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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



FORM 10-KSB



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 Baltimore, Maryland |  | 21201     
|(Address of principal executive officer)   |  | (Zip Code)



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
days.

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



Issuers revenues for its most recent fiscal year: $ 14,392,435



As of March 5, 2004, the registrant had 704,176 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 $20.00 per share of the Registrants Common Stock on that date. For purposes of this calculation, it is assumed that the 424,998 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, 2003 and Registrants 2004 Proxy Statement are incorporated by reference into Parts I and II.



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



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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 of Contents



|                                                                                              |  |   
|--------------------------------------------------------------------------------------------- |  | --
|PART I                                                                                        |  |   
|Item 1. Description of Business                                                               |  | 1 
|Item 2. Description of Properties                                                             |  | 9 
|Item 3. Legal Proceedings                                                                     |  | 9 
|Item 4. Submission of Matters to a Vote of Security Holders                                   |  | 9 
|                                                                                              | 
|PART II                                                                                       |  |   
|Item 5. Market for Common Equity and Related Stockholder Matters                              |  | 10
|Item 6. Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 10
|Item 7. Financial Statements                                                                  |  | 11
|Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure  |  | 11
|Item 8A. Controls and Procedures                                                              |  | 11
|                                                                                              | 
|PART III                                                                                      |  |   
|Item 9. Directors and Executive Officers of the Registrant                                    |  | 11
|Item 10. Executive Compensation                                                               |  | 11
|Item 11. Security Ownership of Certain Beneficial Owners and Management                       |  | 11
|Item 12. Certain Relationships and Related Transactions                                       |  | 11
|Item 13. Exhibits and Reports on Form 8-K                                                     |  | 12
|Item 14. Principal Accountant Fees and Services                                               |  | 12
|                                                                                              | 
|SIGNATURES                                                                                    |  | 13
|                                                                                              | 
|EXHIBITS                                                                                      |  |   





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Documents Incorporated by Reference



Portions of the Registrants Annual Report to Stockholders for the year
ended December 31, 2003 and the Registrants 2004 Proxy Statement are incorporated by reference into Parts I and II.



PART I



Forward Looking Statements



Item 1. Description of Business, Item 3. Legal Proceedings, Item 6. Managements Discussion and Analysis of Financial Condition and Results of
Operations, and other portions of this annual report on Form 10-KSB include forward-looking statements such as: statements of Harbor Bancshares Corporations goals, intentions, and expectations; estimates of risks and of future costs and
benefits; assessments of loan quality, probable loan losses, liquidity, off-balance sheet arrangements, and interest rate risk; and statements of its ability to achieve financial and other goals. These forward-looking statements are subject to
significant uncertainties because they are based upon: the amount and timing of future changes in interest rates and other economic conditions; future laws, regulations and accounting principles; and a variety of other matters. Because of these
uncertainties, the actual future results may be materially different from the results indicated by these forward-looking statements. In addition, Harbor Bankshares Corporations past growth and performance do not necessarily indicate its future
results.



|Item 1. | Description of Business
|------- | -----------------------



Harbor Bankshares Corporation



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, 2003. 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.



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 $11 thousand for the year ended December 31, 2003.



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



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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.



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 collateralized 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, 2003, Harbor Bankshares Corporation and its subsidiaries
employed 78 individuals, of which 27 were officers and 51 were full-time employees.



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Executive Officers



Information concerning executive officers of the Corporation is listed below:



|                     |  |     |  |                                                                               
|-------------------- |  | --- |  | ------------------------------------------------------------------------------
|Executive Officers   |  | Age |  | Position                                                                      
|                     |  |    
|Joseph Haskins, Jr.  |  | 56  |  | Chairman, President and Chief Executive Officer of the Bank and Corporation   
|                     |  |    
|John Paterakis       |  | 75  |  | Chairman of the Executive Committee of the Corporation and the Bank           
|                     |  |    
|Teodoro J. Hernandez |  | 58  |  | Treasurer of the Corporation and Senior Vice President and Cashier of the Bank



Tabular Information



Exhibit A, B, C and D to
the Registrants Annual Report to Shareholders for the year ended December 31, 2003 (the Annual Report) are incorporated herein by reference. The information in this description of business should be read in conjunction with the
information provided in the Managements Discussion and Analysis of Financial Condition and Operations, which is incorporated herein from the Annual Report.



Investment Securities(dollars in thousands)



Maturity Distribution of Investment Securities (dollars in thousands)



|                                         |  |                 |       |               |   |                  |  |       |     |  |   |       
|---------------------------------------- |  | --------------- | ----- | ------------- | - | ---------------- |  | ----- | --- |  | - | ------
|                                         |  | U.S. Treasuries |       | U.S. Agencies |   | Other Securities |  | TOTAL
|Maturing Within One Year                 |  | $               | 2,018 |               | $ | 11,190           |  | $     | 507 |  | $ | 13,715
|Maturing After One But Within Five Years |  |                 |      |               |   | 21,852           |  |       |    |  |   | 21,852
|Maturing After Five But Within Ten Years |  |                 |      |               |   | 1,966            |  |       |    |  |   | 1,966 
|Maturing After Ten Years                 |  |                 |       |               |   | 343              |  |       | 42  |  |   | 385   
|                                         |  |                 |       |               |   |                  |  |       |     |  |   |       
|TOTAL                                    |  | $               | 2,018 |               | $ | 35,351           |  | $     | 549 |  | $ | 37,918
|                                         |  |                 |       |               |   |                  |  |       |     |  |   |       



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Weighted Average Interest Rates of Investment Securities at December 31, 2003



|                                         |  |               |   |  |                         |   |  |                  |   |  |       |  
|---------------------------------------- |  | ------------- | - |  | ----------------------- | - |  | ---------------- | - |  | ----- | -
|                                         |  | U.S. Treasury |   |  | U.S. GovernmentAgencies |   |  | Other Securities |   |  | TOTAL |  
|Maturing Within One Year                 |  | 3.25          | % |  | 3.31                    | % |  | 2.87             | % |  | 3.14  | %
|Maturing After One But Within Five Years |  |              |   |  | 3.57                    | % |  |                 |   |  | 3.57  | %
|Maturing After Five But Within Ten Years |  |              |   |  | 3.34                    | % |  |                 |   |  | 3.34  | %
|Maturing After Ten Years                 |  |              |   |  | 6.19                    | % |  | 7.25             | % |  | 6.35  | %
|                                         |  |               |   |  |                         |   |  |                  |   |  |       |  
|TOTAL                                    |  | 3.25          | % |  | 3.41                    | % |  | 3.35             | % |  | 3.34  | %
|                                         |  |               |   |  |                         |   |  |                  |   |  |       |  



Carrying amount and the market value of Investment Securities at 2003 , 2002 AND 2001 (dollars in thousands)



|                                                                    |  |               |        |        |   |               |  |        |        |               |   |        |  |   |        |  |   |       
|------------------------------------------------------------------- |  | ------------- | ------ | ------ | - | ------------- |  | ------ | ------ | ------------- | - | ------ |  | - | ------ |  | - | ------
|                                                                    |  | 2003          |        | 2002   |   | 2001         
|                                                                    |  | AmortizedCost |        | Market |   | AmortizedCost |  | Market |        | AmortizedCost |   | Market
|U.S. Treasuries, Government Agencies and Mortgage Backed Securities |  | $             | 37,258 |        | $ | 37,369        |  | $      | 54,370 |               | $ | 55,254 |  | $ | 50,879 |  | $ | 50,501
|Other Securities                                                    |  |               | 548    |        |   | 549           |  |        | 554    |               |   | 561    |  |   | 558    |  |   | 553   
|                                                                    |  |               |        |        |   |               |  |        |        |               |   |        |  |   |        |  |   |       
|TOTAL                                                               |  | $             | 37,806 |        | $ | 37,918        |  | $      | 54,924 |               | $ | 55,815 |  | $ | 51,437 |  | $ | 51,054
|                                                                    |  |               |        |        |   |               |  |        |        |               |   |        |  |   |        |  |   |       



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Loan Distribution



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



|                  |  |      |         |      |   |         |  |      |         |      |   |         |  |   |        
|----------------- |  | ---- | ------- | ---- | - | ------- |  | ---- | ------- | ---- | - | ------- |  | - | -------
|                  |  | 2003 |         | 2002 |   | 2001    |  | 2000 |         | 1999
|Commercial Loans  |  | $    | 55,184  |      | $ | 30,964  |  | $    | 23,126  |      | $ | 33,515  |  | $ | 31,801 
|Real Estate Loans |  |      | 87,228  |      |   | 78,856  |  |      | 71,962  |      |   | 70,596  |  |   | 67,117 
|Consumer Loans    |  |      | 8,806   |      |   | 11,751  |  |      | 11,718  |      |   | 8,286   |  |   | 3,583  
|                  |  |      |         |      |   |         |  |      |         |      |   |         |  |   |        
|TOTAL             |  | $    | 151,218 |      | $ | 121,571 |  | $    | 106,806 |      | $ | 112,397 |  | $ | 102,501
|                  |  |      |         |      |   |         |  |      |         |      |   |         |  |   |        



Five-Year Loan Distribution at December 31 (expressed as percentages)



|                  |  |       |   |  |       |   |  |       |   |  |       |   |  |       |  
|----------------- |  | ----- | - |  | ----- | - |  | ----- | - |  | ----- | - |  | ----- | -
|                  |  | 2003  |   |  | 2002  |   |  | 2001  |   |  | 2000  |   |  | 1999  |  
|Commercial Loans  |  | 36.49 | % |  | 25.47 | % |  | 21.65 | % |  | 29.82 | % |  | 31.03 | %
|Real Estate Loans |  | 57.69 | % |  | 64.86 | % |  | 67.38 | % |  | 62.80 | % |  | 65.47 | %
|Consumer Loans    |  | 5.82  | % |  | 9.67  | % |  | 10.97 | % |  | 7.38  | % |  | 3.50  | %
|                  |  |       |   |  |       |   |  |       |   |  |       |   |  |       |  
|TOTAL             |  | 100.0 | % |  | 100.0 | % |  | 100.0 | % |  | 100.0 | % |  | 100.0 | %
|                  |  |       |   |  |       |   |  |       |   |  |       |   |  |       |  



Maturity and Repricing of Loans and December 31, 2003(dollars in thousands)



|                                     |  |                 |        |                  |   |               |  |       |       |  |   |        
|------------------------------------ |  | --------------- | ------ | ---------------- | - | ------------- |  | ----- | ----- |  | - | -------
|                                     |  | CommercialLoans |        | RealEstate Loans |   | ConsumerLoans |  | TOTAL
|Within One Year                      |  | $               | 32,734 |                  | $ | 5,444         |  | $     | 1,513 |  | $ | 39,691 
|After One Year But Within Five Years |  |                 | 17,679 |                  |   | 27,595        |  |       | 5,521 |  | $ | 50,795 
|After Five Years                     |  |                 | 4,771  |                  |   | 54,189        |  |       | 1,772 |  | $ | 60,732 
|                                     |  |                 |        |                  |   |               |  |       |       |  |   |        
|TOTAL                                |  | $               | 55,184 |                  | $ | 87,228        |  | $     | 8,806 |  | $ | 151,218
|                                     |  |                 |        |                  |   |               |  |       |       |  |   |        



Loans Classified by Sensitivity to Changes in Interest Rates (dollars in thousands)



|                                |  |                         |         |                              |   |        |  |   |        
|------------------------------- |  | ----------------------- | ------- | ---------------------------- | - | ------ |  | - | -------
|                                |  | FixedInterest RateLoans |         | AdjustableInterest RateLoans |   | TOTAL 
|Within One Year                 |  | $                       | 9,111   |                              | $ | 38,882 |  | $ | 47,993 
|After One But Within Five Years |  |                         | 50,762  |                              |   | 595    |  |   | 51,357 
|After Five Years                |  |                         | 51,868  |                              |   |       |  |   | 51,868 
|                                |  |                         |         |                              |   |        |  |   |        
|TOTAL                           |  | $                       | 111,741 |                              | $ | 39,477 |  | $ | 151,218
|                                |  |                         |         |                              |   |        |  |   |        



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, 2003, those loans
totaled $78 million or 51.32 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.



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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.



Interest on Non-accrual Loans. (dollars in thousands)



|                                                                   |  |      |    |      |   |   
|------------------------------------------------------------------ |  | ---- | -- | ---- | - | --
|                                                                   |  | 2003 |    | 2002
|Interest Income that Would Have Been Recorded Under Original Terms |  | $    | 30 |      | $ | 57
|                                                                   |  |      |    |      |   |   
|Interest Income Recorded during the Period                         |  | $    |   |      | $ |  
|                                                                   |  |      |    |      |   |   



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.



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



At December 31, 2003, the Corporation had $1,184 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. Impaired loans are individually assessed to determine whether the carrying value
exceeds the fair value of the collateral.



Foreclosed Real Estate



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, 2003, 2002 and 2001,
respectively, we had $0, $70 thousand and $14 thousand in foreclosed real estate.



Potential Nonperforming Loans



Those performing loans considered potential nonperforming loans, loans which are not included in the past due, nonaccrual or restructured categories, but
for which known information about possible credit problems cause management to be uncertain as to the ability of the borrowers to comply with the present loan repayment terms over the next six months, amounted to approximately $3,502 thousand at
December 31, 2003, compared to $3,270 thousand at December 31, 2002, and $2,215 thousand at December 31, 2001. These loans are subject to continuing management attention and are considered by management in determining the level of the allowance for
loan losses.



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Allowance for Loan Losses



The Corporations allowance for loan loss methodology is a loan
classification-based system, based on 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. The $439, thousand, or 41.8%, increase in the allowance in 2003 was primarily the result of substantial loan growth, particularly in categories
that have historically higher risk, such as commercial and commercial real estate Loans, and a decline in the percentage of the portfolio represented by historically lower risk residential real estate loans. During 2003, there were no changes in
estimation methods or assumptions that affected the methodology for assessing the appropriateness of the allowance.



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.



Maturities of Time Certificates of Deposit of $100,000 or
More Outstanding at December 31, 2002 and 2001

(dollars in thousands)



|                     |  |      |        |      |   |       
|-------------------- |  | ---- | ------ | ---- | - | ------
|                     |  | 2003 |        | 2002
|Three months or less |  | $    | 9,013  |      | $ | 7,993 
|Three to six months  |  |      | 5,678  |      |   | 2,871 
|Six to twelve months |  |      | 5,233  |      |   | 10,909
|Over twelve months   |  |      | 5,170  |      |   | 4,069 
|                     |  |      |        |      |   |       
|TOTAL                |  | $    | 25,094 |      | $ | 25,842
|                     |  |      |        |      |   |       



Long And Short Term Borrowings



Long term
borrowings for the year 2003 and 2002 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. This
note was paid during October, 2003. On October 9, 2003, Harbor Bankshares Corporation issued a Floating Rate Junior Subordinated Debt Securities due 2033 in the amount of $7.2 million. The Debt Security was issued by the corporation pursuant to an
Indenture, dated as of October 9, 2003, between the Corporation and Wilmington Trust Company. The Capital Securities will be issued by Harbor Bankshares Corporation Capital Trust pursuant to a Purchase Agreement dated September 18, 2003, among the
Corporation, the Trust and Citigroup Global Markets Inc. Upon receipt of the funds, the corporation paid off its long-term debt to N.C.I.F. in the amount of $1.8 million and placed the remaining funds in its subsidiary, The Harbor Bank of Maryland,
increasing the Banks Tier One capital. This capital infusion will allow the Bank to increase its lending limit and allow for future growth.



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Borrowings for the Years Ended December 31, 2003 and 2002

(dollars in thousands)



|                                                  |  |      |       |   |      |   |       |  
|------------------------------------------------- |  | ---- | ----- | - | ---- | - | ----- | -
|                                                  |  | 2003 |       |   | 2002 |  
|Amount outstanding at period-end:                 |  |      |       |   |      |   |       |  
|Long-term debt                                    |  | $    | 0     |   |      | $ | 1,943 |  
|Subordinated Debt Securities                      |  |      | 7,217 |   |      |   | 0     |  
|                                                  |  |     
|Average outstanding:                              |  |      |       |   |      |   |       |  
|Long-term debt                                    |  | $    | 1,310 |   |      | $ | 1,986 |  
|Subordinated Debt Securities                      |  |      | 1,611 |   |      |   | 0     |  
|                                                  |  |     
|Weighted average interest rate during the period: |  |      |       |   |      |   |       |  
|Long-term debt                                    |  |      | 7.00  | % |      |   | 7.00  | %
|Subordinated Debt Securities                      |  |      | 4.40  | % |      |   | 0     |  



Off-Balance Sheet Arrangements



Standby
letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities
to customers. The Bank holds collateral supporting those commitments for which collateral is deemed necessary. County National Bank has not been required to perform on any financial guarantees and has not incurred any losses on its commitments. The
issuance of letters of credit is not a significant activity of the Bank.



Commitments to extend credit are agreements to lend funds to customers as long as there are no violations of any condition established in the loan contracts. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each
customers credit worthiness on a case-by-case basis. The amount of collateral obtained, if it is deemed necessary by the Bank upon extension of credit, is based on credit evaluation by management. Collateral held varies but may include
accounts receivable, inventory, property, plant and equipment as well as income producing properties. We believe that we have adequate resources to fund all loan commitments.



The Bank has entered into leases for its branch and office space, most of which contain renewal options.



For additional information regarding off-balance sheet arrangements, please
see Notes 7 and 20 to the Consolidated Financial Statements and the discussion of the Debt Security in Long and Short Term Borrowings, above.



Critical Accounting Policies



The Corporations consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States and
follow general practices within the industries in which it operates. Application of these principles requires management to make estimates, assumptions and judgments that affect the amounts reported in the financial statements and accompanying
notes. These estimates, assumptions and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions and
judgments. Certain policies inherently have a greater reliance on the use of estimates, assumptions and judgments and as such have a greater possibility of producing results that could be materially different than originally reported. Estimates,
assumptions and judgments are necessary when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not carried on the financial statements at fair value warrants an impairment write-down or
valuation reserve to be established, or when an asset or liability needs to be recorded contingent upon a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. The fair values and the
information used



8



---

##### Table of Contents

to record valuation adjustments for certain assets and liabilities are based either on quoted market prices or are provided by other third-party sources,
when available.



The most significant accounting policies
followed by the Corporation are presented in Note 2 to the consolidated financial statements. These policies, along with the disclosures presented in the other financial statement notes and in this discussion, provide information on how significant
assets and liabilities are valued in the financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions and estimates underlying those
amounts, management has identified the determination of the allowance for loan losses as the accounting area that requires the most subjective or complex judgments, and as such could be most subject to revision as new information becomes available.



The Corporation believes it has developed appropriate policies
and procedures for assessing the adequacy of the allowance for loan losses, recognizing that this process requires a number of assumptions and estimates with respect to its loan portfolio. The Corporations assessments may be affected in future
periods by changes in economic conditions, the impact of regulatory examinations, and the discovery of information with respect to borrowers which is not known to management at the time of the issuance of the consolidated financial statements. For
additional discussion concerning the Corporations allowance for loan losses and related matters, see Provision for Loan Losses and Asset Quality above and Note 2 to the Consolidated Financial Statements.



|Item 2. | Description of Properties
|------- | -------------------------



The Corporations Headquarters is located at 25 West Fayette Street, Baltimore, Maryland 21201. This location is approximately 60,000 square feet and
was bought by the Corporation during September, 2003 for $2.9 million.



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
another branch facility in Baltimore City. This office was purchased during December 1998.



|Item 3. | Legal Proceedings
|------- | -----------------



In the normal course of business, the Corporation is at all times subject to various pending and threatened legal actions. The relief or damages sought in
some of these actions may be substantial. After reviewing pending and threatened actions with counsel, management considers that the outcome of such actions will not have a material adverse effect on the Corporations financial position;
however, the Corporation is not able to predict whether the outcome of such actions may or may not have a material adverse effect on results of operations in a particular future period as the timing and amount of any resolution of such actions and
relationship to the future results of operations are not known.



In 1999, the Bank entered into an agreement with an unaffiliated company that operated and serviced automated teller machines (ATMs). This agreement called for the Bank to provide cash for use in certain ATMs not
located on Bank premises. The Bank has discovered that it has a significant cash shortage in connection with this arrangement. The investigation of the cash shortage is ongoing and the Bank is vigorously pursuing recovery. The Bank cannot yet
reasonably estimate the amount of loss it may incur as a result of this cash shortage. Therefore, no accrual for any potential loss has been reflected in the accompanying financial statements. The maximum exposure to the Bank is estimated at
approximately $1.1 million, without consideration of any related tax benefit.



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



None



9



---

##### Table of Contents

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, 2003 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, 2003 was 685.



The following table presents disclosure regarding equity compensation plans
in existence at December 31, 2003, consisting only of the stock option plan arrangements described further under the caption Stock Options in Note 14 to the consolidated financial statements.



Equity Compensation Plan Information



|                                                           |  |                                                                                               |  |                                                                               |  |                                                                                                                                           
|---------------------------------------------------------- |  | --------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------
|Plan Category                                              |  | Number of securities to be issuedupon exercise of outstandingoptions, warrants and rights
(a) |  | Weighted average
exerciseprice of outstandingoptions, warrants and rights (b) |  | Number of securities remainingavailable for future issuance underequity compensation plans
excludingsecurities reflected in column (a) (c)
|Equity compensation plans approved by security holders     |  |                                                                                               |  |                                                                               |  |                                                                                                                                           
|Equity compensation plans not approved by security holders |  | 151,843                                                                                       |  | $15.49                                                                        |  | 75,043                                                                                                                                    
|Total                                                      |  | 151,843                                                                                       |  | $15.49                                                                        |  | 75,043                                                                                                                                    



|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 9 of the Management Discussion and Analysis section of the Registrants Annual Report to Shareholders for the year ended December 31, 2003, and from pages 8 through 23 of this Form 10-KSB.



Contractual Obligations



Payments due by period for the Companys contractual obligations (other
than deposit liabilities with no stated maturity) at December 31, 2003 are presented below:



|                               |  |                |            |                                |   |                                 |  |                 |           |       |   |           |  |   |           
|------------------------------ |  | -------------- | ---------- | ------------------------------ | - | ------------------------------- |  | --------------- | --------- | ----- | - | --------- |  | - | ----------
|                               |  | Within OneYear |            | After One butWithin ThreeYears |   | After Threebut WithinFive Years |  | After FiveYears |           | Total
|Time Deposits                  |  | $              | 39,874,000 |                                | $ | 13,957,000                      |  | $               | 2,388,000 |       | $ |          |  | $ | 56,219,000
|Junior subordinated debentures |  |                |            |                                |   |                                 |  |                 |           |       | $ | 7,217,000 |  | $ | 7,217,000 
|Operating Lease obligations    |  | $              | 250,784    |                                | $ | 319,675                         |  | $               | 97,839    |       |   |          |  | $ | 668,298   
|Purchase obligations           |  |                |           |                                |   |                                |  |                 |          |       |   |          |  |   |          
|                               |  |                |            |                                |   |                                 |  |                 |           |       |   |           |  |   |           
|Total contractual obligations  |  | $              | 40,124,784 |                                | $ | 14,276,675                      |  | $               | 2,485,839 |       | $ | 7,217,000 |  | $ | 64,104,298



10



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##### Table of Contents

|Item 7. | Financial Statements
|------- | --------------------



Information required by Item 7 is incorporated by reference from information appearing on pages 1 through 26 in the Audited Consolidated Financial
Statements section of the Registrants Annual Report to Shareholders for the year ended December 31, 2003.



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



None



|Item 8A. | Controls and Procedures
|-------- | -----------------------



The Corporations management, under the supervision and with the participation of it Chief Executive Officer and the Chief Financial Officer,
evaluated as of the last day of the period covered by this report, the effectiveness of the design and operation of the Corporations disclosure controls and procedures, as defined in Rule 13a-15 under the Securities Exchange Act of 1934. Based
on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Corporations disclosure controls and procedures were adequate. There were no significant changes in the Corporations internal controls over
financial reporting (as defined in Rule 13a-15 under the Securities Act of 1934) during the quarter ended December 31, 2003, that have materially effected, or are reasonably likely to materially affect, the Corporations internal control over
financial reporting.



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 2004 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 captions Code of Ethics and Business
Conduct on page 9 and Executive Compensation on pages 11 through 14 of the Registrants 2004 Proxy Statement.



|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 2004 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.



11



---

##### Table of Contents

|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, 2003, are incorporated herein by reference in
Item 8:



Consolidated Balance Sheets As of December 31, 2003
and 2002



Consolidated Statements of Income Years ended
December 31, 2003 and 2002



Consolidated Statements of Changes
in Stockholders Equity Years ended December 31, 2003 and 2002



Consolidated Statements of Cash Flows Years ended December 31, 2003 and 2002



Notes to Consolidated Financial Statements



Report of Stegman & Company, Independent Auditors



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.



| | (a) | Exhibits. The following is a list of exhibits filed as part of this Annual Report on Form 10-KSB.
| | --- | -------------------------------------------------------------------------------------------------



|           |  |                                                                                                                                                                 
|---------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
|No.        |  | Exhibit                                                                                                                                                         
|3.1        |  | Articles of Incorporation of Harbor Bankshares Corporation (incorporated by reference to Exhibit 3(a) to Registration Statement on Form S-4 filed July 17, 1992.
|           | 
|3.2        |  | Bylaws of Harbor Bankshares Corporation (incorporated by reference to Exhibit 3(b) to Registration Statement on Form S-4 filed July 17, 1992.                   
|           | 
|10.1*      |  | Harbor Bankshares Corporation Stock Option Plan (incorporated by reference to Exhibit 10(b) to Registration Statement on Form S-4 filed July 17, 1992.          
|           | 
|10.2*      |  | Employment Agreement by and between Joseph Haskins, Jr., Harbor Bankshares Corporation, and the Harbor Bank of Maryland effective January 1, 2000.              
|           | 
|13         |  | Portions of the Annual Report to Shareholders for the Year Ended December 31, 2003                                                                              
|           | 
|23         |  | Independent Auditors Consent                                                                                                                                   
|           | 
|31(a), (b) |  | Rule 13a-14(a)/15d-14(a) Certifications                                                                                                                         
|           | 
|32(a), (b) |  | 18 U.S.C. Section 1350 Certifications                                                                                                                           



|* | Management contract or compensatory plan or arrangement.
|- | --------------------------------------------------------



| | (b) | Reports on Form 8-K.
| | --- | --------------------



None.



|Item 14. | Principal Accountant Fees and Services
|-------- | --------------------------------------



Information required by this item is incorporated by reference from information appearing under the caption Companys Independent Public
Accountants on pages 10 and 11 of the Registrants 2004 Proxy Statement.



12



---

##### Table of Contents

SIGNATURES



In accordance with
Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.





|       |  |                                                              
|------ |  | -------------------------------------------------------------
|       |  | HARBOR BANKSHARES CORPORATION                                
|       | 
|By:    |  | /s/ Joseph Haskins, Jr.                                      
|       |  |                                                              
|Title: |  | Chairman of the Board, President, and Chief Executive Officer
|Date:  |  | March 23, 2004                                               



In accordance with
Section 13 or 15(d) of the Exchange Act, 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 of the Board, President, and Chief Executive Officer
|Date:  |  | March 23, 2004                                               
|       |  |                                                              
|       | 
|By:    |  | /s/ Teodoro J. Hernandez                                     
|       |  |                                                              
|Title: |  | Treasurer                                                    
|Date:  |  | March 23, 2004                                               
|       |  |                                                              
|       | 
|By:    |  | /s/ George F. Vaeth, Jr.                                     
|       |  |                                                              
|Title: |  | Director                                                     
|Date:  |  | March 23, 2004                                               

|       |  |                     
|------ |  | --------------------
|       |  |                     
|       | 
|By:    |  | /s/ Sachindler Gupta
|       |  |                     
|Title: |  | Director            
|Date:  |  | March 23, 2004      

|       |  |                      
|------ |  | ---------------------
|       |  |                      
|       | 
|By:    |  | /s/ Stanley W. Tucker
|       |  |                      
|Title: |  | Director             
|Date:  |  | March 23, 2004       

|       |  |                     
|------ |  | --------------------
|       |  |                     
|       | 
|By:    |  | /s/ James Scott, Jr.
|       |  |                     
|Title: |  | Director            
|Date:  |  | March 23, 2004      







13



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##### Table of Contents

HARBOR BANKSHARES CORPORATION

AND SUBSIDIARIES



REPORT ON AUDITS OF

FINANCIAL STATEMENTS



FOR THE YEARS ENDED

DECEMBER 31, 2003 AND 2002



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



Stegman & Company



---

##### Table of Contents

TABLE OF CONTENTS



INDEPENDENT AUDITORS REPORT



|                                              |  |       
|--------------------------------------------- |  | ------
|                                              |  | Page  
|CONSOLIDATED FINANCIAL STATEMENTS             |  |       
|                                              | 
|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 - 27



---

##### Table of Contents

INDEPENDENT AUDITORS REPORT



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, 2003 and 2002 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, 2003 and
2002 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.



Baltimore, Maryland

January 17, 2004



---

##### Table of Contents

HARBOR BANKSHARES CORPORATION AND SUBSIDIARIES



CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2003 AND 2002



ASSETS



|                                                                                               |  |      |             |   |      |   |             |  
|---------------------------------------------------------------------------------------------- |  | ---- | ----------- | - | ---- | - | ----------- | -
|                                                                                               |  | 2003 |             |   | 2002 |  
|Cash and due from banks                                                                        |  | $    | 6,982,136   |   |      | $ | 7,273,439   |  
|Federal funds sold                                                                             |  |      | 8,159,452   |   |      |   | 12,653,002  |  
|Interest bearing deposits in other banks                                                       |  |      | 1,900,000   |   |      |   | 2,300,000   |  
|Investment securities:                                                                         |  |      |             |   |      |   |             |  
|Held to maturity - at amortized cost (fair value of $2,129,594 in 2003 and $2,188,910 in 2002) |  |      | 2,048,807   |   |      |   | 2,057,205   |  
|Available for sale - at fair value                                                             |  |      | 35,788,476  |   |      |   | 53,626,729  |  
|                                                                                               |  |      |             |   |      |   |             |  
|Total investment securities                                                                    |  |      | 37,837,283  |   |      |   | 55,683,934  |  
|                                                                                               |  |      |             |   |      |   |             |  
|Loans                                                                                          |  |      | 151,217,707 |   |      |   | 121,571,331 |  
|Allowance for loan losses                                                                      |  |      | (1,488,212  | ) |      |   | (1,048,671  | )
|                                                                                               |  |      |             |   |      |   |             |  
|Net loans                                                                                      |  |      | 149,729,495 |   |      |   | 120,522,660 |  
|                                                                                               |  |      |             |   |      |   |             |  
|Premises and equipment, net                                                                    |  |      | 3,735,628   |   |      |   | 985,018     |  
|Federal Home Loan Bank of Atlanta stock - at cost                                              |  |      | 461,000     |   |      |   | 600,000     |  
|Goodwill                                                                                       |  |      | 2,506,226   |   |      |   | 2,506,226   |  
|Other intangible assets                                                                        |  |      | 623,587     |   |      |   | 716,336     |  
|Bank-owned life insurance                                                                      |  |      | 3,858,625   |   |      |   | 3,679,501   |  
|Other assets                                                                                   |  |      | 3,753,328   |   |      |   | 3,313,803   |  
|                                                                                               |  |      |             |   |      |   |             |  
|TOTAL ASSETS                                                                                   |  | $    | 219,546,760 |   |      | $ | 210,233,919 |  
|                                                                                               |  |      |             |   |      |   |             |  



See accompanying notes.



1



---

##### Table of Contents

LIABILITIES AND STOCKHOLDERS EQUITY



|                                                                                                                                        |  |      |             |      |   |            
|--------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ----------- | ---- | - | -----------
|                                                                                                                                        |  | 2003 |             | 2002
|LIABILITIES:                                                                                                                            |  |      |             |      |   |            
|Deposits:                                                                                                                               |  |      |             |      |   |            
|Noninterest bearing demand                                                                                                              |  | $    | 32,481,912  |      | $ | 27,419,881 
|Interest bearing transaction accounts                                                                                                   |  |      | 21,873,356  |      |   | 21,845,806 
|Savings                                                                                                                                 |  |      | 85,327,769  |      |   | 88,910,645 
|Time, $100,000 or more                                                                                                                  |  |      | 25,093,981  |      |   | 25,842,052 
|Other time                                                                                                                              |  |      | 31,124,406  |      |   | 29,275,363 
|                                                                                                                                        |  |      |             |      |   |            
|Total deposits                                                                                                                          |  |      | 195,901,424 |      |   | 193,293,747
|Accrued interest payable                                                                                                                |  |      | 233,765     |      |   | 319,508    
|Junior subordinated debentures                                                                                                          |  |      | 7,217,000   |      |   |           
|Long-term debt                                                                                                                          |  |      |            |      |   | 1,943,334  
|Other liabilities                                                                                                                       |  |      | 919,803     |      |   | 527,997    
|                                                                                                                                        |  |      |             |      |   |            
|Total liabilities                                                                                                                       |  |      | 204,271,992 |      |   | 196,084,586
|                                                                                                                                        |  |      |             |      |   |            
|                                                                                                                                        |  |     
|STOCKHOLDERS EQUITY:                                                                                                                   |  |      |             |      |   |            
|Common stock (par value $0.01):                                                                                                         |  |      |             |      |   |            
|Authorized 10,000,000 shares; issued 704,176 and 735,813, including 33,795 common nonvoting at December 31, 2003 and 2002,
respectively |  |      | 7,041       |      |   | 7,357      
|Additional paid-in capital                                                                                                              |  |      | 7,210,178   |      |   | 7,204,280  
|Retained earnings                                                                                                                       |  |      | 8,036,714   |      |   | 6,435,464  
|Accumulated other comprehensive income                                                                                                  |  |      | 20,835      |      |   | 502,232    
|                                                                                                                                        |  |      |             |      |   |            
|Total stockholders equity                                                                                                              |  |      | 15,274,768  |      |   | 14,149,333 
|                                                                                                                                        |  |      |             |      |   |            
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                                                                              |  | $    | 219,546,760 |      | $ | 210,223,919
|                                                                                                                                        |  |      |             |      |   |            



2



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##### Table of Contents

HARBOR BANKSHARES CORPORATION AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF INCOME

FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002



|                                                    |  |      |            |      |   |           
|--------------------------------------------------- |  | ---- | ---------- | ---- | - | ----------
|                                                    |  | 2003 |            | 2002
|INTEREST INCOME:                                    |  |      |            |      |   |           
|Interest and fees on loans                          |  | $    | 10,243,769 |      | $ | 9,123,522 
|Interest on investments - taxable                   |  |      | 1,457,451  |      |   | 2,153,695 
|Interest on deposits in other banks                 |  |      | 68,131     |      |   | 63,279    
|Interest on federal funds sold                      |  |      | 97,368     |      |   | 274,015   
|Other interest income                               |  |      | 19,399     |      |   | 32,584    
|                                                    |  |      |            |      |   |           
|Total interest income                               |  |      | 11,886,118 |      |   | 11,647,095
|                                                    |  |      |            |      |   |           
|INTEREST EXPENSE:                                   |  |      |            |      |   |           
|Interest bearing transaction accounts               |  |      | 37,887     |      |   | 61,834    
|Savings                                             |  |      | 696,201    |      |   | 1,144,913 
|Time, $100,000 or more                              |  |      | 661,839    |      |   | 914,422   
|Other time                                          |  |      | 840,168    |      |   | 1,140,035 
|Notes payable                                       |  |      | 103,892    |      |   | 141,213   
|Interest on junior subordinated debentures          |  |      | 70,560     |      |   |          
|                                                    |  |      |            |      |   |           
|Total interest expense                              |  |      | 2,410,547  |      |   | 3,402,417 
|                                                    |  |      |            |      |   |           
|NET INTEREST INCOME                                 |  |      | 9,475,571  |      |   | 8,244,678 
|                                                    |  |     
|PROVISION FOR LOAN LOSSES                           |  |      | 755,000    |      |   | 340,000   
|                                                    |  |      |            |      |   |           
|NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES |  |      | 8,720,571  |      |   | 7,904,678 
|                                                    |  |      |            |      |   |           
|NONINTEREST INCOME:                                 |  |      |            |      |   |           
|Service charges on deposit accounts                 |  |      | 854,745    |      |   | 910,473   
|Other service charges                               |  |      | 490,462    |      |   | 592,361   
|Gain on sale of securities                          |  |      | 225,327    |      |   | 226,355   
|Gain on sales of loans                              |  |      | 50,824     |      |   | 54,015    
|Awards and grants                                   |  |      | 663,818    |      |   | 214,483   
|Loan servicing fees                                 |  |      | 16,287     |      |   | 25,865    
|Other income                                        |  |      | 204,854    |      |   | 197,203   
|                                                    |  |      |            |      |   |           
|Total noninterest income                            |  |      | 2,506,317  |      |   | 2,220,755 
|                                                    |  |      |            |      |   |           
|NONINTEREST EXPENSES:                               |  |      |            |      |   |           
|Salaries and employee benefits                      |  |      | 4,368,415  |      |   | 4,229,792 
|Occupancy expense of premises                       |  |      | 720,155    |      |   | 785,212   
|Equipment expense                                   |  |      | 385,641    |      |   | 477,673   
|Data processing fees                                |  |      | 972,730    |      |   | 975,914   
|Professional fees                                   |  |      | 174,165    |      |   | 207,787   
|Amortization of intangible assets                   |  |      | 80,460     |      |   | 46,615    
|Other expenses                                      |  |      | 1,908,774  |      |   | 1,852,527 
|                                                    |  |      |            |      |   |           
|Total noninterest expense                           |  |      | 8,610,340  |      |   | 8,575,520 
|                                                    |  |      |            |      |   |           
|INCOME BEFORE INCOME TAXES                          |  |      | 2,616,548  |      |   | 1,549,913 
|                                                    |  |     
|APPLICABLE INCOME TAXES                             |  |      | 831,220    |      |   | 472,621   
|                                                    |  |      |            |      |   |           
|NET INCOME                                          |  | $    | 1,785,328  |      | $ | 1,077,292 
|                                                    |  |      |            |      |   |           
|BASIC EARNINGS PER SHARE                            |  | $    | 2.46       |      | $ | 1.47      
|                                                    |  |      |            |      |   |           
|DILUTED EARNINGS PER SHARE                          |  | $    | 2.36       |      | $ | 1.43      
|                                                    |  |      |            |      |   |           



See accompanying notes.



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##### Table of Contents

HARBOR BANKSHARES CORPORATION AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2003 AND
2002



|                                                                 |  |             |       |   |                          |   |                  |  |   |                                            |   |  |                          |          |   |  |   |            |  
|---------------------------------------------------------------- |  | ----------- | ----- | - | ------------------------ | - | ---------------- |  | - | ------------------------------------------ | - |  | ------------------------ | -------- | - |  | - | ---------- | -
|                                                                 |  | CommonStock |       |   | AdditionalPaid-inCapital |   | RetainedEarnings |  |   | AccumulatedOtherComprehensiveIncome (Loss) |   |  | TotalStockholdersEquity |         
|Balance at January 1, 2002                                       |  | $           | 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 |  
|                                                                 |  |             |       |   |                         
|Comprehensive income:                                            |  |             |       |   |                          |   |                  |  |   |                                            |   |  |                          |          |   |  |   |            |  
|Net income                                                       |  |             |      |   |                          |   |                 |  |   | 1,785,328                                  |   |  |                          |         |   |  |   | 1,785,328  |  
|Unrealized losses on securities available-for-sale, net of taxes |  |             |      |   |                          |   |                 |  |   |                                           |   |  |                          | (481,397 | ) |  |   | (481,397   | )
|                                                                 |  |             |       |   |                          |   |                  |  |   |                                            |   |  |                          |          |   |  |   |            |  
|Total comprehensive income                                       |  |             |       |   |                          |   |                  |  |   |                                            |   |  |                          |          |   |  |   | 1,304,013  |  
|Retirement of stock                                              |  |             | (321  | ) |                          |   | 321              |  |   |                                           |   |  |                          |         |   |  |   |           |  
|Payment of cash dividends                                        |  |             |      |   |                          |   |                 |  |   | (184,078                                   | ) |  |                          |         |   |  |   | (184,078   | )
|Stock options exercised                                          |  |             | 5     |   |                          |   | 5,577            |  |   |                                           |   |  |                          |         |   |  |   | 5,582      |  
|                                                                 |  |             |       |   |                          |   |                  |  |   |                                            |   |  |                          |          |   |  |   |            |  
|Balance at December 31, 2003                                     |  | $           | 7,041 |   |                          | $ | 7,210,178        |  | $ | 8,036,714                                  |   |  | $                        | 20,835   |   |  | $ | 15,274,768 |  
|                                                                 |  |             |       |   |                          |   |                  |  |   |                                            |   |  |                          |          |   |  |   |            |  



See accompanying notes.



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##### Table of Contents

HARBOR BANKSHARES CORPORATION AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002



|                                                                                                   |  |      |             |   |      |   |             |  
|-------------------------------------------------------------------------------------------------- |  | ---- | ----------- | - | ---- | - | ----------- | -
|                                                                                                   |  | 2003 |             |   | 2002 |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                              |  |      |             |   |      |   |             |  
|Net income                                                                                         |  | $    | 1,785,328   |   |      | $ | 1,077,292   |  
|Adjustments to reconcile net income to net cash provided by operating activities:                  |  |      |             |   |      |   |             |  
|Depreciation and amortization                                                                      |  |      | 401,080     |   |      |   | 487,150     |  
|Provision for loan losses                                                                          |  |      | 755,000     |   |      |   | 340,000     |  
|Common stock issued as compensation                                                                |  |      |            |   |      |   | 41,760      |  
|Deferred income taxes                                                                              |  |      | 17,457      |   |      |   | 88,805      |  
|Increase in cash surrender value of life insurance                                                 |  |      | (179,124    | ) |      |   | (179,166    | )
|Gains on sales of loans                                                                            |  |      | (50,824     | ) |      |   | (54,015     | )
|Gain on sale securities                                                                            |  |      | (225,327    | ) |      |   | (226,355    | )
|Origination of loans held for sale                                                                 |  |      | (4,477,099  | ) |      |   | (4,045,571  | )
|Proceeds from sales of loans held for sale                                                         |  |      | 4,527,923   |   |      |   | 4,099,586   |  
|Decrease in accrued interest receivable and other assets                                           |  |      | (147,674    | ) |      |   | (1,238,048  | )
|Increase in accrued interest payable and other liabilities                                         |  |      | 306,063     |   |      |   | 32,734      |  
|                                                                                                   |  |      |             |   |      |   |             |  
|Net cash provided by operating activities                                                          |  |      | 2,712,803   |   |      |   | 424,172     |  
|                                                                                                   |  |      |             |   |      |   |             |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                              |  |      |             |   |      |   |             |  
|Net decrease (increase) in deposits at other banks                                                 |  |      | 400,000     |   |      |   | (1,138,483  | )
|Purchases of investment securities available for sale                                              |  |      | (29,812,604 | ) |      |   | (45,411,260 | )
|Proceeds from sales, maturities and principal payments of investment securities available-for-sale |  |      | 18,659,255  |   |      |   | 15,342,008  |  
|Proceeds from called securities available-for-sale                                                 |  |      | 29,000,000  |   |      |   | 26,850,003  |  
|Net increase in loans                                                                              |  |      | (29,938,130 | ) |      |   | (14,901,929 | )
|Proceeds from sales of other real estate owned                                                     |  |      | 69,727      |   |      |   |            |  
|Purchase of other real estate owned                                                                |  |      |            |   |      |   | (55,727     | )
|Purchases of premises and equipment - net                                                          |  |      | (3,151,690  | ) |      |   | (429,944    | )
|                                                                                                   |  |      |             |   |      |   |             |  
|Net cash used in investing activities                                                              |  |      | (14,773,442 | ) |      |   | (19,745,332 | )
|                                                                                                   |  |      |             |   |      |   |             |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                              |  |      |             |   |      |   |             |  
|Net increase in deposits                                                                           |  |      | 2,607,677   |   |      |   | 21,762,559  |  
|Proceeds from sale of common stock                                                                 |  |      | 5,582       |   |      |   |            |  
|Cash dividends paid                                                                                |  |      | (184,078    | ) |      |   | (3,795      | )
|Repayment of long-term debt                                                                        |  |      | (1,943,395  | ) |      |   | (56,666     | )
|Proceeds from junior subordinated debentures                                                       |  |      | 6,790,000   |   |      |   |            |  
|                                                                                                   |  |      |             |   |      |   |             |  
|Net cash provided by financing activities                                                          |  |      | 7,275,786   |   |      |   | 21,702,098  |  
|                                                                                                   |  |      |             |   |      |   |             |  
|(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                                                   |  |      | (4,784,853  | ) |      |   | 2,380,938   |  
|                                                                                                   |  |     
|CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                                                     |  |      | 19,926,441  |   |      |   | 17,545,503  |  
|                                                                                                   |  |      |             |   |      |   |             |  
|CASH AND CASH EQUIVALENTS AT END OF YEAR                                                           |  | $    | 15,141,588  |   |      | $ | 19,926,441  |  
|                                                                                                   |  |      |             |   |      |   |             |  



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##### Table of Contents

Harbor Bankshares Corporation



Consolidated Statements of Cash Flows (Continued)

For the Years Ended December 31, 2003 and 2002



|                                                   |  |      |           |      |   |          
|-------------------------------------------------- |  | ---- | --------- | ---- | - | ---------
|                                                   |  | 2003 |           | 2002
|Supplemental disclosure of cash flows information: |  |      |           |      |   |          
|Cash paid for income taxes                         |  | $    | 675,000   |      | $ | 495,107  
|                                                   |  |      |           |      |   |          
|Cash paid for interest                             |  | $    | 2,321,838 |      | $ | 3,621,292
|                                                   |  |      |           |      |   |          



See accompanying notes.



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##### Table of Contents

HARBOR BANKSHARES CORPORATION AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002



|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 six 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 2003. The following is a summary of the more significant accounting
policies:



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.



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.



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##### Table of Contents

Investment Securities



Debt securities that the Corporation has the positive intent and ability to hold to maturity are classified as held to
maturity and recorded at amortized cost. Debt and equity securities are classified as trading securities if bought and held principally for the purpose of selling them in the near term. Trading securities are reported at estimated fair value, with
unrealized gains and losses included in earnings. Debt securities not classified as held to maturity and debt and equity securities not classified as trading securities are considered available for sale and are reported at estimated fair value, with
unrealized gains and losses excluded from earnings and reported as a separate component of stockholders equity, net of tax effects, in accumulated other comprehensive income.



The Corporation designates securities into one of the three categories at the time of purchase. If a decline in value of an
individual security classified as held to maturity or available for sale is judged to be other than temporary, the cost basis of that security is reduced to its fair value and the amount of the write-down is reflected in earnings. Estimated fair
value is determined based on bid prices published in financial newspapers or bid quotations received from securities dealers. Gains or losses on the sales of investments are calculated using a specific identification basis and are determined on a
trade-date basis. Premiums and discounts on investment and mortgage-backed securities are amortized over the term of the security using methods that approximate the interest method.



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, 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.



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



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##### Table of Contents

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



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##### Table of Contents

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 $-0- and $69,700 as of December 31, 2003 and 2002, 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 annually 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



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##### Table of Contents

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 certain
officers 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 earnings per share is computed by dividing net income by the weighted-average number of shares outstanding during the period. Diluted earnings per share is determined using the weighted-average number of 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



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##### Table of Contents

The table on the following page illustrates the effect on net income and earnings per share if the
Corporation had applied the fair value recognition provisions of SFAS 123 to all stock option awards.



|                                                                                                                |  |                    |           |   |      |   |           |  
|--------------------------------------------------------------------------------------------------------------- |  | ------------------ | --------- | - | ---- | - | --------- | -
|                                                                                                                |  | For the Year Ended |          
|                                                                                                                |  | 2003               |           |   | 2002 |  
|Net income, as reported                                                                                         |  | $                  | 1,785,328 |   |      | $ | 1,077,292 |  
|Less: total option expense determined under fair value method for all option awards, net of related tax effects |  |                    | (33,760   | ) |      |   | (21,202   | )
|                                                                                                                |  |                    |           |   |      |   |           |  
|Pro forma net income                                                                                            |  | $                  | 1,751,568 |   |      | $ | 1,056,090 |  
|                                                                                                                |  |                    |           |   |      |   |           |  
|Pro forma net income per share:                                                                                 |  |                    |           |   |      |   |           |  
|Basic - as reported                                                                                             |  | $                  | 2.46      |   |      | $ | 1.47      |  
|                                                                                                                |  |                    |           |   |      |   |           |  
|Basic - pro forma                                                                                               |  | $                  | 2.42      |   |      | $ | 1.44      |  
|                                                                                                                |  |                    |           |   |      |   |           |  
|Diluted - as reported                                                                                           |  | $                  | 2.36      |   |      | $ | 1.43      |  
|                                                                                                                |  |                    |           |   |      |   |           |  
|Diluted - pro forma                                                                                             |  | $                  | 2.31      |   |      | $ | 1.40      |  
|                                                                                                                |  |                    |           |   |      |   |           |  



The fair values of
stock options granted were estimated at the date of grant using the 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 assumptions, which can materially affect the fair value estimate. The following weighted-average assumptions were used to determine the
fair value of options granted on the Corporations common stock:



|                         |  |                    |   |  |      |  
|------------------------ |  | ------------------ | - |  | ---- | -
|                         |  | For the Year Ended |  
|                         |  | 2003               |   |  | 2002 |  
|Risk-free interest rate  |  | 4.81               | % |  | 4.87 | %
|Expected volatility      |  | 20                 | % |  | 20   | %
|Expected life (in years) |  | 10                 |   |  | 10   |  
|Expected dividend yield  |  | 0                  | % |  | 0    | %



Advertising



Advertising costs are expensed as incurred. Advertising
expense was $344,498 and $286,855 for the years ended December 31, 2003 and 2002, 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.



Business
Segments



The Corporation has determined that its current
business and operations consist of one business segment.



12



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##### Table of Contents

|3. | RECENT ACCOUNTING PRONOUNCEMENTS
|-- | --------------------------------



In April 2003, the Financial Accounting Standards Board (FASB) issued and the Corporation adopted SFAS No. 149, Amendment of Statement No.
133 on Derivative Instruments and Hedging Activities.This Statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging
activities under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities.The adoption of SFAS No. 149 did not have a material impact on the Corporations financial statements.



In November 2002, the FASB issued and the Corporation adopted Interpretation
No. 45 (FIN 45), Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. This interpretation expands the disclosures to be made by a guarantor in its
financial statements about its obligations under certain guarantees and requires the guarantor to recognize a liability for the fair value of an obligation assumed under a guarantee. The adoption of FIN 45 did not have a material impact on the
Corporations financial statements.



In January 2003, the
FASB issued and the Corporation adopted Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities. This interpretation provides new accounting guidance on how to identify a variable interest entity
(VIE) and determine when the assets, liabilities, non-controlling interest and results of operation of a VIE need to be included in a Corporations consolidated financial statements. The adoption of FIN 46 did not have a material
impact on the Corporations financial statements.



In May
2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. This Statement establishes standards for how an issuer classifies and measures certain financial instruments
with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as
equity. Some of the provisions of this Statement are consistent with the current definition of liabilities in FASB Concepts Statement No. 6, Elements of Financial Statements. The remaining provisions of this Statement are consistent with the
Boards proposal to revise that definition to encompass certain obligations that a reporting entity can or must settle by issuing its own equity shares, depending on the nature of the relationship established between the holder and the issuer.
While the Board still plans to revise that definition through an amendment to Concepts Statement 6, the Board decided to defer issuing that amendment until it has concluded its deliberations on the next phase of this project. That next phase will
deal with certain compound financial instruments including puttable shares, convertible bonds, and dual-indexed financial instruments. These provisions of SFAS No. 150 are effective for financial statements for fiscal years ending after June 15,
2003. The application of SFAS No. 150 did not have a material impact on the Corporations operations.



|4. | 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, 2003 were $447,000.



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|5. | INVESTMENT SECURITIES
|-- | ---------------------



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



|                                      |  |               |            |                      |   |                       |  |   |                     |   |  |   |           
|------------------------------------- |  | ------------- | ---------- | -------------------- | - | --------------------- |  | - | ------------------- | - |  | - | ----------
|                                      |  | AmortizedCost |            | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | EstimatedFair Value
|Balance at December 31, 2003:         |  |               |            |                      |   |                       |  |   |                     |   |  |   |           
|Available-for-sale:                   |  |               |            |                      |   |                       |  |   |                     |   |  |   |           
|U.S. Treasury and government agencies |  | $             | 34,921,481 |                      | $ | 166,898               |  | $ | (149,926            | ) |  | $ | 34,938,453
|Mortgage-backed securities            |  |               | 329,643    |                      |   | 13,095                |  |   |                    |   |  |   | 342,738   
|State and political subdivisions      |  |               | 505,784    |                      |   | 1,501                 |  |   |                    |   |  |   | 507,285   
|                                      |  |               |            |                      |   |                       |  |   |                     |   |  |   |           
|Total                                 |  | $             | 35,756,908 |                      | $ | 181,494               |  | $ | (149,926            | ) |  | $ | 35,788,476
|                                      |  |               |            |                      |   |                       |  |   |                     |   |  |   |           
|Held-to-maturity:                     |  |               |            |                      |   |                       |  |   |                     |   |  |   |           
|U.S. Government agencies              |  | $             | 2,006,713  |                      | $ | 80,787                |  | $ |                    |   |  | $ | 2,087,500 
|Other                                 |  |               | 42,094     |                      |   |                      |  |   |                    |   |  |   | 42,094    
|                                      |  |               |            |                      |   |                       |  |   |                     |   |  |   |           
|Total                                 |  | $             | 2,048,807  |                      | $ | 80,787                |  | $ |                    |   |  | $ | 2,129,594 
|                                      |  |               |            |                      |   |                       |  |   |                     |   |  |   |           
|Balance at December 31, 2002:         |  |               |            |                      |   |                       |  |   |                     |   |  |   |           
|Available-for-sale:                   |  |               |            |                      |   |                       |  |   |                     |   |  |   |           
|U.S. Treasury and government agencies |  | $             | 46,839,253 |                      | $ | 590,988               |  | $ | (26,691             | ) |  | $ | 47,403,550
|Mortgage-backed securities            |  |               | 5,517,590  |                      |   | 189,365               |  |   |                    |   |  |   | 5,706,954 
|State and political subdivisions      |  |               | 508,930    |                      |   | 7,295                 |  |   |                    |   |  |   | 516,225   
|                                      |  |               |            |                      |   |                       |  |   |                     |   |  |   |           
|Total                                 |  | $             | 52,865,773 |                      | $ | 787,648               |  | $ | (26,691             | ) |  | $ | 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 
|                                      |  |               |            |                      |   |                       |  |   |                     |   |  |   |           



Management believes
that based upon the credit quality of the debt securities, none of the unrealized loss on securities is considered other than temporary as of December 31, 2003. No securities have been in a continuous loss position for twelve months or more.



The amortized cost and estimated fair value of debt securities
at December 31, 2003, 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.



|                                       |  |               |            |            |   |           
|-------------------------------------- |  | ------------- | ---------- | ---------- | - | ----------
|                                       |  | AmortizedCost |            | Fair Value
|Available-for-sale:                    |  |               |            |            |   |           
|Due after one year through five years  |  | $             | 33,438,758 |            | $ | 33,479,478
|Due after five years through ten years |  |               | 1,988,507  |            |   | 1,966,260 
|Mortgage-backed securities             |  |               | 329,643    |            |   | 342,738   
|                                       |  |               |            |            |   |           
|Total                                  |  | $             | 35,756,908 |            | $ | 35,788,476
|                                       |  |               |            |            |   |           
|Held-to-maturity:                      |  |               |            |            |   |           
|Due after one year through five years  |  | $             | 2,006,713  |            | $ | 2,087,500 
|Due after ten years                    |  |               | 42,094     |            |   | 42,094    
|                                       |  |               |            |            |   |           
|Total                                  |  | $             | 2,048,807  |            | $ | 2,129,594 
|                                       |  |               |            |            |   |           



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During the year ended December 31, 2003 available-for-sale securities were sold resulting in gross
proceeds of $10,745,105 and gross gains of $225,327. During 2002, the gross proceeds for the sale of available securities were $13,000,000 and gains of $226,356.



Securities with a fair value of $15,528,000 at December 31, 2003 have been pledged as collateral for money market and
certificate of deposit accounts.



|6. | LOANS AND ALLOWANCE FOR LOAN LOSSES
|-- | -----------------------------------



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



|                  |  |      |             |      |   |            
|----------------- |  | ---- | ----------- | ---- | - | -----------
|                  |  | 2003 |             | 2002
|Real estate       |  | $    | 87,227,970  |      | $ | 78,855,951 
|Commercial        |  |      | 55,183,872  |      |   | 30,964,151 
|Consumer          |  |      | 7,862,103   |      |   | 10,828,437 
|Credit card loans |  |      | 943,761     |      |   | 922,792    
|                  |  |      |             |      |   |            
|                  |  | $    | 151,217,706 |      | $ | 121,571,331
|                  |  |      |             |      |   |            



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



|                                         |  |      |           |   |      |   |           |  
|---------------------------------------- |  | ---- | --------- | - | ---- | - | --------- | -
|                                         |  | 2003 |           |   | 2002 |  
|Balance at January 1                     |  | $    | 1,048,671 |   |      | $ | 959,574   |  
|                                         |  |      |           |   |      |   |           |  
|Provision charged to operating expense   |  |      | 755,000   |   |      |   | 340,000   |  
|                                         |  |      |           |   |      |   |           |  
|Loans charged-off                        |  |      | (422,811  | ) |      |   | (314,004  | )
|Recovery on loans previously charged-off |  |      | 107,352   |   |      |   | 63,101    |  
|                                         |  |      |           |   |      |   |           |  
|Net loans charged-off                    |  |      | (315,459  | ) |      |   | (250,903  | )
|                                         |  |      |           |   |      |   |           |  
|Balance at December 31                   |  | $    | 1,488,212 |   |      | $ | 1,048,671 |  
|                                         |  |      |           |   |      |   |           |  



Information with
respect to impaired loans at December 31, 2003 and 2002 and for the years then ended is as follows:



|                                                               |  |      |           |      |   |          
|-------------------------------------------------------------- |  | ---- | --------- | ---- | - | ---------
|                                                               |  | 2003 |           | 2002
|Impaired loans with a valuation allowance                      |  | $    | 101,643   |      | $ | 313,302  
|Impaired loans without a valuation allowance                   |  |      | 118,208   |      |   | 96,052   
|                                                               |  |      |           |      |   |          
|Total impaired loans                                           |  | $    | 219,851   |      | $ | 409,354  
|                                                               |  |      |           |      |   |          
|Allowance for loan losses related to impaired loans            |  | $    | 49,664    |      | $ | 54,953   
|Allowance for loan losses related to other than impaired loans |  |      | 1,438,548 |      |   | 993,718  
|                                                               |  |      |           |      |   |          
|Total allowance for loan losses                                |  | $    | 1,488,212 |      | $ | 1,048,671
|                                                               |  |      |           |      |   |          
|Average impaired loans for the year                            |  | $    | 311,182   |      | $ | 413,593  
|                                                               |  |      |           |      |   |          



Approximately $29,649
and $22,056 of interest income was recognized on average impaired loans for the years ended December 31, 2003 and 2002, respectively. Interest income recognized on impaired loans on a cash basis during 2003 and 2002 was immaterial.



15



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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 $7,254,759 and $4,045,571 at December 31, 2003 and 2002, respectively. There were $790,000 of
loans held for sale at December 31, 2003 and none at December 31, 2002.



At December 31, 2003 and 2002 the net carrying amount of mortgage servicing rights was $7,861 and $12,289, respectively, which approximated fair value and are included in other 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 $8,698,668 and $3,546,765 at December 31, 2003 and 2002, respectively. During 2003, $6,876,785 of new loans were made while repayments totaled $1,724,882. During 2002, $1,151,892 of
new loans were made while repayments totaled $3,190,647.



|7. | PREMISES AND EQUIPMENT
|-- | ----------------------



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



|                                               |  |      |           |      |   |          
|---------------------------------------------- |  | ---- | --------- | ---- | - | ---------
|                                               |  | 2003 |           | 2002
|                                               |  |     
|Land                                           |  | $    | 661,900   |      | $ | 30,000   
|Buildings                                      |  |      | 2,405,736 |      |   | 129,510  
|Furniture, fixtures and equipment              |  |      | 1,871,765 |      |   | 2,728,890
|Leasehold improvements                         |  |      | 583,140   |      |   | 524,570  
|                                               |  |      |           |      |   |          
|                                               |  |      | 5,522,541 |      |   | 3,412,970
|Less accumulated depreciation and amortization |  |      | 1,786,913 |      |   | 2,427,952
|                                               |  |      |           |      |   |          
|Total                                          |  | $    | 3,735,628 |      | $ | 985,018  
|                                               |  |      |           |      |   |          



Depreciation expense
was $401,080 and $440,535 for the years ended December 31, 2003 and 2002.



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, 2003:



|           |  |   |        
|---------- |  | - | -------
|2004       |  | $ | 250,784
|2005       |  |   | 179,728
|2006       |  |   | 139,947
|2007       |  |   | 97,839 
|2008       |  |   |       
|Thereafter |  |   |       



Total rental expense
under operating leases amounted to $343,322 and $464,191 for the years ended December 31, 2003 and 2002, respectively.



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|8. | CORE DEPOSIT INTANGIBLE
|-- | -----------------------



The Corporation has a finite-lived core deposit intangible asset created in 2002 which is being amortized over a 9-year period beginning in 2003. Annual
amortization expense related to this intangible will be $62,153 per year through 2010 and $15,538 in 2011.



|9. | TIME DEPOSITS
|-- | -------------



At December 31, 2003, time deposits with a remaining maturity of one year or more amounted to $16,345,635. Maturities of all time deposits are as follows:



|     |  |   |          
|---- |  | - | ---------
|2004 |  | $ | 9,979,395
|2005 |  |   | 2,439,898
|2006 |  |   | 2,034,613
|2007 |  |   | 1,825,208
|2008 |  |   | 66,521   



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.



|10. | INCOME TAX
|--- | ----------



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



|                                |  |      |         |      |   |        
|------------------------------- |  | ---- | ------- | ---- | - | -------
|                                |  | 2003 |         | 2002
|Taxes currently payable         |  | $    | 813,763 |      | $ | 383,816
|Deferred taxes                  |  |      | 17,457  |      |   | 88,805 
|                                |  |      |         |      |   |        
|Income tax expense for the year |  | $    | 831,220 |      | $ | 472,621
|                                |  |      |         |      |   |        



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



|                                               |  |      |   |  |      |  
|---------------------------------------------- |  | ---- | - |  | ---- | -
|                                               |  | 2003 |   |  | 2002 |  
|Federal income tax rate                        |  | 34.0 | % |  | 34.0 | %
|Increase (decrease) resulting from:            |  |      |   |  |      |  
|Increase in value of bank-owned life insurance |  | (2.5 | ) |  | (4.1 | )
|Other                                          |  | .3   |   |  | .8   |  
|                                               |  |      |   |  |      |  
|Effective tax rate                             |  | 31.8 | % |  | 30.7 | %
|                                               |  |      |   |  |      |  



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



|                                                                     |  |      |         |   |      |   |          |  
|-------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | -------- | -
|                                                                     |  | 2003 |         |   | 2002 |  
|Deferred tax liabilities - Intangible assets                         |  | $    | 210,418 |   |      | $ | 108,127  |  
|                                                                     |  |      |         |   |      |   |          |  
|Deferred tax assets:                                                 |  |      |         |   |      |   |          |  
|Allowance for loan losses                                            |  |      | 353,500 |   |      |   | 216,204  |  
|Deferred loan origination fees                                       |  |      | 18,085  |   |      |   | 25,274   |  
|Depreciation                                                         |  |      | 3,066   |   |      |   | 101,513  |  
|Deferred compensation                                                |  |      | 132,770 |   |      |   | 79,596   |  
|                                                                     |  |      |         |   |      |   |          |  
|Total gross deferred tax assets                                      |  |      | 507,421 |   |      |   | 422,587  |  
|                                                                     |  |      |         |   |      |   |          |  
|Attributable to operations                                           |  |      | 297,003 |   |      |   | 314,460  |  
|Unrealized gain on investments charged to other comprehensive income |  |      | (10,733 | ) |      |   | (258,725 | )
|                                                                     |  |      |         |   |      |   |          |  
|Deferred income taxes                                                |  | $    | 286,270 |   |      | $ | 55,735   |  
|                                                                     |  |      |         |   |      |   |          |  



|11. | SHORT-TERM BORROWINGS
|--- | ---------------------



As of December 31, 2003, the Bank had an unused available line-of-credit from the Federal Home Loan Bank of Atlanta (FHLB) of $21,900,000.



|12. | LONG-TERM DEBT
|--- | --------------



Long-term debt consists of the following at December 31, 2003 and 2002:



|                                                                                                                                                         |  |      |   |      |   |          
|-------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | - | ---- | - | ---------
|                                                                                                                                                         |  | 2003 |   | 2002
|Note payable - due July 1, 2012. Interest only payments from August 10, 2002 to August 1, 2003. Interest rate is fixed at 7.0% for the term of
the note. |  | $    |  |      | $ | 1,943,334
|                                                                                                                                                         |  |      |   |      |   |          



|13. | JUNIOR SUBORDINATED DEBENTURES
|--- | ------------------------------



On October 9, 2003, the Corporation issued floating rate junior subordinated debt securities due 2033 in the amount of $7.2 million. The debt security was
issued by the Corporation pursuant to an indenture, dated as of October 9, 2003, between the Corporation and Wilmington Trust Company. The capital securities will be issued by Harbor Bankshares Corporation Capital Trust (the Trust)
pursuant to a purchase agreement dated September 18, 2003, among the Corporation, the Trust and Citigroup Global Markets Inc. Upon the receipt of the funds, the Corporation paid off its long-term debt in the amount of $1.8 million and placed the
remaining funds in the amount of $4.9 million in the Bank, increasing the Banks tier one capital. The interest rate on the debentures was 4.14% at December 31, 2003.



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##### Table of Contents

|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, 2003 and
2002 and changes during the years ended on those dates is presented below:



|                                                               |  |         |   |      |                              |       |        |         |   |                              |   |      
|-------------------------------------------------------------- |  | ------- | - | ---- | ---------------------------- | ----- | ------ | ------- | - | ---------------------------- | - | -----
|                                                               |  | 2003    |   | 2002
|                                                               |  | Shares  |   |      | WeightedAverageExercisePrice |       | Shares |         |   | WeightedAverageExercisePrice
|Outstanding at the beginning of the year                       |  | 145,712 |   |      | $                            | 15.33 |        | 156,685 |   |                              | $ | 15.26
|Granted                                                        |  | 6,631   |   |      |                              | 18.00 |        | 4,457   |   |                              |   | 17.35
|Exercised                                                      |  | (500    | ) |      |                              | 9.87  |        | (2,664  | ) |                              |   | 14.87
|Forfeited                                                      |  |        |   |      |                              | .00   |        | (12,766 | ) |                              |   | 15.62
|                                                               |  |         |   |      |                              |       |        |         |   |                              |   |      
|Outstanding at end of year                                     |  | 151,843 |   |      |                              | 15.49 |        | 145,712 |   |                              |   | 15.33
|                                                               |  |         |   |      |                              |       |        |         |   |                              |   |      
|Options exercisable at year-end                                |  | 151,843 |   |      | $                            | 15.49 |        | 145,712 |   |                              | $ | 15.33
|                                                               |  |         |   |      |                              |       |        |         |   |                              |   |      
|Weighted average fair value of options granted during the year |  |         |   |      | $                            | 7.86  |        |         |   |                              | $ | 7.75 
|                                                               |  |         |   |      |                              |       |        |         |   |                              |   |      



The following table
summarizes information about stock options outstanding at December 31, 2003:



|                                    |  |                     |  |                                      |  |                               |       |                   |         |                                      |     |                               |   |      
|----------------------------------- |  | ------------------- |  | ------------------------------------ |  | ----------------------------- | ----- | ----------------- | ------- | ------------------------------------ | --- | ----------------------------- | - | -----
|Options Outstanding and Exercisable |  | Options Exercisable
|Exercise Price Range                |  | NumberOutstanding   |  | Weighted-AverageRemainingLife(Years) |  | Weighted-AverageExercisePrice |       | NumberOutstanding |         | Weighted-AverageRemainingLife(Years) |     | Weighted-AverageExercisePrice
|                                    |  |                     |  |                                      |  |                              
|$14.80 - $18.00                     |  | 151,843             |  | 5.3                                  |  | $                             | 15.49 |                   | 148,528 |                                      | 5.2 |                               | $ | 15.43



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 $67,650 and $55,766
for the years ended December 31, 2003 and 2002, respectively.



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Deferred Compensation



The Bank has entered into deferred compensation agreements with one of its executive officers. Under the agreements, the
Bank is obligated to provide for the 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, 2003 and 2002 was $156,396 and
$81,630, respectively. The Bank is the beneficiary of life insurance policies, with aggregate cash surrender value of $3,858,625 at December 31, 2003, that was purchased as a method of partially financing benefits under this plan.



|15. | CONCENTRATIONS OF CREDIT RISK
|--- | -----------------------------



Real estate loans comprise $87,227,970 and $78,955,951 of the total loan portfolio at December 31, 2003 and 2002, respectively. All real estate mortgage
loans are collateralized by real property and/or other assets.



|16. | CONTINGENT LIABILITIES
|--- | ----------------------



In 1999, the Bank entered into an agreement with an unaffiliated company that operated and serviced automated teller machines (ATMs).
This agreement called for the Bank to provide cash for use in certain ATMs not located on Bank premises. The Bank has discovered that it has a significant cash shortage in connection with this arrangement. The investigation of the cash
shortage is ongoing and the Bank is vigorously pursuing recovery. The Bank cannot yet reasonably estimate the amount of loss it may incur as a result of this cash shortage. Therefore, no accrual for any potential loss has been reflected in the
accompanying financial statements. The maximum exposure to the Bank is estimated at approximately $1.1 million, without consideration of any related tax benefit.



|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, 2003, the capital levels of the Corporation and the Bank exceed all minimum capital adequacy requirements to which they are subject.



20



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##### Table of Contents

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



|                                              |  |        |        |       |                              |   |               |                                                               |               |  |     |               |  |               |        |  |      |  
|--------------------------------------------- |  | ------ | ------ | ----- | ---------------------------- | - | ------------- | ------------------------------------------------------------- | ------------- |  | --- | ------------- |  | ------------- | ------ |  | ---- | -
|                                              |  | Actual |        |       | For CapitalAdequacy Purposes |   |               | To Be WellCapitalized UnderPrompt CorrectiveAction Provisions |              
|                                              |  | Amount |        | Ratio |                              |   | MinimumAmount |                                                               | RequiredRatio |  |     | MinimumAmount |  | RequiredRatio |       
|As of December 31, 2003:                      |  |        |        |       |                              |   |               |                                                               |               |  |     |               |  |               |        |  |      |  
|Total Capital (to risk-weighted total assets) |  |        |        |       |                              |   |               |                                                               |               |  |     |               |  |               |        |  |      |  
|Harbor Bankshares Corporation                 |  | $      | 17,426 |       | 11.10                        | % |               | $                                                             | 12,540        |  | 8.0 | %             |  | $             | 15,676 |  | 10.0 | %
|Harbor Bank of Maryland                       |  |        | 20,403 |       | 13.02                        | % |               |                                                               | 12,540        |  | 8.0 | %             |  |               | 15,676 |  | 10.0 | %
|                                              |  |        |        |       |                              |  
|Tier 1 Capital (to risk weighted assets)      |  |        |        |       |                              |   |               |                                                               |               |  |     |               |  |               |        |  |      |  
|Harbor Bankshares Corporation                 |  |        | 15,938 |       | 10.15                        | % |               |                                                               | 6,270         |  | 4.0 | %             |  |               | 9,405  |  | 6.0  | %
|Harbor Bank of Maryland                       |  |        | 18,915 |       | 12.07                        | % |               |                                                               | 6,270         |  | 4.0 | %             |  |               | 9,405  |  | 6.0  | %
|                                              |  |        |        |       |                              |  
|Tier 1 Capital (to average assets)            |  |        |        |       |                              |   |               |                                                               |               |  |     |               |  |               |        |  |      |  
|Harbor Bankshares Corporation                 |  |        | 15,938 |       | 7.46                         | % |               |                                                               | 8,530         |  | 4.0 | %             |  |               | 10,663 |  | 5.0  | %
|Harbor Bank of Maryland                       |  |        | 18,915 |       | 8.87                         | % |               |                                                               | 8,530         |  | 4.0 | %             |  |               | 10,663 |  | 5.0  | %
|                                              |  |        |        |       |                              |  
|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  | %



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, 2003, the Bank could
have paid additional dividends of $7,968,780 to its parent company without regulatory approval.



|18. | EARNINGS PER SHARE
|--- | ------------------



Basic and diluted earnings per common share calculations for the years ended December 31, 2003 and 2002 are as follows:



|                                  |  |      |           |      |   |          
|--------------------------------- |  | ---- | --------- | ---- | - | ---------
|                                  |  | 2003 |           | 2002
|BASIC:                            |  |      |           |      |   |          
|Net income                        |  | $    | 1,785,328 |      | $ | 1,077,292
|                                  |  |      |           |      |   |          
|Average common shares outstanding |  |      | 724,513   |      |   | 731,974  
|                                  |  |      |           |      |   |          
|Earnings per common share  basic |  | $    | 2.46      |      | $ | 1.47     
|                                  |  |      |           |      |   |          



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|                                            |  |      |           |      |   |          
|------------------------------------------- |  | ---- | --------- | ---- | - | ---------
|                                            |  | 2003 |           | 2002
|DILUTED:                                    |  |      |           |      |   |          
|Net income                                  |  | $    | 1,785,328 |      | $ | 1,077,292
|                                            |  |      |           |      |   |          
|Average common shares outstanding           |  |      | 724,513   |      |   | 731,974  
|Stock option adjustment                     |  |      | 32,420    |      |   | 21,663   
|                                            |  |      |           |      |   |          
|Average common shares outstanding  diluted |  |      | 756,933   |      |   | 753,637  
|                                            |  |      |           |      |   |          
|Earnings per common share  diluted         |  | $    | 2.36      |      | $ | 1.43     
|                                            |  |      |           |      |   |          



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



Diluted earnings 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, 2003 all of the Corporations
151,843 outstanding stock options were considered to be in the money.



|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:



|                                                             |  |              |          |   |                     |   |           |  |   |              |   |  |                     |           |   |           |   |          |   |  |   |          |  
|------------------------------------------------------------ |  | ------------ | -------- | - | ------------------- | - | --------- |  | - | ------------ | - |  | ------------------- | --------- | - | --------- | - | -------- | - |  | - | -------- | -
|                                                             |  | 2003         |          |   | 2002                |  
|                                                             |  | PretaxAmount |          |   | Tax(Expense)Benefit |   | NetAmount |  |   | PretaxAmount |   |  | Tax(Expense)Benefit |           |   | NetAmount |  
|Unrealized gains (losses) on securities available-for-sale:  |  |              |          |   |                     |   |           |  |   |              |   |  |                     |           |   |           |   |          |   |  |   |          |  
|Unrealized holding gains (losses) arising during the year    |  | $            | (504,062 | ) |                     | $ | 171,381   |  | $ | (332,681     | ) |  | $                   | 1,427,411 |   |           | $ | (485,320 | ) |  | $ | 942,091  |  
|Reclassification adjustment for gains included in net income |  |              | (225,327 | ) |                     |   | 76,611    |  |   | (148,716     | ) |  |                     | (226,355  | ) |           |   | 76,961   |   |  |   | (149,394 | )
|                                                             |  |              |          |   |                     |   |           |  |   |              |   |  |                     |           |   |           |   |          |   |  |   |          |  
|Total                                                        |  | $            | (729,389 | ) |                     | $ | 247,992   |  | $ | (481,397     | ) |  | $                   | 1,201,056 |   |           | $ | (408,359 | ) |  | $ | 792,697  |  
|                                                             |  |              |          |   |                     |   |           |  |   |              |   |  |                     |           |   |           |   |          |   |  |   |          |  



|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.



22



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Loan and credit line commitments, totaled $38,191,000 at December 31, 2003 and $22,287,000 at December
31, 2002. These commitments are contingent upon continuing customer compliance with the terms of the agreement.



Commercial letters of credit, totaling $930,109 at December 31, 2003 and $1,469,927 at December 31, 2002, 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.



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.



23



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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.



Long-Term Debt



Long-term debt is discounted on a cash flow approach based on market rates as of December 31, 2003 and 2002.



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:



|                                         |  |                   |             |                      |   |                |  |                      |             |  |   |            
|---------------------------------------- |  | ----------------- | ----------- | -------------------- | - | -------------- |  | -------------------- | ----------- |  | - | -----------
|                                         |  | December 31, 2003 |             | December 31, 2002   
|                                         |  | Carrying Value    |             | Estimated Fair Value |   | Carrying Value |  | Estimated Fair Value
|Financial assets:                        |  |                   |             |                      |   |                |  |                      |             |  |   |            
|Cash and due from banks                  |  | $                 | 6,982,136   |                      | $ | 6,982,136      |  | $                    | 7,273,439   |  | $ | 7,273,439  
|Federal funds sold                       |  |                   | 8,159,452   |                      |   | 8,159,452      |  |                      | 12,653,002  |  |   | 12,653,002 
|Interest bearing deposits in other banks |  |                   | 1,900,000   |                      |   | 1,900,000      |  |                      | 2,300,000   |  |   | 2,300,000  
|Investment securities                    |  |                   | 37,837,283  |                      |   | 37,918,070     |  |                      | 55,683,934  |  |   | 55,815,639 
|Loans, net of reserves                   |  |                   | 149,729,495 |                      |   | 147,921,023    |  |                      | 120,522,660 |  |   | 118,026,521
|FHLB of Atlanta stock                    |  |                   | 461,000     |                      |   | 461,000        |  |                      | 600,000     |  |   | 600,000    
|Accrued interest receivable              |  |                   | 1,183,439   |                      |   | 1,183,439      |  |                      | 1,188,469   |  |   | 1,188,469  
|Bank-owned life insurance                |  |                   | 3,858,625   |                      |   | 3,858,625      |  |                      | 3,679,501   |  |   | 3,679,501  



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|                               |  |                   |             |                      |   |                          |  |            |             |  |   |            
|------------------------------ |  | ----------------- | ----------- | -------------------- | - | ------------------------ |  | ---------- | ----------- |  | - | -----------
|                               |  | December 31, 2003 |             | December 31, 2002   
|                               |  | Carrying Value    |             | Estimated Fair Value |   | Estimated Carrying Value |  | Fair Value
|Financial liabilities:         |  |                   |             |                      |   |                          |  |            |             |  |   |            
|Deposits                       |  | $                 | 195,901,424 |                      | $ | 195,742,182              |  | $          | 193,293,747 |  | $ | 192,841,751
|Accrued interest payable       |  |                   | 233,765     |                      |   | 233,765                  |  |            | 319,508     |  |   | 319,508    
|Long-term debt                 |  |                   |            |                      |   |                         |  |            | 1,943,334   |  |   | 1,943,334  
|Junior subordinated debentures |  |                   | 7,217,000   |                      |   | 7,217,000                |  |            |            |  |   |           



Off-Balance Sheet
Financial Assets



|                             |  |                 |            |                     |   |                 |  |                     |            |  |   |           
|---------------------------- |  | --------------- | ---------- | ------------------- | - | --------------- |  | ------------------- | ---------- |  | - | ----------
|                             |  | 2003            |            | 2002               
|                             |  | EstimatedAmount |            | EstimatedFair Value |   | EstimatedAmount |  | EstimatedFair Value
|Commitments to extend credit |  | $               | 33,915,000 |                     | $ | 33,915,000      |  | $                   | 18,605,000 |  | $ | 18,605,000
|Other unused commitments     |  |                 | 4,276,000  |                     |   | 4,276,000       |  |                     | 3,682,000  |  |   | 3,682,000 
|Commercial letters of credit |  |                 | 930,109    |                     |   | 930,109         |  |                     | 1,469,927  |  |   | 1,469,927 



|22. | PARENT COMPANY ONLY FINANCIAL STATEMENTS
|--- | ----------------------------------------



Condensed Balance Sheets



|                                           |  |             |            |      |   |           
|------------------------------------------ |  | ----------- | ---------- | ---- | - | ----------
|                                           |  | December 31
|                                           |  | 2003        |            | 2002
|Assets:                                    |  |             |            |      |   |           
|Balance with subsidiary                    |  | $           | 70,560     |      | $ |          
|Investment in bank subsidiary              |  |             | 22,282,923 |      |   | 16,044,654
|Due from bank subsidiary                   |  |             |           |      |   | 48,013    
|Prepaid placement fee                      |  |             | 208,845    |      |   |          
|                                           |  |             |            |      |   |           
|Total assets                               |  | $           | 22,562,328 |      | $ | 16,092,667
|                                           |  |             |            |      |   |           
|Liabilities:                               |  |             |            |      |   |           
|Accrued interest payable                   |  | $           | 70,560     |      | $ |          
|Long-term debt                             |  |             |           |      |   | 1,943,334 
|Junior subordinated debentures             |  |             | 7,217,000  |      |   |          
|Stockholders equity                       |  |             | 15,274,768 |      |   | 14,149,333
|                                           |  |             |            |      |   |           
|Total liabilities and stockholders equity |  | $           | 22,562,328 |      | $ | 16,092,667
|                                           |  |             |            |      |   |           



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Condensed Statement of Income



|                                             |  |                         |           |   |      |   |           |  
|-------------------------------------------- |  | ----------------------- | --------- | - | ---- | - | --------- | -
|                                             |  | Years Ended December 31 |          
|                                             |  | 2003                    |           |   | 2002 |  
|Dividend from subsidiary                     |  | $                       | 2,453,685 |   |      | $ | 201,675   |  
|Interest and other expenses                  |  |                         | (326,212  | ) |      |   | (212,009  | )
|Income tax benefit                           |  |                         | 110,912   |   |      |   | 73,253    |  
|Equity in undistributed income of subsidiary |  |                         | (453,057  | ) |      |   | 1,014,373 |  
|                                             |  |                         |           |   |      |   |           |  
|Net income                                   |  | $                       | 1,785,328 |   |      | $ | 1,077,292 |  
|                                             |  |                         |           |   |      |   |           |  



Condensed Statements
of Cash Flows



|                                                                                |  |                         |            |   |      |   |            |  
|------------------------------------------------------------------------------- |  | ----------------------- | ---------- | - | ---- | - | ---------- | -
|                                                                                |  | Years Ended December 31 |           
|                                                                                |  | 2003                    |            |   | 2002 |  
|Operating activities:                                                           |  |                         |            |   |      |   |            |  
|Net income                                                                      |  | $                       | 1,785,328  |   |      | $ | 1,077,292  |  
|Adjustment to reconcile net income to net cash provided by operating activities |  |                         |            |   |      |   |            |  
|Change in other assets and liabilities, net                                     |  |                         | (75,934    | ) |      |   | (2,277     | )
|Equity in undistributed income of subsidiary                                    |  |                         | 453,057    |   |      |   | (1,014,373 | )
|                                                                                |  |                         |            |   |      |   |            |  
|Net cash provided by operating activities                                       |  |                         | 2,162,451  |   |      |   | 60,642     |  
|                                                                                |  |                         |            |   |      |   |            |  
|Investing activities - Investment in subsidiary                                 |  |                         | (6,970,000 | ) |      |   |           |  
|                                                                                |  |                         |            |   |      |   |            |  
|Financing activities:                                                           |  |                         |            |   |      |   |            |  
|Repayment of long-term debt                                                     |  |                         | (1,943,395 | ) |      |   | (56,666    | )
|Proceeds from sale of common stock                                              |  |                         | 5,582      |   |      |   |           |  
|Payments of cash dividends                                                      |  |                         | (184,078   | ) |      |   | (3,796     | )
|Proceeds from issuance of junior subordinated debentures                        |  |                         | 7,000,000  |   |      |   |           |  
|                                                                                |  |                         |            |   |      |   |            |  
|Net cash provided (used) by financing activities                                |  |                         | 4,878,109  |   |      |   | (60,642    | )
|                                                                                |  |                         |            |   |      |   |            |  
|Change in cash and cash equivalents                                             |  |                         | 70,560     |   |      |   |           |  
|                                                                                |  |                        
|Cash and cash equivalents at beginning of year                                  |  |                         |           |   |      |   |           |  
|                                                                                |  |                         |            |   |      |   |            |  
|Cash and cash equivalents at end of year                                        |  | $                       | 70,560     |   |      | $ |           |  
|                                                                                |  |                         |            |   |      |   |            |  



26



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HARBOR BANKSHARES CORPORATION

---



CONSOLIDATED FIVE-YEARS SELECTED
FINANCIAL DATA

HARBOR BANKSHARES CORPORATION AND SUBSIDIARIES



(In thousands, except per share data)



|                                    |  |                         |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|----------------------------------- |  | ----------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | - |  | ---- | ------- | - |  | - | ------- | -
|                                    |  | Year ended December 31, |        
|                                    |  | 2003                    |         |   | 2002 |   |         | 2001 |  |   | 2000    |   |  | 1999 |        
|OPERATING DATA                      |  |                         |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Interest Income                     |  | $                       | 11,886  |   |      | $ | 11,647  |      |  | $ | 13,609  |   |  | $    | 13,665  |   |  | $ | 12,342  |  
|Interest Expense                    |  |                         | 2,411   |   |      |   | 3,402   |      |  |   | 5,973   |   |  |      | 6,199   |   |  |   | 5,718   |  
|                                    |  |                         |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Net Interest Income                 |  |                         | 9,475   |   |      |   | 8,245   |      |  |   | 7,636   |   |  |      | 7,466   |   |  |   | 6,624   |  
|Provision for Loan Losses           |  |                         | 755     |   |      |   | 340     |      |  |   | 400     |   |  |      | 346     |   |  |   | 803     |  
|Other Operating Income              |  |                         | 2,506   |   |      |   | 2,220   |      |  |   | 2,329   |   |  |      | 1,841   |   |  |   | 1,470   |  
|Other Operating Expenses            |  |                         | 8,610   |   |      |   | 8,575   |      |  |   | 8,526   |   |  |      | 8,109   |   |  |   | 7,284   |  
|                                    |  |                         |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Income Before Taxes                 |  |                         | 2,616   |   |      |   | 1,550   |      |  |   | 1,039   |   |  |      | 852     |   |  |   | 7       |  
|Income Taxes                        |  |                         | 831     |   |      |   | 473     |      |  |   | 309     |   |  |      | 287     |   |  |   | 6       |  
|                                    |  |                         |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Net Income                          |  | $                       | 1,785   |   |      | $ | 1,077   |      |  | $ | 730     |   |  | $    | 565     |   |  | $ | 1       |  
|                                    |  |                         |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|                                    |  |                         |         |   |     
|PER SHARE DATA                      |  |                         |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Net Income  Basic                  |  | $                       | 2.46    |   |      | $ | 1.47    |      |  | $ | 1.02    |   |  | $    | .81     |   |  | $ |        |  
|Net Income  Diluted                |  |                         | 2.36    |   |      |   | 1.43    |      |  |   | .99     |   |  |      | .79     |   |  |   |        |  
|Cash and Stock Dividends            |  |                         | .25     |   |      |   | .25     |      |  |   |        |   |  |      |        |   |  |   | .25     |  
|Book Value                          |  | $                       | 21.69   |   |      | $ | 19.23   |      |  | $ | 16.72   |   |  | $    | 14.65   |   |  | $ | 10.67   |  
|                                    |  |                         |         |   |     
|BALANCE SHEET DATA                  |  |                         |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Total Assets                        |  | $                       | 219,547 |   |      | $ | 210,234 |      |  | $ | 186,586 |   |  | $    | 184,517 |   |  | $ | 177,618 |  
|Deposits                            |  |                         | 195,901 |   |      |   | 193,294 |      |  |   | 171,531 |   |  |      | 169,282 |   |  |   | 165,541 |  
|Total Net Loans                     |  |                         | 149,729 |   |      |   | 120,523 |      |  |   | 105,847 |   |  |      | 111,665 |   |  |   | 101,823 |  
|Total Stockholders Equity          |  |                         | 15,274  |   |      |   | 14,149  |      |  |   | 12,241  |   |  |      | 10,246  |   |  |   | 7,464   |  
|Return on Average Assets            |  |                         | .84     | % |      |   | .54     | %    |  |   | .37     | % |  |      | .32     | % |  |   |        |  
|Return on Average Equity            |  |                         | 12.23   | % |      |   | 8.2     | %    |  |   | 6.2     | % |  |      | 7.0     | % |  |   |        |  
|Tier 1 Regulatory Capital to Assets |  |                         | 7.5     | % |      |   | 5.2     | %    |  |   | 5.4     | % |  |      | 4.6     | % |  |   | 4.3     | %
|Dividend Payout Ratio %             |  |                         | 10.4    | % |      |   | 16.7    | %    |  |   |        |   |  |      |        |   |  |   | 117.0   | %



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MANAGEMENTS DISCUSSION AND
ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS





FORWARD-LOOKING STATEMENTS



The Managements Discussion and Analysis of Financial Condition and
Results of Operations, and other portions of this annual report include forward-looking statements such as; statements of Harbor Bancshares Corporations goals, intentions, and expectations; estimates of risks and of future costs and benefits;
assessments of loan quality, probable loan losses, liquidity, off-balance sheet arrangements, and interest rate risk; and statements of its ability to achieve financial and other goals. These forward-looking statements are subject to significant
uncertainties because they are based upon: the amount and timing of future changes in interest rates and other economic conditions; future laws, regulations and accounting principles; and a variety of other matters. Because of these uncertainties,
the actual future results may be materially different from the results indicated by these forward-looking statements. In addition, Harbor Bankshares Corporations past growth and performance do not necessarily indicate its future results.



Corporate Financial Review



OVERVIEW  2003 COMPARED TO 2002



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 2003 when compared to the prior year. Earnings for the year were $1.8
million compared to $1.1 million earned during 2002, an increase of $700 thousand or 65.7 percent.



The Harbor Bank of Maryland achieved earnings of $2.0 million compared to $1.2 million for the prior year, an increase of $800 thousand or 66.7%.



Returns on average assets (ROAA) and average equity (ROAE) for
the Corporation in 2003 were .84% and 12.23%, respectively, compared to the .54% and 8.21% achieved during the prior year. The return on average assets for the Bank in 2003 was .94%, compared to .61% 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 2003 increased by $1.2 million or 14.9 percent.
The increase reflects the continuing repricing of liabilities during 2003 and its beneficial effect on earnings.



Total interest income increased by $239 thousand or 2.1% to $11.9 million for 2003 when compared to the $11.6 million earned during 2002. The growth in
the loan portfolio combined with lower interest rates were the main reasons for the increase.



Total interest expense decreased by $1.0 million or 29.1% to $2.4 million in 2003 from $3.4 million in 2002. Lower interest rates resulted in lower interest expense due to the repricing of liabilities throughout the
year.



Net interest margin for 2003 was 4.84% compared to 4.51%
for 2002.



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



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PROVISION FOR LOAN LOSSES AND ASSET
QUALITY



For the year ended December 31, 2003, the
Corporation recorded a $755 thousand provision for loan losses, compared to $340 thousand for the year ended December 31, 2002. Gross charge-offs totaled $423 thousand for the year ended December 31, 2003, compared to the prior year total of $314
thousand. These charge-offs in 2003 primarily relate to credit cards, consumer and commercial loans.



The allowance for loan losses as of December 31, 2003, was .98% of total loans and .86% at the end of the comparable 2002 period.



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)



|                                                                  |  |      |     |   |      |   |       |      |  |   |      |   |  |      |     |   |  |   |       |  
|----------------------------------------------------------------- |  | ---- | --- | - | ---- | - | ----- | ---- |  | - | ---- | - |  | ---- | --- | - |  | - | ----- | -
|                                                                  |  | 2003 |     |   | 2002 |   |       | 2001 |  |   | 2000 |   |  | 1999 |    
|Non-accrual Loans                                                 |  | $    | 220 |   |      | $ | 409   |      |  | $ | 620  |   |  | $    | 265 |   |  | $ | 1,003 |  
|Accruing Loans past due 90 days or more                           |  |      | 506 |   |      |   | 746   |      |  |   | 135  |   |  |      | 6   |   |  |   | 47    |  
|Foreclosed Real Estate                                            |  |      |    |   |      |   | 70    |      |  |   | 14   |   |  |      | 37  |   |  |   | 217   |  
|Total Non-performing Assets and past due Loans                    |  |      | 726 |   |      |   | 1,225 |      |  |   | 769  |   |  |      | 308 |   |  |   | 1,267 |  
|Total Non-performing Assets and past due Loans to year-end Assets |  |      | .33 | % |      |   | .58   | %    |  |   | .41  | % |  |      | .17 | % |  |   | .71   | %
|Total Non-performing Loans to year-end Loans                      |  |      | .48 | % |      |   | 1.01  | %    |  |   | .72  | % |  |      | .24 | % |  |   | 1.0   | %



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The Corporations allowance for
loan loss methodology is a loan classification-based system, based on 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 increased by $285 thousand or 12.8% to $2.5 million in
2003. ATM fees were $216 thousand for 2003, representing 8.6% of other operating income. Included in the 2003 non-interest income were $51 thousand of gains on sale of loans, a $664 thousand award from CDFI (Treasury Department), $16 thousand of
servicing fees and a gain on sale of securities of $225 thousand. The 2002 non-interest income reflects a $54 thousand gain on sale of loans, a $214 thousand award from CDFI (Treasury Department), $26 thousand of servicing fees and a $226 gain on
the sale of securities available for sale.



Non-Interest Income Summary (in
thousands)



|                                    |  |      |       |      |   |       |  |      |       |      |   |       |  |   |      
|----------------------------------- |  | ---- | ----- | ---- | - | ----- |  | ---- | ----- | ---- | - | ----- |  | - | -----
|                                    |  | 2003 |       | 2002 |   | 2001  |  | 2000 |       | 1999
|Service charges on deposit accounts |  | $    | 855   |      | $ | 910   |  | $    | 965   |      | $ | 1,069 |  | $ | 845  
|ATM fees                            |  |      | 216   |      |   | 274   |  |      | 166   |      |   | 147   |  |   | 155  
|Awards & Grants                     |  |      | 664   |      |   | 214   |  |      | 229   |      |   | 127   |  |   |     
|Gain on sale of real estate         |  |      |      |      |   |      |  |      |      |      |   |      |  |   | 112  
|Gain on sale of loans               |  |      | 51    |      |   | 54    |  |      | 45    |      |   | 11    |  |   | 7    
|Gain on sale of securities          |  |      | 225   |      |   | 226   |  |      | 197   |      |   |      |  |   |     
|Servicing fees                      |  |      | 16    |      |   | 26    |  |      | 27    |      |   | 46    |  |   | 32   
|Other non-interest income           |  |      | 479   |      |   | 517   |  |      | 700   |      |   | 441   |  |   | 319  
|                                    |  |      |       |      |   |       |  |      |       |      |   |       |  |   |      
|Total non-interest income           |  | $    | 2,506 |      | $ | 2,221 |  | $    | 2,329 |      | $ | 1,841 |  | $ | 1,470
|                                    |  |      |       |      |   |       |  |      |       |      |   |       |  |   |      



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NON-INTEREST EXPENSES



Non-interest expenses of $8.6 million in 2003 increased by $35 thousand or
..41% when compared to the prior year. Salaries and benefits of $4.4 million in 2003 reflected an increase of $138 thousand or 3.3% when compared to the prior year salaries and benefits cost. Equipment expense decreased by $92 thousand or 19.2% due
to less amortization cost. Professional fees decreased by $34 thousand or 16.3%. FDIC Insurance remained constant at $30 thousand. Other expenses increased by $58 thousand or 3.2 %. Other intangibles amortization increased by $33 thousand or 70.2%.
The amortization of $80 thousand under goodwill/other intangibles reflects the purchase of a branch facility during 2003. From 1999 to 2001, the amortization of goodwill before the adoption of FASB 147 is reflected.



Non-Interest Expenses Summary (In thousands)



|                               |  |      |       |      |   |       |  |      |       |      |   |       |  |   |      
|------------------------------ |  | ---- | ----- | ---- | - | ----- |  | ---- | ----- | ---- | - | ----- |  | - | -----
|                               |  | 2003 |       | 2002 |   | 2001  |  | 2000 |       | 1999
|Salaries and Employee Benefits |  | $    | 4,368 |      | $ | 4,230 |  | $    | 3,989 |      | $ | 3,622 |  | $ | 3,220
|Occupancy Expense, net         |  |      | 720   |      |   | 785   |  |      | 778   |      |   | 809   |  |   | 831  
|Equipment Expenses             |  |      | 386   |      |   | 478   |  |      | 654   |      |   | 802   |  |   | 728  
|Data Processing Fees           |  |      | 973   |      |   | 976   |  |      | 918   |      |   | 791   |  |   | 679  
|Professional Fees              |  |      | 174   |      |   | 208   |  |      | 199   |      |   | 388   |  |   | 199  
|Goodwill/Other Intangibles     |  |      | 80    |      |   | 47    |  |      | 331   |      |   | 331   |  |   | 331  
|Amortization                   |  |      |       |      |   |       |  |      |       |      |   |       |  |   |      
|FDIC Insurance                 |  |      | 30    |      |   | 30    |  |      | 87    |      |   | 29    |  |   | 44   
|Other Non-Interest Expense     |  |      | 1,879 |      |   | 1,821 |  |      | 1,571 |      |   | 1,337 |  |   | 1,252
|                               |  |      |       |      |   |       |  |      |       |      |   |       |  |   |      
|Total Non-Interest Expense     |  | $    | 8,610 |      | $ | 8,575 |  | $    | 8,527 |      | $ | 8,109 |  | $ | 7,284
|                               |  |      |       |      |   |       |  |      |       |      |   |       |  |   |      



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 2003 were $831 thousand compared to $473 thousand for 2002. The effective tax rate for the year ended December 31,2003, was 31.2% compared to 30.7%
for the year ended December 31, 2002.



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.



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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, 2003, the Corporation had sufficient collateral in order to borrow up to an aggregate of $21.9 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 $52.8 million or 24.1% of total assets at December 31, 2003.



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.



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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, 2003, net cash provided by
operating activities totaled $2.7 million. Net cash used by investing activities totaled $14.8 million resulting primarily from the proceeds of called investment securities totaling $29.0 million, proceeds from the sale, maturities and principal
payments of investment securities of $18.6 million, purchase of investment securities of $29.8 million and a net increase in loans of $29.9 million. Net cash provided by financing activities totaled $7.3 million resulting from the net increase in
total deposits of $2.6 million, re-payment of the long term debt in the amount of $1.9 million and net proceeds for the issuance of a preferred beneficial interest in companys subsidiaries in the amount of $6.8 million.



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      |  | $      | 104.5 |  
|Interest sensitive liabilities |  |        | 76.8  |  
|                               |  |        |       |  
|Interest sensitivity gap       |  | $      | 27.7  |  
|                               |  |        |       |  
|Gap to total assets            |  |        | 12.6  | %
|                               |  |        |       |  



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



On October 9, 2003, Harbor Bankshares Corporation issued a Floating Rate Junior Subordinated Debt Security due 2033 in the amount of $7.0 million. The
Debt Security was issued by the corporation pursuant to an Indenture, dated as of October 9, 2003, between the Corporation and



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Wilmington Trust Company. The Capital Securities will be issued by Harbor Bankshares Corporation Capital Trust pursuant to a
Purchase Agreement dated September 18, 2003, among the Corporation, the Trust and Citigroup Global Markets Inc. Upon the receipt of the funds, the Corporation paid off its long-term debt to N.C.I.F. in the amount of $1.9 million and placed the
remaining funds in the amount of $4.9 million in its subsidiary, The Harbor Bank of Maryland, increasing the Banks Tier One capital. This capital infusion will permit the Bank to increase its lending limit and allow for future growth. There
are no other borrowings as of December 31, 2003.



CONTRACTUAL
OBLIGATIONS, COMMITMENTS, CONTINGENT LIABILITIES, AND OFF-BALANCE SHEET ARRANGEMENTS



Contractual Obligations: The following table presents, as of December 31, 2003, significant fixed and determinable contractual obligations to third parties by payment date. Further discussion of the nature of each
obligation is included in the referenced note to the consolidated financial statements.



PAYMENTS DUE IN



|                               |  |               |  |                 |  |                   |  |                    |  |                |  |      
|------------------------------ |  | ------------- |  | --------------- |  | ----------------- |  | ------------------ |  | -------------- |  | -----
|(In Millions)                  |  | NoteReference |  | One Yearor Less |  | One to ThreeYears |  | Three toFive Years |  | Over FiveYears |  | Total
|Junior Subordinated Debentures |  |               |  |                 |  |                   |  |                    |  | 7,210          |  | 7,210
|                               |  |               |  |                 |  |                   |  |                    |  |                |  |      



Excludes Interest



CAPITAL RESOURCES



Stockholders equity increased by $1.1million or 7.9% to $15.3 million.
This increase was mainly due to net income of $1.8 million and the unrealized gain of securities held for sale, which was $21 thousand at December 31, 2003, compared to a gain of $502 thousand for 2002. As of year-end, based on borrowing
arrangements with the Federal Home Loan Bank of $21.9 million, the Corporation had sufficient liquidity to withstand any unusual demand of funds without liquidating these securities. Stockholders equity was 7.0% of total assets as of the
year-end. The Tier 1 capital ratio as of December 31, 2003, was 7.3%, and the risk-based capital ratio was 11.10%. The minimum 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 $21.69 as of December 31, 2003.



The Tier I capital ratio for the Corporations subsidiary, The Harbor Bank of Maryland as of December 31, 2003, was 8.8% and the risk-based capital ratio was 13.0%, both above the established regulatory requirements.



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CHANGES IN FINANCIAL POSITION



The Corporation, through its subsidiary, The Harbor Bank
of Maryland, continued its growth during 2003. Total assets increased by $9.3 million or 4.4 percent.



Deposits increased from $193.3 million in 2002 to $195.9 million in 2003, an increase of $2.6 million or 1.3%. Net loans reached to $149.7 million in 2003
from $120.5 million in 2002, an increase of $29.2 million or 24.2%.



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, 2003, 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.



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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.



HARBOR BANKSHARES CORPORATION

SUPPLEMENT TO THE 2003 ANNUAL REPORT TO STOCKHOLDERS



|                             |  |                                                                              
|---------------------------- |  | -----------------------------------------------------------------------------
|BOARD OF DIRECTORS           |  |                                                                              
|                             | 
|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 and CEO/Tree Top Toys, Inc.                                        
|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                          
|Dr. Derek Lindsey            |  | Physician and CEO/True Health Care                                           
|Hassan Murphy                |  | Attorney/William H. Murphy Jr. and Associates, P.A.                          
|James Watkins, (Col.)        |  | President/Watkins Security Agency                                            
|Kenneth O. Wilson            |  | President and Owner/Inner Harbor Marina                                      



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STOCKHOLDERS INFORMATION



MARKET SUMMARY OF STOCK



Harbor Bankshares Corporation is traded privately and is not listed on any
exchange. During 2003 and 2002, there was little trading activity in the stock. The bid and ask price during 2003 was $20.00 per share. During 2002 the bid and ask price varied from $18.00 to $20.00 per share. At December 31, 2003 the Corporation
had 685 common stockholders of record.



CASH
DIVIDENDS



A stock dividend equivalent to $.25 per
share was paid during the first quarter of 2003.



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.



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Exhibit A



HARBOR BANKSHARES CORPORATION

CONSOLIDATED THREE-YEARS STATEMENT:

AVERAGE BALANCES, YIELDS/RATES AND INCOME EXPENSE

(dollars in thousands)



|                                           |  |                  |         |      |               |      |   |               |   |                  |  |   |               |   |  |               |   |                  |   |        |               |   |         |               |  |       |   |  |   |       
|------------------------------------------ |  | ---------------- | ------- | ---- | ------------- | ---- | - | ------------- | - | ---------------- |  | - | ------------- | - |  | ------------- | - | ---------------- | - | ------ | ------------- | - | ------- | ------------- |  | ----- | - |  | - | ------
|Year ended December 31,                    |  | 2003             |         | 2002 |               | 2001
|                                           |  | Average Balances |         |      | Yields/ Rates |      |   | IncomeExpense |   | Average Balances |  |   | Yields/ Rates |   |  | IncomeExpense |   | Average Balances |   |        | Yields/ Rates |   |         | IncomeExpense
|ASSETS                                     |  |                  |         |      |               |      |   |               |   |                  |  |   |               |   |  |               |   |                  |   |        |               |   |         |               |  |       |   |  |   |       
|U. S. Treasury Securities                  |  | $                | 3,048   |      |               | 2.79 | % |               | $ | 85               |  | $ | 2,989         |   |  | 2.64          | % |                  | $ | 79     |               | $ | 2,138   |               |  | 4.07  | % |  | $ | 87    
|U.S. Government Agencies                   |  |                  | 39,878  |      |               | 3.39 |   |               |   | 1,354            |  |   | 49,256        |   |  | 4.17          |   |                  |   | 2,055  |               |   | 55,140  |               |  | 6.19  |   |  |   | 3,411 
|Interest-Bearing Deposits with Other Banks |  |                  | 2,100   |      |               | 3.24 |   |               |   | 68               |  |   | 1,770         |   |  | 3.56          |   |                  |   | 63     |               |   | 998     |               |  | 4.84  |   |  |   | 48    
|FHLB Stock and Other Securities            |  |                  | 1,051   |      |               | 3.61 |   |               |   | 38               |  |   | 1,155         |   |  | 4.50          |   |                  |   | 52     |               |   | 652     |               |  | 6.90  |   |  |   | 45    
|Federal Funds Sold                         |  |                  | 9,397   |      |               | 1.03 |   |               |   | 97               |  |   | 17,083        |   |  | 1.60          |   |                  |   | 274    |               |   | 18,805  |               |  | 3.89  |   |  |   | 731   
|                                           |  |                  |         |      |               |      |   |               |   |                  |  |   |               |   |  |               |   |                  |   |        |               |   |         |               |  |       |   |  |   |       
|                                           |  |                  | 55,474  |      |               | 2.96 |   |               |   | 1,642            |  |   | 72,253        |   |  | 3.49          | % |                  |   | 2,523  |               |   | 77,733  |               |  | 5.56  | % |  |   | 4,322 
|                                           |  |                  |         |      |               |      |   |               |   |                  |  |   |               |   |  |               |   |                  |   |        |               |   |         |               |  |       |   |  |   |       
|Loans                                      |  |                  |         |      |               |      |   |               |   |                  |  |   |               |   |  |               |   |                  |   |        |               |   |         |               |  |       |   |  |   |       
|Commercial Loans                           |  |                  | 44,887  |      |               | 7.03 |   |               |   | 3,156            |  |   | 27,976        |   |  | 8.21          |   |                  |   | 2,297  |               |   | 22,313  |               |  | 9.10  |   |  |   | 2,032 
|Real Estate Loans                          |  |                  | 85,226  |      |               | 7.16 |   |               |   | 6,102            |  |   | 70,996        |   |  | 8.06          |   |                  |   | 5,723  |               |   | 72,261  |               |  | 8.53  |   |  |   | 6,161 
|Consumer Loans                             |  |                  | 10,263  |      |               | 9.61 |   |               |   | 986              |  |   | 11,321        |   |  | 9.75          |   |                  |   | 1,104  |               |   | 10,493  |               |  | 10.43 |   |  |   | 1,094 
|                                           |  |                  |         |      |               |      |   |               |   |                  |  |   |               |   |  |               |   |                  |   |        |               |   |         |               |  |       |   |  |   |       
|Loans Net of Unearned Income               |  |                  | 140,376 |      |               | 7.30 |   |               |   | 10,244           |  |   | 110,293       |   |  | 8.27          |   |                  |   | 9,124  |               |   | 105,067 |               |  | 8.84  |   |  |   | 9,287 
|                                           |  |                  |         |      |               |      |   |               |   |                  |  |   |               |   |  |               |   |                  |   |        |               |   |         |               |  |       |   |  |   |       
|Total Earning Assets                       |  |                  | 195,850 |      |               | 6.07 | % |               | $ | 11,886           |  |   | 182,546       |   |  | 6.38          | % |                  | $ | 11,647 |               |   | 182,800 |               |  | 7.44  | % |  | $ | 13,609
|                                           |  |                  |         |      |               |      |   |               |   |                  |  |   |               |   |  |               |   |                  |   |        |               |   |         |               |  |       |   |  |   |       
|Allowance for Possible Losses              |  |                  | (1,488  | )    |               |      |   |               |   |                  |  |   | (1,007        | ) |  |               |   |                  |   |        |               |   | (844    | )             |  |       |   |  |   |       
|Other Assets                               |  |                  | 18,909  |      |               |      |   |               |   |                  |  |   | 16,633        |   |  |               |   |                  |   |        |               |   | 16,283  |               |  |       |   |  |   |       
|                                           |  |                  |         |      |               |      |   |               |   |                  |  |   |               |   |  |               |   |                  |   |        |               |   |         |               |  |       |   |  |   |       
|TOTAL ASSETS                               |  | $                | 213,271 |      |               |      |   |               |   |                  |  | $ | 198,172       |   |  |               |   |                  |   |        |               | $ | 198,239 |               |  |       |   |  |   |       
|                                           |  |                  |         |      |               |      |   |               |   |                  |  |   |               |   |  |               |   |                  |   |        |               |   |         |               |  |       |   |  |   |       
|LIABILITIES AND STOCKHOLDERS EQUITY       |  |                  |         |      |               |      |   |               |   |                  |  |   |               |   |  |               |   |                  |   |        |               |   |         |               |  |       |   |  |   |       
|Non-Interest Bearing Deposits              |  | $                | 31,641  |      |               |     | % |               | $ |                 |  | $ | 23,829        |   |  |              | % |                  | $ |       |               | $ | 21,341  |               |  |      | % |  | $ |      
|                                           |  |                  |         |      |               |      |   |               |   |                  |  |   |               |   |  |               |   |                  |   |        |               |   |         |               |  |       |   |  |   |       
|Interest-Bearing Transaction Accounts      |  |                  | 23,515  |      |               | .16  |   |               |   | 38               |  |   | 21,197        |   |  | .29           |   |                  |   | 62     |               |   | 18,597  |               |  | .71   |   |  |   | 132   
|Savings                                    |  |                  | 84,715  |      |               | .82  |   |               |   | 696              |  |   | 87,356        |   |  | 1.31          |   |                  |   | 1,145  |               |   | 82,907  |               |  | 3.03  |   |  |   | 2,518 
|Time - $100,000 or more                    |  |                  | 25,172  |      |               | 2.63 |   |               |   | 662              |  |   | 22,264        |   |  | 4.10          |   |                  |   | 914    |               |   | 30,482  |               |  | 5.50  |   |  |   | 1,675 
|Other Time                                 |  |                  | 29,831  |      |               | 2.81 |   |               |   | 840              |  |   | 27,567        |   |  | 4.14          |   |                  |   | 1,140  |               |   | 29,907  |               |  | 5.00  |   |  |   | 1,497 
|                                           |  |                  |         |      |               |      |   |               |   |                  |  |   |               |   |  |               |   |                  |   |        |               |   |         |               |  |       |   |  |   |       
|Savings and Time Deposits                  |  |                  | 163,233 |      |               | 1.37 | % |               |   | 2,236            |  |   | 158,384       |   |  | 2.06          | % |                  |   | 3,261  |               |   | 161,893 |               |  | 3.59  | % |  |   | 5,822 
|                                           |  |                  |         |      |               |      |   |               |   |                  |  |   |               |   |  |               |   |                  |   |        |               |   |         |               |  |       |   |  |   |       
|TOTAL Deposits                             |  |                  | 194,874 |      |               |      |   |               |   |                  |  |   | 182,213       |   |  |               |   |                  |   |        |               |   | 183,234 |               |  |       |   |  |   |       
|                                           |  |                  |         |      |               |      |   |               |  
|Junior Subordinated Debentures             |  |                  | 1,611   |      |               | 4.40 | % |               |   | 71               |  |   |               |   |  |               |   |                  |   |        |               |   |         |               |  |       |   |  |   |       
|Other Borrowed Money                       |  |                  |        |      |               |     | % |               |   |                 |  |   |              |   |  |              | % |                  |   |       |               |   | 137     |               |  | 6.24  | % |  |   | 9     
|Notes payable                              |  |                  | 1,310   |      |               | 7.0  |   |               |   | 104              |  |   | 1,985         |   |  | 7.0           |   |                  |   | 141    |               |   | 2,000   |               |  | 7.0   |   |  |   | 142   
|Other Liabilities                          |  |                  | 871     |      |               |     |   |               |   |                  |  |   | 866           |   |  |              |   |                  |   |       |               |   | 1,168   |               |  |      |   |  |   |      
|                                           |  |                  |         |      |               |      |   |               |   |                  |  |   |               |   |  |               |   |                  |   |        |               |   |         |               |  |       |   |  |   |       
|TOTAL Liabilities                          |  |                  | 198,666 |      |               | 1.45 | % |               | $ | 2,411            |  |   | 185,064       |   |  | 2.12          | % |                  | $ | 3,402  |               |   | 186,539 |               |  | 3.64  | % |  | $ | 5,973 
|                                           |  |                  |         |      |               |      |   |               |   |                  |  |   |               |   |  |               |   |                  |   |        |               |   |         |               |  |       |   |  |   |       
|STOCKHOLDERS EQUITY                       |  |                  | 14,605  |      |               |      |   |               |   |                  |  |   | 13,108        |   |  |               |   |                  |   |        |               |   | 11,700  |               |  |       |   |  |   |       
|                                           |  |                  |         |      |               |      |   |               |   |                  |  |   |               |   |  |               |   |                  |   |        |               |   |         |               |  |       |   |  |   |       
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |  | $                | 213,271 |      |               |      |   |               |   |                  |  | $ | 198,172       |   |  |               |   |                  |   |        |               | $ | 198,239 |               |  |       |   |  |   |       
|                                           |  |                  |         |      |               |      |   |               |   |                  |  |   |               |   |  |               |   |                  |   |        |               |   |         |               |  |       |   |  |   |       
|Net Yield on Interest Earning Assets       |  |                  |         |      |               | 4.62 | % |               |   |                  |  |   |               |   |  | 4.26          | % |                  |   |        |               |   |         |               |  | 3.80  | % |  |   |       
|Benefit of Non-Interest Bearing Funds      |  |                  |         |      |               | .22  | % |               |   |                  |  |   |               |   |  | .25           | % |                  |   |        |               |   |         |               |  | .56   | % |  |   |       
|Net Interest Margin                        |  |                  |         |      |               | 4.84 | % |               |   |                  |  |   |               |   |  | 4.51          | % |                  |   |        |               |   |         |               |  | 4.36  | % |  |   |       



---

##### Table of Contents

HARBOR BANKSHARES CORPORATION

---



Exhibit B



SUMMARY OF LOAN LOSS EXPERIENCE

(dollars in thousands)



|                                                        |  |      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |        |  
|------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | - |  | ---- | ------- | - |  | - | ------ | -
|Year ended December 31,                                 |  | 2003 |         |   | 2002 |   |         | 2001 |  |   | 2000    |   |  | 1999 |        
|Balance at Beginning of Period                          |  | $    | 1,049   |   |      | $ | 959     |      |  | $ | 732     |   |  | $    | 678     |   |  | $ | 699    |  
|                                                        |  |      |         |   |     
|Loans Charged Off:                                      |  |      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |        |  
|Commercial Loans                                        |  |      | 71      |   |      |   | 109     |      |  |   | 65      |   |  |      | 228     |   |  |   | 291    |  
|Real Estate Loans                                       |  |      | 11      |   |      |   | 26      |      |  |   | 70      |   |  |      | 73      |   |  |   | 395    |  
|Consumer Loans                                          |  |      | 341     |   |      |   | 178     |      |  |   | 111     |   |  |      | 103     |   |  |   | 239    |  
|                                                        |  |      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |        |  
|TOTAL Loans Charged Off                                 |  |      | 423     |   |      |   | 313     |      |  |   | 246     |   |  |      | 404     |   |  |   | 925    |  
|                                                        |  |      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |        |  
|Recoveries of Loans:                                    |  |      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |        |  
|Commercial Loans                                        |  |      | 22      |   |      |   | 42      |      |  |   | 39      |   |  |      | 69      |   |  |   | 40     |  
|Real Estate Loans                                       |  |      | 22      |   |      |   | 11      |      |  |   | 22      |   |  |      | 16      |   |  |   | 26     |  
|Consumer Loans                                          |  |      | 63      |   |      |   | 10      |      |  |   | 12      |   |  |      | 27      |   |  |   | 35     |  
|                                                        |  |      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |        |  
|TOTAL Loans Recovered                                   |  |      | 107     |   |      |   | 63      |      |  |   | 73      |   |  |      | 112     |   |  |   | 101    |  
|                                                        |  |      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |        |  
|Net Loans Charged Off                                   |  |      | 316     |   |      |   | 250     |      |  |   | 173     |   |  |      | 292     |   |  |   | 824    |  
|                                                        |  |      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |        |  
|Provisions Charged to Operations                        |  |      | 755     |   |      |   | 340     |      |  |   | 400     |   |  |      | 346     |   |  |   | 803    |  
|                                                        |  |      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |        |  
|Balance at End of Period                                |  | $    | 1,488   |   |      | $ | 1,049   |      |  | $ | 959     |   |  | $    | 732     |   |  | $ | 678    |  
|                                                        |  |      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |        |  
|Daily Average Amount of Loans                           |  | $    | 140,376 |   |      | $ | 110,293 |      |  | $ | 105,067 |   |  | $    | 107,860 |   |  | $ | 87,399 |  
|                                                        |  |      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |        |  
|Allowance for Possible Loan Losses to Loans Outstanding |  |      | .98     | % |      |   | .86     | %    |  |   | .90     | % |  |      | .65     | % |  |   | .66    | %
|                                                        |  |      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |        |  
|Net Charge Offs to Average Loans Outstanding            |  |      | .22     | % |      |   | .22     | %    |  |   | .16     | % |  |      | .27     | % |  |   | .94    | %
|                                                        |  |      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |        |  



ALLOCATION OF
ALLOWANCE FOR LOAN LOSSES

(dollars in thousands)



|                                |  |      |       |      |   |       |  |      |     |      |   |     |  |   |    
|------------------------------- |  | ---- | ----- | ---- | - | ----- |  | ---- | --- | ---- | - | --- |  | - | ---
|As of December 31,              |  | 2003 |       | 2002 |   | 2001  |  | 2000 |     | 1999
|Commercial Loans                |  | $    | 825   |      | $ | 555   |  | $    | 557 |      | $ | 442 |  | $ | 317
|Real Estate Loans               |  |      | 151   |      |   | 138   |  |      | 110 |      |   | 127 |  |   | 131
|Consumer Loans                  |  |      | 35    |      |   | 76    |  |      | 80  |      |   | 17  |  |   | 4  
|Credit Cards                    |  |      | 47    |      |   | 46    |  |      | 55  |      |   | 16  |  |   | 10 
|Unallocated                     |  |      | 430   |      |   | 234   |  |      | 157 |      |   | 130 |  |   | 216
|                                |  |      |       |      |   |       |  |      |     |      |   |     |  |   |    
|TOTAL Allowance for Loan Losses |  | $    | 1,488 |      | $ | 1,049 |  | $    | 959 |      | $ | 732 |  | $ | 678
|                                |  |      |       |      |   |       |  |      |     |      |   |     |  |   |    



---

##### Table of Contents

HARBOr BANKSHAREs CORPORATION

---



Exhibit C



INTEREST VARIANCE ANALYSIS

(dollars in thousands)



|                                      |  |                                                  |       |   |                                                  |   |        |     |  |   |        |   |  |      |      |   |     |   |        |   |  |   |        |  
|------------------------------------- |  | ------------------------------------------------ | ----- | - | ------------------------------------------------ | - | ------ | --- |  | - | ------ | - |  | ---- | ---- | - | --- | - | ------ | - |  | - | ------ | -
|                                      |  | 2003 COMPARED TO 2002Increase (Decrease) due to: |       |   | 2002 COMPARED TO 2001Increase (Decrease) due to: |  
|                                      |  | Volume                                           |       |   | Rate                                             |   |        | Net |  |   | Volume |   |  | Rate |      |   | Net |  
|INTEREST INCOME                       |  |                                                  |       |   |                                                  |   |        |     |  |   |        |   |  |      |      |   |     |   |        |   |  |   |        |  
|Loans                                 |  | $                                                | 2,488 |   |                                                  | $ | (1,368 | )   |  | $ | 1,120  |   |  | $    | 462  |   |     | $ | (625   | ) |  | $ | (163   | )
|Investment Securities                 |  |                                                  | (355  | ) |                                                  |   | (354   | )   |  |   | (709   | ) |  |      | (232 | ) |     |   | (1,125 | ) |  |   | (1,347 | )
|Federal Funds Sold                    |  |                                                  | (123  | ) |                                                  |   | (54    | )   |  |   | (177   | ) |  |      | (67  | ) |     |   | (390   | ) |  |   | (457   | )
|Other Interest Bearing Assets (1)     |  |                                                  | 12    |   |                                                  |   | (7     | )   |  |   | 5      |   |  |      | 37   |   |     |   | (22    | ) |  |   | 5      |  
|                                      |  |                                                  |       |   |                                                  |   |        |     |  |   |        |   |  |      |      |   |     |   |        |   |  |   |        |  
|TOTAL Interest Income                 |  | $                                                | 2,022 |   |                                                  | $ | (1,783 | )   |  | $ | 239    |   |  | $    | 200  |   |     | $ | (2,162 | ) |  | $ | (1,962 | )
|                                      |  |                                                  |       |   |                                                  |   |        |     |  |   |        |   |  |      |      |   |     |   |        |   |  |   |        |  
|INTEREST EXPENSE                      |  |                                                  |       |   |                                                  |   |        |     |  |   |        |   |  |      |      |   |     |   |        |   |  |   |        |  
|Interest-Bearing Transaction Accounts |  | $                                                | 7     |   |                                                  | $ | (31    | )   |  | $ | (24    | ) |  | $    | 18   |   |     | $ | (88    | ) |  | $ | (70    | )
|Savings                               |  |                                                  | (35   | ) |                                                  |   | (414   | )   |  |   | (449   | ) |  |      | 135  |   |     |   | (1,509 | ) |  |   | (1,374 | )
|Time - $100,000 or more               |  |                                                  | 119   |   |                                                  |   | (371   | )   |  |   | (252   | ) |  |      | (452 | ) |     |   | (310   | ) |  |   | (762   | )
|Other Time                            |  |                                                  | 94    |   |                                                  |   | (394   | )   |  |   | (300   | ) |  |      | (117 | ) |     |   | (240   | ) |  |   | (357   | )
|Other Borrowed Money                  |  |                                                  |      |   |                                                  |   |       |     |  |   |       |   |  |      | (8   | ) |     |   |       |   |  |   | (8     | )
|Subordinate Debentures                |  |                                                  | 71    |   |                                                  |   |       |     |  |   | 71     |   |  |      |     |   |     |   |        |   |  |   |        |  
|Notes Payable                         |  |                                                  | (37   | ) |                                                  |   |       |     |  |   | (37    | ) |  |      |     |   |     |   |       |   |  |   |       |  
|                                      |  |                                                  |       |   |                                                  |   |        |     |  |   |        |   |  |      |      |   |     |   |        |   |  |   |        |  
|TOTAL Interest Expense                |  | $                                                | 219   |   |                                                  | $ | (1,210 | )   |  | $ | (991   | ) |  | $    | (424 | ) |     | $ | (2,147 | ) |  | $ | (2,571 | )
|                                      |  |                                                  |       |   |                                                  |   |        |     |  |   |        |   |  |      |      |   |     |   |        |   |  |   |        |  
|NET INTEREST INCOME                   |  | $                                                | 1,803 |   |                                                  | $ | (573   | )   |  | $ | 1,230  |   |  | $    | 624  |   |     | $ | (15    | ) |  | $ | 609    |  
|                                      |  |                                                  |       |   |                                                  |   |        |     |  |   |        |   |  |      |      |   |     |   |        |   |  |   |        |  

---

|Note: | Loan fees, which were included in interest income, were $814 in 2003, $644 in 2002, and $481 in 2001. A change in Rate/Volume has been allocated to the change in rate.
|----- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(1) | Certificates of Deposit with other financial institutions.
|--- | ----------------------------------------------------------



---

##### Table of Contents

Exhibit D



Other Financial Information at December 31, 2003



Maturities of Certificates of Deposit of $100,000 or More

(dollars
in Thousands)



|                 |  |                      |       |   |                               |   |        |                |  |   |       |   |  |   |        |  
|---------------- |  | -------------------- | ----- | - | ----------------------------- | - | ------ | -------------- |  | - | ----- | - |  | - | ------ | -
|MATURITIES       |  | Three months or less |       |   | Over three months to12 months |   |        | Over 12 months |  |   | Total |  
|Balance          |  | $                    | 9,013 |   |                               | $ | 10,911 |                |  | $ | 5,170 |   |  | $ | 25,094 |  
|Percent to Total |  |                      | 35.9  | % |                               |   | 43.5   | %              |  |   | 20.6  | % |  |   | 100.0  | %



Loan Portfolio by Type of Loan

(dollars in Thousands)



|                         |  |      |         |  |       |   |  |      |         |  |       |   |  |      |         |  |       |   |  |   |         |  |       |   |  |   |         |  |       |  
|------------------------ |  | ---- | ------- |  | ----- | - |  | ---- | ------- |  | ----- | - |  | ---- | ------- |  | ----- | - |  | - | ------- |  | ----- | - |  | - | ------- |  | ----- | -
|                         |  | 2003 |         |  | 2002  |   |  | 2001 |         |  | 2000  |   |  | 1999 |        
|Commercial               |  | $    | 55,725  |  | 36.9  | % |  | $    | 30,914  |  | 21.7  | % |  | $    | 23,126  |  | 21.7  | % |  | $ | 33,515  |  | 29.8  | % |  | $ | 31,801  |  | 31.0  | %
|Real Estate Commercial   |  |      | 42,232  |  | 27.9  | % |  |      | 34,102  |  | 34.5  | % |  |      | 36,807  |  | 34.5  | % |  |   | 32,500  |  | 28.9  | % |  |   | 24,789  |  | 24.2  | %
|Real Estate Construction |  |      | 9,380   |  | 6.2   | % |  |      | 5,017   |  | 2.5   | % |  |      | 2,699   |  | 2.5   | % |  |   | 2,836   |  | 2.5   | % |  |   | 2,992   |  | 2.9   | %
|Real Estate Residential  |  |      | 35,075  |  | 23.2  | % |  |      | 39,854  |  | 30.4  | % |  |      | 32,456  |  | 30.4  | % |  |   | 35,260  |  | 31.4  | % |  |   | 39,336  |  | 38.4  | %
|Consumer                 |  |      | 8,806   |  | 5.8   | % |  |      | 11,684  |  | 10.9  | % |  |      | 11,718  |  | 10.9  | % |  |   | 8,286   |  | 7.4   | % |  |   | 3,583   |  | 3.5   | %
|                         |  |      |         |  |       |   |  |      |         |  |       |   |  |      |         |  |       |   |  |   |         |  |       |   |  |   |         |  |       |  
|TOTAL LOANS              |  | $    | 151,218 |  | 100.0 | % |  | $    | 121,571 |  | 100.0 | % |  | $    | 106,806 |  | 100.0 | % |  | $ | 112,397 |  | 100.0 | % |  | $ | 102,501 |  | 100.0 | %
|                         |  |      |         |  |       |   |  |      |         |  |       |   |  |      |         |  |       |   |  |   |         |  |       |   |  |   |         |  |       |  



Investments Securities Portfolio
Summary

(dollars in Thousands)



|                                             |  |      |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|-------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | - |  | ---- | ------ | - |  | - | ------ | -
|                                             |  | 2003 |        |   | 2002 |   |        | 2001 |  |   | 2000   |   |  | 1999 |       
|Securities Available for Sale:               |  |      |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|U.S. Treasury, State and Government Agencies |  | $    | 35,445 |   |      | $ | 47,919 |      |  | $ | 41,438 |   |  | $    | 52,379 |   |  | $ | 49,061 |  
|Mortgage-Backed Securities                   |  |      | 343    |   |      |   | 5,707  |      |  |   | 7,494  |   |  |      | 2,265  |   |  |   | 712    |  
|                                             |  |      |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|TOTAL Securities Available for Sale          |  | $    | 35,788 |   |      | $ | 53,626 |      |  | $ | 48,932 |   |  |      | 54,644 |   |  |   | 49,773 |  
|                                             |  |      |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Securities Held to Maturity:                 |  |      |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|U.S. Treasury and Government Agencies        |  |      | 2,007  |   |      |   | 2,012  |      |  |   | 2,019  |   |  |      |       |   |  |   |       |  
|Mortgage-Backed Securities                   |  |      |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Other Debt Securities                        |  |      | 42     |   |      |   | 45     |      |  |   | 45     |   |  |      | 27     |   |  |   | 20     |  
|                                             |  |      |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|TOTAL Securities Held to Maturity            |  |      | 2,049  |   |      |   | 2,057  |      |  |   | 2,064  |   |  |      | 27     |   |  |   | 20     |  
|                                             |  |      |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|TOTAL Investment Securities Portfolio        |  | $    | 37,837 |   |      | $ | 55,683 |      |  | $ | 50,996 |   |  | $    | 54,671 |   |  | $ | 49,793 |  
|                                             |  |      |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|TOTAL PORTFOLIO YIELD                        |  |      | 3.2    | % |      |   | 4.1    | %    |  |   | 6.1    | % |  |      | 6.6    | % |  |   | 6.4    | %



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