APPENDIX B FAIRNESS OPINION HARBOR BANKSHARES CORPORATION BALTIMORE, MARYLAND FAIRNESS OPINION AS OF AUGUST 29, 2006 Set forth herein is Danielson Associates Inc.'s ("Danielson Associates") updated independent appraisal of the "fair" market value of the common stock of Harbor Bankshares Corporation ("Harbor" or "the Bank") of Baltimore, Maryland as of August 29, 2006. The original opinion was dated December 8, 2005. Market value is defined as the price at which the common stock would change hands between a willing seller and a willing buyer, each having reasonable knowledge of relevant facts and assuming a significant amount of stock changing hands daily to assure a true reflection of market forces. This fairness opinion is based on data supplied by Harbor to Danielson Associates and its regulators, but it also relies on some public information. All information received is believed to be reliable, but the accuracy or completeness of such information cannot be guaranteed. In particular, this fairness opinion assumes that there are no significant loan quality problems beyond what has been stated in Harbor's quarterly reports to the Federal Deposit Insurance Corporation ("FDIC"). In determining the fair value of the common stock of Harbor, primary emphasis has been given to the stock prices of banks that have comparable financial, market and structural characteristics, and the relationship of these prices to earnings. Based on these updated comparisons, an analysis of Harbor's past performance and future potential and by applying discounts for market, stock liquidity and its minority ownership, it has been established that the fair value of its common stock as of August 29, 2006 is between $30.53 and $32.17 per share with the midpoint being $31.35 per share. Any price in this range would be fair to current shareholders. Respectfully submitted, /s/ David G. Danielson David G. Danielson, President Danielson Associates Inc.
[DANIELSON ASSOCIATES LOGO] HARBOR BANKSHARES CORPORATION BALTIMORE, MARYLAND UPDATED FAIRNESS OPINION AS OF AUGUST 29, 2006 8300 Boone Blvd, Suite 200, Vienna, VA 22182 - (703) 564-9120 www.danielsonassociates.com HARBOR BANKSHARES CORPORATION BALTIMORE, MARYLAND UPDATED FAIRNESS OPINION AS OF AUGUST 29, 2006 TABLE OF CONTENTS Page Opinion Letter.............................................................1 Financial Summary..........................................................2 Market Value Adjustments...................................................3 Valuation..................................................................6 TABLES 1 Financial Summary......................................................10 2 Urban Exchange Group...................................................11 3 Urban Over-the-Counter Group...........................................15 4 Urban Most Applicable Group............................................19 5 Publicly-Traded Minority-Owned Banks and Thrifts.......................23 6 Minority-Owned Group...................................................24 7 Stock Trades in 2005...................................................28 8 Discounted Dividends Applied to Harbor.................................29 9 Summary of Valuation Multiples.........................................30 10 Pricing Applied to Harbor..............................................31 HARBOR BANKSHARES CORPORATION BALTIMORE, MARYLAND FAIRNESS OPINION AS OF AUGUST 29, 2006 Set forth herein is Danielson Associates Inc.'s ("Danielson Associates") updated independent appraisal of the "fair" market value of the common stock of Harbor Bankshares Corporation ("Harbor" or "the Bank") of Baltimore, Maryland as of August 29, 2006. The original opinion was dated December 8, 2005. Market value is defined as the price at which the common stock would change hands between a willing seller and a willing buyer, each having reasonable knowledge of relevant facts and assuming a significant amount of stock changing hands daily to assure a true reflection of market forces. This fairness opinion is based on data supplied by Harbor to Danielson Associates and its regulators, but it also relies on some public information. All information received is believed to be reliable, but the accuracy or completeness of such information cannot be guaranteed. In particular, this fairness opinion assumes that there are no significant loan quality problems beyond what has been stated in Harbor's quarterly reports to the Federal Deposit Insurance Corporation ("FDIC"). In determining the fair value of the common stock of Harbor, primary emphasis has been given to the stock prices of banks that have comparable financial, market and structural characteristics, and the relationship of these prices to earnings. Based on these updated comparisons, an analysis of Harbor's past performance and future potential and by applying discounts for market, stock liquidity and its minority ownership, it has been established that the fair value of its common stock as of August 29, 2006 is between $30.53 and $32.17 per share with the midpoint being $31.35 per share. Any price in this range would be fair to current shareholders. Respectfully submitted, /s/ David G. Danielson David G. Danielson, President Danielson Associates Inc. FINANCIAL PERFORMANCE Since its inception, Harbor has been a slow growing bank. This, though, can still be considered good growth as its primary market has a declining population base and comparatively low income levels. In 1990, its eighth year of operations, the Bank had assets of $38 million and grew these assets to $62 million by the end of 1993. In 1994, the Bank purchased 2 branches from the Resolution Trust Corporation, which moved its assets above $100 million for the first time. From the beginning of 1998 through the end of 2001 - a four year period - Harbor's growth stalled as assets hovered around $184 million. Growth picked up again in 2002 when Harbor purchased a branch in Randallstown from Carrollton Bancorp. With the purchase of this branch, the Bank's assets in 2002 surpassed $200 million and as of June 30, 2006 it had assets of $258 million. Harbor has earned in excess of $1 million annually since 2002, and annualized earnings for the six months ended June 30, 2006 are just under $1.8 million. These earnings produced returns on equity in the 8% to 12% range during this period and while these are good results, they were helped by capital that was less than 7% of assets. Returns on assets were not as good, ranging from a low of .54% to a high of .84% during this same period (see Table 1). 2 MARKET VALUE ADJUSTMENTS In order to determine a "fair" price for shares of Harbor's common stock, it is necessary to consider how it differs from the two primary groups to which it has been compared - the urban most applicable group and the minority-owned group - and make the adjustments reflecting the differences, if needed. These adjustments should consider such items as profitability, capital, growth momentum, market, deposit mix, asset mix and quality, management, liquidity of stock as well as any unique circumstances. Background information on these items appears in the original opinion or in the updated tables at the end of the report. Profitability Earnings, when they are normal, are the primary determinant of the value of a stock, but relationships based on earnings have to consider their sustainability. Harbor's earnings have been consistent over the last four years, and its overall financial condition make it likely that it can, and will, sustain similar earnings and earnings growth going forward. Thus, in an earnings-determined valuation, there is no cause for an adjustment based on profitability. Capital Harbor's capital-to-asset ratio is low but so were several banks in the comparable groups. The current amount of capital is sufficient to continue to grow at historical rates and should not have an impact on restraining earnings growth. Thus, there is no cause for a value adjustment based on capital. In 2006, the Bank's going private transaction will cause the holding company to purchase, approximately, 14,000 shares of Harbor common stock for an amount less than $420,000. This will reduce Harbor's capital ratios, but not enough to cause a value adjustment. Growth Harbor's growth has been adequate. Some of this growth was fueled by branch acquisitions, but this has helped Harbor hold onto its current local market share. Thus, growth is not a reason for a value adjustment. 3 Market The Bank has continued to look for branches in growing areas within its market, but the majority of its branches and deposits are in Baltimore City, a declining market. This is particularly important in a valuation since part of the value of a bank is its growth opportunities and the likelihood that it will be acquired. Harbor's market limits both its potential growth and is likely to deter most potential acquirers. Thus, market is a reason for a downward value adjustment in comparison to the urban most applicable group, which generally served better markets, but not the minority-owned group, which mostly served similar large urban markets. Size The comparable banks take into account Harbor's size. As a result, size is not a reason for a value adjustment. Asset Mix and Quality Harbor's asset mix is good and contributes toward the Bank's profitability. Thus, since asset mix is factored into an earnings-determined value, a value adjustment is not necessary. Asset quality is also good and is comparable to the asset quality of the comparable groups. Thus, asset quality is not a reason for a value adjustment. Deposit Mix Harbor's deposit mix is excellent, but these good deposits are a major part of the determination of profits. Thus, deposit mix is factored into an earnings-determined value and is not a reason for a value adjustment. Management Since there has not been any substantial change in management for many years, the impact of management on value is reflected in all of the above value-determining categories. Thus, management also is not a reason for a value adjustment. 4 Stock Liquidity Harbor differs from the comparable banks in the illiquidity of its stock. The banks in the comparable groups, generally, do not trade extensively, but they are listed on either a national exchange, the Nasdaq or trade over-the-counter. Harbor is not listed on any exchange, nor does its stock trade on the Nasdaq or over-the-counter. Its stock does trade occasionally but not in any organized manner. Thus, stock liquidity is a reason for a value discount in relation to the comparable groups. Unique Characteristics The only unique characteristic of Harbor that is not addressed above is Harbor's minority-ownership. This characteristic is reflected in the minority-owned group, but not in the urban most applicable group. This minority-ownership impacts the value of the stock by decreasing the likelihood the bank will be sold, and thus its potential sale value. Investors do not consider minority banks likely to sell, and, thus, no acquisition premium is normally included in the value. The reason for this perception is that minority banks seldom are sold willingly because there is a stronger community commitment than for most non-minority urban banks and non-minority banks, which represent the bulk of possible buyers, have minimal interest in acquiring minority banks because of the poor economic dynamics of the urban markets they normally serve and the potential larger than normal run-off of customers after a merger. A non-minority bank will buy a minority bank, but it will not pay a full premium. Thus, Harbor's status as a minority-owned bank is a reason for a value discount relative to the urban most applicable group. Conclusion When all of the elements of possible adjustment to the value of Harbor's value are considered, it merits discounts to the urban most applicable group based on market, stock liquidity and minority ownership. In relation to the minority-owned group, the only discount would be for the illiquidity of its stock. 5 VALUATION In establishing a "fair" price for shares of an unlisted stock, there are numerous methodologies that can be used including a) sale prices of similar companies, b) liquidation value, c) discounted dividends analysis under certain earnings and growth assumptions and d) comparisons with stock prices of similar companies that are publicly-traded or trade on the Nasdaq or over-the-counter. The latter is by far the most commonly-used method and is the best method by which to value Harbor's stock. The first three methods are primarily utilized when there is either a likely sale of the company, a possibility of failing, and/or adequate comparisons do not exist. These methods have not been used because Harbor is not considering a sale, it is not in danger of failing and there are enough applicable banks with a traded stock on which to base a valuation. Thus, the value of Harbor's stock has been established by comparisons to urban and minority-owned banks with similar size, performance and market characteristics after which certain discounts were applied. Earnings derived Valuation There are several methods by which bank stocks are normally valued. Price times earnings, price-to-book and price-to-assets. The best method of valuation when earnings are "normal", or can be "normalized", is earnings. Price-to-book is used when price times earnings cannot be used because earnings are not "normal" or cannot easily be "normalized". Price-to-assets is used when price-to book does not provide a meaningful valuation. Thus, as Harbor's earnings are "normal" and have been sustained for several years the best method of a valuation is one based on earnings. The first two groups considered were the urban exchange group and the urban OTC group. While many of the banks in these two groups were eliminated to form a single group with more similarities to Harbor, it is helpful to consider their pricing multiples as each is a much larger group than the final two comparative groups. The urban exchange group had thirteen banks and a median price times earnings multiple of 19.6. The urban OTC group had ten banks and had a median price times earnings multiple of 17.8 (see Table 2 & 3). When the new banks and high performers in the urban exchange group and the OTC group were eliminated there were five banks remaining. These five banks comprise the urban most applicable group and had financial conditions and performance quite similar to Harbor. The median price times earnings of this group was 15.4. That the price times earnings multiple fell is not surprising as new banks are often valued based on anticipated future performance and high performing banks may merit a higher multiple (see Table 4). 6 The final comparative group and the most relevant to Harbor is the minority-owned group. Four of these six banks are African-American owned and serve large urban areas like Harbor. In addition, they all have similarities in financial condition and performance. The median price times earnings for this group is 14.0 (see Table 5 & 6). The price times earnings multiples for the four comparables groups were 19.6X, 17.8X, 15.4X and 14.0X. The latter two multiples - for the urban most applicable and the minority-owned group - are the most comparable. Stock Transactions Trading in shares of Harbor common stock is very infrequent as there have only been sixteen known stock transactions since the beginning of 2005. In 2005, the stock traded consistently around $25 per share except for two trades around $19 per share. In 2006, the stock continued trading around $25 per share but the three most recent trades were for $29.73, $28.00 and $31.00 per share. At a price of $31.00 based on current financial data, the Bank trades for 11.6 times fully-diluted earnings and 122% of book. Trading volume in 2006 was just 11,181 and in 2005 34,875 shares traded. These are too few shares traded on which to base a valuation and they are not considered in this valuation (see Table 7). Discounted Dividends Using the discounted dividends investment calculation and price times earnings of 12 and 14, Harbor's price per share varies from $24.13 to $32.10. The low price of $24.54 per share is under a 12% discount rate and 12 times earnings and the high price of $33.72 per share is under a 10% discount rate and 14 times earnings (see Table 8). 7 Application of earnings multiples Using the earnings multiple from the urban most applicable group of 15.4 times earnings, a value of $27.6 million, or $38.72 per fully-diluted share is reached. Since the majority of banks in this group are located in better urban markets and thus have better growth opportunities a downward adjustment in value is necessary. Further adjustments take into account that these banks all have some liquidity in their stock which exceeds the few trades in Harbor's stock. Finally, an adjustment should be made because the minority-ownership of Harbor limits the potential sale value of the Bank, and thus makes its stock less attractive. It is our opinion that in comparison to the urban most applicable group a discount of 20% to 30% would be appropriate to account for the poor market dynamics, illiquidity of stock and minority-ownership of Harbor. When these discounts are applied to a 15.4 times earnings multiple the value is 10.8 to 12.3 times earnings, $19.3 to $22.1 million, or $27.91 to $31.52 per fully-diluted share. The midpoint is $20.7 million, or $29.71 per fully-diluted share, which is 11.6 times earnings, or 119% of book. In using the minority-owned group the price times earnings multiple is 14.0 and discounts would only be taken for the illiquidity of stock since the other minority-owned banks are located in similar urban markets. At 14.0 times earnings, these minority-owned financial institutions suggest an unadjusted value of $25.1 million, or $35.45 per fully-diluted share. It is our opinion that a discount of 5% to 15% would be appropriate to account for the illiquidity of Harbor's stock in comparison to the minority-owned group. When this discount is applied, the resulting value is 11.9 times earnings to 13.3 times earnings, $21.3 to $23.8 million; or $30.53 to $33.81 per fully-diluted share. The midpoint is $22.6 million or $32.17 per fully-diluted share, which is 12.6 times earnings, or 130% of book. In our opinion, the best guide as to the value of Harbor's stock is the price times earnings multiples of other minority-owned banks having similar size and performance, and being located in urban markets. The value determined by the urban most applicable group - which is slightly lower - should also be considered, but only to determine that the value is toward the lower half of the range determined by the minority-owned group. This range is $21.3 to $22.6 million, or $30.53 to $32.17 per fully diluted share. This is 123% to 130% of book value. As of August 29, 2006, any price in this range would be a "fair" price at which to exchange stock (see Tables 9 and 10). 8 This updated fairness opinion is provided in connection with a proposed "going private transaction," in the form of a merger in which Harbor common stock owned by shareholders who own 100 or fewer shares would be exchanged for cash. Record holders of more than 100 shares of Harbor common stock would not receive cash for their shares in the merger and would remain Harbor shareholders. Harbor would be the surviving company in the merger. Any price in the indicated range would be "fair" to current Harbor shareholders, including shareholders who would be cashed out in the merger and shareholders who would not be cashed out in the merger and would remain shareholders of Harbor. 9 TABLE 1 ------- HARBOR FINANCIAL HISTORY Percent of Assets Return Net Net on Avg. Assets Equity Income Capital Income Equity ------ ------ ------ ------- ------ ------ (In millions) (In thous.) 2006* $258 $17.2 $1,790 6.17% .70% 10.59% 2005 257 17.0 1,883 6.61 .78 11.57 2004 235 16.2 1,462 6.90 .63 9.33 2003 220 15.3 1,785 6.96 .84 12.22 2002 210 14.1 1,077 6.73 .54 8.22 2001 187 12.2 730 6.56 .37 6.24 2000 185 10.2 565 5.55 .32 7.03 1999 178 7.5 1 4.20 - .01 1998** 184 16.4 1,009 8.91 .70 6.21 1997 136 16.0 905 11.77 .69 5.99 1996 130 14.5 777 11.21 .67 5.90 1995 113 11.3 901 10.00 .84 8.14 1994 106 10.9 703 10.26 .79 8.92 1993 62 4.5 475 7.25 .78 11.18 1992 57 4.1 346 7.15 .67 8.99 1991 45 3.7 107 8.24 .25 2.95 1990 38 3.5 149 9.35 .40 - *June 30, 2006 or six months annualized. **Bank level data for 1998 and proceeding years. Source: SNL Financial, Charlottesville, Virginia. 10 TABLE 2A URBAN EXCHANGE GROUP* DESCRIPTION Full Name City, State Assets** - --------- ----------- ------ (In mill.) American Community Bancshares, Inc. Charlotte, N.C. $461 Annapolis Bancorp, Inc. Annapolis, Md. 324 Bank of Wilmington Corporation Wilmington, N.C. 397 Cardinal State Bank Durham, N.C. 176 Carolina Bank Holdings, Inc. Greensboro, N.C. 390 Crescent Financial Corporation Cary, N.C. 471 First National Bancshares, Inc. Spartanburg, S.C. 386 Glen Burnie Bancorp Glen Burnie, Md. 332 Greenville First Bancshares, Inc. Greenville, S.C. 455 Jacksonville Bancorp, Inc. Jacksonville, Fla. 310 Millennium Bankshares Corporation Reston, Va. 486 Monarch Bank Chesapeake, Va. 378 Valley Bancorp Las Vegas, Nev. 441 Harbor Bankshares Corporation Baltimore, Md. $258 *Non-minority urban banks on the east coast with assets between $150 and $500 million and returns on average assets over .50%. **June 30, 2006. Source: SNL Financial, Charlottesville, Virginia. 11 TABLE 2B URBAN EXCHANGE GROUP FINANCIAL PERFORMANCE* As a Percent of Assets or Avg. Assets ------------------------------------- Return Net on Avg. Short Name Assets Equity NPAs** Income Equity - ---------- ------ ------ ---- ------ ------ (In mill.) American Community $461 11.42% .68% 1.05% 9.09% Annapolis 324 6.71 .31 .99 14.68 Bank of Wilmington 397 6.32 .23 .62 8.61 Cardinal State 176 11.19 .51 .48 4.03 Carolina Bank 390 6.10 .92 .67 10.43 Crescent Financial 471 9.13 .06 .91 10.07 First National 386 6.02 - .99 16.08 Glen Burnie 332 7.77 .11 .86 10.40 Greenville First 455 7.02 .50 .71 9.11 Jacksonville 310 6.75 .05 .92 12.97 Millennium 486 9.73 .30 .50 4.49 Monarch 378 8.31 - .98 9.90 Valley 441 10.31 .02 1.72 15.95 --- ----- --- ---- ----- Median $390 7.77% .23% .91% 10.07% Harbor $258 6.67% .14% .77% 11.65% *June 30, 2006 or the twelve months ended June 30, 2006. **Includes loans 90 days past due. Source: SNL Financial, Charlottesville, Virginia. 12 TABLE 2C URBAN EXCHANGE GROUP INCOME AND EXPENSE COMPARISON* Percent of Average Assets ---------------------------------------------------------------------------------- Net Int. Net Oper. Net Oper. Contr. to Net Short Name Income Expense Income Reserves Other Income - ---------- ------ ------- ------ -------- ----- ------ American Community 4.09% 2.11% 1.98% .33% .01% 1.05% Annapolis 3.77 2.18 1.59 .08 .06 .99 Bank of Wilmington 3.37 1.98 1.39 .42 (.01) .62 Cardinal State 3.76 2.92 .84 .36 - .48 Carolina Bank 3.20 1.77 1.43 .35 - .67 Crescent Financial 3.77 2.18 1.59 .17 - .91 First National 3.55 1.79 1.76 .26 .01 .99 Glen Burnie 3.73 2.69 1.04 (.02) .02 .86 Greenville First 3.37 1.55 1.82 .30 (.38) .71 Jacksonville 3.73 2.09 1.64 .19 - .92 Millennium 3.00 2.06 .94 .03 (.17) .50 Monarch 4.11 2.31 1.80 .26 - .98 Valley 4.98 2.12 2.86 .20 (.04) 1.72 ---- ---- ---- ---- ----- ---- Median 3.73% 2.11% 1.59% .26% - .91% Harbor 4.53% 3.24% 1.29% .12% .03% .77 *Twelve months ended June 30, 2006. Source: SNL Financial, Charlottesville, Virginia. 13 TABLE 2D URBAN EXCHANGE GROUP STOCK PERFORMANCE Price* Avg. Shares Stock Times Percent Traded Short Name Price* Earnings of Book Daily** - ---------- ----- -------- ------- ----------- American Community $11.39 17.5X 150% 5,867 Annapolis 9.50 13.0 179 1,533 Bank of Wilmington 12.50 21.9 179 5,880 Cardinal State 12.27 36.1 141 1,651 Carolina Bank 13.50 15.7 155 4,359 Crescent Financial 13.32 19.6 180 7,172 First National 17.20 20.5 248 1,314 Glen Burnie 17.20 15.4 165 923 Greenville First 19.25 17.3*** 177 1,359 Jacksonville 37.82 26.6 311 869 Millennium 8.87 29.6*** 167 19,585 Monarch 17.68 24.6 222 2,325 Valley 44.72 19.6 278 8,951 ---- --- ----- Median 19.6X 179% 2,325 *August 29, 2006 stock price and financial data as of June 30, 2006 or the twelve months ended June 30, 2006, unless otherwise noted. **One year. ***Adjusted to remove unusual quarters. Source: SNL Financial, Charlottesville, Virginia. 14 TABLE 3A URBAN OTC GROUP* DESCRIPTION Full Name City, State Assets** - --------- ----------- ------ (In mill.) BCB Bancorp, Inc.*** Bayonne, N.J. $489 Business Bank Corporation Las Vegas, Nev. 459 Capital Bancorp, Inc. Nashville, Tenn. 514 First South Bancorp, Inc. Spartanburg, S.C. 347 First Trust Bank*** Charlotte, N.C. 350 Grandsouth Bancorporation*** Greenville, S.C. 290 Greater Sacramento Bancorp Sacramento, Calif. 288 Hampton Roads Bankshares, Inc. Chesapeake, Va. 424 North State Bancorp*** Raleigh, N.C. 423 VSB Bancorp, Inc. Staten Island, N.Y. 224 Harbor Baltimore, Md. $258 *Non-minority urban banks on the east coast with assets between $150 and $500 million and returns on average assets above .50%. **June 30, 2006. ***De novo bank. Source: SNL Financial, Charlottesville, Virginia. 15 TABLE 3B URBAN OTC GROUP FINANCIAL PERFORMANCE* As a Percent of Assets or Avg. Assets ------------------------------------- Return Net on Avg. Short Name Assets Equity NPAs** Income Equity - ---------- ------ ------ ---- ------ ------ (In mill.) BCB $489 10.35% .31% 1.11% 12.40% Business Bank 459 8.75 .36 1.60 19.19 Capital 514 5.95 .41 .77 12.49 First South 347 9.63 .85 1.53 16.27 First Trust 350 8.29 - 1.18 13.10 Grandsouth 290 6.08 .73 1.22 19.45 Greater Sacramento 288 6.36 .12 1.12 17.62 Hampton Roads 424 11.75 .40 1.46 12.42 North State 423 5.46 - .76 13.20 VSB 224 6.77 .17 1.14 16.76 --- ---- --- ---- ----- Median $386 7.53% .34% 1.16% 14.74% Harbor $258 6.67% .14% .77% 11.65% *June 30, 2006 or the twelve months ended June 30, 2006. **Includes loans 90 days past due. Source: SNL Financial, Charlottesville, Virginia. 16 TABLE 3C URBAN OTC GROUP INCOME AND EXPENSE COMPARISON* ----------------------------- Percent of Average Assets -------------------------------------------------------------------------------- Net Int. Net Oper. Net Oper. Contr. to Net Short Name Income Expense Income Reserves Other Income - ---------- ------ ------- ------ -------- ----- ------ BCB 3.75% 1.74% 2.01% .25% - 1.11% Business Bank 5.53 2.86 2.67 .21 (.01)% 1.60 Capital 3.72 2.15 1.57 .37 - .77 First South 4.30 1.70 2.60 .21 - 1.53 First Trust 3.96 1.87 2.09 .18 - 1.18 Grandsouth 4.64 2.50 2.14 .37 - 1.22 Greater Sacramento 4.42 2.49 1.93 .12 - 1.12 Hampton Roads 5.00 2.70 2.30 .04 (.03) 1.46 North State 3.67 2.25 1.42 .21 - .76 VSB 4.46 2.36 2.10 .02 .05 1.14 ---- ---- ---- ---- ---- ---- Median 4.36% 2.31% 2.10% .21% - 1.16% Harbor 4.53% 3.24% 1.29% .12% .03% .77% *Twelve months ended June 30, 2006. Source: SNL Financial, Charlottesville, Virginia. 17 TABLE 3D URBAN OTC GROUP STOCK PERFORMANCE ----------------- Price* Avg. Shares ------------------------- ----------- Stock Times Percent Traded Short Name Price* Earnings of Book Daily** - ---------- ----- -------- ------- ------- BCB $15.12 13.4X 150% 2,521 Business Bank 53.20 17.9 290 1,432 Capital 21.50 21.7 249 884 First South 28.90 12.4 184 848 First Trust 22.90 20.3 239 1,542 Grandsouth 17.00 20.0 324 175 Greater Sacramento 22.00 17.7 259 834 Hampton Roads 11.49 16.2 191 3,952 North State 19.50 32.0 366 1,080 VSB 14.75 11.2 184 271 ---- --- --- Median 17.8X 244% 982 *August 29, 2006 stock price and financial data as of June 30, 2006 or the twelvemonths ended June 30, 2006. **One year. ***Adjusted to remove unusual quarters. Source: SNL Financial, Charlottesville, Virginia. 18 TABLE 4A URBAN MOST APPLICABLE GROUP* DESCRIPTION Full Name City, State Assets** - --------- ----------- ------ (In mill.) Annapolis Bancorp, Inc. Annapolis, Md. $324 Capital Bancorp, Inc. Nashville, Tenn. 514 Carolina Bank Holdings, Inc. Greensboro, N.C. 390 Glen Burnie Bancorp Glen Burnie, Md. 332 VSB Bancorp, Inc. Staten Island, N.Y. 224 Harbor Bankshares Corporation Baltimore, Md. 258 *Non-minority urban banks with assets between $150 and $500 million and returns on average assets above .50% excluding banks established on or after 1998 and top performing banks with a return on average assets over 1.20%. **June 30, 2006. Source: SNL Financial, Charlottesville, Virginia. 19 TABLE 4B URBAN MOST APPLICABLE GROUP FINANCIAL PERFORMANCE* As a Percent of Assets or Avg. Assets ------------------------------------- Return Net on Avg. Short Name Assets Equity NPAs** Income Equity - ---------- ------ ------ ---- ------ ------ (In mill.) Annapolis $324 6.71% .31% .99% 14.68% Capital 514 5.95 .41 .77 12.49 Carolina Bank 390 6.10 .92 .67 10.43 Glen Burnie 332 7.77 .11 .86 10.40 VSB 224 6.77 .17 1.14 16.76 --- ---- --- ---- ----- Median $332 6.71% .31% .86% 12.49% Harbor $258 6.67% .14% .77% 11.65% *June 30, 2006 or the twelve months ended June 30, 2006. **Includes loans 90 days past due. Source: SNL Financial, Charlottesville, Virginia. 20 TABLE 4C URBAN-MOST APPLICABLE GROUP INCOME AND EXPENSE COMPARISON* Percent of Average Assets -------------------------------------------------------------------------------- Net Int. Net Oper. Net Oper. Contr. to Net Short Name Income Expense Income Reserves Other Income - ---------- ------ ------- ------ -------- ----- ------ Annapolis 3.77% 2.18% 1.59% .08% .06% .99% Capital 3.72 2.15 1.57 .37 - .77 Carolina Bank 3.20 1.77 1.43 .35 - .67 Glen Burnie 3.73 2.69 1.04 (.02) .02 .86 VSB 4.46 2.36 2.10 .02 .05 1.14 ---- ---- ---- --- --- ---- Median 3.73% 2.18% 1.57% .08% .02% .86% Harbor 4.53% 3.24% 1.29% .12% .03% .77% *Twelve months ended June 30, 2006. Source: SNL Financial, Charlottesville, Virginia. 21 TABLE 4D URBAN-MOST APPLICABLE GROUP STOCK PERFORMANCE Price* ------------------------- Avg. Shares Stock Times Percent Traded Short Name Price* Earnings of Book Daily** - ---------- ------ -------- ------- ------- Annapolis $9.50 13.0X 179% 1,533 Capital 21.50 21.7 249 884 Carolina Bank 13.50 15.7 155 4,359 Glen Burnie 17.20 15.4 165 923 VSB 14.75 11.2 184 271 ---- --- --- Median 15.4X 179% 923 *August 29, 2006 stock price and financial data as of June 30, 2006 or the twelvemonths ended June 30, 2006. **One year. ***Adjusted to remove unusual quarters. Source: SNL Financial, Charlottesville, Virginia. 22 TABLE 4 PUBLICLY-TRADED MINORITY-OWNED BANKS AND THRIFTS DESCRIPTION Full Name City, State Assets* - --------- ----------- ------ (In mill.) Banks - over $900 million Cathay General Bancorp, Inc. Los Angeles, Calif. $ 7,458 East West Bancorp, Inc. San Marino, Calif. 10,018 International Bancshares Corporation Laredo, Texas 10,649 - -------------------------------------------------------------------------------------------------------------------- MetroCorp Bancshares, Inc.** Houston, Texas 1,188 - -------------------------------------------------------------------------------------------------------------------- Preferred Bank Los Angeles, Calif. 1,216 Banks - under $900 million Abigail Adams National Bancorp, Inc. Washington, D.C. $ 372 Albina Community Bancorp Portland, Org. 125 Canyon National Bank Palm Springs, Calif. 240 - -------------------------------------------------------------------------------------------------------------------- Citizens Bancshares Corporation** Atlanta, Ga. 331 IBW Financial Corporation** Washington, D.C. 335*** M&F Bancorp, Inc.** Durham, N.C. 251 - -------------------------------------------------------------------------------------------------------------------- Pan American Bancorp Los Angeles, Calif. 43 Sun American Bancorp Miami, Fla. 321 Saehan Bancorp Los Angeles, Calif. 531 Thrifts - -------------------------------------------------------------------------------------------------------------------- Carver Bancorp, Inc.** New York, N.Y. $ 655 Independence Federal Savings Bank** Washington, D.C. 170*** Mutual Community Savings Bank, Inc.** Durham, N.C. 90 - -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- Harbor** Baltimore, Md. $ 258 - -------------------------------------------------------------------------------------------------------------------- *June 30, 2006. **African-American owned banks. ***March 31, 2006. Source: SNL Financial, Charlottesville, Virginia. 23 TABLE 6A MINORITY-OWNED GROUP* DESCRIPTION Short Name City, State Assets** ---------- ----------- ------ (In mill.) Abigail Adams Washington, D.C. $372 Albina Community Portland. Org. 125 Carver*** New York, N.Y. 655 Citizens*** Atlanta, Ga. 331 IBW*** Washington, D.C. 335**** M&F*** Durham, N.C. 251 --- Median $333 Harbor*** Baltimore, Md. $258 *Minority owned with assets under $900 million. **June 30, 2006. ***African-American owned banks. ****March 31, 2006. Source: SNL Financial, Charlottesville, Virginia. 24 TABLE 6B MINORITY-OWNED GROUP FINANCIAL PERFORMANCE* As a Percent of Assets or Avg. Assets ------------------------------------- Return Net on Avg. Short Name Assets Equity NPAs** Income Equity - ---------- ------ ------ ---- ------ ------ (In mill.) Comparable Abigail Adams $372 7.62% .31% .85% 10.28% Albina Community 125 5.80 .38 .52 6.67 Carver 655 7.51 .45 .59 7.78 Citizens 331 8.36 1.22 .87 10.53 IBW*** 335 7.61 .65 .61 8.04 M&F 251 8.38 .70 .64 7.50 --- ---- --- ---- ---- Median $333 7.62% .55% .63% 7.91% Harbor $258 6.67% .14% .77% 11.65% Non-comparable ----------------- Canyon National $240 8.99% .74% 1.67% 20.42% Independence*** 170 8.43 .36 (.55) (5.62) ---------------- ------------------- Mutual Community 90 7.33 1.42 (.82) (10.29) ------------------- Pan American 43 13.70 .50 .30 2.23 ---------------- Saehan 536 8.99 .21 1.48 16.51 Sun American 321 19.39 .01 .96 5.20 NOTE: Bolded numbers are reason for exclusion. *June 30, 2006 or the twelve months ended June 30, 2006. **Includes loans 90 days past due. ***March 31, 2006 or the twelve months ended March 31, 2006. Source: SNL Financial, Charlottesville, Virginia. 25 TABLE 6C -------- MINORITY-OWNED GROUP INCOME AND EXPENSE COMPARISON* ----------------------------- Percent of Average Assets -------------------------------------------------------------------------------- Net Int. Net Oper. Net Oper. Contr. to Net Short Name Income Expense Income Reserves Other Income - ---------- ------ ------- ------ -------- ----- ------ Abigail Adams 4.59% 3.03% 1.56% .10% (.06)% .85% Albina Community 4.02 3.10 .92 .20 - .52 Carver 3.02 2.15 .87 - (.08) .59 Citizens 4.32 3.38 .94 .05 .12 .87 IBW** 4.29 3.67 .62 .01 (.07) .61 M&F 4.07 3.27 .80 .05 .14 .64 ---- ---- ---- ---- ---- --- Median 4.18% 3.19% .90% .05% (.04)% .63% Harbor 4.53% 3.24% 1.29% .12% .03% .77% *Twelve months ended June 30, 2006. **Twelve months ended March 31, 2006. Source: SNL Financial, Charlottesville, Virginia. 26 TABLE 6D MINORITY-OWNED GROUP STOCK PERFORMANCE Price* -------------------------- Avg. Shares Stock Times Percent Traded Short Name Price* Earnings of Book Daily*** - ---------- ------ -------- ------- -------- Abigail Adams $13.78 16.4X 168% 3,775 Albina Community 17.50 17.2 224 36 Carver 16.64 11.5 85 1,786 Citizens 10.45 7.7 79 1,028 IBW** 35.90 24.4**** 94 18 M&F 11.25 10.8**** 91 516 ---- -- --- Median 14.0X 93% 772 *August 29, 2006 stock price and financial data as of June 30, 2006 or the twelve months ended June 30, 2006. **August 29, 2006 stock price and financial data as of March 31, 2006 or the twelve months ended March 31,2006. ***One year. ****Adjusted to remove unusual quarters. Source: SNL Financial, Charlottesville, Virginia. 27 TABLE 7 STOCK TRADES IN 2005 & 2006 Trade Shares Date Traded Price ---- ------ ----- 2006* 8/22/06 300 $31.00 6/14/06 100 28.00 5/18/06 200 29.73 5/2/06 100 26.50 4/28/06 100 25.50 4/4/06 100 25.50 2/13/06 10,000 25.00 1/1/06 281 25.00 -------- ----- Total 2006 11,181 $25.29** 2005 11/11/05 154 $24.65 7/22/05 10,000 25.00 6/2/05 1,668 19.25 3/16/05 1,668 19.00 4/27/05 10,000 25.00 4/21/05 308 25.00 4/19/05 77 25.00 1/14/05 11,000 25.00 ------ ----- Total 2005 34,875 $24.44** *Through August 23, 2006. **Weighted average. Source: Internal report and Nasdaq.com 28 TABLE 8 DISCOUNTED DIVIDENDS APPLIED TO HARBOR* Discount Rate -------------------------------------------- 10% 11% 12% --- --- --- Value (in millions) -------------------------------------------- 12 times earnings*** $21.0 $18.5 $16.4 14 times earnings*** 22.5 19.8 17.4 Per Share** -------------------------------------------- 12 times earnings*** $30.14 $26.87 $24.13 14 times earnings*** 32.10 28.57 25.43 Times Earnings -------------------------------------------- 12 times earnings*** 11.7X 10.3X 9.2X 14 times earnings*** 12.6 11.0 9.7 Price-to-Book**** -------------------------------------------- 12 times earnings*** 121% 107% 95% 14 times earnings*** 130 114 101 *Assumes 6% earnings growth, capital in excess of 6.50% dividended out and a tax rate of 36%. **Shares outstanding of 641,784 options outstanding of 123,284 with a weighted strike price of $16.70. ***Earnings of $1,790,000. ****Equity of $17,320,000. 29 TABLE 9 SUMMARY OF VALUATION MULTIPLES* Price ------------------------- Number Times Percent in Comparable groups Earnings of Book Group ----------------- -------- ------- ----- Urban exchange group 19.6X 179% 13 Urban OTC group 17.8 244 10 ----- Urban most applicable 15.4X 179% 5 Minority-owned group 14.0 93 6 ----- Discounted dividends** 10.3X 107 - *August 27, 2006 stock price and financial data for the year ended June 30, 2006 or June 30, 2006 or most recent available. **Based on a 11% discount rate and a terminal value of 12 times earnings. 30 TABLE 10 PRICING APPLIED TO HARBOR Discount - All* --------------------------------------------- Based on urban most applicable group 20% 25% 30% - ------------------------------------ --- --- --- -------------------- P/E** 15.4X 12.3X 11.6X 10.8X Value (in mill.) $27.6 $22.1 $20.7 $19.3 Per share*** 42.95 34.36 32.21 30.07 Per Share Diluted*** 38.72 31.52 29.71 27.91 Price-to-book**** 159% 127% 119% 111% -------------------- Discount for illiquidity -------------------------------------------- Based on minority-owned group 5% 10% 15% - ----------------------------- -- --- --- -------------------- P/E** 14.0X 13.3X 12.6X 11.9X Value (in mill.) $25.1 $23.8 $22.6 $21.3 Per share*** 39.05 37.10 35.14 33.19 Per Share Diluted*** 35.45 33.81 32.17 30.53 Price-to-book**** 145% 137% 130% 123% -------------------- *Discount for poor market dynamics, illiquidity of stock and minority-ownership. **Earnings of $1,790,000. ***Shares outstanding of 641,784 options outstanding of 123,284 with a weighted strike price of $16.70. ****Equity of $17,320,000. 31
