<PAGE>

                                  cover page
<PAGE>

                                   CONTENTS

<TABLE>
<S>                                                                <C>
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

</TABLE>

                          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,
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>

                  THE PRESIDENT'S REPORT TO OUR SHAREHOLDERS


We are pleased to present to our shareholders this year's annual report.  For
those of you who are interested in the details of our performance, you might
want to turn to the Management's Discussion on page 5.  For those of you who
just want to know, "Did the Corporation and the Subsidiary Bank do better than
last year?", please read on.

The first thing Shareholders usually want to know is, "Did the Corporation make
more money than last year?"  The answer is yes.  After tax net income was up
$271,000 over the previous year for an increase of 17.6%.  On a per share basis,
earnings rose from $2.57 to $3.02.  The Corporation's return on assets was
favorably impacted by the increase in income, moving from 1.05% last year to
1.25% in 2000.  We are also pleased to report that the return on your investment
in Potomac Bancshares, Inc. grew from 9.33% to 10.46% for an increase of 12%.
As a result of these improved earnings, we were able to increase cash dividends
per share from $1.15 in 1999 to $1.25 in 2000.

The next question by Shareholders might be, " Did the Corporation grow since
last year?"  The answer is yes and no.  All across our industry, loan demand is
outpacing deposit growth, and Potomac Bancshares, Inc. and the Subsidiary Bank
are not immune to this trend.  Average loans increased 3.9% or $3,045,000 over
1999 levels.  However, average deposits decreased by $3,095,000 compared to 1999
levels for a decline of 2.4%.  Needless to say, the Corporation does not want to
develop a trend in this direction, and we are confident that we can reverse this
direction with some concentration and work.

The last question Shareholders might ask is, "What does the future hold for
Potomac Bancshares, Inc. and the Subsidiary Bank?"  Going forward, we believe we
have a number of opportunities to enhance our asset growth and earnings.

First, unlike many banks today, we have a relatively low loan to deposit ratio
which means there is ample room to expand our lending capacity and improve
earnings.  In 2001, our plan is to diversify the mix of our loan portfolio and
increase our small business lending activities.  Business loans properly
underwritten, can provide the Corporation with improved asset yields and
increased noninterest income opportunities.

Second, we believe that to grow the franchise, we must expand beyond the borders
of Jefferson County. To this end, this spring we will establish a loan
production office in Berkeley County that will offer a full line of commercial,
retail and mortgage products. We will also consider other branching
opportunities as they present themselves during 2001.

And third, we intend to increase the number of product offerings in an effort to
be more competitive.  Such offerings will include a full line of mortgage
products, cash management services for our business customers, and an expanded
menu of investment products available through our Trust and Financial Services.
It is our thought that these expanded product offerings will help us solidify
relationships with existing customers as well as attract new clients.

In spite of the many changes we anticipate making to our business plan, we feel
we have a solid foundation on which to build with Bank of Charles Town
celebrating it's 130/th/ Anniversary in 2001. Potomac Bancshares, Inc. and the
Subsidiary Bank have a loyal and experienced staff who are dedicated to
providing the best customer service possible. We operate in a tremendous market
that appears to have unlimited potential. We also think the "Community Bank"
image of our Subsidiary Bank will serve us well given some of the recent turmoil
within our industry.

We ask you as Shareholders to support the Corporation as these changes are
initiated, and we encourage you to enhance your Shareholder value by
experiencing the best customer service possible at Potomac Bancshares, Inc. and
it's subsidiary, Bank of Charles Town.


                                               Robert F. Baronner, Jr.
                                               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 any
touch tone telephone and/or the World Wide Web. 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
                              As of March 1, 2001

<TABLE>
<S>                         <C>                                <C>
Robert F. Baronner, Jr.     Robert W. Butler                   E. William Johnson
President & CEO             Farmer-Orchardist                  Professor of Economics
Bank of Charles Town        Warm Spring Orchard & Farm         Shepherd College

J. Scott Boyd               Guy Gareth Chicchirichi            John C. Skinner, Jr.
President                   Executive Manager                  Owner
Jefferson Pharmacy, Inc.    Guy's Buick-Pontiac-Oldsmobile-    Nichols & Skinner, L.C.
                            GMC Truck, Inc.

John P. Burns, Jr.          Thomas C. G. Coyle                 Donald S. Smith
Partner                     Retired Owner-Operator             Retired President
Burns Farm                  Riddleberger's Store               Bank of Charles Town

                            William R. Harner
                            Senior Vice President
                            & Cashier
                            Bank of Charles Town
</TABLE>

Potomac Bancshares, Inc. and Bank of Charles Town would like to acknowledge with
sadness the November 3, 2000 death of Francis M. Frye, a director of the Bank
since November 1, 1983 and of Potomac since 1994; and the March 1, 2001
retirement of Minnie R. Mentzer, a director of the Bank since October 4, 1983
and of Potomac since 1994. Mr. Frye served as Chairman of the Audit Committee
and as a member of the Building, Salary and Personnel, and Steering Committees.
He gave hours of volunteer time to numerous community activities. His
contributions to Potomac Bancshares, Inc., Bank of Charles Town and the
community will not be forgotten. Mrs. Mentzer served as a member of the Audit,
Investment, and Steering Committees. Upon retirement, she plans to continue many
of her activities in the community and to spend more time with her family.
Potomac Bancshares, Inc. and Bank of Charles Town appreciate her faithfulness
during her years as a director.

                                      -2-
<PAGE>

                     SELECTED CONSOLIDATED FINANCIAL DATA
                 (Dollars in Thousands Except Per Share Data)

<TABLE>
<CAPTION>
                                              2000       1999      1998      1997      1996
                                            --------   --------  --------  --------  --------
<S>                                         <C>        <C>       <C>       <C>       <C>
Summary of Operations

 Interest income                            $ 10,328   $ 10,009  $ 10,055  $  9,563  $  9,086
 Interest expense                              3,968      4,191     4,401     3,710     3,623
                                            --------   --------  --------  --------  --------
 Net interest income                           6,360      5,818     5,654     5,853     5,463
 Provision for (recovery of) loan losses         (70)       125       125       127       100
                                            --------   --------  --------  --------  --------
 Net interest income after provision
   for (recovery of) loan losses               6,430      5,693     5,529     5,726     5,363
 Non-interest income                           1,148      1,170     1,126     1,128       989
 Non-interest expense                          4,711      4,423     4,297     4,127     4,114
                                            --------   --------  --------  --------  --------
 Income before income taxes                    2,867      2,440     2,358     2,727     2,238
 Income tax expense                            1,053        897       869     1,005       831
                                            --------   --------  --------  --------  --------

 Net income                                 $  1,814   $  1,543  $  1,489  $  1,722  $  1,407
                                            ========   ========  ========  ========  ========

Per Share Data

 Net income, basic and diluted              $   3.02   $   2.57  $   2.48  $   2.87  $   2.35
 Cash dividends declared                        1.25       1.15      1.15      1.15       .95
 Book value at period end                      29.94      27.81     26.99     25.50     23.70
 Average shares outstanding                  600,000    600,000   600,000   600,000   600,000


Average Balance Sheet Summary

 Assets                                     $145,339   $147,612  $138,698  $126,474  $124,267
 Loans                                        81,755     78,710    78,552    76,866    73,817
 Securities                                   45,384     49,315    45,190    40,576    36,972
 Deposits                                    126,617    129,711   121,612   110,291   109,709
 Shareholders' equity                         17,345     16,539    15,862    14,870    13,806


Performance Ratios

 Return on average assets                       1.25%      1.05%     1.07%     1.36%      1.13%
 Return on average equity                      10.46%      9.33%     9.39%    11.58%     10.19%
 Dividend payout ratio                         41.39%     44.75%    46.37%    40.07%     40.43%


Capital Ratios

 Leverage ratio                                12.32%     11.55%    11.15%    11.83%     11.43%
 Risk-based capital ratios
   Tier 1 capital                              22.70%     23.19%    22.64%    23.15%     23.21%
   Total capital                               23.95%     24.45%    23.89%    24.41%     24.47%
</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>
                                                   2000                                    1999
                                ---------------------------------------   --------------------------------------
                                   Average        Income/      Average      Average        Income/     Average
                                  Balances       Expense     Yield/Rate     Balances       Expense    Yield/Rate
                                ------------   -----------   ----------   ------------   -----------  ----------
<S>                             <C>            <C>           <C>          <C>            <C>          <C>
ASSETS
Loans
 Taxable                        $ 81,440,912   $ 7,109,661      8.73%     $ 78,390,482   $ 6,664,884     8.50%
 Tax exempt                          313,769        29,502      9.40%          319,534        28,182     8.82%
                                ------------   -----------                ------------   -----------
   Total loans                    81,754,681     7,139,163      8.73%       78,710,016     6,693,066     8.50%
                                ------------   -----------                ------------   -----------
Taxable securities                45 383,763     2,677,124      5.90%       49,315,036     2,782,193     5.64%
Securities purchased under
 agreements to resell and
 federal funds sold                9,161,133       522,368      5.70%       11,985,942       543,077     4.53%
                                ------------   -----------                ------------   -----------

   Total earning assets          136,299,577   $10,338,655      7.59%      140,010,994   $10,018,336     7.16%
                                ------------   ===========                ------------   ===========

Allowance for loan losses         (1,262,222)                               (1,183,685)
Cash and due from banks            5,376,831                                 5,320,986
Premises and equipment,
 net                               2,845,680                                 1,493,602
Other assets                       2,079,473                                 1,969,995
                                ------------                              ------------

   Total assets                 $145,339,339                              $147,611,892
                                ============                              ============


LIABILITIES AND
 STOCKHOLDERS' EQUITY
Deposits
 Savings and interest
   bearing demand
   deposits                     $ 69,628,442   $ 1,968,321      2.83%     $ 70,917,739   $ 2,018,720     2.85%
 Time deposits                    39,760,157     1,999,184      5.03%       42,393,782     2,171,943     5.12%
                                ------------   -----------                ------------   -----------
   Total interest
     bearing deposits            109,388,599     3,967,505      3.63%      113,311,521     4,190,663     3.70%
                                ------------   -----------                ------------   -----------

Federal funds purchased                8,197           584      7.12%               --            --       --
                                ------------   -----------                ------------   -----------
   Total interest
     bearing liabilities         109,396,796   $ 3,968,089      3.63%      113,311,521   $ 4,190,663     3.70%
                                ------------   ===========                ------------   ===========

Noninterest bearing demand
 deposits                         17,227,906                                16,399,781
Other liabilities                  1,369,983                                 1,361,238
Stockholders' equity              17,344,654                                16,539,352
                                ------------                              ------------
   Total liabilities and
     stockholders' equity       $145,339,339                              $147,611,892
                                ============                              ============


Net interest spread                                             3.96%                                    3.46%
Interest expense as a
 percent of average earning assets                              2.91%                                    2.99%

Net interest margin                                             4.67%                                    4.16%
</TABLE>

                                      -4-
<PAGE>

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



GENERAL
-------

  Total assets increased $3,500,000 or 2.4% in 2000 compared to 1999. The most
significant change in the balance sheet is the 7.8% or $6,100,000 growth in
loans. Premises and equipment also increased over $1,000,000 due to the
renovation of existing facilities and completion of the new addition at the main
office in Charles Town. Funding for these increases was provided by a decrease
in securities, and an increase in deposits.

  Management is unaware of any trends, events or uncertainties that would have a
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 income increased $271,000 or 17.6% in 2000 compared to 1999. During 2000,
the Bank received a recovery in the amount of $191,430 on a mortgage loan
charged off in 1992. The recovery was credited to the reserve for loan losses
when received. Due to the recovery, management adjusted the reserve for loan
losses which resulted in a recovery of loan losses of $70,000 in 2000 compared
to a provision for loan losses of $125,000 in 1999. This recovery by the Bank
created a large part of the increase in net income for 2000.



NET INTEREST INCOME
-------------------

  In 2000 net interest income increased 9.3% when compared to 1999 due to
increased interest income and decreased interest expense.

  Interest income increased $300,000 or 3.2% in 2000 when compared to 1999.

  Interest and fees on loans increased 6.7% in 2000 compared to 1999 due to
increased rates and increased volume. The loan portfolio increased $6,100,000 in
2000 to $84,446,835 compared to $78,330,052 in 1999.

  Interest income on securities held to maturity and securities available for
sale decreased 3.8% in 2000 compared to 1999. This decrease is due to the
decrease in volume offset by an increase in the average rate in 2000 compared to
1999. Interest income from securities purchased under agreements to resell and
federal funds sold decreased 3.8% in 2000 compared to 1999. This decrease is due
to decreased volume even though there was an increase in the average rate for
these investments in 2000 compared to 1999.

  Interest expense decreased to $3,968,089 in 2000 compared to $4,190,663 in
1999. Decreased volumes and, to a lesser extent, decreased rates were
responsible for the decrease in interest expense. Although total deposits
increased $2,200,000 in 2000 compared to 1999, interest bearing deposits
actually decreased $1,100,000 while noninterest bearing deposits increased
$3,300,000.

  In 2000, the average yield for earning assets was 7.59%, an increase of .43%
when compared to 1999. The average rate paid on all interest bearing liabilities
was 3.63% in 2000 compared to 3.70% in 1999. The net interest spread increased
 .50% to 3.96% in 2000 compared to 3.46% in 1999. The net interest margin
increased .51% to 4.67% in 2000 compared to 1999.

                                      -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>

                                               2000 Compared to 1999                        1999 Compared to 1998
                                     ------------------------------------------      ------------------------------------
                                       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                          $ 444,777       $ 262,349       $182,428       $(302,971)     $ 15,522   $(318,493)
 Tax exempt loans                           1,320            (499)         1,819          (3,894)       (1,610)     (2,284)
 Taxable securities                      (105,069)       (249,145)       144,076         171,435       233,359     (61,924)
 Securities purchased under
   agreements to resell
   and federal funds sold                 (20,709)       (143,696)       122,987          87,538       150,248     (62,710)
                                        ---------       ---------       --------       ---------      --------   ---------
     TOTAL                              $ 320,319       $(130,991)      $451,310       $ (47,892)     $397,519   $(445,411)
                                        ---------       ---------       --------       ---------      --------   ---------

INTEREST EXPENSE
 Savings and interest bearing
   demand deposits                      $ (50,399)      $ (36,363)      $(14,036)      $ (29,095)     $195,057   $(224,152)
 Time deposits                           (172,759)       (134,657)       (38,102)       (181,174)       17,384    (198,558)
 Federal funds purchased                      584             584             --              --            --          --
                                        ---------       ---------       --------       ---------      --------   ---------
     TOTAL                              $(222,574)      $(170,436)      $(52,138)      $(210,269)     $212,441   $(422,710)
                                        ---------       ---------       --------       ---------      --------   ---------

NET INTEREST INCOME                     $  97,745       $(301,427)      $399,172       $ 162,377      $185,078   $ (22,701)
                                        =========       =========       ========       =========      ========   =========
</TABLE>

NONINTEREST INCOME AND EXPENSE
------------------------------

     Noninterest income decreased approximately 1.9% in 2000 compared to 1999.
This included a 7.5% decrease in income from the Trust and Financial Services
Department and a 7% decrease in other customer service fees which was the result
of decreased commissions on installment loan insurance. Service charges on
deposit accounts increased 8.8% due to increases in base fees charged.

     Noninterest expense increased 6.5% in 2000 compared to 1999. The majority
of the increase is in the salaries and employee benefits category, which
increased 10% in 2000 compared to 1999. A combination of a 10% increase in
salaries and related costs and a 70% increase in group insurance costs increased
total salary and employee benefit expenses by $259,000. There were increases in
occupancy and furniture and equipment expenses as a result of the building and
renovation project. Directors fees increased $10,652 or 11% when comparing 2000
to 1999 due to an increase in fees paid for each meeting attended. Stationary
and supplies expense decreased 9.9% because of nonrecurring Y2K expenses in
1999.

                                      -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,
2000. 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                 $ 8,829,725     $24,247,053        $43,748,880     $ 3,881,138      $        --
 Floating rate loans                3,740,039              --                 --              --               --
 Securities                         5,999,198      13,937,723         16,153,125              --          449,700
 Securities purchased under
  agreements to resell and
  federal funds sold               17,365,954              --                 --              --               --
                                  -----------     -----------        -----------     -----------      -----------
   Total                          $35,934,916     $38,184,776        $59,902,005     $ 3,881,138      $   449,700
                                  -----------     -----------        -----------     -----------      -----------

Interest Bearing Liabilities:
 Time deposits
  $100,000 and over               $ 1,929,690     $ 2,815,371        $   736,386     $        --      $        --
 Other time deposits                6,957,360      18,891,204          8,457,634         357,851               --
 Money market accounts              6,178,490              --                 --              --               --
 NOW accounts                      29,657,490              --                 --              --       17,176,789
 Savings accounts                          --              --                 --              --       16,364,017
                                  -----------     -----------        -----------     -----------      -----------
   Total                          $44,723,030     $21,706,575        $ 9,194,020     $   357,851      $33,540,806
                                  -----------     -----------        -----------     -----------      -----------

Rate Sensitivity Gap              $(8,788,114)    $16,478,201        $50,707,985     $ 3,523,287
                                  -----------     -----------        -----------     -----------

Cumulative Gap                    $(8,788,114)    $ 7,690,087        $58,398,072     $61,921,359
                                  ===========     ===========        ===========     ===========
</TABLE>

     The matching of the maturities or repricing opportunities of interest
earning assets and interest bearing liabilities may be analyzed by examining the
extent to which these assets and liabilities are interest rate sensitive and by
monitoring an institution's interest rate sensitivity gap. An asset or liability
is interest rate sensitive within a specific time period if it will mature or
reprice within that period. The interest rate sensitivity gap is the difference
between the amount of interest earning assets that will mature or reprice within
a specific time period and the amount of interest bearing liabilities that will
mature or reprice within the same time period.

     A gap is considered negative when the amount of liabilities maturing or
repricing in a specific period exceeds the amount of assets maturing or
repricing in the same period. 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, 2000 and 1999 are summarized below:

<TABLE>
<CAPTION>
                                                                        2000         1999
                                                                    -----------   -----------
<S>                                                                 <C>           <C>
         Commercial, financial and agricultural                     $ 2,235,977   $ 2,823,556
         Mortgage loans on real estate:
          Construction and land development                              14,000        31,000
          Secured by farm land                                        2,762,776     2,604,920
          Secured by 1-4 family residential                          45,055,946    43,798,037
          Other real estate                                          12,150,047    11,859,376
         Consumer loans                                              22,022,827    16,879,468
         All other loans                                                205,262       333,695
                                                                    -----------   -----------
                                                                    $84,446,835   $78,330,052
                                                                    ===========   ===========
</TABLE>

     Loans have increased 7.8% comparing year end totals for 2000 and 1999. This
growth was in consumer lending where loans increased 30% and in loans secured by
1-4 family residential property where loans increased by 2.9%. The other loan
categories remained basically the same at December 31, 2000 as at December 31,
1999. The concentration by consumer lenders to increase the number of
relationships with auto dealers in our market area is the major reason for the
growth in the consumer loan category.

     There were no categories of loans that exceeded 10% of outstanding loans at
December 31, 2000 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                                            $1,934,993    $         --
         Variable rate                                                 206,152          14,000
         Fixed rate, over one through five years                        94,832              --
                                                                    ----------    ------------
               Total maturities                                     $2,235,977    $     14,000
                                                                    ==========    ============
</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>
                                                                       2000          1999          1998
                                                                    ----------    ----------    ----------
<S>                                                                 <C>           <C>           <C>
     Balance at beginning of period                                 $1,217,919    $1,140,000    $1,138,747
     Charge-offs:
       Commercial, financial and agricultural                               --            --            --
       Real estate - construction                                           --            --            --
       Real estate - mortgage                                               --        26,854            --
       Consumer                                                        105,677        62,510       166,722
                                                                    ----------    ----------    ----------
        Total charge-offs                                              105,677        89,364       166,722
                                                                    ----------    ----------    ----------
     Recoveries:
       Commercial, financial and agricultural                               --            --            --
       Real estate - construction                                           --            --            --
       Real estate - mortgage                                          201,284        17,000            --
       Consumer                                                         24,709        25,283        42,730
                                                                    ----------    ----------    ----------
        Total recoveries                                               225,993        42,283        42,730
                                                                    ----------    ----------    ----------
     Net charge-offs (recoveries)                                     (120,316)       47,081       123,992
     Additions charged (credited) to operations                        (70,000)      125,000       125,245
                                                                    ----------    ----------    ----------
     Balance at end of period                                       $1,268,235    $1,217,919    $1,140,000
                                                                    ==========    ==========    ==========

     Ratio of net charge-offs (recoveries) during the period
      to average loans outstanding during the period                      0.15%         0.06%         0.16%
                                                                    ==========    ==========    ==========
</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>
                                                                        2000                               1999
                                                           -------------------------------     -----------------------------
                                                                          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              $   46,934            2.65%          $   14,118         3.61%
      Mortgage loans on real estate:
       Construction and land development                          70             .02%                 155          .04%
       Secured by farm land                                   13,814            3.27%              13,025         3.32%
       Secured by 1-4 family residential                     268,879           53.35%             265,168        55.91%
       Other real estate                                     365,623           14.39%             246,681        15.14%
      Consumer loans                                         119,779           26.08%              93,869        21.55%
      All other loans                                          1,026             .24%               1,668          .43%
      Unallocated                                            452,110              --              583,235           --
                                                          ----------          --------         ----------       ------
                                                          $1,268,235          100.00%          $1,217,919       100.00%
                                                          ==========          ========         ==========       ======
</TABLE>

RISK ELEMENTS IN THE LOAN PORTFOLIO

<TABLE>
<CAPTION>
                                                                                  2000               1999       1998
                                                                                --------         ----------   --------
<S>                                                                             <C>              <C>          <C>
      Nonaccrual loans                                                          $     --         $  112,844         --
      Restructured loans                                                              --                 --         --
      Foreclosed properties                                                       12,647            201,429     55,425
                                                                                --------         ----------   --------
       Total nonperforming assets                                               $ 12,647         $  314,273   $ 55,425
                                                                                ========         ==========   ========

      Loans past due 90 days accruing interest                                  $790,349         $  559,924   $596,877
                                                                                ========         ==========   ========

      Allowance for loan losses to period end loans                                 1.50%              1.55%      1.47%

      Nonperforming assets to period end loans and
       foreclosed properties                                                         .01%               .40%       .07%
</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 $725,040 and
$231,520 at December 31, 2000 and 1999. Nonaccrual loans not classified as
impaired totaled $-0- in 2000 and $112,844 in 1999.

      At December 31, 2000, other potential problem loans totaled $82,783. 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 Financial Accounting Standards Board Statement 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
                                                      2000       Average        1999        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                       $ 8,004,061    5.66%      $ 7,002,421     5.95%
   Maturing after one year but
    within five years                               9,923,700    6.89%        8,004,668     5.66%
                                                  -----------               -----------
     Total securities held to maturity            $17,927,761               $15,007,089
                                                  ===========               ===========

Securities available for sale
 U.S. Treasury securities and securities
  of U.S. government agencies:
   Maturing within one year                       $11,932,860    5.17%      $ 8,976,611     5.77%
   Maturing after one year but
    within five years                               6,229,425    5.77%       17,855,177     5.37%
 Equity securities                                    449,700      --           449,700       --
                                                  -----------               -----------
     Total securities available for sale          $18,611,985               $27,281,488
                                                  ===========               ===========

     Total securities                             $36,539,746               $42,288,577
                                                  ===========               ===========
 </TABLE>

DEPOSITS
--------

     When comparing the 2000 and 1999 year end balances, total deposits
increased over $2,000,000 or 1.8% in 2000. Noninterest bearing deposits
increased over $3,000,000 or 21%, while interest bearing deposits decreased over
$1,000,000 or 1%.

     There was some movement within the interest bearing deposit categories. NOW
accounts increased $1,100,000 while money market accounts and certificates of
deposits both decreased $1,200,000. The Select Checking balances (a form of NOW
account that pays a higher interest rate on balances of $5,000 or more) and
savings accounts remained stable.

     The average yield on savings and interest bearing demand deposits decreased
only slightly from 2.85% at year end 1999 to 2.83% at December 31, 2000. The
average yield on time deposits decreased in 2000 to 5.03% compared to 5.12% in
1999.

     At December 31, 2000, time deposits of $100,000 or more were 4.25% of total
deposits compared with 4.1% at December 31, 1999. Maturities of time deposits of
$100,000 or more at December 31, 2000 are as follows:


               Within three months                      $1,929,690
               Over three through six months             1,080,810
               Over six months through twelve months     1,734,561
               Over twelve months                          736,386
                                                        ----------

                     Total                              $5,481,447
                                                        ==========


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 23.95% at
December 31, 2000 and a ratio of Tier 1 capital to risk-weighted assets of
22.70%. Both of these exceed the capital requirements adopted by the federal
regulatory agencies.

                                                 2000          1999
                                             -----------   -----------
         Tier 1 capital:
          Common stock                       $   600,000   $   600,000
          Surplus                              5,400,000     5,400,000
          Retained earnings                   12,008,205    10,943,890
                                             -----------   -----------
         Total tier 1 capital                $18,008,205   $16,943,890
         Tier 2 capital:
          Allowance for loan losses (1)          995,259       916,986
                                             -----------   -----------

         Total risk-based capital            $19,003,464   $17,860,876
                                             ===========   ===========

         Risk-weighted assets                $79,347,762   $73,057,953
                                             ===========   ===========

         Capital ratios:
          Tier 1 risk-based capital ratio          22.70%        23.19%
          Total risk-based capital ratio           23.95%        24.45%
          Leverage ratio                           12.32%        11.55%

(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 2000
(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, 2000, cash and due from banks, securities purchased under
agreements to resell, federal funds sold and loans and securities maturing
within one year were $59,985,012.

     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 $47,000,000.
The Subsidiary Bank borrowed $3,000,000 for one day from Bank of America during
2000.

                                     -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, 2000 and 1999, and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for the years ended December 31, 2000, 1999 and 1998. 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, 2000 and 1999, and the
results of their operations and their cash flows for the years ended December
31, 2000, 1999 and 1998, in conformity with generally accepted accounting
principles.


Winchester, Virginia
January 31, 2001

                                     -13-
<PAGE>

                          CONSOLIDATED BALANCE SHEETS
                          December 31, 2000 and 1999


<TABLE>
<CAPTION>
                                                                  2000          1999
                                                             -------------  ------------
<S>                                                          <C>            <C>
    ASSETS

Cash and due from banks                                       $  6,052,922  $  5,523,254
Securities purchased under agreements to resell
 and federal funds sold                                         17,365,954    15,530,674
Securities held to maturity (fair value $18,104,620
 in 2000 and $14,917,040 in 1999)                               17,927,761    15,007,089
Securities available for sale, at fair value                    18,611,985    27,281,488
Loans, net of allowance for loan losses of $1,268,235
 in 2000 and $1,217,919 in 1999                                 83,178,600    77,112,133
Other real estate owned                                             12,647       201,429
Premises and equipment, net                                      3,177,115     2,142,650
Accrued interest receivable                                      1,051,217     1,111,958
Other assets                                                       843,225       803,375
                                                              ------------  ------------

    Total Assets                                              $148,221,426  $144,714,050
                                                              ============  ============

   LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES
 Deposits
   Noninterest bearing                                        $ 19,422,660  $ 16,034,134
   Interest bearing                                            109,522,282   110,650,389
                                                              ------------  ------------
    Total Deposits                                            $128,944,942  $126,684,523
 Accrued interest payable                                          302,684       307,785
 Other liabilities                                               1,010,052     1,034,065
 Commitments and contingent liabilities                                 --            --
                                                              ------------  ------------
    Total Liabilities                                         $130,257,678  $128,026,373
                                                              ------------  ------------

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                                              12,008,205    10,943,890
 Accumulated other comprehensive (loss)                            (44,457)     (256,213)
                                                              ------------  ------------
    Total Stockholders' Equity                                $ 17,963,748  $ 16,687,677
                                                              ------------  ------------

    Total Liabilities and Stockholders' Equity                $148,221,426  $144,714,050
                                                              ============  ============
</TABLE>

See Notes to Consolidated Financial Statements.

                                     -14-
<PAGE>

                       CONSOLIDATED STATEMENTS OF INCOME
                  Years Ended December 31, 2000, 1999 and 1998



<TABLE>
<CAPTION>
                                                          2000          1999         1998
                                                      -----------   -----------  -----------
<S>                                                   <C>           <C>          <C>
Interest and Dividend Income:
 Interest and fees on loans                           $ 7,129,132   $ 6,683,484  $ 6,989,025
 Interest on securities held to maturity
     Taxable                                            1,276,315     1,358,213    1,702,127
 Interest and dividends on securities
   available for sale
     Taxable                                            1,369,589     1,394,466      881,103
     Dividends                                             31,220        29,514       27,528
 Interest on securities purchased under agreements
   to resell and federal funds sold                       522,368       543,077      455,539
                                                      -----------   -----------  -----------

       Total Interest and Dividend Income             $10,328,624   $10,008,754  $10,055,322
                                                      -----------   -----------  -----------

Interest Expense:
 Interest on deposits                                 $ 3,967,505   $ 4,190,663  $ 4,400,932
 Interest on federal funds purchased                          584            --           --
                                                      -----------   -----------  -----------

       Total Interest Expense                         $ 3,968,089   $ 4,190,663  $ 4,400,932
                                                      -----------   -----------  -----------

       Net Interest Income                            $ 6,360,535   $ 5,818,091  $ 5,654,390

Provision for (Recovery of) Loan Losses                   (70,000)      125,000      125,245
                                                      -----------   -----------  -----------

       Net Interest Income after Provision
         for (Recovery of) Loan Losses                $ 6,430,535   $ 5,693,091  $ 5,529,145
                                                      -----------   -----------  -----------

Noninterest Income:
 Trust and financial services                         $   547,727   $   592,182  $   555,101
 Service charges on deposit accounts                      379,763       348,992      378,523
 Fees for other customer services                         156,910       168,810      161,298
 Other operating income                                    63,500        59,924       30,746
                                                      -----------   -----------  -----------

       Total Noninterest Income                       $ 1,147,900   $ 1,169,908  $ 1,125,668
                                                      -----------   -----------  -----------

Noninterest Expenses:
 Salaries and employee benefits                       $ 2,860,274   $ 2,601,097  $ 2,627,960
 Net occupancy expense of premises                        211,838       204,076      183,917
 Furniture and equipment expenses                         396,045       377,852      361,798
 Stationery and supplies                                  111,389       123,573      104,927
 Other operating expenses                               1,131,415     1,116,271    1,018,358
                                                      -----------   -----------  -----------

       Total Noninterest Expenses                     $ 4,710,961   $ 4,422,869  $ 4,296,960
                                                      -----------   -----------  -----------

       Income before Income Tax Expense               $ 2,867,474   $ 2,440,130  $ 2,357,853

Income Tax Expense                                      1,053,159       897,110      868,724
                                                      -----------   -----------  -----------

       Net Income                                     $ 1,814,315   $ 1,543,020  $ 1,489,129
                                                      ===========   ===========  ===========

Earnings Per Share, basic and diluted                 $      3.02   $      2.57  $      2.48
                                                      ===========   ===========  ===========
</TABLE>

See Notes to Consolidated Financial Statements.


                                     -15-
<PAGE>

          CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                 Years Ended December 31, 2000, 1999 and 1998

<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, 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,
   unrealized holding gains
   arising during the period
   (net of tax, $51,039)                --          --           --          99,076          99,076        99,076
                                                                                         ----------
  Total 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,
   unrealized holding (losses)
   arising during the period
   (net of tax, $186,227)               --          --           --        (361,499)       (361,499)     (361,499)
                                                                                         ----------
  Total 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

 Comprehensive income
  Net income - 2000                     --          --    1,814,315              --      $1,814,315     1,814,315
  Other comprehensive income,
   unrealized holding gains
   arising during the period
   (net of tax, $109,086)               --          --           --         211,756         211,756       211,756
                                                                                         ----------
  Total comprehensive income                                                             $2,026,071
                                                                                         ==========

 Cash dividends - 2000
  ($1.25 per share)                     --          --     (750,000)             --                      (750,000)
                                  --------  ----------  -----------   -------------                   -----------

Balances, December 31, 2000       $600,000  $5,400,000  $12,008,205       $ (44,457)                  $17,963,748
                                  ========  ==========  ===========   =============                   ===========
</TABLE>

See Notes to Consolidated Financial Statements.


                                     -16-
<PAGE>

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                  Years Ended December 31, 2000, 1999 and 1998

<TABLE>
<CAPTION>

                                                                       2000          1999           1998
                                                                   -----------   -----------   ------------
<S>                                                                <C>           <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES
 Net income                                                        $ 1,814,315   $ 1,543,020   $  1,489,129
 Adjustments to reconcile net income to net cash
   provided by operating activities:
     Provision for (recovery of) loan losses                           (70,000)      125,000        125,245
     Depreciation                                                      236,554       202,873        212,287
     Amortization                                                           --         7,165         12,282
     Deferred tax expense (benefit)                                     32,870       (85,804)       (43,592)
     Discount (accretion) and premium amortization
       on securities, net                                              (40,428)       26,060         19,416
     (Gain) loss on sale of other real estate                          (12,220)      (58,796)         9,579
     (Gain) loss on sale and disposal of premises and equipment         (5,684)       41,903             --
     Changes in assets and liabilities:
       (Increase) decrease in accrued interest receivable               60,741        55,741       (159,342)
       (Increase) decrease in other assets                            (181,807)      113,621        (61,732)
       Increase (decrease) in accrued interest payable                  (5,101)      (42,473)         7,755
       Increase (decrease) in other liabilities                        (24,013)      142,123        157,790
                                                                   -----------   -----------   ------------
         Net cash provided by operating activities                 $ 1,805,227   $ 2,070,433   $  1,768,817
                                                                   -----------   -----------   ------------

CASH FLOWS FROM INVESTING ACTIVITIES
 Proceeds from maturity of securities held to maturity             $ 7,000,000   $10,000,000   $ 10,000,000
 Proceeds from maturity of securities available for sale             9,000,000     3,550,000      3,000,000
 Purchases of securities held to maturity                           (9,889,898)           --    (11,014,326)
 Purchases of securities available for sale                                 --    (6,204,302)   (14,618,728)
 Net (increase) decrease in loans                                   (6,009,114)     (864,271)       226,428
 Purchases of premises and equipment                                (1,271,019)   (1,186,174)      (234,716)
 Proceeds from sale of equipment                                         5,684        22,727             --
 Proceeds from sale of other real estate                               213,649       206,467         91,007
                                                                   -----------   -----------   ------------
         Net cash provided by (used in) investing activities       $  (950,698)  $ 5,524,447   $(12,550,335)
                                                                   -----------   -----------   ------------

CASH FLOWS FROM FINANCING ACTIVITIES
 Net increase (decrease) in noninterest bearing deposits           $ 3,388,526   $(1,387,408)  $  2,407,923
 Net increase (decrease) in interest bearing deposits               (1,128,107)   (2,593,277)    14,075,363
 Cash dividends                                                       (750,000)     (690,000)      (690,000)
                                                                   -----------   -----------   ------------
         Net cash provided by (used in) financing activities       $ 1,510,419   $(4,670,685)  $ 15,793,286
                                                                   -----------   -----------   ------------

         Increase in cash and cash equivalents                     $ 2,364,948   $ 2,924,195   $  5,011,768

CASH AND CASH EQUIVALENTS
 Beginning                                                          21,053,928    18,129,733     13,117,965
                                                                   -----------   -----------   ------------

 Ending                                                            $23,418,876   $21,053,928   $ 18,129,733
                                                                   ===========   ===========   ============

SUPPLEMENTAL DISCLOSURES OF CASH
 FLOW INFORMATION
   Cash payments for:
     Interest                                                      $ 3,973,190   $ 4,233,136   $  4,393,177
                                                                   ===========   ===========   ============

     Income taxes                                                  $ 1,088,541   $   949,882   $    902,011
                                                                   ===========   ===========   ============

SUPPLEMENTAL DISCLOSURES OF NON-CASH
 INVESTING AND FINANCING ACTIVITIES
   Other real estate acquired in settlement of loans               $    12,647   $   293,674   $    110,006
                                                                   ===========   ===========   ============

   Loans originated upon sale of real estate                       $   105,000   $   249,000   $     54,000
                                                                   ===========   ===========   ============

   Unrealized gain (loss) on securities available for sale         $   320,842   $  (547,726)  $    150,115
                                                                   ===========   ===========   ============
</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

          Assets acquired through, or in lieu of, loan foreclosure are held for
          sale and are initially recorded at fair value at the date of
          foreclosure, establishing a new cost basis. Subsequent to foreclosure,
          valuations are periodically performed by management and the assets are
          carried at the lower of carrying amount or fair value less cost to
          sell. Revenue and expenses from operations and changes in the
          valuation allowance are included in net expenses from foreclosed
          assets.

        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 four 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."

        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 dilative
          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, 2000, 1999, and 1998.

                                     -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

            Accounting principles generally require that recognized revenue,
            expenses, gains and losses be included in net income. Although
            certain changes in assets and liabilities, such as unrealized gains
            and losses on available for sale securities, are reported as a
            separate component of the equity section of the balance sheet, such
            items, along with net income, are components of comprehensive
            income.

        Recent Accounting Pronouncements

            In June 1998, the Financial Accounting Standards Board issued
            Statement No. 133, "Accounting for Derivative Instruments and
            Hedging Activities," and as amended is effective for fiscal years
            beginning after June 15, 2000. This Statement establishes accounting
            and reporting standards for derivative instruments and hedging
            activities, including certain derivative instruments embedded in
            other contracts, and requires that an entity recognize all
            derivatives as assets or liabilities in the balance sheet and
            measure them at fair value. The Corporation does not employ
            derivative instruments in its portfolio. This Statement was adopted
            effective October 1, 1999 and has had no impact on the Corporation's
            earnings or financial position.

Note 2. Securities

        The amortized cost and fair value of securities being held to maturity
        as of December 31, 2000 and 1999, are as follows:

<TABLE>
<CAPTION>

                                                                         2000
                                                   -------------------------------------------------
                                                                  Gross       Gross
                                                   Amortized    Unrealized  Unrealized        Fair
                                                     Cost         Gains      (Losses)        Value
                                                   -----------  ----------  ----------   -----------
<S>                                                <C>          <C>         <C>          <C>
        Obligations of U.S. Government agencies    $17,927,761    $186,630     $(9,771)  $18,104,620
                                                   ===========  ==========  ==========   ===========
</TABLE>
                                     -20-
<PAGE>

Note 2.  Securities (Continued)

<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)    2,914,540
                                                   -----------      ------  ----------   -----------
                                                   $15,007,089      $3,120    $(93,169)   14,917,040
                                                   ===========      ======  ==========   ===========
</TABLE>

The amortized cost and fair value of the securities being held to maturity as of
December 31, 2000, by contractual maturity, are shown below:

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

        Due in one year or less                  $ 8,004,061  $ 7,994,290
        Due after one year through five years      9,923,700   10,110,330
                                                 -----------  -----------
                                                 $17,927,761  $18,104,620
                                                 ===========  ===========

The amortized cost and fair value of securities available for sale as of
December 31, 2000 and 1999 are as follows:

<TABLE>
<CAPTION>


                                                                        2000
                                                   ---------------------------------------------------
                                                                    Gross       Gross
                                                    Amortized     Unrealized  Unrealized       Fair
                                                       Cost         Gains       (Losses)      Value
                                                   ------------  ----------  ----------    -----------
<S>                                                <C>           <C>         <C>           <C>
        Obligations of U.S. Government agencies     $18,229,644     $15,020   $ (82,379)   $18,162,285
        Federal Home Loan Bank stock                    449,700          --          --        449,700
                                                    -----------  ----------  ----------    -----------
                                                    $18,679,344     $15,020   $ (82,379)   $18,611,985
                                                    ===========  ==========  ==========    ===========
<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>

The amortized cost and fair value of the securities available for sale as of
December 31, 2000, by contractual maturity, are shown below:

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

        Due in one year or less                  $12,000,203   $11,932,860
        Due after one year through five years      6,229,441     6,229,425
        Other                                        449,700       449,700
                                                 -----------   -----------
                                                 $18,679,344   $18,611,985
                                                 ===========   ===========

There were no sales of securities during 2000, 1999 and 1998.

Securities with a carrying value of $9,947,074 and $9,828,571 at December 31,
2000 and 1999, 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
                                                                               ---------------------------
                                                                                    2000           1999
                                                                                -----------    -----------
<S>                                                                           <C>            <C>
                    Mortgage loans on real estate:
                      Construction and land development                       $      14,000   $     31,000
                      Secured by farm land                                        2,762,776      2,604,920
                      Secured by 1-4 family residential                          45,055,946     43,798,037
                      Other real estate                                          12,150,047     11,859,376
                    Loans to farmers (except those secured by
                      real estate)                                                  208,688        388,860
                    Commercial loans (except those secured
                      by real estate)                                             2,027,289      2,434,696
                    Consumer loans                                               22,022,827     16,879,468
                    All other loans                                                 205,262        333,695
                                                                                -----------    -----------
                      Total loans                                             $  84,446,835   $ 78,330,052
                        Less:  allowance for loan losses                          1,268,235      1,217,919
                                                                                -----------    -----------
                                                                              $  83,178,600   $ 77,112,133
                                                                                ===========    ===========
</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, 2000 and 1999, these
         loans totaled $1,048,250 and $772,076 respectively. During 2000, total
         principal additions were $488,633 and total principal payments were
         $212,459.

Note 4.  Allowance for Loan Losses

         The following is a summary of transactions in the allowance for loan
         losses for 2000, 1999 and 1998:

<TABLE>
<CAPTION>

                                                                                           2000         1999         1998
                                                                                        ----------   ----------   ----------
<S>                                                                                     <C>          <C>          <C>
                    Balances at beginning of year                                       $1,217,919   $1,140,000   $1,138,747
                      Provision charged (credited) to operating expense                    (70,000)     125,000      125,245
                      Recoveries added to the allowance                                    225,993       42,283       42,730
                      Loan losses charged to the allowance                                (105,677)     (89,364)    (166,722)
                                                                                        ----------   ----------   ----------
                    Balances at end of year                                             $1,268,235   $1,217,919   $1,140,000
                                                                                        ==========   ==========   ==========
</TABLE>

      Information about impaired loans as of and for the years ended December
      31, 2000 and 1999 are as follows:

<TABLE>
<CAPTION>
                                                                                                 2000         1999
                                                                                              ----------   ----------
<S>                                                                                           <C>          <C>
             Impaired loans for which an allowance has been provided                          $  725,040   $  231,520
             Impaired loans for which no allowance has been provided                                  --           --
                                                                                              ----------   ----------
                    Total impaired loans                                                      $  725,040   $  231,520
                                                                                              ==========   ==========

             Allowance provided for impaired loans, included in the
             allowance for loan losses                                                        $  217,512   $   69,456
                                                                                              ==========   ==========
<CAPTION>
                                                                                                  2000         1999         1998
                                                                                              ----------   ----------   ----------
<S>                                                                                           <C>          <C>          <C>
             Average balance in impaired loans                                                $  239,140   $  372,633   $  397,986
                                                                                              ==========   ==========   ==========

             Interest income recognized                                                       $   18,443   $   21,994   $   34,062
                                                                                              ==========   ==========   ==========
</TABLE>

      No additional funds are committed to be advanced in connection with
      impaired loans.

      There were no nonaccrual loans excluded from disclosure under FASB 114 at
      December 31, 2000. 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.

                                     -22-
<PAGE>

Note 5.  Premises and Equipment, Net

         Premises and equipment consists of the following:


                                                     December 31
                                               ----------------------

                                                  2000        1999
                                               ----------  ----------

              Premises                         $3,596,546  $1,654,544
              Furniture and equipment           2,758,250   2,378,609
              Construction in progress                 --   1,050,624
                                               ----------  ----------
                                               $6,354,796  $5,083,777
              Less accumulated depreciation     3,177,681   2,941,127
                                               ----------  ----------
                                               $3,177,115  $2,142,650
                                               ==========  ==========

         Depreciation included in operating expense for 2000, 1999 and 1998, was
         $236,554, $202,873 and $212,287 respectively.


Note 6.  Deposits

         The aggregate amount of time deposits with a balance of $100,000 or
         more was $5,481,447 and $5,160,065 at December 31, 2000 and 1999,
         respectively.

         At December 31, 2000, the scheduled maturities of all time deposits are
         as follows:


              2001                               $30,593,625
              2002                                 7,485,110
              2003                                 1,708,910
              2004                                   357,851
                                                 -----------
                                                 $40,145,496
                                                 ===========

Note 7.  Borrowings

         The Corporation has unused lines of credit totaling approximately
         $54,314,000 at December 31, 2000.


Note 8.  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 8.    Employee Benefit Plans (Continued)

           Information about the plans follow:

<TABLE>
<CAPTION>
                                                         Pension Benefits                       Postretirement Benefits
                                           -----------------------------------------    -----------------------------------------
                                               2000           1999          1998           2000           1999           1998
                                           -----------    -----------    -----------    ------------   ----------     -----------
<S>                                        <C>            <C>            <C>            <C>            <C>            <C>
Change in Benefit Obligation:
    Benefit obligation, beginning          $ 3,736,742    $ 4,129,250    $ 3,339,744    $   574,797    $   534,845    $   463,642
    Service cost                               133,682        161,271        156,373          9,219          8,536          7,904
    Interest cost                              289,811        274,718        262,650         45,160         42,787         38,337
    Actuarial (gain) loss                     (182,204)      (144,079)       337,654             --         13,855         52,976
    Benefits paid                             (139,803)      (117,991)      (119,720)       (28,114)       (25,226)       (28,014)
    Change in discount rates                        --       (566,427)       152,549             --             --             --
                                           -----------    -----------    -----------    -----------    -----------    -----------
    Benefit obligation, ending             $ 3,838,228    $ 3,736,742    $ 4,129,250    $   601,062    $   574,797    $   534,845
                                           -----------    -----------    -----------    -----------    -----------    -----------

Change in Plan Assets:
    Fair value of plan assets, beginning   $ 3,531,914    $ 3,416,690    $ 3,337,355             --    $        --    $        --
    Actual return on plan assets               208,776        175,266        199,055             --             --             --
    Employer contributions                     168,377         57,949             --         28,114         25,226         28,014
    Benefits paid                             (139,803)      (117,991)      (119,720)       (28,114)       (25,226)       (28,014)
                                           -----------    -----------    -----------    -----------    -----------    -----------
    Fair value of plan assets, ending      $ 3,769,264    $ 3,531,914    $ 3,416,690    $        --    $        --    $        --
                                           -----------    -----------    -----------    -----------    -----------    -----------


    Funded status                          $   (68,964)   $  (204,828)   $  (712,560)   $  (601,062)   $  (574,797)   $  (534,845)
    Unrecognized net (gain) loss              (491,923)      (402,581)       197,926        126,685        126,685        112,830
    Unrecognized net obligation
       (asset) at transition                   (96,641)      (116,943)      (137,245)       243,764        261,176        278,588
    Unrecognized prior service cost              1,025          1,180          1,335             --             --             --
                                           -----------    -----------    -----------    -----------     ----------    -----------
    Accrued benefit cost included
       in other liabilities                $  (656,503)   $  (723,172)   $  (650,544)   $  (230,613)   $  (186,936)   $  (143,427)
                                           ===========    ===========    ===========    ===========    ===========    ===========
</TABLE>

<TABLE>
<CAPTION>
                                                                Pension Benefits                     Postretirement Benefits
                                                     ---------------------------------------   ------------------------------------
                                                        2000           1999         1998          2000         1999         1998
                                                     -----------   -----------    ----------   ----------   ----------   ----------
<S>                                                  <C>           <C>            <C>          <C>          <C>          <C>
           Components of Net Periodic Benefit Cost:
               Service cost                          $   133,682   $   161,271    $  156,373   $    9,219   $    8,536   $    7,904
               Interest cost                             289,811       274,718       262,650       45,160       42,787       38,337
               Expected return on plan assets           (301,638)     (285,265)     (279,002)          --           --           --
               Amortization of prior service cost            155           155           155           --           --           --
               Amortization of net obligation
                  at transition                          (20,302)      (20,302)      (20,302)      17,412       17,412       17,296
                                                     -----------   -----------    ----------   ----------   ----------   ----------
               Net periodic benefit cost             $   101,708   $   130,577    $  119,874   $   71,791   $   68,735   $   63,537
                                                     ===========   ===========    ==========   ==========   ==========   ==========

           Weighted-Average Assumptions:
               Discount rate                                8.00%         8.00%         7.00%        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 2000, 1999 and
           1998, 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                             $  42,610        $  (36,622)
            Effect on total of service and interest cost components of
               net periodic postretirement health care benefit cost              4,331            (3,702)
</TABLE>

                                     -24-
<PAGE>

Note 9.   Income Taxes

          Net deferred tax assets consist of the following components as of
          December 31, 2000 and 1999:

                                                          2000         1999
                                                    ------------- -------------
               Deferred tax assets:
                   Reserve for loan losses          $     234,963   $   258,763
                   Accrued pension expense                223,211       245,848
                   Accrued postretirement benefits         78,409        62,362
                   Nonaccrual interest                         --         1,828
                   Securities available for sale           22,902       131,989
                                                    ------------- -------------
                                                    $     559,485   $   700,790
                                                    ------------- -------------
               Deferred tax liabilities:
                   Depreciation                     $       7,228   $     6,576
                                                    ------------- -------------

                      Net deferred tax assets       $     552,257   $   694,214
                                                    ============= =============

          The provision for income taxes charged to operations for the years
          ended December 31, 2000, 1999 and 1998 consists of the following:

<TABLE>
<CAPTION>
                                                                            2000            1999         1998
                                                                       -------------     ----------   ----------
<S>                                                                    <C>               <C>          <C>
               Current tax expense                                     $   1,020,289     $  982,914   $  912,316
               Deferred tax expense (benefit)                                 32,870        (85,804)     (43,592)
                                                                       -------------     ----------   ----------
                                                                       $   1,053,159     $  897,110   $  868,724
                                                                       =============     ==========   ==========
</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, 2000, 1999 and 1998 due to the
          following:

<TABLE>
<CAPTION>
                                                                                    2000              1999            1998
                                                                            -------------     -------------   --------------
<S>                                                                         <C>               <C>             <C>
               Computed "expected" tax expense                              $     974,941     $     829,644   $     801,670
               Increase (decrease) in income taxes resulting from:
                  Tax exempt interest income                                       (6,041)           (6,324)         (4,627)
                  State income taxes, net of federal income tax benefit            78,435            73,767          69,385
                  Other                                                             5,824                23           2,296
                                                                            -------------     -------------   -------------
                                                                            $   1,053,159     $     897,110   $     868,724
                                                                            =============     =============   =============
</TABLE>

Note 10.  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 12 with respect to financial instruments with off-balance-
          sheet risk.

          The Corporation has approximately $2,412,410 in deposits in other
          financial institutions in excess of amounts insured by the Federal
          Deposit Insurance Corporation (FDIC) at December 31, 2000.

          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, 2000 and 1999,
          the aggregate amounts of daily average required balances were
          approximately $3,147,000 and $2,881,000, respectively.

                                     -25-
<PAGE>

Note 11.  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, 2000, the aggregate amount of unrestricted funds which could be
          transferred from the banking subsidiary to the parent corporation,
          without prior regulatory approval, totaled $2,716,335 or 15.1% of the
          consolidated net assets.

Note 12.  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 instruments 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, 2000 and 1999,
          is as follows:

<TABLE>
<CAPTION>
                                                                2000           1999
                                                         -------------  -------------
<S>                                                      <C>            <C>
                 Financial instruments whose contract
                  amounts represent credit risk:
                       Commitments to extend credit      $   9,225,661  $   7,890,050
                       Standby letters of credit               266,251        264,194
</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 generally
          holds collateral supporting those commitments if deemed necessary.

Note 13.  Fair Value of Financial Instruments and Interest Rate Risk

          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 13.  Fair Value of Financial Instruments and Interest Rate Risk (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, 2000 and 1999, the carrying amounts of loan
              commitments and standby-letters of credit approximated fair value.

            The estimated fair values of the Corporation's financial instruments
            are as follows:

<TABLE>
<CAPTION>
                                                            2000                         1999
                                                  -----------------------      ------------------------
                                                    Carrying      Fair          Carrying       Fair
                                                     Amount       Value          Amount        Value
                                                  ----------   ----------      ----------   -----------
                                                       (in thousands)               (in thousands)
<S>                                                <C>         <C>             <C>          <C>
              Financial assets:
                 Cash                              $   6,053   $    6,053      $    5 523   $    5,523
                 Securities purchased under
                     agreements to resell and
                     federal funds sold               17,366       17,366          15,531       15,531
                 Securities held to maturity          17,928       18,105          15,007       14,917
                 Securities available for sale        18,612       18,612          27,281       27,281
                 Loans, net                           83,179       79,351          77,112       73,391
                 Accrued interest receivable           1,051        1,051           1,112        1,112

              Financial liabilities:
                 Deposits                            128,945      128,792         126,685      126,714
                 Accrued interest payable                303          303             308          308
</TABLE>

          The Corporation assumes interest rate risk (the risk that general
          interest rate levels will change) as a result of its normal
          operations. As a result, the fair values of the Corporation's
          financial instruments will change when interest rate levels change and
          that change may be either favorable or unfavorable to the Corporation.
          Management attempts to match maturities of assets and liabilities to
          the extent believed necessary to minimize interest rate risk. However,
          borrowers with fixed rate obligations are less likely to prepay in a
          rising rate environment and more likely to prepay in a falling rate
          environment. Conversely, depositors who are receiving fixed rates are
          more likely to withdraw funds before maturity in a rising rate
          environment and less likely to do so in a falling rate environment.
          Management monitors rates and maturities of assets and liabilities and
          attempts to minimize interest rate risk by adjusting terms of new
          loans and deposits and by investing in securities with terms that
          mitigate the Corporation's overall interest rate risk

                                     -27-
<PAGE>

Note 14.  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 below) of total and Tier 1
          capital (as defined in the regulations) to risk-weighted assets (as
          defined), and of Tier 1 capital (as defined) to average assets (as
          defined). Management believes, as of December 31, 2000, that the
          Corporation and the Bank meet all capital adequacy requirements to
          which they are subject.

          As of December 31, 2000, 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, 2000:
               Total capital (to risk-weighted assets):
                     Consolidated                     $  19,003      23.95%       $  6,348          8.0%           N/A          N/A
                     Bank of Charles Town             $  18,956      23.89%       $  6,347          8.0%      $  7,934        10.0%
               Tier 1 capital (to risk-weighted assets):
                     Consolidated                     $  18,008      22.70%       $  3,174          4.0%           N/A          N/A
                     Bank of Charles Town             $  17,961      22.64%       $  3,174          4.0%      $  4,760         6.0%
               Tier 1 capital (to average assets):
                     Consolidated                     $  18,008      12.32%       $  5,849          4.0%           N/A          N/A
                     Bank of Charles Town             $  17,961      12.28%       $  5,849          4.0%      $  7,311         5.0%

           As  of December 31, 1999:
               Total capital (to risk-weighted assets):
                     Consolidated                     $  17,861      24.45%       $  5,845          8.0%           N/A          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          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          N/A
                     Bank of Charles Town             $  16,875      11.50%       $  5,869          4.0%      $  7,336         5.0%
</TABLE>

                                     -28-
<PAGE>

Note 15. Parent Corporation Only Financial Statements


                           POTOMAC BANCSHARES, INC.
                           (Parent Corporation Only)
                                Balance Sheets
                          December 31, 2000 and 1999


                                                          2000         1999
                                                       -----------  -----------
      ASSETS

        Cash                                           $    43,216  $    62,699
        Investment in subsidiary                        17,916,484   16,619,104
        Other assets                                         9,044       10,870
                                                       -----------  -----------

            Total Assets                               $17,968,744  $16,692,673
                                                       ===========  ===========

      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                               12,008,205   10,943,890
        Accumulated other comprehensive (loss)             (44,457)    (256,213)
                                                       -----------  -----------
           Total Stockholders' Equity                  $17,963,748  $16,687,677
                                                       -----------  -----------

           Total Liabilities and Stockholders' Equity  $17,968,744  $16,692,673
                                                       ===========  ===========


                            POTOMAC BANCSHARES, INC.
                           (Parent Corporation Only)
                              Statements of Income
                  Years Ended December 31, 2000, 1999 and 1998

<TABLE>
<CAPTION>
                                                         2000                1999               1998
                                                      ----------          ----------         ----------
<S>                                                   <C>                 <C>                <C>
      Income
        Dividends from subsidiary                     $  750,000          $  740,000         $  715,000

      Expenses
        Amortization                                  $       --          $    7,165         $   12,282
        Transfer agent expense                             7,634               8,095              7,887
        Legal and professional                             4,410               3,675              4,634
        Other operating expenses                          18,127              15,826             18,394
                                                      ----------          ----------         ----------
            Total Expenses                            $   30,171          $   34,761         $   43,197
                                                      ----------          ----------         ----------

            Income before Income Tax (Benefit) and
              Equity in Undistributed Income of
              Subsidiary                              $  719,829          $  705,239         $  671,803

      Income Tax (Benefit)                                (8,862)            (10,688)           (13,708)
                                                      ----------          ----------         ----------

            Income before Equity in Undistributed
              Income of Subsidiary                    $  728,691          $  715,927         $  685,511

      Equity in Undistributed Income of Subsidiary     1,085,624             827,093            803,618
                                                      ----------          ----------         ----------

            Net Income                                $1,814,315          $1,543,020         $1,489,129
                                                      ==========          ==========         ==========
</TABLE>

                                      -29-
<PAGE>

Note 15. Parent Corporation Only Financial Statements (Continued)

                           POTOMAC BANCSHARES, INC.
                           (Parent Corporation Only)
                           Statements of Cash Flows
                 Years Ended December 31, 2000, 1999 and 1998

<TABLE>
<CAPTION>


                                                               2000         1999         1998
                                                           -----------   ----------   ----------
<S>                                                        <C>           <C>          <C>
      CASH FLOWS FROM OPERATING ACTIVITIES
        Net income                                         $ 1,814,315   $1,543,020   $1,489,129
        Adjustments to reconcile net income to net cash
          provided by operating activities:
            Equity in undistributed (income) of
              subsidiary                                    (1,085,624)    (827,093)    (803,618)
            Amortization                                            --        7,165       12,282
            (Increase) decrease in other assets                  1,826        3,020       (1,911)
                                                           -----------   ----------   ----------

              Net cash provided by operating
                activities                                 $   730,517   $  726,112   $  695,882
                                                           -----------   ----------   ----------

      CASH FLOWS FROM FINANCING ACTIVITIES
        Cash dividends                                     $  (750,000)  $ (690,000)  $ (690,000)
                                                           -----------   ----------   ----------

              Increase (decrease) in cash and cash
                equivalents                                $   (19,483)  $   36,112   $    5,882

      CASH AND CASH EQUIVALENTS
        Beginning                                               62,699       26,587       20,705
                                                           -----------   ----------   ----------

        Ending                                             $    43,216   $   62,699   $   26,587
                                                           ===========   ==========   ==========
</TABLE>

                                     -30-
<PAGE>

                         TRUST AND FINANCIAL SERVICES

     Trust fees in year 2000 totaled $547,727, compared to $592,182 in 1999.
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. Your Bank's net trust income
in 2000 equaled 16.4% of gross fees, down from 21% in 1999, but still exceeding
the 12% to 13% benchmark for our department-size peer group. In 2000, estate
fees received and accrued totaled $101,000 which equaled the fees recorded in
1999.

     Trust assets as of December 31, 2000, totaled $83,852,000, compared to
December 31, 1999 footings of $87,545,000. The net decrease (4.2%) in fiduciary
assets was the result of the distribution of six estates with $1,400,000 in
assets, and the termination of 15 personal trusts and agencies following the
death of the grantors.

     In 2000, we were pleased to announce the promotion of Sheila R. Miller to
the position of Assistant Trust Officer. Sheila's responsibilities include
administration of the trust accounting system and related operational duties.

     As we review our developing menu of fiduciary services, the department
anticipates an increasing emphasis on employee benefit services (rollover IRAs
and 401K plans) and agency products, while maintaining our core personal trust
services. The department is now providing a mutual fund agency program utilizing
the Managed Allocation Mutual Funds through Federated Investors. 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, 2000
                                  (unaudited)

<TABLE>
<S>                                                                           <C>
      ASSETS
      ------
      Discretionary assets:
        Bank Deposits: Bank of Charles Town                                    $    18,000
                       Other Banks                                                  50,000
        United States Treasury and Agency Obligations                            7,148,000
        State, County, and Municipal Obligations                                   906,000
        Short Term Interest Bearing Funds                                        6,440,000
        Other Short Term Obligations                                                57,000
        Notes and Bonds                                                          7,768,000
        Common and Preferred Stocks                                             32,507,000
        Real Estate Mortgages                                                      150,000
        Real Estate                                                                108,000
        Miscellaneous Assets                                                         9,000
                                                                               -----------
          Total Discretionary Assets                                           $55,161,000
                                                                               -----------

      Non-Discretionary Assets                                                 $28,691,000
                                                                               -----------

                Total Assets                                                   $83,852,000
                                                                               ===========
      ACCOUNTS
      --------
      Personal Trusts                                           136            $55,660,000
      Estates and Other Court Accounts                           28              5,576,000
      Employee Benefit Accounts                                  27              4,978,000
      Agencies and Other                                         70             17,638,000
                                                                ---            -----------

                Total Accounts                                  261            $83,852,000
                                                                ===            ===========
</TABLE>
                                      -31-
<PAGE>

                           POTOMAC BANCSHARES, INC.

                   Robert F. Baronner, Jr., President & CEO
         William R. Harner, Sr. Vice President, Secretary & Treasurer
       Gayle Marshall Johnson, Vice President & Chief Financial Officer
             Donald S. Smith, Vice President & Assistant Secretary
              Susan S. Myers, Assistant Vice President & Auditor

<TABLE>
<CAPTION>
                                                  BANK OF CHARLES TOWN
<S>                                        <C>                                              <C>
        Loan Department                           Robert F. Baronner, Jr.
                                                      President & CEO                               Bookkeeping Department
         Donna J. Burns
         Vice President                              William R. Harner                                 Doris V. Loudan
                                                Sr. Vice President & Cashier                 Assistant Cashier & Head Bookkeeper
       Thomas F. Chambers
         Vice President                          C. Kenneth Nicewarner, Jr                             Neil A. Bradley
                                                 Assistant Vice President &                            Patricia L. Clay
       Richard B. Breeden                              Branch Manager                                  Marcia S. Lerch
   Assistant Vice President &                                                                          Cindy L. Magaha
        Security Officer                        Gayle Marshall Johnson, CPA                             Helen E. Myers
                                             Vice President & Financial Officer                       Elizabeth W. Park
        Janice B. Davis                                                                              M. Jacqueline Propst
       Assistant Cashier                            Susan S. Myers, CPA                               Penny J. Sebastian
                                             Assistant Vice President & Auditor                        Karen A. Staubs
        Cynthia A. Light                                                                               Peggy C. Turner
       Assistant Cashier                              Tammy L. Miller                                Christopher D. Ware
                                                     Personnel Officer
                                                                                                     Kearneysville Branch
       Victoria B. Burns                          William H. Chesley, Jr.
         Mary A. Davis                               Marketing Officer                                  Nancy L. Baker
      Kimberly K. DeSarno                                                                         Assistant Vice President &
        Patricia A. Ott                             Gary L. Dungan, CPA                                 Branch Manager
        Matthew D. Perks                             Compliance Officer
      Jacqueline L. Smith                                                                           H. William Easter, Jr.
        Linda A. Stewart                            Deanna D. Greenfield                     Assistant Vice President & Assistant
                                                    Michelle N. Slusher                                 Branch Manager
       Teller Department
                                                                                                        Linda D. Alger
       Kendra L. Nichols                        Trust and Financial Services                           Rebecca E. Black
Assistant Cashier & Head Teller                                                                         Mary L. Bowers
                                                      Robert L. Hersey                                 Carolyn A. Dunn
       Sharon L. Ashbaugh                      Vice President & Trust Officer                          Kimberly A. Furr
         John P. Blanc                                                                                 Joshua E. Higdon
       Jennifer A. Casale                           David S. (Joe) Smith                                Tammy E. Hough
        Joshua A. Dailey                               Trust Officer                                  Melissa A. Mackey
         Leah G. Driver                                                                                 Jena L. Manuel
       Shirley G. Dutrow                              Sheila R. Miller                                  April D. Myers
        Kara C. Feagans                           Assistant Trust Officer
        Cathy Jo Fraley                                                                              Harpers Ferry Branch
        C. Lane McCarron                             Latisha C. Clinton
     Lorraine A. Neurauter                          Michelle S. Griffith                                Wayne C. Welty
        Lori L. Orlando                            Virginia M. Longerbeam                         Assistant Vice President &
        Kristie  Penick                                Beth A. Wilson                                   Branch Manager
       Laura E. Rattenni
        Kathryn L. Root                    Certificates of Deposit & New Accounts                      Shelly L. Holmes
      Stephanie R. Rosner                                Department                             Assistant Cashier & Assistant
        A. Ramey Stokes                                                                                 Branch Manager
      Crystal D. Strickler                           Judith A. Edwards
        Terrie C. Thomas                             Assistant Cashier                                 Sandra K. Brooky
                                                                                                        Jaime M. Burch
           Part-time                                Linda L. Whittington                              Melissa D. Castle
                                                                                                     Rebecca K. Fitzwater
        Clara K. Carroll                         Data Processing Department                           Patricia A. Hardy
                                                                                                        Karen S. James
     Maintenance Department                           Richard M. Crea                                   Michael B. Ott
                                                    Assistant Cashier &                                 Holly G. Wells
        Paula M. Fraley                           Data Processing Manager                          Charles W. Wyndham, Jr.
         Paul D. Staubs
       E. Geraldine White                            Nancy L. Harrison                                     Courier
                                                      John N. Haymaker
                                                     Richard S. Stotler                              Benjamin T. Breeden
                                                                                                        Robert E. Turner
</TABLE>

                                     -32-
<PAGE>

                         ANNUAL REPORT ON FORM 10-KSB

     A copy of the Corporation's 2000 annual report on 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 and
cannot be described as a public trading market. Potomac Bancshares, Inc. (symbol
PTBS) is 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, 2000, there were
600,000 common shares outstanding held by approximately 825 shareholders.

     The per share sale prices of the Corporation's stock for 1999 and 2000 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 1999 and 2000 are also listed.


                                     High      Low    Dividends

                  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

                  2000
                  ----
                  First Quarter     $33.500  $28.250    $ N/A
                  Second Quarter     30.000   26.125     0.50
                  Third Quarter      28.500   24.000      N/A
                  Fourth Quarter     28.000   22.000     0.75


     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
                                59 Maiden Lane
                                New York NY  10038
                                (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 24, 2001,
beginning at 10:30 a.m.

                                     -33-