HARBOR BANKSHARES CORP, 424B3, 1996-05-21

HARBOR BANKSHARES CORP
424B3, 1996-05-21
STATE COMMERCIAL BANKS

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PROSPECTUS
Maximum - 350,000 Shares
Minimum - 70,000 Shares
HARBOR BANKSHARES
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C O R P O R A T I O N
Common Stock

___________________

Harbor Bankshares Corporation (the "Company") is offering up to 350,000
shares of its Common Stock (the "Common Stock"). The maximum number of shares of
Common Stock to be sold is 350,000 shares, and the minimum is 70,000 shares.
Prior to this offering, there has been no active public trading market for the
Common Stock. See "Market Price" for a discussion of the factors considered in
determining the offering price. The Common Stock will not be listed on any
exchange, and it is unlikely that an active public trading market for the Common
Stock will develop.

Investment in the Common Stock involves certain risks. See "Risk Factors"
beginning on page 7.

The Common Stock is being offered for sale by the Company on a "best
efforts" basis through certain officers of the Company in jurisdictions where
such officers have complied with applicable agent registration requirements. All
funds for the purchase of the Common Stock will be placed promptly in escrow
with The First National Bank of Maryland (the "Escrow Agent") and held for the
benefit of the prospective investors until the funds are used to purchase Common
Stock or are returned to prospective investors. The Offering will terminate on
May 31, 1996 (which date may be extended from time to time by the Company to not
later than June 30, 1996) (as extended, the "Closing Date"). The funds will be
used to purchase Common Stock once subscriptions have been received for the
minimum of 70,000 shares. As of April 25, 1996, subscriptions for approximately
55,000 shares have been received. The Offering may be terminated by the Company
at any time prior to the Closing Date. All funds deposited with the Escrow Agent
shall earn interest at the rate of 3.50% per annum from the date of deposit to
the date of the purchase of Common Stock or to the date of return of funds to
the prospective investors. The Escrow Agent shall promptly return all funds,
with interest, to the subscribers if a minimum of 70,000 shares of Common Stock
is not subscribed for by the Closing Date. See "Plan of Distribution."

__________________

THE SECURITIES OFFERED BY THIS PROSPECTUS ARE NOT SAVINGS ACCOUNTS, DEPOSITS OR
OTHER OBLIGATIONS OF ANY BANK OR NONBANK SUBSIDIARY OF THE COMPANY AND ARE NOT
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENT AGENCY.

_________________

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMIS-
SION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

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Underwriting
Price to Discounts and Proceeds to
Public Commissions Company(1)
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Per Share $15.00 N/A $15.00
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Total Minimum $1,050,000 N/A $1,050,000
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Total Maximum $5,250,000 N/A $5,250,000
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(1) Before deducting certain expenses payable by the Company estimated at
$146,000.

____________________________

The date of this Prospectus is May 15, 1996.

<PAGE>

AVAILABLE INFORMATION

The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and, in accordance
therewith, files reports, proxy or information statements and other information
with the Securities and Exchange Commission (the "Commission"). This Prospectus
contains information concerning the Company but does not contain all of the
information set forth in the Registration Statement and exhibits thereto which
the Company has filed with the Commission under the Securities Act of 1933, as
amended (the "Securities Act"). Such reports, proxy or information statements,
Registration Statement and exhibits and other information filed by the Company
with the Commission can be inspected and copied at the public reference
facilities maintained by the Commission at Room 1024, 450 Fifth St., N.W.,
Washington, D.C. 20549, and at the Regional Offices of the Commission at
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661
and Seven World Trade Center, 13th Floor, New York, New York 10048. Copies of
such material can be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates.

The Company furnishes to its stockholders annual reports containing
consolidated financial statements for each fiscal year and audited by an
independent accounting firm.

___________________

Unless the context otherwise requires, references to the Company include
Harbor Bankshares Corporation and The Harbor Bank of Maryland, its sole
subsidiary.

<PAGE>

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PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the detailed
information and financial statements included elsewhere herein.

The Company

Harbor Bankshares Corporation (the "Company") is a Maryland corporation
incorporated in 1992 and is registered as a bank holding company under the Bank
Holding Company Act of 1956, as amended (the "BHC Act"). At March 31, 1996, the
Company had total assets, loans net of unearned income, deposits and
stockholders' equity of $115.3 million, $80.2 million, $103.0 million and $5.7
million, respectively.

The Company's sole subsidiary is The Harbor Bank of Maryland (the "Bank").
The Bank is a commercial bank chartered under the laws of the State of Maryland,
and it commenced operations in Baltimore, Maryland on September 13, 1982. The
Bank currently accounts for substantially all of the Company's assets and
earnings. The Bank operates six banking offices, four are located in Baltimore
City, Maryland, one is located in Riverdale, Prince George's County, Maryland,
and one is located in Randallstown, Baltimore County, Maryland. The Bank
provides a wide variety of general commercial and retail banking services, which
include lending, depository and related financial services to individuals and
businesses principally located in the Baltimore, Maryland metropolitan area. It
is a member of a local and national automated teller machine ("ATM") network.
The Bank has established several niches in commercial banking and lending to
small and medium size businesses and individuals. While Baltimore City provides
a strong and opportunistic market, the Bank's niches allow it to effectively
compete in other Maryland counties. The deposits of the Bank are insured by the
Federal Deposit Insurance Corporation ("FDIC").

The Bank is an independent, community bank which seeks to provide personal
attention and professional financial service to its customers while offering
many of the banking services of larger competitors. These customers are
primarily individuals and small and medium-sized businesses. The Bank's business
philosophy includes offering direct access to its President and other officers
and providing friendly, informed and courteous service, local and timely
decision-making, flexible and reasonable operating procedures, and
consistently-applied credit policies.

The Company has grown since inception in 1982 through both internal
expansion and external acquisition from its original capital infusion of
approximately $2.0 million. In 1994, the Company acquired two John Hanson
Federal Savings Bank branches, which had deposits of approximately $32.8
million. One of these branches is located in Riverdale, Prince George's County,
Maryland and the other was closed and the deposits transferred to the Company's
main banking office. In September, 1994, the Company acquired a branch of Second
National Federal Savings Bank located in Baltimore City, which had deposits of
approximately $24.0 million. The Company recently established a new banking
office in Randallstown, Baltimore County, Maryland. The Company believes that
additional opportunities for growth by acquisition and internal expansion exist
in its core market, Baltimore City and contiguous market areas, but no assurance
can be given that the historic growth can be sustained.

The Company is a legal entity separate and distinct from the Bank.
Accordingly, the right of the Company, and thus the right of the Company's
creditors and stockholders, to participate in any distribution of the assets or
earnings of the Bank is necessarily subject to the prior claims of creditors of
such subsidiary, except to the extent that claims of the Company in its capacity
as a creditor may be recognized. The principal source of the Company's revenues
is dividends paid by the Bank. Certain legal restrictions limit the extent to
which the Bank can supply funds to the Company. See "Dividends."
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<PAGE>

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Risk Factors

The investor should carefully consider before purchasing any shares of
Common Stock offered by this Prospectus (a) the prospect of future profitability
for the Company, (b) the policy on dividends, (c) the determination of the
offering price, (d) the absence of a trading market for the Common Stock, (e)
the effects of competition, (f) the effects of economic conditions and monetary
policies, (g) the effects of government regulation, and (h) the difficulties and
risks associated with opening or acquiring an additional office.

The Offering

The Company is offering (the "Offering") up to 350,000 shares of Common
Stock (the "Common Stock"). The Common Stock is being offered for sale by the
Company on a "best efforts" basis through certain officers of the Company (the
"Agents") in jurisdictions where such officers have complied with applicable
agent registration requirements. All funds for the purchase of the Common Stock
will be placed promptly in escrow with The First National Bank of Maryland (the
"Escrow Agent") and held for the benefit of the prospective investors until the
funds are used to purchase Common Stock or are returned to prospective
investors. The Offering will terminate on May 31, 1996 (which date may be
extended from time to time by the Company to not later than June 30, 1996) (as
extended, the "Closing Date"). The funds will be used to purchase Common Stock
once subscriptions have been received for the minimum of 70,000 shares. As of
April 25, 1996, subscriptions of approximately 55,000 shares have been received.
The Offering may be terminated by the Company at any time prior to the Closing
Date. All funds deposited with the Escrow Agent shall earn interest at the rate
of 3.50% per annum from the date of deposit to the date of the purchase of
Common Stock or to the date of return of funds to the prospective investors. The
Escrow Agent shall promptly return all funds, with interest, to the subscribers
if a minimum of 70,000 shares of Common Stock is not subscribed for by the
Closing Date. See "Plan of Distribution."

Common Stock:

Minimum Offered..................... 70,000 shares

Maximum Offered..................... 350,000 shares

Dividends on shares of Common Stock...The Company has paid cash dividends
semi-annually. The Company paid cash
dividends of $.07 per share in the first
and third quarters of 1994, a cash
dividend of $.10 per share in the first
and third quarters of 1995, and a cash
dividend of $.20 per share in the first
quarter of 1996. It is unlikely that
further cash dividends will be paid in
1996. Future declarations of dividends
by the Board of Directors will depend
upon a number of factors, including the
Company's and the Bank's financial
condition and results of operations,
investment opportunities available to
the Company or the Bank, capital
requirements, regulatory limitations,
tax considerations, the amount of net
proceeds retained by the Company and
general economic conditions. See
"Dividends."

Risk Factors..........................Prospective investors in the Common
Stock should consider the information
discussed under the heading "Risk
Factors."

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<PAGE>

Summary Consolidated Financial Information
<TABLE>
<CAPTION>
Three months ended
Years ended December 31, March 31,

--------------------------------------------------- ----------------------
1991 1992 1993 1994 1995 1995 1996
---- ---- ---- ---- ---- ---- ----
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Income Statement Data:
Interest income........................$ 3,952 $ 4,163 $ 4,369 $ 6,537 $ 8,490 $ 1,958 $ 2,209
Interest expense....................... 2,187 1,907 1,659 2,526 3,631 829 996
--------- --------- --------- ---------- ---------- ---------- -----------
Net interest income.................... 1,765 2,256 2,710 4,011 4,859 1,129 1,213
Provision for possible loan losses..... 133 106 96 248 183 50 30
--------- --------- --------- ---------- ---------- ---------- -----------
Net interest income after provision
for 1,632 2,150 2,614 3,763 4,676 1,079 1,183
possible loan losses..................
Other operating income................. 399 517 515 786 635 154 151
Other operating expense................ 1,872 2,100 2,343 3,554 4,181 981 1,095
--------- ---------- -------- ---------- ---------- ---------- -----------
Income before income taxes............. 159 567 786 995 1,130 252 239
Income taxes........................... 52 221 311 370 451 101 95
--------- ---------- -------- ---------- ---------- ---------- -----------
Net income.............................$ 107 $ 346 $ 475 $ 625 $ 679 $ 151 $ 144
========= ========== ======== ========== ========== ========== -----------
Consolidated Balance Sheet Data:
Total assets...........................$ 44,898 $ 56,575 $ 61,741 $ 106,040 $ 113,316 $106,744 $115,342
Total loans, net of unearned income.... 27,989 32,295 36,080 58,301 78,108 76,101 80,201
Total deposits......................... 40,672 52,037 56,868 94,726 101,098 94,318 103,001
Total stockholders' equity............. 3,698 4,046 4,479 5,059 5,642 5,102 5,697
Per Share Data(1):
Net income.............................$ 0.25 $ 0.81 $ 1.11 $ 1.46 $ 1.59 $ .35 $ .34
Dividends.............................. -- -- 0.10 .14 .20 .10 .20
Book value............................. 8.68 9.50 10.51 11.77 13.17 11.87 13.29
Common shares outstanding, end of 425,760 426,069 426,069 429,709 428,488 429,709 428,488
period................................
Consolidated Ratios:
Return on average assets............... .25% .66% .78% .70% .64% .57% .51%
Return on average stockholders' equity. 2.95 8.98 11.17 13.50 12.77 11.84 10.30
Average stockholders' equity to
average total assets................. 8.36 7.42 7.02 5.21 4.98 4.79 4.98
Period end capital to period-end
risk-adjusted assets(2):
Tier 1............................... 16.87 15.31 14.53 10.49 9.82 9.55 9.61
Total................................. 18.12 16.56 15.79 11.85 11.07 10.80 10.86
Period-end Tier 1 leverage ratio(2).... 8.52 7.78 7.39 4.50 5.28 4.80 5.05
Cash dividends declared to net income.. -- -- 8.96 9.58 12.65 19.75 59.10
Reserve for possible loan losses to
total loans, net of unearned income,
at period end........................ 1.02 1.06 1.18 1.13 1.09 .92% 1.06
Net (charge-offs) recoveries to
average total loans.................. .50 .16 .04 .04 .03 .01% --
Reserve for possible loan losses to
nonperforming loans, at period end.... 340.48 819.05 182.90 191.84 169.85 330.66 128.5
Nonperforming assets and past due
loans to total loans, net of unearned
income, at period-end................ .30 .13 .65 .59 .62 .28 .83
Net interest margin(3)................. 4.27 4.55 4.68 4.78 5.05 4.96 4.71
</TABLE>

(1) Per share data for 1991 has been adjusted to reflect the 3-for-1 stock
split which occurred in 1992.

(2) The Board of Governors of the Federal Reserve Board (the "Federal Reserve
Board") guidelines for risk-based capital requirements applicable to all
bank holding companies require the minimum ratios of Tier 1 and total
capital to risk-adjusted assets to be 4.00% and 8.00%, respectively. The
ratios above for 1991 were calculated using the December 31, 1992
guidelines; the ratios at other dates were calculated using guidelines in
effect at each reported date. The Federal Reserve Board's minimum leverage
guidelines require all bank holding companies to maintain a ratio of Tier 1
capital to total average quarterly assets generally of at least 4.00%.

(3) Net interest margin is the ratio of net interest income to total average
interest-earning assets.

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<PAGE>

Use of Proceeds

The net proceeds from the sale of the Common Stock (after giving effect to
the payment of estimated offering expense) are estimated to be approximately
$904,000 if the minimum number of shares of Common Stock is sold and
approximately $5,104,000 if the maximum number of shares of Common Stock is
sold. The Common Stock will qualify under the capital adequacy guidelines of the
Board of Governors of the Federal Reserve System (the "Federal Reserve Board")
as Tier 1 capital for the Company. The net proceeds will become part of the
general funds of the Company and will be available for use in the business of
the Company and for investment in the Bank. A portion of the proceeds may be
used in the expansion of the Company's and the Bank's businesses through
acquisitions of other financial institutions, their branches or deposits or the
establishment of new operations or branch offices. There are no definite plans
or arrangements for any such acquisitions or establishment of new operations or
branch offices and no commitments have been made which would be violated if a
specified amount is not raised by the Offering. Approximately $110,000 of the
proceeds may be used in connection with the new banking office that was recently
established in Randallstown, Baltimore County, Maryland.

<PAGE>

RISK FACTORS

A prospective investor should review and consider carefully the following
risk factors, together with the other information contained in this Prospectus,
in evaluating an investment in the Common Stock.

Offering Price Not Based Solely on Marked Prices

The offering price of the Common Stock has been determined by the Company
based on certain factors including an evaluation of assets, earnings, and other
established criteria of value, as well as the comparisons of the relationships
between market prices and book values of other banking institutions of a similar
size and asset quality. It was not based upon an actual trading market for the
Common Stock; accordingly, there can be no assurance that the Common Stock may
be resold at the offering price.

No Assurance of Acquisitions

The net proceeds from the Offering may be used for the funding of
acquisitions of bank holding companies, banks (or their branches), thrift
institutions (or their branches) or companies conducting businesses deemed
closely related to banking or managing or controlling banks or thrift
institutions. Such acquisitions are subject to a number of conditions including
availability, price and regulatory approval. There can be no assurance that
potential acquisitions meeting the Company's investment criteria will be
available or that the required regulatory approval of such acquisitions can be
obtained. See "Business -- Supervision and Regulation."

Additional Deposit Insurance Assessments

As a result of the acquisition of branch offices of John Hanson Federal
Savings Bank and Second National Federal Savings Bank, approximately 49.5% of
the Bank's "average assessment base" (as defined in the FDIC's regulations) is
subject to the rates of the Savings Association Insurance Fund ("SAIF") of the
FDIC. Based upon the Bank's current risk classification, the Bank is required to
pay a SAIF assessment of $.23 per $100 of its SAIF assessable domestic deposits.
The remainder of the Bank's average assessable base is subject to rates of the
Bank Insurance Fund ("BIF") of the FDIC. Based upon the Bank's current risk
classifications, the Bank is required to pay a BIF assessment of less than half
of a cent per $100 of its BIF assessable domestic deposits. The total assessment
(BIF and SAIF) for 1996 is estimated to be approximately $103,000.

Legislation has been introduced in Congress to recapitalize SAIF by (i) a
significant one-time special assessment on SAIF assessable deposits (including
those held by banks), and (ii) additional annual assessments for approximately
23 years on BIF assessable deposits. The one-time fee on SAIF assessable
deposits could amount to approximately $317,000, and the additional annual
assessment on BIF assessable deposits could amount to approximately $13,000 each
year, based on deposits at December 31, 1995. Although passage of the
legislation appears likely, the ultimate form of the legislation, including
timing and amount of any payments to be made thereunder, cannot be determined at
this time.

Lack of Trading Market

At the present time, there is no active public trading market for the
Common Stock of the Company, and the Company has no plans to list the Common
Stock on any securities exchange or to seek quotation of the Common Stock on the
National Association of Securities Dealers' Automated Quotation System.
Prospective investors may be unable to sell their shares at the price paid for
them or at all. Consequently, investors should be prepared to consider their
investment in the Common Stock as a long-term investment. There will be no
restrictions on the right of a holder of shares of Common Stock to sell them,
unless the holder is an officer or director of the Company.

<PAGE>

No Assurance of Profitability

Since the Company's principal activity for the foreseeable future will be
to act as the holding company of the Bank, the profitability of the Company will
be largely dependent on the results of the operations of the Bank. Although the
Company has experienced profitable operations in recent years, no assurance can
be given as to the future profitability of the Company or as to the ultimate
return, if any, which purchasers of the Common Stock may realize on their
investment.

Growth Strategy and Possible Need for Additional Capital

The Company intends to pursue an aggressive growth strategy. This strategy
is focused primarily upon the ability of the Company to develop new account
relationships, establish new branches, complete selected acquisitions and
generate loans and deposits at acceptable risk levels and on acceptable terms.
While the Company believes that its capital is currently sufficient to support
the Company's operations and anticipated expansion within its existing markets
during at least the next 12 months and meet all regulatory requirements, other
factors such as faster than anticipated growth, reduced earnings levels and
revisions in regulatory requirements may force the Company to seek additional
capital. There can be no assurance that the Company will be successful in
implementing, or will have the necessary regulatory capital to implement, its
growth strategy. See "Business -- Competition" and "--Supervision and
Regulation."

Limitations on Payment of Dividends

The Bank is a wholly-owned subsidiary of the Company and is its principal
income-producing operation. Accordingly, dividends payable by the Company are
subject to the financial conditions of both the Bank and the Company, as well as
to other business considerations. In addition, because the Bank is a depository
institution insured by the Federal Deposit Insurance Corporation (the "FDIC"),
the Bank may not pay dividends or distribute any of its capital assets if it
were in default on any assessment due the FDIC. In addition, FDIC regulations
also impose certain minimum capital requirements which affect the amount of cash
available for the payment of dividends by the Bank. The Maryland Financial
Institutions Law also imposes certain restrictions on the payment of dividends
by the Bank. Even if the Bank is able to generate sufficient earnings to pay
dividends, there is no assurance that the Board of Directors might not decide or
be required to retain a greater portion of the Bank's earnings in order to
maintain existing capital or achieve additional capital necessary because of any
(i) increase in the capital requirements established by the FDIC, (ii)
significant increase in the total risk-weighted assets held by the Bank, (iii)
significant decreases in the Bank's income, (iv) significant deterioration of
the quality of the Bank's loan portfolio, (v) a determination by the FDIC that
the payment of a dividend would (under the circumstances) constitute an "unsafe
or unsound" banking practice, or (vi) new federal or state regulations. The
occurrence of any of these events would decrease the amount of funds potentially
available for the payment of dividends. In addition, under Federal Reserve Board
policy, the Company is expected to act as a source of financial strength to the
Bank and to commit resources to support the Bank in circumstances where it might
not do so absent such a policy. This policy could have the effect of reducing
the amount of dividends payable by the Company.

Intensity of Competition

The Company operates in a competitive environment, competing for deposits
and loans with commercial banks, thrift institutions and other financial
institutions which possess greater financial resources than those available to
the Company. These institutions have substantially higher lending limits than
the Company, and they provide certain services for their customers, such as
trust and investment services, which the Company does not offer directly to its
customers. The Company also competes for deposits with money market mutual
funds. It is impossible to predict the competitive impact on the Company of
certain federal and state legislation and/or regulations relating to the banking
industry and interstate banking. See "Business -- Competition" and "Business --
Supervision and Regulation."

<PAGE>

Fluctuations in Economic Conditions and Monetary Policy

The operating results of the Company will depend to a great extent upon the
income produced by the rate differentials between the yields earned on its
loans, securities and other earning assets and the rates paid on its deposits
and other interest-bearing liabilities. These rate differentials are highly
sensitive to many factors beyond the control of the Company, including general
economic conditions and the policies of various governmental and regulatory
authorities, in particular the Federal Reserve Board. The makeup of the
Company's loan and deposit portfolio determines the Company's sensitivity to
these factors. At March 31, 1996, the Company had a one-year cumulative interest
sensitivity gap of $(52.1) million (and a one-year cumulative interest
sensitivity gap ratio of (45.1)%). See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Interest Rate Sensitivity."

Like other depository institutions, the Company is affected by the monetary
policies implemented by the Federal Reserve Board and other federal entities. A
primary instrument of monetary policy employed by the Federal Reserve Board is
the restriction on expansion of the money supply through open market operations
including the purchase and sale of government securities and the adjustment of
reserve requirements. These actions may at times result in significant
fluctuations in interest rates, which could have adverse effects on the
operations of the Company. In particular, the Company's ability to make loans
and attract deposits, as well as public demand for loans, could be adversely
affected. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Other Income" and "Business -- Governmental Monetary
Policies and Economic Controls."

The Baltimore area has experienced a slow-down in economic activity, which
may have an adverse effect on the Company's operations (including its loan
portfolio, which includes a heavy concentration in loans secured by real
estate).

Burden of Government Regulation

The Company and the Bank are subject to extensive governmental supervision,
regulation and control, and future legislation and government policy could
adversely affect the banking industry and the operations of the Company and the
Bank. Federal law enables financial institutions such as savings banks, savings
and loan associations and credit unions to provide accounts similar to checking
accounts, resulting in increased competition for deposits among banking
institutions which may in turn have the effect of increasing the Company's
interest expense. See "Business -- Supervision and Regulation."

Control by Management

A total of 131,055 shares of Common Stock of the Company outstanding are
beneficially owned by the directors and executive officers of the Company
representing approximately 30.60% of the Common Stock outstanding. The Company
will offer the Common Stock offered by this Prospectus to its officers and
directors in the Offering, but it is not known how many shares they will
purchase.

Dependence on Key Personnel

The Company is highly dependent on the continued services of Joseph
Haskins, Jr., Chairman, President and Chief Executive Officer of the Company and
the Bank, Teodoro J. Hernandez, Treasurer of the Company and Vice President and
Cashier of the Bank, and Sheila R. Lawson, Vice President/Lending of the Bank.
The loss of the services of these officers and certain other key personnel could
adversely affect the Company. The Company has entered an Employment Agreement
with Joseph Haskins, Jr. See "Management."

<PAGE>

Adequacy of Reserve for Possible Loan Losses

The risk of credit losses varies with, among other things, general economic
conditions, the type of loan being made, the creditworthiness of the borrower
over the term of the loan and, in the case of a collateralized loan, the value
and marketability of the collateral for the loan. Management maintains a reserve
for possible loan losses based upon, among other things, historical experience,
an evaluation of economic conditions and regular reviews of delinquencies and
loan portfolio quality. Based upon such factors, management makes various
assumptions and judgments about the ultimate collectibility of the loan
portfolio and provides a reserve for possible loan losses based upon a
percentage of the outstanding balances and for specific loans when their
ultimate collectibility is considered questionable. If management's assumptions
and judgments prove to be incorrect and the reserve for possible loan losses is
inadequate to absorb future losses, or if the bank regulatory authorities
require the Bank to increase the reserve for possible loan losses, the Bank's
earnings could be significantly and adversely affected. Because certain lending
activities involve greater risks, the percentage applied to specific loan types
may vary. Historically, commercial loans have been more risky than real estate
mortgage loans. In recent years, the banking industry has experienced
significant credit losses with respect to commercial loans and commercial real
estate loans. As of March 31, 1996, the Bank had a total of $20.1 million in
commercial loans and commercial real estate loans. Of this amount $18.1 million
were either fully or partially collateralized and $2.0 million were
uncollateralized.

At March 31, 1996, the Company had total nonperforming loans of
approximately $664,000. At the same date, the Company's reserve for possible
loan losses was $853,000 or 1.06% of total loans and 128.5% of total
nonperforming loans. The Company actively manages its non-performing loans in an
effort to minimize credit losses and monitors its asset quality to maintain an
adequate reserve for possible loan losses. Although management believes that its
reserve for possible loan losses is adequate, there can be no assurance that the
reserve will prove sufficient to cover future credit losses. Further, although
management uses the best information available to make determinations with
respect to the reserve for possible loan losses, future adjustments may be
necessary if economic conditions differ substantially from the assumptions used
or adverse developments arise with respect to the Company's non-performing or
performing loans. Material additions to the Company's reserve for possible loan
losses would result in a decrease in the Company's net income, possibly its
capital, and could result in the inability to pay dividends, among other adverse
consequences. See "Management's Discussion and Analysis -- Loan Portfolio."

Anti-Takeover Provisions

The Board of Directors has the authority to issue additional shares of
stock of the Company in any number of classes and series (and to designate the
rights and preferences of such class or series). The Board of Directors of the
Company has no present intent to issue any additional capital stock. If such
stock is issued such shares could be used to create voting impediments or to
frustrate persons seeking to gain control of the Company. The issuance of new
shares could be used to dilute the stock ownership of a person or entity seeking
to obtain control of the Company.

In addition, the Board of Directors could authorize holders of a class or
series of stock to vote either separately as a class or with the holders of the
Company's Common Stock or another series of preferred stock, on any merger, sale
or exchange of assets by the Company or any other extraordinary corporate
transaction. The existence of the additional authorized shares could have the
effect of discouraging unsolicited takeover attempts or delaying, deferring or
preventing a change in control of the Company. Such an occurrence, in the event
of a hostile takeover attempt, may have an adverse impact on stockholders.

Finally, the Board of Directors serve in three year staggered terms and may
only be removed for cause and by an 80% vote of the stockholders. Stockholders
must give advanced notice of director nominations and of new business to come
before annual and special meetings of stockholders. Certain charter amendments
require an 80% vote of the stockholders. Federal and Maryland law contain other
provisions which may discourage a takeover. See "Certain Provisions of Law and
of the Company's Charter and By-Laws."

<PAGE>

Management's Broad Discretion to Allocate Proceeds

The management of the Company has broad discretion to allocate the proceeds
from this offering as they deem appropriate. See "Use of Proceeds."

Possible Volatility of Stock Price and Shares Eligible for Future Sale

At the present time, there is no active public market for the Common Stock
of the Company. No predictions can be made to the effect, if any, that market
sales of Common Stock or the availability of Common Stock for sale will have on
the market price prevailing from time to time. Sales of substantial amounts of
Common Stock in the public market following the Offering could adversely affect
the market price of the Common Stock and may make it more difficult for the
Company to sell equity securities in the future at a time and price which it
deems appropriate. Further, the Company has granted options to purchase 64,000
shares of the Common Stock under its stock option plans or otherwise (and has
3,000 shares available for future grants of options under those plans).
Directors and executive officers of the Company have agreed that they will not
sell any shares of Common Stock held by them during the 180-day period
immediately following completion of the Offering. See "Management -- Stock
Ownership of Directors and Executive Officers."

THE COMPANY

Harbor Bankshares Corporation (the "Company") is a Maryland corporation
incorporated in 1992 and is registered as a bank holding company under the Bank
Holding Company Act of 1956, as amended (the "BHC Act"). The Company has grown
since inception in 1982 through both internal expansion and external acquisition
from its original capital infusion of approximately $2.0 million. At March 31,
1996, the Company had total assets, loans net of unearned income, deposits and
stockholders' equity of $115.3 million, $80.2 million, $103.0 million and $5.7
million, respectively.

The Company's sole subsidiary is The Harbor Bank of Maryland (the "Bank").
The Bank is a commercial bank chartered under the laws of the State of Maryland,
and it commenced operations in Baltimore, Maryland on September 13, 1982. The
Bank currently accounts for substantially all of the Company's assets and
earnings. The Bank operates six banking offices, four are located in Baltimore
City, Maryland, one is located in Prince George's County, Maryland and one is
located in Randallstown, Baltimore County, Maryland. The Bank has applied for a
new branch in Baltimore County, Maryland. The Bank provides a wide variety of
general commercial and retail banking services, which include lending,
depository and related financial services to individuals and businesses
principally located in the Baltimore, Maryland metropolitan area. It is a member
of a local and national automated teller machine ("ATM") network. The Bank has
established several niches in commercial banking and lending to small and medium
size businesses and individuals. While Baltimore City provides a strong and
opportunistic market, the Bank's niches allow it to effectively compete in other
Maryland counties. The deposits of the Bank are insured by the Federal Deposit
Insurance Corporation ("FDIC").

On May 13, 1992 the Board of Directors of the Bank approved a plan to form
a bank holding company. Under the terms of the reorganization agreement, the
Bank became a wholly owned subsidiary of the Company. The transaction was
accounted for under the pooling of interests method and, accordingly, the
operations of the Bank are included in the financial statements for all years
presented.

<PAGE>

The principal executive offices of the Company are located at 25 West
Fayette Street, Baltimore, Maryland 21201, and its telephone number is (410)
528-1800.

USE OF PROCEEDS

CAPITALIZATION

The following table sets forth the capitalization of the Company as of
March 31, 1996, and as adjusted to give effect to the issuance of the Common
Stock offered hereby (after giving effect to the payment of estimated offering
expenses):
<TABLE>
<CAPTION>

March 31, 1996
-----------------------------------------------------
Outstanding As adjusted
--------------------------------
Minimum Maximum
(In thousands)
<S> <C> <C> <C>
Stockholders' equity:
Common Stock, $.01 par value, authorized 10,000,000 shares; $ 4 $ 5 $ 8
issued 428,488 shares.......................................
Capital surplus................................................ 2,829 3,732 7,929
Retained earnings.............................................. 2,856 2,856 2,856
Net unrealized gains on securities available for sale.......... 8 8 8
======== ======= =======
Total stockholders' equity..................................... $ 5,697 $ 6,601 $
10,801
======== ======= =======
</TABLE>

In addition to the capitalization described in the table above, the Company
employs a variety of other sources to fund operations. Funding sources for the
Company at March 31, 1996 included noninterest bearing demand deposits of
approximately $9.9 million and interest bearing deposits of approximately $93.1
million and a credit facility with the Federal Home Loan Bank of Atlanta of
$13.0 million with no outstanding balance at March 31, 1996.

<PAGE>

PLAN OF DISTRIBUTION

The Company is offering up to 350,000 shares of Common Stock. The Common
Stock is being offered for sale by the Company on a "best efforts" basis through
certain officers of the Company (the "Agents") in jurisdictions where such
officers have complied with applicable agent registration requirements. All
funds for the purchase of the Common Stock will be placed promptly in escrow
with The First National Bank of Maryland (the "Escrow Agent") and held for the
benefit of the prospective investors until the funds are used to purchase Common
Stock or are returned to prospective investors. The Offering will terminate on
May 31, 1996 (which date may be extended from time to time by the Company to not
later than June 30, 1996) (as extended, the "Closing Date"). The funds will be
used to purchase Common Stock once subscriptions have been received for the
minimum of 70,000 shares. As of April 25, 1996, subscriptions for approximately
55,000 shares have been received. The Offering may be terminated by the Company
at any time prior to the Closing Date. All funds deposited with the Escrow Agent
shall earn interest at the rate of 3.50% per annum from the date of deposit to
the date of the purchase of Common Stock or to or to the date of return of funds
to the prospective investors. The Escrow Agent shall promptly return all funds,
with interest, to the subscribers if a minimum of 70,000 shares of Common Stock
is not subscribed for by the Closing Date.

The securities will be offered for sale at the executive offices of the
Company in Baltimore City, Maryland and at other locations. The securities will
not be offered for sale in any banking office of the Company.

The Agents will not receive compensation for their participation in the
Offering and will meet the exemption from broker-dealer registration provided by
Rule 3a4-1 under the Exchange Act.

Method of Subscription

Applications to purchase shares of Common Stock under the Offering may be
made by completing and signing the Application for Subscription for Shares,
substantially in the form attached hereto as Exhibit A (the "Application") and
delivering or mailing the Application to the Escrow Agent at the address shown
below. Copies of the Application will to be furnished to each prospective
investor in advance of its purchase, together with payment in full for the total
purchase price made payable to "The First National Bank of Maryland, Escrow
Agent for Harbor Bankshares Corporation," Upon receipt of a completed
Application together with payment in full for the shares of Common Stock
subscribed for, the Escrow Agent will forward to the Company, and the Company
will sign and return to the subscriber, by first class mail or by personal
delivery, a copy of the Application. Applications will be irrevocable by
subscribers, and subscribers will be unable to obtain a refund of their
subscription deposit during the period of the Offering.

THE FULL SUBSCRIPTION PRICE FOR THE SHARES OF COMMON STOCK MUST BE PAID AND
INCLUDED WITH THE APPLICATION, AND THE PURCHASE PRICE MUST BE PAID IN UNITED
STATES CURRENCY BY CHECK, BANK DRAFT OR MONEY ORDER PAYABLE TO "THE FIRST
NATIONAL BANK OF MARYLAND, ESCROW AGENT FOR HARBOR BANKSHARES CORPORATION."
FAILURE TO INCLUDE THE FULL SUBSCRIPTION PRICE WITH THE APPLICATION MAY CAUSE
THE COMPANY TO REJECT THE SUBSCRIPTION.

Completed Applications, together with payment in full as described above,
should be personally delivered or mailed by first-class mail, postage prepaid,
to:

The First National Bank of Maryland
Corporate Trust Department
Mail Code 101-591
25 South Charles Street, 16th Floor
Baltimore, Maryland 21201
Attention: Donald C. Hargadon

You may inquire at the Company about your Application at telephone number
(410) 528-1885.

<PAGE>

Subscription Escrow Account

In connection with the sale of the Common Stock by the Company under the
Offering, an escrow account has been established at the Escrow Agent. All
subscription funds will be deposited in an escrow account at the Escrow Agent
upon receipt thereof by the Escrow Agent. Subscription funds may be invested for
the benefit of the Company temporarily in short-term U.S. government
obligations, bank money market accounts or certificates of deposit. The funds in
the escrow account will be held by the Escrow Agent and will not be released
until the receipt and acceptance by the Company of subscriptions for not less
than 70,000 shares of Common Stock.

Acceptance of Subscriptions

Applications will not be binding until accepted by the Company. The Company
reserves the right to reject, with or without cause, any Application to
subscribe for shares of Common Stock, in whole or in part, for any reason
whatsoever. In determining which Applications to accept, in whole or in part,
the Company will consider, among other factors, a subscriber's potential to do
business with, or to direct business to, the Company, the amount subscribed for,
the continued qualification of the Company as a minority business enterprise and
the order in which Applications are received. In making such determination, no
single factor among the foregoing will be given primary weight, but rather the
totality of all circumstances present will be considered.

In the event that the Company rejects all or any portion of any
Application, the Escrow Agent will refund to the subscriber by check sent by
first-class mail all (or the appropriate portion) of the amount submitted with
the Application, with interest from the date of deposit with the Escrow Agent at
the rate of 3.50% per annum. In addition, the Company reserves the right to
cancel any or all accepted Applications until June 30, 1996. The Escrow Agent
shall promptly return all funds, with interest at the rate of 3.50% from the
date of deposit, to the subscribers if a minimum of 70,000 shares of Common
Stock is not subscribed for by the Closing Date.

The Company may elect to notify some or all subscribers of the acceptance
or rejection of their respective Applications during the Offering, but, in any
event, the Company will make acceptance and rejection decisions not later than
20 days after the Closing Date. Deposit of a subscriber's funds in the escrow
account does not constitute acceptance of an Application. If the Company has not
notified a subscriber of acceptance prior to the expiration of such period, such
subscriber's Application shall be deemed rejected. The Company will mail all
refunds within 10 days of the date of rejection and, in no event, later than 30
days after the Closing Date.

After all refunds have been made, the Escrow Agent, the Company and their
respective directors, officers and agents will have no further liability to
subscribers.

Issuance of Stock Certificates

Certificates representing shares of Common Stock duly authorized,
subscribed and paid for will be issued as soon as practicable after the Closing
Date.

DIVIDENDS

The Company has paid cash dividends semi-annually. The Company paid cash
dividends of $.07 per share in the first and third quarter of 1994, cash
dividends of $.10 per share in the first and third quarters of 1995 and cash
dividends of $.20 per share in the first quarter of 1996. It is unlikely that
further cash dividends will be paid in 1996. Future declarations of dividends by
the Board of Directors will depend upon a number of factors, including the
Company's and the Bank's financial condition and results of operations,
investment opportunities available to the Company or the Bank, capital
requirements, regulatory limitations, tax considerations, the amount of net
proceeds retained by the Company and general economic conditions.

<PAGE>

The payment of dividends by the Company depends largely upon the ability of
the Bank to declare and pay dividends to the Company because the principal
source of the Company's revenue will be dividends paid by the Bank. In
considering the payment of dividends, the Board of Directors will take into
account the Company's financial condition, results of operations, tax
considerations, costs of expansion, industry standards, economic conditions, and
need for funds, as well as governmental policies and regulations applicable to
the Company and the Bank.

As a depository institution whose deposits are insured by the FDIC, the
Bank may not pay dividends or distribute any of its capital assets while it
remains in default on any assessment due the FDIC. The Bank currently is not in
default under any of its obligations to the FDIC. As a commercial bank under the
Maryland Financial Institutions Law, the Bank may declare cash dividends from
undivided profits or, with the prior approval of the Maryland Bank Commissioner,
out of surplus in excess of 100% of its required capital stock, and (in either
case) after providing for due or accrued expenses, losses, interest and taxes.
At March 31, 1996 the Bank had undivided profits and surplus of $4.3 million
which are available to pay dividends to the Company.

The Federal Reserve Board has established guidelines with respect to the
maintenance of appropriate levels of capital by registered bank holding
companies. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Capital Resources" and "Business -- Capital Adequacy
Guidelines." Compliance with such standards, as presently in effect or as they
may be amended from time to time, could possibly limit the amount of dividends
that the Company may pay in the future. In 1985, the Federal Reserve Board
issued a policy statement on the payment of cash dividends by bank holding
companies. In the statement, the Federal Reserve Board expressed its view that a
holding company experiencing earnings weaknesses should not pay cash dividends
exceeding its net income or which could only be funded in ways that weakened the
holding company's financial health, such as by borrowing.

Distributions paid by the Company to stockholders will be taxable to the
stockholders as dividends, to the extent of the Company's accumulated or current
earnings and profits. There can be no assurance that the Company will declare or
pay cash dividends on its Common Stock at any particular time.

<PAGE>

MARKET PRICE

The offering price of the Common Stock was determined by the Company based
on certain factors including an evaluation of assets, earnings, interest rates,
and other established criteria of value. It was not based upon an actual trading
market for the Common Stock; accordingly, there can be no assurance that the
Common Stock may be resold at the offering price. There is no active public
trading market for the Common Stock, and none is expected to develop. The Common
Stock is traded on a sporadic basis in the over-the-counter market. There are no
market makers for the Common Stock. As a result, prospective investors may be
unable to sell their shares at the price paid for them or at all. Prospective
investors should be aware of the long-term nature of their investment.

The following table provides the high and low trade prices for the Common
Stock for trades known to management of the Company taking place during the
periods indicated:

High Low
1993:
First quarter....................................... $ 8.33 $ 8.33
Second quarter...................................... 8.33 6.67
Third quarter....................................... -- --
Fourth quarter...................................... 7.33 7.33
1994:
First quarter....................................... 8.33 8.33
Second quarter...................................... 8.33 8.33
Third quarter....................................... 8.33 8.33
Fourth quarter...................................... 10.00 10.00
1995:
First quarter....................................... 10.50 10.00
Second quarter...................................... 10.00 9.00
Third quarter....................................... 10.00 10.00
Fourth quarter ..................................... 14.00 11.50
1996:
First quarter....................................... -- --
Second quarter (through April 25, 1996.............. -- --

The last trade in the Common Stock known to management of the Company took
place on October 31, 1995 at a price of $12.00 per share. As of April 25, 1996,
there were over 647 holders of record of the Company's Common Stock.

<PAGE>

CONSOLIDATED SELECTED FINANCIAL INFORMATION

This consolidated selected financial information is qualified in its
entirety by the detailed information and financial statements included in this
Prospectus. This information is not necessarily indicative of the results to be
expected for any future periods, and includes all adjustments consisting only of
normal recurring accruals which, in the opinion of management, are necessary for
a fair statement of results for such periods.

Summary Consolidated Financial Information
<TABLE>
<CAPTION>

Three months
Years ended December 31, ended
March 31,
---------------------------------------------------- ----------------
1991 1992 1993 1994 1995 1995 1996
---- ---- ---- ---- ---- ---- ----
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Income Statement Data:
Interest income........................$ 3,952 $ 4,163 $4,369 $ 6,537 $8,490 $ 1,958 $ 2,209
Interest expense....................... 2,187 1,907 1,659 2,526 3,631 829 996
--------- ---------- -------- ---------- ----------- ---------- -----------
Net Interest income.................... 1,765 2,256 2,710 4,011 4,859 1,129 1,213
Provision for possible loan losses..... 133 106 96 248 183 50 30
--------- --------- -------- ---------- ----------- ---------- -----------
Net interest income after provision
for possible loan losses............... 1,632 2,150 2,614 3,763 4,676 1,079 1,183

Other operating income................. 399 517 515 786 635 154 151
Other operating expense................ 1,872 2,100 2,343 3,554 4,181 981 1,095
--------- --------- -------- ---------- ----------- ---------- -----------

Income before income taxes............. 159 567 786 995 1,130 252 239
Income taxes........................... 52 221 311 370 451 101 95
========= ========= ======== ========== =========== ========== ===========
Net income.............................$ 107 $ 346 $ 475 $ 625 $ 679 $ 141 $ 144
========= ========= ======== ========== =========== ========== ===========
Consolidated Balance Sheet Data:
Total assets...........................$ 44,898 $ 56,575 $ 61,741 $ 106,040 $113,316 $106,744 $ 115,342
Total loans, net of unearned income.... 27,989 32,295 36,080 58,301 78,101 76,101 80,201
Total deposits......................... 40,672 52,037 56,868 94,726 101,098 94,318 103,001
Total stockholders' equity............. 3,698 4,046 4,479 5,059 5,642 5,102 5,697
Per Share Data(1):
Net income.............................$ 0.25 $ 0.81 $ 1.11 $ 1.46 $ 1.59 $ .35 $ .34
Dividends.............................. -- -- 0.10 .14 .20 .10 .20
Book value............................. 8.68 9.50 10.51 11.77 13.17 11.87 13.30
Common shares outstanding, end of
period................................ 25,760 426,069 426,069 429,709 428,488 429,709 428,488
Consolidated Ratios:
Return on average assets............... .25% .66% .78% .70% .64% .57% .51%
Return on average stockholders' equity. 2.95 8.98 11.17 13.50 12.77 11.84 10.30
Average stockholders' equity to
average total assets.................. 8.36 7.42 7.02 5.21 4.98 4.79 4.98
Cash dividends declared to net income.. -- -- 8.96 9.58 12.65 19.75 59.10
Period end capital to period end
risk-adjusted assets(2):
Tier 1................................ 16.87 15.31 14.53 10.49 9.82 9.55 9.61
Total................................. 18.12 16.56 15.79 11.85 11.07 10.80 10.86
Period-end Tier 1 leverage ratio(2).... 8.52 7.78 7.39 4.50 5.28 4.80 5.05
</TABLE>

(1) Per share data for 1991 has been adjusted to reflect the 3-for-1 stock
split which occurred in 1992.

(2) The Federal Reserve Board guidelines for risk-based capital requirements
applicable to all bank holding companies require the minimum ratios of Tier
1 and total capital to risk-adjusted assets to be 4.00% and 8.00%,
respectively. The ratios above for 1991 were calculated using the December
31, 1992 guidelines; the ratios at other dates were calculated using
guidelines in effect at each reported date. The Federal Reserve Board's
minimum leverage guidelines require all bank holding companies to maintain
a ratio of Tier 1 capital to total average quarterly assets generally of at
least 4.00%.

<PAGE>

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

The following analysis of the Company's consolidated financial data for the
years ended December 31, 1995 and 1994, and the three months ended March 31,
1996, should be read in conjunction with the Consolidated Financial Statements
of the Company and other statistical data included in this Prospectus.

Overview

The Company continued its expansion during 1995. A new branch location was
opened during December 1995 in Randallstown, Maryland, Baltimore County,
creating a new market for the products and services of the Company.

During February 1995, $17.3 million of real estate loans were purchased
from the Resolution Trust Corporation. This purchase increased the Company's
loan portfolio by approximately 32.0%, creating substantial additional revenues
for the year.

Assets grew by $7.3 million or 6.9% to $113.3 million at December 31, 1995
from $106.0 million at December 31, 1994. Deposits increased by $6.4 million to
$101.1 million at December 31, 1995 or 6.8% from $94.7 million at December 31,
1994, and net loans increased by $19.7 million to $77.3 million at December 31,
1995 or 34.2% over $57.6 million at December 31, 1994.

Net earnings for the Company increased to $679,000 for 1995, 8.6% over the
$625,000 earned during 1994. This performance represents the highest earnings
year for the Company and was achieved by tight management control over expenses
and results from the acquisitions, which included the purchase and sale of
mortgage loans.

Return on Average Assets ("ROAA") was .64%, compared to .70% during 1994,
reflecting the cost of the interest on the borrowing which financed the 1994
acquisitions. Return on Average Equity ("ROAE") was 12.8% for 1995 compared to
13.5% for 1994. Earnings per average outstanding share increased to $1.58 from
$1.46 the previous year.

Net earnings for 1994 increased to $625,000 an increase of 31.6% over the
$475,000 earned during 1993, and were achieved by increase balances in earning
assets due to the acquisitions during the third and fourth quarter of 1994, sale
of real estate loans and tight management control over expenses.

ROAA for the year ended December 31, 1994 was .70%, compared to .78% during
1993, reflecting the cost incurred during the acquisitions. ROAE was 13.5% for
1994 up from 11.17% for 1993. Earnings per average outstanding share increased
to $1.46 from $1.11 the previous year.

Year to date earnings as of March 31, 1996, were $144,000 or $.34 per
share, reflecting a decrease of $7,000 or 4.6% over the same period for 1995.
ROAA and ROAE were .51% and 10.30%, respectively.

Recent Changes in FDIC Assessments and Recent Acquisitions

<PAGE>

half a cent per $100 of domestic deposits to $.23. Based upon the Bank's current
risk classification, the Bank is now required to pay a BIF assessment of less
than half a cent per $100 of its BIF assessable domestic deposits.

As a result of the acquisition of branch offices of John Hanson Federal
Savings Bank and Second National Federal Savings Bank, approximately 49.5% of
the Bank's "average assessment base" (as defined in the FDIC's regulations is
subject to the rates of the Savings Association Insurance Fund ("SAIF") of the
FDIC. Because the SAIF remains substantially undercapitalized, the FDIC has not
reduced the lowest assessment rate for the SAIF, and SAIF assessment rates
continue to range from $.23 to $.31 per $100 of domestic deposits, depending
upon an institution's risk classification. Based upon the Bank's current risk
classification, the Bank is required to pay a SAIF assessment of $.23 per $100
of its SAIF assessable domestic deposits. The total assessment (BIF and SAIF)
for 1996 is estimated to be approximately $103,000.

The Company, through the Bank, achieved record growth during 1994 through
the purchase of three branch locations from the Resolution Trust Corporation. In
June 1994, the Company acquired the deposits of two John Hanson Federal Savings
Bank branches, which had deposits of approximately $32.8 million. One of the
branches is located in Riverdale, Prince George's County, Maryland and the other
was closed and the deposits transferred to the Company's main banking office. In
September, 1994, the Company acquired the Erdman Avenue branch located in
Baltimore City of Second National Federal Savings Bank, which had deposits of
approximately $24.0 million. The Company believes that there is not sufficient
continuity of operations of the acquired entities' operations prior to and after
the acquisition so that the disclosure of prior financial information is
material to an understanding of future operations. The Company recently
established a new banking office in Randallstown, Baltimore County, Maryland.
The Company believes that additional opportunities for growth by acquisition and
internal expansion exist in its core market, Baltimore City and contiguous
market areas, but no assurance can be given that the historic growth can be
sustained.

As of March 31, 1996, total deposits were $103.0 million reflecting an
increase of $1.9 million or 1.9% when compared to December 31, 1995. Net loans
increased by $2.0 million or 2.7% to $79.3 million. As of March 31, 1996, there
were no borrowings from the Federal Home Loan Bank of Atlanta.

<PAGE>

Distribution of Assets, Liabilities and Stockholders' Equity; Yield, and Rates

The significant growth achieved by the Company is shown by the following
table which indicates average balances of asset and liability categories,
interest income and expense and average rates for the periods indicated.

<TABLE>
Years ended December 31, Three months ended
----------------------------------------------------------------------------
1993 1994 1995 March 31, 1996
------------------------- ------------------------- ------------------------ -------------------------
Average Income/ Rate/ Average Income/ Rate/ Average Income/ Rate/ Average Income/ Rate/
balance(1) Expense Yield balance(1) Expense Yield balance(1)Expense Yield balance(1) Expense Yield
---------- ------- ------ ---------- ------- ----- --------- ------- ------ ---------- ------- ------
(Dollars in thousands)
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Interest-earning assets:
Commercial loans...............$ 2,391 $ 216 9.03% $ 3,324 $ 289 8.69% $ 4,862 $ 512 10.53% $6,070 $150 9.88%
Federal funds sold............. 6,495 189 2.91 20,784 937 4.51 4,786 300 6.27 4,744 65 5.48
FHLB stock..................... 266 14 5.26 270 17 6.29 418 31 7.41 461 9 7.81
Real estate mortgages.......... 29,616 2,820 9.52 37,062 4,034 10.88 67,508 6,339 9.39 69,595 1,609 9.25
Interest-bearing deposits in
other banks.................. 9,211 558 6.06 9,190 508 5.53 7,712 431 5.59 7,652 109 5.70
Consumer loans................. 1,539 187 12.15 1,885 211 11.19 2,541 311 12.23 2,862 88 12.30
Taxable investment securities.. 8,354 385 4.61 11,344 541 4.77 10,265 566 5.59 11,694 179 6.12
--------- ------ -------- ------ -------- ------ ------- ------
Total interest-earning assets.. 57,872 4,369 7.55 83,859 6,537 7.80 98,092 8,490 8.65 103,078 2,209 8.57
--------- ------ -------- ------ -------- ------ ------- ------
Noninterest-earning assets:
Other assets................... 3,104 5,5660 9,584 10,520
Less reserve for possible loan
losses........................ (394) (499 (817) (840)
--------- ------- -------- -------
Total assets.................$60,582 $88,926 $106,859 $112,758
========= ======= ======== ========

Liabilities and Stockholders'
Equity
Interest-bearing liabilities:
Savings accounts...............$17,539 574 3.27 $26,541 896 3.38 $33,386 1,018 3.05 $33,503 275 3.28
Interest-bearing transaction
accounts...................... 11,919 304 2.55 19,434 490 2.52 18,184 462 2.54 17,992 114 2.53
Time deposits - $100,000
or more....................... 7,225 269 3.72 7,557 289 3.82 8,748 463 5.29 10,707 138 5.16
Other time deposits............ 12,133 512 4.22 18,816 727 3.86 24,648 1,275 5.17 28,799 389 5.40
Federal funds purchased........ -- -- -- -- 1,195 78 6.53 --
Notes payable.................. -- -- 2,724 124 4.55 5,796 335 5.78 5,796 80 5.52
--------- ----- ------- ------ ------ ------ ------- ------
Total interest-bearing
liabilities................... 48,816 1,659 3.40 75,072 2,526 3.36 $91,957 3,631 3.96 96,797 996 4.12
--------- ----- ------- ------ ------ ------
Noninterest-bearing liabilities:
Noninterest-bearing deposits... 7,030 8,640 8,991 9,357
Other liabilities.............. 483 584 598 1,013
Stockholders' equity............. 4,253 4,630 5,318 5,591
========= ======= ======== ========
Total liabilities and
stockholders' equity..........$60,582 $88,926 $106,859 $112,758
------- ------- -------- --------
Net interest income.............. $2,710 $4,011 $4,859 $1,213
====== ====== ====== ======
Net yield on earning assets...... 4.68 4.78 4.69 4.45
Net interest margin.............. 4.15 4.44 5.05 4.71

</TABLE>
(1) Average balances are calculated as the average of daily balances.
Non-accrual loans are included in the average loan balances. Interest
income on loans includes loan fees of $196,000, $207,000, $232,000 and
$35,000 for the years ended December 31, 1993, 1994 and 1995 and for the
three months ended March 31, 1996, respectively.

<PAGE>

The following table sets forth, for the periods indicated, a summary of the
changes in interest earned and interest paid resulting from changes in volume
and changes in rates:

<TABLE>
<CAPTION>
Three months ended
March 31, 1996 compared
to three months ended
1994 compared to 1993 1995 compared to 1994 March 31, 1995
-------------------------- -------------------------- --------------------------
Increase (decrease) Increase (decrease) Increase (decrease)
due to due to due to
-------------------------- -------------------------- --------------------------
Volume Rate(1) Net Volume Rate(1) Net Volume Rate(1) Net
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Income
Loans............................ $935 $376 $1,311 $3,118 $(490) $2,628 $1,216 $(886) $330
Taxable investment securities.... 144 15 159 (53) 92 39 (52) 69 17
Interest-bearing deposits in other 644 104 748 (1,002) 365 (637) (42) 37 (5)
banks............................
Federal funds sold............... (1) (49) (50) (132) 55 (77) (351) 259 (92)
------- ------- ------- ------- ------- ------- -------- ------ --------
Total interest income(2)....... 1,722 446 2,168 1,931 22 1,953 771 (521) 250
------- ------- ------- ------- ------- ------- -------- ------ --------
Interest Expense
Interest-bearing transaction 190 (4) 186 (66) 38 (28) (97) 71 (26)
accounts.........................
Savings.......................... 341 (19) 322 210 (88) 122 15 137 152
Time - $100,000 or more.......... 13 7 20 63 111 174 74 (39) 35
Other time....................... 259 (44) 215 302 246 548 299 (282) 17
Federal Funds purchased.......... -- -- -- 78 -- 78 (8) -- (8)
Notes payable.................... 124 -- 124 176 35 211 -- (4) (4)
------- ------- ------- ------- ------- ------- -------- ------ --------
Total interests expense........ 927 (60) 867 763 342 1,105 283 (117) 166
------- ------- ------- ------- ------- ------- ------- ------- -------
======= ======= ======= ======= ======= ======= ======== ====== ========
Net interest income............ $795 $506 $1,301 $1,168 $(320) $848 $488 $(404) $84
======= ======= ======= ======= ======= ======= ======== ====== ========
</TABLE>

(1) The changes due to rate/volume have been allocated to the changes due to
rate.

(2) Loan fees, which were included in interest income were $196,000, $207,000,
$108,000, $232,000 and $35,000 in 1993, 1994, 1995, the three months ended
March 31, 1995 and the three months ended March 31, 1996, respectively.

Net Interest Income

Net interest income, the largest component of the Company's earnings, is
the difference between interest income and related fees on earning assets and
the interest expenses incurred on deposits and the borrowings.

For the period ended March 31, 1996, net interest income increased to $1.2
million, a 7.4% increase when compared to the same period last year. This
increase reflects the growth in earning assets due to the purchase of loans from
the RTC related to the branch acquisitions that took place in 1994. Total loan
revenues were $1.8 million or 83.6% of total interest income. Total interest
expense for the period was $1.0 million, reflecting an increase of $167,000 or
20.1% over the same period for 1995. Time deposits were the main source of
interest expense totaling $527,000 or 52.9%. Also included in the total interest
expense, is $80,000 of interest cost which represents the interest paid by the
Company to the Resolution Trust Corporation for the borrowings under the Interim
Capital Assistance.

Total interest income increased by $2.0 million or 29.9% to $8.5 million
for 1995 when compared to the $6.5 million earned during 1994. A growth in
average earnings assets of 35.8%, mainly due to the acquisitions, and increasing
interest rates were the main reasons for the increase.

Interest expense increased by $1.1 million or 43.7% to $3.6 million in 1995
from $2.5 million in 1994. This increase was mainly due to the growth in
interest bearing deposits, increasing interest rates, and interest due on the
borrowings from the Resolution Trust Corporation.

Net interest margin as of March 31, 1996 was 4.71% compared to 5.05% in
1995 and 4.68% in 1994.

Provision for Possible Loan Losses

The provision for possible loan losses was $30,000 for the three months
ended March 31, 1996. This figure represents a decrease of $20,000 or 40.0% over
the same period of the previous year. Charge-offs for 1996 remain low in

<PAGE>

comparison to the industry, totaling $1,000 with recoveries of $7,000. These
figures reflect the conservative lending policies of the Company.

The provision for loan losses was $183,000 for 1995, a decrease of $65,000
from the $248,000 provided in 1994. Risk in the loan portfolio continued to be
monitored closely by management on a quarterly basis to assure that reserves are
adequate. The Company maintains a highly collateralized loan portfolio
consisting mainly of mortgage loans. Net charge-offs increased slightly from
$18,000 in 1994 to $24,000 in 1995. The ratio of loan loss reserves to
outstanding loans was 1.06% as of March 31, 1996, 1.05% as of December 31, 1995
and 1.12% as of December 31, 1994.

Other Operating Income

Non-interest income for the period ended March 31, 1996 decreased by $5,000
or 3.2% over the year to date operating income in 1995. This decrease was mainly
attributable to the other fee income category.

Non-interest income decreased by $151,000 or 19.2% to $635,000 in 1995. Net
gains on the sale of real estate loans totaled $218,000 in 1994. There were no
gains during 1995, resulting in the decrease in non-interest income. There were
no security sales during 1995 or 1994.

Other Operating Expense

For the period ended March 31, 1996, other operating expense increased by
$111,000 or 11.3% to $1.1 million from $1.0 million for the same period in 1995.
Salaries and employee benefits increased by 15.5% reflecting the cost of the
expansion with three additional branches as well as support staff. Occupancy and
equipment expenses increased by 19.6% and 27.2%, respectively, also as a result
of the expansion. Goodwill amortization, at $84,000 represents 7.7% of the total
increase for non-interest expenses.

Other operating expense, at $4.2 million in 1995, increased by 17.6%.
Salaries and benefit expenses increased to $1.9 million in 1995 from $1.6
million in 1994. Additional staff, due to the branch acquisitions, salary
increases and benefit costs accounted for the 21.8% increase. Other expenses
increased by $236,000 or 11.5%. Costs related to the acquisitions, such as
goodwill amortization, general merger costs, staff support, and occupancy,
coupled with higher FDIC premiums, legal costs and data processing fees due to
higher account activity were the main contributor to the increase in other
operating expenses.

Applicable Income Taxes

Applicable income taxes include current and deferred portions for 1995 and
1994. For the period ended March 31, 1996, taxes were $95,000 or 39.6% of total
income. In 1995, taxes were $451,000 or 39.9% of total income. In 1994, taxes
were $370,000 or 37.2% of total income.

Credit Risk Analysis

The Company, through the Bank, 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
ongoing risk associated with the lending process.

Non-performing loans, comprised of non-accrual loans and accruing loans 90
days or more past due, were $664,000 or .83% of outstanding loans as of March
31, 1996, $481,000 or .62% of outstanding loans at the end of 1995, and $343,000
or .60% of outstanding loans at the end of 1994.

The reserve for possible loan losses increased from $817,000 at the end of
1995 to $853,000 as of March 31, 1996 and from $658,000 at the end of 1994 to
$817,000 at the end of 1995. As of March 31, 1996, the reserve represented 1.06%
of outstanding gross loans. Based on quarterly analyses conducted throughout the
year, this reserve is considered adequate by management.

<PAGE>

Asset and Liability Management

Introduction. The Investment Committee of the Company 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 Company 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 Company,
as well as to meet current and planned expenditures. The Company 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 Company, derives liquidity
through the maturity distribution of the investment portfolio, loan repayments
and income from earning assets. The Bank maintains a portion of its portfolio of
short-term marketable investments as a liquidity reserve which can be converted
to cash on an immediate basis with minimal loss.

The Company's major sources of liquidity are the deposit base and
stockholders' equity. At March 31, 1996, total deposits were $103.1 million.
Core deposits, defined as all deposits except certificates of deposit of
$100,000 or more, totaled $91.4 million or 88.7% of total deposits.
Stockholders' equity totaled $5.7 million at March 31, 1996. Also, the Bank has
established secured lines of credit with the FHLB as an additional source of
liquidity. At March 31, 1996, the Company had sufficient collateral in order to
borrow up to an aggregate of $13.0 million from the FHLB under the established
lines of credit, if necessary, but there were no advances from the FHLB at that
date. Liquidity is also provided through the Company'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
$13.3 million or 11.5% of total assets at March 31, 1996.

The Company derives its cash from a combination of operating activities,
investing activities and financing activities as disclosed in the Consolidated
Statements 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. Cash flows from investing activities include the
purchase, sale and maturity of investments and interest bearing deposits in
other banks, the net increase in the level of loans, purchases of premises and
equipment and the acquisitions of branches from the RTC. Cash flows from
financing activities consist of movements in the level of deposits and other
borrowings, proceeds from the issuance of stock, and payment of cash dividends.

For the three months ended March 31, 1996, net cash provided by operating
activities totaled $94,000. Net cash used in investing activities for the same
period totaled $7.0 million resulting primarily from a net increase in loans of
$2.1 million, a net increase in investments of $4.7 million. Net cash provided
by financing activities for the three months ended March 31, 1996 totaled $1.7
million resulting primarily from a net increase in deposits of $1.9 million
offset by dividend payments of $167,000.

For the year ended December 31, 1995, net cash provided by operating
activities was $1.8 million. Net cash used in investing activities for the same
period totaled $16.2 million resulting primarily from a net increase in loans of
$19.8 million, and purchases of investments of $7.9 million, offset by the
maturities of investments and interest bearing deposits in other banks totaling
$12.2 million. Of the $19.8 million net increase in loans, $17.3 million relates
to loans acquired from the RTC in the first quarter of 1995. Net cash provided
by financing activities for the year ended December 31, 1995 totaled $6.2
million resulting primarily from a net increase in deposits of $6.4 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

<PAGE>

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 Company's balance sheet is the
goal of the asset/liability management process.

The following table summarizes the anticipated maturities or repricing of
the Company's interest-earning assets and interest-bearing liabilities on March
31, 1996, the Company's interest sensitivity gap (i.e., interest-earning assets
less interest-bearing liabilities), the Company's cumulative interest
sensitivity gap and the Company's cumulative interest sensitivity gap ratio
(i.e., cumulative interest sensitivity gap as a percentage of total
interest-earning assets). A positive interest sensitivity gap for any time
period means that more interest-bearing assets will reprice or mature during
that time period than interest-bearing liabilities. During periods of rising
interest rates, a short-term positive interest sensitivity gap position would
generally increase earnings, and during periods of declining interest rates, a
short-term positive interest sensitivity gap position would generally decrease
earnings.
<TABLE>
<CAPTION>
March 31, 1996
-------------------------------------------------------------------
Interest sensitivity period
-------------------------------------------------------------------
Three After After
months three one After
or less through through five Total
12 months five years
years
--------- ---------- --------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest-bearing deposits in other banks $ 492 $ 2.531 $ 4,666 $ -- $ 7,689
Federal funds sold...................... 1,777 -- -- -- 1,777
Investment securities held to maturity.. -- -- 12,005 2,000 14,005
Securities available for sale........... 583 1,010 -- -- 1,593
Loans receivable(1)(2).................. 20,504 7,811 11,190 40,695 80,200
--------- ---------- --------- ---------- ----------
Total interest-earning assets....... 23,356 11,352 27,861 42,695 105,264
--------- ---------- --------- ---------- ----------
Interest-bearing liabilities:
Deposits:
Savings, Money Market, and NOW Accounts 52,729 -- -- -- 52,729
Time; 100,000 or more................. 4,778 6,118 669 150 11,715
Other time............................ 10,765 12,386 5,539 -- 28,690
Short-term borrowings................... -- -- -- -- --
Notes payable......................... -- -- 5,796 -- 5,796
--------- ---------- --------- ---------- ----------
Total interest-bearing liabilities.. 68,272 18,504 12,004 150 98,930
--------- ---------- --------- ---------- ----------
Interest sensitivity gap.................. $(44,916) $ (7,152) $ 15,857 $ 42,545 $ 6,334
========= ========== ========= ========== ==========
Cumulative interest sensitivity gap....... $(44,916) $ (52,068) $ (36,211) $ 6,334
========= ========== ========= ==========
Cumulative interest sensitivity gap ratio. (38.9) (45.1) (31.4) 5.5
========= ========== ========= ==========
</TABLE>

(1) Real estate loans are stated net of unearned income.

(2) Nonvariable real estate loans have callable features from three to five
years.

Investment Portfolio

The following table provides the maturities and weighted average yields of
the investment portfolio of the Company at March 31, 1996 and December 31, 1995.

<TABLE>
<CAPTION>
December 31, 1995
------------------------------------------------------------------------
Maturing in
------------------------------------------------------------------------
After one After five
One year through through After ten
or less five years ten years years
----------------- ------------------ -----------------------------------
Amount Yield Amount Yield Amount Yield Amount Yield
--------- ------- --------- ----------------- ------- --------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U. S. Treasury securities.................. $ -- --% $ -- --% -- --% $ -- --%
U. S. government agency securities......... 1,500 6.16 8,947 6.33 -- -- -- --
Other securities........................... -- -- -- -- -- -- 447 6.95
------ ----- ----- -----
Total investment securities.............. $1,500 6.16 $8,947 6.33 -- -- $ 447 6.95
======= ====== ===== =======

</TABLE>

<PAGE>

<TABLE>
<CAPTION>
March 31, 1996
------------------------------------------------------------------------
Maturing in
------------------------------------------------------------------------
After one After five
One year through through After ten
or less five years ten years years
----------------- ------------------ -----------------------------------
Amount Yield Amount Yield Amount Yield Amount Yield
--------- ------- --------- ----------------- ------- --------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U. S. Treasury securities.................. $ -- --% $ -- --% $ -- --% $ -- --%
U. S. government agency securities......... 1,000 7.14 12,015 6.04 2,000 6.74 -- --
Other securities........................... -- -- -- -- -- -- 588 7.00
------- -------- ------- -------
Total investment securities.............. $1,000 7.14 $12,015 6.04 $2,000 6.74 $ 588 7.00%
======= ======== ======= =======

</TABLE>
The following table provides the book values of the Company's investment
portfolios at each of the dates indicated.

<TABLE>
<CAPTION>
December 31,
--------------------------------------------------
1994 1995 March 31, 1996
------------------------- ----------------------- ----------------------
Held to Available Held to Available Held to Available
maturity for sale maturity for sale maturity for sale
------------- ----------- ----------- ----------- ----------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. treasury securities................... $ 2,001 $ 993 $ -- $ -- $ -- $ --
U.S. government agency securities.......... 9,516 990 9,438 1,009 14,008 1,006
Investment FHLB stock...................... -- 277 -- 441 -- 582
Other securities........................... 3 -- 6 -- 7 --
------- ------- ------- -------- -------- -------
Total.................................. $11,520 $ 2,260 $ 9,444 $ 1,450 $14,015 $1,588
======== ======= ======= ======= ======= ======
</TABLE>

Loan Portfolio

The following table shows the Company's loan distribution, net of unearned
income as of March 31, 1996 and at the end of each of the last two years.
<TABLE>
<CAPTION>

December 31,
--------------------------------------------
1994 1995 March 31, 1996
-------------------- -------------------- --------------------
Amount Percent Amount Percent Amount Percent
-------- -------- --------- --------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Commercial loans............................. $ 3,761 6.5% $ 5,891 7.5% $ 6,571 8.2%
Real estate mortgages........................ 52,418 89.9 69,414 88.9 70,742 88.2
Consumer loans............................... 2,122 3.6 2,804 3.6 2,887 3.6
======== ======== ========= ======== ======== =========
Total loans................................ $58,301 100.0% $78,109 100.0% $80,200 100.0%
======== ======== ========= ======== ======== =========
</TABLE>

The following tables show the contractual final maturities and interest
rate sensitivities of loans of the Company at March 31, 1996. Some loans may
include contractual installment payments which are not reflected in the tables
until final maturity. In addition, the Company's experience indicates that a
significant number of loans will be extended or repaid prior to contractual
final maturity. Consequently, the table cannot necessarily be viewed as an
accurate forecast of future cash payments.

<TABLE>
<CAPTION>
March 31, 1996
-----------------------------------------------------------------------
In one year or less After one through five After five years years
------------------- ---------------------- ---------------- -----
years
-----
Fixed Variable Fixed Variable Fixed Variable Total
----- -------- ----- -------- ----- -------- -----
($ in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Commercial loans........ $325 $4,563 $1,430 -- $253 -- $6,571
</TABLE>

<PAGE>

Nonperforming assets consist of loans past due 90 days or more, non-accrual
loans and restructured loans. The following table sets forth information with
respect to these assets at the dates indicated.

<TABLE>
<CAPTION>
December 31,
-----------------------
1994 1995 March 31, 1996
--------- --------- ----------------
(In thousands)
<S> <C> <C> <C>
Non-accrual loans..................................... $ 200 $ -- $ --
Accruing loans 90 days or more past due............... 143 481 664(1)
Restructured loans.................................... -- -- --
----- ------ -------
Total nonperforming assets.......................... $ 343 $ 481 $664
===== ====== =======
- ------------------
</TABLE>

(1) Since March 31, 1996 one of these loans for $263,000 has been placed on
non-accrual status.

It is the policy of the Company 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.

When a loan is placed on non-accrual status, interest accrued and unpaid
during the current year is reversed through a charge to current year earnings.
Prior years' interest accrued and unpaid is charged to the reserve for possible
loan losses. While the loan is on non-accrual status, interest income is
recognized only upon receipt, if at all, depending upon management's assessment
of the value of the underlying collateral and the likelihood of collection. If
interest on non-accrual loans had been accrued, such income would have been
approximately $26,000 for the year ended December 31, 1994. There were no
non-accrual loans as of December 31, 1995 or March 31, 1996. No amount was
recognized as interest income on these loans for the periods listed above.

In addition to the loans shown in the table above, at March 31, 1996, and
December 31, 1995, the Company had $211,000 and $486,000, respectively, in loans
for which the borrowers are experiencing financial difficulties or contain other
unfavorable features. Those loans are subject to constant management attention
and their classification is reviewed monthly.

As of March 31, 1996, 84.57% of the Company's loan portfolio was secured by
real estate, mainly, 1-to-4 family residential properties.

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

Management allocates the reserve for possible loan losses by type of loan.
Both performing and non-performing loans are reviewed to identify high risk
assets and their potential impact upon the reserve. Based on all information
known to date, management does not expect net losses as a percentage of average
loans in 1996 to exceed the 1995 levels.

<PAGE>

The following table gives a summary of the loan loss experience for the
periods indicated:
<TABLE>
<CAPTION>
Three months
Years ended December 31, ended
---------------------------
1994 1995 March 31, 1996
----------- ----------- -----------------
(Dollars in thousands)
<S> <C> <C> <C>
Balance at beginning of period..................... $ 428 $ 658 $ 817
Loans charged off:
Commercial loans.............................. 4 -- 1
Real estate mortgages......................... 19 6 --
Consumer loans................................ 8 29 --
----------- ----------- -----------------
Total loans charged off............................ 31 35 1
Recoveries of loans previously charged off:
Commercial loans.............................. 2 1 --
Real estate mortgages......................... -- 6 --
Consumer loans................................ 11 4 7
----------- ----------- -----------------
Total loans recovered.............................. 13 11 7
Net loans charged off.............................. 18 24 (6)
Provisions charged to operations................... 248 183 30
----------- ----------- -----------------
Balance at end of period........................... $ 658 $ 817 $ 853
=========== =========== =================

Average loans net of unearned income .............. $42,271 $ 74,911 $ 78,507
=========== =========== =================
Reserve for possible loan losses to loans 1.13% 1.09% 1.06%
outstanding........................................ =========== =========== =================
Reserve for possible loan losses to nonperforming 192% 170% 128%
loans.............................................. =========== =========== =================
Net charge offs to average loans outstanding....... .04% .03% --%
=========== =========== =================
</TABLE>

Deposits

The following table sets forth the average deposit balances and the average
rates paid on deposits during the periods indicated.
<TABLE>
<CAPTION>

Years ended December 31, Three months
ended
----------------------------------------
1994 1995 March 31, 1996
------------------- -------------------- --------------------
Average Average Average Average Average Average
balance rate balance rate balance rate
--------- --------- --------- --------- -------- --------
(Dollars in thousands)

<S> <C> <C> <C> <C> <C> <C>
Total non-interest bearing deposits................... $ 8,640 --% $ 8,991 --% $ --%
9,357
Interest-bearing deposits:
Savings accounts.................................... 26,541 3.38 33,386 3.05 33,533 3.28
Interest-bearing transaction accounts............... 19,434 2.52 18,184 2.54 17,992 2.53
Certificates of deposit - $100,000 or more.......... 7,557 3.82 8,748 5.29 10,707 5.16
Other time deposits................................. 18,816 3.86 24,648 5.17 28,799 5.40
-------- -------- ---------
Total interest-bearing deposits................. 72,348 3.36% 84,966 3.79% 91,031 4.03%
-------- -------- ---------
Total deposits........................................ $80,988 $93,957 $100,388
======== ======== =========
</TABLE>

Maturities of time certificates of deposit of $100,000 or more outstanding
at December 31, 1995 and March 31, 1996 are summarized as follows:

Maturing
-------------------------------------
December 31, 1995 March 31, 1996
---------------- ---------------
(In thousands)
Three months or less.......... $ 3,870 $ 4,778
Three to six months........... 3,310 3,863
Six to twelve months.......... 3,494 2,255
Over twelve months............ 674 819
======== =========
Total......................... $11,348 $11,715
======== =========

<PAGE>

Long and Short-Term Borrowings

Short term borrowings consist of borrowings from the FHLB. During 1995, the
Company borrowed up to $5.5 million of these short-term borrowings in order to
finance the purchase of real estate loans. These borrowings were repaid during
the third quarter of 1995. There were no outstanding short-term borrowings as of
December 31, 1995 or March 31, 1996. These borrowings reprice daily, have
maturities of one year or less and may be prepaid without penalty. Long term
borrowings consist of a five-year note from the Resolution Trust Company with
quarterly interest payments based on Treasury Bill rates and principal payment
at the end of the fifth year. Principal payments can be made without penalty
before the maturity of the note. During 1994, the Company borrowed $5.8 million
from the Resolution Trust Corporation. This borrowing, which qualifies as
capital for risk-based capital purposes, was necessary to maintain adequate
capital levels due to the growth achieved through the purchase of three branches
from the Resolution Trust Corporation during 1994.

The table below presents certain information with respect to short-term
borrowings:
<TABLE>
<CAPTION>

Years ended
December 31, Three
------------------------ months ended
1994 1995 March 31, 1996
---------- --------- ------------------
(Dollars in thousands)
<S> <C> <C> <C>
Amount outstanding at period-end:
Long-term promissory note................................ $5,796 $5,796 $5,796
Borrowings from FHLB..................................... -- -- --
Average outstanding:
Long-term promissory note................................ $2,724 $5,796 $5,796
Borrowings from FHLB..................................... -- -- --
Weighted average interest rate during the period:
Long-term promissory note................................ 4.55% 5.93% 5.55%
Borrowings from FHLB..................................... -- -- --

</TABLE>
Capital Resources

As of March 31, 1996, stockholders' equity had increased by $55,000 or 1.0%
over the same period a year ago to $5.7 million. Primary capital to total assets
was 4.94% at March 31, 1996. At December 31, 1995, stockholders' equity had
grown by $583,000 or 11.52% over the level at December 31, 1994, to $5.6
million. This increase was mainly due to the retained earnings of the Company.
Capital was 5.28% of total assets as of the year-end and risk based capital was
11.07%. The ratios for both periods, were above the requirements by regulators
which are 4.0% for capital and 8.0% for risk based capital. The book value of
each share of Common Stock rose from $11.83 at the end of 1994 to $13.17 at the
end of 1995, an 11.32% increase and to $13.29 as of March 31, 1996.

Changes in Accounting Methods

In March 1995, the FASB issued SFAS No. 121 - "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of."
Statement 121 requires impairment losses to be recorded on long-lived assets
used in operations when the undiscounted cash flows estimated to be generated by
those assets are less than the assets carrying amount. Statement 121 also
addresses the accounting for long-lived assets that are expected to be disposed
of. Statement 121 was adopted on January 1, 1996, with no material impact on
earnings.

In May 1995, the FASB issued SFAS No. 122 - "Accounting for Mortgage
Servicing Rights an amendment to FASB No. 65," which requires that an enterprise
recognize as separate assets the rights to service mortgage loans for others,
however these servicing rights are acquired. Statement 122 requires that a
mortgage banking enterprise assess its capitalized mortgage servicing rights for
impairment based upon the fair value of those rights. Impairment should be
recognized through a valuation allowance. Statement 122 was adopted on January
1, 1996 with no material impact on earnings.

<PAGE>

In October 1995, the FASB issued SFAS No. 123 - "Accounting for Stock Based
Compensation," which provides an alternative to APB Opinion No. 25 "Accounting
for Stock Issued to Employees" in accounting for stock-based compensation issued
to employees. The Company will continue to utilize the cost measurement
principles of APB Opinion No. 25, while adopting only the disclosure provisions
of Statement 123.

Beginning in 1995, the Company adopted Statement of Financial Accounting
Standards No. 114, "Accounting by Creditors for Impairment of a Loan." Under the
new standard, the 1995 allowance for credit losses related to loans that are
identified for evaluation in accordance with Statement 114 is based on
discounted cash flows using the loan's initial effective interest rate or the
fair value of the collateral for certain collateral dependent loans. Prior to
1995, the allowance for credit losses related to these loans was based on
undiscounted cash flows or the fair value of the collateral for collateral
dependent loans. The adoption of this new accounting pronouncement does not
materially impact the Company's financial condition or results of operations.

In May 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." The Company adopted the provisions of the new
standard for investments held as of or acquired after January 1, 1994. In
accordance with the Statement prior period financial statements have not been
restated to reflect the change in accounting principle. As a result of the
adoption of the new standard, debt securities that the Company has the positive
intent and ability to hold to maturity are classified as held to maturity
securities and reported at amortized cost. Debt and equity securities not
classified as held to maturity securities are classified as available-for-sale
securities and reported at fair value, with unrealized gains and losses excluded
from earnings and reported in a separate component of stockholders' equity. The
cumulative effect as of January 1, 1994 of adopting Statement 115 was an
increase in stockholders' equity of $12,399 to reflect the net unrealized
holding losses on securities classified as available for sale previously carried
at amortized cost or lower of cost or market.

BUSINESS

General

The Company is a bank holding company with the Bank as its sole subsidiary.
The Company was organized under the laws of the State of Maryland in 1992. On
November 2, 1992, the Company acquired all outstanding stock of the Bank.

The Bank is a commercial bank headquartered in Baltimore, Maryland. The
deposits of the Bank are insured by the Bank Insurance Fund of the FDIC. 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 and a branch in Randallstown, Baltimore 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 full diversification of deposits and borrowers so
it is not dependent upon a single or a few customers.

During 1994, the Company, through the Bank, acquired three branch offices
from the Resolution Trust Company, one of these branches was merged into the
Bank's main office, resulting in a net addition of two branches to the Bank's
network.

More than 50% of the Common Stock of the Company is owned by minority
persons and, as a result, the Company qualifies as a "minority business
enterprise" as defined in Section 6 of Executive Order No. 11625, October 14,
1971, 36 F.R. 19967. As such, the Company is entitled to certain benefits
provided to minority-owned banks, including maintenance of deposits by
governmental entities and major companies and participation in certain loan
pools arranged for such banks. The Company estimates that less than 5% of 1995
gross revenues will be derived from participation in this program.

The following types of services are offered by the Company:

<PAGE>

Commercial services

o Loans, including working capital loans and lines of credit, a wide
range of demand, term and time loans, and loans for real estate,
equipment, inventory and accounts receivable financing

o Cash management, including automatic overnight investment of funds

o Investments, including certificates of deposit

o Direct deposit of payroll

o Letters of credit

o Consumer Services

o Transaction accounts, including checking accounts

o Savings accounts

o Certificates of deposit

o Credit cards

o Individual retirement accounts

o 24-hour automated teller machines and access to the MOST(R)
system and the CIRRUS(R) system

o Installment and home equity loans and lines of credit

o Residential construction and first mortgage loans

o Traveler's checks and safe deposit boxes

Competition

The Company competes with virtually all banks and savings institutions
which offer services in its market area. The Company directly competes with
branches of most of Maryland'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 Company 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

Bank holding companies and banks are extensively regulated under both
federal and state law. These laws and regulations are intended primarily to
protect depositors and not stockholders. To the extent that the following
information describes statutory and regulatory provisions, it is qualified in
its entirety by reference to the particular statutory and regulatory provisions.
Any change in the applicable law or regulation may have a material effect on the
business and prospects of the Company and the Bank.

The Company is a registered bank holding company subject to regulation
and examination by the Federal Reserve Board under the Bank Holding Company Act
of 1956, as amended (the "Act"). The Company is required to file with the
Federal Reserve Board quarterly and annual reports and any additional
information that may be required under the Act. The Act also requires every bank
holding company to obtain the prior approval of the Federal Reserve Board before

<PAGE>

(i) acquiring all or substantially all of the assets of or direct or indirect
ownership or control of more than 5% of the outstanding voting stock of any bank
which is not already majority owned, or (ii) acquiring, or merging or
consolidating with, any other bank holding company. The Federal Reserve Board
will not approve any acquisition, merger, or consolidation that would have a
substantially anti-competitive effect, unless the anti-competitive impact of the
proposed transaction is clearly outweighed by a greater public interest in
meeting the convenience and needs of the community to be served. The Federal
Reserve Board also considers capital adequacy and other financial and managerial
resources and future prospects of the companies and the banks concerned,
together with the convenience and needs of the community to be served, when
reviewing acquisitions, mergers or consolidations. Since September 29, 1995, an
adequately capitalized and managed bank holding company may (with Federal
Reserve Board approval) acquire control of banks outside its principal state of
operations, without regard to whether such acquisitions are permissible under
state law. States may, however, limit the eligibility of banks to be acquired by
an out-of-state bank holding company to banks in existence for a minimum period
of time (not in excess of five years). In addition, no bank holding company may
make an acquisition outside its principal state of operations which would result
in it controlling more than 10% of the total amount of deposits of all insured
depository institutions in the United States, or 30% or more of the total
deposits of insured depository institutions in any state (unless such limit is
waived, or a more restrictive or permissible limit is established, by a
particular state).

Additionally, the Act prohibits a bank holding company, with certain
limited exceptions, from (i) acquiring or retaining direct or indirect ownership
or control of more than 5% of the outstanding voting stock of any company which
is not a bank or bank holding company, or (ii) engaging directly or indirectly
in activities other than those of banking, managing or controlling banks, or
performing services for its subsidiaries unless such non-banking business is
determined by the Federal Reserve Board (by regulation or order) to be so
closely related to banking or managing or controlling banks as to be properly
incident thereto. In making such determinations, the Federal Reserve Board is
required to weight the expected benefits to the public, such as greater
convenience, increased competition or gains in efficiency, against the possible
adverse effects, such as undue concentration of resources, decreased or unfair
competition, conflicts of interest, or unsound banking practices.

In January, 1989, the Federal Reserve Board adopted risk-based capital
guidelines for bank holding companies. The risk-based capital guidelines are
designed to make regulatory capital requirements more sensitive to differences
in risk profile among banks and bank holding companies, to account for
off-balance sheet exposure and to minimize disincentives for holding liquid
assets. Under these guidelines, assets and off-balance sheet items are assigned
to broad risk categories each with appropriate weights. The resulting capital
ratios represent capital as a percentage of total risk-weighted assets and
off-balance sheet items. Failure to meet the capital guidelines could subject a
banking institution to a variety of enforcement remedies available to federal
regulatory authorities.

Bank holding companies currently are required to maintain a minimum
ratio of total capital to risk-weighted assets (including certain off-balance
sheets activities, such as standby letters of credit) of 8%. At least half of
the total capital is required to be "Tier 1 capital," consisting of common
equity, retained earnings, noncumulative perpetual preferred stock and a limited
amount of cumulative perpetual preferred stock, minority interests in the equity
accounts of consolidated subsidiaries, and (subject to certain limitations)
mortgage servicing rights and purchased credit card relationships, less all
other intangibles (primarily good will). The remainder ("Tier 2 capital") may
consist of (a) the allowance for loan losses of up to 1.25% of risk-weighted
risk assets, (b) excess of qualifying perpetual preferred stock, (c) hybrid
capital instruments, (d) perpetual debt, (e) mandatory convertible debt
securities, and (f) a limited amount of subordinated debt and intermediate-term
preferred stock up to 50% of Tier 1 capital. The maximum amount of supplementary
capital elements that qualifies as Tier 2 capital is limited to 100% of Tier 1
capital net of goodwill and certain other intangible assets. Total capital is
the sum of Tier 1 and Tier 2 capital less reciprocal holdings of other banking
organizations' capital instruments, investments in unconsolidated subsidiaries
and any other deduction as determined by the Federal Reserve Board (determined
on a case by case basis or as a matter of policy after formal rulemaking).

Bank holding company assets are given risk-weights of 0%, 20%, 50% and
100%. In addition, certain off-balance sheet items are given similar credit
conversion factors to convert them to asset equivalent amounts to which an
appropriate risk-weight will apply. These computations result in the total
risk-weighted assets. Most loans will be assigned to the 100% risk category,
except for performing first mortgage loans fully secured by certain residential

<PAGE>

property, which carry a 50% risk rating. Most investment securities (including,
primarily, general obligation claims on states or other political subdivisions
of the United States) will be assigned to the 20% category, except for municipal
or state revenue bonds, which have a 50% risk-weight, and direct obligations of
the U.S. Treasury or obligations backed by the full faith and credit of the U.S.
Government, which have a 0% risk-weight. In converting off-balance sheet items,
direct credit substitutes including general guarantees and standby letters of
credit backing financial obligations, are given a 100% conversion factor.
Transaction related contingencies such as bid bonds, standby letters of credit
backing non-financial obligations and commitments (including commercial credit
lines) with an initial maturity or more than one year have a 50% conversion
factor. Short-term commercial letters of credit are converted at 20% and certain
short-term or unconditionally cancelable commitments have a 0% factor.

The Company's management believes that the risk-weighting of assets
under these guidelines does not and will not have a material impact on the
Company's operations or on the operations of the Bank. As of December 31, 1995
and March 31, 1996, the Company's total risk-based capital ratios were 11.0% and
10.86%, respectively, and its Tier 1 risk-based capital ratios were 9.82% and
9.61%, respectively. In addition, to the risk-based capital guidelines, the
Federal Reserve Board has adopted a minimum Tier 1 leverage capital ratio, under
which a bank holding company must maintain a minimum level of Tier 1 capital to
average total consolidated assets of at least 3% in the case of a bank holding
company that has the highest regulatory examination rating and is not
contemplating significant growth or expansion. All other bank holding companies
are expected to maintain a leverage ratio of at least 1.0% to 2.0% above the
stated minimum. The leverage capital ratio assists in the assessment of the
capital adequacy of bank holding companies. Its principal objective is to place
a constraint on the maximum degree to which a banking organization can leverage
its equity capital base, even if it invests primarily in assets with low
risk-weights. As of December 31, 1995 and March 31, 1996, the Company's Tier 1
leverage ratios were 5.28% and 5.05%, respectively.

In August, 1995, the federal bank regulatory agencies revised their
capital adequacy guidelines to provide explicitly for consideration of interest
rate risk in the overall determination of a bank's minimum capital requirement.
The intended effect is to ensure that banking institutions effectively measure
and monitor their interest rate risk and that they maintain adequate capital for
the risk. A banking institution deemed to have excessive interest rate risk
exposure may be required to maintain additional capital. The Company does not
believe that this revision in the capital adequacy guidelines will have a
material adverse effect on the Company.

The Bank is a state-chartered bank subject to supervision, regulation
and examination by the Maryland Bank Commissioner and by the FDIC under the
Federal Deposit Insurance Act. Deposits, reserves, investments, loans, consumer
law compliance, issuance of securities, payment of dividends, establishment and
closing of branches, mergers and consolidations, changes in control, electronic
funds transfer, community reinvestment, management practices and other aspects
of operations are subject to regulation by the appropriate federal and state
regulatory agencies. The Bank is also subject to various regulatory requirements
of the Federal Reserve Board applicable to FDIC-insured banks, including
disclosure requirements in connection with personal and mortgage loans, interest
on deposits and reserve requirements. In addition, the Bank is subject to
numerous federal, state and local laws and regulations which set forth specific
restrictions and procedural requirements with respect to the extension of
credit, credit practices, the disclosure of credit terms and discrimination in
credit transactions.

The FDIC has implemented a risk-related assessment system for deposit
insurance premiums. All depository institutions have been assigned to one of
nine risk assessment classifications based upon certain capital and supervisory
measures. Except to the extent indicated below, the deposits of the Bank are
subject to the rates of the Bank Insurance Fund ("BIF") of the FDIC. On August
8, 1995, in view of the successful recapitalization of the BIF, the FDIC reduced
the lowest assessment rate for the BIF from 23(cent) per $100 of domestic
deposits to 4(cent) of domestic deposits. This reduction in the lowest BIF
assessment rate was made effective retroactive to June 1, 1995 (the FDIC having
determined that the BIF achieved the statutorily required reserve ratio of 1.25%
on May 31, 1995). On September 15, 1995, the FDIC paid refunds (reflecting that
revised rate schedule) to banks which overpaid their BIF assessments for the
period June 1, 1995 through September 30, 1995, and the Bank received a refund
(plus interest) totaling $31,683. On November 14, 1995, in view of the success
in recapitalizing the BIF, the FDIC reduced the lowest assessment rate for the
BIF from $.04 per $100 of domestic deposits to less than half a cent per $100 of

<PAGE>

domestic deposits, effective January 1, 1996, so that the revised schedule of
BIF assessment rates now ranges from less than half a cent per $100 of domestic
deposits to $.23. Based upon the Bank's current risk classification, the Bank is
now required to pay a BIF assessment of less than half a cent per $100 of its
BIF assessable domestic deposits.
As a result of the acquisition of branch offices of John Hanson Federal
Savings Bank and Second National Federal Savings Bank, approximately 49.5% of
the Bank's "average assessment base" (as defined in the FDIC's regulations) is
subject to the rates of the Savings Association Insurance Fund ("SAIF") of the
FDIC. Because the SAIF remains substantially undercapitalized, the FDIC has not
reduced the lowest assessment rate for the SAIF, and SAIF assessment rates
continue to range from $.23 to $.31 per $100 of domestic deposits, depending
upon an institution's risk classification. Based upon the Bank's current risk
classification, the Bank is required to pay a SAIF assessment of $.23 per $100
of its SAIF assessable domestic deposits. The total assessment (BIF and SAIF)
for 1996 is estimated to be approximately $103,000.

Legislation has been introduced in Congress to recapitalize SAIF by (i)
a significant one-time special assessment on SAIF-assessable deposits (including
those held by banks), and (ii) additional annual assessments for approximately
23 years on BIF assessable deposits. The one-time fee on SAIF assessable
deposits could amount to approximately $317,000, and the additional annual
assessment on BIF assessable deposits could amount to approximately $13,000 each
year, based on deposits at December 31, 1995. Although passage of the
legislation appears likely, the ultimate form of the legislation, including
timing and amount of any payments to be made thereunder, cannot be determined at
this time.

Federal regulatory agencies have broad powers to take prompt corrective
action to resolve problems at banking institutions, including (in certain cases)
the appointment of a conservator or receiver. The extent of these powers is
generally influenced by the level of capital at the institution. Management does
not anticipate that the Bank will become subject to these prompt corrective
action provisions.

Only a well capitalized depository institution may accept brokered
deposits without prior regulatory approval. Under FDIC regulations, an
institution is generally considered "well-capitalized" if it has a total
risk-based capital ratio of at least 10%, a Tier 1 risk-based capital ratio of
at least 6%, and a Tier 1 capital (leverage) ratio of at least 5%. Federal law
generally requires full-scope on-site annual examinations of all insured
depository institutions by the appropriate federal bank regulatory agency
although the examination may occur at longer intervals for small
well-capitalized or state chartered banks.

In the liquidation or other resolution by any receiver of a bank
insured by the FDIC, the claims of depositors have priority over the general
claims of other creditors. Hence, in the event of the liquidation or other
resolution of a banking subsidiary of the Company, the general claims of the
Company as creditor of such banking subsidiary would be subordinate to the
claims of the depositors of such banking subsidiary, even if the claims of the
Company were not by their terms so subordinated.

As a consequence of the extensive regulation of the commercial banking
business in the United States, the business of the Company and the Bank are
particularly susceptible to changes in federal and state legislation and
regulations which may increase the cost of doing business.

In accordance with Federal Reserve Board regulations, the Bank is limited
as to the amount it may loan affiliates, including the Company, 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. See "Dividends."

The following table details the Company's capital position relative to
its minimum statutory capital requirements at March 31, 1996, and as adjusted to
give effect to the issuance of the Common Stock offered hereby, based upon the
capital requirements of the Federal Reserve Board. The Company exceeded the
applicable minimum capital ratio requirements on each of those dates.
<PAGE>

<TABLE>
<CAPTION>
March 31, 1996
-------------------------------------------------
As adjusted
----------------------------
Outstanding Minimum Maximum
--------------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C>
Total Risk-based capital ratio
Total risk-based capital...................................... $ 6,438 $ 7,342 $ 11,542
Total risk-weighted assets.................................... 59,263 59,263 59,263
Total risk-based capital ratio................................ 10.86% 12.38% 19.47%
Minimum ratio requirement..................................... 8.00% 8.00% 8.00%

Tier 1 risk-based capital ratio
Tier 1 capital................................................ $ 5,697 $ 6,601 $ 10,801
Total risk-weighted assets.................................... 59,263 59,263 59,263
Tier 1 risk-based capital ratio............................... 9.61% 11.13% 18.22%
Minimum ratio requirement..................................... 4.00% 4.00% 4.00%

Tier 1 leverage capital ratio
Tier 1 capital................................................ $ 5,697 $ 6,601 $ 10,801
Average total assets.......................................... 112,758 112,758 112,758
Tier 1 leverage capital ratio................................. 5.05% 5.85% 9.57%
Minimum ratio requirement..................................... 3.00% 3.00% 3.00%
</TABLE>

Governmental Monetary Policies and Economic Controls

The earnings and growth of the banking industry and ultimately the
Company are affected by the credit policies of monetary authorities including
the Federal Reserve Board. An important function of the Federal Reserve Board 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 Board 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
Board 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
monetary markets, as well as the effect of actions by monetary and fiscal
authorities, including the Federal Reserve Board, 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 Company.

Employees

At April 15, 1996, the Company employed 62 individuals, of which 18
were officers and 44 were full-time employees. None of the employees are covered
by a collective bargaining agreement and management believes that its
relationship with its employees is good.

Properties

The main offices of the Company and the Bank occupy approximately
16,100 square feet at 25 West Fayette Street, Baltimore, Maryland 21201, and are
presently under a lease agreement for a term of 10 years and a renewable option
of 5 years.

The Bank also maintains five other leased branch offices, four located
in Baltimore, Maryland and one located in Riverdale, Prince George's County,
Maryland. In management's opinion, its facilities are adequate for its present
needs.

<PAGE>

Legal Proceedings

The Company is at times and in the ordinary course of business subject
to legal actions. Management does not believe the outcome of such matters will
have a material adverse effect on the financial condition of the Company.

MANAGEMENT

Directors

All directors of the Company are also members of the Board of Directors
of the Bank. The Charter and By-Laws of the Company provide that the directors
shall be classified into three classes as equal in number as possible, with each
director serving a three year term. Unless otherwise indicated, the principal
occupation listed has been each director's principal occupation for the past
five years.

Name Age Principal Occupation
---- --- --------------------

Class II, Term Expires April, 1997

Reginald D. Haysbert 48 Director of the Company since 1992; Director of
the Bank since 1989; Vice President, H. G. Parks,
Inc. (meat packing company).

Nathaniel Higgs 65 Director of the Company since 1992; Director of
the Bank since 1981; Pastor, Southern Baptist
Church.

Delores G. Kelley 59 Director of the Company since 1992; Director of
the Bank since 1980; Senator, Maryland State
Senate.

Erich March 44 Director of the Company since 1992; Director of
the Bank since 1981; Vice President, March Funeral
Homes, Inc.(1)

Class III, Term Expires April, 1998

Stephen A. Geppi 46 Director of the Company since 1996; Director of
the Bank since 1996; President and Chief Executive
Officer of Diamond Comic Distributors, Inc. (comic
book distributor).

John Paterakis 67 Director and Chairman of the Executive Committee
of the Company since 1992; Director and Chairman
of the Executive Committee of the Bank since 1982;
President and Chief Executive Officer, H & S
Bakery, Inc. and Northeast Foods, Inc.

Edward St. John 57 Director of the Company since 1992; Director of
the Bank since 1990; President and Chief Executive
Officer, M.I.E. Investment Company (real estate
development).

Ronald Scott 71 Director of the Company since 1992; Director of
the Bank since 1982; retired, Baltimore Post
Office.

George F. Vaeth, Jr. 62 Director of the Company since 1992; Director of
the Bank since 1981; Secretary of the Company
since 1992 and of the Bank since 1982; President,
George Vaeth Associates, Inc. (architects).(1)

<PAGE>

Class I, Term Expires April, 199

J. P. Blase Cooke 49 Director of the Company since 1992; Director of
the Bank since 1985; Chairman and President,
Harkins Builders, Inc. (construction).(1)

James H
DeGraffenreidt, Jr. 42 Director of the Company since 1996; Director of
the Bank since 1996; President and Chief Operating
Officer of Washington Gas Light Company (natural
gas distributor).

Joe Louis Gladney 61 Director of the Company since 1992; Director of
the Bank since 1982; President, Gladney
Transportation & Oil Company (heating oil sales
and bus transportation).

Louis J. Grasmick 72 Director of the Company since 1992; Director of
the Bank since 1982; Chief Executive Officer,
Grasmick Lumber Company, Inc.

Sachinder Gupta 51 Director of the Company since 1992; Director of
the Bank since 1989; President, Earth Engineering
Sciences (engineering company).(1)

Joseph Haskins, Jr. 48 Director of the Company since 1992; Director of
the Bank since 1980; President and Chief Executive
Officer of the Company since 1992 and of the Bank
since 1986; Chairman of the Board of the Company
and the Bank since April, 1995.(1)

(1) Member of the Audit Committee of the Bank.

<PAGE>

Executive Officers

The following information is supplied with respect to executive
officers of the Company. Each such officer serves at the pleasure of the Board
and is appointed annually. Except as noted, each person's principal occupation
for at least the past five years has been to serve as an officer of the
organization named below.

Name Age Position with the Company and the Bank
---- --- --------------------------------------

Teodoro J. Hernandez 51 Treasurer of the Company since 1992 and Vice
President and Cashier of the Bank since 1982.

Sheila R. Lawson 39 Vice President/Lending of the Bank.

Samuel J. Deal 44 Vice President/Branch Operations of the Bank.

Stock Ownership of Directors and Executive Officers

The following table lists the number of shares of Common Stock of the
Company beneficially owned by directors and executive officers of the Company,
directly or indirectly, as of April 25, 1996. Unless otherwise indicated, the
individuals named below have sole voting and investment power over all shares
beneficially owned by them. There are no persons known by the Company to own
beneficially, directly or indirectly, more than 5% of the Common Stock of the
Company except as shown below. The business address for each individual is The
Harbor Bank of Maryland, 25 West Fayette Street, Baltimore, Maryland 21201.
<TABLE>
<CAPTION>

Total shares Percent of
Name beneficially owned class
---------------------- ------------

<S> <C> <C>
J. P. Blase Cooke ...................................... 5,096(1) 1.18
James H. DeGraffenreidt, Jr............................. 2,425(1) .56
Stephen A. Geppi........................................ 2,000(1) .46
Joe Louis Gladney....................................... 32,554(1) 7.56
Louis J. Grasmick....................................... 7,933(2) 1.83
Sachinder Gupta......................................... 12,454(3) 2.88
Joseph Haskins, Jr...................................... 45,530(4) 10.11
Reginald D. Haysbert.................................... 3,308(1) .77
Nathaniel Higgs......................................... 4,112(5) .96
Delores G. Kelley....................................... 10,393(6) 2.37
Erich March............................................. 17,267(7) 4.01
John Paterakis.......................................... 25,539(8) 5.44
Edward St. John......................................... 8,000(1) 1.86
Ronald Scott............................................ 2,570(9) .60
George F. Vaeth, Jr..................................... 11,374(3) 2.63

Beneficial ownership of Common Stock of all directors and
executive officers as a group (18 persons).............. 195,055(10) 39.61%
</TABLE>

<PAGE>
_________________

(1) Includes currently exercisable options to purchase 2,000 shares.

(2) Includes 3,627 shares owned jointly by Mr. Grasmick and his son and
currently exercisable options to purchase 4,000 shares.

(3) Includes currently exercisable options to purchase 4,000 shares.

(4) Includes 14,850 shares owned jointly by Joseph and Cassandra Haskins and
currently exercisable options to purchase 22,000 shares.

(5) Includes 1,962 shares owned jointly by Reverend Higgs and his wife and
currently exercisable options to purchase 2,000 shares. Does not include
11,340 shares owned by a religious organization which Reverend Higgs has
the power to vote.

(6) Includes 603 shares owned by Mrs. Kelley and her husband and currently
exercisable options to purchase 4,000 shares.

(7) Includes 15,042 shares owned by a Company controlled by Mr. March and
currently exercisable options to purchase 2,000 shares.

(8) Includes 12,000 shares owned by two companies controlled by Mr. Paterakis
and currently exercisable options to purchase 4,000 shares.

(9) Includes currently exercisable options to purchase 2,000 shares. Does not
include 16,632 shares owned by a fraternal organization to which Mr. Scott
has the power to vote.

(10) Includes currently exercisable options to purchase 64,000 shares held by
all executive officers and directors, as a group. The grant of 44,500 of
these options is conditioned upon the successful completion of the Common
Stock Offering of the Company now in progress.

Compensation of Directors and Executive Officers

The following table shows the compensation paid to the chief executive
officer of the Company for the three years ended December 31, 1995, 1994, and
1993. No other executive officer received total annual salary and bonus in
excess of $100,000 during such period.
<TABLE>
<CAPTION>

Long-term
Annual compensation compensation
-------------------------------------------------- ----------------
Other annual Number of All other
Name and position Year Salary Bonus(1) compensation(2) options granted compensation(4)
------------------- ------ ------- --------- ---------------- ---------------- ---------------

Joseph Haskins, Jr. 1995 $132,500 $32,000 $ -- 4,000 $6,626
Chairman, President and CEO 1994 115,500 63,100 -- 1,000 5,602
1993 111,800 29,407 -- 3,000(3) 5,041

</TABLE>

(1) Bonus paid pursuant to terms of Employment Agreement.
(2) Other annual compensation did not exceed 10% of salary and bonus.
(3) Represents replacement options granted to replace options previously
granted by the Bank prior to the formation of the Company.
(4) Represents $2,000 annual contribution to an individual retirement account
and the excess, if any, represents the Company's matching contribution to
its 401(k) Profit Sharing Plan.

The Company has adopted the 1992 Stock Option Plan (the "1992 Plan"),
pursuant to which it has reserved 30,000 shares of its Common Stock for the
issuance of options. The Company granted 4,000 stock options to Mr. Haskins in
1995. The following table sets forth information regarding this stock option
grant.
<TABLE>
<CAPTION>

Number of shares Percent of total
underlying options options Exercise price
Name granted(1) granted to employees per share Expiration date
in 1995
------ --------------------- ------------------------ ---------------------- -----------------

Joseph Haskins, Jr. 4,000 8.89% $15.00 9/5/05
Chairman, President and CEO
</TABLE>

__________

(1) The grant of the options is conditioned upon the successful completion of
the Common Stock Offering of the Company now in progress.

<PAGE>

The following table sets forth the aggregated option exercises in 1995 and the
option values at December 31, 1995, based upon a market value for the Company's
Common Stock of $15.00 per share.
<TABLE>
<CAPTION>

Number of shares
underlying Value of unexercised
Number of shares unexercised options in-the-money options
Name acquired on Value realized at December 31, at December 31, 1995
exercise 1995(1)
------ ------------------- --------------- ----------------------- ----------------------

Joseph Haskins, Jr.
Chairman, President and CEO -- $ -- 11,000 $92,400
3,000 20,010
3,000 21,000
1,000 5,000
4,000 --

</TABLE>

___________

(1) Currently exercisable options. The grant of the option for 4,000 shares is
conditioned upon the successful completion of the Common Stock Offering of
the Company now in progress.

Compensation of Directors

Directors of the Company do not receive a fee for attending meetings of
the Board of Directors or committees thereof. Directors of the Bank receive a
fee of $200 for each board meeting attended ($300 if the director is a member of
the Bank's executive committee), but do not receive a fee for attendance at
committee meetings. Total fees paid to directors of the Bank during 1995 were
$32,400. Directors who are not employed by the Company or the Bank are permitted
to elect whether to receive their fees in the form of cash or in the form of
options to purchase Common Stock of the Company under the 1995 Director Stock
Option Plan which has been approved by stockholders. The exercise prices of the
options will equal the market price of the Common Stock on the date of grant. On
September 5, 1995 each member of the Board of Directors who was a member of the
Executive Committee received options to purchase 4,000 shares of Common Stock of
the Company, and each other director received options to purchase 2,000 shares
of Common Stock of the Company. The option price for all of these options was
$15.00 per share, and the options will expire on September 5, 2005. The grants
of the options are conditioned upon the successful completion of the Company's
Common Stock Offering now in progress.

Employment Agreement

The Company entered an Employment Agreement with Joseph Haskins, Jr.
(the "Employment Agreement") which, as amended effective January 1, 1996,
provides that Mr. Haskins will be employed by the Company until the earlier of
(a) the close of business on Mr. Haskins' 65th birthday, (b) the date three
years after either the Company or Mr. Haskins gives written notice of
termination, or (c) the date on which Mr. Haskins' employment is otherwise
terminated pursuant to the provisions of the Employment Agreement. The
Employment Agreement provides that Mr. Haskins will serve as Chairman of the
Board, President and Chief Executive Officer of the Company at an annual salary
of not less than (i) $150,000 for 1996, (ii) $157,500 for 1997, (iii) $165,375
for 1998, and (iv) any subsequently established higher annual base salary for
subsequent years during the terms of the Employment Agreement. The Employment
Agreement provides for a bonus for the prior year if the Company's net income
for the prior year is greater than $400,000. The amount of the bonus will be
equal to the sum of (i) 2% of the Company's aggregate income before income
taxes, plus (ii) the Company's aggregate depreciation amount, plus (iii) the
Company's aggregate amortization of goodwill amount, plus (iv) the Company's
aggregate amortization of securities purchased at a premium, plus (v) the
Company's aggregate interest amount on Resolution Trust Company debt. The bonus
amount may not exceed 100% of Mr. Haskins' annual combined base salary then in
effect. In addition to those benefit programs, plans, and arrangements of the
Company generally available to its employees, the Employment Agreement provides
that Mr. Haskins will receive medical insurance, long-term disability insurance,
life insurance, a self-directed individual retirement account funded with an
annual contribution of $2,000, and the use of an automobile. If Mr. Haskins'
employment is terminated for reasons other than death, total disability or
"cause" as defined in the Employment Agreement, the Company is required to pay
within 60 days after such termination, a lump sum equal to: (i) six months of
his annual combined base salary at the rate in effect immediately prior to the

<PAGE>

date of termination; plus (ii) a bonus that shall be equal to (X) the average
bonus percentage of combined base salary paid to Mr. Haskins during the three
years prior to the year in which the termination occurs, multiplied by (Y) the
six months salary amount described above; plus (iii) six months of medical
insurance premiums for him and his family at the level of coverage existing at
the time of termination. In addition, Mr. Haskins shall be entitled to keep his
then-current company automobile.

Transactions with Directors, Executive Officers and Affiliates

During the past year the Bank has had loan transactions in the ordinary
course of its banking business with directors and executive officers of the
Company and with their affiliates. Loans to such persons were made in the
ordinary course of business and did not and do not currently involve more than
the normal risk of collectibility or present other unfavorable features. All
such loans were made on substantially the same terms, including interest rates
and collateral requirements, as those prevailing at the time for comparable
transactions with non-affiliates. The Bank expects to enter into such
transactions in the future. As of December 31, 1995, loans to directors and
executive officers of the Company, and their affiliates, including loans
guaranteed by such persons and unfunded commitments made in 1995, aggregated
$1.7 million, or approximately 24.5% of tangible stockholders' equity of the
Company.

DESCRIPTION OF CAPITAL STOCK

The following description of the particular terms of the Common Stock
offered hereby does not purport to be complete and is qualified in its entirety
by the Company's Charter creating the Common Stock, the form of which has been
filed as an exhibit to the Registration Statement.

General

The shares of Common Stock offered hereby are not savings accounts,
deposits or other obligations of any bank or nonbank subsidiary of the Company
and are not insured by the Federal Deposit Insurance Corporation or any other
government agency.

Under the Company's Charter, the Company is authorized to issue
10,000,000 shares of Common Stock (par value $.01 per share) and the Board of
Directors is authorized to classify and reclassify unissued shares of Common
Stock into Preferred Stock and to divide such Preferred Stock into classes and
series thereof. The Board of Directors may classify and reclassify any unissued
shares of Common Stock by setting or changing in any one or more respects the
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications, or terms or conditions of
redemption of shares of stock.

American Stock Transfer & Trust Company, New York, New York is the
Registrar and Transfer Agent for the Common Stock.

A holder of Common Stock has one vote for each share held by him on all
matters submitted to a vote of stockholders and, subject to the voting rights,
if any, of any outstanding Preferred Stock, the exclusive voting power for all
purposes is vested in the holders of the Common Stock. Holders of Common Stock
do not have the right of cumulative voting in connection with the election of
directors. The Common Stock has no conversion rights and is not subject to
redemption. A stockholder of the Company has no preemptive rights to subscribe
for additional shares of stock or other securities of the Company except as may
be granted by the Board of Directors.

Subject to the rights of holders of any outstanding Preferred Stock,
the holders of Common Stock of the Company are entitled to receive, pro rata,
dividends when, as and if declared by the Board of Directors from funds legally
available therefor. The ability of the Company to pay dividends to its
stockholders is limited primarily by the ability of the Bank to pay dividends to
the Company. In the event of any liquidation, dissolution or winding up of the
Company, after payment or providing for the payment of all liabilities and
amounts due the holders of any outstanding Preferred Stock, the holders of
Common Stock are entitled to share ratably in all the remaining assets.

<PAGE>

All of the outstanding shares of Common Stock are, and the shares of
Common Stock offered hereby will be, validly issued, fully paid and
nonassessable.

CERTAIN PROVISIONS OF LAW
AND OF THE COMPANY'S CHARTER AND BY-LAWS

The following paragraphs summarize certain provisions of Maryland
General Company Law ("MGCL") and the Company's Charter and By-Laws. The summary
does not purport to be complete and is subject to and qualified in its entirety
by reference to Maryland law and the Company's Charter and By-Laws for complete
information.

Board of Directors

The Company's Charter provides that the number of directors of the
Company shall be 14 and thereafter may be increased or decreased pursuant to the
By-Laws of the Company, but shall never be less than the minimum number
permitted by the MGCL. The members of the Board of Directors of the Company are
identical to the members of the Board of Directors of the Bank. The Charter of
the Company has classified the Board of Directors into three classes of roughly
equal size which will serve for three year terms, with one class being elected
each year. Either a majority vote of the stockholders of the Company or a
majority vote of the Board of Directors then in office may elect a successor to
fill a vacancy on the Board of Directors. Any directors so chosen by the
stockholders shall hold office for the balance of the term then remaining. Any
directors so chosen by the remaining directors shall hold office until the next
annual meeting, at which time the stockholders shall elect a director to hold
office for the balance of the term then remaining.

Removal of Directors

The Charter of the Company provides that a director may be removed only
for cause and then only by the affirmative vote of at least 80% of the votes
entitled to be cast in the election of directors. If a stockholder were to
obtain 80% of the shares of Common Stock of the Company outstanding, he would be
able to repeal this provision, remove all the current directors and elect ones
of his choice. If a stockholder were to obtain 50% or more, but less than 80%,
of the shares of Common Stock of the Company outstanding, because of the
structure of the Board of Directors of the Company, he would be unable to elect
a majority of the Board of Directors until the second annual meeting of
stockholders after his acquisition.

Advance Notice of Director Nominations and New Business

The Charter of the Company provides that nominations for the election
of directors and proposals for any new business to be taken up at any annual or
special meeting of stockholders may be made by the Board of Directors of the
Company or by any stockholder of the Company entitled to vote generally in the
election of directors; however, for a stockholder of the Company to make any
such nominations and/or proposals, he or she must usually provide written notice
to the Secretary of the Company between 30 days and 60 days prior to the
meeting. Each such notice given by a stockholder with respect to nominations for
the election of directors shall set forth (a) the name, age, business address
and, if known, residence address of each nominee proposed in such notice, (b)
the principal occupation or employment of each such nominee, (c) the number of
shares of stock of the Company which are beneficially owned by each such
nominee, (d) such other information as would be required to be included in a
proxy statement soliciting proxies for the election of the proposed nominee
pursuant to Regulation 14A of the Exchange Act including, without limitation,
such person's written consent to be named in the proxy statement as a nominee
and to serve as a director, if elected, and (e) as to the stockholder giving
such notice, his name and address as they appear on the Company's books and the
class and number of shares of the Company which are beneficially owned by such
stockholder. In addition, the stockholder making such nomination shall promptly
provide any other information reasonably requested by the Company. Each such
notice given by a stockholder to the Secretary with respect to business
proposals to bring before a meeting shall set forth in writing as to each
matter: (a) a brief description of the business desired to be brought before the

<PAGE>

meeting and the reasons for conducting such business at the meeting; (b) the
name and address, as they appear on the Company's books, of the stockholder
proposing such business; (c) the class and number of shares of the Company which
are beneficially owned by the stockholder; and (d) any material interest of the
stockholder in such business.

Limited Liability and Indemnification of Directors and Officers of the Company

As permitted by the MGCL, the Company has Charter provisions limiting
the personal liability of directors and officers for money damages to the
fullest extent permitted by Maryland law except that such Charter provisions do
not limit liability (a) for, and to the extent of, actual receipt of an improper
benefit in money, property or services or (b) in respect of any adjudication
based upon a finding of active and deliberate dishonesty which was material to
the cause of action adjudicated. The Charter provisions do not affect potential
liability of directors and officers to third parties, such as creditors of the
Company or the Bank, nor in the case of the Bank, affect the right of a state
government entity, receiver, conservator or depositor to sue a director or
officer of the Bank for money damages.

As permitted by the MGCL, the Company's Charter obligates the Company
to indemnify its directors and officers and to pay or reimburse expenses for
such individuals in advance of the final disposition of a proceeding to the
maximum extent permitted by Maryland law. The MGCL permits a Company to
indemnify its directors and officers, among others, against judgments,
penalties, fines, settlements and reasonable expenses actually incurred by them
in connection with any proceeding to which they may be made a party by reason of
their service in those or other capacities, unless it is established that (a)
the act or omission of the director or officer was material to the matter giving
rise to such proceeding and (i) was committed in bad faith or (ii) was the
result of active and deliberate dishonesty, (b) the director or officer actually
received an improper personal benefit in money, property or services, or (c) in
the case of any criminal proceeding, the director or officer had reasonable
cause to believe that the action or omission was unlawful. The By-Laws implement
the provisions relating to indemnification contained in the Charter.

Amendments to Charter and Other Charter Provisions

The Charter of the Company may be amended only by the affirmative vote
of the holders of not less than a majority of all of the votes entitled to be
cast on the matter, except an 80% vote is required to amend the Charter (i) to
make certain changes relating to the Board of Directors, (ii) to limit
stockholder proposals and nominations and (iii) to make changes to provisions
relating to limitations of liability and indemnification. The Charter provisions
relating to limitations of liability and indemnification may only be amended
prospectively.

The Charter of the Company directs the Board of Directors, in
connection with the exercise of its business judgment when evaluating a
transaction which may involve a change in control of the Company, to give
consideration to all relevant factors, including the immediate and long-term
economic effects on the Company and its stockholders; the social and economic
effects on employees, depositors and other constituents of the Company; the
historical and current operating results or financial condition of the Company;
whether a more favorable price could be obtained in the future; the reputation
and business practices of the other party; an estimate of the future value of
securities of the Company; and any antitrust or other legal or regulatory issues
raised by the transaction. The Charter of the Company authorizes the Board of
Directors to employ a broad range of defensive measures to defeat an offer they
believe should be opposed.

Business Combinations

The MGCL prohibits certain "business combinations" (including a merger,
consolidation, share exchange, or, in certain circumstances, an asset transfer
or issuance or reclassification of equity securities) between a Maryland company
and an "Interested Stockholder." Interested Stockholders are all persons (i) who
beneficially own 10% or more of the voting power of the company's shares or (ii)
an affiliate or associate of the company who, at any time within the two-year
period prior to the date in question, was an Interested Stockholder or an
affiliate or an associate thereof. Such business combinations are prohibited for
five years after the most recent date on which the Interested Stockholder became
an Interested Stockholder. Thereafter, any such business combination must be
recommended by the board of directors of such company and approved by the
affirmative vote of at least (a) 80% of the votes entitled to be cast by all

<PAGE>

holders of voting shares of the company, and (b) 66 2/3% of the votes entitled
to be cast by all holders of voting shares of the company other than voting
shares held by the Interested Stockholder or an affiliate or associate of the
Interested Stockholder, with whom the business combination is to be effected,
unless, among other things, the company's stockholders receive a minimum price
(as defined in the MGCL) for their shares and the consideration is received in
cash or in the same form as previously paid by the Interested Stockholder for
its shares. These provisions of Maryland law do not apply, however, to business
combinations that are approved or exempted by the board of directors of the
company prior to the time that the Interested Stockholder becomes an Interested
Stockholder. A Maryland company may adopt an amendment to its charter electing
not to be subject to the special voting requirements of the foregoing
legislation. Any such amendment would have to be approved by the affirmative
vote of at least 80% of the votes entitled to be cast by all holders of
outstanding shares of voting stock and 66 2/3% of the votes entitled to be cast
by holders of outstanding shares of voting stock who are not Interested
Stockholders. The Company has not adopted such an amendment to its Charter.

Control Share Acquisitions

The MGCL provides the "control shares" of a Maryland company acquired
in a "control share acquisition" have no voting rights except to the extent
approved by a vote of two-thirds of the votes entitled to be cast on the matter,
excluding shares of stock owned by the acquiror or by officers or directors who
are employees of the company. Control shares are voting shares of stock which,
if aggregated with all other shares of stock previously acquired by such a
person, would entitle the acquiror to exercise voting power in electing
directors within one of the following ranges of voting power: (i) 20% or more
but less than 33 1/3%; (ii) 33 1/3% or more but less than a majority; or (iii) a
majority of all voting power. Control Shares do not include shares of stock an
acquiring person is entitled to vote as a result of having previously obtained
stockholder approval. A control share acquisition means, subject to certain
exceptions, the acquisition of, ownership of or the power to direct the exercise
of voting power with respect to, control shares.

A person who has made or proposes to make a "control share
acquisition," upon satisfaction of certain conditions (including an undertaking
to pay expenses), may compel the board of directors to call a special meeting of
stockholders to be held within 50 days of demand therefore to consider the
voting rights of the shares. If no request for a meeting is made, the company
may itself present the question at any stockholders' meeting.

If voting rights are not approved at the meeting or if the acquiring
person does not deliver an acquiring person statement as permitted by the
statute, then, subject to certain conditions and limitations, the company may
redeem any or all of the control shares (except those for which voting rights
have previously been approved) for fair value determined, without regard to
voting rights, as of the date of the last control share acquisition or of any
meeting of stockholders at which the voting rights of such shares are considered
and not approved. If voting rights for "control shares" are approved at a
stockholders' meeting and the acquiror becomes entitled to vote a majority of
the shares entitled to vote, all other stockholders may exercise appraisal
rights. The fair value of the stock as determined for purposes of such appraisal
rights may not be less than the highest price per share paid in the control
share acquisition, and certain limitations and restrictions otherwise applicable
to the exercise of dissenters' rights do not apply in the context of a "control
share acquisition."

The control share acquisition statute does not apply to stock acquired in a
merger, consolidation or stock exchange if the company is a party to the
transaction, or to acquisitions previously approved or exempted by a provision
in the Charter or By-Laws of the company. There are no such provisions in the
Charter or By-Laws of the Company.

State and Federal Banking Regulations

The Maryland Financial Institutions Law requires approval of the
Maryland Bank Commissioner for any company to become an affiliate of a banking
institution. The term "affiliate" is defined to include a company which will
control, directly or indirectly, a Maryland banking institution. The Maryland
Attorney General has opined that only the Maryland banking institution may make
the application to have an affiliate. The effect of the statute is to require

<PAGE>

companies seeking to become affiliates of Maryland banking institutions to
obtain the approval of the Maryland banking institution so that the application
may be made.

Under the BHC Act and the regulations promulgated thereunder by the
Federal Reserve Board, no company may acquire "control" of institutions such as
the Company without the prior approval of the Federal Reserve Board. The
ownership of, control of, holding with power to vote of or holding proxies
representing 25% or more of any class of voting securities is presumed to be a
"controlling" interest under the BHC Act, and, depending upon the circumstances,
control may be found to exist below this level of ownership. Any company
acquiring such control would become a bank holding company, would be subject to
certain limitations and prohibitions on its operations, and would become subject
to registration, examination and regulation by the Federal Reserve Board. The
Federal Reserve Board may withhold approval of an application to become a bank
holding company on certain specified grounds.

The Federal Reserve Board has adopted a regulation to the Change in
Bank Control Act of 1978 which generally requires persons (except for companies
subject to the corresponding provisions of the BHC Act) who intend to acquire
control of the Company to give 60 days prior written notice to the Federal
Reserve Board. Control for the purpose of the regulation is presumed in
situations in which the acquiring party has voting control of at least 25% of
any class of the institution's voting stock or the power to direct the
management or policies of the institution. Control is presumed to exist when the
acquiring party has voting control of at least 10% of any class of the
institution's voting stock if (a) the institution's shares are registered
pursuant to Section 12 of the Exchange Act, or (b) the acquiring party would be
the largest stockholder of the institution. The statute and related regulations
authorize the Federal Reserve Board to disapprove the proposed transaction on
certain specified grounds.

Anti-Takeover Effect

The statutory, regulatory, Charter and Bylaw provisions mentioned
above, may make it more difficult and time consuming to change majority control
of the Board of Directors of the Company and thus reduce the vulnerability of
the Company to an unsolicited proposal for the takeover of the Company. In some
circumstances, certain stockholders may consider these provisions to have
disadvantageous effects. Takeover offers are frequently made at prices above the
market price of the target company's stock. In addition, acquisitions of stock
by persons attempting to acquire control through market purchases may cause the
market price of the target company's stock to reach levels that are higher than
would otherwise be the case. The Company's Charter and Bylaw provisions, as well
as the statutory and regulatory provisions mentioned above, may discourage any
such acquisitions, even though such acquisitions might be beneficial to the
Company or its stockholders. Accordingly, stockholders could be deprived of the
opportunity to sell their stock at prices in excess of current market prices
which often prevail as the result of such occurrences.

LEGAL OPINIONS

The validity of the Common Stock and certain other legal matters will
be passed on for the Company by Piper & Marbury L.L.P., of Baltimore, Maryland.

EXPERTS

The consolidated financial statements of Harbor Bankshares Corporation
as of December 31, 1995 and 1994 and for the years then ended, appearing in this
Prospectus and Registration Statement have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon appearing elsewhere
herein and in the Registration Statement, and are included in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.

<PAGE>

HARBOR BANKSHARES CORPORATION AND SUBSIDIARY

Index to Financial Statements

Financial Statements as of December 31, 1994 and 1995 and March 31, 1996
Report of Independent Auditors........................................... F-2
Consolidated Statements of Condition..................................... F-3
Consolidated Statements of Income........................................ F-4
Consolidated Statements of Changes in Stockholders' Equity............... F-5
Consolidated Statements of Cash Flows.................................... F-6
Notes to Consolidated Financial Statements............................... F-7

<PAGE>

REPORT OF INDEPENDENT AUDITORS

To the Stockholders and the Board of Directors
Harbor Bankshares Corporation

We have audited the accompanying consolidated statements of condition
of Harbor Bankshares Corporation and subsidiary as of December 31, 1995 and 1994
and the related consolidated statements of income, stockholders' equity and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Harbor
Bankshares Corporation and subsidiary at December 31, 1995 and 1994 and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.

As described in Note 1 to the financial statements, effective January
1, 1994, the Company changed its method of accounting for investments.

ERNST & YOUNG LLP

Baltimore, Maryland
February 23, 1996

<PAGE>

Consolidated Statements of Condition
<TABLE>
<CAPTION>

December 31, March 31,
----------------------------
1994 1995 1996
------ ------ ----------
(unaudited)
<S> <C> <C> <C>
Assets
Cash and due from banks................................................ $ 2,134,402 $ 6,682,427 $ 4,023,037
Federal funds sold..................................................... 17,022,915 4,308,285 1,776,845
Interest bearing deposits in other banks............................... 8,790,252 7,517,733 7,689,234
Investment securities:
Held to maturity (market value $11,280,570 in 1994, $9,653,542 in
1995 and 13,852,835 in March 1996) ................................. 11,520,292 9,437,205 14,014,568
Available for sale.................................................. 2,260,409 1,460,861 1,588,550
------------- -------------- --------------
Total investment securities ........................................... 13,780,701 10,898,066 15,603,118

Loans.................................................................. 58,444,346 78,238,442 80,335,036
Unearned income........................................................ (143,323) (129,754) (134,430)
Reserve for possible loan losses....................................... (658,386) (816,853) (853,220)
------------- -------------- --------------
Net loans.............................................................. 57,642,637 77,291,835 79,347,386
Property and equipment--net............................................ 477,771 805,669 836,696
Intangible assets-net.................................................. 4,825,130 4,493,858 4,411,040
Accrued interest receivable ........................................... 995,633 775,911 939,802
Other assets........................................................... 370,423 542,516 714,520
------------- ------------- --------------
Total assets........................................................... $106,039,864 $113,316,300 $115,341,678
============= ============== ==============

Liabilities and stockholders' equity
Liabilities:
Deposits:
Noninterest bearing demand.......................................... $ 8,706,878 $ 12,682,591 $ 9,866,645
Interest bearing transaction accounts............................... 17,484,848 15,337,116 18,660,076
Savings............................................................. 37,170,818 34,139,846 34,067,545
Time, $100,000 or more.............................................. 8,748,923 11,348,015 11,714,968
Other time.......................................................... 22,614,641 27,590,556 28,691,303
------------- -------------- --------------
Total deposits......................................................... 94,726,108 101,098,124 103,000,537
Accrued interest payable .............................................. 347,496 639,541 587,303
Notes payable.......................................................... 5,795,547 5,795,547 5,795,547
Federal fund purchased................................................. -- -- --
Other liabilities...................................................... 111,718 141,256 261,777
------------- -------------- --------------
Total liabilities...................................................... 100,980,869 107,674,468 109,645,164

Stockholders' equity:
Common stock--par value $.01 per share: authorized 10,000,000 shares,
issued and outstanding 428,488 and 429,709 shares at December 31,
1995 and 1994 respectively.......................................... 4,297 4,285 4,285
Capital surplus........................................................ 2,860,297 2,829,026 2,829,026
Retained earnings...................................................... 2,203,429 2,796,918 2,855,653
Net unrealized gain (loss) on investment securities available for sale, (9,028) 11,603 7,550
net of taxes........................................................
------------- -------------- --------------
Total stockholders' equity............................................. 5,058,995 5,641,832 5,696,514
------------- -------------- --------------
Total liabilities and stockholders' equity............................. $106,039,864 $113,316,300 $115,341,678
============= ============== ==============

See accompanying notes.
</TABLE>

<PAGE>

HARBOR BANKSHARES CORPORATON AND SUBSIDIARY

Consolidated Statements of Income

Three months ended
December 31, March 31,
-------------------------- ---------------------------
------
1994 1995 1995 1996
------ ------ ----- ------
(unaudited)
<S> <C> <C> <C> <C>
Interest income
Interest and fees on loans................................ $ 4,533,975 $ 7,161,412 $ 1,515,580 $1,846,553
Interest on other investments - taxable................... 557,588 597,379 171,303 188,356
Interest on deposits in other banks....................... 508,113 431,602 114,209 109,280
Interest on federal funds sold............................ 937,193 300,152 156,664 64,763
------------ ----------- ------------- ------------
Total interest income..................................... 6,536,869 8,490,545 1,957,756 2,208,952

Interest expense
Interest bearing transaction accounts..................... 359,960 383,347 137,903 114,010
Savings................................................... 1,025,994 1,470,806 234,353 275,161
Time, $100,000 or more.................................... 288,650 463,330 103,331 137,994
Notes payable............................................. 123,558 900,462 83,599 80,194
Federal fund purchased.................................... -- 334,778 -- --
Other time................................................ 727,445 78,349 269,838 388,408
------------ ----------- ------------- ------------
Total interest expense.................................... 2,525,607 3,631,072 829,024 995,767
----------- ----------- ------------- ------------
Net interest income....................................... 4,011,262 4,859,473 1,128,732 1,213,185
Provision for possible loan losses........................ 248,000 183,337 50,000 30,000
----------- ----------- ------------- ------------
Net interest income after provision for possible loan losses 3,763,262 4,676,136 1,078,732 1,183,185

Other operating income
Service charges on deposit accounts....................... 464,303 490,842 125,153 127,479
Other service charges..................................... 98,347 92,955 28,767 20,410
Investment security gains................................. -- -- -- --
Gain on sales of loans.................................... 218,329 -- -- --
Other income.............................................. 5,370 51,559 141 1,056
----------- ----------- ------------- ------------
786,349 635,356 154,061 148,945

Other operating expenses
Salaries and employee benefits............................ 1,550,403 1,902,807 443,951 509,904
Occupancy expense of premises............................. 356,431 433,764 102,173 122,030
Data processing fees...................................... 267,192 338,077 71,914 84,529
Equipment expense......................................... 122,371 201,249 44,305 54,969
FDIC insurance............................................ 147,381 165,991 57,175 16,756
Stationery and supplies................................... 94,479 138,895 31,303 46,229
Audit and tax professional fees........................... 95,982 99,032 23,616 25,473
Postage................................................... 65,823 64,038 15,778 17,305
Courier transportation.................................... 61,016 68,972 17,813 18,084
Goodwill amortization..................................... 143,970 331,272 82,818 82,018
Other expense............................................. 649,004 437,160 90,250 115,131
----------- ----------- ------------- ------------
3,554,052 4,181,257 981,096 1,092,428
----------- ----------- ------------- ------------
Income before income taxes................................ 995,559 1,130,235 251,697 239,702
Applicable income taxes................................... 370,449 450,804 101,501 95,270
---------- ----------- ------------- ------------
Net income................................................ $ 625,110 $ 679,431 150,196 144,432
=========== =========== ============= ============

Net income per share...................................... $ 1.46 $ 1.59 $ .35 $ .34
=========== =========== ============= ============

See accompanying notes.
</TABLE>

<PAGE>
HARBOR BANKSHARES CORPORATION AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders' Equity
<TABLE>
<CAPTION>

Common Capital Retained Unrealized Stockholders'
Stock Surplus Earnings Gain (Loss) Equity
--------- --------- ----------- ------------ --------------

<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993...................... $4,261 $2,836,309 $1,638,224 $ -- $4,478,794
Adjustment to beginning balance for change in
accounting method, net of income taxes of $7,801 -- -- -- 12,399 12,399
Net income for the year........................... -- -- 625,110 -- 625,110
Exercise of stock options......................... 36 23,988 -- -- 24,024
Cash dividends - $.14 per share................... -- -- (59,905) -- (59,905)
Net unrealized loss on investment securities
available for sale, net of income tax
benefit of $13,481. -- -- -- (21,427) (21,427)
-------- ----------- ---------- ---------- ------------

Balance at December 31, 1994...................... 4,297 2,860,297 2,203,429 (9,028) 5,058,995
Net income for the year........................... -- -- 679,431 -- 679,431
Exercise of stock options......................... 30 24,970 -- -- 25,000
Cash dividends - $.20 per share................... -- -- (85,942) -- (85,942)
Retirement of treasury stock...................... (42) (56,241) -- -- (56,283)
Net unrealized gain on investment securities
available for sale, net of income taxes of $11,230 -- -- -- 20,631 20,631
-------- ----------- ----------- --------- ------------

Balance at December 31, 1995...................... 4,285 2,829,026 2,796,918 11,603 5,641,832
Net income for the period (unaudited)............. -- -- 144,432 -- 144,432
Cash dividends - $.20 per share (unaudited)....... -- -- (85,697) -- (85,697)
Net unrealized loss on investment securities
available for sale, net of income tax benefit -- -- -- (4,053) (4,053)
of $2,590 (unaudited) ======== =========== =========== ========= ============

Balance at March 31, 1996 (unaudited)............. $4,285 $2,829,026 $ 2,855,653 $ 7,550 $5,696,514
======== ========== ============ ========= ============

See accompanying notes.
</TABLE>

<PAGE>

HARBOR BANKSHARES CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>

Three months ended
Years ended December 31, March 31,
--------------------------- -----------------------------
------
1994 1995 1995 1996
------------ ------ ------ ------
(unaudited)
<S> <C> <C> <C> <C>
Operating activities
Net income.............................................. $ 625,110 $ 679,431 $ 150,195 $ 144,432
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for possible loan losses................... 248,000 183,337 50,000 30,000
Depreciation and amortization........................ 319,993 537,681 115,154 139,226
Securities gains..................................... -- -- -- --
Gains on sales of loans.............................. (218,329) -- -- --
(Increase) decrease in interest receivable and other (568,095) 47,629 33,601 (461,577)
assets.............................................
Increase (decrease) in interest payable and other 64,942 321,583 52,330 241,998
liabilities........................................ ------------- ------------- ------------ -------------
Net cash provided by operating activities............... 471,621 1,769,661 401,280 94,079
Investing activities
Net decrease (increase) in deposits at other banks...... 933,257 1,272,519 478,000 (171,501)
Purchases of investment securities held to maturity..... (5,872,816) (7,947,964) (174,149) (5,578,000)
Purchases of investment securities available for sale... (986,880) (165,857) -- (127,052)
Proceeds from maturities of investment securities held to
maturity................................................ 1,000,000 10,000,000 1,000,000 1,000,000
Proceeds from maturities of investment securities 1,000,000 1,000,000 -- --
available for sale......................................
Purchase of branches.................................... (4,969,100) -- -- --
Purchase of loans....................................... (32,340,441) (17,319,820) (17,319,820) --
Other increase in loans................................. (5,273,641) (2,506,881) (459,068) (2,055,551)
Proceeds from sales of loans............................ 15,449,407 -- -- --
Purchases of premises and equipment..................... (228,542) (523,054) (289,610) (88,482)
------------- ------------- ------------ -------------
Net cash used in investing activities................... (31,288,756) (16,191,057) (16,764,647) (7,020,586)
Financing activities
Net increase (decrease) in noninterest bearing
transaction accounts.................................... 1,736,628 3,975,713 (942,497) (2,815,946)
Net increase (decrease) in interest bearing
transaction accounts................................. 8,869,268 (2,147,732) 4,159,856 3,322,959
Net increase (decrease) in savings deposits............. 15,336,109 (3,030,972) (4,447,763) (72,300)
Net increase (decrease) in time deposits................ 11,916,205 7,575,007 822,321 1,467,700
Proceeds from common stock issuance..................... 24,024 25,000 -- --
Proceeds from issuance of notes payable................. 5,795,547 -- -- --
Federal funds borrowed.................................. -- (85,942) 1,000,000 --
Payments of cash dividends.............................. (59,905) (56,283) (126,570) (166,736)
------------- ------------- ------------ -------------
Net cash provided by financing activities............... 43,617,930 6,254,791 465,347 1,735,677
------------- ------------- ------------ -------------
Increase (decrease) in cash and cash equivalents........ 12,800,795 (8,166,605) (15,898,020) (5,190,830)
Cash and cash equivalents at beginning of period........ 6,356,522 19,157,317 19,157,317 10,990,712
------------ ------------ ------------- -------------
Cash and cash equivalents at end of period.............. $19,157,317 $10,990,712 $ 3,259,297 $ 5,799,882
============= ============= ============ =============

See accompanying notes.
</TABLE>

<PAGE>

HARBOR BANKSHARES CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

1. Summary of Significant Accounting Policies

Business

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

The Bank is a commercial bank headquartered in Baltimore, Maryland. The deposits
of the Bank are insured by the FDIC. 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 deposits and borrowers so it is not dependent upon
a single or a few customers.

Basis of Presentation

The accompanying consolidated financial statements include the accounts of the
Company and the Bank and have been prepared in accordance with generally
accepted accounting principles. All significant intercompany activity has been
eliminated.

The preparation of financial statements in conformity with generally accepted
accounting principles 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
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Estimates that are
particularly susceptible to change in the near term relate to the reserve for
possible loan loses.

Investment Securities

Effective January 1, 1994, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." Debt securities that the Company has the intent and ability
to hold until maturity, are classified as "held to maturity" and are carried at
historical cost adjusted for any amortization of premium or accretion of
discount. Trading securities are carried at fair value and unrealized gains and
losses included in earnings. The Company does not maintain a trading securities
portfolio. Marketable equity securities and debt securities which are not
classified as held to maturity or trading are classified as "available for sale"
and are carried at fair value with the unrealized gains and losses, net of tax,
reported as a separate component of stockholders' equity. In accordance with the
Statement, prior period financial statements have not been restated to reflect
the change in accounting principle. The cumulative effect as of January 1, 1994
of adopting the Statement increased the opening balance of stockholders' equity
by $12,399 (net of $7,801 in deferred income taxes) to reflect the net
unrealized holding gains on securities classified as available for sale which
were previously carried at amortized cost or lower of cost or market value.
Prior to 1994, if it was the Company's intent and it had the ability at the time
of purchase to hold securities until maturity or on a long term basis, they were
classified as investment securities and carried at historical amortized cost.
Securities held for indefinite periods of time, but not until maturity or on a
long term basis, were classified as investment securities held for sale and were
carried at the lower of cost or market value.

<PAGE>
HARBOR BANKSHARES CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

1. Summary of Significant Accounting Policies (continued)

Realized gains and losses and declines in value judged to be other than
temporary are included in earnings. The specific identification method is
utilized in determining the cost of a security which has been sold. Premiums and
discounts are amortized and accreted, respectively, as an adjustment of the
securities' yield using the interest method.

Loans

Loans are generally stated at their outstanding unpaid principal balance net of
any deferred fees or costs on originated loans, and net of any unamortized
premiums or discounts on purchased loans. Interest income is accrued and
recognized as income based upon the principal amount outstanding. Loan
origination and commitment fees net of certain direct origination costs are
being deferred, and the net amounts are being amortized over the contractual
life of the loans as adjustments of the yield. The accrual of interest income is
discontinued when a reasonable doubt exists as to the full collectibility of
interest or principal.

Reserve for Possible Loan Losses

The reserve for possible loan losses is established through a provision for loan
losses charged to income. Losses are charged against the reserve when management
believes that the collectibility of a loan's principal is unlikely. The reserve
is an amount that management believes will be adequate to absorb possible losses
on existing loans that may become uncollectable, based upon evaluations of the
collectibility of loans and prior loan loss experience. The evaluations take
into consideration such factors as changes in the nature and volume of the loan
portfolio, overall portfolio quality, review of specific problem loans and
current economic conditions that may affect the borrowers' ability to pay.

Effective January 1, 1995, the Company adopted SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan," and SFAS No. 118, "Accounting by Creditors
for Impairment of a Loan - Income Recognition and Disclosures." Under the new
Statements, the reserves for possible loan losses related to impaired loans are
required to be measured based on the present value of the expected future cash
flows discounted at the loan's effective interest rate or the fair value of the
collateral for collateral dependent loans. Since the total amount of impaired
loans is not significant, the adoption of these new accounting pronouncements
did not materially impact the Company's financial condition or results of
operations. Prior to 1995, the reserve for possible loan losses related to
impaired loans was based on undiscounted cash flows or the fair value of
collateral for collateral dependent loans.

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are computed using the straight-line
method. Maintenance and repairs are charged to operations when incurred, and the
cost of improvements is capitalized.

Income Taxes

The Company uses the liability method of accounting for income taxes in
accordance with SFAS No. 109, "Accounting for Income Taxes."

<PAGE>

HARBOR BANKSHARES CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

1. Summary of Significant Accounting Policies (continued)

Under the liability method, deferred tax assets and liabilities are determined
based upon the differences between financial statement carrying amounts and the
tax bases of existing assets and liabilities. These temporary differences are
measured at prevailing enacted tax rates that will be in effect when the
differences are settled or realized. The Company and the Bank file a
consolidated federal income tax return.

Statements of Cash Flows

The Company has defined cash and cash equivalents in the statements of cash
flows as those amounts included in the consolidated statements of condition
captions "Cash and due from banks" and "Federal funds sold".

For the years ended December 31, 1994 and 1995 the Company paid interest of
$2,456,487 and $3,631,072, respectively, and income taxes of $537,674 and
$443,991 , respectively.

Other Real Estate Owned

Other real estate owned consists of assets that have been acquired through
foreclosure and assets collateralizing loans that have been designated
in-substance foreclosed. These assets are recorded on the books of the Company
at the lower of cost or fair value less estimated costs to dispose.

Earnings Per Share

Earnings per share is based upon average shares outstanding of 427,644 and
429,404 for the years ended December 31, 1994 and 1995, respectively.

Reclassifications

Certain prior year amounts have been reclassified to conform to the current year
presentation.

2. Acquisitions

On June 13, 1994, the Company assumed approximately $32.8 million of deposit
liabilities in exchange for $28.9 million in cash and $0.3 million in assets
from Resolution Trust Corporation ("RTC") as receiver of two branches of the
former John Hanson Federal Savings Bank. The deposit liabilities consisted of
interest bearing transaction accounts of $8.9 million, savings accounts of $11.8
million, and time accounts of $12.1 million. Interest rates on all deposits
acquired were adjusted to current market rates immediately following the
acquisition. The difference between the $32.8 million of deposit liabilities,
$0.3 million of assets and $28.9 million in cash received represents a premium
paid by the Company to the RTC. This premium of $3.6 million, which represents
goodwill, is being amortized on a straight line basis over 15 years. The Company
merged one of the branch locations into its headquarters branch and continues to
lease the remaining branch office.

<PAGE>
HARBOR BANKSHARES CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

2. Acquisitions (continued)

On September 25, 1994, the Company assumed approximately $24.0 million of
deposit liabilities in exchange for $22.7 million in cash and $0.1 million in
assets from the RTC as receiver of one branch of the former Second National
Federal Savings Bank. The deposit liabilities consisted of interest bearing
transaction accounts of $2.5 million, savings accounts of $4.5 million, and time
accounts of $17.0 million. Interest rates on all deposits acquired were adjusted
to current market rates immediately following the acquisition. The difference
between the $24.0 million of deposit liabilities, $0.1 million of assets and
$22.7 million in cash received represents a premium paid by the Company to the
RTC. This premium of $1.3 million, which represents goodwill, is being amortized
on a straight line basis over 15 years. The Company intends to continue to
operate the branch location obtained through this acquisition.

In 1994, the Company purchased approximately $32.3 million in real estate
mortgage loans from the RTC. $15.4 million of these loans were subsequently sold
to a third party for a gain of $218,329. In February 1995, the Company purchased
an additional $17.3 million in real estate mortgage loans from the RTC. There
remains $1,239,095 of unamortized discounts on purchased loans retained by the
Company at December 31, 1995.

3. Fair Value of Financial Instruments

The following discloses the fair value of financial instruments held by the
Company as of December 31, 1995, whether or not recognized in the Consolidated
Statements of Condition. In cases in which quoted market prices were not
available, fair values were based upon estimates using present value or other
valuation techniques. These techniques were significantly affected by the
assumptions used, including the discount rate and estimates of cash flows.
Consequently, these fair values cannot be substantiated by comparisons with
independent markets and, in many cases, may not be realized upon the immediate
sale of the instrument. Since generally accepted accounting principles exclude
certain financial instruments and all nonfinancial instruments from this
presentation, the aggregated fair value amounts do not represent the underlying
value of the Company.

Cash and Short-Term Investments

The carrying amounts reported under the captions "Cash and due from banks,"
"Interest-bearing time deposits in other banks," and "Federal funds sold"
approximate the fair value of those assets.

Investment Securities

The fair values of investment 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.

<PAGE>
HARBOR BANKSHARES CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

3. Fair Value of Financial Instruments (continued)

Loans

The fair values of fixed and variable-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.

Deposits

The fair values for demand deposits are, 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.

Notes Payable

Notes payable have interest rates that vary in line with the 13 week U.S.
Treasury Bill Rate. The carrying amount of the notes payable approximate their
fair value.

Off-Balance Sheet Financial Instruments

In the normal course of business, the Company makes commitments to extend credit
and issues commercial letter of credit. As a result of excessive costs, the
Company considers estimation of fair values for commitments to extend credit and
commercial letters of credit to be impracticable.

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

December 31, 1995
-------------------------------
Carrying Fair
Value Value
----------------- -----------

Financial assets:
Cash and due from banks...................... $6,682,427 $6,682,427
Federal funds sold........................... 4,308,285 4,308,285
Interest bearing deposits in other banks..... 7,517,733 7,517,733
Investment securities........................ 10,898,066 11,114,403
Loans, net of reserves....................... 77,291,835 78,902,525
Accrued interest receivable.................. 775,911 775,911

Financial liabilities:
Deposits..................................... 101,098,124 101,236,104
Accrued interest payable..................... 639,541 639,541
Notes payable................................ 5,795,547 5,795,547

<PAGE>
HARBOR BANKSHARES CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

4. Investment Securities

The amortized cost and estimated market values of investment securities are as
follows:
<TABLE>
<CAPTION>

Gross Gross Estimated Market
Amortized Cost Unrealized Unrealized Value
----------------- ------------------
December 31, 1994 Debt Equity Gains Losses Debt Equity
---- ------ ---- ------
---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Investment securities available for sale:
U.S. Treasury and government agencies....... $ 1,994,488 $ -- $ -- $ (14,708) $ 1,979,780 $ --

Other securities............................ - 280,629 -- -- -- 280,629
------------ ---------- ---------- ---------- ------------- ---------
Total.......................................... $ 1,994,488 $ 280,629 $ $ (14,708) $ 1,979,780 $280,629
============ ========== ========== ========== ============= =========

Investment securities held to maturity:
U.S. Treasury and government and agencies... $11,520,292 $ -- $ -- $(239,722) $ 11,280,570 $ --
------------ ---------- ---------- ---------- ------------- ---------
Total.......................................... $11,520,292 $ -- $ -- $(239,722) $ 11,280,570 $
============ ========== ========== ========== ============= ==========

December 31, 1995
Investment securities available for sale:
U.S. Treasury and government agencies....... $ 997,222 $ -- $ 17,153 $ -- $ 1,014,375 $ --
Other securities............................ -- 446,486 -- -- -- 446,486
------------ ---------- ---------- ---------- ------------- ---------
Total.......................................... $ 997,222 446,486 -- -- $ 1,014,375 $446,486
============ ========== ========== ========== ============= ==========

Investment securities held to maturity:
U.S. Treasury and government and agencies... $ 9,437,205 $ -- $216,962 $ (625) $ 9,653,542 $ --
------------ ---------- ---------- ---------- ------------- ---------
Total.......................................... $ 9,437,205 $ -- $216,962 $ (625) $ 9,653,542 $ --
============ ========== ========== ========== ============= =========

</TABLE>
The amortized cost and market value of debt securities at December 31, 1995, by
contractual maturity, are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or repay
obligations without call or prepayment penalties.

<TABLE>
<CAPTION>
Debt Securities Debt Securities
Available for Sale Held to Maturity
----------------------------- ---------------------------------
Amortized Market Amortized Market
Cost Value Cost Value
----------- --------- ------------ -----------

<S> <C> <C> <C> <C>
Due in one year or less........................... $ 997,222 $1,014,375 $ 500,559 $ 499,375
Due after one year through five years............. -- -- 8,936,646 9,154,167
------------ ----------- ----------- ----------
$ 997,222 $1,014,375 $ 9,437,205 $9,653,542
============ =========== =========== ==========
</TABLE>

There were no sales of investment securities during 1994 or 1995.

5. Loans and Reserve for Possible Loan Losses

The composition of loans at December 31, 1994 and 1995 is as follows:

December 31,
-------------------------------
1994 1995
----------- -----------

Real estate--mortgage................. $52,151,034 $69,569,648
Commercial............................ 3,760,925 5,785,876
Consumer.............................. 1,946,827 2,032,206
Credit card loans..................... 585,560 850,712
============= ============
$58,444,346 $78,238,442
============= ============

<PAGE>

HARBOR BANKSHARES CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

5. Loans and Reserve for Possible Loan Losses (continued)

Transactions in the reserve for possible loan losses are summarized as follows

Years ended December 31,
---------------------------
1994 1995
------ ------

Balance at January 1.......................... $427,664 $685,387
Provision charged to operating expense........ 248,000 183,337
Recovery on loans previously charged-off...... 13,550 10,086
Loans charged-off............................. (30,828) (34,957)
========== ==========
Balance at December 31........................ $658,386 $816,853
========== ==========

The following is an analysis of interest on non accruing loans:

Years ended December 31,
---------------------------
1994 1995
------ ------

Non accruing loans at December 31................. $199,998 $--
Interest income which would have been
recognized under original terms................. 26,000 --

6. Property and Equipment

The major classes of property and equipment are summarized as follows:

December 31,
-----------------------
1994 1995
------ -------

Furniture, fixtures and equipment...................... $902,034 $1,297,967
Leasehold improvements................................. 284,536 411,566
--------- ----------
1,186,570 1,709,533
Less accumulated depreciation and amortization......... 708,799 903,864
========= ==========
Total.................................................. $477,771 $ 805,669
========= ==========

Depreciation expense was $110,846 and $150,286 in 1994 and 1995, respectively.
The Bank leases its branch and office facilities. The lease agreements provide
for the payment of utilities and taxes by the lessee.

Future minimum payments in the aggregate and for each of the five succeeding
years under noncancelable operating leases consisted of the following at
December 31, 1995:

<PAGE>
HARBOR BANKSHARES CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

6. Property and Equipment (continued)

1996............................... $ 270,537
1997............................... 276,339
1998............................... 280,785
1999 .............................. 256,533
2000 and thereafter................ 609,247
----------
Total minimum lease payments....... $1,693,441
==========

Total rental expense under operating leases amounted to $203,009 and $216,733 in
1994 and 1995, respectively.

7. Restriction on Undivided Profits

The ability of the Company to pay dividends is limited by the level of dividends
which can be paid by the Bank. The ability of the Bank to pay dividends is
limited by the provisions of Maryland law, which requires the maintenance of a
capital surplus account equal to the par value of the outstanding common stock.

8. 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. In 1995, the required reserve ranged from $0 to $300,000.

9. Income Tax

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

Years ended December 31,
--------------------------
1994 1995
------ -------

Taxes currently payable............................ $449,198 $504,849
Deferred taxes (benefit)........................... (78,749) (54,045)
========= =========
Income tax expense for the year.................... $370,449 $450,804
========= =========

A reconciliation between the total income tax expense and the income tax expense
computed by applying the statutory Federal income tax rate to earnings before
income taxes is as follows
Years ended December 31,
--------------------------
1994 1995
------ --------

Income before income taxes......................... $995,559 $1,130,235
Statutory income tax rate.......................... 34%
34%
----------- ------------
Income tax at statutory rate....................... 338,490 384,280
State franchise tax, net of federal tax benefit.... 50,500 73,903
Other.............................................. (18,541) (7,379)
=========== =============
Income tax expense for the year.................... $370,449 $ 450,804
=========== =============

<PAGE>
HARBOR BANKSHARES CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

9. Income Tax (continued)

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets as of December 31, 1994 and
1995 are as follows:
<TABLE>
<CAPTION>

December 31,
---------------------------
1994 1995
---- ----
<S> <C> <C>
Deferred tax liabilities:
Prepaid expenses...................................................................... $(13,181) $(14,527)
Unrealized gain on investment securities, available for sale.......................... -- (7,964)
Other................................................................................. (6,821) (12,253)
---------- ---------
Total deferred tax liabilities........................................................ (20,002) (34,744)

Deferred tax assets:
Loan loss reserve..................................................................... 196,676 265,852
Depreciation.......................................................................... 15,808 1,595
Unrealized loss on investment securities, available for sale.......................... 5,680 --
Other................................................................................. 1,274 7,134
---------- ---------

Total deferred tax assets............................................................. 219,438 274,581
========== =========

Net deferred tax asset................................................................ $199,436 $239,837

========== =========
</TABLE>
No valuation allowance was recorded for the deferred tax assets at December 31,
1994 or 1995.

10. Notes Payable

Notes payable consists of two notes totaling $5,795,547 which are payable to the
RTC. The notes each have a term of five years and have interest rates that vary
in line with the 13 week U.S. Treasury Bill rate. At December 31, 1995 the
interest rate on the notes was 5.52%. Interest payments are made quarterly. No
principal payments are required prior to maturity. These loans were made by the
RTC to assist the Company in financing the branch acquisitions discussed in Note
2.

11. Stock Option Plan

In accordance with the Non-Qualified Stock Option Plan, 30,000 shares of Common
Stock were initially reserved for issuance to key executives. Option prices
under the plan may not be less than the fair market value of the stock on the
date granted, and therefore have no associated expense. Non-qualified options
become exercisable in annual installments of 20 percent commencing on the date
granted, and have a maximum duration of 10 years. At December 31, 1994 and 1995
there were 21,500 and 19,500 stock options outstanding and exercisable,
respectively.

12. Loans to Related Parties

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
$1,734,316 and $1,922,609 at December 31, 1994 and 1995, respectively. During
1995, $347,888 of new loans were made while repayments totaled $159,595.

<PAGE>
HARBOR BANKSHARES CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

13. Financial Arrangements with Off-Balance-Sheet Risk

In the normal course of business, the Company is a party to financial
arrangements with off-balance-sheet risk designed to meet the financing needs of
its customers. These financial arrangements include commitments to extend credit
and commercial letters of credit. The Bank uses the same credit policies in
making commitments and conditional obligations as it does for on-balance-sheet
arrangements.

Financial arrangements whose contract amounts involve credit risk at December 31
are as follows:
<TABLE>
<CAPTION>

December 31,
---------------------------------------
1994 1995
------------------- -------------------
<S> <C> <C>
Unused commitments to extend credit:
Revolving open-end lines secured by residential properties.............. $ 787,000 $ 917,075
Credit card lines....................................................... 863,000 1,128,041
Commercial real estate & construction................................... 1,760,000 3,011,300
Other unused commitments................................................ 4,991,000 2,600,000
Commercial letters of credit.............................................. 537,000 516,319
</TABLE>

Management conducts regular reviews of the above credit arrangements on an
individual customer basis, and the results are considered in assessing the
adequacy of the Bank's allowance for possible loan losses.

14. Contingent Liabilities

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

15. Parent Company Only Financial Statements

Condensed Statements of Condition December 31,
---------------------------------
1994 1995
---- ----
Assets
Investment in bank subsidiary............... $10,808,826 $11,334,122
Other....................................... 118,172 240,176
------------- -----------
Total Assets................................ $10,926,998 $11,574,298
============= ===========
Liabilities and stockholders' equity
Notes payable............................... $ 5,795,547 $5,795,547
Accrued interest payable.................... 72,456 136,919
------------- -----------
Total liabilities........................... 5,868,003 5,932,466
Stockholders' equity........................ 5,058,995 5,641,832
-------------- -----------
Total liabilities and stockholder's equity.. $10,926,998 $11,574,298
============= ===========

Condensed Statements of Income

December 31,
------------------------------
1994 1995
------ -------
Dividend from subsidiary....................... $111,007 $420,720
Interest expense............................... (123,558) (334,778)
Income tax benefit............................. 45,716 113,824
Equity in undistributed income of subsidiary... 591,945 479,665
----------- ---------
Net income..................................... $625,110 $679,431
=========== =========
<PAGE>
HARBOR BANKSHARES CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

15. Parent Company Only Financial Statements (continued)

Condensed Statements of Cash Flows
<TABLE>
<CAPTION>

Years ended December 31,
------------------------------------
1994 1995
---- ----
<S> <C> <C>
Operating activities
Net income................................................................... $ 625,110 $ 679,431
Adjustment to reconcile net income to net cash provided by operating activities:
Increase in other (assets) liabilities, net.................................. 26,740 (57,541)
Equity in undistributed income of subsidiary................................. (591,945) (479,665)
-------------- --------------
Net cash provided by operating activities.................................... 59,905 142,225
-------------- --------------
Investing activities
Additional investment in subsidiary.......................................... (5,819,571) (25,000)
-------------- --------------
Net cash used in investing activities........................................ (5,819,571) (25,000)
-------------- --------------
Financing activities
Acquisition of treasury stock................................................ -- (56,283)
Proceeds from issuance of note payable....................................... 5,795,547 --
Cash dividends............................................................... (59,905) (85,942)
Proceeds from exercise of stock options...................................... 24,024 25,000
-------------- --------------
Net cash provided by (used in) financing activities.......................... 5,759,666 (117,225)
-------------- --------------
Change in cash and cash equivalents.......................................... -- --
Cash and cash equivalents at beginning of year............................... -- --
-------------- --------------
Cash and cash equivalents at end of year..................................... $ -- $ --
============== ==============
</TABLE>

16. Subsequent Event

During February 1996, the Company began to raise additional capital through a
stock offering of up to 350,000 shares at a price of $15.00 per share. The
offering has a minimum of 70,000 shares and the net proceeds will be used for
expansion of the Company and the Bank.

17. Interim Consolidated Financial Statements (Unaudited)

Basis of Presentation

The accompanying unaudited interim consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all the information and
footnotes required for complete financial statements. In the opinion of
management, all adjustments and reclassifications considered necessary for a
fair presentation have been included. Operating results for the three month
period ended March 31, 1996 are not necessarily indicative of the results that
may be expected for the year ending December 31, 1996. The accompanying
unaudited interim consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto for the
years ended December 31, 1994 and 1995.

Accounting Changes

Effective January 1, 1996, the Company adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
SFAS No. 122, "Accounting for Mortgage Servicing Rights--an amendment of FAS
65," and SFAS No. 123, "Accounting for Stock Based Compensation." The adoption
of these new accounting pronouncements did not have a material impact on the
financial statements of the Company.

<PAGE>

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

<S> <C>
No dealer, salesman or other person has been authorized Maximum - 350,000 Shares
to give any information or make any representation not Minimum - 70,000 Shares
contained or incorporated by reference in this Prospectus
and, if given or made, such information or representation
must not be relied upon as having been authorized by the
Company. This Prospectus does not constitute an offer to HARBOR BANKSHARES
sell or a solicitation of an offer to buy any of the _____________________
securities offered hereby in any jurisdiction to any C O R P O R A T I O N
person to whom it is unlawful to make such offer in such
jurisdiction. Neither the delivery of this Prospectus
nor any sale made hereunder shall, under any Common Stock
circumstances, create any implication that the
information herein is correct as of any time subsequent
to the date hereof or that there has been no change in
the affairs of the Company since such date.

TABLE OF CONTENTS

Page
Available Information............................ 2
Prospectus Summary............................... 3
Risk Factors..................................... 7
The Company...................................... 11 ----------------------------
Use of Proceeds.................................. 12 PROSPECTUS
Capitalization................................... 12 -----------------------------
Plan of Distribution............................. 13
Dividends........................................ 14
Market Price..................................... 15
Consolidated Selected Financial Information...... 17
Management's Discussion and Analysis of
Financial Condition and Results of Operations.. 18
Business......................................... 29
Management....................................... 35
Description of Capital Stock..................... 40
Certain Provisions of Law and the
Company's Charter and By-Laws.................. 41
Legal Opinions................................... 44
Experts.......................................... 44
Financial Statements............................. F-1
May 15, 1996

</TABLE>