<PAGE>


                                                   Harbor Bankshares Corporation


                                   FORM 10-KSB
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                  ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                        Commission File Number : 0-20990

                          HARBOR BANKSHARES CORPORATION
             (Exact name of registrant as specified in its charter)


                  Maryland                               52-1786341
         (State or other jurisdiction of       (IRS Employer Identification No.)
         incorporation or organization)

           25 West Fayette Street                           21201
            Baltimore, Maryland                          (Zip Code)
  (Address of principal executive officer)

       Registrant's telephone number, including area code: (410) 528-1800

        Securities registered pursuant to Section 12(b) of the Act: None.

           Securities registered pursuant to Section 12(g) of the Act:

                     Common Stock, par value $0.01 per share
                                (Title of Class)

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-KSB. [X]

State issuer's revenues for its most recent fiscal year: $13,867,850

As of March 5, 2003, the registrant had [736,313] shares of Common Stock issued
and outstanding, including 33,795 non-voting shares. The aggregate market value
of shares held by nonaffiliates on such date was $7,603,578 based on the average
of the bid and asked price of $18.00 per share of the Registrant's Common Stock
on that date. For purposes of this calculation, it is assumed that the 422,421
shares held by directors and executive officers of the Registrant, are shares
held by affiliates.

Documents Incorporated by Reference: Portions of the Registrant's Annual Report
to Stockholders for the year ended December 31, 2002 and Registrant's 2003 Proxy
Statement are incorporated by reference into Parts I and II.

Transitional small business disclosure format (check one):  Yes         No  X


<PAGE>



                          HARBOR BANKSHARES CORPORATION

                  ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                       SECURITIES AND EXCHANGE COMMISSION
                                   FORM 10-KSB

<TABLE>
<S>                                                                                           <C>
Table of Contents .............................................................................i-ii
PART I ........................................................................................   1
Item 1.  Business .............................................................................   1
The Harbor Bank of Maryland ....................................................................  1
Competition ....................................................................................  2
Supervision and Regulation .....................................................................  2
Governmental Monetary Policies and Economic Controls ...........................................  3
Employees ......................................................................................  3
Executive Officers .............................................................................  3
Statistical Information ........................................................................  4
Item 2.  Properties ............................................................................  5
Item 3.  Legal Proceedings .....................................................................  5
Item 4.  Submission of Matters to a Vote of Security Holders ...................................  5
PART II ........................................................................................  5
Item 5.  Market for Registrant's Common Equity and Related Stockholder Matters .................  5
Item 6.  Management's Discussion and Analysis of Financial Condition and Results of Operations..  6
Item 7.  Financial Statements ..................................................................  6
Item 8.  Changes In and Disagreements with Accountants on Accounting and Financial Disclosure ..  6
PART III .......................................................................................  6
Item 9.  Directors and Executive Officers of the Registrant ....................................  6
Item 10.  Executive Compensation ...............................................................  6
Item 11.  Security ownership of certain beneficial owners and management .......................  7
Item 12.  Certain relationships and related transactions .......................................  7
PART IV ........................................................................................  7
Item 13.  Exhibits and Reports on Form 8-K .....................................................7-8
CONSOLIDATED AVERAGE STATEMENTS OF CONDITION AND RATIOS ........................................  9
CAPITAL SCHEDULE ............................................................................... 10
CONSOLIDATED STATEMENTS OF INCOME .............................................................. 11
AVERAGE RATES EARNED OR PAID FOR THE YEARS 2002, 2001 AND 2000 ................................. 12
INTEREST VARIANCE ANALYSIS ..................................................................... 13
INVESTMENT SECURITIES .......................................................................... 14
Maturity Distribution .......................................................................... 14
Carrying amount and the market value at 2002, 2001 and 2000 .................................... 14
FIVE-YEAR LOAN DISTRIBUTION .................................................................... 15
Five-Year Loan Distribution at December 31 (dollars in thousands) .............................. 15
</TABLE>


                                       i

<PAGE>

<TABLE>

<S>                                                                                           <C>
Five-Year Loan Distribution at December 31 (expressed as percentages) .......................... 15
SUMMARY OF LOAN LOSS EXPERIENCE ................................................................ 16
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES .................................................... 17
RISK ELEMENTS OF LOAN PORTFOLIO ................................................................ 18
Potential Problem Loans ........................................................................ 18
MATURITY OF LOANS AS OF DECEMBER 31, 1998 ...................................................... 19
LOANS CLASSIFIED BY SENSITIVITY TO CHANGES IN INTEREST RATES ................................... 19
LONG AND SHORT TERM BORROWINGS ................................................................. 20

ARTICLES OF INCORPORATION/BYLAWS ............................................................... 21

EMPLOYMENT AGREEMENTS .......................................................................... 21

STOCK OPTION PLAN .............................................................................. 21

LIST OF SUBSIDIARIES ........................................................................... 21

CONSENT OF INDEPENDENT AUDITORS ................................................................ 22

CERTIFICATIONS ...............................................................................24-25

</TABLE>
                                     - ii -


<PAGE>


                                                   Harbor Bankshares Corporation

Documents Incorporated by Reference

         Portions of the Registrant's Annual Report to Stockholders for the year
ended December 31,2002 and the Registrant's 2003 Proxy Statement are
incorporated by reference into Parts I and II.

PART I

Harbor Bankshares Corporation

Forward Looking Statements

         Some of the statements in this Form 10-KSB discuss future expectations.
There may also be statements regarding projections of results of operations or
financial condition or state other "forward-looking" information. Those
statements are subject to known and unknown risks, uncertainties and other
factors that could cause the actual results to differ materially from those
contemplated by the statements. We based the forward-looking information on
various factors and numerous assumptions, which may or may not turn out to be
correct.

         Important factors that may cause actual results to differ from those
contemplated by forward-looking statements include, for example:

o   The success or failure of our efforts to implement our business strategy;

o   The effect of changing economic conditions, both nationally and in our local
    community;

o   Changes in government regulations, tax and interest rates applicable to our
    business and similar matters;

o   Our ability to attract and retain quality employees; and

o   Other risks which may be described in our future filings with the SEC.

         We do promise to update forward-looking information to reflect actual
results or changes in assumptions or other factors that could affect those
statements other than material changes to such information.

Item 1.  Business

         Harbor Bankshares Corporation (the Corporation) is a bank holding
company with one bank subsidiary and two other Community Development financial
subsidiaries, one for profit, The Harbor Bank of Baltimore LLC and a non-profit,
The Harbor Bank CDC. Both were established during 2002. The Corporation has no
investment in either subsidiary as of December 31, 2002. The Corporation was
organized under the laws of the State of Maryland in 1992. On November 2, 1992,
Harbor Bankshares Corporation acquired all outstanding stock of The Harbor Bank
of Maryland (the Bank), headquartered in Baltimore, Maryland.

The Harbor Bank of Maryland

         The Harbor Bank of Maryland is a state chartered institution in the
State of Maryland. The deposits of the Bank are insured by the Federal Deposit
Insurance Corporation.

                                      - 1 -

<PAGE>

                                                   Harbor Bankshares Corporation

         The Harbor Bank of Maryland is a commercial bank headquartered in
Baltimore, Maryland. The Bank conducts a general commercial and retail business.
The Bank was opened on September 13, 1982 and was incorporated under the laws of
the State of Maryland. During the second and third quarters of 1994, the
Corporation, through its subsidiary, The Harbor Bank of Maryland acquired three
(3) branch locations from the Resolution Trust Corporation; two (2) located in
Baltimore City, and one (1) located in Riverdale, Prince George's County. A new
branch location was opened during December 1995 in Baltimore County, expanding
the market area of the Bank. During May 1997, The Harbor Bank of Maryland opened
a de novo branch location in the East side of Baltimore City, and on January 19,
1999, a de novo branch was opened in the West side of the City, this branch
location was closed during March 2002. During September 2000, a branch located
in Baltimore City was also closed. The closing of both facilities have helped
the profitability of the Bank.

         In April, 2002, the Bank purchased a branch location from another
financial institution in Baltimore County in order to increase its market share.
The purchase included $18.8 million in deposits. The Bank had a location near
the purchased facility and both were merged into the acquired office in order to
reduce the overhead cost of running both branches.

         Harbor Financial Services, a company dealing with the sale of mutual
funds, stocks, insurance, etc., was established as a subsidiary of the Bank
during May 1997, in order to compete with that expanding market. This subsidiary
had a loss of $4 thousand for the year ended December 31, 2002.

         The Bank conducts general banking business in six (6) locations and
serves primarily the Baltimore Metropolitan area. It offers checking, savings
and time deposits, commercial, real estate, personal, home improvement,
automobile and other installment loans, credit cards and term loans. The Bank is
also a member of a local and national ATM network. The retail nature of the Bank
allows for full diversification of deposits and borrowers so it is not dependent
upon a single or a few customers.

Competition

         The Corporation's subsidiary, The Harbor Bank of Maryland, competes
with virtually all banks and savings institutions, which offer services in its
market area. The Bank directly competes with branches of most of the State's
largest banks, each of which has greater financial and other resources to
conduct large advertising campaigns and to allocate their investment assets to
regions of higher yield and demand. To attract business in this competitive
environment, the Bank relies heavily on local promotional activities and
personal contact by its officers and directors and by its ability to provide
personalized services.

Supervision and Regulation

         Harbor Bankshares Corporation is a registered bank holding company
subject to regulation and examination by the board of governors of the Federal
Reserve System under the Bank Holding Company Act of 1956 (the "Act"). The
Corporation is required to file with the board of governors quarterly and annual
reports and any additional information that may be required according to the
Act. The Act also requires every bank holding company to obtain the prior
approval of the Federal Reserve Board before acquiring direct or indirect
ownership or control of more than 5% of the voting shares of any bank that is
not already majority owned. The Act also prohibits a bank holding company, with
certain exceptions, from engaging in or acquiring direct or indirect control of
more than 5% of the voting shares of any company engaged in non-banking
activities. One of the principal exceptions to these provisions is for engaging
or acquiring shares of a company engaged in activities found by the Federal
Reserve Board to be so closely related to banking or managing banks to be a
proper incident thereto.

                                     - 2 -

<PAGE>

                                                   Harbor Bankshares Corporation

         The Harbor Bank of Maryland is a state chartered institution insured by
the Federal Deposit Insurance Corporation ("FDIC") and subject to federal and
state laws applicable to commercial banks. The Bank is examined regularly by
FDIC and the State of Maryland Banking Commissioner's office.

         In accordance with Federal Reserve regulation, the Bank is limited as
to the amount it may loan affiliates, including the Corporation, unless such
loans are collateralize by specific obligations. Additionally, banking law
limits the amount of dividends that a bank can pay without prior approval from
bank regulators.

Governmental Monetary Policies and Economic Controls

         The earnings and growth of the banking industry and ultimately of The
Harbor Bank of Maryland, Harbor Bankshares Corporation's sole subsidiary, are
affected by the credit policies of monetary authorities including the Federal
Reserve System. An important function of the Federal Reserve System is to
regulate the national supply of bank credit in order to control recessionary and
inflationary pressures. Among the instruments of monetary policy used by the
Federal Reserve to implement these objectives are open market operations in U.S.
Government securities, changes in the discount rate of member bank borrowings,
and changes in reserve requirements against member bank deposits. These means
are used in varying combinations to influence overall growth of bank loans and
investments and deposits, and may also affect interest rates charged on loans or
paid for deposits. The monetary policies of the Federal Reserve authorities have
had a significant effect on the operating results of commercial banks in the
past and are expected to continue to have such an effect in the future.

         In view of changing conditions in the national economy and in the money
markets, as well as the effect of actions by monetary and fiscal authorities,
including the Federal Reserve System, no prediction can be made as to possible
future changes in interest rates, deposit levels, and loan demand, or their
effect on the business and earnings of the Corporation and its subsidiary.

Employees

         At December 31, 2002, Harbor Bankshares Corporation and its
subsidiaries employed 80 individuals, of which 28 were officers and 52 were
full-time employees.

Executive Officers

         Information concerning executive officers of the Corporation is listed
below:

<TABLE>
<S>                                       <S>         <C>
         Executive Officers               Age         Position


         Joseph Haskins, Jr.              55          Chairman, President and Chief Executive Officer of
                                                      the Bank and Corporation

         John Paterakis                   74          Chairman of the Executive Committee of the
                                                      Corporation and the Bank

         Teodoro J. Hernandez             57          Treasurer of the Corporation and Senior Vice
                                                      President and Cashier of the Bank

         George F. Vaeth, Jr.             69          Secretary of the Corporation and the Bank


</TABLE>

                                     - 3 -

<PAGE>

                                                   Harbor Bankshares Corporation

Statistical Information

         The statistical information required in this section is incorporated
herein by reference from the Registrant's Annual Report to Shareholders for the
year ended December 31, 2002 and from pages 10 through 20 of this form 10-KSB.

Asset Quality

         One of the Corporation's main objectives has been and continues to be
the achievement of a high level of asset quality. We maintain a large portion of
loans secured by residential one-to four- family properties and commercial
properties. As of December 31, 2002, those loans totaled $78 million or 64.86
percent of total outstanding loans. We set sound credit standards for new loan
originations, and follow careful loan administration procedures. We strengthened
our focus on credit risk by having independent reviews of all major credit with
detailed reports to management.

         Delinquent Loans and Foreclosed Assets: The Corporation policies
require that management continuously monitor the status of the loan portfolio
and report to the Board of Directors on a monthly basis. These reports include
information on delinquent loans and foreclosed real estate, and actions and
plans to cure the delinquent status of the loans and to dispose of the
foreclosed properties.

         The following table presents information regarding total non-accrual
loans, accruing loans delinquent 90 days or more, and foreclosed real estate as
of the dates indicated. At December 31, 2002, 2001 and 2000 we had $1.2 million,
$769 thousand and $308 thousand, of non-performing loans. If all non-accrual
loans had been performing in accordance with their original terms and had been
outstanding from the earlier of the beginning of the period origination, we
would have recorded additional interest income on these loans of approximately
$57 thousand from the year ended December 31, 2002.
<TABLE>
<CAPTION>

                                                      2002      2001      2000
                                                      ----      ----      ----

<S>                                                  <C>       <C>       <C>
Accruing Loans 90 Days Or More                       $  746    $  135    $    6
                                                     ======    ======    ======

Total Non-Performing Loans                           $  409    $  620    $  265
Foreclosed Real Estate                                   70        14        37
                                                     ------    ------    ------
Total Non-Performing Loans To Total Loans            $1,225    $  769    $  308
                                                     ======    ======    ======

Non-Performing Loans To Total Loans                    1.01%      .72%      .24%
                                                     ======    ======    ======

Non-Performing Assets To Total Assets                   .58%      .41%      .17%
                                                     ======    ======    ======
</TABLE>

We generally stop accruing income when interest or principal payments are
between 90 and 120 days in arrears. We may stop accruing income on such loans
earlier than 90 days when we consider the timely collectibility of interest or
principal payment to be doubtful.

When we designate non-accrual loans, we reverse all outstanding interest that we
had previously credited. If we receive a payment on a non-accrual loan, we may
recognize a portion of that payment as interest income if we determine that the
ultimate collectibility of principal is no longer in doubt. However, such loans
may remain in non-accrual status. Impaired loans are individually assessed to
determine whether the carrying value exceeds the fair value of the collateral.

                                      - 4 -

<PAGE>

                                                   Harbor Bankshares Corporation

Foreclosed real estate consists of property we have acquired through foreclosed
or deed in lieu of foreclosure. Foreclosed real estate properties are initially
recorded at the lower of the recorded investment in the loan or fair value. At
December 31, 2002, 2001 and 2000, respectively, we had $70 thousand, $14
thousand and $37 thousand in foreclosed real estate.

Allowance for Loan Losses - see Management's Discussion and Analysis of
Financial Condition and Results of Operations, Provision for Loan Losses and
Asset Quality on pages 3 and 4.

Item 2.  Properties

         The Corporation's Headquarters is located at 25 West Fayette Street,
Baltimore, Maryland 21201. The lease agreement for this location is
approximately 12,777 square feet with a term of ten (10) years, and a renewable
option of five (5) years.

         The Bank also maintains another five(5) branch offices, four (4) are
leased; two (2) located in Baltimore City, one (1) located in Prince George's
County, Maryland and one (1) located in Baltimore County, Maryland. The Bank
owns a branch facility in Baltimore City. This office was purchased during
December 1998.

Item 3.  Legal Proceedings

         The Corporation and its subsidiaries, at times, and in the ordinary
course of business, are subject to legal actions. Management does not believe
the outcome of such matters will have a material adverse effect on the financial
condition or results of operations of the Corporation.

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

         None

PART II

Item 5.  Market for Registrant's Common Equity and Related Stockholder Matters

         Information listed under, "Stockholder Information" in the Annual
Report to Stockholders for the year ended December 31, 2002 is incorporated
herein by reference with respect to prices for the Registrant's common stock and
the dividends paid thereon. The number of Stockholders of Record as of
December 31, 2002 was 702.

         The following table presents disclosure regarding equity compensation
plans in existence at Decmber 31, 2002, consisting only of the stock option plan
arrangements described further under the caption "Stock Options" in Note 14 to
the consolidated financial statements.

                                     - 5 -

<PAGE>

                                                   Harbor Bankshares Corporation

                      Equity Compensation Plan Information
<TABLE>
<S>                             <C>                          <C>                          <C>
-----------------------------------------------------------------------------------------------------------------------
Plan Category                   Number of securities to      Weighted average             Number of securities
                                be issued upon exercise      exercise price of            remaining available for
                                of outstanding options,      outstanding options,         future issuance under
                                warrants and rights          warrants and rights          equity compensation plans
                                       (a)                          (b)                   excluding securities
                                                                                          reflected in column (a)
                                                                                                   (c)
-----------------------------------------------------------------------------------------------------------------------
Equity compensation
plans approved by
security holders
-----------------------------------------------------------------------------------------------------------------------
Equity compensation                       152,643                      $15.45                       74,243
plans not approved by
security holders
-----------------------------------------------------------------------------------------------------------------------
            Total                         152,643                      $15.45                       74,243
-----------------------------------------------------------------------------------------------------------------------
</TABLE>


Item 6.  Management's Discussion and Analysis of Financial Condition and
         Results of Operations

         Information required by this item is incorporated by reference from
information appearing under the caption, "Corporate Financial Review" appearing
on pages 1 through 11 of the Management Discussion and Analysis section of the
Registrant's Annual Report to Shareholders for the year ended December 31, 2002,
and from pages 8 through 19 of this Form 10-KSB.

Item 7.  Financial Statements

         Information required by Item 7 is incorporated by reference from
information appearing on pages 1 through 29 in the Audited Consolidated
Financial Statements section of the Registrant's Annual Report to Shareholders
for the year ended December 31, 2002.

Item 8.  Changes In and Disagreements with Accountants on Accounting and
         Financial Disclosure

         None

PART III

Item 9.  Directors and Executive Officers of the Registrant

         Information required by this item is incorporated by reference from
information appearing under the caption, "Election of Directors" on pages 2 to 6
of the Registrant's 2003 Proxy statement and page 4 of this report under the
caption of "Executive Officers" of the Registrant.

Item 10.  Executive Compensation

         Information required by this item is incorporated by reference from
information appearing under the caption "Executive Compensation" on pages 7 and
8 of the Registrant's 2003 Proxy Statement.

                                     - 6 -

<PAGE>

                                                   Harbor Bankshares Corporation

Item 11. Security ownership of certain beneficial owners and management

         Information required by Item 11 is incorporated by reference from
information appearing on pages 2 to 6 of the Registrant's 2003 Proxy Statement,
under the caption of "Election of Directors" of the Registrant.

Item 12. Certain relationships and related transactions

         The information required by Item 12 is incorporated by reference from
Note 6 on page 16 in the Audited Consolidated Financial Statements section of
the Registrant's Annual Report to Shareholders.

PART IV

Item 13. Exhibits and Reports on Form 8-K

(a)      Exhibits

         (1) The following consolidated financial statements of the Registrant
and its subsidiaries, included in the Annual Report to Stockholders for the year
ended December 31, 2002, are incorporated herein by reference in Item 8:

         Consolidated Balance Sheets
                  As of December 31, 2002 and 2001

         Consolidated Statements of Income
                  Years ended December 31, 2002 and 2001

         Consolidated Statements of Changes in Stockholders' Equity
                  Years ended December 31, 2002 and 1

         Consolidated Statements of Cash Flows
                  Years ended December 31, 2002 and 2001

         Notes to Consolidated Financial Statements

         Report of Stegman & Company, Independent Auditors.

         Harbor Bankshares Corporation 2003 Proxy Statement

         All other schedules to the consolidated financial statements required
by Article 9 of Regulation S-X and all other schedules to the financial
statements of the Registrant required by Article 5 of Regulation S-X are not
required under the related instructions or are inapplicable and, therefore, have
been omitted.

                                     - 7 -

<PAGE>

                                                   Harbor Bankshares Corporation

         (2) List of financial items attached:

              Consolidated Average Statements of Condition
              Consolidated Statements of Income
              Schedule of Average Rates
              Interest Variance Analysis
              Investment Securities -- Book Value
              Investment Securities -- Weighted Rate by Maturity
              Investment Securities -- Market Value
              Investment Securities -- Maturities
              Loan Distribution
              Risk Elements of Loan Portfolio
              Summary of Loan Loss Experience
              Loan Maturities and Sensitivity
              Time Certificates -- $100,000 Maturities

                                     - 8 -

<PAGE>

                                                   Harbor Bankshares Corporation

             CONSOLIDATED AVERAGE STATEMENTS OF CONDITION AND RATIOS
                             (dollars in thousands)

Year ended December 31,
<TABLE>
<CAPTION>

                                                                            2002             2001             2000
                                                                            ----             ----             ----
<S>                                                                     <C>                <C>             <C>

ASSETS

U.S. Treasury Securities                                                $   2,989        $   2,138        $     ---
U.S. Government Agencies                                                   49,256           55,140           54,733
Interest-Bearing Deposits with Other Banks                                  1,770              998              546
FHLB Stock and Other Securities                                             1,155              652              528
Federal Funds Sold                                                         17,083           18,805            2,492
                                                                        ---------        ---------        ---------
                                                                           72,253           77,733           58,299

Loans
-----
Commercial Loans                                                           27,976           22,313           30,094
Real Estate Loans                                                          70,996           72,261           72,703
Consumer Loans                                                             11,321           10,493            5,063
                                                                        ---------        ---------        ---------
Loans Net of Unearned Income                                              110,293          105,067          107,860
                                                                        ---------        ---------        ---------

Total Earning Assets                                                      182,546          182,800          166,159
Allowance for Possible Losses                                              (1,007)            (844)            (724)
Other Assets                                                               16,633           16,283            9,471
                                                                        ---------        ---------        ---------
         TOTAL ASSETS                                                   $ 198,172        $ 198,239        $ 174,906
                                                                        =========        =========        =========

LIABILITIES AND SHAREHOLDERS' EQUITY

Non-Interest Bearing Deposits                                             $23,829          $21,341          $19,326
Interest-Bearing Transaction Accounts                                      21,197           18,597           15,623
Savings                                                                    87,356           82,907           76,169
Time - $100,000 or more                                                    22,264           30,482           17,098
Other Time                                                                 27,567           29,907           30,165
                                                                        ---------        ---------        ---------
         TOTAL Deposits                                                   182,213          183,234          158,381
                                                                        ---------        ---------        ---------
Other Borrowed Money                                                           --              137            4,547
Notes payable                                                               1,985            2,000            3,202
Other Liabilities                                                             866            1,168              742
                                                                        ---------        ---------        ---------
         TOTAL Liabilities                                                185,064          186,539          166,872
SHAREHOLDERS' EQUITY                                                       13,108           11,700            8,034
                                                                        ---------        ---------        ---------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                              $ 198,172        $ 198,239        $ 174,906
                                                                        =========        =========        =========

RATIOS
Average Equity to Average Total Assets                                       6.61%            5.90%            4.59%
Return on Assets                                                              .54%             .37%             .32%
Return on Equity                                                             8.21%            6.24%            7.03%
Dividend Payout Ratio                                                        16.7%             ---              ---
</TABLE>


                                     - 9 -

<PAGE>



CAPITAL SCHEDULE

         Risk-based guidelines apply on a consolidated basis to bank holding
companies with consolidated assets of $150 million or more. Harbor Bankshares
Corporation had total consolidated assets of $210 million at December 31, 2002.
Disclosed below are the capital ratios of the Corporation:

                         Harbor Bankshares     Regulatory Requirements
                         -----------------     -----------------------
                            Corporation
                            -----------

Primary Capital                  5.2%                    4.0%

Risk-Based Capital               9.1%                    8.0%




                                     - 10 -

<PAGE>

                                                   Harbor Bankshares Corporation



                        CONSOLIDATED STATEMENTS OF INCOME
                      (in thousands except per share data)

<TABLE>
<CAPTION>

Year ended December 31,                                                2002           2001            2000
                                                                       ----           ----            ----
<S>                                                                  <C>             <C>             <C>
INTEREST AND FEES ON LOANS
Commercial Loans                                                     $ 2,297         $ 2,056         $ 2,958
Real Estate Mortgages                                                  5,723           6,133           6,288
Consumer Loans                                                         1,104           1,098             586
                                                                     -------         -------         -------

TOTAL Interest and Fees on Loans(1)                                    9,124           9,287           9,832
Interest on Taxable Investment Securities                              2,186           3,543           3,659
Interest on Other Investments(2)                                          63              48              31
Interest on Federal Funds Sold                                           274             731             143
                                                                     -------         -------         -------
TOTAL Interest Income                                                 11,647          13,609          13,665
INTEREST EXPENSE

Savings                                                                1,145           2,519           3,002
Interest-Bearing Transaction Accounts                                     62             132             138
Time - $100,000 or more                                                  914           1,676             885
Other Time                                                             1,140           1,497           1,615
Other Borrowed Money                                                      --               8             310
Interest on Notes Payable                                                141             141             249
                                                                     -------         -------         -------
TOTAL Interest Expense                                                 3,402           5,973           6,199
Net Interest Income                                                    8,245           7,636           7,466
Provision for Possible Credit Losses                                     340             400             346
                                                                     -------         -------         -------
Net Interest Income After Provision for Possible                       7,905           7,236           7,120
  Credit Losses
Other Income                                                           1,995           2,132           1,841
Investment Security Gains                                                226             197              --
Other Expenses                                                         8,576           8,526           8,109
                                                                     -------         -------         -------
Income Before Taxes                                                    1,550           1,039             852
Applicable Income Tax                                                    473             309             287
                                                                     -------         -------         -------
NET INCOME                                                           $ 1,077         $   730         $   565
                                                                     =======         =======         =======

PER COMMON SHARE
         NET INCOME - BASIC                                          $  1.47         $  1.03         $   .82
                                                                     =======         =======         =======

         Stock Dividend per Share                                    $   .25         $    --         $    --
                                                                     =======         =======         =======

</TABLE>


NOTES ON CONSOLIDATED STATEMENTS OF INCOME:

(1)    Loan fees, which are included in Interest Income, were $644 in 2002, $481
       in 2001, $577 in 2000.

(2)    Certificates of Deposit with other financial institutions.



                                     - 11 -

<PAGE>

                                                   Harbor Bankshares Corporation

         AVERAGE RATES EARNED OR PAID FOR THE YEARS 2002, 2001 AND 2000
<TABLE>
<CAPTION>


Years ended December 31,                                                2002               2001               2000
                                                                        ----               ----               ----
<S>                                                                     <C>               <C>                <C>
         Commercial Loans                                               8.21%              9.10%              9.82%

         Real Estate Loans                                              8.06%              8.53%              8.65%

         Consumer Loans                                                 9.75%             10.43%             11.57%

         Taxable Investment Securities                                  4.09%              6.12%              6.62%

         Other Investments(1)                                           3.56%              4.81%              5.68%

         Federal Funds Sold                                             1.60%              3.89%              5.73%

              TOTAL Earning Assets                                      6.38%              7.44%              8.22%

AVERAGE RATES PAID

         Interest Bearing Transaction Accounts                           .29%               .71%               .88%

         Savings                                                        1.31%              3.03%              3.94%

         Time - $100,000 or more                                        4.10%              5.50%              5.18%

         Other Time                                                     4.14%              5.00%              5.35%

         Other Borrowed Money                                             --%              6.24%              6.82%

         Notes Payable                                                   7.0%              7.00%              7.77%

         TOTAL Interest Bearing Liabilities                             2.12%              3.64%              3.73%

         NET YIELD ON EARNING ASSETS                                    4.26%              3.80%              4.49%


(1) Certificates of Deposit with other financial institutions.

</TABLE>

                                     - 12 -

<PAGE>

                                                   Harbor Bankshares Corporation


                           INTEREST VARIANCE ANALYSIS
                                 (in thousands)


<TABLE>
<CAPTION>
                                            2002 COMPARED TO 2001                         2001 COMPARED TO 2000
                                         Increase (Decrease) due to:                   Increase (Decrease) due to:
                                     ---------------------------------------------------------------------------------

                                     Volume          Rate           Net           Volume           Rate            Net
                                     ------          ----           ---           ------           ----            ---

<S>                                 <C>           <C>           <C>              <C>              <C>           <C>
INTEREST INCOME

Loans                               $  462        $   (625)     $   (163)        $  (254)         $ (290)       $ (544)

Investment Securities                 (232)         (1,125)       (1,357)            177            (293)         (116)

Federal Funds Sold                     (67)           (390)         (457)            935            (347)          588

Other Interest Bearing
 Assets(1)                              37             (22)           15              26             (10)           16
                                    ------        --------      --------         -------          ------        ------

TOTAL Interest Income               $  200        $ (2,162)     $ (1,962)        $   884          $ (940)       $  (56)
                                    ======        ========      ========         =======          ======        ======


INTEREST EXPENSE

Interest-Bearing
 Transaction Accounts               $   18        $    (88)     $    (70)        $    26          $  (32)       $   (6)

Savings                                135          (1,509)       (1,374)            265            (749)         (484)

Time - $100,000 or more               (452)           (310)         (762)            693              98           791

Other Time                            (117)           (240)         (357)             14            (132)         (118)

Short-Term Borrowings                   (8)            ---            (8)           (301)            ---          (301)

Notes Payable                          ---             ---           ---             (93)            (15)         (108)
                                    ------        --------      --------         -------          ------        ------
TOTAL Interest Expense              $ (424)       $ (2,147)     $ (2,571)        $   604          $ (830)       $ (226)
                                    ======        ========      ========         =======          ======        ======


NET INTEREST INCOME                 $  624        $    (15)     $    609         $   280          $ (110)       $  170
                                    ======        ========      ========         =======          ======        ======
</TABLE>


Note:   Loan fees, which were included in interest income were $644 in
        2002, $481 in 2001, and $577 in 2000. A change in Rate/Volume has been
        allocated to the change in rate.

(1)     Certificates of Deposit with other financial institutions.

                                     - 13 -

<PAGE>

                                                   Harbor Bankshares Corporation

                  INVESTMENT SECURITIES (dollars in thousands)

<TABLE>
<CAPTION>

Maturity Distribution
---------------------

                                                                             U.S. Government
                                                      U.S. Treasuries               Agencies      Other Securities   Total
                                                      ---------------        ---------------      ----------------   -----

<S>                                                    <C>                     <C>                    <C>          <C>
Maturing Within One Year                               $   2,531               $   3,086              $  --        $   5,617

Maturing After One But Within Five Years                   2,053                  30,129                516           32,698

Maturing After Five But Within Ten Years                      --                   9,559                 --            9,559

Maturing After Ten Years                                      --                   5,707                 45            5,752
                                                       ---------               ---------              -----        ---------

TOTAL                                                  $   4,584               $  48,481              $ 561        $  53,626
                                                       =========               =========              =====        =========
</TABLE>
<TABLE>
<CAPTION>

Weighted Average Interest Rate at December 31, 2002
---------------------------------------------------
                                                                             U.S. Government
                                                      U.S. Treasury                 Agencies      Other Securities   Total
                                                      -------------          ---------------      ----------------   -----

<S>                                                       <C>                      <C>                  <C>           <C>
Maturing Within One Year                                  2.21%                    5.58%                  --          3.89%

Maturing After One But Within Five Years                  3.09%                    3.56%                2.84%         3.16%

Maturing After Five But Within Ten Years                    --                     4.50%                  --          4.50%

Maturing After Ten Years                                    --                     5.33%                7.27%         5.58%
                                                          ----                     ----                 ----          ----
TOTAL                                                     2.62%                    3.69%                3.22%         3.57%
                                                          ====                     ====                 ====          ====
</TABLE>
<TABLE>
<CAPTION>
Carrying amount and the market value at 2002, 2001 AND 2000:
-------------------------------------------------------------

                                              2002                         2001                           2000
                                   -----------------------        -----------------------       -----------------------
                                   Amortized        Market        Amortized        Market       Amortized        Market
                                   ---------        ------        ---------        ------       ---------        ------
                                      Cost                           Cost                          Cost
                                      ----                           ----                          ----
<S>                                <C>             <C>            <C>            <C>            <C>            <C>
U.S. Treasuries and Government
 Agencies                          $ 54,370        $ 55,254       $ 50,879       $ 50,501       $ 56,625       $ 54,644

Other Securities                        554             561            558            553             27            627
                                   --------         -------       --------       --------       --------       --------

TOTAL                              $ 54,924         $55,815       $ 51,437       $ 51,054       $ 56,652       $ 55,271
                                   ========         =======       ========       ========       ========       ========
</TABLE>

                                     - 14 -

<PAGE>

                                                   Harbor Bankshares Corporation


                                                 FIVE-YEAR LOAN DISTRIBUTION
                                                 ---------------------------

Five-Year Loan Distribution at December 31 (dollars in thousands)
-----------------------------------------------------------------

<TABLE>
<CAPTION>
                                     2002              2001              2000              1999              1998
                                     ----              ----              ----              ----              ----

<S>                               <C>               <C>               <C>               <C>                <C>
Commercial Loans                  $  30,964         $  23,126         $  33,515         $  31,801          $ 20,711

Real Estate Loans                    78,856            71,962            70,596
                                                                                           67,117            61,704
Consumer Loans                       11,751            11,718             8,286             3,583             3,381
                                  ---------         ---------         ---------         ---------          --------

    TOTAL                         $ 121,571         $ 106,806         $ 112,397         $ 102,501          $ 85,796
                                  =========         =========         =========         =========          ========

</TABLE>


Five-Year Loan Distribution at December 31 (expressed as percentages)
---------------------------------------------------------------------
<TABLE>
<CAPTION>
                                      2002              2001              2000              1999              1998
                                      ----              ----              ----              ----              ----
<S>                                 <C>               <C>               <C>               <C>                <C>

Commercial Loans                     25.47%            21.65%            29.82%            31.03%            24.14%

Real Estate Loans                    64.86%            67.38%            62.80%            65.47%            71.92%

Consumer Loans                        9.67%            10.97%             7.38%             3.50%             3.94%
                                     -----             -----             -----             -----             -----

    TOTAL                            100.0%            100.0%            100.0%            100.0%            100.0%
                                     =====             =====             =====             =====             =====
</TABLE>



                                     - 15 -

<PAGE>

                                                   Harbor Bankshares Corporation

                         SUMMARY OF LOAN LOSS EXPERIENCE
                             (dollars in thousands)
<TABLE>
<CAPTION>


Year ended December 31,                                 2002             2001          2000           1999            1998
                                                        ----             ----          ----           ----            ----


<S>                                                  <C>                <C>            <C>            <C>             <C>
Balance at Beginning of Period                       $     959      $     732      $     678       $    699        $    654
                                                     ---------      ---------      ---------       --------        --------

Loans Charged Off:
      Commercial Loans                                     109             65            228                             --
      Real Estate Loans                                     26             70             73            395              54
      Consumer Loans                                       179            111            103            239             149
                                                     ---------      ---------      ---------       --------        --------
      TOTAL Loans Charged Off                              314            246            404            925             203
                                                     ---------      ---------      ---------       --------        --------

Recoveries of Loans:
      Commercial Loans                                      42             39             69
      Real Estate Loans                                     11             22             16             26               3
      Consumer Loans                                        10             12             27             35              32
                                                     ---------      ---------      ---------       --------        --------
      TOTAL Loans Recovered                                 63             73            112            101              35
                                                     ---------      ---------      ---------       --------        --------

Net Loans Charged Off                                      251            173            292            824             168
                                                     ---------      ---------      ---------       --------        --------

Provisions Charged to Operations                           340            400            346            803             213
                                                     ---------      ---------      ---------       --------        --------

Balance at End of Period                             $   1,048      $     959      $     732       $    678        $    699
                                                     =========      =========      =========       ========        ========

Daily Average Amount of Loans                        $ 111,293      $ 105,067      $ 107,860       $ 87,399        $ 80,502
                                                     =========      =========      =========       ========        ========

Allowance for Possible Loan
  Losses to Loans Outstanding                              .86%           .90%           .65%           .66%            .82%
                                                     =========      =========      =========       ========        ========


Net Charge Offs to Average Loans
  Outstanding                                              .22%           .16%           .27%           .94%            .21%
                                                     =========      =========      =========       ========        ========

</TABLE>


                                     - 16 -

<PAGE>


                   ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES

         The following table presents a five-year history for the allocation of
the allowance for loan losses along with the percentage of total loans and
leases in each category (dollars in thousands).
<TABLE>
<CAPTION>

----------------- --------------- --------------- --------------- --------------- ---------------
                    Category to                     Category to                     Category to
     Amount         Total Loans        Amount       Total Loans        Amount       Total Loans
----------------- --------------- --------------- --------------- --------------- ---------------
<S>                 <C>              <C>           <C>              <C>            <C>
       $ 555                           $ 557           21.65%           $ 442          29.82%
         138           25.47%            110           67.38              127          62.80
         122           64.86             135           10.97               33           7.38
         233            9.67             157                              130
-----------------  --------------  --------------  --------------  --------------  --------------
      $1,048          100.00%           $959          100.00%            $732         100.00%
=================  ==============  ==============  ==============  ==============  ==============

<CAPTION>


--------------- --------------- --------------- ---------------
                 Category to                     Category to
    Amount       Total Loans        Amount       Total Loans
--------------- --------------- --------------- ---------------
<C>            <C>               <C>           <C>
     $ 317          31.03%            $ 59          21.14%
       131          65.47               34          71.92
        14           3.50               71           3.94
       216                             535
--------------  --------------  --------------  --------------
      $678         100.00%            $699         100.00%
==============  ==============  ==============  ==============



</TABLE>



                                       -17-

<PAGE>


                                                   Harbor Bankshares Corporation

                         RISK ELEMENTS OF LOAN PORTFOLIO
                                 (in thousands)
<TABLE>
<CAPTION>



December 31                               2002            2001            2000             1999              1998
                                          ----            ----            ----             ----              ----
<S>                                      <C>             <C>             <C>             <C>               <C>
Non-Accrual Loans                        $ 409           $ 620           $ 265           $ 1,003           $ 1,107
Accruing Loans Past
  Due 90 Days or more                      746             135               6                47               547
Restructured Loans                        none            none            none              none              none
                                         =====           =====           =====           =======           =======


NON-ACCRUAL LOANS AT DECEMBER 31, 2002 AND DECEMBER 31, 2001

                                                                2002      2001
                                                                ----      ----
Interest Income that Would Have Been Recorded Under
  Original Terms                                                $ 57     $ 158
                                                                ----     -----
Interest Income Recorded during the Period                      $ --     $  --
                                                                ----     -----
</TABLE>

      It is the policy of the Corporation to place a loan on non-accrual status
whenever there is substantial doubt about the ability of a borrower to pay
principal or interest on any outstanding credit. Management considers such
factors as payment history, the nature of the collateral securing the loan, and
the overall economic situation of the borrower when making a non-accrual
decision. Non-accrual loans are closely monitored by management. A non-accruing
loan is restored to accrual status when principal and interest payments have
been brought current or it becomes well-secured or is in the process of
collection and the prospects of future contractual payments are no longer in
doubt.

Potential Problem Loans

      At December 31, 2002, the Corporation had $1,888 thousand of impaired
loans for which the borrowers were experiencing financial difficulties. Those
loans are subject to constant management attention and their classification is
reviewed monthly.

      As of December 31, 2002, 64.9% of the Corporation's loan portfolio was
secured by real estate properties.

      Management analyzes the reserve for possible loan losses on a quarterly
basis. Those factors considered in determining the adequacy of the reserve
include specific identification of known risk loans, adequacy of collateral on
specific past due and non-accrual loans, past experience, the ratio of the
reserve to net loans and current and anticipated economic conditions affecting
the customer base in the area the Bank serves.

      Management allocates the reserve for possible loan losses by type of loan
based on the experience method and actual potential losses. Both performing and
non-performing loans are also reviewed periodically to identify high risk assets
and their potential impact upon the reserve. Based on all information known to
date, management does not expect net losses as a percentage of average loans in
2003 to exceed the 2002 levels.



                                     - 18 -

<PAGE>
                                                   Harbor Bankshares Corporation


MATURITY AND REPRICING OF LOANS AS OF DECEMBER 31, 2002
-------------------------------------------------------

<TABLE>
<CAPTION>
                                       Commercial               Real Estate         Consumer
                                            Loans                     Loans            Loans                   TOTAL
                                       ----------               -----------         --------               ---------
<S>                                    <C>                     <C>                 <C>                    <C>
Within One Year                          $ 22,935                  $  7,802         $  1,816               $  32,553
After One Year But Within Five Years        5,364                    21,984            7,637               $  34,985
After Five Years                            2,615                    49,187            2,231               $  54,033
                                         --------                  --------         --------               ---------
TOTAL                                    $ 30,914                  $ 78,973         $ 11,684               $ 121,571
                                         ========                  ========         ========               =========
</TABLE>

LOANS CLASSIFIED BY SENSITIVITY TO CHANGES IN INTEREST RATES
------------------------------------------------------------

<TABLE>
<CAPTION>
                                                    Fixed Interest          Adjustable Interest
                                                        Rate Loans                   Rate Loans             TOTAL
                                                    --------------          --------------------         --------
<S>                                                    <C>                       <C>                     <C>
Within One Year                                           $  7,174                      $ 25,379         $ 32,553
After One But Within Five Years                             34,331                           654           34,985
After Five Years                                            54,033                           ---           54,033
                                                          --------                      --------         --------
TOTAL                                                     $ 95,538                      $ 26,033         $121,571
                                                          ========                      ========         ========

</TABLE>


                                     - 19 -

<PAGE>

                                                   Harbor Bankshares Corporation

MATURITIES OF TIME CERTIFICATES OF DEPOSIT OF $100,000 OR MORE OUTSTANDING AT
-----------------------------------------------------------------------------
DECEMBER 31, 2002 AND 2001
--------------------------
<TABLE>
<CAPTION>
                                               2001              2000
                                               ----              ----

<S>                                         <C>               <C>
             Three months or less           $  7,993          $ 14,207

             Three to six months               2,871             2,750

             Six to twelve months             10,909             5,299

             Over twelve months                4,069             6,965
                                            --------          --------
             TOTAL                          $ 25,842          $ 29,221
                                            ========          ========
</TABLE>



LONG AND SHORT TERM BORROWINGS
------------------------------

      Short term borrowings consist of borrowings from the FHLB. These
borrowings re-price daily, have maturities of one year or less and may be
prepaid without penalty. Long term borrowings for the year 2002 and 2001 consist
of a note payable due July 1, 2012 at a fixed rate of 7.0% with interest
payments only from August 2001 to August 2002 and equal principal and interest
payments from August 2002 to July 1, 2012.

BORROWINGS FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
---------------------------------------------------------
(dollars in thousands)


                                                       2002            2001
                                                       ----            ----


Amount outstanding at period-end:
      Long-term debt                                $ 1,943          $ 2,000
      Short-term borrowings                               0                0


Average outstanding:
      Long-term debt                                $ 1,986          $ 2,000
      Short-term borrowings                             ---              137


Weighted average interest rate during the period:
      Long-term debt                                  7.00%            7.00%
      Short-term borrowings                             ---            6.24%




                                     - 20 -

<PAGE>

                                                   Harbor Bankshares Corporation

ARTICLES OF INCORPORATION/BYLAWS:
---------------------------------

      Incorporated by reference on Form S-4, filed with the Securities and
Exchange Commission on July 17, 1992.

EMPLOYMENT AGREEMENTS
---------------------

      Incorporated by reference on Form S-4, filed with the Securities and
Exchange Commission on July 17, 1992.

STOCK OPTION PLAN
-----------------

      Incorporated by reference on Form S-4, filed with the Securities and
Exchange Commission on July 17, 1992.

LIST OF SUBSIDIARIES
--------------------

      Information required by this item is incorporated by reference under the
caption "Business of the Registrant's Form 10-KSB," page 2.

                                     - 21 -

<PAGE>

                                                   Harbor Bankshares Corporation

                        CONSENT OF INDEPENDENT ACCOUNTANT


The Board of Directors
Harbor Bankshares Corporation
Baltimore, Maryland

      We hereby consent to the inclusion of our report dated January 17, 2003
relating to the balance sheets of Harbor Bankshares Corporation (the
"Corporation") as of December 31, 2002 and 2001 and the related statements of
operations, changes in stockholders' equity and cash flows for each of the years
then ended in the Corporation's Form 10-KSB for the year ended December 31, 2002
to be filed with the Securities and Exchange Commission.

Stegman & Company

Baltimore, Maryland
March 25, 2003

                                     - 22 -

<PAGE>

                                                   Harbor Bankshares Corporation

      Pursuant to the requirements of Section 13 or 15(D) 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.

           HARBOR BANKSHARES CORPORATION

By:        /s/ Teodoro J. Hernandez
           --------------------------------------------------

Title:     Vice President & Treasurer
           --------------------------------------------------

Date       3-17-2003
           --------------------------------------------------



Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant, and in the
capacities, and on the dates indicated:


By:        /s/ Joseph Haskins, Jr.
           --------------------------------------------------

Title:     Chairman, President & CEO
           --------------------------------------------------

Date
           --------------------------------------------------



By:        /s/ Joe Louis Gladney
           --------------------------------------------------

Title:     Director
           --------------------------------------------------

Date:      3-17-03
           --------------------------------------------------


By:
           --------------------------------------------------

Title:
           --------------------------------------------------

Date:
           --------------------------------------------------


By:
           --------------------------------------------------

Title:
           --------------------------------------------------

Date:
           --------------------------------------------------


                                     - 23 -

<PAGE>


HARBOR BANKSHARES CORPORATION AND SUBSIDIARY                       Exhibit A


                                 CERTIFICATIONS

I, Joseph Haskins, Jr., certify that:

1.   I have reviewed this report on Form 10-KSB of Harbor Bankshares
     Corporation.

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

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

4.   The registrant's other certifying officer and I are responsible for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

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

     b)   evaluated the effectiveness of the registrant's disclosure controls
          and procedures as of a date within 90 days prior to the filing date of
          this report (the "Evaluation Date"); and

     c)   presented in this report our conclusions about the effectiveness of
          the disclosure controls and procedures based on our evaluation as of
          the Evaluation Date:

5.   The registrant's other certifying officer and I have disclosed, based on
     our most recent evaluation, to the registrant's board of directors (or
     persons performing the equivalent function):

     a)   all significant deficiencies in the design or operation of internal
          controls which could adversely affect the registrant's ability to
          record, process, summarize and report financial data and have
          identified for the registrant's auditors any material weaknesses in
          internal controls; and

     b)   any fraud, whether or not material, that involves management or other
          employees who have a significant role in the registrant's internal
          controls; and

6.   The registrant's other certifying officers and I have indicted in this
     report whether or not their significant changes in internal controls or in
     other factors that could significantly affect internal controls subsequent
     to the date of our most recent evaluation, including any corrective actions
     with regard to significant deficiencies and material weaknesses.


                                       /s/ Joseph Haskins, Jr.
March 17, 2003                         ____________________________________
                                       Joseph Haskins, Jr.
                                       Chairman and Chief Executive Officer



                                       24

<PAGE>

HARBOR BANKSHARES CORPORATION AND SUBSIDIARY                       Exhibit A


                                 CERTIFICATIONS

I, Teodoro J. Hernandez, Jr., certify that:

1.   I have reviewed this report on Form 10-KSB of Harbor Bankshares
     Corporation.

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

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

4.   The registrant's other certifying officer and I are responsible for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

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

     b)   evaluated the effectiveness of the registrant's disclosure controls
          and procedures as of a date within 90 days prior to the filing date of
          this report (the "Evaluation Date"); and

     c)   presented in this report our conclusions about the effectiveness of
          the disclosure controls and procedures based on our evaluation as of
          the Evaluation Date:

5.   The registrant's other certifying officer and I have disclosed, based on
     our most recent evaluation, to the registrant's board of directors (or
     persons performing the equivalent function):

     a)   all significant deficiencies in the design or operation of internal
          controls which could adversely affect the registrant's ability to
          record, process, summarize and report financial data and have
          identified for the registrant's auditors any material weaknesses in
          internal controls; and

     b)   any fraud, whether or not material, that involves management or other
          employees who have a significant role in the registrant's internal
          controls; and

6.   The registrant's other certifying officers and I have indicted in this
     report whether or not their significant changes in internal controls or in
     other factors that could significantly affect internal controls subsequent
     to the date of our most recent evaluation, including any corrective actions
     with regard to significant deficiencies and material weaknesses.


                                       /s/ Teodoro J. Hernandez
March 17, 2003                         ____________________________________
                                       Teodoro J. Hernandez,
                                       Treasurer



                                       25

<PAGE>

                          HARBOR BANKSHARES CORPORATION
                                AND SUBSIDIARIES

                               REPORT ON AUDITS OF
                              FINANCIAL STATEMENTS

                               FOR THE YEARS ENDED
                           DECEMBER 31, 2002 AND 2001

   No extracts from this report may be published without our written consent.

                                Stegman & Company

<PAGE>

                                TABLE OF CONTENTS

INDEPENDENT AUDITORS' REPORT

CONSOLIDATED FINANCIAL STATEMENTS                                          Page
                                                                          ------

   Balance Sheets                                                         1 - 2

   Statements of Income                                                     3

   Statements of Changes in Stockholders' Equity                            4

   Statements of Cash Flows                                               5 - 6

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                7 - 29

<PAGE>

[LOGO] STEGMAN & COMPANY

                          INDEPENDENT AUDITORS' REPORT

Audit Committee of the Board of Directors and Stockholders
   of Harbor Bankshares Corporation
Baltimore, Maryland

     We have audited the accompanying consolidated balance sheets of Harbor
Bankshares Corporation and subsidiaries as of December 31, 2002 and 2001 and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for the years then ended. These financial statements are the
responsibility of the management of Harbor Bankshares Corporation. Our
responsibility is to express an opinion on these financial statements based on
our audits.

     We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Harbor
Bankshares Corporation and subsidiaries as of December 31, 2002 and 2001 and the
results of their operations and cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States of
America.

                                                              STEGMAN & COMPANY

Baltimore, Maryland
January 17, 2003

    Suite 200, 405 East Joppa Road, Baltimore, Maryland 21286 * 410-823-8000
            * 1-800-686-3883 * Fax: 410-296-4815 * www.stegman.com *

<PAGE>

                 HARBOR BANKSHARES CORPORATION AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 2002 AND 2001

                                     ASSETS

<TABLE>
<CAPTION>
                                                             2002           2001
                                                         ------------   ------------
<S>                                                      <C>            <C>
Cash and due from banks                                  $  7,273,439   $  6,992,077

Federal funds sold                                         12,653,002     10,553,426

Interest bearing deposits in other banks                    2,300,000      1,161,517

Investment securities:
   Held to maturity - at amortized cost (fair value of
      $2,188,910 in 2002 and $2,121,120 in 2001)            2,057,205      2,064,156

   Available for sale - at fair value                      53,626,729     48,932,420
                                                         ------------   ------------

      Total investment securities                          55,683,934     50,996,576
                                                         ------------   ------------

Loans                                                     121,571,331    106,806,899

Allowance for loan losses                                  (1,048,671)      (959,574)
                                                         ------------   ------------

      Net loans                                           120,522,660    105,847,325
                                                         ------------   ------------

Premises and equipment, net                                   985,018        995,609

Federal Home Loan Bank of Atlanta stock - at cost             600,000        600,000

Goodwill                                                    2,506,226      2,506,226

Other intangible assets                                       716,336             --

Accrued interest receivable                                 1,188,469      1,077,140

Bank-owned life insurance                                   3,679,501      3,500,335

Deferred income taxes                                          55,735        552,898

Other assets                                                2,069,599      1,802,533
                                                         ------------   ------------

      TOTAL ASSETS                                       $210,233,919   $186,585,662
                                                         ============   ============
</TABLE>

See accompanying notes.

                                        1

<PAGE>

                      LIABILITIES AND STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                             2002          2001
                                                         ------------   ------------
<S>                                                      <C>            <C>
LIABILITIES:
   Deposits:
      Noninterest bearing demand                         $ 27,419,881   $ 19,979,053
      Interest bearing transaction accounts                21,845,806     21,205,840
      Savings                                              88,910,645     75,330,105
      Time, $100,000 or more                               25,842,052     29,221,626
      Other time                                           29,275,363     25,794,564
                                                         ------------   ------------
         Total deposits                                   193,293,747    171,531,188
   Accrued interest payable                                   319,508        538,383
   Long-term debt                                           1,943,334      2,000,000
   Other liabilities                                          527,997        274,712
                                                         ------------   ------------

         Total liabilities                                196,084,586    174,344,283
                                                         ------------   ------------

STOCKHOLDERS' EQUITY:
   Common stock (par value $0.01):
      Authorized 10,000,000 shares; issued 735,813
         and 721,965, including 33,333 and 33,795
         common non-voting at December 31, 2002
         and 2001, respectively                                 7,357          7,219
      Paid-in capital                                       7,204,280      6,986,078
      Retained earnings                                     6,435,464      5,538,547
      Accumulated other comprehensive income
         gain (loss)                                          502,232       (290,465)
                                                         ------------   ------------

         Total stockholders' equity                        14,149,333     12,241,379
                                                         ------------   ------------

         TOTAL LIABILITIES AND STOCKHOLDERS'
            EQUITY                                       $210,233,919   $186,585,662
                                                         ============   ============
</TABLE>

                                        2

<PAGE>

                 HARBOR BANKSHARES CORPORATION AND SUBSIDIARIES

                        CONSOLIDATED STATEMENTS OF INCOME
                 FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001

                                                          2002          2001
                                                       -----------   -----------
INTEREST INCOME:
   Interest and fees on loans                          $ 9,123,522   $ 9,287,266
   Interest on investments - taxable                     2,153,695     3,500,910
   Interest on deposits in other banks                      63,279        47,749
   Interest on federal funds sold                          274,015       731,248
   Other interest income                                    32,584        41,886
                                                       -----------   -----------

      Total interest income                             11,647,095    13,609,059
                                                       -----------   -----------

INTEREST EXPENSE:
   Interest bearing transaction accounts                    61,834       132,015
   Savings                                               1,144,913     2,518,970
   Time, $100,000 or more                                  914,422     1,675,514
   Other time                                            1,140,035     1,496,596
   Notes payable                                           141,213       141,556
   Interest on short-term borrowings                            --         8,553
                                                       -----------   -----------

      Total interest expense                             3,402,417     5,973,204
                                                       -----------   -----------

NET INTEREST INCOME                                      8,244,678     7,635,855

PROVISION FOR LOAN LOSSES                                  340,000       399,996
                                                       -----------   -----------

NET INTEREST INCOME AFTER PROVISION
   FOR LOAN LOSSES                                       7,904,678     7,235,859
                                                       -----------   -----------

NONINTEREST INCOME:
   Service charges on deposit accounts                     910,473       965,095
   Other service charges                                   592,361       658,727
   Gain on sale of securities                              226,355       197,072
   Gain on sales of loans                                   54,015        45,341
   Awards and grants                                       214,483       229,053
   Loan servicing fees                                      25,865        27,350
   Other income                                            197,203       206,851
                                                       -----------   -----------

      Total noninterest income                           2,220,755     2,329,489
                                                       -----------   -----------

NONINTEREST EXPENSES:
   Salaries and employee benefits                        4,229,792     3,989,234
   Occupancy expense of premises                           785,212       777,500
   Equipment expense                                       477,673       654,061
   Data processing fees                                    975,914       918,231
   Professional fees                                       207,787       199,069
   Goodwill amortization                                        --       331,272
   Amortization of intangible assets                        46,615            --
   Other expenses                                        1,852,527     1,657,374
                                                       -----------   -----------

      Total noninterest expense                          8,575,520     8,526,741
                                                       -----------   -----------

INCOME BEFORE INCOME TAXES                               1,549,913     1,038,607

APPLICABLE INCOME TAXES                                    472,621       308,729
                                                       -----------   -----------

NET INCOME                                             $ 1,077,292   $   729,878
                                                       ===========   ===========

BASIC EARNINGS PER SHARE                               $      1.47   $      1.02
                                                       ===========   ===========

DILUTED EARNINGS PER SHARE                             $      1.43   $       .99
                                                       ===========   ===========

See accompanying notes.

                                        3

<PAGE>

                 HARBOR BANKSHARES CORPORATION AND SUBSIDIARIES

           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                 FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001

<TABLE>
<CAPTION>
                                                                                    Accumulated
                                                                                       Other
                                                                                   Comprehensive      Total
                                              Common       Capital     Retained        Income      Stockholders'
                                               Stock       Surplus     Earnings        (Loss)         Equity
                                            ----------   ----------   ----------   -------------   -------------
<S>                                           <C>        <C>          <C>           <C>             <C>
Balance at January 1, 2001                    $6,897     $6,500,537   $4,808,669    $(1,070,026)    $10,246,077

Comprehensive income:
   Net income                                     --             --      729,878             --         729,878
   Unrealized gains on securities
      available-for-sale, net of taxes            --             --           --        779,561         779,561
                                                                                                    -----------

      Total comprehensive income                                                                      1,509,439

   Sales of common stock                          28         41,936           --             --          41,964
   Exercise of stock options                     294        443,605           --             --         443,899
                                              ------     ----------   ----------    -----------     -----------

Balance at December 31, 2001                   7,219      6,986,078    5,538,547       (290,465)     12,241,379

Comprehensive income:
   Net income                                     --             --    1,077,292             --       1,077,292
   Unrealized gains on securities
      available-for-sale, net of taxes            --             --           --        792,697         792,697
                                                                                                    -----------

      Total comprehensive income                                                                      1,869,989

   Stock dividend                                 98        176,482     (176,580)            --              --
   Payment of cash dividends                      --             --       (3,795)            --          (3,795)
   Common stock issued as compensation            40         41,720           --             --          41,760
                                              ------     ----------   ----------    -----------     -----------

Balance at December 31, 2002                  $7,357     $7,204,280   $6,435,464    $   502,232     $14,149,333
                                              ======     ==========   ==========    ===========     ===========
</TABLE>

See accompanying notes.

                                        4

<PAGE>

                 HARBOR BANKSHARES CORPORATION AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                 FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001

<TABLE>
<CAPTION>
                                                                                  2002           2001
                                                                              ------------   ------------
<S>                                                                           <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income                                                                 $  1,077,292   $    729,878
   Adjustments to reconcile net income to net
      cash provided by operating activities:
      Depreciation and amortization                                                487,150        941,558
      Provision for loan losses                                                    340,000        399,996
      Common stock issued as compensation                                           64,246             --
      Deferred income taxes                                                         88,805       (128,052)
      Increase in cash surrender value of life insurance                          (179,166)      (188,268)
      Gains on sales of loans                                                      (54,015)       (45,341)
      Gain on sale securities                                                     (226,355)      (197,072)
      Origination of loans held for sale                                        (4,045,571)    (4,643,621)
      Proceeds from sales of loans held for sale                                 4,099,586      4,688,962
      (Increase) decrease in accrued interest receivable and other assets       (1,260,534)       261,424
      Increase (decrease) in accrued interest payable and other liabilities         32,734       (175,877)
                                                                              ------------   ------------

         Net cash provided by operating activities                                 424,172      1,643,587
                                                                              ------------   ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Net increase in deposits at other banks                                      (1,138,483)      (520,163)
   Purchases of investment securities held to maturity                                  --     (2,040,530)
   Purchases of investment securities available for sale                       (45,411,260)   (71,311,142)
   Proceeds from sales, maturities and principal payments of
      investment securities available-for-sale                                  15,342,008     22,438,448
   Proceeds from called securities available-for-sale                           26,850,003     56,000,000
   Net (increase) decrease in loans                                            (14,901,929)     5,590,982
   Proceeds from sales of other real estate owned                                       --         62,000
   Purchase of other real estate owned                                             (55,727)       (39,000)
   Purchases of premises and equipment - net                                      (429,944)      (237,527)
                                                                              ------------   ------------

         Net cash (used) provided by investing activities                      (19,745,332)     9,943,068
                                                                              ------------   ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Net increase in deposits                                                     21,762,559      2,249,464
   Proceeds from sale of common stock                                                   --        485,863
   Cash dividends paid                                                              (3,795)            --
   Repayment of long-term debt                                                     (56,666)            --
   Net decrease in short-term borrowings                                                --     (2,000,000)
                                                                              ------------   ------------

         Net cash provided by financing activities                              21,702,098        735,327
                                                                              ------------   ------------

INCREASE IN CASH AND CASH EQUIVALENTS                                            2,380,938     12,321,982

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                                  17,545,503      5,223,521
                                                                              ------------   ------------

CASH AND CASH EQUIVALENTS AT END OF YEAR                                      $ 19,926,441   $ 17,545,503
                                                                              ============   ============
</TABLE>

                                        5

<PAGE>

Harbor Bankshares Corporation

Consolidated Statements of Cash Flows (Continued)
For the Years Ended December 31, 2002 and 2001

                                                            2002         2001
                                                         ----------   ----------

Supplemental disclosure of cash flows information:

   Cash paid for income taxes                            $  495,107   $  308,729
                                                         ==========   ==========

   Cash paid for interest                                $3,621,292   $6,034,876
                                                         ==========   ==========

See accompanying notes.

                                        6

<PAGE>

                 HARBOR BANKSHARES CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001

1.   NATURE OF OPERATIONS

          Harbor Bankshares Corporation (the "Corporation") is a bank holding
company organized under the laws of the State of Maryland in 1992. The
Corporation owns all of the outstanding stock of the Harbor Bank of Maryland
(the "Bank") which owns all of the outstanding stock of the Bank's subsidiary,
Harbor Financial Services.

          The Bank is a commercial bank headquartered in Baltimore, Maryland.
The deposits of the Bank are insured by the Federal Deposit Insurance
Corporation. The Bank conducts general banking business in seven locations and
primarily serves the Baltimore, Maryland metropolitan area. The Bank also has a
branch in Riverdale, Prince George's County, Maryland. It offers checking,
savings and time deposits, commercial real estate, personal, home improvement,
automobile, and other installment and term loans. The Bank is also a member of a
local and national ATM network. The retail nature of the Bank allows for
diversification of depositors and borrowers so it is not dependent upon a single
or a few customers.

2.   BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

          The accounting and reporting policies of the Corporation and its
subsidiary conform to accounting principles generally accepted in the United
States of America and to general practice within the banking industry. Certain
reclassifications have been made to amounts previously reported to conform to
the classifications made in 2002. The following is a summary of the more
significant accounting policies:

          Operating Segments

               An operating segment is defined as a component of an enterprise
that engages in business activities that generates revenue and incurs expense,
and the operating results of which are reviewed by management. The Corporation's
business activities are currently confined to one operating segment which is
community banking.

          Use of Estimates

               The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.

                                        7

<PAGE>

          Cash and Cash Equivalents

               For purposes of the consolidated statements of cash flows, the
Corporation considers all highly liquid debt instruments with original
maturities of three months or less and money market funds to be cash
equivalents.

          Investment Securities

               Securities are classified as held to maturity when management has
the positive intent and ability to hold the securities to maturity. Securities
held to maturity are carried at amortized cost.

               Securities not classified as held to maturity or trading are
classified as available for sale. Securities available for sale are carried at
fair value with unrealized gains and losses reported separately through
accumulated other comprehensive income, net of tax.

               Interest and dividends on securities, including amortization of
premiums and accretion of discounts, are included in interest income. The
adjusted cost of specific securities sold is used to compute gains or losses on
sales.

          Loans

               Loans are stated at their principal balance outstanding net of
any deferred fees and costs. Interest income on loans is accrued at the
contractual rate based on the principal outstanding. The Corporation places
loans, except for consumer installment loans, on non-accrual when any portion of
the principal or interest is ninety days past due and collateral is insufficient
to discharge the debt in full. Interest accrual may also be discontinued earlier
if, in management's opinion, collection is unlikely. Generally, consumer
installment loans are not placed on non-accrual, but are charged off when they
are five months past due.

               Loans are considered impaired when, based on current information,
it is probable that the Corporation will not collect all principal and interest
payments according to contractual terms. Generally, loans are considered
impaired once principal or interest payments become ninety days or more past due
and they are placed on non-accrual. Management also considers the financial
condition of the borrower, cash flows of the loan and the value of the related
collateral. Impaired loans do not include large groups of smaller balance
homogeneous credits such as residential real estate and consumer installment
loans, which are evaluated collectively for impairment. Loans specifically
reviewed for impairment are not considered impaired during periods of "minimal
delay" in payment (ninety days or less) provided eventual collection of all
amounts due is expected. The impairment of a loan is measured based on the
present value of expected future cash flows discounted at the loan's effective
interest rate, or the fair value of the collateral if repayment is expected to
be provided by the collateral. Generally, the Corporation's impairment on such
loans is measured by reference to the fair value of the collateral. Income on
impaired loans is recognized on the cash basis and is first applied against the
principal balance outstanding.

               Discounts and premiums on purchased loans are amortized to income
using the interest method over the remaining period to contractual maturity,
adjusted for anticipated prepayments.

                                        8

<PAGE>

          Allowance for Loan Losses

               The allowance for loan losses represents an amount which, in
management's judgment, will be adequate to absorb probable losses on existing
loans that may become uncollectible. The allowance for loan losses consists of
an allocated component and an unallocated component. The components of the
allowance for loan losses represent an estimation done pursuant to either
Statement of Financial Accounting Standards ("SFAS") No. 5, Accounting for
Contingencies, or SFAS No. 114, Accounting by Creditors for Impairment of a
Loan. The adequacy of the allowance for loan losses is determined through
careful and continuous review and evaluation of the loan portfolio and involves
the balancing of a number of factors as outlined below to establish a prudent
level. Loans deemed uncollectible are charged against, while recoveries are
credited to, the allowance. Management adjusts the level of the allowance
through the provision for loan losses, which is recorded as a current period
operating expense. The Corporation's methodology for assessing the
appropriateness of the allowance consists of several key elements, which include
the formula allowance, specific allowances and the unallocated allowance.

               The allowance formula is calculated by applying loss factors to
corresponding categories of outstanding loans. Loss factors are based on the
Corporation's historical loss experience. The use of these loss factors is
intended to reduce the difference between estimated losses inherent in the
portfolio and observed losses.

               Specific allowances are established in cases where management has
identified significant conditions or circumstances related to a loan that
management believes indicate the probability that a loss may be incurred in an
amount different from the amount determined by application of the formula
allowance. For other problem graded credits, allowances are established
according to the application of credit risk factors. These factors are set by
management to reflect its assessment of the relative level of risk inherent in
each grade.

               The unallocated allowance is based upon management's evaluation
of various conditions that are not directly measured in the determination of the
formula and specific allowances. Such conditions include general economic and
business conditions affecting key lending areas, credit quality trends
(including trends in delinquencies and nonperforming loans expected to result
from existing conditions), loan volumes and concentrations, specific industry
conditions within portfolio categories, recent loss experience in particular
loan categories, duration of the current business cycle, bank regulatory
examination results, findings of internal loan examiners, and management's
judgment with respect to various other conditions including loan administration
and management and the quality of risk identification systems. Executive
management reviews these conditions quarterly.

               Management believes that the allowance for loan losses is
adequate. However, the determination of the allowance requires significant
judgment, and estimates of probable losses inherent in the loan portfolio can
vary significantly from the amounts actually observed. While management uses
available information to recognize probable losses, future additions to the
allowance may be necessary based on changes in the loans comprising the loan
portfolio and changes in the financial condition of borrowers, such as may
result from changes in economic conditions. In addition, various regulatory
agencies, as an integral part of their examination process, periodically review
the Bank's loan portfolio and allowance for loan losses. Such review may result
in recognition of additions to the allowance based on their judgments of
information available to them at the time of their examination.

                                        9

<PAGE>

          Premises and Equipment

               Premises and equipment are stated at cost less accumulated
depreciation and amortization computed using the straight-line method. Premises
and equipment are depreciated over the useful lives of the assets, except for
leasehold improvements which are amortized over the terms of the respective
leases or the estimated useful lives of the improvements, whichever is shorter.
Useful lives range from three to seven years for furniture, fixtures and
equipment and forty years for buildings. The costs of major renewals and
betterments are capitalized, while the costs of ordinary maintenance and repairs
are expensed as incurred.

          Federal Home Loan Bank of Atlanta Stock

               The Bank, as a member of the Federal Home Loan Bank System, is
required to maintain an investment in capital stock of the Federal Home Loan
Bank of Atlanta ("FHLB") in varying amounts based on balances of outstanding
home loans and on amounts borrowed from the FHLB. Because no ready market exists
for this stock and it has no quoted market value, the Bank's investment in this
stock is carried at cost.

          Other Real Estate Owned (OREO)

               OREO comprises properties acquired in partial or total
satisfaction of problem loans. The properties are recorded at the lower of cost
or fair value at the date acquired. Losses arising at the time of acquisition of
such properties are charged against the allowance for loan losses. Subsequent
write-downs that may be required are added to a valuation reserve. Gains and
losses realized from the sale of OREO, as well as valuation adjustments, are
included in noninterest income. Expenses of operation are included in
noninterest expense. OREO of $69,700 and $14,000 as of December 31, 2002 and
2001, respectively, was included in other assets.

          Goodwill

               Goodwill represents the excess of the cost of assets acquired in
business combinations accounted for under the purchase method over the fair
value of the net assets at dates of acquisition and is periodically tested for
impairment.

          Core Deposit Intangibles

               Upon acquiring the branches of another financial institution, the
Bank engages an independent third party of experts to analyze and prepare a core
deposit study. This study reflects the cumulative present value benefit of
acquiring deposits versus an alternative source of funding. Based upon this
analysis, the amount of the premium related to the core deposits of the business
purchased is calculated along with the estimated life of the acquired deposits.
The core deposit intangible is then amortized to expense over an approximate
life of 9 years.

          Loan Servicing

               The cost of mortgage servicing rights is amortized in proportion
to, and over the period of, estimated net servicing revenue. Impairment of
mortgage servicing rights is assessed based on the fair value of those rights.
Fair values are estimated using discounted cash flows based on a current market
interest rate. The amount of impairment recognized is the amount by which the
capitalized mortgage servicing rights exceed their fair value.

                                       10

<PAGE>

               When participating interests in loans sold have an average
contractual interest rate, adjusted for normal servicing fees, that differs from
the agreed yield to the purchaser, gains or losses are recognized equal to the
present value of such differential over the estimated remaining life of such
loans. The resulting "excess servicing receivable" or "deferred servicing
revenue" is amortized over the estimated life using a method approximating the
interest method.

               Quoted market prices are not available for the excess servicing
receivables. Thus, the excess servicing receivables and the amortization thereon
are periodically evaluated in relation to estimated future servicing revenue,
taking into consideration changes in interest rates, current repayment rates,
and expected future cash flows. The Corporation evaluates the carrying value of
the excess servicing receivables by estimating the future servicing income of
the excess servicing receivables based on management's best estimate of
remaining loan lives and discounted at the original discount rate.

          Bank-Owned Life Insurance

               The Bank is the beneficiary of insurance policies on the lives of
officers and some employees of the Bank. The Bank has recognized the amount that
could be realized under the insurance policies as an asset in the consolidated
balance sheets.

          Income Taxes

               Income tax expense is based on the results of operations,
adjusted for permanent differences between items of income or expense reported
in the financial statements and those reported for tax purposes. Under the
liability method, deferred income taxes are determined based on the differences
between the financial statement carrying amounts and the income tax basis of
assets and liabilities and are measured at the enacted tax rates that will be in
effect when these differences reverse.

          Earnings Per Share

               Basic net earnings per common share is computed by dividing net
earnings applicable to common stockholders by the weighted-average number of
common shares outstanding during the period. Diluted net earnings per common
share is determined using the weighted-average number of common shares
outstanding during the period, adjusted for the dilutive effect of common stock
equivalents, consisting of shares that might be issued upon exercise of common
stock options.

          Stock Based Compensation

               The Corporation's stock-based compensation plan is accounted for
based on the intrinsic value method set forth in Accounting Principles Board
Opinion ("APB") No. 25, Accounting for Stock Issued to Employees, and related
interpretations. Compensation expense for stock options is generally not
recognized if the exercise price of the option equals or exceeds the fair market
value of the stock on the date of grant.

                                       11

<PAGE>

          Advertising

               Advertising costs are expensed as incurred. Advertising expense
was $286,855 and $115,290 for the years ended December 31, 2002 and 2001,
respectively.

          Awards and Grants

               Income from awards and grants represents awards from the
Community Development Financial Institution Fund and is recognized when a
definitive commitment from the federal government agency is received.

3.   RECENT ACCOUNTING PRONOUNCEMENTS

          In June 2001, the Financial Accounting Standards Board issued SFAS No.
141, Business Combinations (SFAS No. 141) and No. 142 Goodwill and Other
Intangible Assets (SFAS No. 142). SFAS No. 141 changes the accounting for
business combinations, requiring that all business combinations be accounted for
using the purchase method and that intangible assets be recognized as assets
apart from goodwill if they arise from contractual or other legal rights, or if
they are separable or capable of being separated from the acquired entity and
sold, transferred, licensed, rented or exchanged. SFAS No. 141 is effective for
all business combinations initiated after June 30, 2001. SFAS No. 142 specifies
the financial accounting and reporting for acquired goodwill and other
intangible assets. Goodwill and intangible assets that have indefinite useful
lives will not be amortized but rather will be tested at least annually for
impairment. SFAS No. 142 is effective for fiscal years beginning after December
15, 2001.

          SFAS No. 142 requires that the useful lives of intangible assets
acquired on or before June 30, 2001 be reassessed and the remaining amortization
periods adjusted accordingly. Previously recognized intangible assets deemed to
have indefinite lives shall be tested for impairment.

          In June 2002, the Financial Accounting Standards Board issued SFAS No.
143, Accounting for Asset Retirement Obligations. SFAS No. 143 addresses
financial accounting and reporting for obligations associated with the
retirement of intangible long-lived assets and the associated asset retirement
costs and is effective for the fiscal years beginning after June 15, 2002.
Management does not expect the impact of SFAS No. 143 to be material to the
Corporation's consolidated financial statements.

          In August 2002, the Financial Accounting Standards Board issued SFAS
No. 144, Accounting for Impairment or Disposal of Long-Lived Assets. SFAS No.
144 amends SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of, and establishes a single accounting
model for the impairment or disposal of long-lived assets. SFAS No. 144 is
effective for fiscal years beginning after December 15, 2001. The adoption of
this standard did not have a material impact on results of operations, financial
position or liquidity.

                                       12

<PAGE>

          In April 2002, the Financial Accounting Standards Board issued SFAS
145, which updates, clarifies, and simplifies certain existing accounting
pronouncements beginning at various dates in 2002 and 2003. The statement
rescinds SFAS 4 and SFAS 64, which required net gains or losses from the
extinguishment of debt to be classified as an extraordinary item in the income
statement. These gains and losses will now be classified as extraordinary only
if they meet the criteria for such classification as outlined in APB Opinion 30,
which allows for extraordinary treatment if the item is material and both
unusual and infrequent in nature. The statement also rescinds SFAS 44 related to
the accounting for intangible assets for motor carriers and amends SFAS 13 to
require certain lease modifications that have economic effects similar to
sale-leaseback transactions to be accounted for as such. The changes required by
SFAS 145 are not expected to have a material impact on results of operations,
financial position, or liquidity.

          In July 2002, the Financial Accounting Standards Board issued SFAS
146, Accounting for Costs Associated with Exit or Disposal Activities, which
becomes effective for the Corporation beginning January 1, 2003. This statement
requires a cost associated with an exit or disposal activity, such as the sale
or termination of a line of business, the closure of business activities in a
particular location, or a change in management structure, to be recorded as a
liability at fair value when it becomes probable the cost will be incurred and
no future economic benefit will be gained by the Company for such cost.
Applicable costs include employee termination benefits, contract termination
costs, and costs to consolidate facilities or relocate employees. SFAS 146
supersedes EITF Issue No. 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity, which in some cases
required certain costs to be recognized before a liability was actually
incurred. The adoption of this standard is not expected to have a material
impact on results of operations, financial position, or liquidity.

          On October 1, 2002, the Financial Accounting Standards Board issued
SFAS No. 147, Acquisitions of Certain Financial Institutions, which amends
certain provisions of SFAS No. 72, SFAS No. 144, and FASB Interpretation No. 9.
SFAS No. 147 removes acquisitions of financial institutions from the scope of
SFAS No. 72 and requires that such acquisitions be accounted for in accordance
with SFAS No. 141, Business Combinations. If the acquisition meets the
definition of a business combination, it shall be accounted for by the purchase
method in accordance with the provisions of SFAS No. 141. Any goodwill that
results will be accounted for in accordance with the provisions of SFAS No. 142.
If the acquisition does not meet the definition of a business combination, the
cost of the assets acquired shall be allocated to the individual assets acquired
and liabilities assumed based on their relative fair values and shall not give
rise to goodwill.

          In addition, this proposed statement would amend SFAS No. 144 to
include in its scope long-term customer-relationship intangible assets of
financial institutions such as depositor- and borrower-relationship intangible
assets and credit-cardholder intangible assets. Accordingly, those intangible
assets would be subject to the same undiscounted cash flow recoverability tests
and impairment loss recognition and measurement provisions that SFAS No. 144
requires for long-term tangible assets and other finite-lived intangible assets
that are held and used.

          Existing unidentifiable intangible assets, as that term is defined in
SFAS No. 72, previously recognized under the provisions of SFAS No. 72 shall
continue to be amortized (consistent with the existing clarifying provisions of
Emerging Issues Task Force Topic D-100) unless the transaction in which the
intangible asset arose meets the definition of a business combination.

                                       13

<PAGE>

          Management believes its 1995 branch office acquisition meets the
definition of a business combination and has discontinued amortizing the
intangible, subject to periodic review for impairment.

          In December 2002, the Financial Accounting Standards Board issued SFAS
No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure,
which provides guidance on how to transition from the intrinsic value method of
accounting for stock-based employee compensation under APB 25 to SFAS 123's fair
value method of accounting, if a company so elects. The Corporation will not
adopt the fair value method of recording stock options under SFAS 123 and,
accordingly, this standard will not have a material impact on results of
operations, financial position or liquidity.

4.   BRANCH ACQUISITION

          On April 29, 2002, the Bank acquired the branch facility and related
business of another commercial bank. The purchase method transaction involved
the assumption of deposits and acquisitions of assets as follows (in thousands):

Deposits assumed (at fair value)                       $18,743,525
                                                       ===========
Assets acquired:
   Cash                                                $   136,375
   Loans receivable                                         12,433
   Premises and equipment                                   14,565
   Core deposit intangible                                 750,662
                                                       -----------

      Total                                            $   914,035
                                                       ===========

5.   RESTRICTIONS ON CASH AND DUE FROM BANKS

          The Bank is required by the Federal Reserve to maintain a reserve
balance based principally on deposit liabilities. The balance maintained is
included in cash and due from banks. The reserve balances kept at the Federal
Reserve Bank as of December 31, 2002 were $232,000.

6.   INVESTMENT SECURITIES

          The amortized cost and estimated fair values of investments securities
are as follows:

<TABLE>
<CAPTION>
                                                           Gross        Gross
                                            Amortized    Unrealized   Unrealized    Estimated
                                              Cost         Gains        Losses     Fair Value
                                           -----------   ----------   ----------   -----------
<S>                                        <C>            <C>             <C>      <C>
Balance at December 31, 2002
Available for sale:
   U.S. Treasury and government agencies   $46,839,253    $564,297        $--      $47,403,550
   Mortgage-backed securities                5,517,590     189,365         --        5,706,954
   State and municipals                        508,930       7,295         --          516,225
                                           -----------    --------        ---      -----------

      Total                                $52,865,773    $760,957        $--      $53,626,729
                                           ===========    ========        ===      ===========

Held to maturity:
   U.S. Government agencies                $ 2,012,675    $131,705        $--      $ 2,144,380
   Other                                        44,530          --         --           44,530
                                           -----------    --------        ---      -----------

      Total                                $ 2,057,205    $131,705        $--      $ 2,188,910
                                           ===========    ========        ===      ===========
</TABLE>

                                       14

<PAGE>
<TABLE>
<CAPTION>
                                                            Gross        Gross
                                            Amortized    Unrealized    Unrealized    Estimated
                                               Cost         Gains        Losses     Fair Value
                                           -----------   -----------   ----------   -----------
<S>                                        <C>             <C>         <C>          <C>
Balance at December 31, 2001
Available for sale:
   U.S. Treasury and government agencies   $41,227,200     $160,858    $(457,068)   $40,930,990
   Mortgage-backed securities                7,633,242       10,382     (149,848)     7,493,776
   State and municipals                        512,076           --       (4,422)       507,654
                                           -----------     --------    ---------    -----------

      Total                                $49,372,518     $171,240    $(611,338)   $48,932,420
                                           ===========     ========    =========    ===========

Held to maturity:
   U.S. Government agencies                $ 2,018,656     $ 56,964    $      --    $ 2,075,620
   Other                                        45,500           --           --         45,500
                                           -----------     --------    ---------    -----------

      Total                                $ 2,064,156     $ 56,964    $      --    $ 2,121,120
                                           ===========     ========    =========    ===========
</TABLE>

          The amortized cost and estimated fair value of debt securities at
December 31, 2002, by contractual maturity, are shown below. Expected maturities
may differ from contractual maturities because borrowers have the right to call
or repay obligations without call or prepayment penalties.

                                                   Amortized       Fair
                                                      Cost         Value
                                                  -----------   -----------
Available for sale:
   Due after one year through five years          $35,348,183   $35,786,015
   Due after five years through ten years          12,000,000    12,133,760
   Mortgage-backed securities                       5,517,590     5,706,954
                                                  -----------   -----------

      Total                                       $52,865,773   $53,626,729
                                                  ===========   ===========

Held to maturity:
   Due after one year through five years          $ 2,012,675   $ 2,144,380
   Due after ten years                                 44,530        44,530
                                                  -----------   -----------

      Total                                       $ 2,057,205   $ 2,188,910
                                                  ===========   ===========

          During the year ended December 31, 2002 available-for-sale securities
were sold resulting in gross proceeds of $13,000,000 and gross gains of
$226,356. During 2001, the gross proceeds for the sale of available securities
were $22,438,448 and gains of $197,072.

          Securities with a fair value of $17,492,830 at December 31, 2002 have
been pledged as collateral for money market and certificate of deposit accounts.

7.   LOANS AND ALLOWANCE FOR LOAN LOSSES

          The composition of loans, net of unearned income at December 31 is as
follows:
                                                     2002           2001
                                                 ------------   ------------

Real estate                                      $ 78,855,951   $ 71,961,877
Commercial                                         30,964,151     23,125,985
Consumer                                           10,828,437     10,612,351
Credit card loans                                     922,792      1,106,686
                                                 ------------   ------------

                                                 $121,571,331   $106,806,899
                                                 ============   ============

                                       15

<PAGE>

          Transactions in the allowance for loan losses are summarized as
follows:

                                               2002         2001
                                            ----------   ---------

Balance at January 1                        $  959,574   $ 732,636
                                            ----------   ---------
Provision charged to operating expense         340,000     399,996
                                            ----------   ---------
Loans charged-off                             (314,004)   (246,168)
Recovery on loans previously charged-off        63,101      73,110
                                            ----------   ---------
   Net loans charged-off                      (250,903)   (173,058)
                                            ----------   ---------

Balance at December 31                      $1,048,671   $ 959,574
                                            ==========   =========

          Information with respect to impaired loans at December 31, 2002 and
2001 and for the years then ended is as follows:

                                                         2002        2001
                                                      ----------   --------
Impaired loans with a valuation allowance             $  313,302   $285,574
Impaired loans without a valuation allowance              96,052    363,687
                                                      ----------   --------

      Total impaired loans                            $  409,354   $649,261
                                                      ==========   ========

Allowance for loan losses related to impaired loans   $   54,953   $ 70,059
Allowance for loan losses related to other than
   impaired loans                                        993,718    889,515
                                                      ----------   --------

      Total allowance for loan losses                 $1,048,671   $959,574
                                                      ==========   ========

Average impaired loans for the year                   $  413,593   $756,213
                                                      ==========   ========

          Approximately $22,056 and $42,123 of interest income was recognized on
average impaired loans for the years ended December 31, 2002 and 2001,
respectively. Interest income recognized on impaired loans on a cash basis
during 2002 and 2001 was immaterial.

          The Bank has sold certain real estate mortgage loans without recourse
and in some cases retained the related servicing rights. The principal balances
of these serviced loans, which are not included in the accompanying consolidated
balance sheets, totaled $4,045,571 and $8,419,720 at December 31, 2002 and 2001,
respectively. There were no loans held for sale at December 31, 2002 and 2001.

          At December 31, 2002 and 2001 the net carrying amount of mortgage
servicing rights was $12,289 and $31,640, respectively, which approximated fair
value and are included in other intangible assets.

          The Bank has granted loans to certain officers and directors of the
Bank and their associates. Related party loans are made on substantially the
same terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with unrelated persons and do not involve more
than the normal risk of collectibility. The aggregate dollar amount of these
loans was $3,546,765 and $5,585,520 at December 31, 2002 and 2001, respectively.
During 2002, $1,151,892 of new loans were made while repayments totaled
$3,190,647. During 2001, $2,125,070 of new loans were made while repayments
totaled $5,383,333.

                                       16

<PAGE>

8.   PREMISES AND EQUIPMENT

          The major classes of premises and equipment at December 31 are
summarized as follows:

                                                       2002         2001
                                                    ----------   ----------

Land                                                $   30,000   $   30,000
Buildings                                              129,510      129,510
Furniture, fixtures and equipment                    2,728,890    3,008,180
Leasehold improvements                                 524,570      626,587
                                                    ----------   ----------
                                                     3,412,970    3,794,277
   Less accumulated depreciation and amortization    2,427,952    2,798,668
                                                    ----------   ----------

      Total                                         $  985,018   $  995,609
                                                    ==========   ==========

          Depreciation expense was $440,535 and $588,293 for the years ended
December 31, 2002 and 2001.

          The Bank leases branch and office facilities. The lease agreements
provide for the payment of utilities and taxes by the lessee. Future minimum
payments for each of the five succeeding years under noncancelable operating
leases consisted of the following at December 31, 2002:

2003         $636,061
2004          628,950
2005          557,894
2006          518,113
2007          476,005
Thereafter    918,857

          Total rental expense under operating leases amounted to $464,191 and
$482,119 for the years ended December 31, 2002 and 2001, respectively.

9.   GOODWILL AND OTHER INTANGIBLE ASSETS

          Upon adoption of SFAS 147, the Corporation reclassified its
unidentifiable intangible asset to goodwill. The reclassification was
retroactive to January 1, 2002 and allowed for the cessation of amortization for
the year ended December 31, 2002. The following table shows the proforma effects
of the adoption of SFAS 147:

                                                   2002        2001
                                                ----------   --------
Goodwill amortization:
   Pretax                                       $       --   $331,272
   After-tax                                            --    203,335

Net income:
   Reported                                      1,077,292    729,878
   Add back:  after-tax goodwill amortization           --    203,335
                                                ----------   --------

   Adjusted                                     $1,077,292   $933,213
                                                ==========   ========

                                       17

<PAGE>

                                                          2002     2001
                                                          -----   -----
Basic net income per share:
   Reported                                               $1.47   $1.02
   Add back: after-tax goodwill amortization per share      .00     .28
                                                          -----   -----

   Adjusted                                               $1.47   $1.30
                                                          =====   =====

Diluted net income per share:
   Reported                                               $1.43   $ .99
   Add back: after-tax goodwill amortization per share      .00     .28
                                                          -----   -----

      Adjusted                                            $1.43   $1.27
                                                          =====   =====

          Goodwill is tested annually for impairment. If the implied fair value
of goodwill is lower than its carrying amount, goodwill impairment is indicated
and goodwill is written down to its implied fair value. Subsequent increases in
goodwill value are not recognized in the financial statements.

          The Corporation has a finite-lived core deposit intangible asset
created in 2002 which is being amortized over a 9-year period beginning in 2002.
Annual amortization expense related to this intangible will be $62,153 per year
through 2010 and $15,538 in 2011.

10.  TIME DEPOSITS

          At December 31, 2002, time deposits with a remaining maturity of one
year or more amounted to $12,444,804. Maturities of all time deposits are as
follows:

2004         $6,522,475
2005         $2,473,188
2006         $1,414,568
2007         $1,978,571
Thereafter   $   56,002

          Deposits are the Company's primary funding source for loans and
investment securities. The mix and repricing alternatives can significantly
affect the cost of this source of funds and, therefore, impact the margin.

11.  INCOME TAX

          The Corporation's provision for income taxes for the years ended
December 31, is summarized as follows:

                                    2002       2001
                                  --------   ---------
Taxes currently payable           $383,816   $ 436,781
Deferred taxes (benefit)            88,805    (128,052)
                                  --------   ---------

Income tax expense for the year   $472,621   $ 308,729
                                  ========   =========

                                       18

<PAGE>

          A reconcilement of the difference between the statutory federal income
tax rate and the effective tax rate for the Corporation is as follows:

                                                    2002   2001
                                                    ----   ----

Federal income tax rate                             34.0%  34.0%
Increase (decrease) resulting from:
   Increase in value of bank-owned life insurance   (4.1)  (6.6)
   Other                                              .8    2.3
                                                    ----   ----

Effective tax rate                                  30.7%  29.7%
                                                    ====   ====

          Significant components of the Corporation's deferred tax liabilities
and assets at December 31 are as follows:

                                                  2002        2001
                                                ---------   --------
Deferred tax liabilities:
   Prepaid expenses                             $      --   $ 10,244
   Intangible assets                              108,127         --
                                                ---------   --------

       Total gross deferred tax liabilities       108,127     10,244
                                                ---------   --------

Deferred tax assets:
   Allowance for loan losses                      216,204    241,653
   Deferred loan origination fees                  25,274     36,957
   Depreciation                                   101,513    136,707
   Deferred compensation                           79,596     58,886
                                                ---------   --------

       Total gross deferred tax assets            422,587    474,203
                                                ---------   --------

Attributable to operations                        314,460    403,265
Unrealized (gain) loss on investments charged
   to other comprehensive income                 (258,725)   149,633
                                                ---------   --------

Deferred income taxes                           $  55,735   $552,898
                                                =========   ========

12.  SHORT-TERM BORROWINGS

          Short-term borrowings consist entirely of an advance from the Federal
Home Loan Bank ("FHLB"). Information related to these advances for the years
ended December 31, 2002 and 2001 is as follows:

                                                2002      2001
                                                ----   ----------

Balance at December 31                           $--   $       --
Maximum amount outstanding at any month-end       --    2,000,000
Daily average amount outstanding                  --      137,000
Weighted daily average interest rate              --         6.24%
Weighted average interest rate at December 31     --           --

                                        19

<PAGE>

          The FHLB advances are collateralized by a blanket lien on all 1 - 4
family residential mortgage loans. As of December 31, 2002, the Bank had an
unused available line of credit of $21,023,400.

13.  LONG-TERM DEBT

          Long-term  debt  consists of the  following  at December  31, 2002 and
2001:

                                                    2002         2001
                                                 ----------   ---------

Note payable - due July 1, 2012. Interest only
   payments from August 10, 2001 to August 1,
   2002. From August 2002 to July 2012, equal
   principal monthly and interest payments of
   $23,087 to maturity. Interest rate is fixed
   at 7.0% for the term of the note.             $1,943,334   $2,000,000
                                                 ==========   ==========

14.  EMPLOYEE BENEFIT PLANS

     .    Stock Options

               The Corporation has stock option award arrangements which provide
for the granting of options to acquire common stock to directors and key
employees. Option prices are equal to or greater than the estimated fair market
value of the common stock at the date of the grant. Options are generally
exercisable immediately after the date of the grant.

               A summary of the Corporation's stock options as of December 31,
2002 and 2001 and changes during the years ended on those dates is presented
below:

<TABLE>
<CAPTION>
                                                  2002                 2001
                                           ------------------   ------------------
                                                     Weighted             Weighted
                                                      Average              Average
                                                     Exercise             Exercise
                                           Shares     Price     Shares     Price
                                           -------   --------   -------   --------
<S>                                        <C>        <C>       <C>        <C>
Outstanding at the beginning of the year   156,685    $15.26    195,828    $15.18
Granted                                      4,457     17.35      4,307     17.00
Exercised                                   (2,664)    14.87    (29,398)    14.80
Forfeited                                  (12,766)    15.62    (14,052)    14.80
                                           -------              -------
Outstanding at end of year                 145,712     15.33    156,685     15.26
                                           =======              =======

Options exercisable at year-end            145,712    $15.33    156,685    $15.26
                                           =======              =======

Weighted average fair value of options
  granted during the year                             $ 7.75               $ 7.76
                                                      ======               ======
</TABLE>

                                       20

<PAGE>

               The following table summarizes information about stock options
outstanding at December 31, 2002:

                    Options Outstanding and Exercisable
                   ------------------------------------
                                  Weighted-
                                   Average    Weighted-
                                  Remaining    Average
    Exercise         Number         Life      Exercise
  Price Range      Outstanding     (Years)      Price
----------------   -----------   ----------   ---------

$ 9.87 to $14.00       1,013        2.96       $ 9.87
$14.80 to $15.24     116,436        3.68       $14.83
$15.75 to $17.35      28,263        7.06       $16.17

               The fair value of each option is estimated on the date of the
grant using Black-Scholes option pricing model. The Black-Scholes option pricing
model was originally developed for use in estimating the fair value of traded
options, which have different characteristics from the Corporation's employee
stock options. The model is also sensitive to changes in the subjective
assumptions, which can materially affect the fair value estimate. As a result,
management believes the Black-Scholes model may not necessarily provide a
reliable single measure of the fair value of employee stock options.

               The following weighted average assumptions were used for the
years ended December 31, 2002 and 2001:

                            2002    2001
                            -----   -----

Dividend yield                .00%    .00%
Expected volatility         20.00%  20.00%
Risk-free interest rate      4.87%  5.106%
Expected lives (in years)   10      5

               For purpose of pro forma disclosures, the estimated minimum value
of the options is amortized to expense over the options' vesting period. Note
that the effects of applying SFAS No. 123 for pro forma disclosure in the
current year are not necessarily representative of the effects on pro forma net
income for future years.

               Options under the Plans are granted with an exercise price equal
to the fair value of the shares of the date of grant. As allowed by SFAS No.
123, the Corporation has elected to continue applying APB Opinion No. 25.
Accordingly, no compensation cost has been recognized for the Plans. Had
compensation cost for the Plans been determined consistent with SFAS No. 123,
the Corporation's net income and earnings per share on a pro forma basis in 2002
and 2001 would have been as set out below follows:

                                           2002        2001
                                        ----------   --------

Net income - as reported                $1,077,292   $729,878

Deduct: Total stock-based employee
   compensation determined under fair
   value based method for all awards,
   net of related income tax effects       (21,202)   (20,517)
                                        ----------   --------

Pro forma net income                    $1,056,090   $709,361
                                        ==========   ========

                                       21

<PAGE>

                                                 2002    2001
                                                -----   -----

Earnings per share:
   Basic - as reported                          $1.47   $1.02
                                                =====   =====
   Basic - pro forma                            $1.44   $ .99
                                                =====   =====
   Diluted - as reported                        $1.43   $ .99
                                                =====   =====
   Diluted - pro forma                          $1.40   $ .96
                                                =====   =====

          Profit Sharing Retirement Savings Plan

               The Corporation has established a defined contribution plan
covering employees meeting certain age and service eligibility requirements. The
plan provides for cash deferrals qualifying under Section 401(k). Matching
contributions made by the Corporation totaled $55,766 and $54,842 for the years
ended December 31, 2002 and 2001, respectively.

          Deferred Compensation

               The Bank has entered into deferred compensation agreements with
two of its executive officers. Under the agreements, the Bank is obligated to
provide for each such officer or his beneficiaries, during a period of fifteen
years after the employee's death, disability or retirement, annual benefits
ranging from $90,000 to $200,000. The estimated present value of future benefits
to be paid is being accrued over the period from the effective date of the
agreements until the full eligibility dates of the participants. The expense
incurred for this plan for the years ended December 31, 2002 and 2001 was
$81,630 and $121,980, respectively. The Bank is the beneficiary of life
insurance policies, with aggregate cash surrender value of $3,679,501 at
December 31, 2002, that was purchased as a method of partially financing
benefits under this plan.

15.  CONCENTRATIONS OF CREDIT RISK

          Real estate loans comprise $78,855,951 and $71,961,877 of the total
loan portfolio at December 31, 2002 and 2001, respectively. All real estate
mortgage loans are collateralized by real property and/or other assets.

16.  CONTINGENT LIABILITIES

          The Corporation and its subsidiary at times, and in the ordinary
course of business, are subject to legal actions. Management does not believe
the outcome of such matters will have a material adverse effect on the financial
condition, results of operations, or cash flows of the Corporation.

                                       22

<PAGE>

17.  REGULATORY MATTERS

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

          Quantitative measures established by regulation to ensure capital
adequacy require the Corporation and the Bank to maintain amounts and ratios
(set forth in the table below) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as
defined) to average assets (as defined). As of December 31, 2002, the capital
levels of the Corporation and the Bank exceed all minimum capital adequacy
requirements to which they are subject.

          The Corporation's and the Bank's actual capital amounts and ratios are
also presented in the table: (in thousands)

<TABLE>
<CAPTION>
                                                                                              To Be Well
                                                                                           Capitalized Under
                                                                        For Capital        Prompt Corrective
                                                        Actual       Adequacy Purposes     Action Provisions
                                                   ---------------   ------------------   ------------------
                                                                     Minimum   Required   Minimum   Required
                                                   Amount    Ratio    Amount     Ratio     Amount     Ratio
                                                   -------   -----   -------   --------   -------   --------
<S>                                                <C>        <C>    <C>         <C>      <C>        <C>
As of December 31, 2002:
   Total Capital (to risk-weighted total assets)
      Harbor Bankshares Corporation                $11,485    9.12%  $10,069     8.0%     $12,586    10.0%
      Harbor Bank of Maryland                       13,380   10.63%   10,069     8.0%      12,586    10.0%

   Tier 1 Capital (to risk weighted assets)
      Harbor Bankshares Corporation                 10,437    8.29%    5,035     4.0%       7,552     6.0%
      Harbor Bank of Maryland                       12,332    9.80%    5,035     4.0%       7,552     6.0%

   Tier 1 Capital (to average assets)
      Harbor Bankshares Corporation                 10,437    5.18%    8,056     4.0%      10,070     5.0%
      Harbor Bank of Maryland                       12,332    6.12%    8,056     4.0%      10,070     5.0%

As of December 31, 2001:
   Total Capital (to risk-weighted total assets)
      Harbor Bankshares Corporation                $10,984    9.71%   $9,043     8.0%     $11,308    10.0%
      Harbor Bank of Maryland                       12,936   11.44%    9,043     8.0%      11,304    10.0%

   Tier 1 Capital (to risk weighted assets)
      Harbor Bankshares Corporation                 10,025    8.87%    4,522     4.0%       6,782     6.0%
      Harbor Bank of Maryland                       11,997   10.61%    4,522     4.0%       6,783     6.0%

   Tier 1 Capital (to average assets)
      Harbor Bankshares Corporation                 10,025    5.13%    7,823     4.0%       9,775     5.0%
      Harbor Bank of Maryland                       11,997    6.13%    7,823     4.0%       9,779     5.0%
</TABLE>

                                       23

<PAGE>

          Bank and holding company regulations, as well as Maryland law, impose
certain restrictions on dividend payments by the Bank, as well as restricting
extensions of credit and transfers of assets between the Bank and the Company.
At December 31, 2001, the Bank could have paid additional dividends of
$6,605,791 to its parent company without regulatory approval.

18.  EARNINGS PER SHARE

          Basic and diluted net income per common share calculations for the
years ended December 31, 2002 and 2001 are as follows:

                                                    2002        2001
                                                 ----------   --------

BASIC:
   Net income                                    $1,077,292   $729,878
                                                 ----------   --------

   Average common shares outstanding                731,974    716,835
                                                 ----------   --------

   Net income per common share - basic           $     1.47   $   1.02
                                                 ==========   ========

DILUTED:
   Net income                                    $1,077,292   $729,878
                                                 ----------   --------

   Average common shares outstanding                731,974    716,835

   Stock option adjustment                           21,663     19,690
                                                 ----------   --------

   Average common shares outstanding - diluted      753,637    736,525
                                                 ----------   --------

   Net income per common share - diluted         $     1.43   $    .99
                                                 ==========   ========

          Basic net income per common share is calculated by dividing net income
by the weighted- average number of common shares outstanding for the period.

          The calculation of weighted average shares outstanding has given
retroactive effect of the stock dividend declared in 2002 to all periods shown.

          Diluted net income per common shares takes into consideration the pro
forma dilution assuming the Corporation's outstanding in-the-money stock options
were converted or exercised into common shares. The average price of the
Corporation's common stock for the period is used to determine the dilutive
effect of outstanding stock options. As of December 31, 2002 all of the
Corporation's 145,712 outstanding stock options were considered to be in the
money.

                                       24

<PAGE>

19.  COMPREHENSIVE INCOME

          The following table summarizes the related tax effect of unrealized
gains (losses) on securities available-for-sale, with the net amount included in
"Accumulated Other Comprehensive Income (Loss)", as shown in the Consolidated
Statement of Changes in Stockholders' Equity:

<TABLE>
<CAPTION>
                                                          2002                                2001
                                          ----------------------------------   ----------------------------------
                                                          Tax                     Tax
                                            Pretax     (Expense)       Net       Pretax     (Expense)      Net
                                            Amount      Benefit      Amount      Amount      Benefit      Amount
                                          ----------   ---------   ---------   ----------   ---------   ---------
<S>                                       <C>          <C>         <C>         <C>          <C>         <C>
Unrealized gains (losses) on securities
   available-for-sale:
   Unrealized holding gains (losses)
      arising during the year             $1,427,411   $(485,320)  $ 942,091   $1,378,226   $(468,597)  $ 909,629
   Reclassification adjustment for
      (gains) losses included in
      net income                            (226,355)     76,961    (149,394)    (197,072)     67,004    (130,068)
                                          ----------   ---------   ---------   ----------   ---------   ---------

         Total                            $1,201,056   $(408,359)  $ 792,697   $1,181,154   $(401,593)  $ 779,561
                                          ==========   =========   =========   ==========   =========   =========
</TABLE>

20.  FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

          In the normal course of business, the Corporation has various
outstanding credit commitments which are properly not reflected in the financial
statements. These commitments are made to satisfy the financing needs of the
Corporation's clients. The associated credit risk is controlled by subjecting
such activity to the same credit and quality controls as exist for the
Corporation's lending and investing activities. The commitments involve diverse
business and consumer customers and are generally well collateralized.
Management does not anticipate that losses, if any, which may occur as a result
of these commitments would materially affect the stockholders' equity of the
Corporation. Since a portion of the commitments have some likelihood of not
being exercised, the amounts do not necessarily represent future cash
requirements.

          Loan and credit line commitments, totaled $22,287,000 at December 31,
2002 and $25,323,000 at December 31, 2001. These commitments are contingent upon
continuing customer compliance with the terms of the agreement.

          Commercial letters of credit, totaling $1,469,927 at December 31, 2002
and $760,361 at December 31, 2001, are obligations to make payments under
certain conditions to meet contingencies related to customers' contractual
agreements. They are primarily used to guarantee a customer's contractual and/or
financial performance, and are seldom exercised.

21.  FAIR VALUE OF FINANCIAL INSTRUMENTS

          SFAS No. 107, Disclosure About Fair Value of Financial Instruments
requires the Corporation to disclose fair value information about financial
instruments for which it is practicable to estimate, whether or not such fair
values are reflected in the consolidated balance sheets. Estimated fair value
amounts have been determined using available market information and other
valuation methodologies. However, considerable judgment is required to interpret
market data in developing the estimates of fair value. Accordingly, the
estimates presented are not necessarily indicative of the amount that could be
realized in a current market exchange. The use of different market assumptions
and estimation methodologies may have a material effect on the estimated fair
value amounts.

                                       25

<PAGE>

          Cash and Due from Banks and Federal Funds Sold

               The carrying amount approximated fair value.

          Interest-Bearing Deposits in Other Banks

               Due to their short-term nature, the carrying amount approximated
fair value.

          Investment Securities

               The fair values of securities are based upon quoted market prices
when available. If quoted market prices are not available, fair values are based
upon quoted market prices of comparable instruments.

          Loans

               The fair values of variable-rate loans and fixed-rate loans that
reprice within one year, with no significant credit risk, are based upon their
carrying amounts. The fair values of all other loans are estimated using
discounted cash flow analysis, which utilizes interest rates currently being
offered for loans with similar terms to borrowers of similar credit quality. The
reserve for possible loan losses is allocated to the various components of the
loan portfolio in determining the fair value.

          FHLB of Atlanta Stock

               Due to its restrictive nature, the fair value of FHLB of Atlanta
Stock approximates its carrying value.

          Accrued Interest Receivable

               The carrying amount reported in the consolidated balance sheets
is a reasonable estimate of fair value.

          Bank-Owned Life Insurance

               The carrying amount reported in the consolidated balance sheets
represents cash to be received on the surrender value of life insurance policies
and is a reasonable estimate of value.

          Deposits

               The fair value for demand deposits is, by definition, equal to
the amount payable on demand at the reporting date. The carrying amounts for
variable rate deposits and fixed-rate certificates of deposit that reprice
within one year approximate their fair values at the reporting date. Fair values
for longer-term fixed-rate certificates of deposit are estimated using
discounted cash flow analysis that applies interest rates currently being
offered on certificates.

          Accrued Interest Payable

               Accrued interest payable includes interest expensed but not yet
paid for deposits and notes payable. The carrying amount approximates its fair
value.

                                       26

<PAGE>

          Long-Term Debt

               Long-term debt is discounted on a cash flow approach based on
market rates as of December 31, 2002 and 2001.

          Off-Balance Sheet Financial Instruments

               The fair value of loan commitments and letters of credit was
estimated based upon the estimated amount of unamortized fees collected or paid
incident to granting or receiving the commitment.

               The carrying values and estimated fair values of the
Corporation's financial assets and liabilities are as follows:

<TABLE>
<CAPTION>
                                       December 31, 2002            December 31, 2001
                                 ---------------------------   ---------------------------
                                                 Estimated                      Estimated
                                   Carrying         Fair         Carrying         Fair
                                     Value         Value          Value           Value
                                 ------------   ------------   ------------   ------------
<S>                              <C>            <C>            <C>            <C>
Financial assets:
   Cash and due from banks       $  7,273,439   $  7,273,439   $  6,992,077   $  6,992,077
   Federal funds sold              12,653,002     12,653,002     10,553,426     10,553,426
   Interest bearing deposits
      in other banks                2,300,000      2,300,000      1,161,517      1,161,517
   Investment securities           55,683,934     55,815,639     50,996,576     51,053,540
   Loans, net of reserves         120,522,660    118,026,521    105,847,325    103,435,500
   FHLB of Atlanta stock              600,000        600,000        600,000        600,000
   Accrued interest receivable      1,188,469      1,188,469      1,077,140      1,077,140
   Bank-owned life insurance        3,679,501      3,679,501      3,500,335      3,500,335

Financial liabilities:
   Deposits                       193,293,747    192,841,751    171,531,188    171,290,300
   Accrued interest payable           319,508        319,508        538,383        538,383
   Long-term debt                   1,943,334      1,943,334      2,000,000      1,975,200
</TABLE>

          Off-Balance Sheet Financial Assets

<TABLE>
<CAPTION>
                                         2002                       2001
                               ------------------------   ------------------------
                                Estimated    Estimated     Estimated    Estimated
                                 Amount      Fair Value     Amount      Fair Value
                               -----------   ----------   -----------   ----------
<S>                            <C>           <C>          <C>           <C>
Commitments to extend credit   $18,605,000   $  (47,250)  $15,586,000   $  (32,500)
Other unused commitments         3,682,000   $   (7,250)    9,747,000      (12,500)
Commercial letters of credit     1,469,927           --       760,361           --
</TABLE>

                                       27

<PAGE>

22.  PARENT COMPANY ONLY FINANCIAL STATEMENTS

                            Condensed Balance Sheets

                                                           December 31,
                                                     -------------------------
                                                        2002          2001
                                                     -----------   -----------
Assets:
   Investment in bank subsidiary                     $16,044,654   $14,193,248
   Due from bank subsidiary                               48,013        48,131
                                                     -----------   -----------

      Total assets                                   $16,092,667   $14,241,379
                                                     ===========   ===========

Liabilities -
   Long-term debt                                    $ 1,943,334   $ 2,000,000

Stockholders' equity                                  14,149,333    12,241,379
                                                     -----------   -----------
      Total liabilities and stockholders' equity     $16,092,667   $14,241,379
                                                     ===========   ===========

                          Condensed Statement of Income

                                                     Years Ended December 31
                                                     -----------------------
                                                        2002        2001
                                                     ----------   ---------

Dividend from subsidiary                             $  201,675   $ 141,556
Interest and other expenses                            (212,009)   (141,556)
Income tax benefit                                       73,253      48,131
Equity in undistributed income of subsidiary          1,014,373     681,747
                                                     ----------   ---------

Net income                                           $1,077,292   $ 729,878
                                                     ==========   =========

                                       28

<PAGE>

                       Condensed Statements of Cash Flows

<TABLE>
<CAPTION>
                                                            Years Ended December 31
                                                            ------------------------
                                                                2002         2001
                                                            -----------   ----------
<S>                                                         <C>           <C>
Operating activities:
   Net income                                               $ 1,077,292   $  729,878
   Adjustment to reconcile net income to net
      cash provided by operating activities
   Change in other assets and liabilities, net                   (2,277)      47,459
   Equity in undistributed income of subsidiary              (1,014,373)    (681,747)
                                                            -----------   ----------

         Net cash provided by operating activities               60,642       95,590
                                                            -----------   ----------

Investing activities - Investment in subsidiary                      --     (581,453)
                                                            -----------   ----------

Financing activities:
   Repayment of long-term debt                                  (56,666)          --
   Proceeds from sale of common stock                                --      485,863
   Payments of cash dividends                                    (3,796)          --
                                                            -----------   ----------

         Net cash (used) provided by financing activities       (60,642)     485,863
                                                            -----------   ----------

Change in cash and cash equivalents                                  --           --

Cash and cash equivalents at beginning of year                       --           --
                                                            -----------   ----------

Cash and cash equivalents at end of year                    $        --   $       --
                                                            ===========   ==========
</TABLE>

                                       29

<PAGE>

                                                   Harbor Bankshares Corporation
--------------------------------------------------------------------------------

                          Harbor Bankshares Corporation

                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS

                  Table of Contents: Corporate Financial Review

CONSOLIDATED FIVE-YEARS SELECTED FINANCIAL DATA............................- 1 -

OVERVIEW...................................................................- 2 -

NET INTEREST INCOME........................................................- 2 -

PROVISION FOR LOAN LOSSES AND ASSET QUALITY................................- 3 -

      Non-Performing Assets................................................- 3 -

NON INTEREST INCOME........................................................- 4 -
      Non-Interest Income Summary

NON INTEREST EXPENSES......................................................- 5 -
      Non-Interest Expenses Summary

APPLICABLE INCOME TAXES....................................................- 5 -

CREDIT RISK ANALYSIS.......................................................- 5 -

ASSET AND LIABILITY MANAGEMENT.............................................- 6 -

      Introduction.........................................................- 6 -

      Liquidity............................................................- 6 -

      Interest Rate Sensitivity............................................- 7 -

LONG AND SHORT TERM BORROWINGS.............................................- 7 -

CAPITAL RESOURCES..........................................................- 8 -

CHANGES IN FINANCIAL POSITION..............................................- 8 -

                                       -i-

<PAGE>

                                                   Harbor Bankshares Corporation
--------------------------------------------------------------------------------

OTHER INFORMATION..........................................................- 9 -
      Recent Accounting Pronouncements.....................................- 9 -

SUPPLEMENT TO 2002 ANNUAL REPORT TO STOCKHOLDERS..........................- 10 -
      BOARD OF DIRECTORS..................................................- 10 -
      EXECUTIVE OFFICERS..................................................- 10 -
      ADVISORY BOARD......................................................- 10 -

STOCKHOLDER INFORMATION...................................................- 11 -

      MARKET SUMMARY OF STOCK.............................................- 11 -

      CASH DIVIDENDS......................................................- 11 -

      TRANSFER AGENT AND REGISTRAR........................................- 11 -

      SEC FORM 10-KSB.....................................................- 11 -

--------------------------------------------------------------------------------

Table of Exhibits

      A    Consolidated Three-Year Statement: Average Balances, Yields/Rates,
           Income and Expense at December 31 for each of the three years from
           2000 through 2002

      B    Summary of Loan Loss Experience and Allocation of Allowance for Loan
           Losses

      C    Interest Variance Analysis: A summary of the changes in interest
           earned and interest paid resulting from changes in volume and changes
           in rates

      D    Other Financial Information at December 31, 2002 as to: 1) Maturities
           of Certificates of Deposit of $100,000 or more; 2) the Corporation's
           Loan Portfolio by Type of Loan; and 3) the Corporation's Investment
           Securities Portfolio Summary as of that date.

                                      -ii-

<PAGE>

                                                   Harbor Bankshares Corporation
--------------------------------------------------------------------------------

                 CONSOLIDATED FIVE-YEARS SELECTED FINANCIAL DATA
                 HARBOR BANKSHARES CORPORATION AND SUBSIDIARIES

(In thousands, except per share data)

<TABLE>
<CAPTION>
                                                   Year ended December 31,
                                      ----------------------------------------------------
                                        2002       2001       2000       1999       1998
                                      --------   --------   --------   --------   --------
<S>                                   <C>        <C>        <C>        <C>        <C>
OPERATING DATA
Interest Income                       $ 11,647   $ 13,609   $ 13,665   $ 12,342   $ 11,083
Interest Expense                         3,402      5,973      6,199      5,718      5,143
                                      --------   --------   --------   --------   --------
Net Interest Income                      8,245      7,636      7,466      6,624      5,940
Provision for Loan Losses                  340        400        346        803        213
Other Operating Income                   2,220      2,329      1,841      1,470      1,302
Other Operating Expenses                 8,575      8,526      8,109      7,284      5,984
                                      --------   --------   --------   --------   --------
Income Before Taxes                      1,550      1,039        852          7      1,045
Income Taxes                               473        309        287          6        317
                                      --------   --------   --------   --------   --------
Net Income                            $  1,077   $    730   $    565   $      1   $    728
                                      ========   ========   ========   ========   ========
PER SHARE DATA
Net Income - Basic                    $   1.47   $   1.02   $    .81   $     --   $   1.05
Net Income - Diluted                      1.43        .99        .79         --         --
Cash and Stock Dividends                   .25         --         --        .25        .25
Book Value                            $  19.23   $  16.72   $  14.65   $  10.67   $  15.33

BALANCE SHEET DATA
Total Assets                          $210,234   $186,586   $184,517   $177,618   $184,723
Deposits                               193,294    171,531    169,282     165,54    167,482
Total Net Loans                        120,523    105,847    111,665    101,823     85,097
Total Stockholder's Equity              14,149     12,241     10,246      7,464     10,669
Return on Average Assets                   .54%       .37%       .32%        --        .50%
Return on Average Equity                   8.2%       6.2%       7.0%        --        6.9%
Tier 1 Regulatory Capital to Assets        5.0%       5.4%       4.6%       4.3%       3.9%
Dividend Payout Ratio %                   16.7%        --         --      117.0%      23.4%
</TABLE>

                                      -1-

<PAGE>

                                                   Harbor Bankshares Corporation
--------------------------------------------------------------------------------

                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS

                           Corporate Financial Review

OVERVIEW - 2002 COMPARED TO 2001

     All references to Harbor Bankshares Corporation (the "Corporation") should
be interpreted to include The Harbor Bank of Maryland (the "Bank") whenever
appropriate, or when specifically noted otherwise.

     The Corporation improved its performance for the year 2002 when compared to
the prior year. Earnings for the year were $1.1 million compared to $730
thousand earned during 2001, an increase of $347 thousand or 47.5 percent.

     The Harbor Bank of Maryland achieved earnings of $1.2 million compared to
$823 thousand for the prior year, an increase of $389 thousand or 47.3%.

     Returns on average assets (ROAA) and average equity (ROAE) for the
Corporation were .54% and 8.21% respectively, compared to the .37% and 6.24%
achieved during the prior year. The return on average assets for the Bank was
..61%, compared to .42% for the prior year.

NET-INTEREST INCOME

     Net interest income is the difference between interest income and related
fees on earning assets and the interest expense incurred on deposits and other
borrowings. Net interest income continued to be the Corporation's main source of
earnings. Net interest income for 2002 increased by $609 thousand or 8.0
percent. The increase reflects the repricing of liabilities during 2002 and its
beneficial effect on earnings.

     Total interest income decreased by $2.0 million or 14.4% to $11.6 million
for 2002 when compared to the $13.6 million earned during 2001. Lower interest
rates were the main reason for the decrease.

     Total interest expense also decreased by $2.6 million or 43.0% to $3.4
million in 2002 from $6.0 million in 2001. Lower interest rates resulted in
lower interest expense due to the repricing of liabilities throughout the year.

     Net interest margin for 2002 was 4.51% compared to 4.36% for 2001.

     The table attached as Exhibit A compares the Corporation's consolidated
average balances, interest income, interest expense and yields for a three-year
period.

                                      -2-

<PAGE>

                                                   Harbor Bankshares Corporation
--------------------------------------------------------------------------------

PROVISION FOR LOAN LOSSES AND ASSET QUALITY

     For the year ended December 31, 2002, we recorded a $340 thousand provision
for loan losses, compared to $400 thousand for the year ended December 31, 2001.
Gross charge-offs totaled $314 thousand for the year ended December 31, 2002, as
compared to the prior year total of $246 thousand. These charge-offs in 2002
primarily relate to credit cards and consumer and commercial loans.

     The allowance for loan losses as of December 31, 2002, was .86% of total
loans and .89% at the end of the comparable 2001 period. The lower ratio
reflects an increase in charge-offs and outstanding loan balances.

     Future provisions for loan losses will continue to be based upon our
assessment of the overall loan portfolio and its underlying collateral, the mix
of loans within the portfolio, delinquency trends, economic conditions, current
and prospective trends in real estate values, and other relevant factors.

     The table below shows the non-performing assets for a five-year period:

Non-Performing Assets (in thousands except percentages)

                                        2002    2001   2000    1999     1998
                                       ------   ----   ----   ------   ------

Non-accrual Loans                      $  409   $620   $265   $1,003   $1,107
Accruing Loans past due 90 days
   or more                                746    135      6       47      547
Foreclosed Real Estate                     70     14     37      217      638
Total Non-performing Assets and
   past due Loans                       1,225    769    308    1,267    2,292
Total Non-performing Assets and
   past due Loans to year-end Assets      .58%   .41%   .17%     .71%     1.2%
Total Non-performing Loans to
   year-end Loans                        1.01%   .72%   .24%     1.0%     1.9%

                                      -3-

<PAGE>

                                                   Harbor Bankshares Corporation
--------------------------------------------------------------------------------

     Our allowance for loan loss methodology is a loan classification-based
system. We base the required reserve on a percentage of the loan balance for
each type of loan and classification level. Watch, special mention, substandard
and doubtful loans are reserved at 5.0%, 10.0%, 20.0% and 50.0%, respectively.
Reserve percentages are based on each individual lending program, its loss
history and underwriting characteristics including loan to value, credit score,
debt coverage, collateral, and capacity to service debt. This analysis is used
to validate the loan loss reserve matrix as well as assist in establishing
overall lending direction.

     While management considers the Corporation's allowance for loan losses to
be adequate based on information currently available, future adjustments to the
allowance may be necessary due to changes in economic conditions, management's
assumptions as to future delinquencies or loss rates, and management's intent
with regard to asset disposition options. In addition, the Corporation's
allowance for loan losses is periodically reviewed by the bank regulatory
agencies as an integral part of their examination process. Based on their
review, the agencies may require the Corporation to adjust the allowance.

     The allocation of the allowance for loan losses is detailed in Exhibit B.

NON-INTEREST INCOME

     Non-interest income decreased by $108 thousand or 4.9% to $2.2 million in
2002. ATM fees were $274 thousand for 2002, representing 12.3% of other
operating income. Included in the 2002 non-interest income were $54 thousand of
gains on sale of loans, a $214 thousand award from CDFI (Treasury Department),
$26 thousand of servicing fees and a gain on sale of securities of $226
thousand. The 2001 non-interest income reflects a $45 thousand gain on sale of
loans, a $229 thousand award from CDFI (Treasury Department), $27 thousand of
servicing fees and a $197 gain on the sale of securities available for sale.

Non-Interest Income Summary (in thousands)

                                       2002     2001     2000     1999     1998
                                      ------   ------   ------   ------   ------

Service charges on deposit accounts   $  910   $  965   $1,069   $  845   $  609
ATM fees                                 274      166      147      155      336
Awards & Grants                          214      229      127       --       --
Gain on sale of real estate               --       --       --      112       --
Gain on sale of loans                     54       45       11        7       --
Gain on sale of securities               226      197       --       --       26
Servicing fees                            26       27       46       32       42
Other non-interest income                517      700      441      319      289
                                      ------   ------   ------   ------   ------
Total non-interest income             $2,221   $2,329   $1,841   $1,470   $1,302
                                      ======   ======   ======   ======   ======

                                      -4-

<PAGE>

                                                   Harbor Bankshares Corporation
--------------------------------------------------------------------------------

NON-INTEREST EXPENSES

     Non-interest expenses of $8.6 million in 2002 increased by $48 thousand or
..56% when compared to the prior year. Salaries and benefits of $4.2 million in
2002 reflected an increase of $241 thousand or 6.0% when compared to the prior
year salaries and benefits cost. Equipment expense decreased by $176 thousand or
26.9% due to less amortization cost. Professional fees increased slightly by $9
thousand or 4.5%. FDIC Insurance decreased by $57 thousand or 65.5% due to the
Corporation's subsidiary, The Harbor Bank of Maryland, returning to a
well-capitalized status. Other expenses increased by $250 thousand or 15.9%
reflecting general increases. Goodwill amortization decreased by $284 thousand
as a result of the adoption of FASB 147. The amortization of $47 thousand under
goodwill/other intangibles reflects the purchase of a branch facility during
2002. From 1998 to 2001, the amortization cost of goodwill before the adoption
of FASB 147 is reflected.

Non-Interest Expenses Summary (In thousands)

                                       2002     2001     2000     1999     1998
                                      ------   ------   ------   ------   ------

Salaries and Employee Benefits        $4,230   $3,989   $3,622   $3,220   $2,672
Occupancy Expense, net                   785      778      809      831      737
Equipment Expenses                       478      654      802      728      408
Data Processing Fees                     976      918      791      679      604
Professional Fees                        208      199      388      199      117
Goodwill/Other Intangibles                47      331      331      331      331
Amortization
FDIC Insurance                            30       87       29       44       37
Other Non-Interest Expense             1,821    1,571    1,337    1,252    1,078
                                      ------   ------   ------   ------   ------
Total Non-Interest Expense            $8,575   $8,527   $8,109   $7,284   $5,984
                                      ======   ======   ======   ======   ======

APPLICABLE INCOME TAXES

     Applicable income taxes includes current and deferred portions which are
detailed in Note 10 of the audited consolidated financial statements. Taxes for
2002 were $473 thousand compared to $309 thousand for 2001. The effective tax
rate for the year ended December 31,2002, was 30.7% compared to 29.7% for the
year ended December 31, 2001.

CREDIT RISK ANALYSIS

     The Corporation, through its subsidiary, The Harbor Bank of Maryland, has
in place credit policies and procedures designed to control and monitor credit
risk. Credit analysis and loan review functions have provided a check and
balance system for assessing initial and on-going risk associated with the
lending process.

                                      -5-

<PAGE>

                                                   Harbor Bankshares Corporation
--------------------------------------------------------------------------------

     Credit risk is mitigated through portfolio diversification, limiting
exposure to any single industry or customer, requiring collateral and employing
standard lending policies and underwriting criteria across the Corporation. Note
2 to the consolidated financial statements describes the Corporation's
accounting policies related to nonperforming loans and charge-offs and describes
the methodologies used to develop the allowance, including both the allocated
and unallocated components. The Corporation's policies are consistent with
regulatory standards.

ASSET AND LIABILITY MANAGEMENT

     Introduction

     The Investment Committee of the Corporation reviews policies regarding the
sources and uses of funds, maturity distribution, and associated interest rate
sensitivities. This effort is aimed at minimizing risks associated with
fluctuating interest rates, as well as maintaining sufficient liquidity.

     Liquidity

     Liquidity describes the ability of the Corporation to meet financial
obligations, including lending commitments and contingencies, that arise during
the normal course of business. Liquidity is primarily needed to meet the
borrowing and deposit withdrawal requirements of the customers of the
Corporation, as well as to meet current and planned expenditures. The
Corporation, through the Bank, is required to maintain adequate sources of cash
in order to meet its financial commitments in an organized manner without
incurring substantial losses. These commitments relate principally to changes in
the Bank's deposit base through withdrawals and changes in funds required to
meet normal and seasonal loan demands. The Bank, and thereby the Corporation,
derives liquidity through the maturity distribution of the investment portfolio,
loan repayments and income from earning assets. The Bank maintains a portion of
its investment portfolio as a liquidity reserve, which can be converted to cash
on an immediate basis.

     The Bank has also established secured lines of credit with the Federal Home
Loan Bank as an additional source of liquidity. Collateral must be pledged to
the FHLB before advances can be obtained. At December 31, 2002, the Corporation
had sufficient collateral in order to borrow up to an aggregate of $21.0 million
from the FHLB under the established lines of credit, if necessary. Liquidity is
also provided through the Corporation's portfolio of liquid assets, consisting
of cash and due from banks, interest-bearing deposits in other banks and
investment securities available for sale. Such assets totaled $63.2 million or
30.1% of total assets at December 31, 2002.

     The Corporation derives its cash from a combination of operating
activities, investing activities and financing activities as disclosed in the
consolidated statement of cash flows. Cash flows from operating activities
consist of interest income collected on loans and investments, interest expense
paid on deposits and other borrowings, other income collected, such as cash
received relating to service charges, and cash payments for other operating
expenses including income taxes.

                                      -6-

<PAGE>

                                                   Harbor Bankshares Corporation
--------------------------------------------------------------------------------

Cash flows from investing activities include the purchase, sale and maturity of
investments and interest bearing deposits in other banks, the net decrease in
the level of loans, and purchases of premises and equipment. Cash flows from
financing activities consist of movements in the level of deposits and other
borrowings, and proceeds from the issuance of stock.

     For the year ended December 31, 2002, net cash provided by operating
activities totaled $424 thousand. Net cash used by investing activities totaled
$19.7 million resulting primarily from the proceeds of called investment
securities totaling $26.9 million, proceeds from sale of securities of $15.3
million, purchase of investment securities of $45.4 million and a net increase
in loans of $14.9 million. Net cash provided by financing activities totaled
$21.7 million resulting from the net increase in total deposits.

     Interest Rate Sensitivity

     Interest rate sensitivity refers to the degree that earnings will be
affected by changes in the general level of interest rates. Interest sensitive
assets are typically loans which have interest rates related to the prime
interest rate or other type of index. Interest sensitive liabilities have
interest rates which likewise vary based upon market changes. Reducing the net
interest rate sensitivity of the Corporation's balance sheet is the goal of the
asset/liability management process.

     One measure of interest rate sensitivity is the difference between interest
sensitive assets and interest sensitive liabilities called the "interest
sensitivity gap." The following table shows an analysis of the Corporation's
cumulative interest sensitivity gap position.

     Cumulative Interest Sensitivity Gap

                                      1 year
                                      ------

     Interest sensitive assets        $92.9
     Interest sensitive liabilities    83.6
                                      -----
     Interest sensitivity gap         $ 9.3
                                      =====
     Gap to total assets                4.4%
                                      -----

Exhibit C, "Interest Variance Analysis", sets forth, for the period indicated, a
summary of the changes in interest earned and interest paid resulting from
changes in volume and changes in rates.

LONG AND SHORT TERM BORROWINGS

     As of December 31, 2002, the Corporation had a $1.9 million long term
borrowing arrangement with the National Investment Community Fund at a fixed
rate of 7.0%, payable July 1, 2012. The interest paid on the debt for 2002,
totaled $141 thousand. There were no short-term borrowings as of December 31,
2002.

                                      -7-

<PAGE>

                                                   Harbor Bankshares Corporation
--------------------------------------------------------------------------------

CAPITAL RESOURCES

     Stockholders' equity increased by $1.9 million or 15.6% to $14.1 million.
This increase was mainly due to net income of $1.1 million and the unrealized
gain of securities held for sale, which was $502 thousand at December 31, 2002,
compared to a loss of $290 thousand for 2001. As of year end, the Corporation
had sufficient liquidity to withstand any unusual demand of funds without
liquidating these securities, such as borrowing arrangements with the Federal
Home Loan Bank of $21.0 million. Stockholders' equity was 6.7% of total assets
as of the year-end. The Tier 1 capital ratio as of December 31, 2002 was 5.0%,
and the risk-based capital ratio was 9.1%. The requirements established by
regulators are 4.0% for Tier 1 capital and 8.0% for total risk-based capital.
The book value of each share of common stock was $19.23 as of December 31, 2002.

     The Tier I capital ratio for the Corporation's subsidiary, The Harbor Bank
of Maryland as of December 31, 2002, was 6.1% and the risk-based capital ratio
was 10.6%, both above the established regulatory requirements.

CHANGES IN FINANCIAL POSITION

     The Corporation, through its subsidiary, The Harbor Bank of Maryland,
continued its growth during 2002. Total assets increased by $23.6 million or
12.7 percent.

     Deposits increased from $171.5 million in 2001 to $193.3 million in 2002,
an increase of $21.8 million or 12.7%. Net loans increased to $120.5 million in
2002 from $105.8 million in 2001, an increase of $14.7 million or 13.9%.

     The Corporation plans to continue its expansion through marketing efforts
by its Management and Board of Directors.

     Exhibit D presents data and information at December 31, 2002, as to: 1)
Maturities of Certificates of Deposit of $100,000 or more; 2) the Corporation's
Loan Portfolio by Type of Loan; and 3) the Corporation's Investment Securities
Portfolio Summary as of that date.

                                      -8-

<PAGE>

                                                   Harbor Bankshares Corporation
--------------------------------------------------------------------------------

OTHER INFORMATION

     For a complete discussion of recent accounting pronouncements and their
effect on the Corporation's financial statements, please refer to Note 3 of the
Corporation's audited consolidated financial statements.

                                      -9-

<PAGE>

                                                   Harbor Bankshares Corporation
--------------------------------------------------------------------------------

                          HARBOR BANKSHARES CORPORATION
              SUPPLEMENT TO THE 2002 ANNUAL REPORT TO STOCKHOLDERS

BOARD OF DIRECTORS
<TABLE>
<S>                            <C>
Joseph Haskins, Jr.            Chairman, President and Chief Executive Officer/Harbor Bankshares Corporation
James H. DeGraffenreidt, Jr.   Chairman and CEO/WGL Holdings, Inc.
Joe Louis Gladney              President/Gladney Transportation and Oil Company
Louis J. Grasmick              President and CEO/Louis J. Grasmick Lumber Co., Inc.
Sachinder Gupta                President/E2CR, Inc.
Nathaniel Higgs, Th.B., D.D.   Pastor Emeritus/Southern Baptist Church
Delores G. Kelley, Ph.D.       Senator/Maryland State Senate
Erich March                    Vice President/William C. March Funeral Home
John Paterakis                 President and Chief Executive Officer/H&S Bakery
John D. Ryder                  President/AXS Technologies
Edward St. John                President and Chief Executive Officer/MIE Investment Co.
James Scott, Jr.               Principal/Penan & Scott, P.C.
Carl W. Struever               President and CEO/Struever Bros. Eccles and Rouse
Dr. Walter S. Thomas           Pastor/New Psalmist Baptist Church
Stanley W. Tucker              President/Meridian Management Group, Inc.
George F. Vaeth, Jr.           Architect/George Vaeth Associates, Inc.

EXECUTIVE OFFICERS

Joseph Haskins, Jr.            Chairman, President and CEO/Corporation and Bank
John Paterakis                 Chairman, Executive Committee/Corporation and Bank
Teodoro J. Hernandez           Treasurer/Corporation - Senior Vice President and Cashier/Bank
George F. Vaeth, Jr.           Secretary/Corporation and Bank

ADVISORY BOARD

Gary L. Attman                 Principal/Attman Properties Company
Henry Baines                   President/Stop, Shop and Save Supermarkets
Kenneth Banks                  President/Banks Contracting Co., Inc.
Robert L. Haynes               Pastor/New Pleasant Grove Missionary Baptist Church
Walter W. Hill, Jr.            Vice President/ECS Technologies, Inc.
Dr. Derek Lindsey              Physician and CEO/True Health Care
Joshua Matthews                President/JCM Control Systems, Inc.
Hassan Murphy                  Attorney/William H. Murphy Jr. and Associates, P.A.
William Villanueva             Vice President/M&W Medical Equipment
James Watkins, (Col.)          President/Watkins Security Agency
Kenneth O. Wilson              President and Owner/Inner Harbor Marina
</TABLE>

                                     -10-

<PAGE>

                                                   Harbor Bankshares Corporation
--------------------------------------------------------------------------------

STOCKHOLDERS INFORMATION

     MARKET SUMMARY OF STOCK

     Harbor Bankshares Corporation is traded privately and is not listed on
any exchange. During 2002 and 2001, there was little trading activity in
the stock. The bid and ask price during 2002 was $18.00 per share. During
2001 the bid and ask price varied from $17.00 to $18.00 per share. At
December 31, 2002 the Corporation had 702 common stockholders of record.

     CASH DIVIDENDS

     A stock dividend equivalent to $.25 per share was paid during the
first quarter of 2002.

     TRANSFER AGENT AND REGISTRAR

          American Stock Transfer and Trust Company
          59 Maiden Lane
          New York, New York 10007
          (718) 921-8206

     SEC FORM 10-KSB

     The Corporation files an Annual Report on Form 10-KSB with the
Securities and Exchange Commission. A copy of this report will be sent
without charge to any stockholder who submits a request in writing to:

          Teodoro J. Hernandez, Treasurer
          Harbor Bankshares Corporation
          25 West Fayette Street
          Baltimore, Maryland 21201

This report also includes exhibits, a copy of which the Corporation will
furnish its stockholders upon payment of a reasonable fee.

                                     -11-

<PAGE>

                                                   Harbor Bankshares Corporation
--------------------------------------------------------------------------------

                                                                       Exhibit A

                          HARBOR BANKSHARES CORPORATION
                       CONSOLIDATED THREE-YEARS STATEMENT:
                AVERAGE BALANCES, YIELDS/RATES AND INCOME EXPENSE
                             (dollars in thousands)

<TABLE>
<CAPTION>
Year ended December 31,                                   2002                           2001
                                             Average    Yields/   Income    Average    Yields/   Income
                                             Balances    Rates    Expense   Balances    Rates    Expense
                                             --------   -------   -------   --------   -------   -------
<S>                                          <C>         <C>      <C>       <C>         <C>      <C>
ASSETS
U.S. Treasury Securities                     $  2,989    2.64%    $    79   $  2,138     4.07%   $    87
U.S. Government Agencies                       49,256    4.17       2,055     55,140     6.19      3,411
Interest-Bearing Deposits with Other Banks      1,770    3.56          63        998     4.84         48
FHLB Stock and Other Securities                 1,155    4.50          52        652     6.90         45
Federal Funds Sold                             17,083    1.60         274     18,805     3.89        731
                                             --------             -------   --------             -------
                                               72,253    3.49%      2,523     77,733     5.56%     4,322
                                             --------             -------   --------             -------
Loans
Commercial Loans                               27,976    8.21       2,297     22,313     9.10      2,032
Real Estate Loans                              70,996    8.06       5,723     72,261     8.53      6,161
Consumer Loans                                 11,321    9.75       1,104     10,493    10.43      1,094
                                             --------             -------   --------             -------
Loans Net of Unearned Income                  110,293    8.27       9,124    105,067     8.84      9,287
                                             --------             -------   --------             -------
Total Earning Assets                          182,546    6.38%    $11,647    182,800     7.44%   $13,609
                                                                  =======                        =======
Allowance for Possible Losses                  (1,007)                          (844)
Other Assets                                   16,633                         16,283
                                             --------                       --------
   TOTAL ASSETS                              $198,172                       $198,239
                                             ========                       ========

LIABILITIES AND STOCKHOLDERS' EQUITY

Non-Interest Bearing Deposits                $ 23,829      --%    $    --   $ 21,341       --%   $    --
                                             --------                       --------

Interest-Bearing Transaction Accounts          21,197     .29          62     18,597      .71        132
Savings                                        87,356    1.31       1,145     82,907     3.03      2,518
Time - $100,000 or more                        22,264    4.10         914     30,482     5.50      1,675
Other Time                                     27,567    4.14       1,140     29,907     5.00      1,497
                                             --------             -------   --------             -------
Savings and Time Deposits                     158,384    2.06%      3,261    161,893     3.59%     5,822
                                             --------                       --------
   TOTAL Deposits                             182,213                        183,234
Other Borrowed Money                               --      --%         --        137     6.24%         9
Notes payable                                   1,985     7.0         141      2,000      7.0        142
Other Liabilities                                 866      --          --      1,168       --         --
                                             --------                       --------
   TOTAL Liabilities                          185,064    2.12%    $ 3,402    186,539     3.64%   $ 5,973
                                                                  =======                        =======
STOCKHOLDERS' EQUITY                           13,108                         11,700
                                             --------                       --------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY   $198,172                       $198,239
                                             ========                       ========

Net Yield on Interest Earning Assets                     4.26%                           3.80%
Benefit of Non-Interest Bearing Funds                     .25%                            .56%
Net Interest Margin                                      4.51%                           4.36%

<CAPTION>
Year ended December 31,                                  2000
                                             Average    Yields/   Income
                                             Balances   Rates     Expense
                                             --------   -------   -------
<S>                                          <C>         <C>      <C>
ASSETS
U.S. Treasury Securities                     $     --       --%   $    --
U.S. Government Agencies                       54,733     6.61      3,616
Interest-Bearing Deposits with Other Banks        546     5.68         31
FHLB Stock and Other Securities                   528     8.14         43
Federal Funds Sold                              2,492     5.73        143
                                             --------             -------
                                               58,299     6.58%     3,833
                                             --------             -------
Loans
Commercial Loans                               30,094     9.82      2,958
Real Estate Loans                              72,703     8.65      6,288
Consumer Loans                                  5,063    11.57        586
                                             --------             -------
Loans Net of Unearned Income                  107,860     9.11      9,832
                                             --------             -------
Total Earning Assets                          166,159     8.22%   $13,665
                                                                  =======
Allowance for Possible Losses                    (724)
Other Assets                                    9,471
                                             --------
   TOTAL ASSETS                              $174,906
                                             ========

LIABILITIES AND STOCKHOLDERS' EQUITY

Non-Interest Bearing Deposits                $ 19,326       --%   $    --
                                             --------

Interest-Bearing Transaction Accounts          15,623      .88        138

Savings                                        76,169     3.94      3,002
Time - $100,000 or more                        17,098     5.18        885
Other Time                                     30,165     5.35      1,615
                                             --------             -------
Savings and Time Deposits                     139,055     4.05%     5,640
                                             --------
   TOTAL Deposits                             158,381
Other Borrowed Money                            4,547     6.82%       310
Notes payable                                   3,202     7.77        249
Other Liabilities                                 742       --         --
                                             --------
   TOTAL Liabilities                          166,872     3.73%   $ 6,199
                                                                  =======
STOCKHOLDERS' EQUITY                            8,034
                                             --------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY   $174,906
                                             ========

Net Yield on Interest Earning Assets                      4.49%
Benefit of Non-Interest Bearing Funds                      .51%
Net Interest Margin                                       5.00%
</TABLE>

<PAGE>

                                                   Harbor Bankshares Corporation
--------------------------------------------------------------------------------

                                                                       Exhibit B

                         SUMMARY OF LOAN LOSS EXPERIENCE
                             (dollars in thousands)

<TABLE>
<CAPTION>
Year ended December 31,                          2002       2001       2000      1999      1998
                                               --------   --------   --------   -------   -------
<S>                                            <C>        <C>        <C>        <C>       <C>
Balance at Beginning of Period                 $    959   $    732   $    678   $   699   $   654

Loans Charged Off:
   Commercial Loans                                 109         65        228       291        --
   Real Estate Loans                                 26         70         73       395        54
   Consumer Loans                                   179        111        103       239       149
                                               --------   --------   --------   -------   -------
   TOTAL Loans Charged Off                          314        246        404       925       203
                                               --------   --------   --------   -------   -------

Recoveries of Loans:
   Commercial Loans                                  42         39         69        40        --
   Real Estate Loans                                 11         22         16        26         3
   Consumer Loans                                    10         12         27        35        32
                                               --------   --------   --------   -------   -------
   TOTAL Loans Recovered                             63         73        112       101        35
                                               --------   --------   --------   -------   -------

Net Loans Charged Off                               251        173        292       824       168
                                               --------   --------   --------   -------   -------

Provisions Charged to Operations                    340        400        346       803       213
                                               --------   --------   --------   -------   -------

Balance at End of Period                       $  1,048   $    959   $    732   $   678   $   699
                                               ========   ========   ========   =======   =======

Daily Average Amount of Loans                  $110,293   $105,067   $107,860   $87,399   $80,502
                                               ========   ========   ========   =======   =======

Allowance for Possible Loan Losses to Loans
   Outstanding                                      .86%       .90%       .65%      .66%      .81%
                                               ========   ========   ========   =======   =======

Net Charge Offs to Average Loans Outstanding        .22%       .16%       .27%      .94%      .21%
                                               ========   ========   ========   =======   =======
</TABLE>

                     ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
                             (dollars in thousands)

As of December 31,                             2002    2001   2000   1999   1998
                                              ------   ----   ----   ----   ----
Commercial Loans                              $  555   $557   $442   $317   $ 59
Real Estate Loans                                138    110    127    131     34
Consumer Loans                                    76     80     17      4     34
Credit Cards                                      46     55     16     10     37
Unallocated                                      233    157    130    216    535
                                              ------   ----   ----   ----   ----
TOTAL Allowance for Loan Losses               $1,048   $959   $732   $678   $699
                                              ======   ====   ====   ====   ====

<PAGE>

                                                   Harbor Bankshares Corporation
--------------------------------------------------------------------------------

                                                                       Exhibit C

                           INTEREST VARIANCE ANALYSIS
                             (dollars in thousands)

<TABLE>
<CAPTION>
                                       2002 COMPARED TO 2001         2001 COMPARED TO 2000
                                    Increase (Decrease) due to:   Increase (Decrease) due to:
                                    ---------------------------   ---------------------------

                                    Volume    Rate       Net         Volume   Rate     Net
                                    ------   -------   -------       ------   -----   -----
<S>                                  <C>     <C>       <C>            <C>     <C>     <C>
INTEREST INCOME

Loans                                $ 462   $  (625)  $  (163)       $(254)  $(290)  $(544)

Investment Securities                 (232)   (1,125)   (1,347)         177    (293)   (116)

Federal Funds Sold                     (67)     (390)     (457)         935    (347)    588

Other Interest Bearing Assets (1)       37       (22)        5           26     (10)     16
                                     -----   -------   -------        -----   -----   -----

TOTAL Interest Income                $ 200   $(2,162)  $(1,962)       $ 884   $(940)  $ (56)
                                     =====   =======   =======        =====   =====   =====

INTEREST EXPENSE

Interest-Bearing Transaction
   Accounts                          $  18   $   (88)  $   (70)       $  26   $ (32)  $  (6)

Savings                                135    (1,509)   (1,374)         265    (749)   (484)

Time - $100,000 or more               (452)     (310)     (762)         693      98     791

Other Time                            (117)     (240)     (357)          14    (132)   (118)

Other Borrowed Money                    (8)       --        (8)        (301)     --    (301)

Notes Payable                           --        --        --          (93)    (15)   (108)
                                     -----   -------   -------        -----   -----   -----

TOTAL Interest Expense               $(424)  $(2,147)  $(2,571)       $ 604   $(830)  $(226)
                                     =====   =======   =======        =====   =====   =====

NET INTEREST INCOME                  $ 624   $   (15)  $   609        $ 280   $(110)  $ 170
                                     =====   =======   =======        =====   =====   =====
</TABLE>

Note:  Loan fees, which were included in interest income, were $644 in 2002,
       $481 in 2001, and $577 in 2000. A change in Rate/Volume has been
       allocated to the change in rate.

(1) Certificates of Deposit with other financial institutions.

<PAGE>

--------------------------------------------------------------------------------

                                                                       Exhibit D

                Other Financial Information at December 31, 2002

Maturities of Certificates of Deposit of $100,000 or More
(dollars in Thousands)

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------
                                          Over three months to
MATURITIES         Three months or less        12 months         Over 12 months    Total
-------------------------------------------------------------------------------------------
<S>                       <C>                   <C>                  <C>          <C>
Balance                   $ 7,993               $ 13,780             $ 4,069      $ 25,842
-------------------------------------------------------------------------------------------
Percent to Total             30.9%                  53.3%               15.8%        100.0%
-------------------------------------------------------------------------------------------
</TABLE>

Loan Portfolio by Type of Loan
(dollars in Thousands)

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------
                                  2002              2001              2000                1999               1998
-----------------------------------------------------------------------------------------------------------------------
<S>                        <C>         <C>    <C>         <C>    <C>         <C>    <C>         <C>    <C>        <C>
Commercial                 $ 30,914    21.7%  $ 23,126    21.7%  $ 33,515    29.8%  $ 31,801    31.0%  $20,711    24.1%
Real Estate Commercial       34,102    34.5%    36,807    34.5%    32,500    28.9%    24,789    24.2%   17,026    19.8%
Real Estate Construction      5,017     2.5%     2,699     2.5%     2,836     2.5%     2,992     2.9%    2,014     2.3%
Real Estate Residential      39,854    30.4%    32,456    30.4%    35,260    31.4%    39,336    38.4%   42,664    49.8%
Consumer                     11,684    10.9%    11,718    10.9%     8,286     7.4%     3,583     3.5%    3,382     4.0%
-----------------------------------------------------------------------------------------------------------------------

TOTAL LOANS                $121,571   100.0%  $106,806   100.0%  $112,397   100.0%  $102,501   100.0%  $85,796   100.0%
-----------------------------------------------------------------------------------------------------------------------
</TABLE>

Investments Securities Portfolio Summary
(dollars in Thousands)

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
                                                    2002      2001      2000      1999      1998
-------------------------------------------------------------------------------------------------
<S>                                               <C>       <C>       <C>       <C>       <C>
Securities Available for Sale:
   U.S. Treasury, State and Government Agencies   $47,919   $41,438   $52,379   $49,061   $38,771
   Mortgage-Backed Securities                       5,707     7,494     2,265       712    15,845
-------------------------------------------------------------------------------------------------
   TOTAL Securities Available for Sale            $53,626   $48,932    54,644    49,773    54,616
-------------------------------------------------------------------------------------------------
Securities Held to Maturity:
   U.S. Treasury and Government Agencies            2,012     2,019        --        --    17,152
   Mortgage-Backed Securities                          --        --        --        --        --
   Other Debt Securities                               45        45        27        20        15
-------------------------------------------------------------------------------------------------
   TOTAL Securities Held to Maturity                2,057     2,064        27        20    17,167
-------------------------------------------------------------------------------------------------

TOTAL Investment Securities Portfolio             $55,683   $50,996   $54,671   $49,793   $71,783
=================================================================================================
TOTAL PORTFOLIO YIELD                                4.08%      6.1%      6.6%      6.4%      6.7%
-------------------------------------------------------------------------------------------------
</TABLE>