COVER PAGE








<PAGE>
                                    CONTENTS

President's Report.............................................................1

Description of Business........................................................2

Board of Directors.............................................................2

Selected Consolidated Financial Data...........................................3

Management's Discussion and Analysis of
        Financial Condition and Results of Operations.......................4-12

Independent Auditor's Report..................................................13

Consolidated Financial Statements
        Consolidated Balance Sheets...........................................14
        Consolidated Statements of Income.....................................15
        Consolidated Statements of Changes in Stockholders' Equity............16
        Consolidated Statements of Cash Flows.................................17
        Notes to Consolidated Financial Statements.........................18-30

Trust and Financial Services..................................................31

Officers and Staff............................................................32

Annual Report on Form 10-KSB..................................................33

General Information...........................................................33

                           FORWARD-LOOKING STATEMENTS

        The Private Securities Litigation Reform Act of 1995 evidences Congress'
determination that the disclosure of forward-looking information is desirable
for investors and encourages such disclosure by providing a safe harbor for
forward-looking statements by corporate management. This Annual Report,
including the President's Letter and the Management's Discussion and Analysis of
Financial Condition and Results of Operations, contains forward-looking
statements that involve risk and uncertainty. In order to comply with the terms
of the safe harbor, the Corporation notes that a variety of factors could cause
the Corporation's actual results and experience to differ materially from the
anticipated results or other expectations expressed in the Corporation's
forward-looking statements.

        The risks and uncertainties that may affect the operations, performance,
development and results of the Corporation's business include, but are not
limited to, the growth of the economy, interest rate movements, the impact of
competitive products, services and pricing, customer business requirements, the
impact, if any, of Year 2000 computer problems, Congressional legislation and
similar matters. Readers of this report are cautioned not to place undue
reliance on forward-looking statements which are subject to influence by the
named risk factors and unanticipated future events. Actual results, accordingly,
may differ materially from management expectations.

<PAGE>

                               PRESIDENT'S REPORT


        On behalf of the Board of Directors, Officers and Staff, we are pleased
to submit this Annual Report for your holding company, Potomac Bancshares, Inc.,
for the year ended December 31, 1998.

        During the year we experienced growth in assets of over $17,000,000 with
the major portion reflected in deposit growth. Net profit after taxes for 1998
totaled $1,489,129 or $2.48 per share. Even though net income was down from the
previous year, cash dividends paid to stockholders were $1.15 per share, same as
were paid in 1997, and totaled $690,000.

        For some time now you have heard a constant media blitz regarding Y2K. A
committee comprised of members of the Board and Staff has been working
diligently for the past year and will continue to do so for the balance of 1999
to prepare for this millennium conversion.

        Your Board has been working on its building project and has completed
the schematic design. We are now progressing into the design and development
stage. This venture will involve the area now being utilized for the Trust
Department offices and storage area, along with a redecorating project for the
main office building. This should all be well on its way by mid-year 1999.

        The success enjoyed by this corporation would not be possible without
the dedication from members of the staff, nor could it progress without the
commitment of the members of the Board. Everyone's loyalty is greatly
appreciated, as is that of our stockholders and customers.

                                            Sincerely,



                                            Charles W. LeMaster
                                            President and CEO


                                      -1-
<PAGE>

                             DESCRIPTION OF BUSINESS


        Potomac Bancshares, Inc., a one-bank holding company, and Subsidiary,
Bank of Charles Town, are engaged in general banking business with the primary
market area being Jefferson County, West Virginia. However, the Corporation also
provides services to Washington County and Frederick County, Maryland; Loudoun
County and Clarke County, Virginia; and Berkeley County, West Virginia. The main
office is in Charles Town with branch offices in Harpers Ferry and
Kearneysville.

        The Corporation provides consumers, businesses, and governments with a
broad range of banking services including lines of credit, home equity lines of
credit, commercial, agricultural, real estate, and installment loans, checking,
savings, NOW, and money market accounts, certificates of deposit, and individual
retirement accounts. Automated teller machines located at each of the three
offices and Touchline 24, an interactive voice response system available at
1-304-728-2424, provide certain services to customers on a twenty-four hour
basis. Bill paying and certain other banking services are available online
through a personal computer and/or the World Wide Web. These same bill paying
and banking services are also available using a special telephone. The trust and
financial services department provides financial management, investment and
trust services.

        Bank of Charles Town is a West Virginia state chartered bank which
formed and opened for business in 1871. The Bank's deposits are insured by
Federal Deposit Insurance Corporation.


                               BOARD OF DIRECTORS

                POTOMAC BANCSHARES, INC. AND BANK OF CHARLES TOWN
<TABLE>
<CAPTION>
<S>     <C>
JOHN P. BURNS, JR.                         FRANCIS M. FRYE                          MINNIE R. MENTZER
Partner                                    Retired President                        Retired President
Burns Farm                                 Ranson Real Estate                       Myers Coal Company, Inc.

ROBERT W. BUTLER                           WILLIAM R. HARNER                        JAMES E. SENSENEY
Farmer-Orchardist                          Senior Vice President                    Retired Owner-Operator
Warm Spring Orchard & Farm                    & Cashier                             J.E. Senseney & Sons, Inc.
                                           Bank of Charles Town

GUY GARY CHICCHIRICHI                      E. WILLIAM JOHNSON                       JOHN C. SKINNER, JR.
General Manager                            Professor of Economics                   Owner
Guy's Buick-Pontiac-Oldsmobile-            Shepherd College                         Nichols & Skinner, L.C.
   GMC Truck, Inc.

THOMAS C. G. COYLE                         CHARLES W. LEMASTER                      DONALD S. SMITH
Retired Owner-Operator                     President                                Retired President
Riddleberger's Store                       Bank of Charles Town                     Bank of Charles Town
</TABLE>


                                      -2-
<PAGE>

                      SELECTED CONSOLIDATED FINANCIAL DATA
                  (Dollars in Thousands Except Per Share Data)
<TABLE>
<CAPTION>
<S>                                              <C>         <C>         <C>         <C>         <C>
                                                1998        1997        1996        1995        1994
                                             ---------   ---------   ---------   ---------   --------
Summary of Operations

   Interest income                           $  10 055   $   9 563   $   9 086   $   8 747  $   8 979
   Interest expense                              4 401       3 710       3 623       3 591      3 509
                                             ---------   ---------   ---------   ---------  ---------
   Net interest income                           5 654       5 853       5 463       5 156      5 470
   Provision for loan losses                       125         127         100         125        125
                                             ---------   ---------   ---------   ---------  ---------
   Net interest income after provision
      for loan losses                            5 529       5 726       5 363       5 031      5 345
   Non-interest income                           1 126       1 128         989         906        939
   Non-interest expense                          4 297       4 127       4 114       4 078      4 211
                                             ---------   ---------   ---------   ---------  ---------
   Income before income taxes                    2 358       2 727       2 238       1 859      2 073
   Income tax expense                              869       1 005         831         674        742
                                             ---------   ---------   ---------   ---------  ---------

   Net income                                $   1 489   $   1 722   $   1 407   $   1 185  $   1 331
                                             =========   =========   =========   =========  =========


Per Share Data

   Net income, basic and diluted             $    2.48   $    2.87   $    2.35   $    1.98  $    2.22
   Cash dividends declared                        1.15        1.15         .95         .85        .85
   Book value at period end                      26.99       25.50       23.70       22.37      21.19
   Average shares outstanding                  600 000     600 000     600 000     600 000    600 000


Average Balance Sheet Summary

   Assets                                    $ 138 698   $ 126 474   $ 124 267   $ 121 638  $ 128 993
   Loans                                        78 552      76 866      73 817      72 440     68 558
   Securities                                   45 190      40 576      36 972      37 682     52 288
   Deposits                                    121 612     110 291     109 709     107 826    115 907
   Shareholders' equity                         15 862      14 870      13 806      13 052     12 393


Performance Ratios

   Return on average assets                      1.07%       1.36%       1.13%        .97%      1.03%
   Return on average equity                      9.39%      11.58%      10.19%       9.08%     10.74%
   Dividend payout ratio                        46.37%      40.07%      40.43%      43.93%     38.29%


Capital Ratios

   Leverage ratio                               11.15%      11.83%      11.43%      10.83%      9.61%
   Risk-based capital ratios
      Tier 1 capital                            22.64%      23.15%      23.21%      20.73%     20.74%
      Total capital                             23.89%      24.41%      24.47%      21.98%     21.99%
</TABLE>


                                      -3-
<PAGE>

SCHEDULE 1 - AVERAGE BALANCES, INCOME/EXPENSE AND AVERAGE YIELD/RATE

        This schedule is a comparison of interest earning assets and interest
bearing liabilities showing average yields or rates derived from average
balances and actual income and expenses. Income and rates on tax exempt loans
are computed on a tax equivalent basis using a federal tax rate of 34%. Loans
placed on nonaccrual status are reflected in the balances.
<TABLE>
<CAPTION>
<S>                                                <C>                                <C>
                                                   1998                               1997
                           ------------------------------------     --------------------------------------
                             Average       Income/      Average        Average       Income/     Average
                             Balances      Expense    Yield/Rate       Balances      Expense    Yield/Rate

ASSETS
Loans
   Taxable                $78 215 073    $6 967 855     8.91%       $76 726 418    $7 008 657      9.13%
   Tax exempt                 336 999        32 076     9.52%           139 322        15 492     11.12%
                           ----------    ----------                 -----------    ----------
      Total loans          78 552 072     6 999 931     8.91%        76 865 740     7 024 149      9.14%
                           ----------    ----------                 -----------    ----------
Taxable securities         45 190 167     2 610 758     5.78%        40 576 196     2 344 806      5.78%
Securities purchased under
   agreements to resell and
   federal funds sold       7 796 026       455 539     5.84%         3 755 616       198 926      5.30%
                           ----------    ----------                 -----------    ----------

     TOTAL EARNING ASSETS 131 538 265   $10 066 228     7.65%       121 197 552   $ 9 567 881      7.89%
                           -----------  ===========                 -----------   ===========



Reserve for loan losses    (1 137 864)                               (1 160 396)
Cash and due from banks     5 322 429                                 3 613 704
Bank premises/equipment,
   net                      1 212 223                                 1 204 798
Other assets                1 763 203                                 1 617 882
                         ------------                              ------------

      Total assets       $138 698 256                              $126 473 540
                         ============                              ============

LIABILITIES AND
   STOCKHOLDERS' EQUITY
Deposits
   Savings and interest
      bearing demand
      deposits            $64 410 847    $2 047 815     3.18%      $ 55 365 510    $1 451 731      2.62%
   Time deposits           42 083 997     2 353 117     5.59%        40 929 846     2 241 745      5.48%
                          -----------    ----------                 -----------    ----------
      Total interest
        bearing deposits  106 494 844     4 400 932     4.13%        96 295 356     3 693 476      3.84%
                          -----------    ----------                 -----------    ----------



Federal funds purchased and
  securities sold under
  agreements to repurchase        - -           - -      - -            269 471        16 219      6.02%
                          -----------    ----------                 -----------    ----------

   TOTAL INTEREST
      BEARING LIABILITIES 106 494 844   $ 4 400 932     4.13%        96 564 827   $ 3 709 695      3.84%
                          -----------   ===========                 ----------    ===========



Noninterest bearing demand
   deposits                15 117 247                                13 995 920
Other liabilities           1 223 874                                 1 042 649
Stockholders' equity       15 862 291                                14 870 144
                         ------------                               -----------
  Total liabilities and
    stockholders' equity $138 698 256                               $   126 473
                         ============                               ===========
540


NET INTEREST SPREAD                                     3.52%                                      4.05%
INTEREST EXPENSE AS A
   PERCENT OF AVERAGE EARNING ASSETS                    3.35%                                      3.06%

NET INTEREST MARGIN                                     4.31%                                      4.84%
</TABLE>


                                      -4-
<PAGE>

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



GENERAL

        Total assets increased over 13% in 1998 compared to 1997. This
$17,500,000 increase included growth of $13,000,000 in the securities portfolio
and a $5,000,000 increase in the daily investment vehicles of securities
purchased under agreements to resell and federal funds sold. The increased
assets were offset by deposit growth.

        Management is unaware of any trends, events or uncertainties that would
have material effect on liquidity, capital resources or operations. There are no
current recommendations by regulatory authorities which if they were to be
implemented would have a material effect on the Corporation.



NET INTEREST INCOME

        In 1998 net interest income decreased 3% when compared to 1997. The
majority of the increase is due to increases in deposit volume and deposit
rates.

        A 5% increase in interest income brought the 1998 total to $10,055,322
compared to $9,562,614 in 1997.

        Although the year end balance for total loans in 1998 was slightly less
than the 1997 balance, the average balance of total loans in 1998 increased
about $1,700,000 compared to the average balance in 1997. Interest and fees on
loans remained basically the same in 1998 showing only a slight increase
compared to 1997. The decrease in average yield on loans offset the increase in
average volume for the year. No particular category of loans showed a
significant increase or decrease in volume.

        Interest income on investment securities and securities available for
sale increased 11% in 1998 compared to 1997. This increase is due to increased
volumes of securities since the average rate remained the same in 1997 and 1998.
Income on securities purchased under agreements to resell and federal funds sold
increased 129% in 1998 compared to 1997. Most of this increase is due to
increased volumes although there was an increase in the average rate to 5.84% in
1998 compared to 5.30% in 1997.

        The increase in interest expense to $4,400,932 in 1998 compared to
$3,709,695 in 1997 is the major cause of decreased net income for 1998 compared
to 1997. The majority of this increase is in the expense for savings and
interest bearing demand deposits with a smaller expense increase in time
deposits. The savings and interest bearing demand deposits increase is due to
the increase in volume and rate of the Select Checking balances. Select Checking
accounts are NOW accounts that earn a higher rate of interest for balances of
$5,000 or more. Increase in time deposit expense is due to an increase in
average volume of $1,000,000 and an increase in average rate of .11%.

        Total deposits increased $16,500,000 in 1998 compared to 1997. This
increase is due to the increase in the Select Checking balances as described
above. Continuing to compare 1998 year end balances with 1997 year end balances,
non interest bearing demand deposits increased $2,500,000 in 1998, money market
deposits decreased $5,000,000 in 1998, savings decreased $1,500,000 in 1998, and
certificates of deposits increased $2,000,000 in 1998. The decreases in money
market and savings deposits can also be attributed to the availability of the
Select Checking accounts.

        In 1998, the average yield for earning assets was 7.65%, a decrease of
 .24% when compared to 1997. The lower yield is due to the decreased loan yields
during 1998 compared to 1997, since the yields on securities remained the same
and yields on securities purchased under agreements to resell and federal funds
sold increased during 1998.

        The average rate paid on all interest bearing liabilities was 4.13% in
1998 compared to 3.84% in 1997. The net interest spread decreased .53% to 3.52%
compared to 4.05% in 1997, and the net interest margin decreased the same .53%
to 4.31% in 1998 compared to 4.84% in 1997.

        As the narrative above describes, the major reason for decreased
interest income, reduced interest spread and reduced interest margin is the
increased balances in the Select Checking Accounts which pay a higher rate of
interest and minimal increase in income to compensate for this increase in
expense.


                                      -5-
<PAGE>

SCHEDULE 2 - VOLUME AND RATE ANALYSIS

        This schedule analyzes the change in net interest income attributable to
changes in volume of the various portfolios and changes in interest rates. The
change due to both rate and volume variances has been allocated between rate and
volume based on the percentage relationship of such variances to each other.
Income and rates on tax exempt loans are computed on a tax equivalent basis
using a federal tax rate of 34%. Nonaccruing loans are included in average loans
outstanding.

<TABLE>
<CAPTION>
                                        1998 Compared to 1997                     1997 Compared to 1996
                             ----------------------------------------    --------------------------------------
                                Change in       Volume        Rate          Change in       Volume        Rate
                             Income/Expense     Effect        Effect     Income/Expense     Effect       Effect
                             --------------     ------        ------     --------------     ------       ------
<S>                           <C>            <C>           <C>              <C>          <C>          <C>
INTEREST INCOME
   Taxable loans              $  (40 802)    $ 168 640     $ (209 442)      $ 280 573    $  295 395   $ (14 822)
   Tax exempt loans               16 584        18 455         (1 871)        (17 344)      (17 197)       (147)
   Taxable securities            265 952       265 952            - -         445 650       195 697     249 953
   Securities purchased under
      agreements to resell       256 613       234 413         22 200        (238 108)     (240 612)      2 504
                              ----------     ---------     -----------      ---------    ----------   ---------
         TOTAL                $  498 347     $ 687 460     $ (189 113)      $ 470 771    $  233 283   $ 237 488
                              ----------     ---------     -----------      ---------    ----------   ---------

INTEREST EXPENSE
   Savings and interest bearing
      demand deposits           $596 084     $ 258 237     $  337 847       $  30 717    $  (11 232)  $  41 949
   Time deposits                 111 372        65 059         46 313          39 516        51 374     (11 858)
   Federal funds purchased and
      securities sold under
      agreements to repurchase   (16 219)      (16 219)           - -          16 219        16 219         - -
                              ----------     ---------     -----------      ---------    ----------   ---------
         TOTAL                $  691 237     $ 307 077     $  384 160       $  86 452    $   56 361   $  30 091
                              ----------     ---------     -----------      ---------    ----------   ---------


NET INTEREST INCOME           $ (192 890)    $ 380 383      $(573 273)      $ 384 319    $  176 922   $ 207 397
                              ==========     =========     ===========      =========    ==========   =========
</TABLE>

NONINTEREST INCOME AND EXPENSE

         Noninterest income (other income) decreased slightly in 1998 compared
to 1997. This included a 6% increase in income from the Trust and Financial
Services Department in 1998 compared to 1997 which was offset by decreased
income from service charges on deposit accounts, specifically in the return
check charge category, and decreased other operating income which is a
combination of numerous categories.

         Noninterest expense (other expense) increased 4% in 1998 compared to
1997. Included in this is a 6% increase in salaries and employee benefits in
1998 compared to 1997 and a 4% increase in furniture and equipment expenses in
1998 compared to 1997. The bulk of the furniture and equipment expense was the
purchase of new computer equipment to prepare for the year 2000. There was also
a decrease in net occupancy expense of premises of 5% in 1998 compared to 1997.



YEAR 2000

         The "Year 2000 Problem" exists because computers and computer programs
were written using only a two digit field for the year rather than a four digit
field. As we move into the Year 2000 and continue to use "00" for the date, many
computers, computer programs, and any equipment using date sensitive microchips
may not recognize "00" as the Year 2000, but may "think" it is the year 1900.
For many businesses and industries, this misconception may cause problems.
Hence, the challenge facing the world has been to prepare for the Year 2000 by
ensuring that all equipment is appropriately date sensitive to the four digit
date 2000 and beyond. The Subsidiary Bank depends heavily on computer processing
in connection with its business activities. Failure of its computer systems
could have a significant impact on its operations.

         During 1997 the Subsidiary Bank began preparing to meet the challenge
by sending letters to third party vendors and suppliers requesting written
documentation regarding their planning, renovation, and testing of computer
systems and software and other equipment containing embedded microchips to
ensure Year 2000 compliance. Vendors contacted included all parties that
supplied service that the Subsidiary Bank believed could be affected by embedded
microchips, such as electric, water, computer hardware and software providers.
In January 1998, the Subsidiary Bank's Board of Directors approved the
appointment of a Year 2000 Committee composed of directors, officers and staff.
The Committee has written a Year 2000 Plan that was approved by the Board of
Directors which details steps to be taken for Year 2000 compliance.


                                      -6-
<PAGE>

         The Plan includes the following phases of procedure: awareness,
assessment, renovation, validation and implementation. The AWARENESS PHASE was
educating all personnel within the organization including directors, officers
and staff so that everyone understood the definition of the problem. All
personnel also needed to understand that the Corporation was seriously
undertaking the challenge to complete all the remaining phases of the Plan in a
timely manner. The ASSESSMENT PHASE included identifying all systems and
equipment that would be affected by the problem. The RENOVATION PHASE included
performing repairs, upgrades and/or replacements of all computer systems and
equipment containing embedded microchips that were identified in the assessment
phase as needing renovation. The VALIDATION PHASE includes testing of all
systems and equipment. The IMPLEMENTATION PHASE occurs when all previous phases
are complete and all systems have been certified as Year 2000 compliant.

         The status of these phases as of December 31, 1998 is listed below:

               Awareness                     Complete
               Assessment                    Complete
               Renovation                    Substantially Complete. Remaining
                                             renovation includes replacement of
                                             optical disk storage system
                                             hardware and software, five
                                             personal computers, one server and
                                             hub, and one printer. Expected
                                             completion May 31, 1999.
               Validation                    Progressing on schedule. Mission
                                             critical systems expected to be
                                             substantially complete by March 31,
                                             1999. Remaining validation expected
                                             to be substantially complete within
                                             guidelines of the Federal Financial
                                             Institutions Examination Council
                                             (FFIEC), whose completion deadline
                                             is June 30, 1999.
               Implementation                Progressing on schedule. As
                                             renovation and validation phases
                                             progress so does completion of this
                                             phase. Expected completion will be
                                             within FFIEC guidelines.

         The Subsidiary Bank does not maintain a formal budget. Therefore,
expenses related to the Year 2000 are reviewed and approved by the Board of
Directors on an as needed basis. As of December 31, 1998, actual costs were
$187,025. Most of the costs were for computers and related equipment. There have
also been expenditures for testing of our major software vendors. It is
estimated that the total costs for the Year 2000 will not exceed $350,000,
assuming that the Subsidiary Bank has identified the most significant Year 2000
issues. These costs do not include the costs of personnel who have performed
Year 2000 functions in addition to their regular responsibilities during this
time of preparation.

         The Subsidiary Bank has continued to communicate with third party
vendors and suppliers to update documentation from them in regard to their Year
2000 readiness. The majority of these vendors and suppliers have stated that
they have successfully completed their renovations and testing. Questionnaires
were mailed to significant loan customers (limited to commercial purpose loans)
to determine the effectiveness of their Year 2000 preparation including
anticipated problems and proposed solutions. Written responses were requested
with approximately 69% responding as of mid-March 1999. Response and no response
customers are being evaluated (95% evaluated to date) by loan personnel, and
additions to the reserve for loan losses will be made if necessary. At this
time, the Subsidiary Bank does not expect any of these loan customer Year 2000
situations to have an adverse material impact on Bank operations. The aggregate
balances (including available but not outstanding amounts on lines of credit) of
the loan customers questioned represent approximately 27% of the Bank's total
loan portfolio. In the near future, questionnaires will be sent to significant
deposit customers and responses will be evaluated. The aggregate balances of the
deposit customers who will be questioned represent 2% of the total deposit
portfolio.

         The Year 2000 Committee has identified customer awareness as an
important part of Year 2000 preparation. We have a Customer Awareness Policy and
have mailed several communications to customers regarding Year 2000 plans. It is
necessary that all customers understand that the Subsidiary Bank's deposits are
insured by the Federal Deposit Insurance Corporation.

         The Year 2000 Committee has written a Year 2000 Contingency Plan which
has been approved by the Board of Directors. Many issues were discussed during
the development and planning for business resumption and remediation contingency
plans. Responsibility and reporting structure have been designated. Critical
personnel have been designated to be available as needed. Special staffing and
hours have been approved as needed. Core business processes were identified.
Event timelines were designated including critical testing dates. Numerous
failure scenarios were discussed including power outages from complete to
localized, telecommunications outages, water outages, various hardware and
software failures, and lack of vendor supplies. Considerations were given to the
following factors during the planning process: estimated costs, feasibility,
functionality, and appropriateness.

         The most likely worst-case scenario would be a localized disruption or
failure of power and/or telecommunications, although the Subsidiary Bank has no
reason to conclude that these events will happen. If these events did occur, the
Subsidiary Bank would implement its contingency plan. It is important for
customers to understand that if a contingency plan is implemented there may be
some customer inconvenience since service levels may not be at peak.


                                      -7-
<PAGE>


         Finally, we must admit that even after detailed preparation as
described above, there are no guarantees that the assumptions, estimates, tests
and validation will be as we expect. The Corporation is still dependent on third
party vendors and suppliers for a large part of our business operation. If
events are not as the Corporation and our vendors expect, the Subsidiary Bank's
business, results of operations and financial position could be materially
adversely affected.



INTEREST RATE SENSITIVITY

        The table below shows the opportunities the Corporation will have to
reprice interest earning assets and interest bearing liabilities as of December
31, 1998. Nonaccrual loans are excluded from these balances.
<TABLE>
<CAPTION>
<S>     <C>
                                                              Mature or Reprice
                                                  After Three
                                                  Months But   After One Year
                                  Within              Within       But Within         After
                             Three Months     Twelve Months        Five Years        Five Years
 Nonsensitive
Interest Earning Assets:
  Fixed rate loans           $ 8 214 733     $21 503 255       $41 111 453    $ 2 559 819          $ - -
  Floating rate loans          4 417 276             - -              - -             - -            - -
  Securities                   3 000 937      10 571 656        36 185 768            - -        449 700
  Securities purchased under
    agreements to resell and
    federal funds sold        13 483 258             - -              - -             - -            - -
                             -----------     -----------       ----------     -----------    -----------
      Total                  $29 116 204     $32 074 911       $77 297 221    $ 2 559 819      $ 449 700
                             -----------     -----------       -----------    -----------    -----------

Interest Bearing Liabilities:
  Time deposits
    $100,000 and over        $   779 128     $ 1 643 375        $2 587 927    $       - -          $ - -
  Other time deposits          6 601 677      19 591 090        11 532 077            - -            - -
  Money market accounts        7 292 223             - -              - -             - -            - -
  NOW accounts                29 111 469             - -              - -             - -     16 810 385
  Savings accounts                   - -             - -              - -             - -     17 294 315
                             -----------     -----------       ----------     -----------    -----------
      Total                  $43 784 497     $21 234 465       $14 120 004    $       - -   $ 34 104 700
                             -----------     -----------       -----------    -----------   ------------

Rate Sensitivity Gap        $(14 668 293)    $10 840 446       $63 177 217    $ 2 559 819
                            ------------     -----------       -----------    -----------

Cumulative Gap              $(14 668 293)    $(3 827 847)      $59 349 370   $ 61 909 189
                            ============     ===========       ===========   ============
</TABLE>

        At December 31, 1998, the Corporation showed negative cumulative gaps in
the first two time frames with the remaining time frames showing positive gaps.
The increase in the negative gap in the first time frame when comparing to
December 31, 1997 is due to the increase in Select Checking account balances
(Select Checking is a form of NOW account). The Select Checking pays a higher
rate of interest on balances of $5,000 or more and were started in August of
1997 because competition was increasing with similar types of accounts. While
serving the customer well, these accounts are not favorable to the Corporation's
liability sensitive position.

        The Corporation's Asset Liability Committee recommended that the APY
(annual percentage yield) on these Select Checking accounts be gradually reduced
until the balances stopped increasing. However, to date this strategy which was
accepted by the Board of Directors has not been successful. The increase in
Select Checking accounts is basically the only change in the Corporation's
balance sheet during 1998 and therefore the major cause of the increased
liability sensitive positions in the first two time frames. The Committee
explored several other options during the year to decrease liability
sensitivity, but the consensus of opinion was not to adopt any of the suggested
strategies.

        As stated in previous years, an even match between assets and
liabilities in each time frame is the safest position especially in times of
rapidly rising or declining rates. During other times, the even match is not as
critical. The advantages or disadvantages of positive and negative gaps depend
totally on the direction in which interest rates are moving. An asset sensitive
institution's net interest margin and net interest income generally will be
impacted favorably by rising interest rates, while that of a liability sensitive
institution generally will be impacted favorably by declining interest rates.


                                      -8-
<PAGE>

LOAN PORTFOLIO

     Loans at December 31, 1998 and 1997 are summarized below:

                                                         1998          1997
                                                     -----------   -----------

          Commercial, financial and agricultural     $ 2 433 571    $2 314 804
          Real estate:
             Construction and land development           651 848       393 187
             Secured by farm land                      1 394 201     1 717 930
             Secured by 1-4 family residential        42 541 181    43 282 898
             Other real estate                        12 623 662    12 496 739
          Consumer                                    17 738 039    17 705 824
          All other                                      424 034       301 580
                                                     -----------    ----------
                                                    $ 77 806 536   $78 212 962
                                                    ============   ===========

        Loans have decreased slightly when comparing year end totals for 1998
and 1997, while the average balance for total loans has increased approximately
$1,700,000 in 1998 compared to 1997. There are no significant differences
between categories in the loan portfolios when comparing 1998 to 1997.

        There were no categories of loans that exceeded 10% of outstanding loans
at December 31, 1998 which were not disclosed in the table above.

REMAINING MATURITIES OF SELECTED LOANS

                                                 Commercial,
                                                 Financial and      Real Estate-
                                                  Agricultural      Construction

        Within one year                          $ 2 050 883         $  109 436
        Variable rate                                248 030             48 000
        Fixed rate, over one through five years      134 658            494 412
                                                 ----------          ----------
             Total maturities                    $ 2 433 571         $  651 848
                                                 ===========         ==========

ALLOWANCE FOR LOAN LOSSES

        The table shown below is an analysis of the Corporation's allowance for
loan losses. Historically, net charge-offs (loans charged off as uncollectible
less any amounts recovered on these loans) for the Corporation have been very
low when compared with the size of the total loan portfolio. Management
continually monitors the loan portfolio with quarterly procedures that allow for
problem loans and potentially problem loans to be highlighted and watched. Based
on experience, the loan policies and the current monitoring program, management
believes the loan loss reserve is adequate.
<TABLE>
<CAPTION>
                                                          1998          1997          1996
                                                       -----------   -----------  -----------
<S>                                                     <C>           <C>          <C>        
        Balance at beginning of period                  $ 1 138 747   $1 138 747   $  899 245
        Charge-offs:
          Commercial, financial and agricultural               - -           - -          - -
          Real estate - construction                           - -           - -          - -
          Real estate - mortgage                               - -           - -          - -
          Consumer                                         166 722       175 828       98 124
                                                       -----------   -----------  -----------
            Total charge-offs                              166 722       175 828       98 124
                                                       -----------   -----------  -----------

        Recoveries:
          Commercial, financial and agricultural               - -           - -          - -
          Real estate - construction                           - -           - -          - -
          Real estate - mortgage                               - -           - -      186 534
          Consumer                                          42 730        48 420       51 092
                                                       -----------   -----------  -----------
            Total recoveries                                42 730        48 420      237 626
                                                       -----------   -----------  -----------

        Net charge-offs (recoveries)                       123 992       127 408     (139 502)

        Additions charged to operations                    125 245       127 408      100 000
                                                       -----------   -----------  -----------
        Balance at end of period                       $ 1 140 000   $ 1 138 747  $ 1 138 747
                                                       ===========   ===========  ===========



        Ratio of net charge-offs (recoveries) during the period
          to average loans outstanding during the period     0.16%         0.17%        (0.19)%
                                                             ====          ====         =====
</TABLE>


                                      -9-
<PAGE>

ALLOCATION OF RESERVE FOR LOAN LOSSES

        The following table shows an allocation of the reserve among loan
categories based upon analysis of the loan portfolio's composition, historical
loan loss experience, and other factors, and the ratio of the related
outstanding loan balances to total loans. This analysis is recorded each quarter
with monitoring procedures where all loans are examined and problem loans and
potentially problem loans are highlighted for continued observance.
<TABLE>
<CAPTION>
<S>     <C>
                                                              1998                            1997
                                                ------------------------------   ------------------------------
                                                              Percent of Loans                 Percent of Loans
                                                              in Each Category                 in Each Category
                                                 Reserve       to Total Loans     Reserve       to Total Loans
                                                ---------     ----------------   ---------     ----------------
        Commercial, financial and agricultural  $  12 168           3.13%        $  11 575         2.95%
        Real estate mortgage:
          Construction and land development        52 759            .84%           51 466          .50%
          Secured by farm land                      6 971           1.79%           35 679         2.20%
          Secured by 1-4 family residential       294 588          54.68%          272 837        55.34%
          Other real estate                       288 405          16.22%          210 719        15.98%
        Consumer                                  103 769          22.80%          100 671        22.64%
        All other                                   2 120            .54%            1 506          .39%
        Unallocated                               379 220            - -           454 294          - -
                                                ---------         ------         ---------       ------
                                                $1 140 000        100.00%        $1 138 747      100.00%
                                                ==========        ======         ==========      ======


RISK ELEMENTS IN THE LOAN  PORTFOLIO
                                                                     1998           1997           1996
                                                                  ---------      ---------      ---------

        Nonaccrual loans                                          $     - -      $ 285 150      $ 285 150
        Restructured loans                                              - -            - -            - -
        Foreclosed properties                                        55 425        100 005            - -
                                                                  ---------      ---------      ---------
          Total nonperforming assets                              $  55 425      $ 385 155      $ 285 150
                                                                  =========      =========      =========

        Loans past due 90 days accruing interest                  $ 596 877      $  19 923      $  48 663
                                                                  =========      =========      =========

        Reserve for loan losses to period end loans                 1.47%            1.46%         1.55%

        Nonperforming assets to period end loans and
          foreclosed properties                                      .07%             .49%          .39%
</TABLE>

        Loans are placed on nonaccrual status when a loan is specifically
determined to be impaired or when principal or interest is delinquent for 90
days or more. Interest income generally is not recognized on specific impaired
loans unless the likelihood of further loss is remote. Interest income on other
nonaccrual loans is recognized only to the extent of interest payments received.

        Impaired loans excluded from nonperforming assets amounted to $397,986
at December 31, 1998 and 1997.

        At December 31, 1998, other potential problem loans totaled $100,079.
Loans are viewed as potential problem loans according to the ability of such
borrowers to comply with current repayment terms. These loans are subject to
constant management attention, and their status is reviewed on a regular basis.
Management has allocated a portion of the allowance for these loans according to
the review of the potential loss in each loan situation.



SECURITIES PORTFOLIO

        In accordance with FASB No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," the Corporation records securities being held to
maturity at amortized cost and securities available for sale at fair value. The
effect of unrealized gains and losses, net of tax effects, is recognized in
stockholders' equity. The Corporation does not have any derivative financial
instruments.


                                      -10-
<PAGE>

        The schedule below summarizes the book value of the portfolio by
maturity classifications and shows the weighted average yield in each group.
<TABLE>
<CAPTION>
<S>     <C>
                                                                           Weighted                             Weighted
                                                             1998           Average               1997           Average
                                                          Book Value         Yield             Book Value         Yield

Securities held to maturity
   U.S. Treasury securities and securities
      of U.S. Government agencies:
        Maturing within one year                         $10 018 466         5.84%            $ 9 995 556          5.98%
        Maturing after one year but
          within five years                               15 010 863         5.79%             14 044 650          5.90%
                                                         -----------                          -----------
             Total securities held to maturity          $ 25 029 329                          $24 040 206
                                                        ============                          ===========

Securities available for sale
   U.S. Treasury securities and securities
      of U.S. government agencies:
        Maturing within one year                          $3 554 127         5.01%            $ 3 000 000          6.09%
        Maturing after one year but
          within five years                               21 174 905         5.43%             10 002 502          5.66%
   Equity securities                                         449 700          - -                 401 600           - -
                                                         -----------                          -----------
             Total securities available for sale        $ 25 178 732                          $13 404 102
                                                        ============                          ===========

             Total securities                           $ 50 208 061                          $37 444 308
                                                        ============                          ===========
</TABLE>

DEPOSITS

        When comparing the 1998 and 1997 year end balances, total deposits
increased over $16,400,000 or 14.44% in 1998. Noninterest bearing demand
deposits increased over $2,400,000 or 16.04%. Time deposits increased almost
$2,000,000 or 4.88%.

        The most significant change in deposits was in the savings and interest
bearing demand category which increased over $12,000,000 or 20.69%. The Select
Checking balances (a form of NOW account that pays a higher interest rate on
balances of $5,000 or more) increased over $18,000,000. Approximately $5,000,000
moved from Money Market accounts to Select Checking. Balances of NOW accounts
and savings accounts remained basically the same when comparing year end
balances of 1998 and 1997.

        The average yield on savings and interest bearing demand deposits
increased from 2.62% at year end 1997 to 3.18% at December 31, 1998. This
increase is due to the higher rates paid on Select Checking balances during
1998. The average yield on time deposits increased slightly in 1998 to 5.59%
compared to 5.48% in 1997.

        At December 31, 1998, time deposits of $100,000 or more were 3.8% of
total deposits compared with 4.0% at December 31, 1997. Maturities of time
deposits of $100,000 or more at December 31, 1998 are as follows:

                  Within three months                            $  779 128
                  Over three through six months                     528 599
                  Over six months through twelve months           1 114 776
                  Over twelve months                              2 587 927
                                                                 ----------

                     Total                                       $5 010 430
                                                                 ==========



ANALYSIS OF CAPITAL

        The adequacy of the Corporation's capital is reviewed by management on
an ongoing basis with reference to the size, composition, and quality of the
Corporation's asset and liability levels and consistency with regulatory
requirements and industry standards. Management seeks to maintain a capital
structure that will assure an adequate level of capital to support anticipated
asset growth and absorb potential losses.


                                      -11-
<PAGE>

        The Federal Reserve, the Comptroller of the Currency and the Federal
Deposit Insurance Corporation have adopted capital guidelines to supplement the
existing definitions of capital for regulatory purposes and to establish minimum
capital standards. Specifically, the guidelines categorize assets and
off-balance sheet items into four risk-weighted categories. The minimum ratio of
qualifying total capital to risk-weighted assets is 8.0%, of which at least 4.0%
must be Tier 1 capital, composed of common equity, retained earnings and a
limited amount of perpetual preferred stock, less certain goodwill items. The
Corporation had a ratio of total capital to risk-weighted assets of 23.89% at
December 31, 1998 and a ratio of Tier 1 capital to risk-weighted assets of
22.64%. Both of these exceed the capital requirements adopted by the federal
regulatory agencies.

                                                      1998             1997
                                                  ------------     ------------
      Tier 1 capital:
         Common stock                             $    600 000     $    600 000
         Surplus                                     5 400 000        5 400 000
         Retained earnings                          10 090 870        9 291 741
                                                  ------------     ------------
      Total tier 1 capital                         $16 090 870      $15 291 741
      Tier 2 capital:
         Allowance for loan losses (1)                 891 693          829 378
                                                  ------------     ------------

      Total risk-based capital                    $ 16 982 563     $ 16 121 119
                                                  ============     ============



      Risk-weighted assets                        $ 71 087 152     $ 66 040 845
                                                  ============     ============

      Capital ratios:
         Tier 1 risk-based capital ratio               22.64%           23.15%
         Total risk-based capital ratio                23.89%           24.41%
         Leverage ratio                                11.15%           11.83%

(1)     Limited to 1.25% of gross risk-weighted assets.


LIQUIDITY

        Liquidity represents an institution's ability to meet present and future
financial obligations through either the sale or maturity of existing assets or
the acquisition of additional funds through liability management. This could
also be termed the management of the cash flows of an organization. Liquid
assets include cash and due from banks, securities purchased under agreements to
resell, federal funds sold, securities available for sale, and loans and
investments maturing within one year. The Corporation's liquidity during 1998
(aside from borrowing capabilities) is detailed in the statement of cash flows
included in the financial statements. Operating cash flows are derived from net
income adjusted for items that do not involve cash. Cash flows from investing
activities include maturity of securities and payments on and maturities of
loans. Cash flows from financing activities include increases in any deposit
accounts. As a result of the Corporation's management of liquid assets and the
ability to generate liquidity through liability funding, management believes
that the Corporation's overall liquidity is sufficient to satisfy its
depositors' requirements and to meet its customers' credit needs.

        At December 31, 1998, cash and due from banks, securities purchased
under agreements to resell, federal funds sold and loans and securities maturing
within one year were $50,785,000.

        Borrowing capabilities provide additional liquidity. The Subsidiary Bank
maintains a federal funds line of $5,000,000 with NationsBank, N.A. The
Subsidiary Bank is also a member of the Federal Home Loan Bank of Pittsburgh and
has short and/or long-term borrowing capabilities of approximately $45,000,000.
The Subsidiary Bank did not use either of these sources during 1998.


ACCOUNTING RULE CHANGES

        In June 1998, FASB issued FAS 133, "Accounting for Derivative
Instruments and Hedging Activities." FAS 133 establishes accounting and
reporting standards for derivative financial instruments and other similar
financial instruments and for hedging activities. The standard also allows
securities classified as held-to-maturity to be transferred to the
available-for-sale category at the date of initial application of this standard.
FAS 133 is effective for all fiscal years beginning after June 15, 1999.
Management is currently reviewing this statement to determine the impact, if
any, it will have since the Corporation currently has no derivative instruments.


                                      -12-
<PAGE>

                          INDEPENDENT AUDITOR'S REPORT



To the Board of Directors and Stockholders
Potomac Bancshares, Inc. and Subsidiary
Charles Town, West Virginia



        We have audited the accompanying consolidated balance sheets of Potomac
Bancshares, Inc. and Subsidiary as of December 31, 1998 and 1997, and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for the years ended December 31, 1998, 1997 and 1996. These financial
statements are the responsibility of the Corporation'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 audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

        In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Potomac
Bancshares, Inc. and Subsidiary as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for the years ended December
31, 1998, 1997 and 1996, in conformity with generally accepted accounting
principles.



Winchester, Virginia
January 29, 1999



                                      -13-
<PAGE>

                                 CONSOLIDATED BALANCE SHEETS
                                  DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
<S>                                                                      <C>                 <C>
                                                                         1998                1997
                                                                --------------         -------------
       ASSETS

Cash and due from banks                                         $    4 646 475         $   4 517 965
Securities purchased under agreements to resell
   and federal funds sold                                           13 483 258             8 600 000
Securities (fair value:  1998, $50,530,066; 1997,
   $37,507,918)                                                     50 208 061            37 444 308
Loans                                                               77 806 536            78 212 962
   Reserve for loan losses                                          (1 140 000)           (1 138 747)
                                                                --------------         -------------
       Net loans                                                    76 666 536            77 074 215
Premises and equipment, net                                          1 223 979             1 201 550
Accrued interest receivable                                          1 167 699             1 008 357
Other assets                                                           707 556               710 133
                                                                --------------         -------------

       Total Assets                                             $  148 103 564         $ 130 556 528
                                                                ==============         =============


       LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES
   Deposits
     Noninterest bearing demand deposits                        $   17 421 542         $  15 013 619
     Savings and interest bearing demand deposits                   70 508 392            58 419 752
     Time deposits                                                  42 735 274            40 748 551
                                                                --------------         -------------
       Total Deposits                                           $  130 665 208         $ 114 181 922
   Accrued interest payable                                            350 258               342 503
   Other liabilities                                                   891 942               734 152
   Commitments and contingent liabilities                                  - -                   - -
                                                                --------------         -------------
       Total Liabilities                                        $  131 907 408         $ 115 258 577
                                                                --------------         -------------

STOCKHOLDERS' EQUITY
   Common stock, $1 per share par value; 5,000,000 shares
     authorized; 600,000 shares issued and outstanding          $      600 000         $     600 000
   Surplus                                                           5 400 000             5 400 000
   Undivided profits                                                10 090 870             9 291 741
   Accumulated other comprehensive income                              105 286                 6 210
                                                                --------------         -------------
       Total Stockholders' Equity                               $   16 196 156         $  15 297 951
                                                                --------------         -------------

       Total Liabilities and Stockholders' Equity               $  148 103 564         $ 130 556 528
                                                                ==============         =============
</TABLE>

See Notes to Consolidated Financial Statements.


                                      -14-
<PAGE>

                              CONSOLIDATED STATEMENTS OF INCOME
                         YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
<S>     <C>
                                                       1998               1997             1996
                                                  -------------      ------------      ------------

Interest Income:
  Interest and fees on loans                      $   6 989 025      $  7 018 882      $  6 749 755
  Interest on investment securities
        Taxable                                       1 702 127         1 628 597         1 213 709
  Interest and dividends on securities
     available for sale
        Taxable                                         881 103           691 203           661 125
        Dividends                                        27 528            25 006            24 322
  Interest on securities purchased under agreements
     to resell and federal funds sold                   455 539           198 926           437 034
                                                  -------------      ------------      ------------

          Total Interest Income                   $  10 055 322      $  9 562 614      $  9 085 945
                                                  -------------      ------------      ------------

Interest Expense:
  Interest on deposits                            $   4 400 932      $  3 693 476      $  3 623 243
  Interest on federal funds purchased and securities
     sold under agreements to repurchase                    - -            16 219               - -
                                                  -------------      ------------      ------------

          Total Interest Expense                  $   4 400 932      $  3 709 695      $  3 623 243
                                                  -------------      ------------      ------------

          Net Interest Income                     $   5 654 390      $  5 852 919      $  5 462 702

Provision for Loan Losses                               125 245           127 408           100 000
                                                  -------------      ------------      ------------

          Net Interest Income after
             Provision for Loan Losses            $   5 529 145      $  5 725 511      $  5 362 702
                                                  -------------      ------------      ------------

Other Income:
  Trust and financial services                    $     555 101      $    522 023      $    460 053
  Service charges on deposit accounts                   378 523           403 006           318 062
  Fees for other customer services                      161 298           162 423           181 980
  Other operating income                                 30 746            40 933            28 730
                                                  -------------      ------------      ------------

          Total Other Income                      $   1 125 668      $  1 128 385      $    988 825
                                                  -------------      ------------      ------------

Other Expenses:
  Salaries and employee benefits                  $   2 627 960      $  2 473 151      $  2 468 762
  Net occupancy expense of premises                     183 917           194 426           203 033
  Furniture and equipment expenses                      361 798           348 798           300 211
  Stationery and supplies                               104 927           109 472           106 810
  Directors fees                                        103 630           102 330           105 700
  ATM expenses                                           72 078            75 766           105 445
  Other operating expenses                              842 650           822 628           823 555
                                                  -------------      ------------      ------------

          Total Other Expenses                    $   4 296 960      $  4 126 571      $  4 113 516
                                                  -------------      ------------      ------------

          Income before Income Tax Expense        $   2 357 853      $  2 727 325      $  2 238 011

Income Tax Expense                                      868 724         1 005 621           830 577
                                                  -------------      ------------      ------------

          Net Income                              $   1 489 129      $  1 721 704      $  1 407 434
                                                  =============      ============      ============

Earnings Per Share, basic and diluted             $        2.48      $       2.87      $       2.35
                                                  =============      ============      ============
</TABLE>
See Notes to Consolidated Financial Statements.


                                      -15-
<PAGE>

                  CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                         YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
<S>     <C>
                                                                              Accumulated
                                                                                Other
                                       Common                  Undivided     Comprehensive     Comprehensive
                                       Stock      Surplus       Profits         Income            Income             Total
                                     --------   ----------    ----------     -------------     -------------      -----------
Balances, December 31, 1995          $600 000   $5 400 000    $7 422 603           $- -                           $13 422 603

  Comprehensive income
    Net income - 1996                     - -          - -     1 407 434            - -         $1 407 434          1 407 434
    Other comprehensive income
      net of tax, unrealized holding
      (losses) arising during the
      period (net of tax, $21,018)        - -          - -           - -        (40 800)           (40 800)           (40 800)
                                                                                                ----------
  Comprehensive income                                                                          $1 366 634
                                                                                                ==========

  Cash dividends - 1996
    ($.95 per share)                      - -          - -      (570 000)           - -                              (570 000)
                                     --------   ----------    ----------       --------                          ------------
Balances, December 31, 1996          $600 000   $5 400 000    $8 260 037       $(40 800)                         $ 14 219 237

  Comprehensive income
    Net income - 1997                     - -          - -     1 721 704            - -         $1 721 704          1 721 704
    Other comprehensive income
      net of tax, unrealized holding
      gains arising during the
      period (net of tax, $24,217)        - -          - -           - -         47 010             47 010             47 010
                                                                                                ----------
  Comprehensive income                                                                          $1 768 714
                                                                                                ==========

  Cash dividends - 1997
    ($1.15 per share)                     - -          - -      (690 000)           - -                              (690 000)
                                     --------   ----------    ----------       --------                          ------------

Balances, December 31, 1997          $600 000   $5 400 000    $9 291 741         $6 210                          $ 15 297 951

  Comprehensive income
    Net income - 1998                     - -          - -     1 489 129            - -         $1 489 129          1 489 129
    Other comprehensive income
      net of tax, unrealized holding
      gains arising during the
      period (net of tax, $51,039)        - -          - -           - -         99 076             99 076             99 076
                                                                                                ----------
  Comprehensive income                                                                          $1 588 205
                                                                                                ==========

  Cash dividends - 1998
    ($1.15 per share)                     - -          - -      (690 000)           - -                              (690 000)
                                     --------   ----------    ----------       --------                          ------------

Balances, December 31, 1998          $600 000   $5 400 000   $10 090 870       $105 286                          $ 16 196 156
                                     ========   ==========   ===========       ========                          ============
</TABLE>
See Notes to Consolidated Financial Statements.


                                      -16-
<PAGE>

                            CONSOLIDATED STATEMENTS OF CASH FLOWS
                         YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
<S>     <C>
                                                                        1998              1997              1996
                                                                    ------------      -----------       -----------
CASH FLOWS FROM OPERATING ACTIVITIES
   Net income                                                       $  1 489 129      $ 1 721 704       $ 1 407 434
   Adjustments to reconcile net income to net cash
      provided by operating activities:
         Provision for loan losses                                       125 245          127 408           100 000
         Depreciation                                                    212 287          208 809           181 424
         Amortization                                                     12 282           12 282            12 282
         Deferred income tax (credits)                                   (43 592)         (40 759)          (88 111)
         Discount accretion and premium amortization
           on securities, net                                             19 416           28 853            27 060
         Loss on sale of real estate                                       9 579              - -            94 972
         Changes in assets and liabilities:
           (Increase) decrease in accrued interest receivable           (159 342)          12 859          (243 706)
           (Increase) decrease in other assets                           (61 732)         (19 025)           15 002
           Increase (decrease) in accrued interest payable                 7 755           16 459           (20 196)
           Increase in other liabilities                                 157 790            8 837           237 283
                                                                    ------------      -----------       -----------
              Net cash provided by operating activities             $  1 768 817      $ 2 077 427       $ 1 723 444
                                                                    ------------      -----------       -----------

CASH FLOWS FROM INVESTING ACTIVITIES
   Proceeds from maturity of investment securities                  $ 10 000 000      $ 8 000 000       $18 000 000
   Proceeds from maturity of securities available for sale             3 000 000        8 000 000               - -
   Purchases of investment securities                                (11 014 326)      (6 049 375)      (17 996 884)
   Purchases of securities available for sale                        (14 618 728)      (7 019 050)      (14 071 795)
   Net (increase) decrease in loans                                      226 428       (4 915 035)          265 336
   Purchases of premises and equipment                                  (234 716)        (155 966)         (318 897)
   Proceeds from sale of real estate                                      91 007              - -           350 000
                                                                    ------------      -----------       -----------
              Net cash (used in) investing activities               $(12 550 335)     $(2 139 426)     $(13 772 240)
                                                                    ------------      -----------       ------------
CASH FLOWS FROM FINANCING ACTIVITIES
   Net increase in noninterest bearing demand deposits              $  2 407 923      $   977 121       $   188 872
   Net increase (decrease) in savings and interest bearing
      demand deposits                                                 12 088 640        3 336 332        (1 407 379)
   Net increase (decrease) in time deposits                            1 986 723        1 356 000           (58 498)
   Cash dividends                                                       (690 000)        (690 000)         (570 000)
                                                                    ------------    -------------      ------------
              Net cash provided by (used in) financing activities    $15 793 286    $   4 979 453      $ (1 847 005)
                                                                    ------------    -------------      ------------
              Increase (decrease) in cash and cash equivalents       $ 5 011 768    $   4 917 454      $(13 895 801)

CASH AND CASH EQUIVALENTS
   Beginning                                                          13 117 965        8 200 511        22 096 312
                                                                    ------------    -------------      ------------

   Ending                                                           $ 18 129 733     $ 13 117 965      $  8 200 511
                                                                    ============     ============      ============

SUPPLEMENTAL DISCLOSURES OF CASH
   FLOW INFORMATION
      Cash payments for:
         Interest                                                   $  4 393 177      $ 3 693 236       $ 3 643 439
                                                                    ============      ===========       ===========
         Income taxes                                                   $902 011      $ 1 202 017         $ 806 431
                                                                    ============      ===========       ===========
SUPPLEMENTAL DISCLOSURES OF NON-CASH
   INVESTING AND FINANCING ACTIVITIES
      Other real estate acquired in settlement of loans             $    110 006      $   100 005       $       - -
                                                                    ============      ===========       ===========
      Loans made on sale of real estate                             $     54 000      $       - -       $   291 000
                                                                    ============      ===========       ===========
      Unrealized gain (loss) on securities available for sale       $    150 115      $    71 227       $   (61 818)
                                                                    ============      ===========       ===========
</TABLE>
See Notes to Consolidated Financial Statements.


                                      -17-
<PAGE>

                          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1.  Nature of Banking Activities and Significant Accounting Policies

         Potomac Bancshares, Inc. and Subsidiary (the Corporation) grant
         commercial, financial, agricultural, residential and consumer loans to
         customers, primarily in Jefferson County, West Virginia. The
         Corporation's market area also includes Washington County and Frederick
         County, Maryland; Loudoun County and Clarke County, Virginia; and
         Berkeley County, West Virginia. The loan portfolio is well diversified
         and loans generally are collaterized by assets of the customers. The
         loans are expected to be repaid from cash flows or proceeds from the
         sale of selected assets of the borrowers.

         The accounting and reporting policies of the Corporation conform to
         generally accepted accounting principles and to general practices
         within the banking industry. The following is a summary of the more
         significant policies.

            Principles of Consolidation

               The consolidated financial statements of Potomac Bancshares, Inc.
               and its wholly-owned subsidiary, Bank of Charles Town (the Bank),
               include the accounts of both companies. All material intercompany
               balances and transactions have been eliminated in consolidation.

            Securities

               Investments are classified in three categories and accounted for
               as follows:

               a. Securities Held to Maturity

                  Securities classified as held to maturity are those debt
                  securities the Corporation has both the intent and ability to
                  hold to maturity regardless of changes in market conditions,
                  liquidity needs or changes in general economic conditions.
                  These securities are carried at cost adjusted for amortization
                  of premium and accretion of discount, computed by the interest
                  method over their contractual lives.

               b. Securities Available for Sale

                  Securities classified as available for sale are those debt and
                  equity securities that the Corporation intends to hold for an
                  indefinite period of time, but not necessarily to maturity.
                  Any decision to sell a security classified as available for
                  sale would be based on various factors, including significant
                  movements in interest rates, changes in the maturity mix of
                  the Corporation's assets and liabilities, liquidity needs,
                  regulatory capital considerations, and other similar factors.
                  Securities available for sale are carried at fair value.
                  Unrealized gains or losses are reported as a separate
                  component of other comprehensive income, net of tax. Realized
                  gains or losses, determined on the basis of the cost of
                  specific securities sold, are included in earnings.

               c. Trading Securities

                  Trading securities, which are generally held for the short
                  term in anticipation of market gains, are carried at fair
                  value. Realized and unrealized gains and losses on trading
                  account assets are included in interest income on trading
                  account securities. The Corporation had no trading securities
                  at December 31, 1998 and 1997.

            Loans

               Loans are stated at the amount of unpaid principal reduced by a
               reserve for possible loan losses. Interest income on loans is
               computed on the loan balance outstanding. Loans are charged off
               when in the opinion of management, they are deemed to be
               uncollectible after taking into consideration such factors as the
               current financial condition of the customer and the underlying
               collateral and guarantees.

               The Corporation has adopted Financial Accounting Standards
               Statement No. 114, "Accounting by Creditors for Impairment of a
               Loan." This Statement has been amended by FASB Statement No. 118,
               "Accounting by Creditors for Impairment of a Loan - Income
               Recognition and Disclosures." Statement 114, as amended, requires
               that the impairment of loans that have been separately identified
               for evaluation is to be measured based on the present value of
               expected future cash flows or, alternatively, the observable
               market price of the loans or the fair value of the collateral.
               However, for those loans that are collateral dependent (that is,
               if repayment of those loans is expected to be provided solely by
               the underlying collateral) and for which management has
               determined foreclosure is probable, the measure of impairment of
               those loans is to be based on the fair value of the collateral.
               Statement 114, as amended, also requires certain disclosures
               about investments in impaired loans and the reserve for loan
               losses and interest income recognized on loans.


                                      -18-
<PAGE>

Note 1.  Nature of Banking Activities and Significant Accounting Policies
         (Continued)

               The Corporation considers all consumer installment loans and
               residential mortgage loans to be homogeneous loans. These loans
               are not subject to impairment under FASB 114. A loan is
               considered impaired when it is probable that the Corporation will
               be unable to collect all principal and interest amounts according
               to the contractual terms of the loan agreement. Factors involved
               in determining impairment include, but are not limited to,
               expected future cash flows, financial condition of the borrower,
               and the current economic conditions. A performing loan may be
               considered impaired if the factors above indicate a need for
               impairment. A loan on nonaccrual status may not be impaired if in
               the process of collection or there is an insignificant shortfall
               in payment. An insignificant delay of less than 30 days or a
               shortfall of less than 5% of the required principal and interest
               payment generally does not indicate an impairment situation, if
               in management's judgment the loan will be paid in full. Loans
               that meet the regulatory definitions of doubtful or loss
               generally qualify as an impaired loan under FASB 114. Charge-offs
               for impaired loans occur when the loan, or portion of the loan is
               determined to be uncollectible, as is the case for all loans.

               Loans are placed on nonaccrual status when a loan is specifically
               determined to be impaired or when principal or interest is
               delinquent for 90 days or more. Interest income generally is not
               recognized on specific impaired loans unless the likelihood of
               further loss is remote. Interest income on other nonaccrual loans
               is recognized only to the extent of interest payments received.

            Reserve for Loan Losses

               The reserve for loan losses is maintained at a level which, in
               management's judgement, is adequate to absorb credit losses
               inherent in the loan portfolio. The amount of the reserve is
               based on management's evaluation of the collectibility of the
               loan portfolio, credit concentrations, trends in historical loss
               experience, specific impaired loans, and economic conditions.
               Reserves for impaired loans are generally determined based on
               collateral values or the present value of estimated cash flows.
               The reserve is increased by a provision for loan losses, which is
               charged to expense, and reduced by charge-offs, net of
               recoveries. Changes in the reserves relating to impaired loans
               are charged or credited to the provision for loan losses. Because
               of uncertainties inherent in the estimation process, management's
               estimate of credit losses inherent in the loan portfolio and the
               related reserve may change in the near term.

               For federal income tax purposes, the Corporation deducts the
               maximum amount allowable under current income tax regulations.

            Premises and Equipment

               Premises and equipment are stated at cost less accumulated
               depreciation. Depreciation is computed primarily on the
               straight-line and declining-balance methods.

               Maintenance and repairs of property and equipment are charged to
               operations and major improvements are capitalized. Upon
               retirement, sale or other disposition of property and equipment,
               the cost and accumulated depreciation are eliminated from the
               accounts and gain or loss is included in operations.

            Other Real Estate

               Real estate acquired by foreclosure is carried at the lower of
               cost or fair market value, adjusted for anticipated selling
               expenses.

            Employee Benefit Plans

               The Corporation has a noncontributory, defined benefit pension
               plan covering employees meeting certain age and service
               requirements. The Corporation computes the net periodic pension
               cost of the plan in accordance with Financial Accounting
               Standards Board Statement No. 87, "Employers' Accounting for
               Pensions."

               The Corporation sponsors a postretirement life insurance plan
               covering retirees with 25 years of service over the age of 60 and
               health care plan for all retirees and five current employees that
               have met certain eligibility requirements. The Corporation
               computes the net periodic postretirement benefit cost of the plan
               in accordance with Financial Accounting Standards Board Statement
               No. 106, "Employers' Accounting for Postretirement Benefits Other
               Than Pensions."

               In 1998, the Corporation adopted Statement of Financial
               Accounting Standards No. 132, "Employers' Disclosures about
               Pensions and Other Postretirement Benefits." This pronouncement
               does not change the measurement or recognition of amounts
               recognized in the Corporation's financial statements applicable
               to its defined benefit and postretirement plans. Statement No.
               132 revises the existing disclosure requirements by standardizing
               the disclosure requirements for pensions requiring certain
               additional information on changes in the benefit obligations and
               fair values of plan assets, and eliminating certain disclosures.


                                      -19-
<PAGE>


Note 1.  Nature of Banking Activities and Significant Accounting Policies
         (Continued)

            Earnings Per Share

               In 1997, the Financial Accounting Standards Board issued
               Statement No. 128, "Earnings per Share." Statement 128 replaced
               the calculation of primary and fully diluted earnings per share
               with basic and diluted earnings per share. Basic earnings per
               share excludes any dilutive effects of options, warrants and
               convertible securities. Diluted earnings per share is very
               similar to the previously reported fully diluted earnings per
               share. The Corporation had no potential common stock as of
               December 31, 1998, 1997 and 1996.

            Income Taxes

               Deferred taxes are provided on a liability method whereby
               deferred tax assets are recognized for deductible temporary
               differences, operating loss carryforwards, and tax credit
               carryforwards. Deferred tax liabilities are recognized for
               taxable temporary differences. Temporary differences are
               differences between the reported amounts of assets and
               liabilities and their tax bases. Deferred tax assets are reduced
               by a valuation allowance when, in the opinion of management, it
               is more likely than not that some portion or all of the deferred
               tax assets will not be realized. Deferred tax assets and
               liabilities are adjusted for the effects of changes in tax laws
               and rates on the date of enactment.

            Cash and Cash Equivalents

               For purposes of reporting cash flows, cash and cash equivalents
               include cash on hand, amounts due from banks, securities
               purchased under agreements to resell and federal funds sold.
               Generally, securities purchased under agreements to resell and
               federal funds sold are purchased and sold for one-day periods.

            Trust Division

               Securities and other property held by the Trust Division in a
               fiduciary or agency capacity are not assets of the Corporation
               and are not included in the accompanying financial statements.

            Use of Estimates

               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.

            Advertising

               The Corporation follows the policy of charging the costs of
               advertising to expense as incurred.

            Comprehensive Income

               As of January 1, 1998, the Corporation adopted Statement of
               Financial Accounting Standards (SFAS) No. 130, "Reporting
               Comprehensive Income." Statement No. 130 establishes new rules
               for the reporting and display of comprehensive income and its
               components; however, the adoption of this statement had no impact
               on the Corporation's net income or stockholders' equity. The
               Statement requires other comprehensive income to include
               unrealized gains and losses on investments in securities
               classified as available for sale, which prior to adoption were
               reported separately in stockholders' equity. Financial statements
               for prior years have been reclassified to conform to the
               requirements of Statement No. 130.


Note 2.  Securities

         The amortized cost and fair value of securities being held to maturity
         as of December 31, 1998 and 1997, are as follows:
<TABLE>
<CAPTION>
<S>                                                                             <C>
                                                                                1998
                                                       -----------------------------------------------------
                                                                         Gross       Gross
                                                        Amortized     Unrealized   Unrealized       Fair
                                                           Cost          Gains      (Losses)        Value
                                                       -----------    ----------    ---------    -----------

            U.S. Treasury securities                   $17 008 734    $  229 475    $     - -    $17 238 209
            Obligations of U.S. Government agencies      8 020 595        92 530          - -      8 113 125
                                                       -----------    ----------    ---------    -----------
                                                       $25 029 329    $  322 005    $     - -    $25 351 334
                                                       ===========    ==========    =========    ===========
</TABLE>
                                      -20-
<PAGE>

Note 2.  Securities (Continued)
<TABLE>
<CAPTION>
<S>     <C>
                                                                                        1997
                                                              -----------------------------------------------------
                                                                                Gross         Gross
                                                               Amortized      Unrealized   Unrealized       Fair
                                                                  Cost          Gains       (Losses)        Value
                                                              -----------    ----------    ---------    -----------

            U.S. Treasury securities                          $12 045 427    $   32 708    $  (1 570)   $12 076 565
            Obligations of U.S. Government agencies            11 994 779        32 472          - -     12 027 251
                                                              -----------    ----------    ---------    -----------
                                                              $24 040 206    $   65 180    $  (1 570)   $24 103 816
                                                              ===========    ==========    =========    ===========

         The amortized cost and fair value of the securities being held to
         maturity as of December 31, 1998, by contractual maturity, are shown
         below:

                                                       Amortized         Fair
                                                          Cost          Value
                                                      -----------    -----------

            Due in one year or less                   $10 018 466    $10 104 375
            Due after one year through five years      15 010 863     15 246 959
                                                      -----------    -----------
                                                      $25 029 329    $25 351 334
                                                      ===========    ===========

         There were no sales of securities being held to maturity during 1998,
         1997 and 1996.

         Securities being held to maturity with a carrying value of $6,024,899
         and $7,013,601 at December 31, 1998 and 1997, were pledged to secure
         public funds and other balances as required by law.

         The amortized cost and fair value of securities available for sale as
         of December 31, 1998 and 1997 are as follows:

                                                                                        1998
                                                               -----------------------------------------------------
                                                                                 Gross        Gross
                                                                Amortized     Unrealized    Unrealized      Fair
                                                                  Cost           Gains       (Losses)       Value
                                                               -----------    ----------    ---------    -----------
            U.S. Treasury securities                           $ 4 999 573    $   43 239    $     - -    $ 5 042 812
            Obligations of U.S. Government agencies             19 569 935       140 337      (24 052)    19 686 220
            Federal Home Loan Bank stock                           449 700           - -          - -        449 700
                                                               -----------    ----------    ---------    -----------
                                                               $25 019 208    $  183 576    $ (24 052)   $25 178 732
                                                               ===========    ==========    =========    ===========


                                                                                        1997
                                                               -----------------------------------------------------
                                                                                 Gross        Gross
                                                                Amortized     Unrealized    Unrealized      Fair
                                                                  Cost           Gains       (Losses)       Value
                                                               -----------    ----------    ---------    -----------
            U.S. Treasury securities                           $ 7 988 435    $   25 941    $ (19 687)   $ 7 994 689
            Obligations of U.S. Government agencies              5 004 655         4 408       (1 250)     5 007 813
            Federal Home Loan Bank stock                           401 600           - -          - -        401 600
                                                               $13 394 690    $   30 349    $ (20 937)   $13 404 102
                                                               ===========    ==========    =========    ===========

         The amortized cost and fair value of the securities available for sale
         as of December 31, 1998, by contractual maturity, are shown below:

                                                       Amortized         Fair
                                                          Cost          Value
                                                      -----------    -----------

            Due in one year or less                   $ 3 552 553    $ 3 554 127
            Due after one year through five years      21 016 955     21 174 905
            Other                                         449 700        449 700
                                                      -----------    -----------
                                                      $25 019 208    $25 178 732
                                                      ===========    ===========
</TABLE>

         There were no sales of securities available for sale during 1998, 1997
         and 1996.

         Securities available for sale with a carrying value of $2,005,174 and
         $1,988,991 at December 31, 1998 and 1997, were pledged to secure public
         funds and other balances as required by law.


                                      -21-
<PAGE>

Note 3.  Loans and Related Party Transactions

         The loan portfolio is composed of the following:
<TABLE>
<CAPTION>
<S>     <C>
                                                                      December 31
                                                              -------------------------
                                                                  1998          1997
                                                              -----------   -----------
            Real estate loans:
                  Construction and land development          $    651 848   $   393 187
                  Secured by farm land                          1 394 201     1 717 930
                  Secured by 1-4 family residential            42 541 181    43 282 898
                  Other real estate loans                      12 623 662    12 496 739
               Loans to farmers (except those secured by
                  real estate)                                    246 100       269 682
               Commercial and industrial loans (except those
                  secured by real estate)                       2 187 471     2 045 122
               Loans to individuals for personal expenditures  17 738 039    17 705 824
               All other loans                                    424 034       301 580
                                                              -----------   -----------
                                                              $77 806 536   $78 212 962
                                                              ===========   ===========

         The Securities and Exchange Commission requires disclosure of loans
         which exceed $60,000 to executive officers and directors of the
         Corporation or to their associates. Such loans were made on
         substantially the same terms as those prevailing for comparable
         transactions with similar risks. At December 31, 1998 and 1997, these
         loans totaled $214,881 and $674,248 respectively. During 1998, total
         principal additions were $279,722 and total principal payments were
         $739,089.



Note 4.  Reserve for Loan Losses

         The following is a summary of transactions in the reserve for loan
         losses for 1998, 1997 and 1996:

                                                                              1998           1997          1996
                                                                           ----------     ----------    ----------
               Balances at beginning of year                               $1 138 747     $1 138 747    $  899 245
                  Provision charged to operating expense                      125 245        127 408       100 000
                  Recoveries added to the reserve                              42 730         48 420       237 626
                  Loan losses charged to the reserve                         (166 722)      (175 828)      (98 124)
                                                                           ----------     ----------    ----------
               Balances at end of year                                     $1 140 000     $1 138 747    $1 138 747
                                                                           ==========     ==========    ==========

         Information about impaired loans as of and for the years ended December
         31, 1998 and 1997 are as follows:

                                                                              1998           1997
                                                                           ----------     ----------
               Impaired loans for which a reserve has been provided        $  397 986     $  397 986
               Impaired loans for which no reserve has been provided              - -            - -
                  Total impaired loans                                     $  397 986     $  397 986
                                                                           ==========     ==========

               Reserve provided for impaired loans, included in the
                  reserve for loan losses                                    $198 993     $  198 993
                                                                           ==========     ==========


                                                                              1998           1997          1996
                                                                           ----------     ----------    ----------
               Average balance in impaired loans                             $397 986     $  399 178    $  472 292
                                                                           ==========     ==========    ==========

               Interest income recognized                                    $ 34 062     $   34 271    $   36 125
                                                                           ==========     ==========    ==========
</TABLE>

         Nonaccrual loans excluded from impaired loan disclosure under FASB 114
         amounted to $-0- at December 31, 1998 and $285,150 at December 31,
         1997. If interest on these loans had been accrued, such income would
         have approximated $-0- in 1998 and $29,267 in 1997.


                                      -22-
<PAGE>

Note 5.  Premises and Equipment, Net

         Premises and equipment consists of the following:

                                                             December 31
                                                      -------------------------
                                                         1998           1997
                                                      ----------    -----------

                    Premises                          $1 851 509    $ 1 813 763
                    Furniture and equipment            2 458 650      2 262 136
                                                      ----------    -----------
                                                      $4 310 159    $ 4 075 899
                    Less accumulated depreciation      3 086 180      2 874 349
                                                      $1 223 979    $ 1 201 550
                                                      ==========    ===========

         Depreciation included in operating expense for 1998, 1997 and 1996, was
         $212,287, $208,809 and $181,424 respectively.



Note 6.  Deposits

         The aggregate amount of time deposits with a balance of $100,000 or
         more was $5,010,430 and $4,513,606 at December 31, 1998 and 1997,
         respectively.

         At December 31, 1998, the scheduled maturities of all time deposits are
         as follows:

                    1999                                      $28 614 874
                    2000                                       10 222 428
                    2001                                        2 567 506
                    2002                                        1 328 466
                    2003 and thereafter                             2 000
                                                              -----------
                                                              $42 735 274
                                                              ===========


Note 7.  Employee Benefit Plans

         The Corporation sponsors a noncontributory, defined benefit pension
         plan covering full-time employees over 21 years of age upon completion
         of one year of service. Benefits are based on average compensation for
         the five consecutive full calendar years of service which produce the
         highest average. The Corporation computes the net periodic pension cost
         of the plan in accordance with Financial Accounting Standards Board
         Statement No. 87, "Employers' Accounting for Pensions."

         The Corporation sponsors a postretirement life insurance plan covering
         retirees with 25 years of service over the age of 60 and health care
         plan for all retirees and five current employees that have met certain
         eligibility requirements. The plan is contributory for future retirees,
         with retiree contributions that are currently set at 20% of the
         required premium. Effective January 1, 1995, the Corporation adopted
         Financial Accounting Standards Statement No. 106, "Employers'
         Accounting for Postretirement Benefits Other Than Pensions," to account
         for its share of the costs of those benefits. Under that Statement, the
         Corporation's share of the estimated costs that will be paid after
         retirement is generally being accrued by charges to expense over the
         employees' active service periods to the dates they are fully eligible
         for benefits, except that the Corporation's unfunded cost that existed
         at January 1, 1995 is being accrued primarily in a straight-line manner
         that will result in its full accrual by December 31, 2014.


                                      -23-
<PAGE>

Note 7.  Employee Benefit Plans (Continued)

         Information about the plans follow:
<TABLE>
<CAPTION>
<S>     <C>
                                                                        Pension Benefits                   Postretirement Benefits
                                                                -----------------------------             -------------------------
                                                                   1998               1997                   1998           1997
                                                                ----------         ----------             ----------      ---------
         Change in Benefit Obligation:
            Benefit obligation, beginning                       $3 339 744         $2 866 017             $  463 642     $  422 021
            Service cost                                           156 373            129 289                  7 904          7 249
            Interest cost                                          262 650            220 359                 38 337         34 342
            Actuarial loss                                         337 654            183 315                 52 976         21 871
            Benefits paid                                         (119 720)           (98 157)               (28 014)       (21 841)
            Change in discount rate                                152 549             38 921                    - -            - -
                                                                ----------         ----------             ----------      ---------
            Benefit obligation, ending                          $4 129 250         $3 339 744             $  534 845      $ 463 642
                                                                ----------         ----------             ----------      ---------

         Change in Plan Assets:
            Fair value of plan assets, beginning                $3 337 355       $  2 888 800             $      - -      $     - -
            Actual return on plan assets                           199 055            546 712                    - -            - -
            Employer contributions                                     - -                - -                 28 014         21 841
            Benefits paid                                         (119 720)           (98 157)               (28 014)       (21 841)
                                                                ----------         ----------             ----------      ---------
            Fair value of plan assets, ending                   $3 416 690       $  3 337 355             $      - -      $     - -
                                                                ----------         ----------             ----------      ---------
            Funded status                                        $(712 560)      $     (2 389)            $ (534 845)     $(463 642)
            Unrecognized net (gain) loss                           197 926           (372 224)               17 979          (6 950)
            Accumulated premium payments
               for retirees                                            - -                - -                94 851          66 837
            Unrecognized net obligation
               (asset) at transition                              (137 245)          (157 547)              278 588         295 851
            Unrecognized prior service cost                          1 335              1 490                   - -             - -
                                                                ----------         ----------             ----------      ---------
            Accrued benefit cost included
               in other liabilities                              $(650 544)      $   (530 670)            $(143 427)      $(107 904)
                                                                 =========          =========             =========       =========


                                                             Pension Benefits               Postretirement Benefits
                                                   ----------------------------------   ------------------------------
                                                     1998           1997       1996       1998       1997      1996
                                                   ---------     ---------   --------   --------   --------  ---------
         Components of Net Periodic Benefit Cost:
            Service cost                            $156 373    $  129 289 $  133 596   $  7 904   $  7 249  $   6 025
            Interest cost                            262 650       220 359    200 942     38 337     34 342     38 479
            Expected return on plan assets          (279 002)     (241 937)  (217 359)       - -        - -        - -
            Amortization of prior service cost           155           155        155        - -        - -        - -
            Amortization of net obligation
               at transition                         (20 302)      (20 302)   (20 302)    17 296     17 568     19 670
                                                   ---------     ---------   --------   --------   --------  ---------
            Net periodic benefit cost              $ 119 874     $  87 564   $ 97 032   $ 63 537   $ 59 159  $  64 174
                                                   =========     =========   ========   ========   ========  =========


         Weighted-Average Assumptions:
            Discount rate                             7.00%        7.25%      7.75%        8.00%    8.00%       8.00%
            Expected return on plan assets            8.50%        8.50%      8.50%         - -      - -         - -
            Rate of compensation increase             5.00%        5.00%      6.00%         - -      - -         - -


         For measurement purposes, a 10% annual rate of increase in per capita
         health care costs of covered benefits was assumed for 1998, 1997 and
         1996, with such annual rate of increase gradually declining to 5% in
         2013.

         Assumed health care cost trend rates have a significant effect on the
         amounts reported for the health care plans. A 1% change in assumed
         health care cost trend rates would have the following effects:

                                                                           1% Increase      1% Decrease
                                                                           -----------      -----------
            Effect on the health care component of the accumulated
               postretirement benefit obligation                             $ 33 619       $ (29 555)
            Effect on total of service and interest cost components of
               net periodic postretirement health care benefit cost             3 340          (3 610)
</TABLE>


                                      -24-
<PAGE>

Note 8.  Income Taxes

         Net deferred tax assets consist of the following components as of
December 31, 1998 and 1997:

                                                       1998           1997
                                                    ----------    -----------
                 Deferred tax assets:
                   Reserve for loan losses          $  232 271    $   231 845
                   Accrued pension expense             221 185        180 428
                   Accrued postretirement benefits      48 765         36 687
                   Nonaccrual interest                     - -         10 880
                                                    ----------    -----------
                                                    $  502 221    $   459 840
                                                    ----------    -----------
                 Deferred tax liabilities:
                   Premises                         $   25 800    $    27 012
                   Securities available for sale        54 239          3 199
                                                    $   80 039    $    30 211
                                                    ----------    -----------

                      Net deferred tax assets       $  422 182    $   429 629
                                                    ==========    ===========

         The provision for income taxes charged to operations for the years
         ended December 31, 1998, 1997 and 1996 consists of the following:
<TABLE>
<CAPTION>
<S>     <C>
                                                       1998           1997         1996
                                                    ----------    -----------  -----------
                 Current tax expense                $  912 317    $ 1 046 380  $   918 688
                 Deferred tax expense (benefit)        (43 593)       (40 759)     (88 111)
                                                    ----------    -----------  -----------
                                                    $  868 724    $ 1 005 621  $   830 577
                                                    ==========    ===========  ===========

         The income tax provision differs from the amount of income tax
         determined by applying the U.S. federal income tax rate to pretax
         income for the years ended December 31, 1998, 1997 and 1996 due to the
         following:

                                                                        1998           1997        1996
                                                                     ----------    -----------  -----------
            Computed "expected" tax expense                          $  801 670    $   927 291  $   760 924
            Increase (decrease) in income taxes resulting from:
               Tax exempt interest income                                (4 627)        (3 353)      (6 809)
               State income taxes, net of federal income tax benefit     69 385         79 092       74 544
               Other                                                      2 296          2 591        1 918
                                                                     ----------    -----------  -----------
                                                                     $  868 724    $ 1 005 621  $   830 577
                                                                     ==========    ===========  ===========
</TABLE>

Note 9.  Commitments and Contingent Liabilities

         In the normal course of business, there are outstanding, various
         commitments and contingent liabilities which are not reflected in the
         accompanying financial statements. The Corporation does not anticipate
         losses as a result of these transactions.

         See Note 11 with respect to financial instruments with
         off-balance-sheet risk.

         The Corporation has approximately $2,303,481 in deposits in another
         financial institution in excess of amounts insured by the Federal
         Deposit Insurance Corporation (FDIC) at December 31, 1998.

         The Corporation must maintain a reserve against its deposits in
         accordance with Regulation D of the Federal Reserve Act. For the final
         bi-weekly reporting periods which included December 31, 1998 and 1997,
         the aggregate amounts of daily average required balances were
         approximately $2,484,000 and $990,000, respectively.

         The Corporation is conducting a comprehensive review of its computer
         systems to identify the systems that could be affected by the Year 2000
         Issue, and is developing a remediation plan to resolve the Issue. The
         Issue is whether computer systems will properly recognize
         date-sensitive information when the year changes to 2000. Systems that
         do not properly recognize such information could generate erroneous
         data or cause a system to fail. The Corporation is heavily dependent on
         computer processing in the conduct of its business activities. Failure
         of these systems could have a significant impact on the Corporation's
         operations.


                                      -25-
<PAGE>

Note 10. Retained Earnings

         Transfers of funds from the banking subsidiary to the parent
         corporation in the form of loans, advances and cash dividends are
         restricted by federal and state regulatory authorities. As of December
         31, 1998, the aggregate amount of unrestricted funds which could be
         transferred from the banking subsidiary to the parent corporation,
         without prior regulatory approval, totaled $2,723,034 or 16.8% of the
         consolidated net assets.



Note 11. Financial Instruments With Off-Balance-Sheet Risk

         The Corporation is a party to financial instruments with
         off-balance-sheet risk in the normal course of business to meet the
         financing needs of its customers. Those financial instruments include
         commitments to extend credit and standby letters of credit. Those
         instruments involve, to varying degrees, elements of credit and
         interest rate risk in excess of the amount recognized in the balance
         sheet. The contract or notional amounts of those instruments reflect
         the extent of involvement the Corporation has in particular classes of
         financial instruments.

         The Corporation's exposure to credit loss in the event of
         nonperformance by the other party to the financial instrument for
         commitments to extend credit and standby letters of credit is
         represented by the contractual notional amount of those instruments.
         The Corporation uses the same credit policies in making commitments and
         conditional obligations as it does for on-balance-sheet instruments.

         A summary of the contract or notional amount of the Corporation's
         exposure to off-balance-sheet risk as of December 31, 1998 and 1997, is
         as follows:
<TABLE>
<CAPTION>
<S>     <C>
                                                                                  1998            1997
                                                                              -----------      ----------
                    Financial instruments whose contract amounts represent
                       credit risk:
                          Commitments to extend credit                        $12 225 851      $8 538 048
                          Standby letters of credit                                 3 900         144 639
</TABLE>

         Commitments to extend credit are agreements to lend to a customer as
         long as there is no violation of any condition established in the
         contract. Commitments generally have fixed expiration dates or other
         termination clauses and may require payment of a fee. Since many of the
         commitments are expected to expire without being drawn upon, the total
         commitment amounts do not necessarily represent future cash
         requirements. The Corporation evaluates each customer's credit
         worthiness on a case-by-case basis. The amount of collateral obtained,
         if deemed necessary by the Corporation upon extension of credit, is
         based on management's credit evaluation of the counterparty. Collateral
         held varies but may include accounts receivable, inventory, property
         and equipment, and income-producing commercial properties.

         Standby letters of credit are conditional commitments issued by the
         Corporation to guarantee the performance of a customer to a third
         party. Those guarantees are primarily issued to support public and
         private borrowing arrangements, including commercial paper, bond
         financing, and similar transactions. The credit risk involved in
         issuing letters of credit is essentially the same as that involved in
         extending loan facilities to customers. The Corporation holds real
         estate as collateral supporting those commitments for which collateral
         is deemed necessary. No collateral was held for commitments as of
         December 31, 1998.



Note 12. Disclosures About Fair Value of Financial Instruments

         The following methods and assumptions were used to estimate the fair
         value of each class of financial instruments for which it is
         practicable to estimate that value:

            Cash and Short-Term Investments
               For those short-term instruments, the carrying amount is a
         reasonable estimate of fair value.

            Securities
               For securities held for investment purposes, fair values are
         based on quoted market prices or dealer quotes.

            Loans
               For variable rate loans that reprice frequently and with no
               significant change in credit risk, fair values are based on
               carrying values. The fair values for other loans were estimated
               using discounted cash flow analyses, using interest rates
               currently being offered.


                                      -26-
<PAGE>


Note 12. Disclosures About Fair Value of Financial Instruments (Continued)

            Deposit Liabilities
               The fair value of demand deposits, savings accounts, and certain
               money market deposits is the amount payable on demand at the
               reporting date. The fair value of fixed-maturity certificates of
               deposit is estimated using the rates currently offered for
               deposits of similar remaining maturities.

            Off-Balance Sheet Financial Instruments
               The fair value of commitments is estimated using the fees
               currently charged to enter into similar agreements, taking into
               account the remaining terms of the agreements and the present
               creditworthiness of the counterparties. For fixed-rate loan
               commitments, fair value also considers the difference between
               current levels of interest rates and the committed rates. The
               fair value of letters of credit is based on fees currently
               charged for similar agreements or on the estimated cost to
               terminate them or otherwise settle the obligations with the
               counterparties at the reporting date.

               At December 31, 1998 and 1997, the difference between the
               carrying amounts and fair values of loan commitments and
               standby-letters of credit were immaterial.

            The estimated fair values of the Corporation's financial instruments
            are as follows:
<TABLE>
<CAPTION>
                                                            1998                   1997
                                                  -----------------------  -----------------------
                                                   Carrying       Fair       Carrying         Fair
                                                    Amount        Value       Amount         Value
                                                   --------     --------     --------      --------
                                                     (in thousands)              (in thousands)
<S>                                              <C>                            <C>
               Financial assets:
                  Cash                             $  4 646     $  4 646   $    4 518    $    4 518
                  Securities purchased under
                    agreements to resell and
                    federal funds sold               13 483       13 483        8 600         8 600
                  Securities                         50 208       50 530       37 444        37 508
                  Loans                              76 667       74 280       77 074        77 039
                                                   --------     --------     --------      --------
                       Total financial assets      $145 004     $142 939   $  127 636    $  127 665
                                                   ========     ========   ==========    ==========
               Financial liabilities:
                  Deposits                         $130 665     $130 925   $  114 182    $  114 069
                                                   ========     ========   ==========    ==========
</TABLE>

Note 13. Regulatory Matters

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

         Quantitative measures established by regulation to ensure capital
         adequacy require the Corporation to maintain minimum amounts and ratios
         (set forth in the table below) of total and Tier 1 capital (as defined
         in the regulations) to risk-weighted assets, and of Tier 1 capital to
         average assets. Management believes, as of December 31, 1998, that the
         Corporation meets all capital adequacy requirements to which it is
         subject.

         As of December 31, 1998, the most recent notification from the Federal
         Deposit Insurance Corporation and the Federal Reserve Bank categorized
         the Corporation as well capitalized under the regulatory framework for
         prompt corrective action. To be categorized as well capitalized, the
         Corporation must maintain minimum total risk-based, Tier 1 risk-based,
         and Tier 1 leverage ratios as set forth in the table. There are no
         conditions or events since that notification that management believes
         have changed the institution's category.


                                      -27-
<PAGE>

Note 13. Regulatory Matters (Continued)

         The Corporation's actual capital amounts and ratios are also presented
         in the table.
<TABLE>
<CAPTION>
<S>     <C>
                                                                                                    To Be Well
                                                                                                 Capitalized Under
                                                                             For Capital         Prompt Corrective
                                                         Actual           Adequacy Purposes      Action Provisions
                                                   -----------------      ------------------     -----------------
                                                   Amount      Ratio      Amount       Ratio     Amount      Ratio
                                                   ------      -----      ------       -----     ------      -----
                                                                        (Amount in Thousands)
         As of December 31, 1998:
            Total capital (to risk-weighted assets):
                  Consolidated                      $16 983    23.89%    =>$5 687     => 8.0%            N/A
                  Bank of Charles Town              $16 940    23.84%    =>$5 685     => 8.0%    =>$7 107   =>10.0%
            Tier 1 capital (to risk-weighted assets):
                  Consolidated                      $16 091    22.64%    =>$2 843     => 4.0%            N/A
                  Bank of Charles Town              $16 048    22.58%    =>$2 843     => 4.0%    =>$4 264   => 6.0%
            Tier 1 capital (to average assets):
                  Consolidated                      $16 091    11.15%    =>$5 774     => 4.0%            N/A
                  Bank of Charles Town              $16 048    11.12%    =>$5 773     => 4.0%    =>$7 217   => 5.0%


         As of December 31, 1997:
            Total capital (to risk-weighted assets):
                  Consolidated                      $16 121    24.41%    =>$5 283     => 8.0%            N/A
                  Bank of Charles Town              $16 074    24.35%    =>$5 281     => 8.0%    =>$6 601   =>10.0%
            Tier 1 capital (to risk-weighted assets):
                  Consolidated                      $15 292    23.15%    =>$2 642     => 4.0%            N/A
                  Bank of Charles Town              $15 245    23.09%    =>$2 640     => 4.0%    =>$3 961   => 6.0%
            Tier 1 capital (to average assets):
                  Consolidated                      $15 292    11.83%    =>$5 169     => 4.0%            N/A
                  Bank of Charles Town              $15 245    11.80%    =>$5 168     => 4.0%    =>$6 460   => 5.0%
</TABLE>


                                      -28-
<PAGE>

Note 14. Parent Corporation Only Financial Statements

                                   POTOMAC BANCSHARES, INC.
                                  (Parent Corporation Only)
                                        Balance Sheets
                                  December 31, 1998 and 1997
<TABLE>
<CAPTION>
<S>                                                                           <C>              <C>
                                                                              1998             1997
                                                                          ------------     ------------
         ASSETS

            Cash                                                          $    26 587      $    20 705
            Investment in subsidiary                                       16 153 510       15 250 816
            Organization costs, net of accumulated amortization                 7 165           19 447
            Other assets                                                       13 890           11 979
                                                                          -----------      -----------
                  Total Assets                                            $16 201 152      $15 302 947
                                                                          ===========      ===========
         LIABILITIES AND STOCKHOLDERS' EQUITY

         LIABILITIES, other                                               $     4 996      $     4 996
                                                                          -----------      -----------
         STOCKHOLDERS' EQUITY
            Common stock                                                  $   600 000      $   600 000
            Surplus                                                         5 400 000        5 400 000
            Undivided profits                                              10 090 870        9 291 741
            Accumulated other comprehensive income                            105 286            6 210
                                                                          -----------      -----------
                  Total Stockholders' Equity                              $16 196 156      $15 297 951
                                                                          -----------      -----------
                  Total Liabilities and Stockholders' Equity              $16 201 152      $15 302 947
                                                                          ===========      ===========

                                   POTOMAC BANCSHARES, INC.
                                  (Parent Corporation Only)
                                     Statements of Income
                         Years Ended December 31, 1998, 1997 and 1996

                                                                1998             1997             1996
                                                         ------------     ------------     ------------
         Income
            Dividends from subsidiary                    $   715 000      $   690 000      $   570 000

         Expenses
            Amortization                                 $    12 282      $    12 282      $    12 282
            Transfer agent expense                             7 887            7 592            7 563
            Legal and professional                             4 634            2 831            2 575
            Other operating expenses                          18 394           14 710           13 858
                                                         -----------      -----------      -----------
                  Total Expenses                         $    43 197      $    37 415      $    36 278
                                                         -----------      -----------      -----------
                  Income before Income Tax (Benefit) and
                    Equity in Undistributed Income of
                    Subsidiary                           $   671 803      $   652 585      $   533 722

         Income Tax (Benefit)                                (13 708)         (11 797)         (11 618)
                                                         -----------      -----------      -----------
                  Income before Equity in Undistributed
                    Income of Subsidiary                 $   685 511      $   664 382      $   545 340

         Equity in Undistributed Income of Subsidiary        803 618        1 057 322          862 094
                                                         -----------      -----------      -----------
                  Net Income                             $ 1 489 129      $ 1 721 704      $ 1 407 434
                                                         ===========      ===========      ===========
</TABLE>


                                      -29-
<PAGE>


Note 14. Parent Corporation Only Financial Statements (Continued)

                                   POTOMAC BANCSHARES, INC.
                                  (Parent Corporation Only)
                                   Statements of Cash Flows
                         Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
<S>                                                          <C>              <C>              <C>
                                                             1998             1997             1996
                                                         ------------     ------------     ------------
         CASH FLOWS FROM OPERATING ACTIVITIES
            Net income                                   $ 1 489 129      $ 1 721 704      $ 1 407 434
            Adjustments to reconcile net income to net cash
               provided by operating activities:
                  Equity in undistributed (income) of
                    subsidiary                              (803 618)      (1 057 322)        (862 094)
                  Amortization                                12 282           12 282           12 282
                  (Increase) decrease in other assets         (1 911)            (180)           9 575
                  Increase in other liabilities                  - -              - -              255
                                                         -----------      -----------      -----------
                    Net cash provided by operating
                       activities                        $   695 882      $   676 484      $   567 452
                                                         -----------      -----------      -----------
         CASH FLOWS FROM FINANCING ACTIVITIES
            Cash dividends                               $  (690 000)     $  (690 000)     $  (570 000)
                                                         -----------      -----------      -----------
                    Increase (decrease) in cash and cash
                       equivalents                       $     5 882      $   (13 516)     $    (2 548)

         CASH AND CASH EQUIVALENTS
            Beginning                                         20 705           34 221           36 769
                                                         -----------      -----------      -----------
            Ending                                       $    26 587      $    20 705      $    34 221
                                                         ===========      ===========      ===========
</TABLE>


                                      -30-
<PAGE>

                          TRUST AND FINANCIAL SERVICES

    Your trust department realized record income and asset balances in 1998!
Trust assets as of December 31, 1998 totaled $90,189,000, an increase of
$7,017,000 (8.44%) over December 31, 1997 footings of $83,172,000. Trust fees in
1998 totaled $555,101, an increase of $33,078 (6.34%) compared to $522,023 in
1997.

    The question of Y2K preparedness is a concern to all businesses and
individuals as we approach the year 2000. The department administers its
accounting system through the TRUST-RITE software system, developed and
supported by one of the country's leading fiduciary correspondents, Northern
Trust Company. The software has been verified for Y2K compliance by Northern and
independent third party proxy testing.

    In 1999, the department will be moving to a temporary office at 202 West
Washington Street during the renovation and construction of the new bank
quarters at the Citizens Building. The temporary location will provide
convenient access to customers visiting the main bank and trust department. We
will enjoy greeting you in our relocated office over the next several months!

    The department continues to provide emphasis on personal trust service,
specifically addressing the investment, financial management, third party
"bill-paying", and estate settlement needs of our customers. Our dedication to
the delivery of community bank service and our response to the financial and
estate planning needs of our clients will continue to be the foundation of our
fiduciary service.





                                              Robert L. Hersey
                                              Vice President and Trust Officer


                                    STATEMENT OF CONDITION
                                      DECEMBER 31, 1998
                                         (unaudited)

         ASSETS
         Discretionary assets:
            Bank Deposits: Bank of Charles Town                     $   259 000
                           Other Banks                                  215 000
            United States Treasury and Agency Obligations             6 751 000
            State, County, and Municipal Obligations                  1 149 000
            Short Term Interest Bearing Funds                         6 720 000
            Other Short Term Obligations                                115 000
            Notes and Bonds                                           6 076 000
            Common and Preferred Stocks                              37 563 000
            Real Estate Mortgages                                       301 000
            Real Estate                                                 495 000
            Miscellaneous Assets                                          5 000
                                                                    -----------
               Total Discretionary Assets                           $59 649 000
                                                                    -----------

         Non-Discretionary Assets                                   $30 540 000
                                                                    -----------

                       Total Assets                                 $90 189 000
                                                                    ===========

         ACCOUNTS
         Personal Trusts                                   154      $56 938 000
         Estates and Other Court Accounts                   35        6 999 000
         Employee Benefit Accounts                          25        5 082 000
         Agencies and Other                                 78       21 170 000
                                                           ---      -----------

                       Total Accounts                      292      $90 189 000
                                                           ===      ===========


                                      -31-
<PAGE>

                            POTOMAC BANCSHARES, INC.

                      Charles W. LeMaster, President & CEO
          William R. Harner, Sr. Vice President, Secretary & Treasurer
       L. Gayle Marshall Johnson, Vice President & Chief Financial Officer
              Donald S. Smith, Vice President & Assistant Secretary
               Susan S. Myers, Assistant Vice President & Auditor


                              BANK OF CHARLES TOWN



                             MORTGAGE AND COMMERCIAL
                                 LOAN DEPARTMENT

                               Thomas F. Chambers
                                 Vice President

                             H. William Easter, Jr.
                            Assistant Vice President

                                Cynthia A. Light
                                Assistant Cashier

                                 Patricia A. Ott


                           INSTALLMENT LOAN DEPARTMENT

                                 Donna J. Burns
                                 Vice President

                               Richard B. Breeden
                           Assistant Vice President &
                                Security Officer

                                 Janice B. Davis
                                Assistant Cashier

                                Victoria B. Burns
                               Kimberly K. DeSarno
                               Timothy F. Hitrick
                                 Deborah A. Ring
                                Linda A. Stewart


                                TELLER DEPARTMENT

                               Carolyn N. O'Brien
                         Assistant Cashier & Head Teller

                                 Kyle S. Carter
                               Jennifer A. Casale
                                Lisa R. Cook-Bork
                               Cathryn M. DeRonda
                                 Cathy Jo Fraley
                                 Sharon L. Hardy
                               Melissa A. Harrison
                                John N. Haymaker
                            Christopher J. Lancaster
                                 Cindy L. Magaha
                                C. Lane McCarron
                                Kendra L. Nichols
                               Consuelo L. Shanton
                                Roxann L. Shives
                               Michelle N. Slusher
                                 Jeanette Staubs
                                 Misty D. Staubs
                                Suzanne N. Taylor
                                Terrie C. Thomas
                              Linda L. Whittington




                                 ADMINISTRATION

                               Charles W. LeMaster
                                    President

                                William R. Harner
                          Sr. Vice President & Cashier

                         L. Gayle Marshall Johnson, CPA
                       Vice President & Financial Officer

                               Susan S. Myers, CPA
                       Assistant Vice President & Auditor

                                 Diane C. Bogden
                                Personnel Officer

                             William H. Chesley, Jr.
                                Marketing Officer

                                Shelly D. Dodson
                                 Tammy L. Miller


                             BOOKKEEPING DEPARTMENT

                                 Doris V. Loudan
                       Assistant Cashier & Head Bookkeeper

                                Patricia L. Clay
                                 Marcia S. Lerch
                                Elizabeth W. Park
                                  John N. Poole
                               Penny J. Sebastian
                                 Karen A. Staubs
                              Stephanie N. Tennant
                                 Peggy C. Turner


                              KEARNEYSVILLE BRANCH

                           C. Kenneth Nicewarner, Jr.
                           Assistant Vice President &
                                 Branch Manager

                                 Nancy L. Baker
                          Assistant Cashier & Assistant
                                 Branch Manager

                                Rebecca E. Black
                                 Mary L. Bowers
                          Stephanie L. DiGennaro-Dailey
                                 Carolyn A. Dunn
                                 Erin L. Guarino
                                Joshua E. Higdon
                             Jennifer L. Hockensmith
                                Tina D. Holbrook
                                 Tammy E. Hough
                                 April D. Myers


                                     COURIER

                               Benjamin T. Breeden


                             MAINTENANCE DEPARTMENT

                                 Paula M. Fraley
                                 Paul D. Staubs
                               E. Geraldine White


                          TRUST AND FINANCIAL SERVICES

                                Robert L. Hersey
                         Vice President & Trust Officer

                              David S. (Joe) Smith
                                  Trust Officer

                              Deanna D. Greenfield
                              Michelle S. Griffith
                                Sheila R. Miller
                                 K. Renee Queen
                                Holly A. Stevens


                             CERTIFICATES OF DEPOSIT
                                   DEPARTMENT

                                Judith A. Edwards


                           DATA PROCESSING DEPARTMENT

                                 Richard M. Crea
                               Assistant Cashier &
                             Data Processing Manager

                                  Amy L. Brill
                                Nancy L. Harrison
                              Robert F. Spring, Jr.


                              HARPERS FERRY BRANCH

                                 Wayne C. Welty
                           Assistant Vice President &
                                 Branch Manager

                                Shelly L. Holmes
                          Assistant Cashier & Assistant
                                 Branch Manager

                                Misty N. Ashbaugh
                                Melissa D. Castle
                                Jennifer E. Chand
                                Barbara J. Dupuy
                                 Karen S. James
                              M. Jacqueline Propst
                                   W. Ann Wilt
                             Charles W. Wyndham, Jr.



                                      -32-
<PAGE>

                          ANNUAL REPORT ON FORM 10-KSB

        A copy of the Corporation's 1998 annual report of Form 10-KSB filed with
Securities and Exchange Commission may be obtained without charge upon written
request by any stockholder to:

                          Gayle Marshall Johnson
                          Vice President and Chief Financial Officer
                          Potomac Bancshares, Inc.
                          111 East Washington Street
                          PO Box 906
                          Charles Town, West Virginia  25414-0906


                               GENERAL INFORMATION

COMMON STOCK PRICES AND DIVIDENDS
        Trading of Potomac Bancshares, Inc. common stock is not extensive, is
infrequent and cannot be described as a public trading market. Potomac
Bancshares, Inc. (symbol PTBS) is now on the Bulletin Board, a network available
to brokers. Scott and Stringfellow, a regional securities firm with an office in
Winchester, Virginia, is a market maker for Potomac's stock. A market maker is
one who makes a market for a particular stock. Information about sales (but not
necessarily all sales) of Potomac's stock are available on the Internet through
many of the stock information services using Potomac's symbol. As of December
31, 1998, there were 600,000 common shares outstanding held by approximately 830
shareholders.

        The per share sale prices of the Corporation's stock for 1997 listed
below are based solely on transactions of which the Corporation is aware. The
per share sale prices for 1998 are based on information available as a result of
our participation on the Bulletin Board described above and information gathered
on the Internet. The dividends for 1997 and 1998 are also listed.

                                      High          Low           Dividends
            1997
            ----
            First Quarter           $ 30.000      $ 29.000         $ N/A
            Second Quarter            32.000        30.000           0.45
            Third Quarter             32.000        30.000           N/A
            Fourth Quarter            32.000        30.000           0.70

            1998
            ----
            First Quarter           $ 38.000      $ 34.875         $ N/A
            Second Quarter            42.000        32.500           0.50
            Third Quarter             46.000        41.000           N/A
            Fourth Quarter            41.000        40.000           0.65

        Common stock dividends are paid on a semi-annual basis. Management
intends to continue to recommend dividends to be paid as profits and maintenance
of satisfactory equity capital allow.

STOCK TRANSFER AGENT
                                    American Stock Transfer
                                       & Trust Company
                                    40 Wall Street
                                    New York NY  10005
                                    (212) 936-5100

ANNUAL MEETING
        The annual meeting of stockholders will be held at the Bavarian Inn,
Shepherdstown, Jefferson County, West Virginia, on Tuesday, April 27, 1999,
beginning at 10:30 a.m.

                                      -33-