<PAGE>

                                  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.....................4-11

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

         The Board of Directors, Officers and Staff are pleased to submit the
Annual Report for Potomac Bancshares, Inc. for the year 1999. Although we are
not entirely satisfied with last year's results, we feel your holding company is
continuing to be a strong independent institution even in today's fast-paced
economic environment.

         Net income for the year totaled $1,543,020 and was an increase of
$53,891 over 1998. The earnings per share was $2.57 and shareholders benefited
by receiving a dividend of $1.15 per share for the year. After payment of the
dividend and holding company expenses, retained earnings credited to capital was
$853,020. During the year, assets declined slightly shown by the decrease in
deposits of approximately $4 million. In order to hold these deposits in house
we would have been required to pay a higher interest rate that we felt was not
justified.

         1999 was the year we had to make final preparations for the millennium
conversion. Your holding company was prepared for the worst, but as everyone now
knows the banking industry was well prepared and it was business as usual. Our
Y2K Committee is to be commended for its efforts in meeting the regulators'
requirements and seeing that our conversion was glitch free.

         Renovations on the main office and construction of our new building to
house the Trust Department and administrative offices are in full swing and
progressing on schedule. It is anticipated that the completion of this project
will be mid-year 2000.

         Mr. James Senseney, a member of our Board of Directors resigned in 1999
because of health problems. He had served faithfully on the Board and Trust
Committee since March 1964, and departed this life in October 1999. J. Scott
Boyd was elected to the corporation's Board of Directors to fill Mr. Senseney's
unexpired term. Mr. Boyd is the owner and operator of Jefferson Pharmacy, Inc.
located in Ranson since 1982. Mr. Boyd is a life time resident of Berkeley
County and completed his education at West Virginia University.

                                                    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>                          <C>
J. SCOTT BOYD                   THOMAS C. G. COYLE           CHARLES W. LEMASTER
Owner                           Retired Owner-Operator       President
Jefferson Pharmacy              Riddleberger's Store         Bank of Charles Town

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            JOHN C. SKINNER, JR.
Farmer-Orchardist               Senior Vice President        Owner
Warm Spring Orchard & Farm        & Cashier                  Nichols & Skinner, L.C.
                                Bank of Charles Town

GUY GARETH CHICCHIRICHI         E. WILLIAM JOHNSON           DONALD S. SMITH
Executive Manager               Professor of Economics       Retired President
Guy's Buick-Pontiac-            Shepherd College             Bank of Charles Town
Oldsmobile-GMC Truck, Inc.

</TABLE>

                                      -2-
<PAGE>

                     SELECTED CONSOLIDATED FINANCIAL DATA
                 (Dollars in Thousands Except Per Share Data)
<TABLE>
<CAPTION>
                                                          1999           1998          1997          1996          1995
                                                       ----------     ----------    ----------    ----------    ----------
<S>                                                    <C>            <C>           <C>           <C>           <C>
Summary of Operations
    Interest income                                      $ 10,009       $ 10,055      $  9,563      $  9,086      $  8,747
    Interest expense                                        4,191          4,401         3,710         3,623         3,591
                                                         --------       --------      --------      --------      --------
    Net interest income                                     5,818          5,654         5,853         5,463         5,156
    Provision for loan losses                                 125            125           127           100           125
                                                         --------       --------      --------      --------      --------
    Net interest income after provision
       for loan losses                                      5,693          5,529         5,726         5,363         5,031
    Non-interest income                                     1,170          1,126         1,128           989           906
    Non-interest expense                                    4,423          4,297         4,127         4,114         4,078
                                                         --------       --------      --------      --------      --------
    Income before income taxes                              2,440          2,358         2,727         2,238         1,859
    Income tax expense                                        897            869         1,005           831           674
                                                         --------       --------      --------      --------      --------

    Net income                                           $  1,543       $  1,489      $  1,722      $  1,407      $  1,185
                                                         ========       ========      ========      ========      ========
Per Share Data
    Net income, basic and diluted                        $   2.57       $   2.48      $   2.87      $   2.35      $   1.98
    Cash dividends declared                                  1.15           1.15          1.15           .95           .85
    Book value at period end                                27.81          26.99         25.50         23.70         22.37
    Average shares outstanding                            600,000        600,000       600,000       600,000       600,000

Average Balance Sheet Summary
    Assets                                               $147,612       $138,698      $126,474      $124,267      $121,638
    Loans                                                  78,710         78,552        76,866        73,817        72,440
    Securities                                             49,315         45,190        40,576        36,972        37,682
    Deposits                                              129,711        121,612       110,291       109,709       107,826
    Shareholders' equity                                   16,539         15,862        14,870        13,806        13,052

Performance Ratios
    Return on average assets                                1.05%          1.07%         1.36%         1.13%          .97%
    Return on average equity                                9.33%          9.39%        11.58%        10.19%         9.08%
    Dividend payout ratio                                  44.75%         46.37%        40.07%        40.43%        43.93%

Capital Ratios
    Leverage ratio                                         11.55%         11.15%        11.83%        11.43%        10.83%
    Risk-based capital ratios
       Tier 1 capital                                      23.19%         22.64%        23.15%        23.21%        20.73%
       Total capital                                       24.45%         23.89%        24.41%        24.47%        21.98%
</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>
                                                      1999                                               1998
                                --------------------------------------------       ----------------------------------------------
                                  Average          Income/          Average           Average           Income/         Average
                                 Balances          Expense        Yield/rate         Balances           Expense        Yield/rate
                                -------------    -------------    ----------      --------------     -------------     ----------
<S>                             <C>              <C>              <C>             <C>                <C>               <C>
ASSETS
Loans
    Taxable                     $  78,390,482     $  6,664,884       8.50%         $  78,215,073     $   6,967,855       8.91%
    Tax exempt                        319,534           28,182       8.82%               336,999            32,076       9.52%
                                -------------     ------------                     -------------     -------------
       Total loans                 78,710,016        6,693,066       8.50%            78,552,072         6,999,931       8.91%
                                -------------     ------------                     -------------     -------------
Taxable securities                 49,315,036        2,782,193       5.64%            45,190,167         2,610,758       5.78%
Securities purchased under
    agreements to resell and
    federal funds sold             11,985,942          543,077       4.53%             7,796,026           455,539       5.84%
                                -------------     ------------                     -------------     -------------

       Total earning assets       140,010,994     $ 10,018,336       7.16%           131,538,265     $  10,066,228       7.65%
                                -------------     ============                     -------------     =============

Allowance for loan losses          (1,183,685)                                        (1,137,864)
Cash and due from banks             5,320,986                                          5,322,429
Bank premises/equipment,
    net                             1,493,602                                          1,212,223
Other assets                        1,969,995                                          1,763,203
                                -------------                                      -------------

       Total assets             $ 147,611,892                                      $ 138,698,256
                                =============                                      =============

LIABILITIES AND
    STOCKHOLDERS' EQUITY
Deposits
    Savings and interest
       bearing demand
       deposits                 $  70,917,739     $  2,018,720       2.85%         $  64,410,847     $   2,047,815       3.18%
    Time deposits                  42,393,782        2,171,943       5.12%            42,083,997         2,353,117       5.59%
                                -------------     ------------                     -------------     -------------
       Total interest
          bearing deposits        113,311,521     $  4,190,663       3.70%           106,494,844     $   4,400,932       4.13%
                                -------------     ============                     -------------     =============
Noninterest bearing demand
    deposits                       16,399,781                                         15,117,247
Other liabilities                   1,361,238                                          1,223,874
Stockholders' equity               16,539,352                                         15,862,291
                                -------------                                      -------------
       Total liabilities and
          stockholders' equity  $ 147,611,892                                      $ 138,698,256
                                =============                                      =============

Net interest spread                                                  3.46%                                               3.52%
Interest expense as a
    percent of average earning assets                                2.99%                                               3.35%

Net interest margin                                                  4.16%                                               4.31%
</TABLE>

                                      -4-
<PAGE>

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

GENERAL

         Total assets decreased slightly over 2% in 1999 compared to 1998. This
decrease is a combination of a decrease in the securities portfolio and smaller
increases in various other asset categories. The decrease in assets was offset
by a decrease in deposits.

         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 1999 net interest income increased almost 3% when compared to 1998.
The increase is due to decreases in deposit volume and deposit rates.

         Interest income decreased only slightly in 1999 to $10,008,754 when
compared to $10,055,322 in 1998.

         The loan portfolio increased slightly in 1999 to $78,330,052 compared
to $77,806,536 in 1998. Interest and fees on loans decreased over 4% in 1999 due
to decreasing interest rates and only slight loan growth. There was no
significant increase or decrease in volume in any particular category of loans
during 1999.

         Interest income on securities held to maturity and securities available
for sale increased 6.5% in 1999 compared to 1998. This increase is due to
increased volumes of securities since the average rate actually decreased in
1999 compared to 1998. Interest income from securities purchased under
agreements to resell and federal funds sold increased 19% in 1999 compared to
1998. This increase is due to increased volumes since there was also a decrease
in the average rate for these investments in 1999 compared to 1998.

         The decrease in interest expense to $4,190,663 in 1999 compared to
$4,400,932 in 1998 is the reason for the increase in net interest income for
1999 compared to 1998. Decreased volumes and rates were responsible for the
decrease in interest expense. Total interest bearing deposits decreased
$2,600,000 in 1999 compared to 1998.

         In 1999, the average yield for earning assets was 7.16%, a decrease of
 .49% when compared to 1998. The lower yield is due to the decreased loan yields
during 1999 compared to 1998, and lower yields on securities,on securities
purchased under agreements to resell and federal funds sold during 1999 compared
to 1998.

         The average rate paid on all interest bearing liabilities was 3.70% in
1999 compared to 4.13% in 1998. The net interest spread decreased .06% to 3.46%
compared to 3.52% in 1998, and the net interest margin decreased .15% to 4.16%
in 1999 compared to 4.31% in 1998.

                                      -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>
                                                     1999 COMPARED TO 1998                         1998 COMPARED TO 1997
                                    -----------------------------------------------   ---------------------------------------------
                                       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                      $ (302,971)    $    15,522     $   (318,493)      $  (40,802)      $  168,640   $  (209,442)
    Tax exempt loans                       (3,894)         (1,610)          (2,284)          16,584           18,455        (1,871)
    Taxable securities                    171,435         233,359          (61,924)         265,952          265,952            --
    Securities purchased under
       agreements to resell                87,538         150,248          (62,710)         256,613          234,413        22,200
                                      -----------      ----------     ------------       ----------       ----------   -----------
          TOTAL                        $  (47,892)   $    397,519     $   (445,411)      $  498,347       $  687,460   $  (189,113)
                                      -----------      ----------     ------------       ----------       ----------   -----------
INTEREST EXPENSE
    Savings and interest bearing
       demand deposits                 $  (29,095)    $   195,057     $   (224,152)      $  596,084       $  258,237   $   337,847
    Time deposits                        (181,174)         17,384         (198,558)         111,372           65,059        46,313
    Federal funds purchased and
       securities sold under
       agreements to repurchase                --              --               --          (16,219)         (16,219)           --
                                      -----------      ----------     ------------       ----------       ----------   -----------
          TOTAL                       $  (210,269)     $  212,441     $   (422,710)      $  691,237       $  307,077   $   384,160
                                      -----------      ----------     ------------       ----------       ----------   -----------

NET INTEREST INCOME                   $   162,377      $  185,078     $    (22,701)      $ (192,890)      $  380,383   $  (573,273)
                                      ===========      ==========     ============       ==========       ==========   ===========
</TABLE>

NONINTEREST INCOME AND EXPENSE

          Noninterest income (other income) increased approximately 4% in 1999
compared to 1998. This included an almost 7% increase in income from the Trust
and Financial Services Department, increased fees for other customer services
and increases in other operating income due to net gains on property
transactions and initial income from investment in a West Virginia bankers title
company. These increases were offset by decreased income from service charges on
deposit accounts.

          Noninterest expense (other expense) increased 3% in 1999 compared to
1998. There was an 11% increase in net occupancy expense of premises due mostly
to rental expense and improvements to the temporary location for the Trust
Department during construction of the Bank's new building. The majority of the
4% increase in furniture and equipment expenses is due to the purchase of new
computer equipment to prepare for the year 2000. Stationery and supplies expense
increased almost 18% due in large part to additional purchasing of supplies to
prepare for the year 2000. There were decreases in salaries and employee
benefits' expense and directors' fees. Other operating expenses increased over
11%. Advertising, external audit and postage were accounts whose increases were
partially related to Y2K and were included in other operating expenses.

YEAR 2000

          The move into the year 2000 came without noticeable operational
problems for the Subsidiary Bank. The Corporation and the Subsidiary Bank had
seriously undertaken the challenge to prepare in advance for December 31, 1999.
All computer and other equipment containing embedded microchips was tested and
upgraded or replaced as needed. Third party vendors and suppliers were contacted
to assure that they were Y2K compliant. The Subsidiary Bank communicated
continuously with customers throughout 1999 to make them aware of the Bank's
preparation for the year 2000. Total Y2K expenditures were $273,625. $57,699 of
the expenditures were charged directly to earnings as the expenses were incurred
during 1998 and 1999. $215,926 of the expenditures were capitalized. The
Corporation and the Subsidiary Bank are confident that these expenditures and
the intense preparation for December 31, 1999 were time and resources well
spent. Directors, officers and staff as well as customers have been able to
continue working and using the services of the Subsidiary Bank as the year 2000
moves ahead.

                                      -6-
<PAGE>

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, 1999. Nonaccrual loans are excluded from these balances.
<TABLE>
<CAPTION>
                                                                           Mature or Reprice
                                    --------------------------------------------------------------------------------------------
                                                         After Three
                                                          Months But        After One Year
                                       Within               Within            But Within          After
                                    Three Months        Twelve Months         Five Years       Five Years         Nonsensitive
                                    -------------      --------------       -------------      -----------        -------------
<S>                                 <C>                <C>                  <C>                <C>                <C>
Interest Earning Assets:
   Fixed rate loans                 $   8,907,812      $   23,893,037       $  38,986,088      $ 1,912,372        $           --
   Floating rate loans                  4,517,885                  --                  --               --                    --
   Securities                           2,000,000          13,979,032          25,859,845               --               449,700
   Securities purchased under
     agreements to resell and
     federal funds sold                15,530,674                 --                 --                --                     --
                                    -------------      --------------       -------------      -----------         -------------
       Total                        $  30,956,371      $   37,872,069       $  64,845,933      $ 1,912,372         $     449,700
                                    -------------      --------------       -------------      -----------         -------------
Interest Bearing Liabilities:
   Time deposits
     $100,000 and over              $   1,913,061      $    1,811,295       $   1,435,709      $        --         $          --
   Other time deposits                  8,163,153          18,181,892           9,851,159               --                    --
   Money market accounts                7,400,979                  --                  --               --                    --
   NOW accounts                        29,543,978                  --                  --               --            16,056,849
   Savings accounts                            --                  --                  --               --            16,292,314
                                    -------------      --------------       -------------      -----------         -------------
       Total                        $  47,021,171      $   19,993,187       $  11,286,868      $        --         $  32,349,163
                                    -------------      --------------       -------------      -----------         -------------

Rate Sensitivity Gap                $ (16,064,800)     $   17,878,882       $  53,559,065      $ 1,912,372
                                    -------------      --------------       -------------      -----------

Cumulative Gap                      $ (16,064,800)     $    1,814,082       $  55,373,147      $57,285,519
                                    =============      ==============       =============      ===========
</TABLE>

         At December 31, 1999, the Corporation showed a negative cumulative gap
in the first time frame with the remaining time frames showing positive gaps.
The increase in the negative gap in the first time frame when comparing to
December 31, 1998 is due to the increase in time deposit balances in this
category. The positive gap in the second time frame in 1999 compared to a
negative gap in the same time frame in 1998 is due to increased loans and
securities in the category and decreased time deposits in the category. Time
frames three and four are still positive gaps though slightly less in 1999 than
in 1998.

         The Corporation's Asset Liability Committee recommended in 1998 that
the APY (annual percentage yield) on the Select Checking accounts be gradually
reduced until the balances stopped increasing. This strategy did finally take
effect because the total balances in Select Checking have remained relatively
stable throughout 1999.

         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.

                                      -7-
<PAGE>

LOAN PORTFOLIO

         Loans at December 31, 1999 and 1998 are summarized below:
<TABLE>
<CAPTION>
                                                          1999             1998
                                                     -------------    -------------
<S>                                                  <C>              <C>
Commercial, financial and agricultural               $   2,823,556    $   2,433,571
Real estate:
   Construction and land development                        31,000          651,848
   Secured by farm land                                  2,604,920        1,394,201
   Secured by 1-4 family residential                    43,798,037       42,541,181
   Other real estate                                    11,859,376       12,623,662
Consumer                                                16,879,468       17,738,039
All other                                                  333,695          424,034
                                                     -------------    -------------
                                                     $  78,330,052    $  77,806,536
                                                     =============    =============
</TABLE>

         Loans have increased only slightly when comparing year end totals for
1999 and 1998. Most of the loan categories listed above remained basically the
same at December 31, 1999 as at December 31, 1998. The decrease in the
construction and land development category was due to the payoff of a large land
development loan during 1999. The majority of the increase in the secured by
farmland category is due to one large loan added to the portfolio during 1999.

         There were no categories of loans that exceeded 10% of outstanding
loans at December 31, 1999 which were not disclosed in the table above.

REMAINING MATURITIES OF SELECTED LOANS
<TABLE>
<CAPTION>
                                                    Commercial,
                                                   Financial and    Real Estate-
                                                    Agricultural   Construction
                                                   -------------   -------------
<S>                                                <C>             <C>
Within one year                                    $  2,482,559    $        --
Variable rate                                           223,430          31,000
Fixed rate, over one through nine years                 117,567             --
                                                   ------------    ------------
       Total maturities                            $  2,823,556    $     31,000
                                                   ============    ============
</TABLE>

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 allowance for loan losses is adequate.
<TABLE>
<CAPTION>
                                                                1999            1998            1997
                                                            ------------    ------------    -----------
<S>                                                         <C>             <C>             <C>
Balance at beginning of period                              $  1,140,000    $  1,138,747    $   1,138,747
Charge-offs:
    Commercial, financial and agricultural                            --              --               --
    Real estate - construction                                        --              --               --
    Real estate - mortgage                                        26,854              --
    Consumer                                                      62,510         166,722          175,828
                                                            ------------    ------------    -------------
      Total charge-offs                                           89,364         166,722          175,828
                                                            ------------    ------------    -------------
Recoveries:
    Commercial, financial and agricultural                            --              --               --
    Real estate - construction                                        --              --               --
    Real estate - mortgage                                        17,000              --               --
    Consumer                                                      25,283          42,730           48,420
                                                            ------------    ------------    -------------
      Total recoveries                                            42,283          42,730           48,420
                                                            ------------    ------------    -------------
Net charge-offs                                                   47,081         123,992          127,408
Additions charged to operations                                  125,000         125,245          127,408
                                                            ------------    ------------    -------------
Balance at end of period                                    $  1,217,919    $  1,140,000    $   1,138,747
                                                            ============    ============    =============
Ratio of net charge-offs during the period
  to average loans outstanding during the period                0.06%           0.16%            0.17%
                                                                =====           =====            =====
</TABLE>

                                      -8-
<PAGE>

ALLOCATION OF ALLOWANCE FOR LOAN LOSSES

         The following table shows an allocation of the allowance 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>
                                                           1999                                   1998
                                            ---------------------------------      --------------------------------
                                                            Percent of Loans                      Percent of Loans
                                                            in Each Category                      in Each Category
                                             Allowance       To Total Loans         Allowance      To Total Loans
                                            -----------     -----------------      -----------    -----------------
<S>                                         <C>             <C>                    <C>            <C>
Commercial, financial and agricultural      $    14,118           3.61%            $    12,168           3.13%
Real estate mortgage:
    Construction and land development               155            .04%                 52,759            .84%
    Secured by farm land                         13,025           3.32%                  6,971           1.79%
    Secured by 1-4 family residential           265,168          55.91%                294,588          54.68%
    Other real estate                           246,681          15.14%                288,405          16.22%
Consumer                                         93,869          21.55%                103,769          22.80%
All other                                         1,668            .43%                  2,120            .54%
Unallocated                                     583,235             --                 379,220             --
                                            -----------         ---------          -----------         ------
                                            $ 1,217,919         100.00%            $ 1,140,000         100.00%
                                            ===========         =======            ===========         ======
</TABLE>

RISK ELEMENTS IN THE LOAN  PORTFOLIO
<TABLE>
<CAPTION>
                                                                    1999               1998             1997
                                                                -----------        -----------     ------------
<S>                                                             <C>                <C>             <C>
Nonaccrual loans                                                $   112,844        $        --      $   285,150
Restructured loans                                                       --                 --               --
Foreclosed properties                                               201,429             55,425          100,005
                                                                -----------        -----------      -----------
    Total nonperforming assets                                  $   314,273        $    55,425      $   385,155
                                                                ===========        ===========      ===========

Loans past due 90 days accruing interest                        $   559,924        $   596,877      $    19,923
                                                                ===========        ===========      ===========

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

Nonperforming assets to period end loans and
    foreclosed properties                                           .40%                .07%             .49%
</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 $231,520
and $397,986 at December 31, 1999 and 1998. Nonaccrual loans not classified as
impaired totaled $112,844 in 1999 and $-0- in 1998.

         At December 31, 1999, other potential problem loans totaled $13,560.
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.

                                      -9-
<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>
                                                                           Weighted                              Weighted
                                                              1999          Average               1998           Average
                                                           Book Value        Yield             Book Value         Yield
                                                         --------------    --------          --------------     ---------
<S>                                                      <C>               <C>               <C>                <C>
Securities held to maturity
    U.S. Treasury securities and securities
       of U.S. Government agencies:
         Maturing within one year                         $   7,002,421      5.95%            $   10,018,466       5.84%
         Maturing after one year but
             within five years                                8,004,668      5.66%                15,010,863       5.79%
                                                          -------------                       --------------
                Total securities held to maturity         $  15,007,089                       $   25,029,329
                                                          =============                       ==============
Securities available for sale
    U.S. Treasury securities and securities
       of U.S. government agencies:
         Maturing within one year                         $   8,976,611      5.77%            $    3,554,127       5.01%
         Maturing after one year but
             within five years                               17,855,177      5.37%                21,174,905       5.43%
    Equity securities                                           449,700        --                    449,700         --
                                                          -------------                       --------------
                Total securities available for sale       $  27,281,488                       $   25,178,732
                                                          =============                       ==============
                Total securities                          $  42,288,577                       $   50,208,061
                                                          =============                       ==============
</TABLE>

DEPOSITS

         When comparing the 1999 and 1998 year end balances, total deposits
decreased almost $4,000,000 or 3% in 1999. Noninterest bearing deposits
decreased over $1,300,000 or 8%. Interest bearing deposits decreased over
$2,500,000 or 2%.

         There were no significant changes in any deposit categories in 1999.
The Select Checking balances (a form of NOW account that pays a higher interest
rate on balances of $5,000 or more) remained stable which was significant after
the dramatic growth in 1998.

         The average yield on savings and interest bearing demand deposits
decreased from 3.18% at year end 1998 to 2.85% at December 31, 1999. The average
yield on time deposits decreased in 1999 to 5.12% compared to 5.59% in 1998.

         At December 31, 1999, time deposits of $100,000 or more were 4.1% of
total deposits compared with 3.8% at December 31, 1998. Maturities of time
deposits of $100,000 or more at December 31, 1999 are as follows:

          Within three months                              $  1,913,061
          Over three through six months                         374,051
          Over six months through twelve months               1,437,244
          Over twelve months                                  1,435,709
                                                           ------------
           Total                                           $  5,160,065
                                                           ============

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.

                                     -10-
<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 24.45% at
December 31, 1999 and a ratio of Tier 1 capital to risk-weighted assets of
23.19%. Both of these exceed the capital requirements adopted by the federal
regulatory agencies.
<TABLE>
<CAPTION>
                                                                      1999                1998
                                                                 -------------       --------------
<S>                                                              <C>                 <C>
Tier 1 capital:
   Common stock                                                  $     600,000       $      600,000
   Surplus                                                           5,400,000            5,400,000
   Retained earnings                                                10,943,890           10,090,870
                                                                 -------------       --------------
Total tier 1 capital                                             $  16,943,890       $   16,090,870
Tier 2 capital:
   Allowance for loan losses (1)                                       916,986              891,693
                                                                 -------------       --------------

Total risk-based capital                                         $  17,860,876       $   16,982,563
                                                                 =============       ==============

Risk-weighted assets                                             $  73,057,953       $   71,087,152
                                                                 =============       ==============
Capital ratios:
   Tier 1 risk-based capital ratio                                   23.19%               22.64%
   Total risk-based capital ratio                                    24.45%               23.89%
   Leverage ratio                                                    11.55%               11.15%
</TABLE>

(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 1999
(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, 1999, cash and due from banks, securities purchased
under agreements to resell, federal funds sold and loans and securities maturing
within one year were $55,932,775.

         Borrowing capabilities provide additional liquidity. The Subsidiary
Bank maintains a federal funds line of $7,000,000 with Bank of America. 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 1999.

                                     -11-
<PAGE>

                    This page is intentionally left blank.


                                     -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, 1999 and 1998, and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for the years ended December 31, 1999, 1998 and 1997. 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, 1999 and 1998, and the
results of their operations and their cash flows for the years ended December
31, 1999, 1998 and 1997, in conformity with generally accepted accounting
principles.



Winchester, Virginia
January 28, 2000

                                     -13-
<PAGE>

                           CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
                                                                                     1999                       1998
                                                                              -----------------           ----------------
<S>                                                                           <C>                         <C>
        ASSETS
Cash and due from banks                                                       $       5,523,254           $      4,646,475
Securities purchased under agreements to resell
    and federal funds sold                                                           15,530,674                 13,483,258
Securities held to maturity (fair value of $14,917,040
    at December 31, 1999 and $25,351,334 at,
    December 31, 1998)                                                               15,007,089                 25,029,329
Securities available for sale, at fair value                                         27,281,488                 25,178,732
Loans, net of allowance for loan losses of $1,217,919 in 1999
    and $1,140,000 in 1998                                                           77,112,133                 76,666,536
Other real estate owned                                                                 201,429                     55,425
Premises and equipment, net                                                           2,142,650                  1,223,979
Accrued interest receivable                                                           1,111,958                  1,167,699
Other assets                                                                            803,375                    652,131
                                                                              -----------------           ----------------
        Total Assets                                                          $     144,714,050           $    148,103,564
                                                                              =================           ================
        LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
    Deposits
      Noninterest bearing                                                     $      16,034,134           $     17,421,542
      Interest bearing                                                              110,650,389                113,243,666
                                                                              -----------------           ----------------
        Total Deposits                                                        $     126,684,523           $    130,665,208
    Accrued interest payable                                                            307,785                    350,258
    Other liabilities                                                                 1,034,065                    891,942
    Commitments and contingent liabilities                                                   --                         --
                                                                              -----------------           ----------------
        Total Liabilities                                                     $     128,026,373           $    131,907,408
                                                                              -----------------           ----------------
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                                                                10,943,890                 10,090,870
    Accumulated other comprehensive income (loss)                                      (256,213)                   105,286
                                                                              -----------------           ----------------
        Total Stockholders' Equity                                            $      16,687,677           $     16,196,156
                                                                              -----------------           ----------------
        Total Liabilities and Stockholders' Equity                            $     144,714,050           $    148,103,564
                                                                              =================           ================
</TABLE>

See Notes to Consolidated Financial Statements.

                                     -14-
<PAGE>

                        CONSOLIDATED STATEMENTS OF INCOME
                  YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
                                                                   1999                   1998                 1997
                                                             ---------------        ---------------       ---------------
<S>                                                          <C>                    <C>                   <C>
Interest Income:
   Interest and fees on loans                                $     6,683,484        $     6,989,025       $     7,018,882
   Interest on securities held to maturity
         Taxable                                                   1,358,213              1,702,127             1,628,597
   Interest and dividends on securities
      available for sale
         Taxable                                                   1,394,466                881,103               691,203
         Dividends                                                    29,514                 27,528                25,006
   Interest on securities purchased under agreements
      to resell and federal funds sold                               543,077                455,539               198,926
                                                             ---------------        ---------------       ---------------

             Total Interest Income                           $    10,008,754        $    10,055,322       $     9,562,614
                                                             ---------------        ---------------       ---------------
Interest Expense:
   Interest on deposits                                      $     4,190,663        $     4,400,932       $     3,693,476
   Interest on federal funds purchased and securities
      sold under agreements to repurchase                                 --                     --                16,219
                                                             ---------------        ---------------       ---------------

             Total Interest Expense                          $     4,190,663        $     4,400,932       $     3,709,695
                                                             ---------------        ---------------       ---------------

             Net Interest Income                             $     5,818,091        $     5,654,390       $     5,852,919

Provision for Loan Losses                                            125,000                125,245               127,408
                                                             ---------------        ---------------       ---------------
             Net Interest Income after
                Provision for Loan Losses                    $     5,693,091        $     5,529,145       $     5,725,511
                                                             ---------------        ---------------       ---------------
Other Income:
   Trust and financial services                              $       592,182        $       555,101       $       522,023
   Service charges on deposit accounts                               348,992                378,523               403,006
   Fees for other customer services                                  168,810                161,298               162,423
   Other operating income                                             59,924                 30,746                40,933
                                                             ---------------        ---------------       ---------------

             Total Other Income                              $     1,169,908        $     1,125,668       $     1,128,385
                                                             ---------------        ---------------       ---------------
Other Expenses:
   Salaries and employee benefits                            $     2,601,097        $     2,627,960       $     2,473,151
   Net occupancy expense of premises                                 204,076                183,917               194,426
   Furniture and equipment expenses                                  377,852                361,798               348,798
   Stationery and supplies                                           123,573                104,927               109,472
   Directors fees                                                     94,418                103,630               102,330
   Other operating expenses                                        1,021,853                914,728               898,394
                                                             ---------------        ---------------       ---------------

             Total Other Expenses                            $     4,422,869        $     4,296,960       $     4,126,571
                                                             ---------------        ---------------       ---------------

             Income before Income Tax Expense                $     2,440,130        $     2,357,853       $     2,727,325

Income Tax Expense                                                   897,110                868,724             1,005,621
                                                             ---------------        ---------------       ---------------

             Net Income                                      $     1,543,020        $     1,489,129       $     1,721,704
                                                             ===============        ===============       ===============

Earnings Per Share, basic and diluted                        $          2.57        $          2.48       $          2.87
                                                             ===============        ===============       ===============
</TABLE>

See Notes to Consolidated Financial Statements.

                                     -15-
<PAGE>

          CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                 YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
                                                                                     Accumulated
                                                                                        Other
                                        Common                     Undivided        Comprehensive   Comprehensive
                                        Stock        Surplus        Profits         Income (Loss)      Income              Total
                                      ----------   -----------   ------------       -------------   -------------      ------------
<S>                                   <C>          <C>           <C>                <C>             <C>                <C>
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

   Comprehensive income
     Net income - 1999                        --            --      1,543,020               --       $ 1,543,020          1,543,020
     Other comprehensive income
       net of tax, unrealized holding
       (losses) arising during the
       period (net of tax, $(186,227))        --            --             --          (361,499)        (361,499)          (361,499)
                                                                                                     -----------

   Comprehensive income                                                                              $ 1,181,521
                                                                                                     ===========
   Cash dividends - 1999
     ($1.15 per share)                        --            --       (690,000)              --                             (690,000)
                                      ----------   -----------   ------------       ----------                         ------------

Balances, December 31, 1999           $  600,000   $ 5,400,000   $ 10,943,890       $ (256,213)                        $ 16,687,677
                                      ==========   ===========   ============       ==========                         ============
</TABLE>

See Notes to Consolidated Financial Statements.

                                     -16-
<PAGE>

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                  YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
                                                                            1999            1998              1997
                                                                       --------------   -------------     -------------
<S>                                                                    <C>              <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES
    Net income                                                         $    1,543,020   $   1,489,129     $   1,721,704
    Adjustments to reconcile net income to net cash
       provided by operating activities:
          Provision for loan losses                                           125,000         125,245           127,408
          Depreciation                                                        202,873         212,287           208,809
          Amortization                                                          7,165          12,282            12,282
          Deferred tax (benefit)                                              (85,804)        (43,592)          (40,759)
          Discount accretion and premium amortization
              on securities, net                                               26,060          19,416            28,853
          (Gain) loss on sale of other real estate                            (58,796)          9,579                --
          Loss on sale and disposal of premises and equipment                  41,903              --                --
          Changes in assets and liabilities:
              (Increase) decrease in accrued interest receivable               55,741        (159,342)           12,859
              (Increase) decrease in other assets                             113,621         (61,732)          (19,025)
              Increase (decrease) in accrued interest payable                 (42,473)          7,755            16,459
              Increase in other liabilities                                   142,123         157,790             8,837
                                                                       --------------   -------------     -------------
                 Net cash provided by operating activities             $    2,070,433   $   1,768,817     $   2,077,427
                                                                       --------------   -------------     -------------
CASH FLOWS FROM INVESTING ACTIVITIES
    Proceeds from maturity of securities held to maturity              $   10,000,000   $  10,000,000     $   8,000,000
    Proceeds from maturity of securities available for sale                 3,550,000       3,000,000         8,000,000
    Purchases of securities held to maturity                                       --     (11,014,326)       (6,049,375)
    Purchases of securities available for sale                             (6,204,302)    (14,618,728)       (7,019,050)
    Net (increase) decrease in loans                                         (864,271)        226,428        (4,915,035)
    Purchases of premises and equipment                                    (1,186,174)       (234,716)         (155,966)
    Proceeds from sale of equipment                                            22,727              --                --
    Proceeds from sale of other real estate                                   206,467          91,007                --
                                                                       --------------   -------------     -------------
                 Net cash provided by (used in) investing activities   $    5,524,447   $ (12,550,335)    $  (2,139,426)
                                                                       --------------   -------------     -------------
CASH FLOWS FROM FINANCING ACTIVITIES
    Net increase (decrease) in noninterest bearing deposits            $   (1,387,408)  $   2,407,923     $     977,121
    Net increase (decrease) in interest bearing deposits                   (2,593,277)     14,075,363         4,692,332
    Cash dividends                                                           (690,000)       (690,000)         (690,000)
                                                                       --------------   -------------     -------------
                 Net cash provided by (used in) financing activities   $   (4,670,685)  $  15,793,286     $   4,979,453
                                                                       --------------   -------------     -------------

                 Increase in cash and cash equivalents                 $    2,924,195   $   5,011,768     $   4,917,454
CASH AND CASH EQUIVALENTS
    Beginning                                                              18,129,733      13,117,965         8,200,511
                                                                       --------------   -------------     -------------

    Ending                                                             $   21,053,928   $  18,129,733     $  13,117,965
                                                                       ==============   =============     =============
SUPPLEMENTAL DISCLOSURES OF CASH
    FLOW INFORMATION
       Cash payments for:

          Interest                                                     $    4,233,136   $   4,393,177     $   3,693,236
                                                                       ==============   =============     =============

          Income taxes                                                 $      949,882   $     902,011     $   1,202,017
                                                                       ==============   =============     =============

SUPPLEMENTAL DISCLOSURES OF NON-CASH
    INVESTING AND FINANCING ACTIVITIES

       Other real estate acquired in settlement of loans               $      293,674   $     110,006     $     100,005
                                                                       ==============   =============     =============

       Loans originated upon sale of real estate                       $      249,000   $      54,000     $          --
                                                                       ==============   =============     =============

       Unrealized gain (loss) on securities available for sale         $     (547,726)  $     150,115     $      71,227
                                                                       ==============   =============     =============
</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

                  Debt securities that management has the positive intent and
                  ability to hold to maturity are classified as "held to
                  maturity" and recorded at amortized cost. Securities not
                  classified as held to maturity, including equity securities
                  with readily determinable fair values, are classified as
                  "available for sale" and recorded at fair value, with
                  unrealized gains and losses excluded from earnings and
                  reported in other comprehensive income.

                  Purchased premiums and discounts are recognized in interest
                  income using the interest method over the terms of the
                  securities. Declines in the fair value of held to maturity and
                  available for sale securities below their cost that are deemed
                  to be other than temporary are reflected in earnings as
                  realized losses. Gains and losses on the sale of securities
                  are recorded on the trade date and are determined using the
                  specific identification method.

               Loans

                  The Corporation grants mortgage, commercial and consumer loans
                  to customers. A substantial portion of the loan portfolio is
                  represented by mortgage loans. The ability of the
                  Corporation's debtors to honor their contracts is dependent
                  upon the real estate and general economic conditions of the
                  Corporation's market area.

                  Loans that management has the intent and ability to hold for
                  the foreseeable future or until maturity or pay-off generally
                  are reported at their outstanding unpaid principal balances
                  adjusted for the allowance for loan losses. Interest income is
                  accrued on the unpaid principal balance.

                  The accrual of interest on mortgage and commercial loans is
                  discontinued at the time the loan is 90 days delinquent unless
                  the credit is well-secured and in process of collection.
                  Installment loans are typically charged off not later than 180
                  days past due. In all cases, loans are placed on nonaccrual or
                  charged-off at an earlier date if collection of principal or
                  interest is considered doubtful.

                  All interest accrued but not collected for loans that are
                  placed on nonaccrual or charged-off is reversed against
                  interest income. The interest on these loans is accounted for
                  on the cash-basis or cost-recovery method, until qualifying
                  for return to accrual. Loans are returned to accrual status
                  when all principal and interest amounts contractually due are
                  brought current and future payments are reasonably assured.

               Allowance for Loan Losses

                  The allowance for loan losses is established as losses are
                  estimated to have occurred through a provision for loan losses
                  charged to earnings. Loan losses are charged against the
                  allowance when management believes the uncollectibility of a
                  loan balance is confirmed. Subsequent recoveries, if any, are
                  credited to the allowance.

                                     -18-
<PAGE>

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

                  The allowance for loan losses is evaluated on a regular basis
                  by management and is based upon management's periodic review
                  of the collectibility of the loans in light of historical
                  experience, the nature and volume of the loan portfolio,
                  adverse situations that may affect the borrower's ability to
                  repay, estimated value of any underlying collateral and
                  prevailing economic conditions. This evaluation is inherently
                  subjective as it requires estimates that are susceptible to
                  significant revision as more information becomes available.

                  A loan is considered impaired when, based on current
                  information and events, it is probable that the Corporation
                  will be unable to collect the scheduled payments of principal
                  or interest when due according to the contractual terms of the
                  loan agreement. Factors considered by management in
                  determining impairment include payment status, collateral
                  value, and the probability of collecting scheduled principal
                  and interest payments when due. Loans that experience
                  insignificant payment delays and payment shortfalls generally
                  are not classified as impaired. Management determines the
                  significance of payment delays and payment shortfalls on a
                  case-by-case basis, taking into consideration all of the
                  circumstances surrounding the loan and the borrower, including
                  the length of the delay, the reasons for the delay, the
                  borrower's prior payment record, and the amount of the
                  shortfall in relation to the principal and interest owed.
                  Impairment is measured on a loan by loan basis for commercial
                  and construction loans by either the present value of expected
                  future cash flows discounted at the loan's effective interest
                  rate, the loan's obtainable market price, or the fair value of
                  the collateral if the loan is collateral dependent.

                  Large groups of smaller balance homogeneous loans are
                  collectively evaluated for impairment. Accordingly, the
                  Corporation does not separately identify individual consumer
                  and residential loans for impairment disclosures.

               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 a 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."

                  The Corporation has 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
                  standardized 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.

               Earnings Per Share

                  Basic earnings per share represents income available to common
                  stockholders divided by the weighted-average number of common
                  shares outstanding during the period. Diluted earnings per
                  share reflects additional common shares that would have been
                  outstanding if dilutive potential common shares had been
                  issued, as well as any adjustment to income that would result
                  from the assumed issuance. The Corporation had no potential
                  common stock as of December 31, 1999, 1998, and 1997.

                                     -19-
<PAGE>

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

               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

                  In preparing consolidated financial statements in conformity
                  with generally accepted accounting principles, management is
                  required to make estimates and assumptions that affect the
                  reported amounts of assets and liabilities as of the date of
                  the balance sheet and the reported amounts of revenues and
                  expenses during the reported period. Actual results could
                  differ from those estimates. Material estimates that are
                  particularly susceptible to significant change in the near
                  term relate to the determination of the allowance for loan
                  losses, and the valuation of foreclosed real estate and
                  deferred tax assets.

               Advertising

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

               Comprehensive Income

                  The Corporation has 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, 1999 and 1998, are as follows:
<TABLE>
<CAPTION>
                                                                                         1999
                                                           ----------------------------------------------------------------
                                                                                 Gross             Gross
                                                             Amortized        Unrealized        Unrealized        Fair
                                                                Cost             Gains           (Losses)         Value
                                                           -------------    -------------     -----------     -------------
<S>                                                        <C>              <C>               <C>             <C>
               U.S. Treasury securities                    $   2,000,000    $       2,500     $       --      $   2,002,500
               Obligations of U.S. Government agencies        13,007,089              620         (93,169)       12,914,540
                                                           -------------    -------------     -----------     -------------
                                                           $  15,007,089    $       3,120     $   (93,169)    $  14,917,040
                                                           =============    =============     ===========     =============
</TABLE>

                                     -20-
<PAGE>

Note 2.    Securities (Continued)
<TABLE>
<CAPTION>
                                                                                         1998
                                                           ----------------------------------------------------------------
                                                                                 Gross             Gross
                                                             Amortized        Unrealized        Unrealized        Fair
                                                                Cost             Gains           (Losses)         Value
                                                           -------------    -------------     -----------     -------------
<S>                                                        <C>              <C>               <C>             <C>
               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>

           The amortized cost and fair value of the securities being held to
           maturity as of December 31, 1999, by contractual maturity, are shown
           below:
<TABLE>
<CAPTION>
                                                             Amortized           Fair
                                                               Cost              Value
                                                           -------------    -------------
<S>                                                        <C>              <C>
               Due in one year or less                     $   7,002,421    $   6,990,940
               Due after one year through five years           8,004,668        7,926,100
                                                           -------------    -------------
                                                           $  15,007,089    $  14,917,040
                                                           =============    =============
</TABLE>

           The amortized cost and fair value of securities available for sale as
           of December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
                                                                                         1999
                                                           ----------------------------------------------------------------
                                                                                 Gross             Gross
                                                             Amortized        Unrealized        Unrealized        Fair
                                                                Cost             Gains           (Losses)         Value
                                                           -------------    -------------     -----------     -------------
<S>                                                        <C>              <C>               <C>             <C>
               U.S. Treasury securities                    $   1,999,808    $       1,193     $        --     $   2,001,001
               Obligations of U.S. Government agencies        25,220,182               --        (389,395)       24,830,787
               Federal Home Loan Bank stock                      449,700               --              --           449,700
                                                           -------------    -------------     -----------     -------------
                                                           $  27,669,690    $       1,193     $  (389,395)    $  27,281,488
                                                           =============    =============     ===========     =============
</TABLE>

<TABLE>
<CAPTION>
                                                                                         1998
                                                           ----------------------------------------------------------------
                                                                                 Gross             Gross
                                                             Amortized        Unrealized        Unrealized        Fair
                                                                Cost             Gains           (Losses)         Value
                                                           -------------    -------------     -----------     -------------
<S>                                                        <C>              <C>               <C>             <C>
               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
                                                           =============    =============     ===========     =============
</TABLE>

           The amortized cost and fair value of the securities available for
           sale as of December 31, 1999, by contractual maturity, are shown
           below:
<TABLE>
<CAPTION>
                                                             Amortized           Fair
                                                               Cost              Value
                                                           -------------    -------------
<S>                                                        <C>              <C>
               Due in one year or less                     $   9,004,822    $   8,976,611
               Due after one year through five years          18,215,168       17,855,177
               Other                                             449,700          449,700
                                                           -------------    -------------
                                                           $  27,669,690    $  27,281,488
                                                           =============    =============
</TABLE>

           There were no sales of securities during 1999, 1998 and 1997.

           Securities with a carrying value of $9,828,571 and $8,030,073 at
           December 31, 1999 and 1998, 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>
                                                                                       December 31
                                                                            -------------------------------
                                                                                 1999              1998
                                                                            -------------     -------------
<S>                                                                         <C>               <C>
                  Real estate loans:
                     Construction and land development                      $      31,000     $     651,848
                     Secured by farm land                                       2,604,920         1,394,201
                     Secured by 1-4 family residential                         43,798,037        42,541,181
                     Other real estate loans                                   11,859,376        12,623,662
                  Loans to farmers (except those secured by
                     real estate)                                                 388,860           246,100
                  Commercial and industrial loans (except those
                     secured by real estate)                                    2,434,696         2,187,471
                  Loans to individuals for personal expenditures               16,879,468        17,738,039
                  All other loans                                                 333,695           424,034
                                                                            -------------     -------------
                                                                            $  78,330,052     $  77,806,536
                                                                            =============     =============
</TABLE>

           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, 1999 and 1998, these
           loans totaled $772,076 and $214,881 respectively. During 1999, total
           principal additions were $723,589 and total principal payments were
           $166,394.

Note 4.    Allowance for Loan Losses

           The following is a summary of transactions in the allowance for loan
losses for 1999, 1998 and 1997:
<TABLE>
<CAPTION>
                                                                                 1999              1998             1997
                                                                             ------------      ------------     -------------
<S>                                                                          <C>               <C>              <C>
                  Balances at beginning of year                              $  1,140,000      $  1,138,747     $   1,138,747
                     Provision charged to operating expense                       125,000           125,245           127,408
                     Recoveries added to the allowance                             42,283            42,730            48,420
                     Loan losses charged to the allowance                         (89,364)         (166,722)         (175,828)
                                                                             ------------      ------------     -------------
                  Balances at end of year                                    $  1,217,919      $  1,140,000     $   1,138,747
                                                                             ============      ============     =============
</TABLE>

           Information about impaired loans as of and for the years ended
           December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
                                                                                  1999             1998
                                                                              ------------     ------------
<S>                                                                           <C>              <C>
                  Impaired loans for which an allowance has been provided     $    231,520     $    397,986
                  Impaired loans for which no allowance has been provided               --               --
                                                                              ------------     ------------
                     Total impaired loans                                     $    231,520     $    397,986
                                                                              ============     ============
                  Allowance provided for impaired loans, included in the
                     allowance for loan losses                                $     69,456     $    198,993
                                                                              ============     ============
</TABLE>

<TABLE>
<CAPTION>
                                                                                  1999             1998             1997
                                                                              ------------     ------------     -------------
<S>                                                                           <C>              <C>              <C>

                  Average balance in impaired loans                           $    372,633     $    397,986     $     399,178
                                                                              ============     ============     =============
                  Interest income recognized                                  $     21,994     $     34,062     $      34,271
                                                                              ============     ============     =============
</TABLE>

           Nonaccrual loans excluded from impaired loan disclosure under FASB
           114 amounted to $112,844 at December 31, 1999. If interest on this
           loan had been accrued, such income would have approximated $5,377 in
           1999. There were no nonaccrual loans at December 31, 1998 or interest
           during the year.

                                     -22-
<PAGE>

Note 5.    Premises and Equipment, Net

           Premises and equipment consists of the following:
<TABLE>
<CAPTION>
                                                                                       December 31
                                                                            -------------------------------
                                                                                 1999              1998
                                                                            -------------     -------------
<S>                                                                         <C>               <C>
                         Premises                                           $   1,654,544     $   1,851,509
                         Furniture and equipment                                2,378,609         2,458,650
                         Construction in progress                               1,050,624                --
                                                                            -------------     -------------
                                                                            $   5,083,777     $   4,310,159
                         Less accumulated depreciation                          2,941,127         3,086,180
                                                                            -------------     -------------
                                                                            $   2,142,650     $   1,223,979
                                                                            =============     =============
</TABLE>

           Depreciation included in operating expense for 1999, 1998 and 1997,
           was $202,873, $212,287 and $208,809 respectively.

           On September 29, 1997, the Corporation approved a Project Development
           and Construction Agreement to renovate the existing main offices and
           construct additional building space. The Confirmation of Estimate of
           Construction was signed July 15, 1999 stating the estimated cost of
           the project which is currently $2,038,000.

Note 6.    Deposits

           The aggregate amount of time deposits with a balance of $100,000 or
           more was $5,160,065 and $5,010,430 at December 31, 1999 and 1998,
           respectively.

           At December 31, 1999, the scheduled maturities of all time deposits
           are as follows:
<TABLE>
<CAPTION>
<S>                                                         <C>
         2000                                               $  30,069,400
         2001                                                   8,707,610
         2002                                                   2,259,126
         2003                                                     320,133
         2004 and thereafter                                          --
                                                            -------------
                                                            $  41,356,269
                                                            =============
</TABLE>


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 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. The Corporation accounts for its
           share of the costs of those benefits in accordance with Financial
           Accounting Standards Statement No. 106, "Employers' Accounting for
           Postretirement Benefits Other Than Pensions." 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>
                                                           Pension Benefits                      Postretirement Benefits
                                                      -------------------------                 ------------------------
                                                         1999           1998                       1999          1998
                                                      -----------   -----------                 -----------  -----------
<S>                                                   <C>           <C>                         <C>          <C>
           Change in Benefit Obligation:
               Benefit obligation, beginning          $4,129,250    $3,339,744                  $ 534,845    $ 463,642
               Service cost                              161,271       156,373                      8,536        7,904
               Interest cost                             274,718       262,650                     42,787       38,337
               Actuarial (gain) loss                    (144,079)      337,654                     13,855       52,976
               Benefits paid                            (117,991)     (119,720)                   (25,226)     (28,014)
               Change in discount rate                  (566,427)      152,549                         --           --
                                                      ----------    ----------                  ---------    ---------
               Benefit obligation, ending             $3,736,742    $4,129,250                  $ 574,797    $ 534,845
                                                      ----------    ----------                  ---------    ---------
           Change in Plan Assets:
               Fair value of plan assets, beginning   $3,416,690    $3,337,355                  $      --    $      --
               Actual return on plan assets              175,266       199,055                         --           --
               Employer contributions                     57,949            --                     25,226       28,014
               Benefits paid                            (117,991)     (119,720)                   (25,226)     (28,014)
                                                      ----------    ----------                  ---------    ---------
               Fair value of plan assets, ending      $3,531,914    $3,416,690                  $      --    $      --
                                                      ----------    ----------                  ---------    ---------

               Funded status                          $ (204,828)   $ (712,560)                 $(574,797)   $(534,845)
               Unrecognized net (gain) loss             (402,581)      197,926                      6,608       17,979
               Accumulated premium payments
                  for retirees                                --            --                    120,077       94,851
               Unrecognized net obligation
                  (asset) at transition                 (116,943)     (137,245)                   261,176      278,588
               Unrecognized prior service cost             1,180         1,335                         --           --
                                                      ----------    ----------                  ---------    ---------
               Accrued benefit cost included
                  in other liabilities                $ (723,172)   $ (650,544)                 $(186,936)   $(143,427)
                                                      ==========    ==========                  =========    =========
<CAPTION>
                                                                 Pension Benefits                    Postretirement Benefits
                                                     ---------------------------------------   ------------------------------------
                                                         1999          1998          1997         1999         1998         1997
                                                     -----------   -----------    ----------   ----------   ----------   ----------
<S>                                                  <C>           <C>            <C>          <C>          <C>          <C>
           Components of Net Periodic Benefit Cost:
               Service cost                           $ 161,271     $  156,373     $ 129,289    $   8,536    $   7,904     $ 7,249
               Interest cost                            274,718        262,650       220,359       42,787       38,337      34,342
               Expected return on plan assets          (285,265)      (279,002)     (241,937)          --           --          --
               Amortization of prior service cost           155            155           155           --           --          --
               Amortization of net obligation
                  at transition                         (20,302)       (20,302)      (20,302)      17,412       17,296      17,568
                                                      ---------     ----------     ---------    ---------    ---------     -------
               Net periodic benefit cost              $ 130,577     $  119,874     $  87,564    $  68,735    $  63,537     $59,159
                                                      =========     ==========     =========    =========    =========     =======
           Weighted-Average Assumptions:
               Discount rate                            8.00%         7.00%          7.25%        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%          5.00%          --            --          --
</TABLE>

           For measurement purposes, a 10% annual rate of increase in per capita
           health care costs of covered benefits was assumed for 1999, 1998 and
           1997, 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:

<TABLE>
<CAPTION>
                                                                                1% Increase       1% Decrease
                                                                                -----------       -----------
<S>                                                                             <C>               <C>
               Effect on the health care component of the accumulated
                  postretirement benefit obligation                               $39,454          $(33,914)
               Effect on total of service and interest cost components of
                  net periodic postretirement health care benefit cost              4,010            (3,428)
</TABLE>


                                     -24-
<PAGE>

Note 8.    Income Taxes

           Net deferred tax assets consist of the following components as of
           December 31, 1999 and 1998:

<TABLE>
<CAPTION>
                                                                              1999         1998
                                                                             ------       ------
<S>                                                                         <C>          <C>
                    Deferred tax assets:
                        Reserve for loan losses                             $258,763     $232,271
                        Accrued pension expense                              245,848      221,185
                        Accrued postretirement benefits                       62,362       48,765
                        Nonaccrual interest                                    1,828           --
                        Securities available for sale                        131,989           --
                                                                            --------     --------
                                                                            $700,790     $502,221
                                                                            --------     --------
                    Deferred tax liabilities:
                        Depreciation                                        $  6,576     $ 25,800
                        Securities available for sale                             --       54,239
                                                                            --------     --------
                                                                            $  6,576     $ 80,039
                                                                            --------     --------
                           Net deferred tax assets                          $694,214     $422,182
                                                                            ========     ========
</TABLE>

           The provision for income taxes charged to operations for the years
           ended December 31, 1999, 1998 and 1997 consists of the following:

<TABLE>
<CAPTION>
                                                                              1999         1998        1997
                                                                             ------       ------      ------
<S>                                                                         <C>          <C>         <C>
                    Current tax expense                                     $982,914     $912,316   $1,046,380
                    Deferred tax (benefit)                                   (85,804)     (43,592)     (40,759)
                                                                            --------     --------   ----------
                                                                            $897,110     $868,724   $1,005,621
                                                                            ========     ========   ==========
</TABLE>

           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, 1999, 1998 and 1997 due to
           the following:

<TABLE>
<CAPTION>
                                                                              1999         1998        1997
                                                                             ------       ------      ------
<S>                                                                         <C>          <C>         <C>
               Computed "expected" tax expense                              $829,644     $801,670   $  927,291
               Increase (decrease) in income taxes resulting from:
                  Tax exempt interest income                                  (6,324)      (4,627)      (3,353)
                  State income taxes, net of federal income tax benefit       73,767       69,385       79,092
                  Other                                                           23        2,296        2,591
                                                                            --------     --------   ----------
                                                                            $897,110     $868,724   $1,005,621
                                                                            ========     ========   ==========
</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 $1,726,536 in deposits in another
           financial institution in excess of amounts insured by the Federal
           Deposit Insurance Corporation (FDIC) at December 31, 1999.

           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, 1999
           and 1998, the aggregate amounts of daily average required balances
           were approximately $2,881,000 and $2,484,000, respectively.


                                     -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, 1999, the aggregate amount of unrestricted funds which
           could be transferred from the banking subsidiary to the parent
           corporation, without prior regulatory approval, totaled $2,688,033 or
           16.1% 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, 1999 and 1998,
           is as follows:

<TABLE>
<CAPTION>
                                                                                  1999             1998
                                                                                 ------           ------
<S>                                                                            <C>              <C>
                         Financial instruments whose contract
                            amounts represent credit risk:
                               Commitments to extend credit                    $7,890,050       $12,225,851
                               Standby letters of credit                          264,194             3,900
</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.

           Unfunded commitments under commercial lines of credit are commitments
           for possible future extensions of credit to existing customers. These
           lines of credit are uncollateralized and usually do not contain a
           specified maturity date and may not be drawn upon to the extent to
           which the Corporation is committed.

           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, 1999.

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.


                                     -26-
<PAGE>

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

               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.

               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.

               Accrued Interest
                  The carrying amounts of accrued interest approximates fair
                  value.

               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, 1999 and 1998, 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>
                                                                 1999                     1998
                                                      -----------------------   ---------------------
                                                       Carrying       Fair       Carrying     Fair
                                                        Amount        Value       Amount      Value
                                                      ----------   ----------   ----------  ---------
                                                            (in thousands)         (in thousands)
<S>                                                   <C>          <C>           <C>        <C>
                  Financial assets:
                     Cash                               $  5,523   $  5,523      $  4,646   $  4,646
                     Securities purchased under
                         agreements to resell and
                         federal funds sold               15,531     15,531        13,483     13,483
                     Securities held to maturity          15,007     14,917        25,029     25,351
                     Securities available for sale        27,281     27,281        25,179     25,179
                     Loans, net                           77,112     73,391        76,667     74,280
                     Accrued interest receivable           1,112      1,112         1,168      1,168
                                                        --------   --------      --------   --------
                            Total financial assets      $141,566   $137,755      $146,172   $144,107
                                                        ========   ========      ========   ========
                  Financial liabilities:
                     Deposits                           $126,685   $126,714      $130,665   $130,925
                     Accrued interest payable                308        308           350        350
                                                        --------   --------      --------   --------
                            Total financial liabilities $126,993   $127,022      $131,015   $131,275
                                                        ========   ========      ========   ========
</TABLE>

Note 13.   Regulatory Matters

           The Corporation and the Bank are subject to various regulatory
           capital requirements administered by the federal banking agencies.
           Failure to meet minimum capital requirements can initiate certain
           mandatory - possibly additional discretionary - actions by regulators
           that, if undertaken, could have a direct material effect on the
           Corporation's and Bank's financial statements. Under capital adequacy
           guidelines and the regulatory framework for prompt corrective action,
           the Corporation and Bank must meet specific capital guidelines that
           involve quantitative measures of their assets, liabilities, and
           certain off-balance-sheet items as calculated under regulatory
           accounting practices. The capital amounts and classification are also
           subject to qualitative judgments by the regulators about components,
           risk weightings, and other factors. Prompt corrective action
           provisions are not applicable to bank holding companies.

           Quantitative measures established by regulation to ensure capital
           adequacy require the Corporation and the Bank to maintain minimum
           amounts and ratios (set forth in the table on page 28) 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, 1999, that the Corporation and the Bank meet all
           capital adequacy requirements to which they are subject.


                                     -27-
<PAGE>

Note 13.   Regulatory Matters (Continued)

           As of December 31, 1999, the most recent notification from the
           Federal Deposit Insurance Corporation categorized the Bank as well
           capitalized under the regulatory framework for prompt corrective
           action. To be categorized as well capitalized, an institution 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.

           The Corporation's and the Bank's actual capital amounts and ratios
           are also presented in the table.

<TABLE>
<CAPTION>
                                                                                                                   Minimum
                                                                                                                  To Be Well
                                                                                           Minimum            Capitalized Under
                                                                                           Capital            Prompt Corrective
                                                               Actual                    Requirement          Action Provisions
                                                        ------------------         --------------------       ------------------
                                                        Amount       Ratio         Amount         Ratio       Amount       Ratio
                                                        ------       -----         ------         -----       ------       -----
                                                                                   (Amount in Thousands)
<S>                                                     <C>          <C>          <C>             <C>         <C>          <C>
           As of December 31, 1999:
               Total capital (to risk-weighted assets):
                     Consolidated                       $17,861      24.45%       >$5,845        >8.0%               N/A
                                                                                  -              -
                     Bank of Charles Town               $17,792      24.36%       >$5,844        >8.0%      >$7,305      >10.0%
                                                                                  -              -          -            -
               Tier 1 capital (to risk-weighted assets):
                     Consolidated                       $16,944      23.19%       >$2,922        >4.0%               N/A
                                                                                  -              -
                     Bank of Charles Town               $16,875      23.10%       >$2,922        >4.0%      >$4,383      > 6.0%
                                                                                  -              -          -            -
               Tier 1 capital (to average assets):
                     Consolidated                       $16,944      11.55%       >$5,870        >4.0%               N/A
                                                                                  -              -
                     Bank of Charles Town               $16,875      11.50%       >$5,869        >4.0%      >$7,336      > 5.0%
                                                                                  -              -          -            -

           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%
                                                                                  -              -          -            -
</TABLE>


                                     -28-
<PAGE>

Note 14.   Parent Corporation Only Financial Statements

<TABLE>
<CAPTION>
                                                        POTOMAC BANCSHARES, INC.
                                                        (Parent Corporation Only)
                                                             Balance Sheets
                                                       December 31, 1999 and 1998

                                                                                             1999              1998
                                                                                            ------            ------
<S>                                                                                       <C>               <C>
           ASSETS

               Cash                                                                       $    62,699       $    26,587
               Investment in subsidiary                                                    16,619,104        16,153,510
               Organization costs, net of accumulated amortization                                 --             7,165
               Other assets                                                                    10,870            13,890
                                                                                          -----------       -----------
                     Total Assets                                                         $16,692,673       $16,201,152
                                                                                          ===========       ===========
           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                                                           10,943,890        10,090,870
               Accumulated other comprehensive income (loss)                                 (256,213)          105,286
                                                                                          -----------       -----------
                     Total Stockholders' Equity                                           $16,687,677       $16,196,156
                                                                                          -----------       -----------
                     Total Liabilities and Stockholders' Equity                           $16,692,673       $16,201,152
                                                                                          ===========       ===========
<CAPTION>
                                                    POTOMAC BANCSHARES, INC.
                                                   (Parent Corporation Only)
                                                     Statements of Income
                                        Years Ended December 31, 1999, 1998 and 1997

                                                                            1999              1998              1997
                                                                           ------            ------            ------
<S>                                                                      <C>              <C>               <C>
           Income
               Dividends from subsidiary                                 $  740,000       $  715,000        $  690,000

           Expenses
               Amortization                                              $    7,165       $   12,282        $   12,282
               Transfer agent expense                                         8,095            7,887             7,592
               Legal and professional                                         3,675            4,634             2,831
               Other operating expenses                                      15,826           18,394            14,710
                                                                         ----------       ----------        ----------
                     Total Expenses                                      $   34,761       $   43,197        $   37,415
                                                                         ----------       ----------        ----------

                     Income before Income Tax (Benefit) and
                         Equity in Undistributed Income of
                         Subsidiary                                      $  705,239       $  671,803        $  652,585

           Income Tax (Benefit)                                             (10,688)         (13,708)          (11,797)
                                                                         ----------       ----------        ----------

                     Income before Equity in Undistributed
                         Income of Subsidiary                            $  715,927       $  685,511        $  664,382

           Equity in Undistributed Income of Subsidiary                     827,093          803,618         1,057,322
                                                                         ----------       ----------        ----------
                      Net Income                                         $1,543,020       $1,489,129        $1,721,704
                                                                         ==========       ==========        ==========
</TABLE>


                                     -29-
<PAGE>

Note 14.   Parent Corporation Only Financial Statements (Continued)

<TABLE>
<CAPTION>
                                                        POTOMAC BANCSHARES, INC.
                                                       (Parent Corporation Only)
                                                       Statements of Cash Flows
                                             Years Ended December 31, 1999, 1998 and 1997

                                                                          1999             1998             1997
                                                                         ------           ------           ------
<S>                                                                   <C>              <C>              <C>
           CASH FLOWS FROM OPERATING ACTIVITIES
               Net income                                             $1,543,020       $1,489,129       $ 1,721,704
               Adjustments to reconcile net income to net cash
                  provided by operating activities:
                     Equity in undistributed (income) of
                         subsidiary                                     (827,093)        (803,618)       (1,057,322)
                     Amortization                                          7,165           12,282            12,282
                     (Increase) decrease in other assets                   3,020           (1,911)             (180)
                                                                      ----------       ----------       -----------

                         Net cash provided by operating
                            activities                                $  726,112       $  695,882       $   676,484
                                                                      ----------       ----------       -----------

           CASH FLOWS FROM FINANCING ACTIVITIES
               Cash dividends                                         $ (690,000)      $ (690,000)      $  (690,000)
                                                                      ----------       ----------       -----------

                         Increase (decrease) in cash and cash
                            equivalents                               $   36,112       $    5,882       $   (13,516)

           CASH AND CASH EQUIVALENTS
               Beginning                                                  26,587           20,705            34,221
                                                                      ----------       ----------       -----------
               Ending                                                 $   62,699       $   26,587       $    20,705
                                                                      ==========       ==========       ===========
</TABLE>


                                     -30-
<PAGE>

                          TRUST AND FINANCIAL SERVICES

     Your trust department realized record income receipts in 1999! Trust fees
in 1999 totaled $592,182, compared to $555,101 in 1998. Trust revenue continues
to reflect the department's emphasis on personal account relationships, with
approximately 92% of income derived from grantor trusts, testamentary trusts,
and personal agency accounts. Approximately 72% of our peer group department
income was derived from personal accounts in 1998 (the most recent year for FDIC
peer group statistics). Your Bank's NET trust income in 1998 equaled 25% of
gross fees, verses an average of 12.5% for the peer group. Net trust income in
1999 equaled 21% of gross fees. In 1999 estate fees totaled $101,000, verses
$69,000 in 1998.

     Trust assets as of December 31, 1999, totaled $87,545,000, compared to
December 31, 1998 footings of $90,189,000. The net decrease in fiduciary assets
was the result of the distribution of three estates with $1,500,000 in asssets,
and termination of several personal agencies and trusts following the relocation
or death of the grantors.

     In 1999 the question of Y2K preparedness was a concern to all businesses
and individuals. The department's trust accounting software operated without Y2K
problems through the date change.

     As we prepare for our return to our renovated offices in early summer, 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, 1999
                                   (unaudited)

<TABLE>
<S>                                                              <C>       <C>
         ASSETS
         ------
         Discretionary assets:
             Bank Deposits:  Bank of Charles Town                          $    43,000
                             Other Banks                                       270,000
             United States Treasury and Agency Obligations                   5,291,000
             State, County, and Municipal Obligations                          828,000
             Short Term Interest Bearing Funds                               4,750,000
             Other Short Term Obligations                                       75,000
             Notes and Bonds                                                 9,488,000
             Common and Preferred Stocks                                    33,844,000
             Real Estate Mortgages                                             283,000
             Real Estate                                                       565,000
             Miscellaneous Assets                                               20,000
                                                                           -----------
                Total Discretionary Assets                                 $55,457,000
                                                                           -----------

         Non-Discretionary Assets                                          $32,088,000
                                                                           -----------
                          Total Assets                                     $87,545,000
                                                                           ===========

         ACCOUNTS
         --------
         Personal Trusts                                         139       $54,812,000
         Estates and Other Court Accounts                         35         6,666,000
         Employee Benefit Accounts                                26         5,014,000
         Agencies and Other                                       71        21,053,000
                                                                 ---       -----------
                          Total Accounts                         271       $87,545,000
                                                                 ===       ===========
</TABLE>


                                     -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

<TABLE>
<S>                                    <C>                                          <C>
                                              Administration
     Mortgage and Commercial                                                            Maintenance Department
         Loan Department                    Charles W. LeMaster
                                                 President                                  Paula M. Fraley
       Thomas F. Chambers                                                                   Paul D. Staubs
         Vice President                      William R. Harner                            E. Geraldine White
                                       Sr. Vice President & Cashier
     H. William Easter, Jr.                                                          Trust and Financial Services
    Assistant Vice President          L. Gayle Marshall Johnson, CPA
                                    Vice President & Financial Officer                     Robert L. Hersey
        Cynthia A. Light                                                            Vice President & Trust Officer
        Assistant Cashier                   Susan S. Myers, CPA
                                    Assistant Vice President & Auditor                   David S. (Joe) Smith
         Patricia A. Ott                                                                     Trust Officer
                                              Diane C. Bogden
   Installment Loan Department               Personnel Officer                             Sheila R. Miller
                                                                                        Assistant Trust Officer
         Donna J. Burns                  William H. Chesley, Jr.
         Vice President                     Marketing Officer                            Deanna D. Greenfield
                                                                                         Michelle S. Griffith
       Richard B. Breeden                   Gary L. Dungan, CPA                             Deborah A. Ring
   Assistant Vice President &               Compliance Officer                            Consuelo L. Shanton
        Security Officer                                                                    Jeanette Staubs
                                              Tammy L. Miller
         Janice B. Davis                                                                Certificates of Deposit
        Assistant Cashier                 Bookkeeping Department                              Department

        Victoria B. Burns                     Doris V. Loudan                              Judith A. Edwards
       Kimberly K. DeSarno          Assistant Cashier & Head Bookkeeper
        Matthew D. Perks                                                              Data Processing Department
       Jacqueline L. Smith                    Neil A. Bradley
        Linda A. Stewart                     Patricia L. Clay                               Richard M. Crea
                                             Shirley G. Dutrow                            Assistant Cashier &
        Teller Department                     Marcia S. Lerch                           Data Processing Manager
                                              Cindy L. Magaha
       Carolyn N. O'Brien                    Elizabeth W. Park                               Amy L. Brill
 Assistant Cashier & Head Teller           M. Jacqueline Propst                            Nancy L. Harrison
                                            Penny J. Sebastian                            Richard S. Stotler
       Jennifer A. Casale                     Karen A. Staubs
       Latisha C. Clinton                     Peggy C. Turner                            Harpers Ferry Branch
         Leah G. Driver
        Deanna M. Durbin                   Kearneysville Branch                             Wayne C. Welty
         Cathy Jo Fraley                                                              Assistant Vice President &
           Amy E. Gray                 C. Kenneth Nicewarner, Jr.                           Branch Manager
        John N. Haymaker                Assistant Vice President &
         Julia A. Jones                       Branch Manager                               Shelly L. Holmes
       Elizabeth J. Keller                                                           Assistant Cashier & Assistant
        Bradley R. Leigh                      Nancy L. Baker                                Branch Manager
        C. Lane McCarron               Assistant Cashier & Assistant
        Kendra L. Nichols                     Branch Manager                                 Andrea Ariano
         Sharon L. Perry                                                                   Misty N. Ashbaugh
       Michelle N. Slusher                   Rebecca E. Black                              Melissa D. Castle
         Jody L. Talley                       Mary L. Bowers                                Heather M. Cole
        Suzanne N. Taylor                     Carolyn A. Dunn                              Patricia A. Hardy
        Terrie C. Thomas                     Joshua E. Higdon                               Karen S. James
        Rebecca K. Viands                     Tammy E. Hough                               Jennifer L. Riley
      Linda L. Whittington                    Jena L. Manuel                                  W. Ann Wilt
         Beth A. Wilson                      Cheryl C. Miller                            Charles W. Wyndham, Jr.
                                              April D. Myers
            Parttime                                                                            Courier

        Clara K. Carroll                                                                  Benjamin T. Breeden
</TABLE>

                                     -32-
<PAGE>

                          ANNUAL REPORT ON FORM 10-KSB

         A copy of the Corporation's 1999 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, 1999, there were 600,000 common shares outstanding held by approximately 825
shareholders.

         The per share sale prices of the Corporation's stock for 1998 and 1999
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 1998 and 1999 are also listed.

                                        High              Low       Dividends
               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

               1999
               ----
               First Quarter           $40.375           $38.500      $ N/A
               Second Quarter           39.000            36.125       0.50
               Third Quarter            38.000            35.250        N/A
               Fourth Quarter           37.000            33.000       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 25, 2000,
beginning at 10:30 a.m.


                                     -33-