Monarch Bank 2004 Annual Report

Monarch Bank2004 Annual Report

5-Year Net Income(Dollars in thousands)$757$541$361$128($173)‘00 ‘01 ‘02 ‘03 ‘04

Building Lasting RelationshipsThrough Exceptional ServiceMonarch Bank’s Mission StatementMonarch Bank’s mission statement is based on two simpleconcepts. The first is that long-term banking relationshipsare good for our clients and good for our bank. The second,that the key to long-term relationships is providingexceptional service. While simple in concept, deliveringexceptional service is a challenge in this era of poorservice in so many businesses and industries. Indeed,consumers have grown to expect only marginal serviceat best. We like to think that Monarch Bank is the exception.In fact, our clients tell us we are. They are surprised to becalled by name. They are amazed at our can-do attitude.And they are impressed by our product knowledge.As Monarch Bank passes another milestone in growth,we continue to be committed to delivering exceptionalservice to every client every day. We think that’s whatgot us to where we are today. And exceptionalservice takes us wherever we want to be tomorrow.

Letter From The PresidentDear Valued Shareholder:Monarch Bank continues to showstrong growth and improvedprofits and is well on its way tobuilding a strong franchise inSouth Hampton Roads, Virginia.The Bank now has two officeseach in Chesapeake, Norfolk, andVirginia Beach, which are thelargest and fastest-growing citiesin the region. We are quicklyaccomplishing our strategic goalsof building the best located andaccessible franchise in the region.With the success of our NorfolkRegion, with over $55 million inloans and deposits in less than ayear, we have embraced theregional market manager conceptwhich gives the responsibility toour market presidents to lead andcultivate each of our three existingmarkets. As a result of our successwith this concept, we are nowimplementing this in the othertwo regions and have alreadynamed a new market presidentfor Chesapeake. We continue tohire experienced, local, provenbankers and are very proud ofwhat we believe to be the bestteam of bankers in our markets.In addition to building ourfranchise through the opening ofnew offices, both free-standingand store-fronts, we have createda huge network of ATMs fromthe Virginia Beach Oceanfrontinto the cities of Hampton Roadsand onward to the Outer Banksof North Carolina, from Corollato Hatteras, and we now have41 ATMs for our customers’convenience and use. We intendto continue to aggressively growthis important distribution systemfor our customers’ use.Monarch again reported stronggrowth in loans, deposits, earningsand capital for the year endingDecember 31, 2004. Our netincome was $757,054 compared to$540,762 the previous year, a 40%increase and another record year.Pre-tax net income increased by60% when compared to theprevious year.The Bank picked up strongmomentum with each quarter,getting progressively better,culminated by the best quarter onrecord in our short history. For thefourth quarter of 2004, net incomerose $123,000 compared to thesame period in 2003. Our totalassets were $227 million as of thesame date, up almost $43 millionor 23% from $184 million one yearprior. Total loans increased to $179million, up almost $45 million or33% while deposits totaled $171million, up over $28 million or20% in 2003 levels. Asset qualityremains extremely strong as ourcharge-offs have been negligibleand Monarch had no nonperformingloans or assets atyear-end.As we grow and mature, we areputting increased emphasis onincreasing our income from noninterestsources. In 2004, noninterestincome more thandoubled from the previous yearand increased by $1,220,000. Thistremendous growth was fueledby increased production andefficiency from Monarch HomeFunding, the bank’s secondarymortgage origination subsidiary.We had nice increases in depositservice charges related to a newdeposit overdraft (privilege)service. In addition, we startedMonarch Capital, which is acommercial mortgage brokerageoperation that can furnish ourclients with very large permanentloans with extended terms and ona non-recourse basis. MonarchInvestments, our new investmentsubsidiary, continues to progressand show monthly improvement.Our investments in BankersInsurance and Bankers Title,formed with other Virginiacommunity banks, have alreadycontributed to our 2004 earningsand show growth potential in 2005.As we look forward into 2005 andbeyond, our prospects are verypromising. We have positionedthe Bank to take full advantage ofthe current rising interest rateenvironment and have introduceda new asset/liability managementsystem which will let us maximizeour performance under changingeconomic conditions. We arestructured for continued stronggrowth, increased profits and forbuilding a strong franchise.Monarch Bank is personifyingour mission statement of buildinglasting relationships throughexceptional service. If you arenot currently banking withMonarch, I encourage you togive us that opportunity. If youare, I want to thank you for lettingus serve you and ask that yourecommend Monarch to yourfriends, neighbors, and businessassociates.Very truly yours,William F. Rountree, Jr.President & CEO

Selected Consolidated Financial DataAt or for the Years Ended December 31,2004 2003 2002 2001 2000(Dollars in thousands, except per share data)SUMMARY OF OPERATIONSInterest income $ 9,392 $ 7,576 $ 5,901 $ 4,899 $ 3,249Interest expense 3,232 2,788 2,351 2,205 1,378Net interest income 6,160 4,788 3,550 2,694 1,871Provision for loan losses 305 205 377 377 313Net interest income after provision for loan losses 5,855 4,583 3,173 2,317 1,558Non-interest income 2,396 1,176 715 513 152Non-interest expense 7,113 5,050 3,634 2,723 1,889Income (loss) before income taxes and minority interests 1,138 709 254 107 (179)Minority interests in subsidiary's net (income) losses (7) (9) (16) (11) 6Income taxes (benefit) 374 159 (123) (32) -Net income (loss) $ 757 $ 541 $ 361 $ 128 $ (173)PER SHARE AND SHARES OUTSTANDING (1) (2)Basic net income (loss) $0.32 $0.27 $0.18 $0.07 $(0.09)Diluted net income (loss) $0.30 $0.26 $0.18 $0.07 $(0.09)Cash dividends - - - - -Book value at end of period $8.80 $8.43 $6.47 $6.15 $5.90Basic weighted average shares outstanding 2,389,730 1,995,367 1,978,705 1,900,159 1,822,486Diluted weighted average shares outstanding 2,492,362 2,077,128 2,034,613 1,947,686 1,822,486Shares outstanding at period end 2,400,139 1,983,476 1,991,922 1,959,687 1,873,927BALANCE SHEET DATATotal assets $226,858 $184,036 $145,837 $111,290 $56,749Total loans, net 177,141 132,630 97,567 75,831 42,902Total deposits 171,376 143,104 120,698 82,200 40,578Borrowings 33,812 20,616 12,098 16,753 5,032SELECTED PERFORMANCE RATIOSReturn on average assets 0.39% 0.34% 0.32% 0.17% -0.42%Return on average stockholders' equity 3.68% 3.32% 2.89% 1.11% -1.71%Net interest margin (3) 3.35% 3.24% 3.41% 3.88% 4.75%Non-interest income as a percentage of total revenue (4) 20.40% 19.72% 16.77% 15.99% 7.24%Efficiency ratio (5) 79.83% 82.44% 86.29% 86.60% 93.71%ASSET QUALITY RATIOSNet charge-offs to average loans outstanding 0.00% 0.00% 0.00% 0.00% 0.00%Allowance for loan losses to period-end loans 1.01% 1.10% 1.31% 1.20% 1.25%Allowance for loan losses to nonperforming loans (6) n/m n/m n/m n/m n/mNonperforming loans to period-end loans 0.00% 0.00% 0.01% 0.00% 0.00%Nonperforming assets to total assets (7) 0.00% 0.00% 0.01% 0.00% 0.00%CAPITALEquity to assets ratio 9.31% 10.93% 8.84% 10.82% 19.48%Total risk-based capital ratio 10.76% 12.25% 10.46% 12.74% 21.58%Stockholders' equity $21,116 $20,112 $12,887 $12,044 $11,064(1) Adjusted to give effect for a 20% stock dividend on June 16, 2003 and a 20% stock dividend on May 17, 2004.(2) Computed based on the weighted average number of shares outstanding during each period.(3) Net interest margin is net interest income divided by average interest earning assets.(4) Total revenue consists of net interest income and non-interest income.(5) Efficiency ratio is non-interest expense divided by the sum of net interest income and non-interest income.(6) "n/m" means not meaningful.(7) Nonperforming assets consist of non-accrual loans, restructured loans, and foreclosed assets, when applicable.

Building A Better BankBy Emphasizing Our Core BusinessMonarch Bank’s rapid growth hasbeen fueled by overwhelming acceptancefrom both individual and businessclients in Hampton Roads. Much of ourgrowth and success has emanatedfrom our four core areas of business.Commercial BankingCommercial accounts represent a significantpercentage of Monarch Bank’sclient base, deposits and assets. Ourbusiness bankers have been quite successfulin presenting our style of commercialbanking to selected businessowners and executives and enticingthem to experience Monarch commercialbanking. Today we serve a widevariety of commercial accounts includingprofessionals, retail stores, distributionand manufacturing facilities andservice businesses. We expect commercialbanking to continue to leadour growth in 2005 and beyond.Monarch opened a branch in Norfolkthis year.Real EstateHampton Roads is one of the hottestreal estate markets in America.Monarch Bank has ridden the regionalreal estate wave by financing carefullyselected homes and projects. Ourareas of specialization are single-familyhomes, multi-family homes of 2-4 familiesand development. This core businessis especially desirable to MonarchGroup ofChesapeakebusiness leaderssaw a need for acommunity bank.Raised $8 millionin one day toinitially capitalizebank.Built Greenbrierheadquartersand opened forbusiness in April.Became profitablein 15th month.Opened GreatBridge office #2.Started MonarchHome Funding.Openedtemporary officein Virginia Beach.Opened firstVirginia Beachoffice #3.Openedoceanfront officein Virginia Beach#4.‘90s‘98 ‘99 ‘00 ‘00 ‘01 ‘01 ‘02 ‘03

5-Year Total Deposits(Dollars in thousands)$171because it can provide numerous lendingopportunities from constructionlending to permanent mortgages.Private BankingFrom the beginning, Monarch Bankrecognized the need for a specializedbanking service for busy executivesand professionals. Since its announcementand start-up, our private bankinggroup has met with great success andnow serves many of the area’s topexecutives, doctors, attorneys andentrepreneurs. Special checking products,concierge services, investmentsand travel assistance are just a few ofthe many services of the private bankinggroup.Retail BankingRetail banking is the public face ofMonarch and represents the largestnumber of clients. Individuals and familiesfind our value-oriented servicemodel a good fit for their financialservices needs whether they come tous for a checking account or a multipleaccount relationship. Monarch servesthousands of retail customers eachweek in its five offices and thousandsmore through its extensive ATM networkthroughout Southeastern Virginiaand Northeastern North Carolina.Regional Presidents, Local ServiceAs part of our growth strategy,Monarch Bank has named a regionalpresident for Chesapeake, Norfolkand Virginia Beach. Each of the threeregional presidents operate somewhatautonomously from their counterparts,carry lending authority and have overallresponsibility for growth within eachof their regions. Each of the regionalpresidents is actively involved in thecommunities within their region. This“up close and personal” approachto local banking continues to paydividends to Monarch in the form ofcredibility, familiarity and new business.$41$82$121$143‘00 ‘01 ‘02 ‘03 ‘04$435-Year Total Loans, Net(Dollars in thousands)$76$98$133$177‘00 ‘01 ‘02 ‘03 ‘04Formed MonarchInvestments.First stock split.Raised$7 million inadditional capital.Went public onNASDAQ, “MNRK”.OpenedNorfolk/Ghentoffice #5.Second stocksplit.Formed MonarchCapital, LLC.Scheduledto open secondNorfolk location#6.‘03 ‘03 ‘03 ‘03 ‘04 ‘04 ‘04 ‘05

Community Banking And A Lot More5-Year Shareholders’ Equity(Dollars in thousands)$11$12$13$20$21‘00 ‘01 ‘02 ‘03 ‘04Monarch takes great pride in itsrole as a community bank. But wedon’t think that being a communitybank excuses us from offering ourclients the opportunity to accessmost of their financial servicesneeds in one place. So, we haveexpanded our company beyondtraditional banking boundaries tooffer a number of additional services.Mortgage LoansMonarch Home Funding, LLC isa full-service mortgage lendingcompany owned by Monarch Bank.It underwrites mortgage loans ofall types for both individuals andbusinesses, giving our bankingclients the opportunity to obtaintheir home financing where theybank. Monarch Home Fundingoffers conventional financing,ARMs, interest only loans andother mortgage products.InvestmentsThrough our affiliate, MonarchInvestments, we now can offer ourclients a number of investmentoptions. Many Monarch bank clientshave welcomed the opportunity topurchase equities and other investmentinstruments in the familiar andcomfortable atmosphere of theirbank. An investment consultant ison staff to assist clients in selectinginvestment products that matchtheir current situation and futurefinancial goals.Insurance Products and ServicesMonarch Bank is one of only twocommunity banks selected to affiliatewith Bankers Insurance, LLC, one ofthe largest insurance agencies in

Virginia. With this affiliation,Monarch clients can take advantageof extensive insurance expertisewhile enjoying excellent valuesin their coverage.We’re Just BeginningOur clients welcome the one-stopfinancial services direction ofMonarch Bank. For most, our currentmenu of products and services willbe all they will ever need. But thatdoesn’t stop us from pursuing aneven more comprehensive selectionof financial services. As ourclients discover other needs, wewill be there with them. We don’tjust want to be a great communitybank. We want to be all the bankthey’ll ever need.Monarch HomeFunding, LLC, ownedby Monarch Bankunderwrites mortgageloans of all types.Bankers Insurance: (Need logo)

MONARCH BANKBOARD OF DIRECTORSCassell D. Basnight, ChairmanSenior Partner, AttorneyBasnight, Kinser, Telfeyan &Leftwich, P.C.Lawton H. BakerCPA & PresidentBaker & McNiffCertified Public Accountants &Business Consultants, P.C.Jeffrey F. BensonPartnerBenson & AssociatesVice PresidentOverton Enterprises, Inc.Taylor B. GrissomVice President & Co-FounderVisuTel, Inc.Robert M. OmanPresidentOman Funeral Homes, Inc.Elizabeth T. PattersonPresidentWaypoint Advisors, LLCWilliam F. Rountree, Jr.President & CEOMonarch BankBrad E. SchwartzExecutive Vice President &Chief Financial OfficerMonarch BankLawrence L. SuttonPresidentHoffman Beverage Co.MONARCH BANKCHESAPEAKE CITY BOARDHerbert L. AnsellMark R. ChristianBrian M. ClementsDennis M. EllmerKevin L. HubbardDennis R. JonesTerry L. NealSidney M. OmanGail V. Plauka, D.M.D.Jeffrey J. WermersKirk J. WoodruffMONARCH BANKNORFOLK CITY BOARDEdward J. AmorossoF. Nash BilisolyErik S. CooperJoe P. Covington, Jr.Lorna C. DonatoneWilliam H. Fuller, Jr.Marc H. Glickman, M.D.David F. HostJerry S. MeltsnerWilliam S. Miller, IIIHarrison J. PerrineD. Scott PritchettMarc V. SauterDwight C. SchaubachThomas M. SimpsonJ. Randolph StokesLauren V. WolcottMONARCH BANKVIRGINIA BEACH CITYBOARDRandal K. BregmanEric N. BucklewBrian Scott BurgessDennis R. Deans, CPAChristopher J. EttelRobert J. Eveleigh, CPAMichael A. InmanJames P. KaridesAubrey E. Loving, Jr.Jeffrey L. McWatersDavid A. Miller, Jr.Harry R. Purkey, Jr.Adam W. RittVirginia SancilioWayne C. SawyerWilliam H. WilliardMONARCH BANKSENIOR MANAGEMENTWilliam F. Rountree, Jr.President & CEOBrad E. SchwartzExecutive Vice President &Chief Financial OfficerBarry A. MathiasPresident, Chesapeake RegionJames R. FerberExecutive Vice President &Manager, Real Estate GroupE. Neal CrawfordPresident, Norfolk RegionBarbara N. LaneSenior Vice PresidentOperations,IT, FacilitiesAndrew N. LockSenior Vice President &Chief Credit OfficerMary J. AndersonVice President,Human ResourcesMONARCH CAPITAL, LLCTimothy C. DeWispelaereExecutive DirectorMONARCHINVESTMENTS, LLCRichard L. McMillanInvestment ConsultantMONARCHHOME FUNDING, LLCRichard L. McGheePresident

STOCK LISTINGCurrent market quotations for the common stockof Monarch Bank are available on the NASDAQSmallCap Market under the symbol MNRK.STOCK TRANSFER AGENTRegistrar and Transfer CompanyAttn: Transfer Department10 Commerce DriveCranford, New Jersey 07016908-272-8511INVESTOR RELATIONS ANDFINANCIAL STATEMENTSMonarch Bank files an annual report on Form10-KSB and quarterly reports on Form 10-QSBwith the Federal Reserve Board of Governors.A copy of the reports may be obtained at nocost by contacting:Allie CheathamShareholder Relations750 Volvo ParkwayChesapeake, VA 23320757-222-2110Email: acheatham@monarchbank.comA Rare Breed.

A Rare Breed.MONARCH BANK750 Volvo ParkwayChesapeake, VA 23320(757) 222-2100601 Battlefield Boulevard SouthChesapeake, VA 23322(757) 482-2727100 Lynnhaven ParkwayVirginia Beach, VA 23452(757) 463-41003701 Pacific Avenue, Suite 100Virginia Beach, VA 23451(757) 491-2000318 West 21st StreetNorfolk, VA 23517(757) 623-0055240 East Main StreetNorfolk, VA 23510(757) 228-7576MONARCH HOME FUNDING, LLC1403 Greenbrier Parkway, Suite 150Chesapeake, VA 23320(757) 424-6688MONARCH INVESTMENTS, LLC750 Volvo ParkwayChesapeake, VA 23320(757) 222-2145MONARCH CAPITAL, LLC318 West 21st StreetNorfolk, VA 23517(757) 623-0055www.monarchbank.comMember FDIC