapolis (FHLB) and by the ability to raise brokered CDs. FHLB
advances were $36,833,000 at September 30, 2005 compared to $38,029,000 at
December 31, 2004. At September 30, 2005, the Company had excess borrowing
capacity at the FHLB of $18,142,000 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
$45,262,000 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
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 nine months ended September
30, 2005, the Bank declared dividends to the holding company of $2,255,000. As
of October 1, 2005, the amount of dividends the Bank can pay to the parent
company without prior regulatory approval was $9,988,000, 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 nine
months ended September 30, 2005, $5,729,000 of cash was provided by operating
activities, compared to $6,726,000 during the same period in 2004. The decrease
in this area was a result of minor changes in several components. During the
first nine months of 2005, $41,289,000 was used for investing activities,
compared to $36,130,000 in the same period of 2004. The increase in cash used by
investing activities primarily occurred because fewer securities matured during
2005. In the first nine months of 2005, $38,942,000 of cash was provided by
financing activities, primarily from growth in noninterest-bearing demand and
savings deposits and certificates of deposit (brokered CDs), compared to
$23,933,000 provided by financing activities during the same period in 2004 with
growth occurring primarily in certificates of deposit. Overall, net cash and
cash equivalents increased $3,382,000 during the nine months ended September 30,
2005 compared to a decrease of $5,471,000 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

                                       20
<PAGE>

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.

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 September 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

                                       21
<PAGE>

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 September 30, 2005 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                     $  22,149           $(206)          (0.9) %
         +200                        22,242            (113)          (0.5)
         +100                        22,325             (30)          (0.1)
            0                        22,355               0              -
         -100                        22,313             (42)          (0.2)
         -200                        22,006            (349)          (1.6)


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 September 30, 2005 table above indicates that the Bank's projected net
interest income for the next twelve months would decline by 0.9 percent in the
event of a sudden and sustained 300 basis point increase in interest rates and
decrease by 1.6 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
September 30, 2005, are within the approved guidelines established by the Board
of Directors.

                                       22
<PAGE>

However, it should be noted that the rate shock forecasts are built upon the
yield curve as it existed on September 30, 2005. Accordingly the rate shocks are
built upon an extremely flat yield curve. The shape of the yield curve may
change over the next year which would cause results to be different than
forecasted as bank customers alter savings and borrowing decisions in response
to opportunities and challenges created by the shape of the new curve. While
there is considerable uncertainty as to how the yield curve will change over the
next twelve months, management believes that the repricing characteristics of
its current balance sheet provides the Company with a fairly high level of
protection from significant swings in net interest income over this time period.

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.

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 September 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 September 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 September 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,

                                       23
<PAGE>

               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.


Item 4.        Submission of Matters to a Vote of Security Holders.
-------        ----------------------------------------------------
               None.

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.

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.

                                       24
<PAGE>

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.

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.











                                       25
<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: November 8, 2005        By: /s/ Mark D. Bradford
           ----------------            -------------------------------
                                       Mark D. Bradford, President and
                                       Chief Executive Officer
                                       (Principal Executive Officer)

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















                                       26
<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.

                                       27
<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.























                                       28