SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>

                                                      Year Ended December 31,
                                       1995            1994            1993            1992            1991
                                  -------------   -------------    ------------    ------------    ------------
                                                (In thousands, except ratios and per share amounts)
<S>                                  <C>            <C>              <C>             <C>             <C>
Income Statement Data:
   Interest income................   $  133,262     $   119,613      $  107,534      $  103,381      $  111,848
   Interest expense...............       57,297          46,430          43,615          46,058          60,749
                                  -------------   -------------    ------------    ------------    ------------
   Net interest income............       75,965          73,183          63,919          57,323          51,099
   Provision for loan losses......        1,081           2,535           2,857           3,623           6,962
                                  -------------   -------------    ------------    ------------    ------------
   Net interest income after
      provision for loan losses...       74,884          70,648          61,062          53,700          44,137
   Noninterest income.............       15,854          15,564          13,063          11,504          10,207
   Securities gains...............          366             748           1,781           1,020           1,271
   Noninterest expense............       55,995          56,283          48,330          43,207          40,043
                                  -------------   -------------    ------------    ------------    ------------
   Income before income taxes.....       35,109          30,677          27,576          23,017          15,572
   Income taxes...................       11,677           9,976           8,844           6,733           4,262
                                  -------------   -------------    ------------    ------------    ------------
   Net income.....................   $   23,432     $    20,701      $   18,732      $   16,284      $   11,310
                                  =============   =============    ============    ============    ============
Per Share Data:
   Net income.....................   $     1.42     $      1.25      $     1.16      $     1.09      $     0.77
   Cash dividends ................         0.61            0.54            0.58 (1)        0.41            0.39
   Book value at period end.......        11.69           10.25            9.97            9.17            8.30
   Tangible book value............        11.37            9.92            9.60            9.13            8.25

Balance Sheet Data:
   Assets.........................   $1,833,820     $ 1,708,493      $1,670,657      $1,409,814      $1,301,720
   Loans, net of unearned income..    1,053,829       1,009,223         959,052         781,292         766,053
   Securities.....................      569,269         514,488         502,855         434,039         354,792
   Deposits.......................    1,583,477       1,491,072       1,465,287       1,228,404       1,150,557
   Shareholders' equity...........      193,482         168,989         164,494         146,161         122,115
   Average shares outstanding.....       16,529          16,517          16,124          14,961          14,669

Performance Ratios:
   Return on average assets.......         1.33%           1.21%           1.23%           1.22%           0.91%
   Return on average equity.......        12.70%          12.23%          12.03%          12.40%           9.54%
   Dividend payout................        43.17%          43.15%          49.93%          37.87%          50.49%
   Efficiency (2).................        60.15%          62.43%          61.25%          60.88%          63.01%

Asset Quality Ratios:
   Allowance for loan losses to
      period end loans, net.......         1.42%           1.53%           1.46%           1.45%           1.51%
   Allowance for loan losses to
      nonaccrual loans............       131.16%          83.01%          51.34%          76.65%          94.27%
   Nonperforming assets to
      period end loans and
      foreclosed properties (3)...         2.24%           2.94%           3.94%           2.54%           1.85%
   Net charge-offs to average
      loans.......................         0.15%           0.11%           0.18%           0.50%           0.50%

Capital and Liquidity Ratios:
   Leverage.......................        10.46%           9.94%          10.41%          10.90%           9.79%
   Risk-based capital ratios:
      Tier 1 capital..............        16.97%          16.40%          15.75%          17.97%          15.70%
      Total capital...............        18.22%          17.65%          17.00%          19.22%          16.95%
   Average loans to average
      deposits....................        66.70%          65.99%          64.07%          66.09%          69.37%

</TABLE>

Note: The amounts  previously  reported in Form 10Q and Form 10K for the periods
      presented have been retroactively  restated to reflect the acquisitions of
      Bank of the Potomac on April 6, 1995, PNB Financial Corporation on July 1,
      1994 and Hallmark  Bank & Trust on July 1, 1994 and a 2.5% stock  dividend
      effective September 1, 1994.

(1) Includes first quarter 1994 dividend declared in 1993.

(2) Computed by dividing  noninterest  expense by the sum of net interest income
    on a tax equivalent basis and noninterest income, net of securities gains or
    losses.

(3) Nonperforming  assets  do not  include  loans  past  due 90  days  accruing
    interest.

[caption - W.M. Feltner]

[caption - "...in the past five years, our assets have doubled,  our net income
has doubled and our equity  capital has  doubled."]

"We endeavor to have our banks operate as independent community banks, retaining
their board of directors, employees and remaining as a vital and integral part
of the community they serve."

To Our Shareholders, Customers and Friends:

Total assets $1,833,820,000, up 7.34% -- total net income $23,432,000, up 13.2%
-- return on average assets 1.33% -- total dividend payout $10,116,043, up 19.5%
-- book value per share $11.69, up 14% -- market price per share $20.00, up 26%.
That's the 1995 performance of the Big Apple. How sweet it is!

        Our 26th year of  operation  was superb  and  showed a  continuation  of
the outstanding  progress we have made the past several  years.  For instance in
the past five  years,  our assets have doubled,  our net income has doubled and
our equity capital has doubled.

        During the same  period,  we made giant  strides  in the area  served by
the Corporation's banks. In Virginia, our acquisitions of Farmers and Merchants
Bank of Hamilton, Peoples Bank of Warrenton, Hallmark Bank of Springfield and
Potomac Bank of Herndon  opened up the entire area east of Clarke County to the
District of Columbia line. Our  acquisition of the Bank of Emporia also gave us
access to the southern most part of the state.  In West Virginia,  our
acquisition of the Bank of Keyser expanded our service area in the eastern
panhandle from Jefferson County on the east to Mineral County on the west.

        On  November  22,  1995,  we signed an  agreement  whereby,  subject to
their shareholders' approval and the regulatory agencies,  Fairfax Bank and
Trust will join our "Family of Banks." This fine  organization has $243.1
million in assets and 11 locations in Northern  Virginia.  Once the  acquisition
is completed,  we will have an outstanding presence in that area. We are looking
forward to a long and pleasant relationship with the employees, officers,
directors,  shareholders and customers of this  excellent  financial
institution.  We  anticipate  this transaction to be completed during the first
half of 1996.

        Merger  mania seems to be the order of the day  throughout  the  nation,
and particularly  so within the banking  industry.  Over regulation of banks
brought about by punitive  laws passed by Congress in the past five or six years
has led to the situation  whereby small banks find it almost  prohibitive to
comply with them. They are time  consuming,  very costly and of  questionable
value to the consumer.

        In many instances, particularly with the mega banks, consolidation has
led to employee  lay-offs,  branch  closings  and limited  access to banking
services. Fortunately  for your company,  we do not fall into that category.
Whenever and wherever possible through our multi-bank holding company
philosophy, we endeavor to have our banks operate as independent community
banks,  retaining their board of  directors,  employees  and  remaining  as a
vital and  integral  part of the community  they serve.  While this type of
operation may be more costly,  it not only has served us well but also has aided
our acquisition  program and has been well received in the communities we are
privileged to serve. Since all of our 11 banks  are  earning  over  1% on
assets,  you  will  have to  admit  it has its advantages.  Besides,  regardless
of what large banks  would have you  believe, small banks do a better job of
serving their community than do the large ones.

        The land  transactions  that we had with Winchester and Frederick
County are now complete and the  renovation of 9 Court Square,  which is due for
completion around  Labor Day,  will  afford us the  additional  space we need
since we have outgrown   most  of  our banking   departments.   We   anticipate
moving  F&M Bank-Winchester's Trust and Credit Card Departments to the new
location.

        As most of you probably know, in 1991 Congress passed FDICIA (Federal
Deposit Insurance Corporation Improvement Act). In addition to the many
complicated and punitive features contained  therein,  was the extreme increase
in the insurance premiums we were required to pay. For example,  the rate was
increased on well capitalized banks from 8 cents per  hundred  dollars on
deposit to 23 cents per hundred and to give you a better idea of how it affected
our  earnings,  in 1990 prior the new law, we paid insurance  premiums totaling
$857,742.  Last year we paid $3,268,586.  All of this was brought on because
Representative Gonzalez and his cronies  said the banks were going to belly up
like the  savings  and loans had. Well, needless to say, they were wrong (as
usual) and during 1995, the rate was reduced to 4 cents per hundred. 1996's
total premium will be $2,000 for each of our 11 banks.  How's that for
emphasizing how wrong our Congress can be. Now if we can just get the  other
devastating  effects  of  FDICIA  off the  books, bankers might be able to
breathe a little more freely.  We're not expecting that to happen because quite
frankly, our Congress is so confused that we're not sure they know which end is
up!

        Today's  banking  environment  represents  a difficult  challenge  and
we are pleased  with  the  manner  in which  our 11 banks  are  meeting  them.
We are particularly  proud of the manner in which our dedicated  people are
meeting the needs of the public  throughout the area we serve.  Still,
difficult and trying days lie ahead and not only do we intend to meet them head
on, but look  forward to the  challenges  they might  bring. The "Big Apple" is
prepared to take full advantage of the opportunities  that lie ahead and with
the continued support of our shareholders and customers, we will do so with
vigor and enthusiasm.

[caption - "We are particularly proud of the manner in which our dedicated
people are meeting the needs of the public throughout the area we serve."]


Sincerely yours,

                                         /s/ W.M. FELTNER
                                         W.M. Feltner
                                         Chairman of the Board
                                         and Chief Executive Officer


                                         /s/ JACK R. HUYETT
                                         Jack R. Huyett
                                         President and Chief
                                         Administrative Officer

[Jack R. Huyett Caption]




1995 Highlights


1995 -- A Very Good Year

1995 was a very good year for F&M National  Corporation.  We  surpassed all
previous years in total assets, net income,  net income per share, total
deposits,  total loans and stock price.

        Total  assets hit an  all-time  high of $1,833,820,000  as did net
income of $23,432,000   and  net  income  per  share of  $1.42.   Total
deposits   were $1,583,477,000  and  total  loans  were $1,053,829,000  as of
December  31. On December  29,  your  stock  closed  at $20 per  share  and if
you take our total outstanding shares of 16,552,324, this was an all-time high.
The total amount of shares traded on the New York Stock Exchange in 1995 was
1,704,000 shares.

        January 1, saw the merger of F&M Bank-Broadway into F&M
Bank-Massanutten. The decision  to  do  this  was two-fold.  Robert  Driver,
the  President  of  F&M Bank-Broadway, retired and since both banks were in
Rockingham County, Virginia, it brought about an economy of savings.

        On April 7, we affiliated with Bank Of The Potomac in Herndon, Virginia.
This bank,  with  $57.6  million  in  assets,  now made a total of 11 banks  for
your corporation.

[caption - F&M Bank-Potomac in Herndon, Virginia.]


[caption - F&M Bank-Winchester's Senseny Road branch opening. Left to right:
Thomas Thayer, Branch  Manager;  John  Riley,  Frederick  County  Administrator;
W.M  Feltner, Chairman of the Board,  F&M-Bank-Winchester;  Richard Dick,
Chairman,  Frederick County Board of Supervisors; Betty Carroll, President, F&M
Bank-Winchester;  and George Romine, F&M Bank Director.]

        In order to expand our  downtown  F&M Bank-Winchester  operation,  we
traded property with Frederick County, Virginia,  and acquired the historic
Frederick County Court Square offices. These offices are now being renovated,
along with a city parking lot located on North  Cameron  Street.  We also
acquired the vacant Solenberger  Hardware Store  building  and lot.  This lot,
along with the city parking lot, is being made into an employee parking lot.

        To  further  serve  our  customers,  F&M Bank-Winchester  opened a
branch at Westminster  Canterbury in Winchester to serve the residents of this
retirement community.  F&M  Bank-Winchester  also opened a  full-service  branch
in eastern Frederick  County,  Virginia,  on Senseny Road.  F&M
Bank-Massanutten  opened a full-service   branch  in Timberville,   Virginia.
F&M   Bank-Peoples   began construction on a full-service branch in Falmouth,
Virginia.

        On November  22, a Plan of Affiliation  was  announced  between F&M
National Corporation  and Fairfax Bank & Trust of Fairfax,  Virginia.  This
institution, with $243.1 million in assets and 11 banking offices, will give
your corporation a total of 19 banking offices in Northern Virginia.

        New services  implemented  during 1995 were Fixed Rate Annuities in the
State of Virginia, where this service is legal--Discount Brokerage Service,
which will save our customers  brokerage  fees--and an expansion of our ATM
system.  We now operate 68 ATMs throughout the corporation.

        From an  operational  standpoint,  we have  converted  all of our banks'
data processing systems, except one, and that will be converted to our Data
Center in Middletown,  Virginia,  in February  of 1996.  This will  produce a
substantial savings to your corporation.

        Many of you remember a song entitled,  "It Was A Very Good Year." Well,
1995 was a very good year for your corporation.

[caption - F&M Bank-Massanutten's Timberville Branch]

[caption - Ground breaking for Court Square properties]

[F&M Logo] F&M Bank - Winchester

     Total Assets               Return on Average Assets        Locations
     $781,033,000                        1.28%                     31

                                   [Caption]
                               Board of Directors

Left to right, seated: George L. Romine, Jack R. Huyett, W.M. Feltner, Chairman
of the Board, Betty H. Carroll, President & C.E.O., and Mary M. Henkel. Left to
right, standing: Ray Robinson, Jr., F. Dixon Whitworth, Jr., Joseph E. Kalbach,
I. Clinton Miller, J.D. Shockey, Jr., Alfred B. Whitt, and William A. Truban,
D.V.M. Not shown: Frank Armstrong, III, and W. H. Clement.


[F&M Logo] F&M Bank - Central Virginia

     Total Assets               Return on Average Assets            Locations
     $74,268,000                         1.41%                         7

                                   [Caption]
                               Board of Directors

Left to right, seated: Robert C. Raynor, M.D., Wayne L. Turner, President &
C.E.O., Jacob P. Bailey, Chairman of the Board, and Thomas H. Romer. Left to
right, standing: William B. Pollard, M.D., Ronald L. Moyer, Walter L. Tucker,
Jr., James N. Fleming, and Larry J. McElwain. Not shown: William J. Camden, S.W.
Heischman, and F. Dixon Whitworth, Jr.


[F&M Logo] F&M Bank - Emporia

     Total Assets               Return on Average Assets            Locations
     $63,676,000                         1.54%                         3


                                   [Caption]
                               Board of Directors

Left to right, seated: Bobby L. Flippen, Arthur H. Kreienbaum, Jr., Dr.
Theopolis Gilliam, Wayne P. Leath, C. Butler Barrett, and Stephen D. Bloom. Left
to right, standing: Robert H. Grizzard, Jr., Chariman of the Board, and O.Wayne
Hanks, President & C.E.O.

[F&M Logo] F&M Bank - Hallmark

     Total Assets               Return on Average Assets            Locations
     $126,873,000                         1.28%                         5


                                   [Caption]
                               Board of Directors

Left to right, seated: John P. DiGiulian, Hugh W. Compton, President, and Reed
E. Larson, Chariman of the Board. Left to right, standing: Robert H. Bird, F.
Dixon Whitworth, Jr., James C. Davis, John T. Rohrback, and Michael M. Webb.

[F&M Logo] F&M Bank - Massanutten

     Total Assets               Return on Average Assets            Locations
     $160,934,000                         1.52%                         8


                                   [Caption]
                               Board of Directors

Left to right, seated: Russell K. Henry Jr., W. Wallace Hatcher, William A.
Julias, Chairman of the Board, and Wayne L. Smith, President & C.E.O. Left to
right, standing: Dwight W. Hartman, J. Robert Black, Garnett R. Turner, Edward
P. Shank, Marian G. Jenkins, Robert E. Driver, Homer M. Fulk, Curtis F. Kite,
Nancy H. Whitmore, Alfred B. Whitt, Emmet C. Stroop, and Harry L. Rawley. Not
Shown: Robert W. Drechsler.

[F&M Logo] F&M Bank - Peoples

     Total Assets               Return on Average Assets            Locations
     $96,804,000                         1.26%                         4


                                   [Caption]
                               Board of Directors

Left to right, seated: Mark C. Riley, President and CEO, Alice Jane Childs,
Chairman, Jack R. Huyett, and Fred G. Wayland, Jr. Left to right, standing:
George F. Downes, Lewis N. Springer, Edward C. A. Wachtmeister, Thomas H. Kirk,
T. Christopher Jenkins, and Alan L. Day, Jr. Not Shown: Marshall DeF. Doeller.

[F&M Logo] F&M Bank - Potomac

     Total Assets               Return on Average Assets            Locations
     $61,919,000                         1.08%                         1


                                   [Caption]
                               Board of Directors

Left to right, first row: Robert R. Sevila, David E. Feldman, Howard R. Green,
Alfred B. Whitt, and Norman P. Horn. Left to right, second row: Henry C.
Mackall, Thomas Davis Rust, Chairman of the Board, Thomas F. Hanes, President &
CEO, and Daniel R. Baker.

[F&M Logo] F&M Bank - Richmond

     Total Assets               Return on Average Assets          Locations
     $153,157,000                         1.09%                       9


                                   [Caption]
                               Board of Directors

Left to right, seated: James R. Reames, Richard H. Hamlin, Lewis T. Cowardin,
and James E. Howard. Left to right, standing: Zane G. Davis, Jeff C. Bane,
Stephen C. Conte, James H. Atkinson, Jr., President & CEO, William R. Harris,
Chariman of the Board, and F. Dixon Whitworth, Jr.

[F&M Logo] F&M Bank - Blakeley

     Total Assets               Return on Average Assets            Locations
     $96,864,000                         1.38%                         3


                                   [Caption]
                               Board of Directors

Seated: J. Blakcwell Davis, Sr., Chairman of the Board. Left to right, standing:
Paul L. Reid, Charles C. Conrad, Jack R. Huyett, and Denver L. Hipp, President &
CEO. Not shown: Dr. James Moler.

[F&M Logo] F&M Bank - Keyser

     Total Assets               Return on Average Assets            Locations
     $89,501,000                         1.57%                          3


                                   [Caption]
                               Board of Directors

Left to right, seated: Joseph W. Kessel, Harlan M. Bell, President & CEO, and
William C. Knott. Left to right, standing: William M. Bane, Richard B.
Schwinabart, Harland D. Ridder, and Rudy R. Sites. Not shown: Glen A. Ryan,
Chairman of the Board, Jack R. Huyett, and Alfred B. Whitt.

[F&M Logo] F&M Bank - Martinsburg

     Total Assets               Return on Average Assets            Locations
     $93,797,000                         1.20%                          3


                                   [Caption]
                               Board of Directors

Left to right, seated: Betty H. Carroll, Evelyn S. Oates, and Donald L. Sperow.
Left to right, standing: C. William Hammond, President and CEO, J. Wayne
Lancaster, James L. Bowman, Chairman of the Board, and Billy J. Tisinger.


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

      The following  discussion provides  information about the major components
of the results of  operations  and  financial  condition,  liquidity and capital
resources of F&M. This  discussion  and analysis  should be read in  conjunction
with  "Selected  Consolidated  Financial  Data" and the  Consolidated  Financial
Statements and Notes to Consolidated Financial Statements.

Overview

      F&M produced  record  earnings  during 1995,  performing  well in a highly
complex,  competitive  business  environment.  Continued high asset quality,  an
excellent interest margin and improved  management  efficiencies  contributed to
net income of $23.4 million, a return on assets of 1.33% and an efficiency ratio
of 60.2%.

      On March 17,  1995,  F&M  acquired  Farland  Investment  Management,  Inc.
("Farland")  through the exchange of 11,980 shares of F&M common stock.  Farland
was  merged  into F&M  Bank-Winchester  as a part of its Trust  Department.  The
merger of Farland  provides  experienced,  expert Trust counseling in securities
investments.

      On April 6, 1995, Bank of The Potomac ("Potomac"), Herndon, Virginia, with
assets of $54.3 million, became a wholly-owned subsidiary of F&M with a tax-free
exchange of 872,187 shares of F&M common stock for all of the outstanding shares
of Potomac. The share exchange of Potomac has been accounted for as a pooling of
interests and, therefore,  all finacial statements have been restated to reflect
the share exchange.

Results of Operations

       Net income increased 13.2% in 1995 to $23.4 million,  compared with $20.7
million earned in 1994 and $18.7 million earned in 1993.  Earnings per share was
$1.42 per share in 1995 compared to $1.25 and $1.16 per share for 1994 and 1993,
respectively.

      Return  on  average  equity  on an  annualized  basis  for 1995 was  12.7%
compared  to 12.2% for the same  period  for the prior  year.  Return on average
assets on an annualized basis for 1995 was 1.33%, compared to 1.21% for 1994 and
1.23% for 1993. These performance  ratios have varied since 1991, with return on
average  equity  rebounding  from 9.54% in 1991 to 12.40% in 1992,  dropping  to
12.03% in 1993 and then  increasing to 12.23% in 1994.  Return on average assets
rebounded from 0.91% in 1991 to 1.22% in 1992,  increasing  slightly to 1.23% in
1993 and decreasing slightly to 1.21% in 1994.

      Net  interest  margin,  on a  tax-equivalent  basis,  was  4.75%  for 1995
compared  to 4.74%  for 1994 and 4.67% for 1993.  Net  interest  income  and net
interest  margin are influenced by  fluctuations  in market rates and changes in
both the volume and mix of average earning assets and the liabilities  that fund
those  assets.  Market  rates  declined  in the fourth  quarter of 1995 due to a
decrease  in the prime  lending  rate of 25 basis  points.  For the first  three
quarters of 1995,  F&M's prime lending rate increased  approximately 2% which is
reflected in the yield on loans increasing from 8.66% in 1994 to 9.42% in 1995.

      In 1995 and 1994,  loan demand  declined and  competition  increeased  for
potential  loan  customers,  causing a shift in the mix in earning  assets  from
loans to investment  securities.  The securities portfolio represents the second
largest  component of earning  assets.  At December 31, 1995,  F&M's  securities
portfolio  totaled $569.3  million,  $54.8 million  (10.6%) higher than year end
1994 and $11.6 million (2.3%) higher than year end 1993.

      F&M's  efficiency  ratio,  a measure  of its  performance  based  upon the
relationship  between  non-interest  expense and income less  securities  gains,
compares  favorably to other Virginia financial  institutions.  F&M's efficiency
ratio for 1995, 1994 and 1993 was 60.2%, 62.4% and 61.3%, respectively.  A lower
percentage of the efficiency  ratio  represent a greater control of non-interest
related  costs.  A  fluctuation  in the  efficiency  ratio can be  attributed to
relative changes in both noninterest income and net interest income.

      Since the beginning of 1988, F&M has acquired approximately $817.6 million
in assets and $725.1 million in deposits through ten bank acquisitions.  Nine of
these  acquisitions  were accounted for as a  pooling-of-interests  and one as a
purchase,  which enabled F&M to expand its market into the eastern  panhandle of
West Virginia, northern Virginia market of Loudoun, Fauquier, Fairfax and Prince
William counties,  southern  Virginia market of Greensville  County and increase
its market share in two of its other Virginia markets.

      F&M is  not  aware  of  any  current  recommendations  by  any  regulatory
authorities which, if they were implemented, would have a material effect on the
registrant's liquidity, capital resources, or results of operations.

      The  following  table sets  forth,  for the  periods  indicated,  selected
quarterly results of F&M's operations.

                     Summary of Financial Results By Quarter
<TABLE>
<CAPTION>
                                                                     1995*                              1994*
                                                     -----------------------------------   -----------------------------------
                                                    Dec. 31  Sept. 30  June 30  March 31  Dec. 31  Sept. 30  June 30  March 31
------------------------------------------------------------------------------------------------------------------------------
                                                                   (In thousands, except per share amounts)
<S>                                                 <C>      <C>      <C>      <C>       <C>      <C>       <C>       <C>
Interest income...................................  $34,542  $33,756  $33,084  $31,880   $31,221  $30,578   $29,568   $28,246
Interest expense..................................   15,379   14,989   14,237   12,692    12,098   11,718    11,462    11,152
                                                     ---------------------------------   -------------------------------------
Net interest income...............................   19,163   18,767   18,847   19,188    19,123   18,860    18,106    17,094
Provision for loan losses.........................      372      235      197      277       964      435       466       670
                                                     ---------------------------------   -------------------------------------
Net interest income after provision for loan
 losses                                              18,791   18,532   18,650   18,911    18,159   18,425    17,640    16,424
Noninterest income................................    4,085    3,888    4,479    3,768     3,636    4,388     3,589     4,699
Noninterest expense...............................   14,344   13,231   14,625   13,795    14,466   14,239    14,142    13,436
Income before income taxes........................    8,532    9,189    8,504    8,884     7,329    8,574     7,087     7,687
Applicable income taxes...........................    2,793    3,091    2,878    2,915     1,866    3,050     2,462     2,598
                                                      ---------------------------------   ------------------------------------
Net income........................................  $ 5,739  $ 6,098  $ 5,626  $ 5,969   $ 5,463  $ 5,524   $ 4,625   $ 5,089
                                                      =================================   ====================================

Net income per share..............................  $  0.35  $  0.37  $  0.34  $  0.36   $  0.33  $  0.33   $  0.28   $  0.31

</TABLE>

*  The amounts previously reported on Form 10Q for the periods presented have
   been retroactively  restated  to reflect the  acquisitions  of Bank of the
   Potomac on April 6, 1995,  PNB  Financial  Corporation  on July 1, 1994 and
   Hallmark Bank & Trust on July 1, 1994 and a 2.5% stock dividend effective
   September 1, 1994.

        On July 1, 1994, F&M issued a total of 2,301,469 shares of its common
stock to account for the merger of two banks. F&M issued 1,107,846 shares of
common stock to effect the merger of Hallmark Bank and Trust Company,
Springfield, Virginia and 1,193,623 shares of common stock to effect the merger
of PNB Financial Corporation, Warrenton, Virginia.

        On September 1, 1994, F&M issued 378,690 shares of common stock to
account for the issuance of a 2.5% stock dividend.

        On December 28, 1994, F&M joined the New York Stock Exchange under the
trading symbol FMN. Prior to this date, F&M's stock was traded on the NASDAQ
(National Association of Securities Dealers Automated Quotation System) under
the trading symbol FMNT.

Net Interest Income

        Net interest income represents the principal source of earnings for F&M.
Net interest income equals the amount by which interest income exceeds interest
expense. Changes in the volume and mix of interest-earning assets and
interest-bearing liabilities, as well as their respective yields and rates, have
a significant impact on the level of net interest income.

        Net interest income was $76.0 million for the year ended December 31,
1995, up 3.8% over the $73.2 million reported for the same period in 1994 and up
14.5% in 1994 over the $63.9 million reported for 1993. Net interest income in
1995 was affected by a greater investment in securities and lower market rates.
Loans grew $44.6 million (4.4%) to $1.054 billion in 1995 from $1.009 billion in
1994. In 1995, total interest bearing deposits provided the source of funds
increasing to $1.347 billion, up $86.5 million (6.9%) from $1.260 billion in
1994. Interest-bearing deposits increased $2.7 million in 1994 from $1.258
billion in 1993. The growth was a result of offering attractive market rates
coupled with customers' desires to place investments in a strong, highly
capitalized financial corporation.

        Net interest income for 1994 was $73.2 million, compared to $63.9
million for 1993. Net interest income in 1994 was affected by improved loan
demand and higher market rates, while deposits demonstrated only a relatively
small increase. Loans grew $50.2 million (5.2%) to $1.009 billion in 1994 from
$959.1 million in 1993. Depositors, in 1994, chose to remain in a liquid
position in order to take advantage of alternative or higher yielding
investments as indicated by interest-bearing deposits increasing only $2.7
million (0.2%) while noninterest-bearing deposits increased $23.1 million
(11.1%). Increased loan demand and shifting in type of deposit investment
resulted in total interest income increasing $12.1 million (11.2%) from $107.5
million in 1993 to $119.6 million in 1994 and total interest expense increasing
$2.8 million (6.5%) from $43.6 million in 1993 to $46.4 million in 1994. During
1994, funds previously invested in lower yielding federal funds ($37.4 million)
were shifted to much higher yielding loan and investment securities, therefore,
contributing to the increase in net interest margin from 4.67% in 1993 to 4.74%
in 1994.

        Net interest income for 1993 was $63.9 million, compared to $57.3
million for 1992. Although loan demand demonstrated some improvement in 1993,
the increase in net interest income was due primarily to increases in the size
of the investment in the securities portfolio.

           Average Balances, Income and Expense, Yields and Rates (1)

                        Twelve Months Ended December 31,

<TABLE>
<CAPTION>

                                                                                     1995
                                                                                                  Annual
                                                                          Average     Income/     Yield/
                                                                          Balance     Expense      Rate

                                                                          (Dollars in thousands)
<S>                                                                    <C>           <C>          <C>
ASSETS
Securities:
  Taxable............................................................  $  490,061    $ 30,976      6.32%
  Tax-exempt (1).....................................................      37,625       2,888      7.67%

    Total securities.................................................     527,686      33,864      6.42%

Loans (net of unearned income):
  Taxable............................................................   1,015,715      95,587      9.41%
  Tax-exempt (1).....................................................       7,229         760     10.51%

    Total loans......................................................   1,022,944      96,347      9.42%

Federal funds sold and repurchase agreements.........................      74,588       4,302      5.77%
Interest-bearing deposits in other banks.............................         342          26      7.60%

    Total earning assets.............................................   1,625,560     134,539      8.28%

Less: allowance for loan losses......................................     (15,431)
Total nonearning assets..............................................     156,196

    Total assets.....................................................  $1,766,325

LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits:
  Checking...........................................................  $  242,826    $  5,922      2.44%
  Regular savings....................................................     189,220       6,191      3.27%
  Money market  savings..............................................     156,507       4,757      3.04%
  Certificates of deposit:
    Less than $100,000...............................................     601,823      32,263      5.36%
    $100,000 and more................................................     118,818       6,669      5.61%

    Total interest-bearing deposits..................................   1,309,194      55,802      4.26%

Short-term borrowings................................................      31,392       1,252      3.99%

Long-term borrowings.................................................       3,513         243      6.92%

    Total interest-bearing liabilities...............................   1,344,099      57,297      4.26%

Noninterest-bearing liabilities:

  Demand deposits....................................................     224,433

  Other liabilities..................................................      13,328

Total liabilities....................................................   1,581,860
Stockholders' equity.................................................     184,465

Total Liabilities and shareholders` equity...........................  $1,766,325

Net interest income..................................................                $ 77,242

Interest rate spread.................................................                              4.02%

Interest expense as a percent of average earning assets..............                              3.52%

Net interest margin..................................................                              4.75%

</TABLE>

(1) Income and yields are reported on a taxable-equivalent basis.



      Average Balances, Income and Expense, Yields and Rates (1) (continued)

                        Twelve Months Ended December 31,

<TABLE>
<CAPTION>

                                                                                     1994
                                                                                                  Annual
                                                                          Average     Income/     Yield/
                                                                          Balance     Expense      Rate
                                                                        (Dollars in thousands)

<S>                                                                    <C>           <C>           <C>
ASSETS
Securities:
  Taxable............................................................  $  471,577    $ 29,008      6.15%
  Tax-exempt (1).....................................................      43,156       3,425      7.94%

    Total securities.................................................     514,733      32,433      6.30%

Loans (net of unearned income):
  Taxable............................................................     977,690      84,843      8.68%
  Tax-exempt (1).....................................................       8,669         608      7.01%

    Total loans......................................................     986,359      85,451      8.66%

Federal funds sold and repurchase agreements.........................      73,400       3,105      4.23%
Interest-bearing deposits in other banks.............................         521          38      7.29%

    Total earning assets.............................................   1,575,013     121,027      7.68%

Less: allowance for loan losses......................................     (14,911)
Total nonearning assets..............................................     153,003

    Total assets.....................................................  $1,713,105

LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits:
  Checking...........................................................  $  252,583    $  6,055      2.40%
  Regular savings....................................................     219,458       6,779      3.09%
  Money market  savings..............................................     192,638       5,521      2.87%
  Certificates of deposit:
    Less than $100,000...............................................     517,910      22,620      4.37%
    $100,000 and more................................................      94,307       4,312      4.57%

    Total interest-bearing deposits..................................   1,276,896      45,287      3.55%

Short-term borrowings................................................      35,794       1,053      2.94%

Long-term borrowings.................................................       1,835          91      4.96%

    Total interest-bearing liabilities...............................   1,314,525      46,431      3.53%

Noninterest-bearing liabilities:

  Demand deposits....................................................     217,883

  Other liabilities..................................................      11,494

Total liabilities....................................................   1,543,902
Stockholders' equity.................................................     169,203

Total Liabilities and shareholders` equity...........................  $1,713,105

Net interest income..................................................                $ 74,596

Interest rate spread.................................................                              4.15%

Interest expense as a percent of average earning assets..............                              2.95%

Net interest margin..................................................                              4.74%

</TABLE>

(1) Income and yields are reported on a taxable-equivalent basis.



      Average Balances, Income and Expense, Yields and Rates (1) (continued)

                        Twelve Months Ended December 31,

<TABLE>
<CAPTION>

                                                                                     1993
                                                                                                  Annual
                                                                          Average     Income/     Yield/
                                                                          Balance     Expense      Rate

                                                                        (Dollars in thousands)

<S>                                                                    <C>           <C>          <C>
ASSETS
Securities:
  Taxable............................................................  $  426,107    $ 27,094      6.36%
  Tax-exempt (1).....................................................      44,351       4,813     10.85%

    Total securities.................................................     470,458      31,907      6.78%

Loans (net of unearned income):
  Taxable............................................................     844,350      74,176      8.78%
  Tax-exempt (1).....................................................       5,395         677     12.55%

    Total loans......................................................     849,745      74,853      8.81%

Federal funds sold and repurchase agreements.........................      87,483       2,591      2.96%
Interest-bearing deposits in other banks.............................       1,108         105      9.48%

    Total earning assets.............................................   1,408,794     109,456      7.77%

Less: allowance for loan losses......................................     (12,534)
Total nonearning assets..............................................     125,667

    Total assets.....................................................  $1,521,927

LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits:
  Checking...........................................................  $  196,378    $  5,360      2.73%
  Regular savings....................................................     177,883       5,699      3.20%
  Money market  savings..............................................     187,145       5,038      2.69%
  Certificates of deposit:
    Less than $100,000...............................................     488,055      22,924      4.70%
    $100,000 and more................................................      91,488       3,906      4.27%

    Total interest-bearing deposits..................................   1,140,949      42,927      3.76%

Short-term borrowings................................................      28,059         688      2.45%

Long-term borrowings.................................................           -           -         -

    Total interest-bearing liabilities...............................   1,169,008      43,615      3.73%

Noninterest-bearing liabilities:

  Demand deposits....................................................     217,883

  Other liabilities..................................................      11,494

Total liabilities....................................................   1,543,902
Stockholders' equity.................................................     169,203

Total Liabilities and shareholders` equity...........................  $1,713,105

Net interest income..................................................                $ 65,841

Interest rate spread.................................................                              4.04%

Interest expense as a percent of average earning assets..............                              3.10%

Net interest margin..................................................                              4.67%

</TABLE>

(1) Income and yields are reported on a taxable-equivalent basis.


The  balance of the  securities portfolio was $502.9 million at year end 1993,
up $68.9 million (15.9%) over the same period 1992.  Also a major factor
contributing  to the  improvement in net interest  expense was due to lower
interest rates,  which offset the effect of a $136.0 million  increase in
average  interest-bearing  liabilities  during 1993. While the tax  equivalent
yield on  interest-earning  assets  declined 77 basis points from 8.54% during
1992 to 7.77% for 1993, net interest  margin  decreased during that period due
to a larger decrease in total funding costs. Net interest margin  fell 13 basis
points  from  4.80%  during  1992 to 4.67% for 1993.  The decline in the yield
on interest-earning  assets and total funding costs was due to lower, but more
stable interest rate levels during 1993 than during 1992.

      The table on Pages 14 and 15 depicts interest income on earning assets and
related  average  yields  as  well  as  interest  expense  on   interest-bearing
liabilities  and related  average  rates paid for the periods  indicated.  Loans
placed on a nonaccrual  status are included in the balances and were included in
the computation of yields, upon which they had no material effect.

      The following table analyzes  changes in net interest income  attributable
to changes in the volume of interest-bearing  assets and liabilities compared to
changes in interest  rates.  Nonaccruing  loans are  included  in average  loans
outstanding.

                            Volume and Rate Analysis
                              Tax equivalent basis


<TABLE>
<CAPTION>
                                                                      1995                               1994
                                                         ------------------------------      ------------------------------
                                                                              Change in                           Change in
                                                           Volume     Rate     Income/        Volume     Rate      Income/
                                                           Effect    Effect    Expense        Effect    Effect     Expense
                                                         ---------- --------- ---------      --------  --------- ----------
                                                                               (Dollars in thousands)

<S>                                                        <C>        <C>       <C>           <C>       <C>       <C>
Earning Assets:
  Taxable securities....................................   $ 1,154    $   814   $ 1,968       $ 2,772   $  (858)  $ 1,914
  Tax-exempt securities.................................      (424)     (113)     (537)          (127)   (1,261)   (1,388)
  Taxable loans.........................................     3,397      7,347    10,744        11,496      (829)   10,667
  Tax-exempt loans......................................       (76)       228       152          (253)      184       (69)
  Federal funds sold and repurchase agreements..........        51      1,146     1,197          (309)      823       514
  Interest-bearing deposits in other banks..............       (14)         2      (12)           (47)      (20)      (67)
                                                         ---------- --------- ---------      --------  --------- ---------
       Total earning assets.............................   $ 4,088    $ 9,424   $13,512       $13,532   $(1,961)  $11,571
                                                         ---------- --------- ---------      --------  --------- ---------
Interest-Bearing Liabilities:
  Checking deposits.....................................   $  (234)   $   101   $  (133)      $ 1,203   $  (508)  $   695
  Savings deposits - regular............................    (1,019)       431      (588)        1,266      (186)    1,080
  Savings deposits - money market.......................    (1,117)       353      (764)          147       336       483
  CD's & other time deposits - $100,000 & over..........     4,021      5,622     9,643         2,057    (2,361)     (304)
  CD's & other time deposits - under $100,000...........     1,257      1,100     2,357           124       282       406
                                                         ---------- --------- ---------      --------  --------- ---------
       Total interest-bearing deposits..................     2,908      7,607    10,515         4,797    (2,437)    2,360
       Borrowed funds short-term........................      (105)       304       199           212       153       365
       Borrowed funds long-term.........................       106         46       152            91         0        91
                                                         ---------- --------- ---------      --------  --------- ---------
       Total interest-bearing liabilities...............     2,909      7,957    10,866         5,100    (2,284)    2,816
                                                         ---------- --------- ---------      --------  --------- ---------
       Change in net interest income....................   $ 1,179    $ 1,467   $ 2,646       $ 8,432   $   323   $ 8,755
                                                         ========== ========= =========      ========  ========= =========

</TABLE>

Note: The change in interest due to both rate and volume has been allocated to
change due to volume and change due to rate in proportion to the relationship of
the absolute dollar amounts of the change in each.

Interest Sensitivity

      The  primary  goals of  interest  rate  risk  management  are to  minimize
fluctuations  in net interest  margin as a percentage  of earning  assets and to
increase the dollars of net interest margin at a growth rate consistent with the
growth rate of total  assets.  These goals are  accomplished  by  balancing  the
volume  of  floating-rate  liabilities  with a similar  volume of  floating-rate
assets,  by keeping  the  average  maturity  of fixed  rate asset and  liability
contracts  reasonably  consistent and short, and by routinely  adjusting pricing
rates to market conditions on a weekly basis.

      The goal of F&M is to  generally  maintain a  position  that is to provide
flexibility enough to move to an equality between rate sensitive assets and rate
sensitive  liabilities,  which may be desirable when there are wide and frequent
fluctuations  in  interest  rates.   Interest  rate  gaps  are  managed  through
investments, loan pricing and deposit pricing. When an unacceptable positive gap
within a one-year  time frame  occurs,  maturities  can be  extended  by selling
shorter term investments and buying longer maturities.  The same effect can also
be  accomplished  by  reducing   emphasis  on  variable  rate  loans.   When  an
unacceptable negative gap occurs,  variable rate loans can be increased and more
investment in shorter term  investments can be made.  Pricing policies on either
or both loans and deposits can be changed to  accomplish  any of the goals.  F&M
reviews the interest  sensitivity position of each Subsidiary Bank at least once
a quarter.

      F&M  manages  the gap  between  rate-sensitive  assets and  rate-sensitive
liabilities  to expand and contract with the rate cycle phase.  The  traditional
targeted gap should be between a negative  15% and a positive  15%. The one year
income  statement gap at December 31, 1995 was 9.2% which is within the targeted
gap.

      At December 31,  1995,  F&M had $97.6  million more in interest  sensitive
assets than interest-sensitive  liabilities subject to repricing within one year
and was, therefore,  in an asset-sensitive  position.  At December 31, 1994, F&M
had $129.2  million more in interest  sensitive  assets than interest  sensitive
liabilities   subject  to  repricing   within  one  year.   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.

      F&M  utilizes  shock  analysis  to  project  the  estimated  effect on net
interest  income at various  interest rate  scenarios.  This  analysis  reflects
interest rate changes and the related impact on net income on interest sensitive
assets and  liabilities  over  specified  periods.  At December  31,  1995, a 3%
increase in the prime rate is projected  to increase  net  interest  income $4.6
million.  Conversely,  if the prime rate  decreases  3%,  projected net interest
income would decrease similarly.

      The following  table analyzes F&M's rate interest  sensitivity at December
31, 1995.  This is a one-day  position which is continually  changing and is not
necessarily indicative of F&M's position at any other time.



                           Rate Sensitivity Analysis
                               December 31, 1995
<TABLE>
<CAPTION>

                                                Repricing Time Frame                                 Income Statement Gap
                           ---------------------------------------------------------------------------------------------------------
                                                                                                                 One Year
                                                                    Over 5 Years             One Year  Earnings   Income     3%
                             1-90 Day    91-365 Day   1 to 5 Years     or Not                Balance    Change  Statement Prime Rate
                           Sensitivity  Sensitivity   Sensitivity    Sensitive    Total     Sheet Gap   Ratio      Gap      Change
                           -----------  -----------   ------------  ----------- ----------  ---------  -------- --------- ----------
                                          (Dollars in thousands)                              (Dollars in thousands)
<S>                          <C>         <C>            <C>          <C>        <C>         <C>       <C>      <C>          <C>
   ASSETS
Loans, net unearned (1)
 Fixed rate...............   $ 54,182    $102,859       $327,598     $ 78,001   $  562,640  $157,041   75.00%  $ 117,781    $ 3,533
 Floating rate............    296,106     106,834         76,801           --      479,741   402,940  100.00%    402,940     12,088
                             --------    --------       --------     --------   ----------  --------           ---------    -------
 Total loans..............    350,288     209,693        404,399       78,001    1,042,381   559,981   92.99%    520,721     15,621
Investment securities
 Treasuries-HTM...........      4,188      31,611         63,008       40,163      138,970    35,799   75.00%     26,849        805
 Treasuries-AFS...........      4,021      13,125         78,651       19,212      115,009    17,146   75.00%     12,860        386
 Agencies-HTM.............     20,825      13,780         58,363       27,345      120,313    34,605   75.00%     25,954        779
 Agencies-AFS.............      1,965      10,993         82,440       51,867      147,265    12,958   75.00%      9,719        292
 Tax free municipals......      1,857       2,747         12,045       12,717       29,366     4,604   37.00%      1,703         51
 Federal funds sold and
  other                        73,555       3,026          3,661        2,612       82,854    76,581   93.00%     71,220      2,137
                             --------     --------      --------     ---------  ----------  --------           ---------    -------
 Total securities.........    106,411      75,282        298,168      153,916      633,777   181,693   81.62%    148,305      4,450
                             --------    --------       --------     ---------  ----------- --------           ---------    -------
Total rate sensitive
 assets...................    456,699     284,975        702,567      231,917    1,676,158   741,674   90.20%    669,026     20,071
                             --------    --------       --------     ---------    --------- --------           ---------    -------
   LIABILITIES
Interest checking.........   $ 29,024    $ 97,425       $105,653     $ 17,629   $  249,731  $126,449   87.50%  $ 110,643    $ 3,319
Money market deposits.....     14,579      58,320         72,903           --      145,802    72,899   77.50%     56,497      1,695
Regular savings...........         --          --        147,533       36,885      184,418        --       --         --         --
Time deposits > $100,000..     44,280      28,353         62,497           --      135,130    72,633   76.70%     55,710      1,671
Time deposits < $100,000..    165,577     167,508        298,681           --      631,766   333,085   76.70%    255,476      7,664
Short-term borrowings.....     38,281         337             --           --       38,618    38,618   93.00%     35,915      1,077
Long-term borrowings......         --          --             --        3,225        3,225        --       --         --         --
                             --------    --------       -------      --------   ----------  --------           ---------    -------
Total rate sensitive
 liabilities..............    291,741     351,943        687,267       57,739    1,388,690   643,684   79.89%    514,241     15,426
                             --------    --------       --------     --------   ----------  --------           ---------    -------
Rate sensitivity gap......    164,958     (66,968)        15,300      174,178      287,468    97,990             154,785      4,645
Cumulative gap............    164,958      97,990        113,290      287,468                 97,990
Risk to interest margin:
Gap as a % of rate
 sensitive assets.........      9.84%       5.85%          6.76%       17.15%                  5.85%               9.23%
% of Annualized Income....                                                                                                    12.9%
------------------------------------------------------------------------------------------------------------------------------------

Risk to Capital Account...                                                                                                     0.0%
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1) Excludes non-accrual loans


Noninterest Income

      Noninterest  income for 1995  decreased $92 thousand,  or -0.6%,  over the
same period in 1994.  Trust  Department  income increased $170 thousand or 10.3%
from $1.6  million for 1994 to $1.8  million  for 1995 as a result of  increased
fiduciary activities and the acquisition of Farland.  Service charges on deposit
accounts,  the largest single item of noninterest  income, were $6.0 million for
1995, up 5.9% over the comparable  period a year ago. Credit card fees were $2.7
million for 1995 as compared to $2.2  million for 1994 as a result of  increased
card loan activity. Fees for other customer services were $1.4 million for 1995,
which  declined $479  thousand  (-25.1%) from 1994 as a result of a reduction in
refinancing activity. Gains on sale of securities were $366 thousand for 1995 as
compared to $748  thousand for 1994.  Security  gains are  realized  when market
conditions exist that are favorable to F&M and/or conditions  dictate additional
liquidity is desirable.  In 1995 and 1994,  market interest rates were generally
not favorable  which reduced the appeal to reposition.  Other  operating  income
decreased $167 thousand (-4.1%), down from $4.1 million for 1994 to $3.9 million
for 1995.  In 1994,  other  operating  income  included  $2.4  million  from the
settlement of problem loans compared to $948 thousand in 1995.

      Noninterest  income  increased  $1.5 million or 9.9% from $14.8 million in
1993 to $16.3 million in 1994. Trust  Department  income increased $215 thousand
or 15.1%  from $1.4  million  for 1993 to $1.6  million  for 1994 as a result of
increased fiduciary activities.  Service charges on deposit accounts,  were $5.7
million for 1994,  up 8.9% over the  previous  year.  Credit card fees were $2.2
million  and $1.8  million  for 1994 and 1993,  up $400  thousand as a result of
increased card lending  activities.  Fees for other customer  services were $1.9
million for 1994, which declined $327 thousand (-14.6%) from 1993 as a result of
a reduction in loan refinancing activity.  Gains on sale of securities were $748
thousand  for 1994 as compared  to $1.8  million  for 1993.  Security  gains are
realized  when  market  conditions  exist  that  are  favorable  to  F&M  and/or
conditions dictate additional  liquidity is desirable.  In 1993,  interest rates
were favorable for F&M to reposition some  securities at more attractive  rates,
whereas,  in 1994 market  interest  rates began  rising  reducing  the appeal to
reposition.

                               Noninterest Income
<TABLE>
<CAPTION>

                                                                  Year ended December 31,
                                                             --------------------------------
                                                               1995        1994        1993
                                                             ---------  ----------  ----------
                                                                  (Dollars in thousands)
<S>                                                          <C>         <C>        <C>
Commissions and fees from fiduciary activities............   $   1,812   $  1,642   $   1,427
Service charges on deposit accounts.......................       6,011      5,676       5,212
Credit card fees..........................................       2,679      2,247       1,844
Fees for other customer services..........................       1,426      1,905       2,230
Other operating income....................................       3,926      4,094       2,350
                                                            ----------  ----------  ----------
        Noninterest income................................      15,854     15,564      13,063
Profits on securities available for sale..................         366        728       1,617
Investment securities gains, net..........................          --         20         164
                                                            ----------  ----------  ----------
        Total noninterest income..........................   $  16,220   $ 16,312   $  14,844
                                                            ==========  ==========  ==========
</TABLE>

Noninterest Expense

      Total  noninterest  expense  decreased $289 thousand  (-0.5%),  from $56.3
million  in 1994 to  $56.0  million  in 1995.  Salaries  and  employee  benefits
increased $538 thousand or 1.9%, net occupancy expense  including  furniture and
equipment expense increased $219 thousand or 2.7%, credit card expense decreased
$106 thousand or -6.1% and other  operating  expense  increased $693 thousand or
4.8%.  The primary  reason for the decrease in total  noninterest  expense was a
reduction in deposit insurance from $3.4 million in 1994 to $1.7 million in 1995
as a result of the FDIC deposit  insurance  fund  achieving a level deemed to be
adequate to protect  deposits,  therefore,  premiums  were adjusted in the third
quarter 1995 to reflect this achievement.

      For 1994,  noninterest  expense increased by $8.0 million,  or 16.5%, over
1993.  This increase was primarily due to a $4.5 million,  or 18.3%  increase in
salary and employee  benefits  and a $1.7  million,  or 13.5%  increase in other
operating  expenses.  The primary reason for the increase in salary and benefits
was personnel costs associated with the purchase of substantially all the assets
and assumption of certain  liabilities of Farmers and Merchants Bank of Hamilton
("Hamilton") in September 1993. Other operating  expenses  increased for several
reasons.  First,  the purchase of Hamilton and the merger of First National Bank
of Emporia resulted in increased  professional fees. Second, F&M purchased a new
mainframe  computer with related  mainframe  software which required  additional
employee training, thereby, increasing operating expenses.

                               Noninterest Expense
<TABLE>
<CAPTION>

                                                                  Year ended December 31,
                                                             --------------------------------
                                                               1995        1994        1993
                                                             ---------  ----------  ----------
                                                                  (Dollars in thousands)
<S>                                                          <C>         <C>        <C>
Salaries and employee benefits............................   $  29,362   $ 28,824   $  24,361
Net occupancy expense of premises.........................       3,982      3,959       3,575
Furniture and equipment expense...........................       4,253      4,057       3,649
Deposit insurance.........................................       1,740      3,372       2,841
Credit card expense.......................................       1,626      1,732       1,267
Other operating expenses..................................      15,032     14,339      12,637
                                                            ----------  ----------  ----------
       Total..............................................   $  55,995   $ 56,283   $  48,330
                                                            ==========  ==========  ==========
</TABLE>

Income Taxes

      Reported  income tax expense at December  31, 1995 was $11.7  million,  up
from $10.0  million for 1994 and up from $8.8 million for 1993.  The increase in
income  taxes is  attributable  to  increased  taxable  earnings  at the federal
statutory  income tax rate of 35%. This  corresponds to an effective tax rate of
33.3%,  32.5% and 32.1% for the three years ended  December 31, 1995,  1994, and
1993,  respectively.  Note 15 to the Consolidated  Financial Statements for year
end provide a  reconciliation  between the amount of income tax expense computed
using the federal statutory income tax rate and F&M's actual income tax expense.
Also included in Note 15 to the Consolidated Financial Statements is information
regarding  the  principal  items  giving rise to deferred  taxes for each of the
three years ended December 31.

Loan Portfolio

      Loans, net of unearned  income,  were $1.054 billion at December 31, 1995,
up $44.6  million  or 4.4%  from  $1.009  billion  at year end 1994 and up $50.2
million or 5.2% from  $959.1  million  at year end 1993.  The  increase  in loan
activity for 1995 is indicative of  depositors  willingness  to incur new and/or
additional  debt  following a period of  reluctance  and  uncertainty  about the
economy.  The  purchase of $116.0  million of Hamilton  loans is included in the
increase of net loans ($177.8 million) from 1992 to 1993.

      All of the Subsidiary  Banks offer both commercial and consumer loans, but
lending  activity is generally  focused on consumers and small to  middle-market
businesses within the Subsidiary Banks' respective market regions.  Seven of the
Subsidiary Banks, F&M Bank-Massanutten, F&M Bank-Potomac, F&M Bank-Blakeley, F&M
Bank-Emporia,  F&M  Bank-Peoples,  F&M  Bank-Martinsburg,  and F&M  Bank-Keyser,
emphasize  consumer  lending,  with activities  focused primarily on residential
real estate and consumer lending.  F&M Bank-Richmond,  F&M Bank-Hallmark and F&M
Bank-Central  Virginia are based in larger  markets  where the  commercial  loan
demand is stronger and, as a result,  their lending  activities  place a greater
emphasis on small to medium-size business.  F&M Bank-Winchester,  because of its
size and dominant position in its market, has a greater opportunity to appeal to
larger commercial customers in addition to consumers.

      Approximately  44.7% of F&M's loan  portfolio  at  December  31,  1995 was
comprised of  commercial  loans,  which  includes  certain loans secured by real
estate in categories of multifamily,  non-farm, non-residential and agricultural
where real  estate is among the sources of  collateral  securing  the loan.  The
Subsidiary  Banks  offer a variety  of  commercial  loans  within  their  market
regions,  including revolving lines of credit,  working capital loans, equipment
financing loans and letters of credit.  Although the Subsidiary  Banks typically
look to the borrower's  cash flow as the principal  source of repayment for such
loans,  many of the loans within this  category  are secured by assets,  such as
real property,  accounts  receivable,  inventory and equipment.  In addition,  a
number of  commercial  loans are secured by real estate used by such  businesses
and are generally personally guaranteed by the principals of the business. F&M's
commercial  loans  generally  bear  a  floating  rate  of  interest  tied  to  a
system-wide prime rate set by F&M Bank-Winchester.

      F&M's residential real estate loan portfolio (including home equity lines)
was 38.2% of total loans at December 31, 1995.  The  residential  mortgage loans
made by the Subsidiary  Banks and Big Apple  Mortgage  Company are made only for
single family, owner-occupied residences within their respective market regions.
The  residential  mortgage  loans  offered  by the  Subsidiary  Banks are either
adjustable  rate  loans  or fixed  rate  loans  with 20 to 30 year  amortization
schedules  that  mature  with a  balloon  payment  on the  third or  fifth  year
anniversary of the loan.

      Big Apple Mortgage offers both fixed and adjustable rate loans,  while the
Subsidiary  Banks  generally  hold  residential  mortgage  loans in  their  loan
portfolios.  Big Apple Mortgage (also t.a. F&M Mortgage  Company) sells into the
secondary  market all the  permanent  mortgage  loans it  originates.  Big Apple
Mortgage  purchases  government insured 1-4 family FHA and VA loans which it may
warehouse and sell when the market rates are  attractive.  At December 31, 1995,
Big apple  Mortgage had $7.8 million in loans that it had committed to purchase,
but had not settled upon and $16.0 million  residential  loans were  warehoused,
available for sale.

      F&M's  real  estate  construction   portfolio   historically  has  been  a
relatively small portion of the total loan portfolio.  At December 31, 1995, the
construction loans were $40.7 million,  or 3.9% of the total loan portfolio.  Of
this amount,  $22.0 million was  originated by Big Apple  Mortgage,  all made to
finance owner-occupied properties with permanent financing commitments in place.
The Subsidiary Banks make a limited number of loans for acquisition, development
and construction of residential real estate. F&M's construction loans, including
its  acquisition  and  development  loans,  generally  bear a  floating  rate of
interest and mature in one year or less.  Loan  underwriting  standards for such
loans generally limit the loan amount to 75% of the finished  appraised value of
the project. As a result of strict underwriting guidelines,  F&M has experienced
no charge-offs involving residential construction loans since 1987.

      Consumer  loans were 18.4% of F&M's total loan  portfolio  at December 31,
1995, if home equity lines are included in this category.  The Subsidiary  Banks
offer a wide variety of consumer loans, which include  installment loans, credit
card loans, home equity lines and other secured and unsecured credit facilities.
The performance of the consumer loan portfolio is directly tied to and dependent
upon the general economic  conditions in the Subsidiary Banks' respective market
regions.

      Loans  secured  by  real  estate   consist  of  a  diverse   portfolio  of
predominantly  single  family  residential  loans,  which at  December  31, 1995
comprised 33.0% of the loan  portfolio.  Loans secured by commercial real estate
comprised  31.9%  of the  loan  portfolio  at  December  31,  1995  and  consist
principally of commercial and industrial  loans where real estate  constitutes a
source of collateral (28.4%) (shown in the following table under the category of
"Non-farm,  non-residential"),  multifamily loans (1.9%) and agricultural  loans
(1.6%).  F&M  attempts  to reduce  its  exposure  to the risks of the local real
estate  market by limiting  the  aggregate  size of its  commercial  real estate
portfolio and by making such loans primarily on owner-occupied  properties.  F&M
has  historically  engaged  in  limited  mortgage  lending  on  multifamily  and
agricultural properties.  Real estate construction loans accounted for only 3.9%
of total loans  outstanding at December 31, 1995.  F&M's charge-off rate for all
loans  secured by real estate was 0.06% of period end loans.  This is consistent
with 1994 when the  charge-off  rate for all loans  secured  by real  estate was
0.02% of period end loans outstanding. F&M's consumer loan portfolio, its second
largest loan category, consists principally of personal loans

      Consistent with its focus on providing community-based financial services,
F&M generally does not make loans outside its principal market regions. F&M does
not engage in foreign lending  activities,  consequently,  the loan portfolio is
not  exposed to risk  from  foreign  credits.  F&M  maintains  a policy  not to
originate  or purchase  loans  classified  by  regulators  as highly  leveraged
transactions or loans to foreign entities or individuals.

      F&M's  unfunded loan  commitments (excluding  unused home equity lines of
credit and credit card lines)  amounted to $165.3  million at December 31, 1995,
compared  to $133.8  million at December  31,  1994.  This  increase  is due to
stronger  seasonal  demands on lines of credit  during the summer months than at
year end.

      On  December  31, 1995,  F&M had no  concentration  of  loans  in any one
industry in excess of 10 percent of its loan portfolio. Because of the nature of
F&M's market, however, loan collateral is predominantly real estate related.

        A number of economic factors in  conjunction  with loan  activity in
1995 suggest that loan growth in 1996 should be more vibrant than it was in 1994
and 1993. Although  interest rates are above the floors they reached in 1994,
they remain at reasonable levels for borrowers.  New home construction is
increasing as are home sales. Auto sales were up sharply in 1995,  and the
forecast is for continued strength.  The  economy  is  creating  new  jobs  and
absorbing  the unemployment that was created during the recession and business
restructuring in 1994 and 1993.  Importantly,  reports  suggest  that  borrowers
are showing new confidence  and a willingness to incur new debt after a period
of low confidence in the economy.  These factors  resulted in a positive loan
growth trend in 1995 and represent the necessary elements for growth in 1996.


                                 Loan Portfolio
<TABLE>
<CAPTION>

                                                                      December 31,
                                               ---------------------------------------------------------
                                                  1995         1994        1993        1992       1991
                                               ----------   ----------   --------    --------   --------
                                                                 (Dollars in thousands)
<S>                                            <C>          <C>          <C>         <C>        <C>
Commercial, financial and agricultural.....    $  135,208   $  136,989   $107,664    $110,289   $109,761
Real estate construction...................        40,723       33,388     40,198      23,614     23,741
Real estate mortgage:
 Residential (1-4 family)..................       347,584      331,484    334,406     285,478    270,070
 Home equity lines.........................        55,054       55,794     45,960      45,215     47,835
 Multifamily...............................        20,015       19,610     17,597      14,272     14,085
 Non-farm, non-residential(1)..............       299,096      270,740    253,607     163,801    147,556
 Agricultural..............................        17,204       17,213     16,615      13,951     12,704
                                                            ----------   --------    --------   --------
 Real estate subtotal......................       738,953      694,841    668,185     522,717    492,250
Loans to individuals:
 Consumer..................................       125,773      134,184    135,655     120,884    138,328
 Credit card...............................        19,590       15,747     13,645      12,083     12,633
                                               ----------   ----------   --------    --------   --------
 Loans to individuals subtotal.............       145,363      149,931    149,300     132,967    150,961
  Total loans..............................     1,060,247    1,015,149    965,347     789,587    776,713
Less unearned income.......................        (6,418)      (5,926)    (6,295)     (8,295)   (10,660)
                                               ----------   ----------   --------    --------   --------
Loans--net of unearned income..............    $1,053,829   $1,009,223   $959,052    $781,292   $766,053
                                               ==========   ==========   ========    ========   ========
</TABLE>

(1) This category  generally  consists of commercial and industrial  loans where
real estate constitutes a source of collateral.

                     Remaining Maturities of Selected Loans
<TABLE>
<CAPTION>

                                                December 31, 1995
                                           ---------------------------
                                            Commercial,
                                          Financial and   Real Estate-
                                           Agricultural   Construction
                                          -------------   ------------
                                             (Dollars in thousands)
<S>                                        <C>            <C>
Within 1 year.........................     $     91,412   $    38,527
                                           ------------   ------------
Variable Rate:
    1 to 5 years......................            1,678           202
    After 5 years.....................              190            --
                                           ------------   ------------
    Total.............................     $      1,868   $       202
                                           ------------   ------------
Fixed Rate:
    1 to 5 years......................           33,340         1,994
    After 5 years.....................            8,588            --
                                           ------------   ------------
    Total.............................     $     41,928   $     1,994
                                           ------------   ------------
    Total Maturities..................     $    135,208   $    40,723
                                           ============   ============
</TABLE>


Asset Quality

      Allowance for Loan Losses. The allowance for loan losses is an estimate of
an amount adequate to provide for potential losses in the loan portfolio of each
Subsidiary Bank. The amount of the allowance is based on management's evaluation
of the collectability of the loan portfolio,  credit  concentrations,  trends in
historical loss experience,  specific  impaired loans, and economic  conditions.
Allowances  for impaired  loans are  generally  determined  based on  collateral
values or the present value of estimated cash flows.  The allowance is increased
by a  provision  for loan  losses,  which is charged to expense  and  reduced by
charge-offs,  net of recoveries.  Changes in the allowances relating to impaired
loans are charged or credited to the provision for loan losses.  Each Subsidiary
Bank has a formal loan review  function  which  consists of a committee  of bank
officers that regularly reviews loans and assigns a classification, if required,
based on current perceived credit risk. In addition,  the holding company has an
independent  loan  review  team that  performs  a  detailed  on-site  review and
analysis  of each  Subsidiary  Bank's  portfolio  on at  least an  annual  basis
reviewing 60% to 75% of the total  principal  amount of each  Subsidiary  Bank's
loan portfolio.  In addition,  all lending relationships  involving a classified
loan are  reviewed  regardless  of size.  The review team has the  authority  to
classify  any  loan  it  determines  is  not   satisfactory  or  to  change  the
classification  of a loan within F&M's grading system.  All classified loans are
reviewed  at least  quarterly  by  F&M's  senior  officers  and  monthly  by the
Subsidiary  Banks' board of  directors.  All past due and  nonaccrual  loans are
reviewed  monthly by the Subsidiary  Bank's boards of directors.  As a matter of
policy,  the Subsidiary  Banks place loans on nonaccrual  status when management
determines  that the borrower can no longer service debt from current cash flows
and/or collateral liquidation. This generally occurs when a loan becomes 90 days
past due as to principal and interest.  This detailed  management analysis forms
the basis for  determining  the amount  needed in the allowance for loan losses.
Also  included in  nonaccrual  loans at year end 1995 are $3.4  million in loans
that have been  written  down to market  values  where no  allowance is required
which  contributes to F&M's ratio of allowance to total loans of 1.42% and ratio
of allowance to nonaccrual  loans of 131.16% being  substantially  less than its
peers of 1.66% and 316.4%, respectively.  Although the ratio of the allowance to
total loans and nonaccrual loans may be  substantially  less than its peers, F&M
believes the ratio to be adequate based on this loan risk review analysis.

      The  provision  for loan losses in 1995,  1994 and 1993 were $1.1 million,
$2.5 million and $2.9 million,  respectively.  In 1995, 1994 and 1993, slow loan
growth in F&M's  markets and  improved  underwriting  standards  for loan losses
permitted F&M to reduce its provision. The ratio of allowance to total loans for
1995, 1994 and 1993 were 1.42%, 1.53% and 1.46%, respectively. In 1995, 1994 and
1993,  the ratio of allowance for loan losses to nonaccrual  loans were 131.16%,
83.01% and 51.34%, respectively.

      The   allowance   is  also   subject  to   regulatory   examinations   and
determinations  as to adequacy,  which may take into account such factors as the
methodology  used to calculate  the  allowance  and the size of the allowance in
comparison to peer companies identified by regulatory  agencies.  The Subsidiary
Banks are examined at  different  times,  but the  Virginia  Bureau of Financial
Institutions  examined all Virginia  banking  subsidiaries and the West Virginia
Division of Banking examined all West Virginia banking subsidiaries during 1995.
Loans  classified for regulatory  purposes as loss,  doubtful,  substandard,  or
special mention,  do not represent or result from trends or uncertainties  which
management  reasonably  expects will materially impact future operating results,
liquidity,  or capital  resources  or  represent  material  credits  about which
management is aware of any information  which causes  management to have serious
doubts as to the ability of such  borrowers  to comply  with the loan  repayment
terms.

      F&M  maintains a general  allowance  for loan losses and does not allocate
its allowance for loan losses to individual  categories for management purposes.
The  following  Table  shows an  allocation  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.

                     Allocation of Allowance for Loan Losses
<TABLE>
<CAPTION>

                                            1995                            1994                            1993
                                  -------------------------      --------------------------      --------------------------
                                                Percent of                      Percent of                      Percent of
                                               Loans in Each                   Loans in Each                   Loans in Each
                                                Category to                     Category to                     Category to
                                    Allowance   Total Loans        Allowance    Total Loans        Allowance    Total Loans
                                  ----------   ------------       ----------   -----------       -----------    -----------
                                                                   (Dollars in thousands)
<S>                                 <C>           <C>              <C>           <C>               <C>            <C>
December 31:
  Commercial, financial and
    agriculture.............        $  5,373       12.8%           $   5,510      13.6%            $   4,996       11.2%
  Real estate-construction..             585        3.9                  619       3.3                   562        4.2
  Real estate-mortgage......           5,466       70.1                5,635      68.8                 5,133       69.6
  Consumer..................           3,592       13.2                3,699      14.3                 3,349       15.0
                                  ----------   ------------       ----------   -----------       -----------    -----------
                                    $ 15,016      100.0%           $  15,463     100.0%            $  14,040      100.0%
                                  ==========   ============       ==========   ===========       ===========    ===========
</TABLE>

      Slow loan growth in F&M's  markets and  improved  underwriting  standards,
have  permitted F&M to reduce its provision for loan losses at December 31, 1995
to $1.1 million from the $2.5 million for the year 1994.  The 1994 provision was
also a reduction from the 1993 provision of $2.9 million.

      F&M had net  charge-offs  in 1995 of $1.5  million,  higher  than the 1994
level of $1.1 million,  but lower than 1993 net  charge-offs of $1.6 million The
higher net  charge-offs  was due to a few  customers  inability to cope with the
recent  recessionary  period. Net charge-offs to average loans was 0.15% for the
year 1995,  compared  with 0.11% for the same period 1994 and 0.18% for the same
period 1993.

                            Allowance for Loan Losses
<TABLE>
<CAPTION>

                                                                                       December 31,
                                                             --------------------------------------------------------------
                                                                1995          1994         1993         1992         1991
                                                             ----------    ---------    ---------    ---------    ---------
                                                                                  (Dollars in thousands)
<S>                                                           <C>          <C>          <C>          <C>           <C>
Balance, beginning of period...............................   $  15,463    $  14,040    $  11,309    $  11,563     $  8,435
    Loans charged-off:
        Commercial, financial and agriculture..............         509          878          845        2,185        2,592
        Real estate construction...........................          74           45            4           --           --
        Real estate mortgage:
            Residential (1-4 family).......................         583          280          366          914           82
            Home equity lines..............................          --           14          239           25           --
            Multifamily....................................          --           --           --           --           --
            Non-farm, non-residential (1)..................          95           --           89          170           --
            Agricultural...................................          --           --           --           --           --
                                                             ----------    ---------    ---------    ---------    ---------
                    Real estate subtotal...................         678          294          694        1,109           82
    Consumer...............................................         785          566          962        1,156        1,223
    Credit card............................................         343          146          144          162          238
                                                             ----------    ---------    ---------    ---------    ---------
                    Loans to individuals subtotal..........       1,128          712        1,106        1,318        1,461
                    Total loans charged-off................       2,389        1,929        2,649        4,612        4,135
    Recoveries:
        Commercial, financial and agriculture..............         508          397          409          333           81
        Real estate construction...........................          --           --            8           --           --
        Real estate mortgage:
            Residential (1-4 family).......................          60          125          292          109            4
            Home equity lines..............................          56           22           --           25           --
            Multifamily....................................          --           --           --           --           --
            Non-farm, non-residential (1)..................          19            4           31           --       --
            Agricultural...................................          --           --           --           --           --
                                                             ----------    ---------    ---------    ---------    ---------
                    Real estate subtotal...................         135          151          323          134            4
    Loans to individuals:
        Consumer...........................................         206          257          318          243          206
        Credit card........................................          12           12           22           25           10
                                                             ----------    ---------    ---------    ---------    ---------
                    Loans to individuals subtotal..........         218          269          340          268          216
                    Total recoveries.......................         861          817        1,080          735          301
                                                             ----------    ---------    ---------    ---------    ---------
Net charge-offs............................................       1,528        1,112        1,569        3,877        3,834
Provision for loan losses..................................       1,081        2,535        2,857        3,623        6,962
Increase from purchase.....................................          --           --        1,433           --           --
                                                             ----------    ---------    ---------    ---------    ---------
Balance, end of period.....................................   $  15,016    $  15,463    $  14,040    $  11,309     $ 11,563
                                                             ==========    =========    =========    =========    =========
Ratio of allowance for loan losses to loans outstanding
  at end of period.........................................       1.42%        1.53%        1.46%        1.45%        1.51%
Ratio of net charge-offs to average loans outstanding
 during period.............................................       0.15%        0.11%        0.18%        0.50%        0.50%

</TABLE>


(1) This category  generally  consists of commercial and industrial  loans where
real estate constitutes a source of collateral.

                                 Impaired Loans

      On January 1, 1995, F&M adopted FASB No. 114, "Accounting by Creditors for
Impairment  of a Loan."  This  statement  has  been  amended  by FASB  No.  118,
"Accounting  by Creditors  for  Impairment  of a Loan - Income  Recognition  and
Disclosures."  Statement 114, as amended,  requires that the impairment of loans
that have been  separately  identified for evaluation is to be measured based on
the  present  value  of  expected  future  cash  flows  or,  alternatively,  the
observable  market  price  of the  loans or the  fair  value of the  collateral.
However, for those loans that are collateral dependent (that is, if repayment of
those loans is expected to be provided solely by the underlying  collateral) and
for which  management  has determined  foreclosure  is probable,  the measure of
impairment  of those  loans is to be based on the fair value of the  collateral.
Statement 114, as amended,  also requires certain  disclosures about investments
in  impaired  loans and the  allowance  for credit  losses and  interest  income
recognized on loans.

      Information about impaired loans as of and for the year ended December 31,
1995 is as follows:
<TABLE>

<S>                                                                      <C>

Impaired loans for which an allowance has been provided.............     $  7,676,449
                                                                         ------------
Impaired loans for which no allowance has been provided.............        3,029,014
                                                                         ------------
    Total impaired loans............................................     $ 10,705,463
                                                                         ============
Allowance provided for impaired loans, included in the allowance
    for loan losses.................................................     $  1,400,961
                                                                         ============
Average balance in impaired loans...................................     $ 10,828,971
                                                                         ============
Interest income recognized..........................................     $    209,087
                                                                         ============
</TABLE>


      Nonperforming   Assets.  Total  nonperforming  assets,  which  consist  of
nonaccrual  loans,  restructured  loans and  foreclosed  properties,  were $23.9
million at December 31, 1995, a decrease of $6.1 million  (-20.3%) from December
31,  1994.  Total  nonperforming  assets do not  include  loans past due 90 days
accruing  interest.  Total  nonperforming  assets at December 31, 1994 decreased
$8.3  million over year end 1993.  The purchase of assets of Hamilton  increased
nonperforming assets at September 30, 1993, $27.9 million of which $21.3 million
were nonaccrual loans and $6.6 million were foreclosed  properties.  At December
31, 1995, these Hamilton  nonaccrual  loans and foreclosed  properties have been
reduced to $3.4 million and $4.6 million,  respectively.  On the purchase  date,
loans  acquired  from  Hamilton  were booked at fair market  value  according to
purchase  accounting rules.  Management does not anticipate any material loss in
the final disposition of the remaining loans.

      Foreclosed  properties  consists  of 26  parcels of real  estate  acquired
through  debt  previously  contracted.  These  properties  consist  primarily of
commercial and residential real estate whose value is determined through sale at
public  auction or fair market value,  whichever is less. In 1995,  F&M acquired
through  foreclosure  approximately  1,000  acres  of  real  estate  located  in
Jefferson County, West Virginia,  valued in excess of $4 million. F&M intends to
market this property and dispose of it as expediently  as possible.  At December
31, 1995,  F&M had $12.1 million in  foreclosed  property upon which it does not
anticipate incurring any material loss on the final disposition.

      Nonperforming  loans (nonaccrual loans and restructured loans) at December
31, 1995 were $11.8 million, or 1.1% of total loans, down from $19.0 million, or
1.9% of total loans at December  31,  1994 and $28.1  million,  or 2.9% of total
loans,  at  December  31,  1993.  Nonperforming  loans at the year end 1995 were
composed  largely of 1-4 family  residential  loans  amounting to $1.8  million,
construction and land development amounting to $4.2 million and commercial loans
secured by real estate amounting to $3.3 million.

                              Nonperforming Assets
<TABLE>
<CAPTION>

                                                                                  December 31,
                                                     -----------------------------------------------------------------------
                                                         1995           1994          1993           1992          1991
                                                     ------------  -------------  ------------   ------------  -------------
                                                                              (Dollars in thousands)
<S>                                                   <C>           <C>            <C>            <C>           <C>
Nonaccrual loans...................................   $    11,448   $     18,627   $    27,344    $    14,754   $    12,265
Restructured loans.................................           358            325           770             22            22
Foreclosed property................................        12,075         11,049        10,143          5,232         1,942
                                                     ------------  -------------  ------------   ------------  -------------
        Total nonperforming assets.................   $    23,881   $     30,001   $    38,257    $    20,008   $    14,229
                                                     ============  =============  ============   ============  =============

Loans past due 90 days accruing interest...........   $     2,789   $      1,781   $     2,001    $     5,283   $     5,068
Allowance for loan losses to period end loans......          1.42%          1.53%         1.46%          1.45%         1.51%
Allowance for loan losses to nonaccrual loans......        131.16%         83.01%        51.34%         76.65%        94.27%
Nonperforming assets to period end loans and
  foreclosed properties............................          2.24%          2.94%         3.94%          2.54%         1.85%
Net charge-offs to average loans...................          0.15%          0.11%         0.18%          0.50%         0.50%

</TABLE>



The loss of income associated with nonperforming loans at December 31 were:

<TABLE>
<CAPTION>

                                                     -----------------------------------------------------------------------
                                                         1995           1994          1993           1992          1991
                                                     ------------  -------------  ------------   ------------  -------------
                                                                              (Dollars in thousands)
<S>                                                   <C>           <C>            <C>            <C>           <C>
Income that would have been recorded in accordance
  with original terms:
      Nonaccrual loans and restructured loans......   $     1,080   $      1,356   $     1,084    $       922   $       661
Income actually recorded:
      Nonaccrual and restructured loans............           175            145            33             --            --

</TABLE>



On December 31, 1995,  there were no material  outstanding  commitments  to lend
additional funds with respect to nonperforming loans.

      Loans are placed on  nonaccrual  status when  collection  of interest  and
principal is doubtful,  generally  when loans become 90 days past due. There are
three  negative  implications  for earnings  when a loan is placed on nonaccrual
status. First, all interest accrued but unpaid at the date the loan is placed on
nonaccrual  status is either  deducted from interest  income or written off as a
loss.  Second,  accruals of interest are  discontinued  until it becomes certain
that both  principal  and  interest  can be repaid.  Third,  there may be actual
losses which necessitate  additional  provisions for loan losses charged against
earnings.

      At December  31, 1995,  loans past due 90 days or more and still  accruing
interest  because  they are both well  secured and in the process of  collection
were $2.8  million,  compared  to $1.8  million at  December  31,  1994 and $2.0
million at December 31, 1993.

      Potential  Problem Loans.  At December 31, 1995,  potential  problem loans
were  approximately  $21.4  million,  including  6  lending  relationships  with
principal  balances  in excess of  $500,000,  which had an  aggregate  principal
balance  outstanding  of $10.5  million.  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.  The  potential  problem  loans
identified  at  December  31,  1995 are  generally  secured by  residential  and
commercial real estate with appraised values that exceed the principal balance.

      Although  trends  for  credit  quality  factors,  such as loan  losses and
non-performing assets,  continue to improve, it is likely that F&M will continue
modest  provisions for loan losses in 1996. The principal  factor for additional
provisions is expected  growth in the loan  portfolio as the result of continued
improvement in economic conditions.

      Continued  positive  economic  conditions  and an  assessment  of the loan
portfolio  and  problem  assets  suggest  that loan losses in 1996 should not be
materially  greater than those in 1995.  At such  relatively  low levels of loan
losses as were  experienced  in 1995,  however,  a minor dollar  fluctuation  in
losses could represent a large percentage  increase.  Loan loss expectations for
1996 are  influenced  by economic  forecasts  of  continued  growth and moderate
interest rates. Financial circumstances of individual borrowers also will affect
loan  loss  results.  Unforeseen  changes,  either  in  economic  conditions  or
borrowers' financial  conditions,  could also impact actual loan losses in 1996.
F&M will  maintain and follow its policies  and  practices  intended to minimize
future credit losses.



Securities

      The book value of the securities  portfolio was $569.3 million at December
31,  1995,  compared to $514.5  million at December  31,  1994.  The  securities
portfolio  increased $54.8 million in 1995 over 1994, which followed an increase
of $11.6  million in 1994 over 1993.  Investment in U.S.  Government  securities
increased  $62.9  million,  or 13.7%,  for the year 1995,  and  increased  $18.7
million,  or 4.2%, for the year 1994,  while  investment in states and political
subdivisions  declined during the same periods. F&M has generally not reinvested
funds in securities issued by states and political  subdivisions,  because those
securities do not have the same tax benefits that they have had in the past.

      The securities  portfolio  consists of two components,  securities held to
maturity and securities available for sale. Securities are classified as held to
maturity when  management  has the intent and F&M has the ability at the time of
purchase to hold the  securities  to maturity.  Securities  held to maturity are
carried  at  cost  adjusted  for  amortization  of  premiums  and  accretion  of
discounts.  Securities to be held for indefinite  periods of time are classified
as available  for sale and  accounted  for at the lower of cost or market value.
Securities available for sale include securities that may be sold in response to
changes in market interest  rates,  changes in the security's  prepayment  risk,
increases in loan demand, general liquidity needs and other similar factors.

      Financial  Accounting  Standards  Board  Pronouncement  No. 115  effective
January 1, 1994,  required F&M to show the effect of market changes in the value
of securities  available for sale (AFS).  The market value of AFS  securities at
December  31,  1995 was $276.4  million.  The effect of the market  value of AFS
securities  less  the book  value  of AFS  securities,  net of  income  taxes is
reflected as a line in  Stockholders'  Equity as unrealized gain of $3.5 million
at December 31, 1995 and a unrealized loss of $6.8 million at December 31, 1994.
Investment rates have decreased in 1995,  thereby,  causing  currently held bond
portfolio  market values to increase.  In 1994, the decline in market yields was
due to interest  rate  fluctuations  only and not a result of re-ratings or down
grading of  securities.  The 1994 decline in the market value of AFS  securities
below book value was a  temporary  market  condition  as a result of the inverse
relationship of loan rates versus bond rates.

      It is F&M's policy not to engage in activities considered to be derivative
in nature such as futures,  option contracts,  swaps, caps, floors,  collars, or
forward commitments.  F&M considers derivatives as speculative which is contrary
to  F&M's  historical  or  prospective  philosophy.  F&M  does not hold or issue
financial  instruments  for  trading  purposes.  F&M  does  hold in its loan and
security portfolio  investments that adjust or float according to changes in the
"prime" lending rate which is not considered speculative, but necessary for good
asset/liability  management.  Off-balance  sheet risks such as  committments  to
exceed credit,  standby letters of credit, and other items are discussed in Note
17 in the Notes to Consolidated Financial Statements.

             Investment Portfolio and Securities Available For Sale

      The carrying value of investment securities at the dates indicated was:

<TABLE>
<CAPTION>

                                                                      December 31,
                                                             --------------------------------
                                                               1995        1994        1993
                                                             ---------   --------   ---------
                                                                  (Dollars in thousands)
<S>                                                          <C>         <C>        <C>
U.S. Government securities................................   $ 259,282   $252,366   $ 242,017
States and political subdivisions.........................      32,598     39,617      46,696
Other securities..........................................         985      1,671       3,795
                                                             ---------   --------   ---------
        Total investment securities.......................   $ 292,865   $293,654   $ 292,508
                                                             =========   ========   =========
</TABLE>


      The carrying value of securities available for sale at the dates indicated
was:

<TABLE>
<CAPTION>

                                                                       December 31,
                                                             --------------------------------
                                                               1995        1994        1993
                                                             ---------  ----------  ----------
                                                                  (Dollars in thousands)
<S>                                                          <C>         <C>        <C>
U.S. Government securities................................   $ 262,276   $206,328   $ 197,984
Other securities..........................................      14,128     14,506      12,363
                                                            ----------  ----------  ----------
        Total securities available for sale...............   $ 276,404   $220,834   $ 210,347
                                                            ==========  ==========  ==========
</TABLE>


                 Maturity Distribution and Yields of Securities

                                December 31, 1995
                            Taxable-Equivalent Basis
<TABLE>
<CAPTION>

                                                     Due after 1        Due after 5       Due after 10
                                 Due in 1 year        through 5         through 10          years and
                                    or less             years              years        Equity Securities        Total
                              -----------------  -----------------  -----------------  -----------------  -----------------
                                Amount    Yield    Amount    Yield    Amount    Yield     Amount   Yield     Amount   Yield
                              ---------  ------   --------- ------   --------  ------   --------  ------   --------- ------
                                                                 (Dollars in thousands)
<S>                            <C>        <C>     <C>        <C>     <C>        <C>     <C>        <C>    <C>         <C>
Securities held for
 investment:
   U.S. Government securities  $  70,404  6.07%   $ 121,371  6.01%   $ 47,196   6.80%   $ 20,311   7.49%  $ 259,282   6.29%
  Other taxable securities...      1,300  5.48%       1,320  6.78%      1,388   7.35%        209   6.75%      4,217   6.64%
                               ---------          ---------          --------           --------          ---------
      Total taxable..........     71,704  6.06%     122,691  6.02%     48,584   6.82%     20,520   7.48%    263,499   6.32%
  Tax-exempt securities (1)..      4,605  8.55%      12,044  7.95%     10,096   8.10%      2,621   8.71%     29,366   8.03%
                               ---------          ---------          --------           --------          ---------
      Total .................  $  76,309  6.21%   $ 134,735  6.19%   $ 58,680   7.04%   $ 23,141   7.62%  $ 292,865   6.47%
                               ---------          ---------          --------           --------          ---------
Securities held for sale:
  U.S. Government securities.  $  30,503  6.77%   $ 168,524  6.21%   $ 44,684   6.69%   $ 18,569   6.69%  $ 262,280   6.26%
  Other taxable securities...      6,252  3.04%       2,001  6.68%        625   6.96%      5,246   7.44%     14,124   5.27%
                               ---------          ---------          --------           --------          ---------
      Total .................  $  36,755  6.14%   $ 170,525  6.22%   $ 45,309   6.69%   $ 23,815   6.86%  $ 276,404   6.21%
                               ---------          ---------          --------           --------          ---------
Total securities.............  $ 113,064  6.19%   $ 305,260  6.20%   $103,989   6.89%   $ 46,956   7.23%  $ 569,269   6.34%
                               =========          =========          ========           ========          =========
</TABLE>


(1) Yields on tax-exempt securities have been computed on a
    tax-equivalent basis.


      See Note 2 to the  Consolidated  Financial  Statements  as of December
31, 1995 for an analysis of gross  unrealized gains and losses in the securities
portfolio.


Deposits

      F&M has made an effort in  recent  years to  increase  core  deposits  and
reduce cost of funds.  Deposits  provide funding for F&M's  investments in loans
and securities,  and the interest paid for deposits must be managed carefully to
control the level of interest expense.

      Deposits at December 31, 1995 grew $92.4 million or 6.2% to $1.583 billion
from  $1.491  billion at year end 1994.  Non-interest  bearing  demand  deposits
increased  $5.9 million  (2.6%) from $230.7 million in 1994 to $236.6 million in
1995.  Interest bearing deposits  increased $86.5 million (6.9%) to $1.3 billion
in  1995.  Savings  deposits,   interest  checking  and  money  market  deposits
experienced a reduction in deposits, whereas,  certificates of deposit under and
over $100,000 experienced a 24.6% or $151.5 million increase in deposits. Unlike
deposit  growth in 1994 which was affected by  comparatively  low interest rates
and  the  consequent  movement  of  funds  out  of  deposit  accounts  and  into
alternative  investments,  depositors in 1995 were seeking attractive guaranteed
rates provided by certificates of deposits.

      F&M does not have any other  time  deposits,  other than  certificates  of
deposits, over $100,000.

      Deposits  at  December  31,  1994  grew  $25.8  million  or 1.8% to $1.491
billion.  Non-interest  bearing demand deposits  increased $23.1 million (11.1%)
from $207.6 million in 1993 to $230.7 million in 1994. Interest bearing deposits
increased $2.7 million (0.2%) to $1.260 billion in 1994. Savings deposits, money
market  deposits  and  certificates  of  deposit  over  $100,000  experienced  a
reduction in deposits,  whereas,  only  interest  checking and  certificates  of
deposit under $100,000  experienced  an increase in deposits.  Deposit growth in
1994 was  affected  by  comparatively  low  interest  rates  and the  consequent
movement of funds out of deposit accounts and into alternative  investments.  In
addition to moving funds out of deposit accounts,  depositors continued to shift
funds into more liquid accounts.


                             Deposits and Rates Paid
<TABLE>
<CAPTION>

                                                                        December 31,
                                --------------------------------------------------------------------------------------------
                                            1995                            1994                            1993
                                ---------------------------      --------------------------       --------------------------
                                    Amount          Rate            Amount         Rate             Amount          Rate
                                 -----------   ------------      ------------   -----------      ------------   ------------
                                                                   (Dollars in thousands)
<S>                              <C>                <C>          <C>                <C>          <C>                <C>
Noninterest-bearing accounts...  $   236,630                     $    230,678                    $    207,613
                                 -----------                     ------------                    ------------
Interest-bearing accounts:
    Interest checking..........      249,731        2.44%             255,400       2.29%             244,200       2.73%
    Regular savings............      184,418        3.04%             210,831       2.79%             214,681       3.20%
    Money-market...............      145,802        3.27%             178,781       2.83%             191,991       2.69%
       Time deposits:
          Less than $100,000...      631,766        5.36%             524,271       4.31%             515,220       4.70%
          $100,000 and more....      135,130        5.61%              91,111       4.51%              91,582       4.27%
                                 -----------                     ------------                    ------------
Total interest-bearing.........    1,346,847        4.26%           1,260,394       3.44%           1,257,674       3.76%
                                 -----------                     ------------                    ------------
        Total..................  $ 1,583,477                     $  1,491,072                    $  1,465,287
                                 ===========                     ============                    ============
</TABLE>

                     Maturities of CD's of $100,000 and More
<TABLE>
<CAPTION>

                                         Within        Three to        Six to        One to          Over
                                          Three           Six          Twelve         Five           Five
                                         Months         Months         Months         Years          Years         Total
                                      ------------   ------------  -------------  ------------   ------------  -------------
                                                                      (Dollars in thousands)
<S>                                    <C>             <C>          <C>            <C>            <C>           <C>
At December 31, 1995................   $    39,325     $   12,270   $     21,038   $    62,497    $        --   $   135,130

</TABLE>


Capital Resources

      The  adequacy of F&M's  capital is reviewed  by  management  on an ongoing
basis with  reference  to the size,  composition  and quality of F&M's asset and
liability  levels and  consistent  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.

      The Federal  Reserve,  along with the  Comptroller of the Currency and the
Federal  Deposit  Insurance  Corporation,  have adopted  capital  guidelines  to
supplement the  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 I capital,  composed  of common  equity,  retained  earnings  and a
limited amount of perpetual  preferred  stock,  less certain goodwill items. F&M
had a ratio of  risk-weighted  assets to total  capital of 18.2% at December 31,
1995 and a ratio of  risk-weighted  assets to Tier I capital  of 17.0%.  Both of
these exceed the capital  requirements  adopted by the federal  bank  regulatory
agencies.

      The following Table reflects the cash dividends per share paid during each
quarter of the periods  indicated.  The  information in the table below may vary
for certain  periods  from the  dividends  declared  during the quarter in cases
where  the  dividend  was paid in the  quarter  following  its  declaration.  In
addition,  the amounts  shown have not been restated and adjusted to reflect (i)
the  acquisition  on April 6, 1995 of Bank of the Potomac and on July 1, 1994 of
both PNB Financial  Corporation and Hallmark Bank and Trust Company,  and (ii) a
2.5% stock dividend effective September 1, 1994.

                     Common Stock Performance and Dividends
<TABLE>
<CAPTION>

                                                         Common Stock Price
                                       -------------------------------------------------------
                                                 1995                         1994                   Dividends Declared
                                                                                                 ---------------------------
                                          High            Low           High           Low           1995          1994
                                      ------------   ------------  -------------  ------------   ------------  -------------
<S>                                    <C>             <C>          <C>            <C>            <C>           <C>
First quarter.......................   $     17.12     $    15.75   $      16.50   $     15.75    $      0.15   $    0.145
Second quarter......................         17.37          15.50          16.25         15.50           0.15        0.145
Third quarter.......................         18.12          15.62          17.37         16.00           0.15        0.145
Fourth quarter......................         20.00          17.25          17.25         14.75           0.16        0.150

Years ended December 31.............   $     20.00     $    19.00   $      16.00   $     15.63    $      0.61   $    0.585

</TABLE>


F&M National  Corporation  common stock is traded on the New York Stock Exchange
(NYSE) under the symbol FMN. On December 31, 1995 there were approximately 7,821
shareholders of record.

                               Analysis of Capital
<TABLE>
<CAPTION>

                                                                       December 31,
                                                             --------------------------------
                                                               1995        1994        1993
                                                             ---------  ----------  ----------
                                                                  (Dollars in thousands)
<S>                                                         <C>         <C>         <C>
Tier 1 Capital:
    Common stock..........................................  $   33,105  $   32,965  $   32,257
    Additional paid in capital............................      57,680      56,893      52,033
    Retained earnings.....................................      99,230      85,914      80,205
    Less: Goodwill........................................       5,279       5,551       5,984
                                                            ----------  ----------  ----------
    Total Tier 1 capital..................................     184,736     170,221     158,511

Tier 2 Capital:
    Allowance for loan losses.............................      13,607      12,975      12,581
    Allowable long term debt..............................          --          --          --
                                                            ----------  ----------  ----------
    Total Tier 2 capital..................................     13,;607      12,975      12,581
    Total risk-based capital..............................  $  198,343  $  183,196  $  171,092
                                                            ==========  ==========  ==========

Risk-weighted assets......................................  $1,088,525  $1,037,997  $1,006,446

CAPITAL RATIOS:
    Tier 1 risk-based capital ratio.......................       16.97%      16.40%      15.75%
    Total risk-based capital ratio........................       18.22%      17.65%      17.00%
    Tier 1 capital to average total assets................       10.46%       9.94%      10.41%

</TABLE>


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.  Liquid assets
include  cash,   interest-bearing  deposits  with  banks,  federal  funds  sold,
securities  and loans  classified as available for sale and loans and investment
securities  maturing within one year. As a result of F&M's  management of liquid
assets  and  the  ability  to  generate  liquidity  through  liability  funding,
management  believes that F&M maintains overall liquidity  sufficient to satisfy
its depositors' requirements and meet its customers' credit needs.

      At December 31,  1995,  approximately  $756.0  million or 44.8% of total
earning  assets is due to mature or reprice within the next year.

      F&M also maintains  additional  sources of liquidity  through a variety of
borrowing arrangements.  The Subsidiary Banks maintain federal fund lines with a
number of larger  regional and  money-center  banking  institutions  totaling in
excess of $66.5  million,  of which $4.9  million was  borrowed at December  31,
1995.  Federal funds borrowed by the Subsidiary  Banks during 1995 averaged less
than  $500,000.  At  December  31,  1995,  certain of the  Subsidiary  Banks had
outstanding  $10.2  million of  borrowings  pursuant  to  securities  repurchase
agreement transactions,  ranging in maturity from one day to three months. Also,
F&M has credit  lines  totaling  $233.8  million from the Federal Home Loan Bank
that can be utilized for short and/or long-term borrowing.

      F&M engages in short-term borrowings at the parent company level, as well.
At  December  31,  1995,  F&M  had  $18.5  million   outstanding  in  short-term
obligations  issued to selected  customers of the Subsidiary Banks pursuant to a
master  agreement.  As a back-up source of funds, F&M has approved bank lines of
credit  totaling $9.0 million.  At December 31, 1995,  there were no outstanding
balances  under these lines,  however,  the lines are used  irregularly  and the
average  aggregate  balance  outstanding  under the lines has not exceeded  $1.0
million since they have been in place.

      In 1994, some of F&M's  subsidiary banks joined the Federal Home Loan Bank
system in order to enter a program of long-term borrowing which is restricted to
be invested in Residential  Housing  Finance Assets (RHFA).  RHFA are defined as
(1) Loans secured by residential real property; (2) Mortgage-backed  securities;
(3)  Participations  in loans secured by residential  real  property;  (4) Loans
financed  by  Community  Investment  Program  advances;  (5)  Loans  secured  by
manufactured   housing,   regardless  of  whether  such  housing   qualifies  as
residential  real property;  or (6) Any loans or  investments  which the Federal
Housing Finance Board and the Bank, in their discretion,  otherwise determine to
be residential  housing finance assets. In 1995,  long-term  borrowings from the
Federal Home Loan Bank system for RHFA  investments  were $3.2 million  maturing
through 2006.

Accounting Rule Changes

      Statement of Financial  Accounting  Standards No. 121, "Accounting for the
Impairment of Long-Lived  Assets and for  Long-Lived  Assets to be Disposed of,"
establishes   standards  for  the  impairment  of  long-lived  assets,   certain
identifiable  intangibles,  and goodwill  related to those assets to be held and
used and for  long-lived  assets  and  certain  identifiable  intangibles  to be
disposed  of.  This  Statement  requires  that  long-lived  assets  and  certain
identifiable  intangibles  to be held  and used by an  entity  be  reviewed  for
impairment  whenever  events  or  changes  in  circumstances  indicate  that the
carrying amount of an asset may not be  recoverable.  The Statement is effective
for fiscal  years  beginning  after  December  15,  1995.  The  Statement is not
expected to have a material impact on F&M.

      Statement of  Financial  Accounting  Standards  No. 122,  "Accounting  for
Mortgage  Servicing  Rights,"  amends FASB  Statement  No. 65,  "Accounting  for
Certain  Mortgage  Banking  Activities,"  to  require  that a  mortgage  banking
enterprise  recognize as separate  assets rights to service  mortgage  loans for
others,  however  those  servicing  rights  are  acquired.  A  mortgage  banking
enterprise that acquires  mortgage  servicing rights through either the purchase
or  origination  of  mortgage  loans and sells or  securitizes  those loans with
servicing  rights  retained should allocate the total cost of the mortgage loans
to the mortgage  servicing rights and the loans (without the mortgage  servicing
rights)  based on their  relative fair values if it is  practicable  to estimate
those fair values.  If it is not  practicable  to estimate the fair value of the
mortgage servicing rights and the mortgage loans (without the mortgage servicing
rights),  the entire  cost of  purchasing  or  originating  the loans  should be
allocated to the mortgage loans (without the mortgage  servicing  rights) and no
cost should be allocated  to the mortgage  servicing  rights.  The  Statement is
effective for  transactions  in fiscal years  beginning after December 15, 1995.
The Statement is not expected to have a material impact on F&M.

      Statement of  Financial  Accounting  Standards  No. 123,  "Accounting  for
Stock-Based   Compensation,"  establishes  financial  accounting  and  reporting
standards for stock-based  employee  compensation plans. Those plans include all
arrangements  by which  employees  receive  shares  of  stock  or  other  equity
instruments of the employer or the employer  incurs  liabilities to employees in
amounts based on the price of the employer's stock.  Examples are stock purchase
plans, stock options, restricted stock and stock appreciation rights.

      This Statement also applies to  transactions in which an entity issues its
equity  instruments  to  acquire  goods or  services  from  nonemployees.  Those
transactions  must be accounted for based on the fair value of the consideration
received or the fair value of the equity instruments  issued,  whichever is more
reliably measurable.

      This  Statement  defines a fair value based  method of  accounting  for an
employee stock option or similar  equity  instrument and encourages all entities
to adopt that method of accounting for all of their employee stock  compensation
plans.  However,  it also allows an entity to  continue to measure  compensation
cost for those  plans  using the  intrinsic  value  based  method of  accounting
prescribed by APB Opinion No. 25,  "Accounting  for Stock Issued to  Employees."
The fair value based method is  preferable to the Opinion 25 method for purposes
of justifying a change in accounting principle under APB Opinion 20, "Accounting
Changes."  Entities  electing to remain with the  accounting  in Opinion 25 must
make pro forma disclosures of net income and, if presented,  earnings per share,
as if the fair value based method of  accounting  defined in this  Statement had
been applied.

      Under the fair value based  method,  compensation  cost is measured at the
grant date based on the value of the award and is  recognized  over the  service
period,  which is usually the vesting  period.  Under the intrinsic  value based
method,  compensation  cost is the excess, if any, of the quoted market price of
the stock at grant date or other  measurement  date over the amount an  employee
must pay to acquire stock.  Most fixed stock option  plans--the most common type
of stock  compensation  plan--have no intrinsic  value at grant date,  and under
Opinion 25 no  compensation  cost is recognized for them.  Compensation  cost is
recognized for other types of stock-based  compensation  plans under Opinion 25,
including plans with variable, usually performance-based, features.

      The Statement is effective for fiscal years  beginning  after December 15,
1995. The disclosures must include the pro forma effects of other awards granted
in fiscal years beginning after December 31, 1994. The Statement is not expected
to have a material impact on F&M.


                    F&M NATIONAL CORPORATION AND SUBSIDIARIES
                           Consolidated Balance Sheets
                           December 31, 1995 and 1994
<TABLE>
<CAPTION>

                                                                                                    December 31,
                                                                                         ----------------------------------

                                                                                              1995                1994
                                                                                         ---------------    ---------------
<S>                                                                                       <C>                <C>
Assets
 Cash and due from banks (Notes 1, 14 and 18)........................................     $   81,626,102     $   80,282,933
 Interest-bearing deposits in other banks............................................            100,000            229,211
  Securities (fair value: 1995, $577,439,207; 1994, $502,354,294)
    (Notes 1 and 2)..................................................................        569,268,650        514,488,222
  Federal funds sold and securities purchased under
    agreements to resell.............................................................         64,408,000         42,035,000
  Loans (Notes 1, 3 and 5)...........................................................      1,060,247,289      1,015,149,024
    Unearned income..................................................................         (6,418,449)        (5,926,326)
                                                                                         ---------------    ---------------
              Loans (net of unearned income).........................................      1,053,828,840      1,009,222,698
    Allowance for loan losses (Note 4)...............................................        (15,015,909)       (15,462,719)
                                                                                         ---------------    ---------------
              Net loans..............................................................      1,038,812,931        993,759,979
  Bank premises and equipment, net (Notes 1 and 6)...................................         34,881,884         32,153,423
  Other assets.......................................................................         44,722,813         45,543,740
                                                                                         ---------------    ---------------
              Total assets...........................................................     $1,833,820,380     $1,708,492,508
                                                                                         ===============    ===============
Liabilities and Shareholders' Equity
Liabilities
 Deposits:
    Noninterest bearing..............................................................     $  236,629,942     $  230,677,853
    Interest bearing.................................................................      1,346,846,609      1,260,393,847
                                                                                         ---------------    ---------------
              Total deposits (Note 7)................................................     $1,583,476,551     $1,491,071,700
  Federal funds purchased and securities sold under
    agreements to repurchase.........................................................         15,088,887         20,542,960
  Federal Home Loan Bank advances....................................................          4,737,275            875,294
  Other short-term borrowings (Notes 5 and 8)........................................         18,792,294         14,878,857
  Long-term debt (Note 9)............................................................          3,225,000          3,193,573
  Other liabilities..................................................................         15,017,878          8,941,151
  Commitments and contingent liabilities
    (Notes 14, 17 and 19)............................................................                 --                 --
                                                                                         ---------------    ---------------
              Total liabilities......................................................     $1,640,337,885     $1,539,503,535
                                                                                         ---------------    ---------------

Shareholders' Equity
 Preferred stock, no par value, authorized 5,000,000 shares,
    no shares outstanding............................................................     $           --     $           --
  Common stock, par value $2 per share, authorized 30,000,000 shares,
    issued 1995, 16,552,324 shares; issued 1994, 16,482,595 shares...................         33,104,648         32,965,190
  Capital surplus....................................................................         57,680,810         56,893,066
  Retained earnings..................................................................         99,229,815         85,913,709
  Unrealized gain  (loss) on securities available for sale, net......................          3,467,222         (6,782,992)
                                                                                         ---------------    ---------------
              Total shareholders' equity.............................................     $  193,482,495     $  168,988,973
                                                                                         ---------------    ---------------
              Total liabilities and shareholders' equity.............................     $1,833,820,380     $1,708,492,508
                                                                                         ===============    ===============
</TABLE>
-----------------
See Notes to Consolidated Financial Statements.



                    F&M NATIONAL CORPORATION AND SUBSIDIARIES
                        Consolidated Statements of Income
        For Each of the Three Years in the Period Ended December 31, 1995
<TABLE>
<CAPTION>

                                                                                           December 31,
                                                                     ------------------------------------------------------

                                                                            1995              1994                1993
                                                                      ---------------    ---------------    ---------------
<S>                                                                   <C>                <C>                <C>
Interest Income
 Interest and fees on loans.........................................  $    96,081,361    $    85,237,775    $    74,616,190
  Interest and dividends on investment securities:
    Taxable interest income.........................................       16,158,250         12,869,091         14,396,502
    Interest income exempt from federal income taxes................        1,876,600          2,225,641          3,128,504
    Dividends.......................................................               --                 --             65,971
  Interest and dividends on securities available for sale:
    Taxable interest income.........................................       14,424,029         15,885,912         12,630,661
    Dividends.......................................................          393,750            252,610                 --
  Interest income on federal funds sold and securities
    purchased under agreements to resell............................        4,301,567          3,104,812          2,590,830
  Interest on deposits in banks.....................................           26,006             37,744            105,215
                                                                      ---------------    ---------------    ---------------
                     Total interest income..........................  $   133,261,563    $   119,613,585    $   107,533,873
                                                                      ---------------    ---------------    ---------------
Interest Expense
 Interest on deposits (Note 7)......................................  $    55,801,690    $    45,287,084    $    42,927,164
  Interest on short-term borrowings.................................        1,252,526          1,053,264            688,082
  Interest on long-term debt........................................          242,631             90,634                 --
                                                                      ---------------    ---------------    ---------------
                     Total interest expense.........................  $    57,296,847    $    46,430,982    $    43,615,246
                                                                      ---------------    ---------------    ---------------
                     Net interest income............................  $    75,964,716    $    73,182,603    $    63,918,627

  Provision for loan losses (Notes 1 and 4).........................        1,080,748          2,534,666          2,856,875
                                                                      ---------------    ---------------    ---------------
                     Net interest income after provision
                        for loan losses.............................  $    74,883,968    $    70,647,937    $    61,061,752
                                                                      ---------------    ---------------    ---------------
Other Income
 Commissions and fees from fiduciary activities.....................  $     1,811,631    $     1,642,010    $     1,426,526
 Service charges on deposit accounts................................        6,010,565          5,676,383          5,211,748
 Credit card fees...................................................        2,679,530          2,247,432          1,844,084
 Fees for other customer services...................................        1,425,811          1,904,721          2,231,349
 Other operating income.............................................        3,926,438          4,093,803          2,349,815
 Profits on securities available for sale (Note 2)..................          366,133            728,239          1,616,791
 Investment securities gains, net (Note 2)..........................              236             19,895            163,987
                                                                      ---------------    ---------------    ---------------
                     Total other income.............................  $    16,220,344    $    16,312,483    $    14,844,300
                                                                      ---------------    ---------------    ---------------
Other Expenses
 Salaries and employees' benefits (Notes 11, 12 and 13).............  $    29,362,410    $    28,824,024    $    24,360,853
 Net occupancy expense of premises (Notes 6 and 14).................        3,981,914          3,959,251          3,575,578
 Furniture and equipment expenses (Notes 6 and 14)..................        4,253,214          4,056,908          3,648,999
 Deposit insurance..................................................        1,740,109          3,372,304          2,841,261
 Credit card expense................................................        1,625,438          1,731,838          1,266,780
 Other operating expenses...........................................       15,031,641         14,339,051         12,636,903
                                                                      ---------------    ---------------    ---------------
                     Total other expenses...........................  $    55,994,726    $    56,283,376    $    48,330,374
                                                                      ---------------    ---------------    ---------------
                     Income before income taxes.....................  $    35,109,586    $    30,677,044    $    27,575,678

Income tax expense (Notes 1 and 15).................................       11,677,437          9,976,168          8,844,179
                                                                      ---------------    ---------------    ---------------
                     Net income.....................................  $    23,432,149    $    20,700,876    $    18,731,499
                                                                      ===============    ===============    ===============
Earnings Per Share (Note 1)
 Per average share outstanding, net income..........................  $          1.42    $          1.25    $          1.16
                                                                      ===============    ===============    ===============
</TABLE>

------------------
See Notes to Consolidated Financial Statements.


                    F&M NATIONAL CORPORATION AND SUBSIDIARIES
           Consolidated Statements of Changes in Shareholders' Equity
        For Each of the Three Years in the Period Ended December 31, 1995
<TABLE>
<CAPTION>

                                                                                             Unrealized Gain
                                                                                            (Loss) on Secur-
                                                 Common          Capital        Retained     ities Available
                                                  Stock          Surplus        Earnings      for Sale, Net       Total
                                             -------------   -------------   --------------   -------------   -------------
<S>                                          <C>             <C>             <C>              <C>             <C>
Balance--December 31, 1992.................. $  31,137,838   $  44,196,974   $   70,826,338   $          --   $146,161,150
  Net income--1993..........................            --              --       18,731,499              --     18,731,499
  Cash dividends declared ($0.58 per share).            --              --       (9,352,791)             --     (9,352,791)
  Issuance of common stock-- dividend
    reinvestment plan (73,592 shares).......       147,184         944,899               --              --      1,092,083
  Issuance of common stock-- exercise of
    employee stock options (17,464 shares)..        34,928         102,634               --              --        137,562
  Issuance of stock options under non-vari-
    able compensatory plan (10,000 shares)..            --          86,200               --              --         86,200
  Issuance of common stock to acquire
    investment (19,877 shares)..............        39,754         298,155               --              --        337,909
  Retirement of stock options (2,000 shares)            --          (8,000)              --              --         (8,000)
  Issuance of common stock in exchange
    for net assets in bank acquisition
    (432,989 shares)........................       865,978       6,229,642               --              --      7,095,620
 Issuance of common stock for employee
    stock discount plan (15,458 shares).....        30,916         182,598               --              --        213,514
                                             -------------   -------------   --------------   -------------   -------------
Balance-- December 31, 1993................. $  32,256,598   $  52,033,102   $   80,205,046   $          --   $164,494,746
  Net income-- 1994.........................            --              --       20,700,876              --     20,700,876
  Cash dividends declared
     ($0.54 per share)......................            --              --       (8,933,174)             --     (8,933,174)
  Issuance of common stock-- dividend
    reinvestment plan (118,288 shares)......       236,576       1,670,226               --              --      1,906,802
  Issuance of common stock-- exercise of
    employee stock options (5,563 shares)...        11,126          27,628               --              --         38,754
  Issuance of stock options under
    nonvariable compensatory plan
   (26,000 shares)..........................            --         211,120               --              --        211,120
  Acquisition of common stock
    (165,000 shares)........................      (330,000)     (2,485,487)              --              --     (2,815,487)
  Issuance of common stock - 2 1/2% stock
    dividend (378,690 shares)...............       757,380       5,243,898       (6,001,278)             --             --
  Cash paid in lieu of fractional shares....            --              --          (57,761)             --        (57,761)
  Issuance of common stock for employee
    stock discount plan (16,755 shares).....        33,510         192,579               --              --        226,089
  Change in unrealized gain (loss) on secur-
    ities available for sale, net of
    deferred income taxes of $3,658,562.....            --              --               --      (6,782,992)    (6,782,992)
                                             -------------   -------------   --------------   -------------   -------------
Balance-- December 31, 1994................. $  32,965,190   $  56,893,066   $   85,913,709   $  (6,782,992)  $168,988,973
  Net income-- 1995.........................            --              --       23,432,149              --     23,432,149
  Cash dividends declared
    ($0.61 per share).......................            --              --     (10,116,043)              --    (10,116,043)
  Issuance of common stock-- dividend
    reinvestment plan (149,443 shares)......       298,886       2,090,992               --              --      2,389,878
  Acquisition of common stock
    (177,767 shares)........................      (355,534)     (2,716,683)              --              --     (3,072,217)
  Issuance of common stock-- employee
    stock ownership plan (37,393 shares)....        74,786         525,219               --              --        600,005
  Issuance of common stock-- exercise of
    employee stock options (13,323 shares)..        26,646         100,657               --              --        127,303
  Issuance of stock options under non-vari-
    able compensatory plan (26,000 shares)..            --         206,440               --              --        206,440
  Issuance of common stock to acquire
    investment (11,980 shares)..............        23,960         176,040               --              --        200,000
  Issuance of common stock for employee
    stock discount plan (35,357 shares).....        70,714         405,079               --              --        475,793
  Change in unrealized gain (loss) on
    securities available for sale, net of
    deferred income taxes of $5,623,601.....            --              --               --      10,250,214     10,250,214
                                             -------------   -------------   --------------   -------------   -------------
Balance-- December 31, 1995................. $  33,104,648   $  57,680,810   $   99,229,815   $   3,467,222   $193,482,495
                                             =============   =============   ==============   =============   =============
</TABLE>

See Notes to Consolidated Financial Statements.


                    F&M NATIONAL CORPORATION AND SUBSIDIARIES
                      Consolidated Statements of Cash Flows
        For Each of the Three Years in the Period Ended December 31, 1995
<TABLE>
<CAPTION>

                                                                                           December 31,
                                                                      -----------------------------------------------------

                                                                            1995              1994                1993
                                                                      ---------------    ---------------    ---------------
<S>                                                                   <C>                <C>                <C>
Cash Flows From Operating Activities
 Net income.........................................................  $    23,432,149    $    20,700,876    $    18,731,499
  Adjustments to reconcile net income to net cash provided by
    operating activities:
      Depreciation and amortization.................................        3,766,905          3,815,564          3,011,680
      Provision for loan losses.....................................        1,080,748          2,534,666          2,856,875
      Deferred income taxes (credits)...............................             (996)         1,270,662           (764,501)
      Profits on securities available for sale......................         (366,133)          (728,239)        (1,616,791)
      Investment securities gains, net..............................             (236)           (19,895)          (163,987)
      Gain on sale of other real estate.............................         (304,552)           (49,447)                --
      Net amortization and accretion of securities..................          386,927            776,726            662,310
      (Increase) decrease in other assets...........................       (2,893,543)         1,058,988            794,991
      Increase (decrease) in other liabilities......................        5,785,057         (4,308,427)         1,547,211
                                                                      ---------------    ---------------    ---------------
                    Net cash provided by operating activities.......  $    30,886,326    $    25,051,474    $    25,059,287
                                                                      ---------------    ---------------    ---------------
Cash Flows From Investing Activities
  Decrease in interest-bearing deposits in other banks..............  $       129,211    $     2,013,704    $       268,954
  Proceeds from sales and calls of securities available for sale....       27,482,815         48,911,189         29,504,330
  Proceeds from maturities of securities available for sale.........       31,368,930         29,902,250         16,742,000
  Proceeds from principal repayments and calls of investment
    securities......................................................       20,736,543         14,165,988                 --
  Proceeds from maturities of investment securities.................       54,845,000         63,247,000         77,358,803
  Proceeds from sales and calls of investment securities............               --                 --         33,501,638
  Purchase of securities available for sale.........................      (96,131,240)       (50,710,889)       (77,713,536)
  Purchase of investment securities.................................      (77,367,860)      (127,618,796)      (120,906,843)
  (Increase) decrease in federal funds sold and securities
    purchased under agreements to resell............................      (22,373,000)        37,441,000         15,263,000
  Net (increase) in loans...........................................      (52,715,582)       (56,354,423)       (64,791,243)
  Purchases of bank premises and equipment..........................       (6,052,856)        (3,870,767)        (3,602,449)
  Proceeds from sale of other real estate...........................        5,080,870          3,138,593          2,432,112
  Cash acquired in acquisition......................................               --                 --          6,622,857
                                                                      ---------------    ---------------    ---------------
                    Net cash (used in) investing activities.........  $  (114,997,169)   $   (39,735,151)   $   (85,320,377)
                                                                      ---------------    ---------------    ---------------
Cash Flows From Financing Activities
 Net increase (decrease) in noninterest-bearing and interest-bearing
    demand deposits and savings accounts............................  $   (59,109,483)   $    17,205,819    $    76,631,802
 Net increase (decrease) in certificates of deposit.................      151,514,334          8,578,583         (9,027,871)
 Dividends paid.....................................................       (9,824,373)        (8,457,479)        (7,476,664)
 Increase (decrease) in federal funds purchased and securities sold.
   under agreements to repurchase...................................       (5,454,073)         6,271,481           (153,867)
 Increase in other short-term borrowings............................        3,913,437          1,265,430          1,470,576
 Net proceeds from issuance and sale of common stock................        3,592,979          2,171,645          1,443,159
 Acquisition of common stock........................................       (3,072,217)        (2,815,487)                --
 Increase in Federal Home Loan bank advances........................        3,861,981            875,294                 --
 Proceeds from long-term debt.......................................        1,000,000          3,279,743                 --
 Principal payments on long-term debt...............................         (968,573)           (86,170)                --
 Cash paid in lieu of fractional shares on 2 1/2% stock dividend....               --            (57,761)                --
                                                                      ---------------    ---------------    ---------------
                     Net cash provided by financing activities......  $    85,454,012    $    28,231,098    $    62,887,135
                                                                      ---------------    ---------------    ---------------
                     Increase in cash and cash equivalents..........  $     1,343,169    $    13,547,421    $     2,626,045

Cash and Cash Equivalents
 Beginning..........................................................       80,282,933         66,735,512         64,109,467
                                                                      ---------------    ---------------    ---------------
  Ending............................................................  $    81,626,102    $    80,282,933    $    66,735,512
                                                                      ===============    ===============    ===============

Supplemental Disclosures of Cash Flow Information
 Cash payments for:
    Interest paid to depositors.....................................  $    54,177,118    $    44,828,822    $    42,352,302
    Interest paid on short-term borrowings..........................        1,268,178          1,052,160            681,834
    Interest paid on long-term borrowings...........................          242,631             90,635                 --
                                                                      ---------------    ---------------    ---------------
                                                                      $    55,687,927    $    45,971,617    $    43,034,136
                                                                      ===============    ===============    ===============

    Income taxes....................................................  $     9,547,581    $    10,169,899    $     9,383,056
                                                                      ===============    ===============    ===============

Supplemental Schedule of Noncash Investing and Financing Activities
  Issuance of stock options under nonvariable compensatory plan.....  $       206,440    $       211,120    $        86,200
                                                                      ===============    ===============    ===============

  Retirement of stock options under nonvariable compensatory plan...  $            --    $            --    $         8,000
                                                                      ===============    ===============    ===============

  Issuance of common stock in exchange for net assets in bank
   acquisition......................................................  $            --    $            --    $     7,095,620
                                                                      ===============    ===============    ===============

  Issuance of common stock to acquire investment....................  $       200,000    $            --    $       337,909
                                                                      ===============    ===============    ===============

  Loan balances transferred to foreclosed properties................  $     6,581,882    $     5,429,240    $     2,335,356
                                                                      ===============    ===============    ===============

  Common stock issued for 2 1/2% stock dividend.....................  $            --    $     6,001,278    $            --
                                                                      ===============    ===============    ===============

  Unrealized gain (loss) on securities available for sale...........  $    15,873,815    $   (10,441,551)   $            --
                                                                      ===============    ===============    ===============
</TABLE>

------------------
See Notes to Consolidated Financial Statements.


                    F&M NATIONAL CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  Years Ended December 31, 1995, 1994 and 1993

Note 1 -- Nature of Banking Activities and Significant Accounting Policies

      F&M  National   Corporation  and  Subsidiaries  (the  Corporation)   grant
commercial, financial, agricultural, residential and consumer loans to customers
in Virginia  and West  Virginia.  The loan  portfolio  is well  diversified  and
generally is collateralized  by assets of the customers.  The loans are expected
to be repaid from cash flow or proceeds from the sale of selected  assets of the
borrowers.

      The  accounting  and reporting  policies of F&M National  Corporation  and
Subsidiaries  conform to generally  accepted  accounting  principles  and to the
reporting guidelines  prescribed by regulatory  authorities.  The following is a
description of the more significant of those policies and practices.

Principles of Consolidation

      The consolidated  financial  statements  include the accounts of F&M
National  Corporation and all of its banking and nonbanking affiliates. In
consolidation, significant intercompany accounts and transactions have been
eliminated.

Securities

      The Corporation  adopted FASB No. 115,  "Accounting for Certain Investment
in Debt and  Equity  Securities"  effective  beginning  January  1,  1994.  This
statement  addresses the  accounting  and reporting  for  investments  in equity
securities that have readily determinable fair values and for all investments in
debt  securities.  Those  investments are classified in three categories and are
accounted for as follows:

      a.  Securities Held to Maturity

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

      b. Securities  Available for Sale

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

      c. Trading Securities Trading

      securities, which are generally held for the short term in  anticipation
      of market  gains,  are carried at fair value. Realized and  unrealized
      gains and losses on trading  account  assets are included in interest
      income on trading account securities. The Corporation had no trading
      securities  at December 31, 1995 and 1994.  Prior to 1994, the
      Corporation's  accounting  policy  for  securities  was  as  follows:

      Securities  were  classified as investment  securities when management had
the intent and the Corporation had the ability at the time of  purchase  to hold
them until  maturity or on a long-term basis.  These  securities  were  carried
at cost  adjusted for  amortization  of premiums and accretion of  discounts.
Premiums were  amortized  (deducted)  and discounts  were accreted  (added) to
interest  income on  investment  securities using methods that approximate the
level yield method.

      Securities to be held for  indefinite  periods of time and not intended to
be held to maturity or on a long-term  basis were  classified  as available  for
sale and  accounted  for at the lower of cost or market  value.  These  included
securities used as part of the Corporation's asset/liability management strategy
and may have been sold in  response  to changes in  interest  rates,  prepayment
risk, the need or desire to increase capital, to satisfy regulatory requirements
and other similar factors.  Gains and losses arising from the sale of securities
available for sale or  adjustments  for lower of cost or market were included in
"Profits on  securities  available for sale" in the  Consolidated  Statements of
Income.

Loans

      Loans are shown on the balance sheets net of unearned income and allowance
for loan losses. Interest income on commercial and real estate mortgage loans is
computed on the loan balance  outstanding.  Interest income on installment loans
is computed on the sum-of-the-months digits and actuarial methods.

      On January 1, 1995, the Corporation  adopted FASB No. 114,  "Accounting by
Creditors  for  Impairment  of a Loan." This  statement has been amended by FASB
Statement No. 118,  "Accounting  by Creditors for  Impairment of a Loan - Income
Recognition  and  Disclosures."  Statement  114, as amended,  requires  that the
impairment of loans that have been separately identified for evaluation is to be
measured  based  on  the  present  value  of  expected  future  cash  flows  or,
alternatively, the observable market price of the loans or the fair value of the
collateral.  However, for those loans that are collateral dependent (that is, if
repayment  of those loans is expected  to be provided  solely by the  underlying
collateral) and for which management has determined foreclosure is probable, the
measure  of  impairment  of those  loans is to be based on the fair value of the
collateral.  Statement 114, as amended,  also requires certain disclosures about
investments  in impaired  loans and the allowance for credit losses and interest
income recognized on loans.

      Loans are placed on nonaccrual when a loan is  specifically  determined to
be impaired or when principal or interest is delinquent for 90 days or more. Any
unpaid  interest  previously  accrued on those  loans is reversed  from  income.
Interest  income  generally is not recognized on specific  impaired loans unless
the  likelihood of further loss is remote.  Interest  payments  received on such
loans are applied as a reduction of the loan principal balance.  Interest income
on other nonaccrual loans is recognized only to the extent of interest  payments
received.

Allowance for Loan Losses

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

Bank Premises and Equipment

      Premises and  equipment are stated at cost less  accumulated  depreciation
and  amortization.  Premises and equipment are depreciated  over their estimated
useful  lives;  leasehold  improvements  are  amortized  over  the  lives of the
respective  leases or the estimated  useful life of the  leasehold  improvement,
whichever  is  less.   Depreciation   and   amortization  are  recorded  on  the
straight-line and declining-balance methods.

      Costs of maintenance and repairs are charged to expense as incurred. Costs
of replacing structural parts of major units are considered individually and are
expensed or capitalized as the facts dictate.

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 the
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.

Pension Plan

      The  Corporation  has a  trusteed,  noncontributory  defined  contribution
pension plan covering substantially all full-time employees.

Earnings and Dividends Paid Per Share

      Earnings  and  dividends  paid per share of Common  Stock are based on the
weighted  average  number of shares  outstanding  during each year after  giving
retroactive  effect to the equivalent shares exchanged in acquisition of Bank of
Potomac in 1995, in acquisition of PNB Financial Corporation and Hallmark Bank &
Trust Company in 1994,  the 2 1/2% stock dividend in 1994, and in acquisition of
First National Bankshares, Inc. in 1993.

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 consolidated financial statements.

Loan Fees and Costs

      Loan origination and commitment fees and direct loan origination costs are
being  recognized  as  collected  and  incurred.  The  use  of  this  method  of
recognition does not produce results that are materially  different from results
which  would  have  been  produced  if such  costs and fees  were  deferred  and
amortized as an adjustment of the loan yield over the life of the related loan.

Other Real Estate

      Other  real  estate,  classified  in "other  assets"  in the  accompanying
balance  sheets,  consists  primarily  of real estate held for resale  which was
acquired through foreclosure on loans secured by real estate.  Other real estate
is carried at the lower of cost or appraised  market value less an allowance for
estimated selling expenses on the future disposition of the property. Writedowns
to market value at the date of foreclosure are charged to the allowance for loan
losses. Subsequent declines in market value are charged to expense.

Cash and Cash Equivalents

      For purposes of reporting cash flows,  cash and cash  equivalents  include
cash on hand and amounts due from banks.

Use of Estimates

      The  preparation  of financial  statements  in conformity  with  generally
accepted  accounting  principles  requires  management  to  make  estimates  and
assumptions  that  affect the  reported  amounts of assets and  liabilities  and
disclosure of  contingent  assets and  liabilities  at the date of the financial
statements  and the  reported  amounts  of  revenues  and  expenses  during  the
reporting period. Actual results could differ from those estimates.

Note 2 -- Securities

      The  amortized  cost and fair values of  securities  being held to
maturity as of December  31, 1995 and 1994 are as follows:

<TABLE>
<CAPTION>

                                                                              December 31, 1995
                                                   ------------------------------------------------------------------------
                                                                            Gross             Gross
                                                       Amortized         Unrealized        Unrealized             Fair
                                                         Cost               Gains           (Losses)              Value
                                                   ---------------    ---------------    ---------------    ---------------
<S>                                                <C>                <C>                <C>                <C>
U.S. Treasury securities and obligations of
  U.S. government corporations and agencies....... $   259,281,218    $     7,764,096    $      (442,035)   $   266,603,279
Obligations of states and political
  subdivisions....................................      32,598,686            854,416            (92,075)        33,361,027
Corporate securities..............................         985,200             86,155                 --          1,071,355
                                                   ---------------    ---------------    ---------------    ---------------
                                                   $   292,865,104    $     8,704,667    $      (534,110)   $   301,035,661
                                                   ===============    ===============    ===============    ===============
</TABLE>


<TABLE>
Caption>
                                                                              December 31, 1994
                                                   ------------------------------------------------------------------------
                                                                            Gross             Gross
                                                       Amortized         Unrealized        Unrealized             Fair
                                                         Cost               Gains           (Losses)              Value
                                                   ---------------    ---------------    --------------     ---------------
<S>                                                <C>                <C>                <C>                <C>
U.S. Treasury securities and obligations of
  U.S. government corporations and agencies....... $   252,365,986    $       232,684    $  (11,874,322)    $   240,724,348
Obligations of states and political
  subdivisions....................................      39,616,717            584,956        (1,034,819)         39,166,854
Corporate securities..............................       1,671,750              9,000           (51,427)          1,629,323
                                                   ---------------    ---------------    --------------     ---------------
                                                   $   293,654,453    $       826,640    $  (12,960,568)    $   281,520,525
                                                   ===============    ===============    ==============     ===============
</TABLE>


      The amortized cost and fair value of securities  being held to maturity as
of December 31, 1995, by  contractual  maturity are shown below.  Maturities may
differ from  contractual  maturities  because the  corporate  securities  may be
called or repaid  without any  penalties.  Therefore,  these  securities are not
included in the maturity categories in the maturity summary.

<TABLE>
<CAPTION>

                                                                                  Amortized             Fair
                                                                                    Cost                Value
                                                                               ---------------    ---------------
<S>                                                                            <C>                <C>
Due in one year or less..................................................      $    76,309,029    $    76,602,349
Due after one year through five years....................................          134,534,033        136,531,083
Due after five years through ten years...................................           57,896,216         60,553,164
Due after ten years......................................................           23,140,626         26,277,710
Corporate securities.....................................................              985,200          1,071,355
                                                                               ---------------    ---------------
                                                                               $   292,865,104    $   301,035,661
                                                                               ===============    ===============
</TABLE>

      The  amortized cost and fair value of securities available for sale as of
December 31, 1995 and 1994, are as follows:

<TABLE>
<CAPTION>

                                                                              December 31, 1995
                                                   ------------------------------------------------------------------------
                                                                            Gross             Gross
                                                       Amortized         Unrealized        Unrealized             Fair
                                                         Cost               Gains           (Losses)              Value
                                                   ---------------    ---------------    --------------     ---------------
<S>                                                <C>                <C>                <C>                <C>
U.S. Treasury securities and obligations of
  U.S. government corporations and agencies....... $   257,649,832    $     5,533,316    $     (907,092)    $   262,276,056
Corporate securities..............................       7,026,408            514,373            (1,804)          7,538,977
Mortgage-backed securities........................         736,222             39,976              (514)            775,684
Other.............................................       5,558,820            254,009                --           5,812,829
                                                   ---------------    ---------------    --------------     ---------------
                                                   $   270,971,282    $     6,341,674    $     (909,410)    $   276,403,546
                                                   ===============    ===============    ==============     ===============
</TABLE>

<TABLE>
<CAPTION>

                                                                              December 31, 1994
                                                   ------------------------------------------------------------------------
                                                                            Gross             Gross
                                                       Amortized         Unrealized        Unrealized             Fair
                                                         Cost               Gains           (Losses)              Value
                                                   ---------------    ---------------    ---------------    ---------------
<S>                                                <C>                <C>                <C>                <C>
U.S. Treasury securities and obligations of
  U.S. government corporations and agencies....... $   216,857,754    $       369,534    $  (10,899,154)    $   206,328,134
Corporate securities..............................       8,962,542             21,772           (90,500)          8,893,814
Mortgage-backed securities........................         887,955                 --           (13,881)            874,074
Other.............................................       4,567,069            170,678                --           4,737,747
                                                   ---------------    ---------------    --------------     ---------------
                                                   $   231,275,320    $       561,984    $  (11,003,535)    $   220,833,769
                                                   ===============    ===============    ==============     ===============
</TABLE>


      The amortized cost and fair value of securities  available for sale, as of
December 31, 1995 by contractual  maturity are shown below.  Expected maturities
may differ from  contractual  maturities  because the corporate  securities  and
mortgage-backed  securities  may be called or  prepaid  without  any  penalties.
Therefore,  these securities are not included in the maturity  categories in the
maturity summary.

<TABLE>
<CAPTION>

                                                                                  Amortized             Fair
                                                                                    Cost                Value
                                                                               ---------------    ---------------
<S>                                                                            <C>                <C>
Due in one year or less.....................................................   $    29,896,031    $    30,111,582
Due after one year through five years.......................................       167,246,448        170,024,611
Due after five years through ten years......................................        45,690,285         46,856,013
Due after ten years.........................................................        14,817,068         15,283,850
Corporate securities........................................................         7,026,408          7,538,977
Mortgage-backed securities..................................................           736,222            775,684
Other.......................................................................         5,558,820          5,812,829
                                                                               ---------------    ---------------
                                                                               $   270,971,282    $   276,403,546
                                                                               ===============    ===============
</TABLE>


      Proceeds  from  principal  repayments  and  calls  of  securities  held to
maturity during 1995 and 1994 were $20,736,543 and  $14,165,988.  Gross gains of
$26,862  and $27,452  and gross  losses of $26,626  and $7,557 were  realized on
those principal repayments and calls during 1995 and 1994,  respectively.  There
were no sales of securities held to maturity during 1995 and 1994.

      Proceeds from sales and calls of securities available for sale during 1995
and 1994 were $27,482,815 and $48,911,189.  Gross gains of $371,182 and $960,137
and gross losses of $5,049 and $231,898  were  realized on those sales and calls
during 1995 and 1994, respectively.

      Proceeds from sales and calls of securities during 1993 were $63,005,968.
Gross gains of $1,808,394 and gross losses of $27,616 were realized on those
sales.

      As allowed by the Question  and Answer Guide to FASB No. 115,  "Accounting
for Certain  Investments  in Debt and Equity  Securities"  issued in November of
1995, debt securities with an amortized cost of $2,451,366 were transferred from
held-to-maturity to  available-for-sale  in December 1995. The securities had an
unrealized loss of approximately $93,153. There were no securities transferred
between classifications during 1994.

      The book  value of  securities  pledged to secure  deposits  and for other
purposes  amounts to $94,357,378  and $72,649,913 at December 31, 1995 and 1994,
respectively.

Note 3 --Loans

      Major classifications of loans are as follows:
<TABLE>
<CAPTION>

                                                                                        December 31,
                                                                           ------------------------------------

                                                                                  1995                1994
                                                                             ---------------    ---------------
<S>                                                                          <C>                <C>
Commercial, financial and agricultural...................................    $   135,208,000    $   136,989,000
Real estate-- construction...............................................         40,723,000         33,388,000
Real estate-- mortgage...................................................        738,953,000        694,841,000
Consumer loans to individuals............................................        145,363,289        149,931,024
                                                                             ---------------    ---------------

                                                                             $ 1,060,247,289    $ 1,015,149,024
                                                                             ===============    ===============
</TABLE>

Note 4 --Allowance for Loan Losses

      Changes in the allowance for loan losses are as follows:

<TABLE>
<CAPTION>

                                                                                           December 31,
                                                                     ------------------------------------------------------
                                                                            1995              1994                1993
                                                                      ---------------    ---------------    ---------------
<S>                                                                   <C>                <C>                <C>
Balance at beginning of year........................................  $    15,462,719    $    14,039,859    $    11,308,736
Provision charged to operating expense..............................        1,080,748          2,534,666          2,856,875
Recoveries added to the reserve.....................................          861,116            817,390          1,080,156
Increase from acquisition...........................................               --                 --          1,443,169
Loan losses charged to the reserve..................................       (2,388,674)       (1,929,196)         (2,649,077)
                                                                      ---------------    ---------------    ---------------

Balance at end of year..............................................  $    15,015,909    $    15,462,719    $    14,039,859
                                                                      ===============    ===============    ===============
</TABLE>


      Information about impaired loans as of and for the year ended December 31,
1995 is as follows:



Impaired loans for which an allowance has been provided.....  $     7,676,449
Impaired loans for which no allowance has been provided.....        3,029,014
                                                              ---------------

Total impaired loans........................................  $    10,705,463
                                                              ===============
Allowance provided for impaired loans, included in
  the allowance for loan losses.............................  $     1,400,961
                                                              ===============

Average balance in impaired loans...........................  $    10,828,971
                                                              ===============

Interest income recognized..................................  $       209,087
                                                              ===============


Nonaccrual  loans excluded from impaired loan disclosure under FASB 114 amounted
to $1,649,688 and $18,627,000. If interest on these loans had been accrued, such
income would have  approximated  $128,816 and $1,356,053,  respectively.

Note 5 -- Related Party Transactions

      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 risk. At December 31, 1995
and 1994, these loans totaled $45,959,874 and $44,998,082,  respectively. During
1995,  total principal  additions were  $5,259,658 and total principal  payments
were $4,297,866.

      The  Corporation  was indebted to related  parties for short-term
borrowings  totaling  $6,515,000 and $4,026,000 at December 31, 1995 and 1994,
respectively.

      The  Corporation  paid  $2,400 in 1995 to the law firm of a  director  who
serves  as legal  counsel  for a bank  subsidiary.

Note 6 --Bank  Premises  and  Equipment, Net

      Premises and equipment are summarized as follows:

<TABLE>
<CAPTION>

                                                                         December 31,
                                                            ------------------------------------

                                                                   1995                1994
                                                              ---------------    ---------------
<S>                                                           <C>                <C>
Premises..................................................    $    35,694,001    $    34,958,654
Leasehold improvements....................................          1,498,946          1,158,583
Furniture and equipment...................................         21,396,524         18,110,250
Construction in progress..................................          1,697,011          1,132,883
                                                              ---------------    ---------------

                                                              $    60,286,482    $    55,360,370
Less accumulated depreciation and amortization............        (25,404,598)       (23,206,947)
                                                              ---------------    ---------------
                                                              $    34,881,884    $    32,153,423
                                                              ===============    ===============
</TABLE>


      Depreciation and  amortization of bank premises and equipment  included in
operating  expenses for the years ended December 31, 1995,  1994 and 1993,  were
$3,324,395, $3,406,387 and $2,849,241, respectively.

Note 7 -- Deposits

      Deposits  outstanding at December 31, 1995, 1994 and 1993, and the related
interest expense for the periods then ended are summarized as follows:

<TABLE>
<CAPTION>

                                                        December 31, 1995                        December 31, 1994
                                              ------------------------------------     ------------------------------------
                                                    Amount             Expense               Amount              Expense
                                               ----------------   ----------------       ---------------    ---------------
<S>                                            <C>                <C>                     <C>                <C>
Noninterest bearing..........................  $    236,629,942   $             --        $  230,677,853     $           --
                                               ----------------   ----------------       ---------------    ---------------
Interest bearing:
  Interest checking..........................  $    249,730,679   $      5,922,093        $  255,400,188     $    6,055,642
  Money market accounts......................       145,801,585          4,756,607           178,780,922          5,521,296
  Regular savings............................       184,418,437          6,191,079           210,831,163          6,778,585
  Certificates of deposit:
    Less than $100,000.......................       631,766,052         32,263,058           524,270,459         22,619,731
    $100,000 and more........................       135,129,856          6,668,853            91,111,115          4,311,830
                                               ----------------   ----------------       ---------------    ---------------
      Total interest bearing.................  $  1,346,846,609   $     55,801,690        $1,260,393,847     $   45,287,084
                                               ----------------   ----------------       ---------------    ---------------
      Total deposits.........................  $  1,583,476,551   $     55,801,690        $1,491,071,700     $   45,287,084
                                               ================   ================       ===============    ===============
</TABLE>

<TABLE>
<CAPTION>


                                                        December 31, 1993
                                               -----------------------------------
                                                    Amount             Expense
                                               ----------------   ----------------
<S>                                            <C>                <C>
Noninterest bearing..........................  $    207,612,849   $             --
                                               ----------------   ----------------
Interest bearing:
  Interest checking..........................  $    244,199,787   $      5,359,548
  Money market accounts......................       191,990,777          5,037,999
  Regular savings............................       214,680,894          5,699,203
  Certificates of deposit:
    Less than $100,000.......................       515,220,658         22,923,820
    $100,000 and more........................        91,582,333          3,906,594
                                               ----------------   ----------------
      Total interest bearing.................  $  1,257,674,449   $     42,927,164
                                               ----------------   ----------------
      Total deposits.........................  $  1,465,287,298   $     42,927,164
                                               ================   ================
</TABLE>


Note 8 -- Short-Term Borrowings

      The  Corporation had unused lines of credit totaling  $9,000,000  with
nonaffiliated  banks at December 31, 1995. In addition, the Corporation has
unused lines of credit totaling $225,883,775 with the Federal Home Loan Bank.

Note 9 -- Long-Term Debt

      In 1994,  some of the  Corporation's  subsidiary  banks joined the Federal
Home Loan Bank system in order to enter a program of long-term  borrowing  which
is restricted to be invested in Residential  Housing Finance Assets (RHFA). RHFA
are  defined  as  (1)  Loans  secured  by   residential   real   property;   (2)
Mortgage-backed  securities;  (3) Participations in loans secured by residential
real property;  (4) Loans financed by Community Investment Program advances; (5)
Loans  secured by  manufactured  housing,  regardless  of whether  such  housing
qualifies as residential  real property;  or (6) Any loans or investments  which
the Federal Housing Finance Board and the Bank, in their  discretion,  otherwise
determine to be residential housing finance assets.  Borrowings from the Federal
Home Loan Bank system for RHFA  investments  totaled  $3,225,000 at December 31,
1995,  maturing  through 2006. The interest rate on the notes payable range from
7.32% to 8.19% at December 31, 1995.  Principal payments on the notes are due as
follows:

     1996                                        $      350,000
     1997                                               350,000
     1998                                               350,000
     1999                                               350,000
     2000                                               350,000
     Later years                                      1,475,000
                                                 --------------
                                                 $    3,225,000
                                                 ==============


Note 10 -- Business Combinations

      On April 6, 1995,  F&M completed its  acquisition  of Bank of the Potomac,
Inc.  (Potomac).  Potomac  was a  state-chartered  commercial  bank.  F&M issued
872,187  shares of common stock based on an exchange  ratio of 2.5168  shares of
F&M common shares for each share of Potomac common stock.  The  transaction  was
accounted for using the pooling-of-interests method of accounting.  Accordingly,
the financial  statements of F&M have been restated for all reported  periods to
reflect  the  acquisition.  Total  assets and the results of  operations  of the
separate entities prior to the combination are summarized as follows:

<TABLE>
<CAPTION>

                                                         March 31,
                                                           1995            December 31,
                                                        (Unaudited)            1994
                                                      --------------     --------------
<S>                                                    <C>               <C>
Total assets:
  F&M National Corporation........................     $1,670,856,870    $1,650,903,642
 Bank of Potomac..................................         54,330,572        57,588,866
                                                       --------------    --------------
                                                       $1,725,187,442    $1,708,492,508
                                                       ==============    ==============
</TABLE>

<TABLE>
<CAPTION>

                                      March 31,            Years Ended December 31,
                                        1995           --------------------------------
                                     (Unaudited)            1994               1993
                                   ---------------     --------------    --------------
<S>                                <C>                 <C>               <C>
Net interest income:
  F&M National Corporation.......  $    18,538,407     $   70,792,933    $   61,583,480
  Bank of Potomac................          649,325          2,389,670         2,335,147
                                   ---------------     --------------    --------------
                                   $    19,187,732     $   73,182,603    $   63,918,627
                                   ===============     ==============    ==============
Net income:
  F&M National Corporation.......  $     5,781,787     $   20,233,231    $   18,269,804
  Bank of Potomac................          187,416            467,645           461,695
                                   ---------------     --------------    --------------
                                   $     5,969,203     $   20,700,876    $   18,731,499
                                   ===============     ==============    ==============
</TABLE>


      On  July  1,  1994,  F&M  completed  its  acquisitions  of  PNB  Financial
Corporation (PNB) and Hallmark Bank & Trust Company  (Hallmark).  PNB was a bank
holding  company  organized  under  Virginia  law which  conducted a  commercial
banking business through its wholly-owned subsidiary,  The Peoples National Bank
of Warrenton.  F&M issued  1,193,431 shares of common stock based on an exchange
ratio of 2.3683  shares of F&M common shares for each share of PNB common stock.
Hallmark was a  state-chartered  commercial bank. F&M issued 1,107,414 shares of
common stock based on an exchange  ratio of 0.6406  shares of F&M common  shares
for each share of Hallmark  common stock.  The  transactions  were accounted for
using the pooling-of-interests method of accounting.  Accordingly, the financial
statements  of F&M have been  restated for all  reported  periods to reflect the
acquisition.

      On September 1, 1993,  F&M completed  its  acquisition  of First  National
Bankshares,  Inc.  (First  National).  First National was a bank holding company
organized  under  Virginia  law which  conducted a commercial  banking  business
through its wholly-owned national banking association subsidiary, First National
Bank of Emporia.  F&M issued 665,568 shares of common stock based on an exchange
ratio of 3.096  shares of F&M common  shares  for each  share of First  National
common stock.  The transaction was accounted for using the  pooling-of-interests
method of  accounting.  Accordingly,  the financial  statements of F&M have been
restated for all reported periods to reflect the acquisition.

      On September 18, 1993, F&M completed its acquisition of substantially  all
the assets and assumed certain  liabilities of Farmers & Merchants National Bank
of Hamilton  (Hamilton  Bank) in  exchange  for  $7,095,620  worth of F&M common
stock.  The excess of the total  acquisition cost over the fair value of the net
assets  acquired  of  $5,239,496  is  being  amortized  over  15  years  by  the
straight-line  method.  The acquisition has been accounted for as a purchase and
results  of  operations  of  Hamilton  Bank  since the date of  acquisition  are
included in the consolidated financial statements.

Note 11 -- Stock Options

      The  Corporation  sponsors a stock  option  plan,  which  provides for the
granting of both incentive and nonqualified  stock options to executive officers
and key  employees  of the Company  and its  Subsidiaries.  The option  price of
incentive  options  will not be less than the fair market  value of the stock at
the time an option is  granted.  Nonqualified  options may be granted at a price
established by the Board of Directors including prices less than the fair market
value on the date of grant.  There were no incentive  stock options  outstanding
during  1995,  1994 and 1993.  The plan  expense  for 1995,  1994,  and 1993 was
$102,806,  $125,422,  and  $100,910,  respectively.

Stock  Option Plan  Summary (adjusted for 1994 2 1/2% stock dividend)
<TABLE>
<CAPTION>


                                                                           1995                1994               1993
                                                                          -------            -------            -------
<S>                                                                       <C>                <C>                <C>
Options outstanding beginning of year...............................       92,363             71,276             78,490
Options granted.....................................................       26,000             26,650             10,250
Options exercised (none expired)....................................       13,323              5,563             17,464
                                                                          -------            -------            -------
Options outstanding and exercisable.................................      105,040             92,363             71,276
Options available for grant.........................................      193,350            219,350            246,000

</TABLE>


At December 31, 1995,  options  outstanding  ranged in price from $4.88 to $8.42
per share.

Note 12 -- Employee Benefit Plans

      F&M National  Corporation and its affiliates  have a defined  contribution
retirement plan covering substantially all full-time employees and provides that
employees automatically become eligible to participate on January 1 or July 1 as
of the date they  reach age 18 and  complete  12  months of  service,  whichever
occurs last.  The plan was amended in 1989 to add a 401(k) or deferred  feature.
Under the plan, a participant  may contribute to the plan an amount up to 10% of
his covered compensation for the year, subject to certain limitations.  For each
year in which the employee  makes a contribution  to the plan,  the  Corporation
will make a matching  contribution.  The  Corporation  may also make, but is not
required to make, a discretionary  contribution  for each participant out of its
current or accumulated net profits. The amount of the matching  contribution and
discretionary  contribution,  if any, is  determined  on an annual  basis by the
Board of Directors.

      The total plan expense for 1995,  1994 and 1993,  was $181,850,  $115,300,
and $732,350,  respectively.

      In 1994, the Corporation adopted an Employee Stock Ownership Plan (ESOP)
covering substantially all full-time employees  and  providing  that  employees
automatically  become  eligible  to participate on January 1 or July 1 as of the
date they reach age 18 and complete 12 months of service,  whichever  occurs
last. The  Corporation may make, but is not required to make, a discretionary
contribution  for each participant out of its  current  or  accumulated  net
profits.   The  total  contribution  may  be contributed in cash or corporate
common stock.  The amount of the  discretionary contribution,  if  any,  is
determined  on an  annual  basis  by the  Board  of Directors.

      The total  plan  expense  for 1995 and 1994 was  $917,600,  and  $699,800,
respectively.

      In 1993, the Corporation adopted an Employee Stock Discount Plan. The Plan
offers eligible  employees of the Corporation the opportunity to purchase common
stock through payroll deduction. The price of the shares purchased is the lesser
of 85% of the market price of the shares as determined under the plan at January
1 of the  calendar  year of purchase or 85% of the market price of the shares as
determined  under the plan at  December  31 of the  calendar  year of  purchase.
Employees automatically become eligible to participate on January 1 or July 1 as
of the date they  reach age 18 and  complete  12  months of  service,  whichever
occurs last. A regular employee is one who is customarily employed for more than
20 hours per week and more than five months per year. All officers and directors
who are eligible  employees  may  participate.  35,357 shares were issued during
1995 at a discount  of  $84,192.  16,755  shares  were  issued  during 1994 at a
discount of  $39,897.  15,458  shares  were issued  during 1993 at a discount of
$37,679.  The number of shares  available  to be issued in future  years  totals
188,293.

Note  13  --  Executive  Incentive   Compensation  Plan  and  Deferred
Compensation Plan

      The Executive Incentive  Compensation Plan of F&M National Corporation was
established  for the purpose of attracting  and retaining  key  executives.  The
executives and the amounts of the awards  (subject to limits as set forth in the
Plan) are  determined  by a Committee  composed of members of the  Corporation's
Board of Directors who are not employees.  The aggregate cash awards amounted to
$844,772 in 1995, $644,768 in 1994, and $542,457 in 1993.

      In addition, deferred compensation plans have been adopted for certain key
employees which provide that benefits are to be paid in monthly installments for
15  years  following  retirement  or  death.  The  agreement  provides  that  if
employment is terminated for reasons other than death or disability prior to age
65,  the  amount  of  benefits  would be  reduced  or  forfeited.  The  deferred
compensation expense for 1995, 1994, and 1993, based on the present value of the
retirement benefits,  amounted to approximately $517,981, $240,315 and $331,753,
respectively. The plan is unfunded. However, life insurance has been acquired on
the lives of these employees in amounts  sufficient to discharge the obligations
thereunder.

Note 14 -- Lease Commitments and Contingent Liabilities

      The  Corporation  and  Subsidiaries  were  obligated  under  a  number  of
noncancelable   leases  mainly  for  various  banking  premises  and  equipment.
Facilities leases,  including renewal options, expire through 2008. Total rental
expense for operating leases for 1995, 1994 and 1993, was $1,158,160, $1,194,774
and $1,192,141,  respectively.  Minimum rental  commitments under  noncancelable
leases  with  terms in  excess  of one year as of  December  31,  1995,  were as
follows:

                         Year                       Operating Leases
           --------------------------------      --------------------

           1996............................        $         736,035
           1997............................                  678,282
           1998............................                  667,597
           1999............................                  542,449
           2000............................                  442,412
           Later years.....................                  699,486
                                                   -----------------
           Total minimum payments..........        $       3,766,261
                                                   =================



      In the normal course of business,  there are other outstanding 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.

      As members of The Federal Reserve  System,  the  Corporation's  subsidiary
banks are required to maintain certain average reserve  balances.  For the final
weekly  reporting  period in the years ended  December  31,  1995 and 1994,  the
aggregate  amounts  of  daily  average  required  balances  were   approximately
$18,491,000 and $10,400,000, respectively.

Note 15 -- Income Taxes

      Effective  January  1,  1993,  the  Corporation   adopted  FASB  No.  109,
"Accounting  for Income  Taxes."  The  adoption  of this  statement  changes the
Corporation's  method of accounting for income taxes from the deferred method to
a liability method. Under the deferred method, the Corporation deferred the past
tax  effects of timing  differences  between  financial  reporting  and  taxable
income. As explained in Note 1, the liability method requires the recognition of
deferred tax assets and liabilities for the expected future tax  consequences of
temporary differences between the reported amounts of assets and liabilities and
their tax bases. The cumulative effect of the change in accounting  principle is
immaterial in determining net income for the year ended December 31, 1993.

      Net deferred tax assets consist of the following components as of December
31, 1995 and 1994:

<TABLE>
<CAPTION>

                                                                           1995                  1994
                                                                    -----------------   ------------------
<S>                                                                 <C>                 <C>
Deferred tax assets:
  Provision for loan losses......................................   $       4,980,713   $        5,027,276
  Salary continuation plan.......................................             901,926              733,871
  Nonaccrual interest............................................             281,960              304,169
  Insurance commissions..........................................              85,412              113,370
  Securities available for sale..................................                  --            3,658,562
  Other..........................................................             327,931              315,920
                                                                    -----------------   ------------------
                                                                    $       6,577,942   $       10,153,168
                                                                    -----------------   ------------------


Deferred tax liabilities:
  Depreciation...................................................   $         788,926   $          737,590
  Bond discount accretion........................................              25,931               57,662
  Excess tax basis - acquisition.................................             486,323              421,956
  Securities available for sale..................................           1,965,040                   --
  Other..........................................................              23,843               25,475
                                                                    -----------------   ------------------
                                                                    $       3,290,063   $        1,242,683
                                                                    -----------------   ------------------
                                                                    $       3,287,879   $        8,910,485
                                                                    =================   ==================
</TABLE>

      The provision for income taxes charged to operations for the years ended
December 31, 1995,  1994 and 1993 consist of the following:

<TABLE>
<CAPTION>

                                                                            1995              1994                1993
                                                                      ---------------    ---------------    ---------------
<S>                                                                   <C>                <C>                <C>
Current tax expense.................................................  $    11,678,433    $     8,705,506    $     9,689,680
Deferred tax (benefit)..............................................             (996)         1,270,662           (845,501)
                                                                      ---------------    ---------------    ---------------

                                                                      $    11,677,437    $     9,976,168    $     8,844,179
                                                                      ===============    ===============    ===============
</TABLE>


      The income tax provision  differs from the amount of income tax determined
by  applying  the federal  income tax rate to pretax  income for the years ended
December 31, 1995, 1994 and 1993 due to the following:

<TABLE>
<CAPTION>

                                                                            1995              1994                1993
                                                                      ---------------    ---------------    ---------------
<S>                                                                         <C>               <C>                 <C>
Computed "expected" tax expense.....................................        35.0%             35.0%               35.0%
Increase (decrease) in income taxes resulting from:
  Tax-exempt interest...............................................        (2.3)             (3.1)               (3.8)
  Nondeductible merger expenses.....................................          .2                .5                  .6
  Other, net........................................................          .4                .1                  .3
                                                                      ---------------    ---------------    ---------------

                                                                            33.3%             32.5%               32.1%
                                                                      ===============    ===============    ===============
</TABLE>


Note 16 -- Restrictions on Transfers to Parent

      Transfer of funds from banking  subsidiaries 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, 1995, the aggregate amount of
unrestricted   funds  which  could  be   transferred   from  the   Corporation's
subsidiaries  to the Parent  Corporation,  without  prior  regulatory  approval,
totaled  $35,405,811  or  18.3%  of the  consolidated  net  assets.

Note  17 -- Financial Instruments With Off-Balance-Sheet Risk

      The Corporation and Subsidiaries  are party to financial  instruments with
off-balance-sheet  risk in the normal  course of business to meet the  financing
needs of its  customers  and to  reduce  its own  exposure  to  fluctuations  in
interest  rates.  These  financial  instruments  include  commitments  to extend
credit,  standby letters of credit and financial  guarantees.  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  and
Subsidiaries have in particular classes of financial instruments.

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

      Unless noted  otherwise,  the Corporation and  Subsidiaries do not require
collateral or other security to support financial instruments with credit risk.

      A summary  of the  contract  or  notional  amount of the  Corporation  and
Subsidiaries'  exposure to  off-balance-sheet  risk as of December  31, 1995 and
1994, is as follows:

<TABLE>
<CAPTION>

                                                                                              1995                1994
                                                                                         ---------------    ---------------
<S>                                                                                      <C>                <C>
Financial instruments whose contract amounts represent credit risk:
  Commitments to extend credit.......................................................    $   270,275,196    $   221,489,016
  Standby letters of credit and financial guarantees written.........................    $    12,436,159    $    10,219,138

</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 and Subsidiaries  evaluate
each  customer's  credit  worthiness  on a  case-by-case  basis.  The  amount of
collateral  obtained,  if deemed  necessary by the Corporation and  Subsidiaries
upon  extension of credit,  is based on  management's  credit  evaluation of the
counterparty.  Collateral  held  varies  but may  include  accounts  receivable,
inventory, property and equipment, and income-producing commercial properties.

      Standby letters of credit and financial guarantees written are conditional
commitments  issued  by  the  Corporation  and  Subsidiaries  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 and Subsidiaries hold
marketable  securities  as collateral  supporting  those  commitments  for which
collateral  is  deemed  necessary.  The  extent  of  collateral  held for  those
commitments  at December  31, 1995,  varies from 0 percent to 100  percent;  the
average amount collateralized is 53 percent.

Note 18 -- Credit Risk

      As of December 31, 1995, the Corporation  had a concentration  of loans in
non-farm,  non-residential  loans,  consisting  primarily  of  commercial  loans
secured by real estate of $299,096,000 which were in excess of 10 percent of the
total loan  portfolio.  The  Corporation  does not engage in any foreign lending
activities.

      As of December 31, 1995, the  Corporation  had  $17,243,628 in deposits in
financial  institutions  in excess of  amounts  insured by the  Federal  Deposit
Insurance Corporation (FDIC).

Note 19 -- Disclosures About Fair Value of Financial Instruments

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

Cash and Short-Term Investments

      For those  short-term  instruments,  the carrying  amount is a reasonable
estimate of fair value.

Investment Securities and Securities Available for Sale

      For  securities  and  marketable  equity  securities  held for  investment
purposes,  fair values are based on quoted market prices or dealer  quotes.  For
other securities held as investments,  fair value equals quoted market price, if
available.  If a quoted market price is not  available,  fair value is estimated
using quoted market prices for similar securities.

Loan Receivables

      For certain  homogeneous  categories  of loans,  such as some  residential
mortgages,  credit card  receivables,  and other consumer  loans,  fair value is
estimated using the quoted market prices for securities backed by similar loans,
adjusted for differences in loan characteristics.  The fair value of other types
of loans is  estimated  by  discounting  the future cash flows using the current
rates at which  similar  loans would be made to borrowers  with  similar  credit
ratings and for the same remaining maturities.

Deposit Liabilities

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

Off-Balance Sheet Financial Instruments

      The fair value of commitments to extend credit is estimated using the fees
currently charged to enter similar agreements, taking into account the remaining
terms of the agreements and the present credit worthiness 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 stand-by  letters of credit is based on fees  currrently
charged for similar  agreements  or on the estimated  cost to terminate  them or
otherwise settle the obligations with the counterparties at the reporting date.

      The  carrying  amount  is a  reasonable  estimate  of the  fair  value  of
securities loaned.

      At December  31, 1995 and 1994,  the  carrying  amounts and fair values of
loan  commitments,  stand-by  letters  of credit,  and  securities  loaned  were
immaterial.

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

<TABLE>
<CAPTION>

                                                                 1995                                   1994
                                                  -----------------------------------  ------------------------------------
                                                      Carrying             Fair             Carrying              Fair
                                                       Amount              Value             Amount               Value
                                                  ----------------  -----------------    ---------------    ---------------
                                                                           (Dollars in thousands)
<S>                                               <C>                <C>                <C>                 <C>
Financial assets:
  Cash and short-term investments..............   $        146,134   $        146,134   $        122,547    $       122,547
  Investments securities.......................            292,865            301,036            293,654            281,521
  Securities available for sale................            276,404            276,404            220,834            220,834
  Loans........................................          1,053,829          1,062,259          1,009,223            987,281
  Less: allowance for loan losses..............            (15,016)                --            (15,463)                --
                                                  ----------------  -----------------   ----------------    ---------------
        Total financial assets.................   $      1,754,216   $      1,785,833   $      1,630,795    $     1,612,183
                                                  ================  =================   ================    ===============

Financial liabilities:
  Deposits.....................................   $      1,583,477   $      1,583,511   $      1,491,072    $     1,486,459
  Federal funds purchased and securities sold
    under agreement to repurchase..............             15,089             15,089             20,543             20,543
  Other short-term borrowings..................             18,792             18,792             14,879             14,879
  Federal home loan bank advances..............              4,737              4,737                875                875
  Long-term debt...............................              3,225              2,930              3,194              3,194
                                                  ----------------  -----------------   ----------------    ---------------
        Total financial liabilities............   $      1,625,320   $      1,625,059   $      1,530,563    $     1,525,950
                                                  ================  =================   ================    ===============
</TABLE>


Note 20 -- Derivative Financial Instruments

      In October,  1994, FASB No. 119,  "Disclosure  about Derivative  Financial
Instruments and Fair Value of Financial  Instruments" was issued.  The statement
is  effective  for  financial  statements  issued for fiscal  years ending after
December 15, 1994. It requires  various  disclosures  for  derivative  financial
instruments  which are futures,  forward,  swap,  or option  contract,  or other
financial  instruments  with similar  characteristics.  The Corporation does not
have any derivative financial instruments as defined under this statement.

Note 21 -- Proposed Merger

      FB&T Financial  Corporation (FB&T) and the Corporation have entered into a
Definitive Agreement and Plan of Reorganization,  dated November 22, 1995, and a
related  Plan of  Share  Exchange  (collectively,  the  Merger  Agreement).  The
transaction   is  subject  to  the  approval  of  regulatory   authorities   and
shareholders of FB&T. The proposed merger will entitle the  shareholders of FB&T
to receive, in a tax-free exchange, shares of F&M common stock with an aggregate
market value equal to $35.00, with cash being paid in lieu of issuing fractional
shares.  The market value of F&M common stock will be its average  closing price
as reported  on the New York Stock  Exchange  for each of the ten  trading  days
immediately  preceding the closing  date. As of December 31, 1995,  FB&T's total
assets were  $243,069,000,  total loans were  $149,062,000,  total deposits were
$191,514,000 and total shareholders' equity was $16,934,000.

Note 22 -- Condensed Financial Information -- Parent Company Only

                            F&M NATIONAL CORPORATION
                            (Parent Corporation Only)

                                 BALANCE SHEETS
                           December 31, 1995 and 1994
<TABLE>
<CAPTION>

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

<S>                                                                                      <C>                <C>
Assets
  Cash on deposit with subsidiary banks..............................................    $       174,705    $        62,427
  Investment in subsidiaries, at cost, plus equity in undistributed net income.......        180,525,423        158,358,982
  Securities available for sale, at lower of cost or market..........................          8,876,336          6,128,599
  Other short-term investments.......................................................         22,415,000         15,036,000
  Bank premises and equipment, net...................................................          1,408,160          3,988,661
  Intangible, goodwill, at amortized cost............................................            668,516            757,246
  Other assets.......................................................................          3,256,584          3,209,946
                                                                                         ---------------    ---------------
                 Total assets........................................................    $   217,324,724    $   187,541,861
                                                                                         ===============    ===============
Liabilities and Shareholders' Equity

Liabilities
  Short-term borrowings..............................................................    $    18,462,000    $    14,671,000
  Dividends payable..................................................................          2,643,492          2,351,822
  Other liabilities..................................................................          2,736,737          1,530,066
                                                                                         ---------------    ---------------
                Total liabilities....................................................    $    23,842,229    $    18,552,888
                                                                                         ---------------    ---------------

Shareholders' Equity
  Preferred stock....................................................................    $            --    $            --
  Common stock.......................................................................         33,104,648         32,965,190
  Capital surplus....................................................................         57,680,810         56,893,066
  Retained earnings, which are substantially undistributed earnings
    of subsidiaries..................................................................         99,229,815         85,913,709
  Unrealized gain (loss) on securities available for sale, net.......................          3,467,222         (6,782,992)
                                                                                         ---------------    ---------------
                Total shareholders' equity...........................................    $   193,482,495    $   168,988,973
                                                                                         ---------------    ---------------

                Total liabilities and shareholders' equity...........................    $   217,324,724    $   187,541,861
                                                                                         ===============    ===============
</TABLE>



                            F&M NATIONAL CORPORATION
                            (Parent Corporation Only)
                              STATEMENTS OF INCOME
       For Each of the Three Years in the Period Ended December 31, 1995

<TABLE>
<CAPTION>

                                                                                           December 31,
                                                                     ------------------------------------------------------

                                                                            1995              1994                1993
                                                                      ---------------    ---------------    ---------------

<S>                                                                   <C>                <C>                <C>
Revenue
  Dividends from subsidiaries.......................................  $    10,980,591    $     8,658,100    $     6,842,800
  Interest on other short-term investments..........................          769,557            644,529            392,493
  Interest and dividends on securities available for sale...........          342,713            317,948            303,810
  Management fees from subsidiaries.................................        2,115,916          1,166,400            759,500
  Rental income from subsidiaries...................................          402,550            426,300            426,100
  Other revenue.....................................................            4,523             16,050              9,713
                                                                      ---------------    ---------------    ---------------
                 Total revenue......................................  $    14,615,850    $    11,229,327    $     8,734,416
                                                                      ---------------    ---------------    ---------------
Expenses
  Salaries and employee benefits....................................  $     1,817,236    $       990,377    $       528,536
  Directors` fees...................................................          188,408            204,050            228,867
  Taxes (other than income).........................................           41,124             42,577             45,245
  Bank building rental expense......................................               --                 --             36,454
  Interest..........................................................          367,097            346,421            306,157
  Amortization of goodwill..........................................           59,877             59,877             65,843
  Depreciation......................................................          100,881             96,780             97,083
  Merger expenses...................................................          269,958            461,195            288,568
  Other expenses....................................................          491,206            715,747            257,331
                                                                      ---------------    ---------------    ---------------
                 Total expenses.....................................  $     3,335,787    $     2,917,024    $     1,854,084
                                                                      ---------------    ---------------    ---------------

                Income before income taxes and equity
                    in undistributed net income of subsidiaries.....  $    11,280,063    $     8,312,303    $     6,880,332

Income Tax Expense..................................................          309,292             84,854            147,963
                                                                      ---------------    ---------------    ---------------

                Income before equity in undistributed
                    net income of subsidiaries......................  $    10,970,771    $     8,227,449    $     6,732,369

Equity in Undistributed Net Income of Subsidiaries..................       12,461,378         12,473,427         11,999,130
                                                                      ---------------    ---------------    ---------------

                Net income..........................................  $    23,432,149    $    20,700,876    $    18,731,499
                                                                      ===============    ===============    ===============
</TABLE>



                            F&M NATIONAL CORPORATION
                            (Parent Corporation Only)
                            STATEMENTS OF CASH FLOWS
       For Each of the Three Years in the Period Ended December 31, 1995

<TABLE>
<CAPTION>

                                                                                           December 31,
                                                                     ------------------------------------------------------

                                                                            1995              1994                1993
                                                                      ---------------    ---------------    ---------------
<S>                                                                   <C>                <C>                <C>
Cash Flows From Operating Activities
 Net income.........................................................  $    23,432,149    $    20,700,876    $    18,731,499
  Adjustments to reconcile net income to net cash provided
    by operating activities:
      Depreciation..................................................          100,881             96,780             97,083
      Amortization..................................................           59,877             59,877             65,843
      Deferred income taxes (credits)...............................         (159,274)          (182,986)            30,665
      Discount accretion............................................           (3,383)            (3,183)            (2,870)
      Undistributed net income of subsidiaries......................      (12,461,378)       (12,473,427)       (11,999,130)
      (Increase) decrease in goodwill...............................           28,853             23,864           (357,962)
      (Increase) decrease in other assets...........................          519,076         (2,364,144)            27,984
      Increase in other liabilities.................................        1,206,671          1,626,463            106,679
                                                                      ---------------    ---------------    ---------------

          Net cash provided by operating activities.................  $    12,723,472    $     7,484,120    $     6,699,791
                                                                      ---------------    ---------------    ---------------

Cash Flows From Investing Activities
  (Increase) decrease in investment in subsidiaries.................  $      (396,808)   $       525,390    $       116,142
  Purchase of securities available for sale.........................       (1,802,395)          (734,438)           (15,000)
  (Increase) decrease in other short-term investments...............       (7,379,000)            31,000         (2,391,000)
  Proceeds from sale of equipment to subsidiaries...................        2,771,841            387,000                 --
  Purchase of bank premises and equipment...........................         (292,221)           (89,650)           (95,272)
                                                                      ---------------    ---------------    ---------------

          Net cash provided by (used in) investing activities.......  $    (7,098,583)   $       119,302    $    (2,385,130)
                                                                      ---------------    ---------------    ---------------

Cash Flows From Financing Activities
  Increase in short-term borrowings.................................  $     3,791,000    $     1,488,000    $     1,263,000
  Net proceeds from issuance and sale of common stock...............        3,592,979          2,171,645          1,443,159
  Acquisition of common stock.......................................       (3,072,217)        (2,815,487)                --
  Cash dividends paid...............................................       (9,824,373)        (8,408,729)        (6,940,289)
  Cash paid for fractional shares...................................               --            (57,761)                --
                                                                      ---------------    ---------------    ---------------

          Net cash (used in) financing activities...................  $    (5,512,611)   $    (7,622,332)   $    (4,234,130)
                                                                      ---------------    ---------------    ---------------
          Increase (decrease) in cash and cash equivalents..........  $       112,278    $       (18,910)   $        80,531

Cash and Cash Equivalents
 Beginning..........................................................           62,427             81,337                806
                                                                      ---------------    ---------------    ---------------

 Ending.............................................................  $       174,705    $        62,427    $        81,337
                                                                      ===============    ===============    ===============
Supplemental Disclosures of Cash Flow Information
 Cash payments for interest.........................................  $       367,097    $       346,421    $       306,157
                                                                      ===============    ===============    ===============
Supplemental Schedule of Noncash Investing and
 Financing Activities
 Issuance of stock options under nonvariable compensatory plan......  $       206,440    $       211,120    $        86,200
                                                                      ===============    ===============    ===============
 Retirement of stock options under nonvariable compensatory
    plan............................................................  $            --    $            --    $         8,000
                                                                      ===============    ===============    ===============
 Common stock issued in exchange for net assets in bank
    acquisition.....................................................  $            --    $            --    $     7,095,620
                                                                      ===============    ===============    ===============
 Issuance of common stock to acquire investment.....................  $       200,000    $            --    $       337,909
                                                                      ===============    ===============    ===============
 Common stock issued for 2 1/2% stock dividend......................  $            --    $     6,001,278    $            --
                                                                      ===============    ===============    ===============
 Unrealized gain (loss) on securities available for sale............  $       941,959    $      (350,506)   $            --
                                                                      ===============    ===============    ===============
</TABLE>



                          INDEPENDENT AUDITOR'S REPORT


To the Shareholders and Directors
  of F&M National Corporation
Winchester, Virginia


      We have  audited  the  accompanying  consolidated  balance  sheets  of F&M
National  Corporation and Subsidiaries as of December 31, 1995 and 1994, and the
related consolidated  statements of income, changes in shareholders' equity, and
cash flows for the years ended December 31, 1995, 1994 and 1993. 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 F&M National
Corporation  and  Subsidiaries as of December 31, 1995 and 1994, and the results
of its operations and its cash flows for the years ended December 31, 1995, 1994
and 1993, in conformity with generally accepted accounting principles.

      As discussed in Note 1, the  Corporation  changed its method of accounting
for  investments  in debt and  equity  securities  to adopt  the  provisions  of
Statement of Financial  Accounting  Standards No. 115,  "Accounting  for Certain
Investments in Debt and Equity Securities" in 1994.


Winchester, Virginia                         /s/ YOUNT, HYDE & BARBOUR, P.C.
January 31, 1996                             YOUNT, HYDE & BARBOUR, P.C.



F&M NATIONAL CORPORATION


DIRECTORS:

Frank Armstrong, III
Chairman, President, and Chief Executive Officer,
National Fruit Product Company, Inc.

James L. Bowman
Real Estate Developer

Betty H. Carroll
Senior Vice President, F&M National Corporation;
President and Chief Executive Officer,
F&M Bank-Winchester

W. H. Clement
Vice Chairman, Hidden Creek
Industries, Inc.

W. M. Feltner
Chairman of the Board and Chief Executive Officer,
 F&M National Corporation;
Chairman of the Board, F&M Bank-Winchester

William R. Harris
President and Chairman of the Board,
Harris Heating and Plumbing, Inc.

L. David Horner, III
Chairman, Horner Properties, Inc.

Jack R. Huyett
President and Chief Administrative Officer,
F&M National Corporation;
Vice Chairman of the Board,
F&M Bank-Winchester

William A. Julias
Senior Member, Julias, Blatt & Wolfe, P.C., Attorneys at Law

George L. Romine
Consultant, Sales Management

John S. Scully, III
President, Winchester Cold Storage Co., Inc.

J. D. Shockey, Jr.
President, Shockey Industries, Inc.

Fred G. Wayland, Jr.
Retired President, Peoples National Bank of Warrenton

C. Ridgely White
Vice Chairman of the Board, F&M National Corporation

F. Dixon Whitworth, Jr.
Executive Vice President, F&M National Corporation


OFFICERS:

W. M. Feltner
Chairman of the Board and
Chief Executive Officer

C. Ridgely White
Vice Chairman of the Board

Jack R. Huyett
President and Chief Administrative Officer

F. Dixon Whitworth, Jr.
Executive Vice President

Betty H. Carroll
Senior Vice President

Alfred B. Whitt
Senior Vice President,
Senior Financial Officer, Secretary

Barbara H. Ward
Treasurer

M. Lee Boppe
Independent Loan Review Officer

Jack W. Lee, Jr.
Vice President-Auditor

Sally B. Stryker
Assistant Vice President-Audit

Penny E. Myers
EDP Auditor

<PAGE>

F&M BANK-WINCHESTER

DIRECTORS:

Frank Armstrong, III
Betty H. Carroll
W. H. Clement
W. M. Feltner
Mary M. Henkel
Jack R. Huyett
Joseph E. Kalbach
I. Clinton Miller
Ray Robinson, Jr.
George L. Romine
J. D. Shockey, Jr.
William A. Truban, DVM
Alfred B. Whitt
F. Dixon Whitworth, Jr.

Directors Emeriti:

B.B. Byrd
J. Lee Miller

OFFICERS:
W. M. Feltner
Chairman of the Board

Jack R. Huyett
Vice Chairman of the Board

Betty H. Carroll
President and Chief Executive Officer


ADMINISTRATIVE:

Alfred B. Whitt
Senior Vice President,
Senior Financial Officer, Secretary

Robert W. Lake
Senior Vice President
Business Development

Barbara H. Ward
Senior Vice President

LOANS:

Richard B. Wiltshire, Jr.
Senior Vice President-Loans

Frances H. Fortune
Senior Vice President-Credit

Robert E. Lee
Senior Vice President-Loans

Fay H. DeHaven
Vice President-Loans

Luther F. Dorsey
Vice President-Loans

Romaine S. Hess
Vice President-Loan Operations

Steven D. Tavenner
Vice President-Loans

OPERATIONS:

Peggy J. Marcus
Senior Vice President-Cashier

Bruce B. Barley
Security Officer

Colleen M. Bly
Director of Human Resources

Shelby C. Hodgson
Vice President-Branch Coordinator

Gregory D. Price
Compliance Officer

Arvilla B. Rinker
Vice President-Operations

Linda P. Russell
Vice President

Roger W. Shenk
Manager-Printing Department

Paul E. Shifflett
Vice President-Controller

J. Michael Snapp
ATM Coordinator


CHARGE CARDS:

Charles R. Roberson
Senior Vice President-Charge Cards

C. Ridgely White, Jr.
Vice President-Charge Cards

Margaret J. Linster
Assistant Vice President-
Charge Cards

DATA PROCESSING:

G. Hollis Mock
Vice President-Data Processing

MONEY MANAGEMENT:

Linda G. Jones
Vice President

MARKETING:

Jill A. Feltner
Marketing Director

Miles R. Orndorff, Jr.
Public Relations Director

TRUSTS:

Marshall J. Beverley, Jr.
Senior Vice President-Trust

Richard A. Farland
Senior Vice President-Trust-
Investments

W. Blake Curtis
Trust Officer

J. Blackwell Davis, Jr.
Trust Officer

Martha J. Burroughs
Assistant Vice President-
Trust Officer

Sarah V. Propps
Assistant Vice President-
Trust Officer

Dena J. Parsons
Employee Benefit Officer


BRANCH OFFICES:

WINCHESTER:

Main Office:
Cindy C. Jeter
Branch Manager

Apple Blossom Mall:

Steven T. Jones
Branch Manager-Day

Patricia L. Copp
Branch Manager-Night

Berryville Avenue:

Mollie H. Cain
Branch Manager

Fort Collier:

Larry P. Anderson
Vice President and
Branch Manager

Willa M. Banks
Assistant Branch Manager

James Wood:

Mary C. Allowatt
Branch Manager

Loudoun Street:

Phyllis M. Kaval
Branch Manager

Piccadilly Street:

Betty C. Martin
Branch Manager

Pleasant Valley:

Robbin P. McKee
Branch Manager

Pleasant Valley
Drive-In:

Sharon W. Harris
Branch Manager

Senseny Road:

Thomas E. Thayer
Branch Manager

Shawnee:

James L. Dix
Vice President-Loans

Louise B. Cheely
Branch Manager

Westminster Canterbury:

Margaret S. Carpenter
Branch Manager

CLARKE COUNTY:

Berryville:

William W. Fuller
Vice President and Branch Manager

FREDERICK COUNTY:

Gore:

Nancy L. Largent
Branch Manager


Middletown:

Judy A. Paige-Grim
Branch Officer and Manager


Stephens City:

Nancy S. Slonaker
Branch Manager


LOUDOUN COUNTY:

Hamilton:

Alice W. Farris
Vice President-Operations
Loudoun County Division

B. J. Trussell
Vice President-Branch Coordinator
Loudoun County Division

Dennis M. East
Marketing Director
Loudoun County Division


Leesburg/Market Street:

Dorothy J. Lehr
Assistant Branch Manager


Leesburg/Catoctin Circle:

Dale L. Fritts
Vice President-Loans
Loudoun County Division

Nan C. Havens
Branch Manager


Lovettsville:

Faye A. McKimmey
Branch Manager


Middleburg:

John E. Hanna
Loan Officer

Joyce F. Sours
Branch Manager


Round Hill:

Doris E. Hardy
Branch Manager


Sterling:
Darcus E. Breneman
Branch Manager


RAPPAHANNOCK COUNTY:

Flint Hill:

Alice S. Kresge
Vice President and Branch Manager

SHENANDOAH COUNTY:

Mount Jackson:

Dennis L. Snyder
Vice President and Manager
Shenandoah County Division

Cathy S. Lindamood
Assistant Branch Manager

Woodstock:

Alfred R. Heishman, Jr.
Vice President and Branch Manager

New Market:

Tony A. Mongold
Assistant Vice President and
Branch Manager

WARREN COUNTY:

FRONT ROYAL:

East Main:

Robert E. Aylor, III
Vice President-Manager
Front Royal Division

Walter H. Bursey, Jr.
Vice President-Loans

John E. Burke
Marketing Officer

Joyce H. Sutherland
Assistant Vice President-Operations

North Royal:

Edith R. Reil
Branch Officer and Manager

John Marshall:

Joyce C. Davis
Branch Manager

Sixth Street:

Ruth Ann Smoot
Branch Manager

F&M BANK-
CENTRAL VIRGINIA

DIRECTORS:

Jacob P. Bailey
William J. Camden
James N. Fleming
S. W. Heischman
Larry J. McElwain
Ronald L. Moyer
William B. Pollard, M.D.
Robert C. Raynor, M.D.
Thomas H. Romer
Walter L.Tucker, Jr.
Wayne L. Turner
F. Dixon Whitworth, Jr.

OFFICERS:

Wayne L.Turner
President and
Chief Executive Officer

William K. King
Senior Vice President and Secretary

Pamela T. Anderson
Vice President and Cashier

BRANCH OFFICES:

Main:

William K. King
Senior Vice President

Afton:

Jeannette F. Rittenhouse
Branch Manager and Loan Officer

Amherst:

Donnie L. Snead
Vice President and
Branch Manager

Ivy Road:

Danita D. Harris
Branch Manager

Lovingston:

O. Guy Gruber
Vice President and
Branch Manager

5th Street:
Scottsville:

James A. Farmer
Assistant Vice President and
Branch Manager

F&M BANK-EMPORIA

DIRECTORS:

C. Butler Barrett
Stephen D. Bloom
Bobby L. Flippen
Dr. Theopolis Gilliam
Robert H. Grizzard, Jr.
Arthur H. Kreienbaum, Jr.
Wayne P. Leath
O. Wayne Hanks

OFFICERS:

O. Wayne Hanks
President and Chief Executive Officer

Samuel W. Adams, III
Senior Vice President and Secretary

Ryland A. Winston
Vice President

BRANCH OFFICES:

West Atlantic:

David E. Collins
Vice President and Branch Manager

South Main:

Rose D. Clements
Branch Supervisor

F&M BANK-HALLMARK

DIRECTORS:

Robert H. Bird
Hugh W. Compton
James A. Davis
John P. DiGiulian
Walter H. Durum
Reed E. Larson
John T. Rohrback
Michael M. Webb
F. Dixon Whitworth, Jr.

OFFICERS:

Hugh W. Compton
President and Chief Executive Officer

John T. Rohrback
Executive Vice President

Karin M. Johns
Senior Vice President-Cashier

Alice B. Williams
Senior Vice President-Loan Department

Robert E. Duvall
Vice President-Trust Officer

Alex Solis
Vice President-Loan Department

James M. Weaver
Vice President-Loan Department

Kathleen B. Mangano
Assistant Vice President-Loan Department

Jeffrey M. Rosati
Assistant Vice President-Loan Department

William D. Stoneman
Security Officer

Matthew S. Impson
Assistant Cashier-Bookkeeping

Janis K. Bradley
Compliance Officer

Julia H. Stapor
Assistant Cashier


BRANCH OFFICES:

Main Office:

Linda D. Nordin
Assistant Cashier and Branch Manager

Alexandria:

Joann R. Strain
Assistant Cashier and Branch Manager

Annandale:

Margaret M. Lane
Assistant Cashier and Branch Manager

Newington:

Melvia J. Rescigno
Assistant Cashier and Branch Manager

Woodbridge:

Judith A. DeViney
Assistant Cashier and Branch Manager

F&M BANK-
MASSANUTTEN

DIRECTORS:

J. Robert Black
Robert W. Drechsler
Robert E. Driver
Homer M. Fulk
Dwight W. Hartman
W. Wallace Hatcher
Russell K. Henry, Jr.
Marian G. Jenkins
William A. Julias
Curtis F. Kite
Harry L. Rawley
Edward P. Shank
Wayne L. Smith
Emmet C. Stroop
Garnett R. Turner
Nancy H. Whitmore
Alfred B. Whitt

OFFICERS:

Wayne L. Smith
President and Chief Executive Officer

Russell K. Henry, Jr.
Senior Vice President

James G. Link
Vice President

Writa D. Hill
Vice President and Cashier

Edward A. Strunk
Vice President

BRANCH OFFICES:

Main:

Donna S. Sheppard
Assistant Vice President and Office Manager

South:

Ian Robin Dalrymple
Assistant Vice President
and Branch Manager

Parkview:

Donnie E. Ritchie
Vice President and Branch Manager

Grottoes:

Wanda N. Spitzer
Assistant Branch Manager

Dayton Pike:

William M. Groseclose, Jr.
Branch Manager and
Collection Manager

Bridgewater:

Houston T. Dickenson, Jr.
Assistant Vice President and
Branch Manager

Broadway:

Larry S. Bowman
Vice President and
Branch Manager

Timberville:

Robert R. Reedy
Assistant Vice President and
Branch Manager

F&M-PEOPLES

DIRECTORS:

Alice Jane Childs
Alan L. Day, Jr.
Marshall DeF. Doeller
George F. Downes
Jack R. Huyett
T. Christopher Jenkins
Thomas H. Kirk
Mark C. Riley
Lewis N. Springer
Edward C. A. Wachtmeister
Fred G. Wayland, Jr.

Directors Emeriti:

Edward L. Stephenson
Vincent L. Tolson

OFFICERS:

Mark C. Riley
President and Chief Executive Officer

Thomas H. Kirk
Senior Vice President-
Trust and Investments

Warren L. Bane
Vice President-Stafford Region

Theodore R. Coleman
Vice President-Loans

Caren M. Eastham
Vice President-
Administrative Services

Ronnie A. Jenkins
Vice President-Retail Banking
and Sales Management

Joan B. Oliver
Vice President and
Director of Data Processing

Daryl A. Urnosky
Vice President-
Chief Financial Officer and Cashier


BRANCH OFFICES:

Main:

Richard L. Monahan
Assistant Vice President and
Branch Manager

Warrenton Center:

Nancy W. Clatterbuck
Assistant Vice President and
Branch Manager

Marshall:

Peggy A. Smith
Assistant Cashier and Branch Manager

Stafford:

Brenda A. Hisghman
Assistant Cashier and Branch Manager

F&M BANK-POTOMAC

DIRECTORS:

Daniel R. Baker
David E. Feldman
Howard R. Green
Thom F. Hanes
Norman P. Horn
Henry C. Mackall
Thomas D. Rust
Robert E. Sevila
Alfred B. Whitt

OFFICERS:

Thomas D. Rust
Chairman of the Board

Thom F. Hanes
President and Chief Executive Officer

Wayne R. Garcia
Vice President-Loan Administration

Mason L. Kimble
Vice President and Cashier

Patsy I. Rust
Vice President

B. Drew Brown
Assistant Vice President

Dianne S. Capilongo
Assistant Cashier

David W. Hauck
Assistant Cashier

Cynthia S. Peacock
Assistant Cashier

F&M BANK-RICHMOND

DIRECTORS:

James H. Atkinson, Jr.
Jeff C. Bane
Stephen C. Conte
Lewis T. Cowardin
Zane G. Davis
Richard H. Hamlin
William R. Harris
James E. Howard
James R. Reames
F. Dixon Whitworth, Jr.

Director Emeritus:

David M. White

OFFICERS:

James H. Atkinson, Jr.
President and Chief Executive Officer

Wayne D. Eaves
Senior Vice President

K. Bradley Hildebrandt
Vice President-Commercial Lending

Donna D. Sorrell
Vice President

Daily H. Stern
Vice President and Compliance Officer

Gene T. Jones
Assistant Vice President and
Collections Officer

Timmie Lee Cartwright
Operations Officer

Pamela M. Coleman
Administrative Officer

Lynda J. Conklyn
Loan Operations Officer

BRANCH OFFICES:

Main:

Marshall E. McCall
Assistant Vice President and
Branch Manager

Chester:

Martha G. Buchanan
Branch Officer and Branch Manager

Courthouse:

Carolyn Gregg
Branch Officer and Branch Manager

Lakeside:

Nancye Jo Poff
Assistant Vice President and
Branch Manager

Midlothian:

Duncan G. Cooke III
Vice President and Branch Manager

Parham Road:

Upton S. Martin III
Vice President and Branch Manager

Staples Mill Road:

Robyn C. Foster
Assistant Vice President and
Branch Manager

Debra K. Unger
Branch Officer and Assistant
Branch Manager

Three Chopt Road:

Kevin L. Ford
Branch Officer and Branch Manager

Marie H. Ladd
Branch Officer and Assistant Manager

Franklin:

Michelle L. Martin
Branch Manager

F&M BANK-BLAKELEY

DIRECTORS:

Charles C. Conrad
J. Blackwell Davis, Sr.
Denver L. Hipp
Jack R. Huyett
Dr. James M. Moler
Paul L. Reid

OFFICERS:

Denver L. Hipp
President and Chief Executive
Officer

Ida M. Hull
Cashier and Vice Presidentt

Reginald C. Kimble
Vice President-Senior
Lending Officer

Virginia M. Longerbeam
Assistant Vice Presidentt

Vonda K. Miller
Assistant Vice President
and Compliance Officer

Donna W. Phipps
Assistant Vice Presidentt

Laveania M. Hamilton
Assistant Vice Presidentt

Marilyn A. Williams
Assistant Vice Presidentt

Kathleen N. Vaughan
Collection Manager

BRANCH OFFICES:

Hilldale:

Patricia S. Collis
Assistant Vice President and
Branch Manager

Somerset:

Brenda K. Poston
Assistant Vice President and
Branch Manager
F&M BANK-KEYSER

DIRECTORS:

William M. Bane
Harlan M. Bell
Jack R. Huyett
Joseph W. Kessel
William C. Knott
Harland D. Ridder
Glen A. Ryan
Richard B. Schwinabart
Rudy R. Sites
Alfred B. Whitt

OFFICERS:

Harlan M. Bell
President and Chief Executive Officer

Douglas E. Haines
Executive Vice President and Cashier

David E. Harr, Jr.
Vice President-Senior Loan Officer

Dwight C. Metcalf
Vice President

Chargenia S. Kasmier
Trust Officer

BRANCH OFFICES:

Express Office:

Dorothy E. Schmidlen
Branch Manager

Fort Ashby:

Leon W. Arnold
Branch Manager

F&M BANK-
MARTINSBURG

DIRECTORS:

James L. Bowman
Betty H. Carroll
C. William Hammond
J. W. Lancaster
Evelyn S. Oates
Donald L. Sperow
Billy J. Tisinger

Directors Emeriti:

G. Francis Caton
William R. McCune

OFFICERS:

C. William Hammond
President and Chief Executive Officer

David C. Jeffcoat
Senior Vice President-Loans

Rick C. Manning
Vice President-Loans

Susan M. Wenger
Compliance/Bank Secrecy

Jodi A. Frankenberry
Assistant Vice President-Administration

BRANCH OFFICES:

Burke Street:

Lvonne H. Effland
Assistant Vice President and Branch Manager

Old Courthouse Square:

Mary K. Hayward
Vice President-Retail Banking

Inwood:

Debbie J. Dodd
Branch Manager

BIG APPLE
MORTGAGE COMPANY

DIRECTORS AND OFFICERS:

Vergil H. Bates
President and Director

James M. O'Brien
Executive Vice President

Beverly A. Alexander
Vice President

Betty H. Carroll
Vice President and Director

Alfred B. Whitt
Secretary-Treasurer and Director



WINCHESTER
CREDIT CORPORATION

DIRECTORS:

Betty H. Carroll
Edwin B. Clevenger
Jack R. Huyett
J. Randolph Larrick
F. Dixon Whitworth, Jr.

OFFICERS:

Jack R. Huyett
President

Richard V. Reedy
Vice President
Special Assets Division-Loudoun County
Betty H. Carroll
Vice President

Alfred B. Whitt
Secretary

Barbara H. Ward
Treasurer


CREDIT BUREAU OF
WINCHESTER, INC.

Sandra K. Hart
Manager


APPLE TITLE COMPANY

DIRECTORS:

Betty H. Carroll
Jack R. Huyett
Barbara H. Ward
Alfred B. Whitt

OFFICERS:

Jack R. Huyett
President

Betty H. Carroll
Vice President

Alfred B. Whitt
Secretary

Frances H. Fortune
Treasurer

Corporate Headquarters

F&M NATIONAL CORPORATION
38 Rouss Avenue
Winchester, Virginia

F&M BANK-WINCHESTER
Main Office
115 North Cameron Street
Winchester, Virginia

Other Banking Offices:

Winchester:
100 North Loudoun Street
509A Amherst Street
2252 Valley Avenue
829 North Loudoun Street
1850 Apple Blossom Drive
748 Berryville Avenue
124 West Piccadilly Street
2082 South Pleasant Valley Road
2004 South Pleasant Valley Road

Clarke County:
23 North Church Street
Berryville, Virginia

Frederick County:
6701 Northwestern Pike
Gore, Virginia

7800 Main Street
Middletown, Virginia

5306 Main Street
Stephens City, Virginia

1855 Senseny Road
Winchester, Virginia

300 Westminster Canterbury Drive
Winchester, Virginia

Loudoun  County:
38997 East Colonial  Highway
Hamilton,  Virginia

101 Catoctin Circle, SE
Leesburg, Virginia

7 West Market Street
Leesburg,  Virginia

7 Broad Way
Lovettsville,  Virginia

202 West Washington Street
Middleburg,  Virginia

21 Main  Street
Round  Hill,  Virginia

22550  Davis  Drive
Sterling,   Virginia

Rappahannock  County:
Flint Hill, Virginia

Shenandoah County:
Apple Avenue and U.S. Route 11
Mount Jackson, Virginia

158 South Main Street
Woodstock,  Virginia

9383 Congress Street
New Market,  Virginia

Warren County:
102 East Main Street
Front Royal,  Virginia

215 North Royal Avenue
Front Royal,  Virginia

Royal Plaza Shopping  Center
Front  Royal,  Virginia

123 East Sixth  Street
Front  Royal, Virginia

F&M BANK-CENTRAL VIRGINIA

425 Seminole Trail
Charlottesville, Virginia

Virginia Route 151
Afton,  Virginia

Ambriar  Shopping Center
Amherst,  Virginia

2208 Ivy Road
Charlottesville,   Virginia

1113 5th Street Extended
Charlottesville, Virginia

93 Front Street
Lovingston,  Virginia

Valley Street
Scottsville, Virginia


F&M BANK-EMPORIA

401 Halifax Street
Emporia, Virginia

301 West Atlantic Street
Emporia, Virginia

431 South Main Street
Emporia, Virginia


F&M BANK-HALLMARK

6810 Commerce Street
Springfield, Virginia

4115 Annandale Road
Annandale, Virginia

7027-A Manchester Boulevard
Alexandria, Virginia

14339 Potomac Mills Road
Woodbridge, Virginia

7830 Backlick Road
Springfield, Virginia


F&M BANK-MASSANUTTEN

U.S. Route 33, East
Harrisonburg, Virginia

U.S. Route 11, South
Harrisonburg, Virginia

611 Mount Clinton Pike
Harrisonburg, Virginia

157 N. Main Street
Broadway, Virginia

U.S. Route 340 and 2nd Street
Grottoes, Virginia

1900 South High Street
Dayton, Virginia

317 North Main Street
Bridgewater, Virginia

American Legion Drive and State Street
Timberville, Virginia

F&M BANK-PEOPLES

21 Main Street
Warrenton, Virginia

251 West Lee Highway
Warrenton, Virginia

8318 East Main Street
Marshall, Virginia

760 Warrenton Road
Fredericksburg, Virginia

F&M BANK-POTOMAC

230 Herndon Parkway
Herndon, Virginia

F&M  BANK-RICHMOND

9401 West Broad Street
Richmond,  Virginia

1776 Staples Mill Road
Richmond,  Virginia

209 West  Franklin  Street
Richmond,  Virginia

5001 Lakeside Avenue
Richmond,  Virginia

9960 Midlothian Turnpike
Richmond,  Virginia

1300 East  Parham  Road
Richmond,  Virginia

9012 Three  Chopt  Road
Richmond, Virginia

4310  West  Hundred  Road
Chester,   Virginia

9440  Ironbridge  Road
Chesterfield, Virginia


F&M BANK-BLAKELEY

Corner Mildred Street
and Lancaster Circle
Ranson, West Virginia

Somerset Village Shopping Center
Charles Town, West Virginia

Hilldale Shopping Center
Charles Town, West Virginia

F&M BANK-KEYSER

87 N. Main Street
Keyser, West Virginia

Express Office
Florida & Southern Drive
Keyser, West Virginia

Fort Ashby Office
Fort Ashby, West Virginia


F&M BANK-MARTINSBURG

301 W. Burke Street
Martinsburg, West Virginia

1321 Edwin Miller Boulevard
Martinsburg, West Virginia

Route 51 West
Inwood, West Virginia


BIG APPLE MORTGAGE COMPANY

124 West Piccadilly  Street
Winchester,  Virginia

12 Rouss Avenue
Winchester,  Virginia

102 East Main Street
Front Royal,  Virginia

Apple Avenue and U.S. Route 11
Mount  Jackson,  Virginia

F&M Mortgage  Company
22550 Davis Drive
Sterling,  Virginia

1321 Edwin Miller Boulevard
Martinsburg, West Virginia


APPLE TITLE COMPANY

12 Rouss Avenue
Winchester, Virginia


WINCHESTER CREDIT CORPORATION

12 Rouss Avenue
Winchester, Virginia


CREDIT BUREAU OF WINCHESTER, INC.

12 Rouss Avenue
Winchester, Virginia



                               GENERAL INFORMATION

Annual Meeting

      The annual meeting of shareholders will be held at the TraveLodge  Banquet
Room, 1825 Dominion Avenue,  Winchester,  Virginia,  Tuesday, April 23, at 10:00
a.m.

Stock Transfer Agent

                    American Stock Transfer and Trust Company
                                   46th Floor
                                 40 Wall Street
                            New York, New York 10005

      F&M  National  Corporation  Common  Stock is traded on the New York  Stock
Exchange under the symbol FMN.

Information

      For additional information, contact Alfred B. Whitt, Corporate Secretary,
F&M National Corporation, (540) 665-4200.

      A copy of the Corporation's  Form 10-K annual report to the Securities and
Exchange  Commission  may be obtained  without  charge upon  written  request to
Alfred B. Whitt, F&M National Corporation.

Mailing Address

                            F&M National Corporation
                                  P.O. Box 2800
                           Winchester, Virginia 22604



                            F&M NATIONAL CORPORATION
                                CORPORATE PROFILE

      F&M National  Corporation is a bank holding company  registered  under the
Bank Holding Company Act of 1956, as amended. It was incorporated under the laws
of Virginia on November 26, 1968,  and commenced  business on December 31, 1969.
The Corporation  operates eleven commercial banks in Virginia and West Virginia.
The banks in Virginia  are:  F&M  Bank-Central  Virginia,  Charlottesville;  F&M
Bank-Emporia,  Emporia; F&M Bank-Hallmark,  Springfield;  F&M  Bank-Massanutten,
Harrisonburg;  F&M  Bank-Peoples,  Warrenton;  F&M  Bank-Potomac,  Herndon;  F&M
Bank-Richmond,  Richmond and F&M Bank-Winchester,  Winchester. The banks in West
Virginia  are:  F&M  Bank-Blakeley,  Ranson;  F&M  Bank-Keyser,  Keyser  and F&M
Bank-Martinsburg, Martinsburg.

      Its indirect  subsidiaries  are Apple Title  Company,  Big Apple  Mortgage
Company,  Credit  Bureau of  Winchester,  Incorporated,  and  Winchester  Credit
Corporation.  The  Corporation  was organized  primarily as a financial  holding
company which operates through subsidiary  organizations or establishments which
are engaged in banking and in bank and finance related businesses.