SECURITIES AND EXCHANGE COMMISSION
                             Washington, D. C. 20549

                                    FORM 10-K

[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE 
      ACT OF 1934 
                  For the Fiscal Year Ended December 31, 1997

                                       OR

[   ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF SECURITIES EXCHANGE 
      ACT OF 1934
                          Commission File Number 0-5929

                            F&M NATIONAL CORPORATION
             (Exact Name of Registrant as specified in its charter)

               VIRGINIA                                   54-0857462
     (State or other jurisdiction                       (IRS Employer
     of incorporation or organization)               Identification Number)

                   9 COURT SQUARE, WINCHESTER, VIRGINIA 22601
          (Address of principal executive offices, including Zip Code)

               Registrant's telephone number, including area code:
                                 (540) 665-4200

           SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
                          Common Stock, $2.00 par value
                                (Title of Class)

                             New York Stock Exchange
                   (Name of each exchange on which registered)

        SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  Registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days. YES X No

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K (229.405 of this chapter) is not contained  herein,  and will
not be contained, to the best of the registrant's knowledge, in definitive proxy
or  information  statements  incorporated  by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ ]

State the aggregate market value of the voting stock held by the  non-affiliates
of the  Registrant.  The aggregate  market value is computed by reference to the
closing  price of such  stock as  reported  by the New York  Stock  Exchange  on
February 28, 1998: $ 679,360,242.75


  NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AT FEBRUARY 28, 1998: 20,389,759

                       DOCUMENTS INCORPORATED BY REFERENCE

(1)        Portions of the  Registrant's  Annual Report to Shareholders  for the
           fiscal year ended December 31, 1997, are incorporated by reference in
           Parts II and IV hereof; and

(2)        Portions of  Registrant's  1998 Proxy Statement dated March 30, 1998,
           are incorporated by reference in Part III hereof.



<PAGE>

                                     PART I

ITEM 1.  BUSINESS

(a)  GENERAL DEVELOPMENT OF BUSINESS

         Since  January  1,  1997,  there  have  been  no  developments  in  the
Registrant's (hereinafter called "F&M" or the "Company") business other than the
following:

         On February  12,  1997,  F&M  Bank-Allegiance  opened a new branch bank
located at 99 South Washington Street, Rockville, Maryland.

         On February 24, 1997, F&M  Bank-Northern  Virginia  opened a new branch
bank located at 7900 Sudley Road, Manassas, Virginia.

         On March  29,  1997,  F&M  Bank-Massanutten  opened a new  branch  bank
located at 430 Highlands Place, Harrisonburg, Virginia.

         On June 16, 1997, F&M Bank-Richmond opened a new branch bank located at
6980 Forest Hill Avenue, Richmond, Virginia.

         On July 14, 1997, F&M Bank-Martinsburg opened a new branch bank located
at 704 Foxcroft Avenue North, Martinsburg, West Virginia.

         On July 16, 1997, F&M  Bank-Northern  Virginia opened a new branch bank
located at 440 Maple Avenue East, Vienna, Virginia.

         On August 4, 1997, F&M  Bank-Blakeley  opened a new branch bank located
at 1504 Tuscawilla Hills, Charles Town, West Virginia.

         On August 20, 1997, F&M Bank-Northern Virginia opened a new branch bank
located at 3829 South George Mason Drive, Falls Church, Virginia.

         On  September  8,1997,  F&M  Bank-Allegiance  opened a new branch  bank
located at 9401 Key West Avenue, Rockville, Maryland.

         On September 24, 1997, F&M  Bank-Northern  Virginia opened a new branch
bank located at 8432 Old Keene Mill Road, Springfield, Virginia.

         On October 6, 1997, F&M Bank-Northern Virginia opened a new branch bank
located at 200 North Washington Street, Alexandria, Virginia.

         On October 15, 1997, F&M Bank-Blakeley opened a new branch bank located
at 4 Charles Town Plaza, Charles Town, West Virginia.


(b)  FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS

         F&M and its  subsidiaries  are engaged  primarily  in only one industry
segment, banking, the making of commercial and personal loans and similar credit
transactions, and other activities closely related to banking.


(c)  NARRATIVE DESCRIPTION OF THE BUSINESS

                                   THE COMPANY

GENERAL

         F&M National Corporation is a multi-bank holding company  headquartered
in  Winchester,  Virginia.  F&M's eleven  subsidiary  banks  operate 108 banking
offices offering a full range of banking services principally to individuals and
small and middle-market  business in north, central and south Virginia including
the  Shenandoah  Valley,  and the eastern  panhandle of West  Virginia,  and the
counties of Montgomery and Prince George in Maryland.  At December 31, 1997, F&M
had assets of $2.520  billion,  deposits  of $2.138  billion  and  shareholders'
equity of $247.8 million.

         F&M was  formed in 1969 to serve as the parent  holding  company of its
then sole subsidiary  bank, F&M  Bank-Winchester,  organized in 1902.  Since its
organization,  F&M has acquired  eighteen banks,  which expanded its market area
and increased market share in Virginia, West Virginia and Maryland.

<PAGE>


         The following table sets forth certain  information  concerning F&M and
its operating subsidiaries as of December 31, 1997:
<TABLE>
<CAPTION>
<S> <C>
                                  DATE         BANKING          TOTAL             TOTAL            TOTAL
                                ACQUIRED       OFFICES         ASSETS             LOANS           DEPOSITS
                             ----------------------------------------------------------------------------------
F&M Bank-Winchester
  Winchester, VA (1)              1970           31       $      831,374    $      506,498    $      741,283
F&M Bank-Massanutten
  Harrisonburg, VA (2)            1980            9              184,810           119,423           154,278
F&M Bank-Richmond
  Richmond, VA (3)                1982           10              173,810           107,705           158,391
F&M Bank-Central
Virginia (4)
  Charlottesville, VA             1985            7               77,353            41,719            66,016
F&M Bank-Blakeley
  Charles Town/
  Ranson, WV                      1988            5              114,089            85,800            95,887
F&M Bank-Martinsburg
  Martinsburg, WV                 1988            4               99,609            76,383            84,848
F&M Bank-Keyser
  Keyser, WV                      1992            3               97,347            65,078            82,580
F&M Bank-Emporia
  Emporia, VA                     1993            3               68,840            37,843            59,852
F&M Bank-Peoples
  Warrenton, VA                   1994            4              125,090            71,390           112,309
F&M Bank-Northern VA
  Fairfax, VA (5)                 1996           23              529,377           310,372           430,959
F&M Bank-Allegiance
  Bethesda, MD                    1996            9              188,637           121,387           151,431
F&M (Parent only)                  -              -               29,976                 -                 -
Total                                            108      $    2,520,312    $    1,543,598    $    2,137,834
</TABLE>
-----------------------------
(1)  Includes Big Apple  Mortgage,  an insurance  agency,  and a general  credit
     reporting  agency.  Also includes the 1985 acquisition of Stonewall Jackson
     Bank and Trust and the 1993 purchase of substantially all of the assets and
     assumption of certain liabilities of Farmers and Merchants Bank of Hamilton
     (the "Hamilton Bank').
(2)  Includes the  acquisition  in 1989 of The First  National Bank of Broadway,
     Broadway , Virginia
(3)  Includes  the  acquisition  in 1986 of  Virginia  Capital  Bank,  Richmond,
     Virginia.
(4)  Includes  the  acquisition  in 1990 of Peoples  Bank of  Central  Virginia,
     Lovingston, Virginia.
(5)  Includes the  acquisition in 1994 of Hallmark Bank and Trust,  Springfield,
     Virginia,  the  acquisition  in 1995 of The Bank of the  Potomac,  Herndon,
     Virginia  and  the  acquisition  in 1996  of  FB&T  Financial  Corporation,
     Fairfax, Virginia.

         The  business  strategy  of F&M is to provide  its  customers  with the
financial  sophistication  and  breadth of products  of a regional  bank,  while
retaining  the local  appeal and level of service of a community  bank.  F&M has
maintained its community  orientation by allowing its subsidiary  banks latitude
to tailor products and services to meet community and customer needs.  While F&M
has  preserved  the  autonomy  of  its  subsidiary  banks,  it  has  established
system-wide policies governing,  among other things,  lending practices,  credit
analysis and approval procedures,  as well as guidelines for deposit pricing and
investment portfolio management.  In addition, F&M has established a centralized
loan review team that regularly performs a detailed, on-site review and analysis
of each subsidiary bank's loan portfolio to ensure the consistent application of
credit policies and procedures system-wide.  An officer or representative of F&M
serves on the board of directors of each subsidiary  bank to monitor  operations
and to serve as a liaison to the Company.

         F&M's  subsidiary  banks  are  community-oriented  and  offer  services
customarily provided by full-service banks,  including individual and commercial
demand and time deposit  accounts,  commercial and consumer  loans,  residential
mortgages,  credit card services and safe deposit  boxes.  Lending is focused on
individuals and small and  middle-market  businesses in the local market regions
of each of  F&M's  subsidiary  banks.  In  addition,  F&M  Bank-Winchester,  F&M
Bank-Massanutten,  F&M Bank-Northern  Virginia, and F&M Bank-Peoples in Virginia
and F&M  Bank-Blakeley,  F&M  Bank-Martinsburg  and F&M  Bank-Keyser  have trust
powers  offering a range of fiduciary  services.  At December  31,  1997,  trust
assets under management at these seven banks totaled $489.4 million.

                  Effective  January 1, 1998, F&M Trust Company,  a wholly-owned
trust subsidiary of the Company, began operations and assumed responsibility for
all the trust and fiduciary  activities of the Virginia banking  subsidiaries of
the Company.

         F&M  operates  in  seven  market  regions:  the  Shenandoah  Valley  of
Virginia;  the eastern  panhandle  of West  Virginia;  Charlottesville/Albemarle
County and surrounding areas; Greenville County in southside Virginia;  suburban
Richmond,  primarily  Henrico and Chesterfield  Counties;  the northern Virginia
areas of Loudoun, Fairfax, and Prince William Counties;  Stafford, Warrenton and
surrounding  Fauquier  County  area and the  counties of  Montgomery  and Prince
George's in Maryland.  The more populous sectors within each of the seven market
regions experienced substantial population growth between 1980 and 1990, most of
which exceeded 20% growth. At December 31, 1997, F&M operated 33 banking offices
in the Shenandoah Valley from Winchester to Harrisonburg with deposits of $726.6
million;  12 banking  offices in the eastern  panhandle  of West  Virginia  with
deposits of $263.3 million;  7 banking offices in the  Charlottesville/Albemarle
County  area with  deposits  of $66.0  million;  3 banking  offices in  Emporia,
Virginia,  and surrounding  Greenville County with deposits of $59.9 million; 10
banking offices in suburban Richmond, Virginia, with deposits of $158.4 million;
and 30 banking  offices in  Loudoun,  Fairfax  and Prince  William  Counties  of
northern  Virginia  with  deposits of $603.4  million;  4 offices in the city of
Warrenton and Fauquier and Stafford Counties with deposits of $112.3 million and
9 offices in the  counties of  Montgomery  and Prince  George in  Maryland  with
deposits  of  $151.4  million.  F&M's  principal  market is  Winchester  and the
surrounding six Virginia counties where its lead bank, F&M  Bank-Winchester,  is
the dominant financial  institution in terms of deposit market share, with a 44%
share of total  deposits  in  Winchester,  a 28%  share  of  total  deposits  in
surrounding  Frederick  County,  a 30% share of total deposits in Warren County,
and a 18% share of total deposits in Loudoun County. In Rockingham County, which
has the largest  population of any county or city in the Shenandoah  Valley, F&M
has a 46% deposit market share. In F&M's  three-county West Virginia market, F&M
has a 23 % deposit  market share in Jefferson  County  (which  includes  Charles
Town),  a  18%  deposit  market  share  in  Berkeley   County  (which   includes
Martinsburg)  and a 46% deposit market share in Mineral  County (which  includes
Keyser). In Fairfax, Prince William and Fauquier Counties (including Warrenton),
F&M has 11%, 3%, and 15% of deposit market share.  Although F&M's deposit market
share in the Richmond and Charlottesville areas is small, F&M has positioned its
banking  offices in these two  markets to  increase  deposit  market  share as a
result of continued  business  and  population  growth in the  suburban  markets
surrounding Richmond and  Charlottesville.  In F&M's two-county Maryland market,
F&M is  positioning  itself to increase  market share in  Montgomery  County and
Prince George's County.

         At  December  31,  1997,   F&M  had  total   nonperforming   assets  of
approximately  $32.2  million,  representing  2.07%  of  period  end  loans  and
foreclosed  properties.  See "Management's  Discussion and Analysis of Financial
Condition and Results of Operations-Asset Quality."

         F&M also operates Big Apple Mortgage Co. Inc.,  which offers both fixed
and  adjustable  rate  residential  mortgage  loans  and  servicing  . Big Apple
Mortgage (also t/a F&M Mortgage  Company),  F&M  Bank-Northern  Virginia and F&M
Bank-Peoples sell into the secondary market permanent residential mortgage loans
that conform to GNMA and FNMA  underwriting  guidelines.  These F&M subsidiaries
purchase  government  insured  1-4  family  FHA and VA  loans  and  resell  them
immediately in package form.

ACQUISITION PROGRAM

         F&M has expanded its market area and increased its market share through
both internal  growth and strategic  acquisitions.  Since the beginning of 1988,
F&M has acquired approximately $1.206 billion in assets and approximately $1.043
billion in deposits  through  twelve bank  acquisitions.  In 1997,  F&M made the
following acquisitions:

INSURANCE  AGENCY.  On November 1, 1997,  F&M expanded its product base with the
acquisition of Shomo and Lineweaver Insurance Agency ("Shomo Insurance") located
in  Harrisonburg,  Virginia.  Shomo  Insurance  offers a full line of  insurance
products including  automobile,  home, group, life and business  insurance.  The
acquisition  was  accounted  for as a tax-free  purchase  with the  exchange  of
265,853 shares of F&M common stock.

PEOPLES BANK OF VIRGINIA. On December 1, 1997, F&M entered into an agreement for
the acquisition of Peoples Bank of Virginia ("PBV"),  a Virginia  chartered bank
based in  Chesterfield,  Virginia.  The  acquisition  of PBV is  subject  to the
approval of shareholders of PBV and the appropriate  regulatory  agencies and is
expected to close on or about April 1, 1998. The  acquisition of PBV is expected
to be accounted for as a pooling of interests for financial  reporting  purposes
and provides for a tax-free exchange of 2.58 shares of F&M common stock for each
common  share of PBV. At  December  31,  1997,  PBV had  301,376  common  shares
outstanding and 6,842 shares issuable upon outstanding stock options  (excluding
a stock option  granted to F&M).  PBV had assets of $80.4 million as of December
31, 1997 and operates four banking offices in  Chesterfield  and the surrounding
Richmond metropolitan area.

THE BANK OF ALEXANDRIA.  On December 12, 1997, F&M entered into an agreement for
the  acquisition of The Bank of Alexandria  ("BOA"),  a Virginia  chartered bank
based in  Alexandria,  Virginia.  The  acquisition  of BOA, like that of PBV, is
subject to the approval of shareholders  of BOA and the  appropriate  regulatory
agencies and is expected to close in the second quarter of 1998. The acquisition
of BOA is expected to be accounted  for as a pooling of interests  for financial
reporting  purposes and provides for a tax-free  exchange of 0.942 of a share of
F&M common stock for each common  share of BOA. At December  31,  1997,  BOA had
686,461 common shares  outstanding  and 66,476 issuable upon  outstanding  stock
options  (excluding  a stock  option  granted  to F&M).  BOA had assets of $78.9
million as of December 31, 1997 and operates four banking  offices in Alexandria
and the surrounding area.

         Management  believes  there are  additional  opportunities  to  acquire
financial  institutions or to acquire assets and deposits that will allow F&M to
enter adjacent markets or increase market share in existing markets.  Management
intends to pursue  acquisition  opportunities  in  strategic  markets  where its
managerial,  operational  and capital  resources will enhance the performance of
acquired  institutions.  There  can be no  assurance  that  F&M  will be able to
successfully  effect  any  additional  acquisition  activity,  or that  any such
acquisition  activity will have a positive  effect on the value of shares of F&M
Common Stock.

ANTI-TAKEOVER PROVISIONS

         The Articles of  Incorporation  and the Virginia Stock  Corporation Act
contain  certain   anti-takeover   provisions,   including  (I)  the  Affiliated
Transactions  statue which places  restrictions on any  significant  transaction
between a publicly held Virginia  corporation  and any shareholder who owns more
than  10% of any  class  of its  outstanding  shares,  (ii)  the  Control  Share
Acquisitions  statue which provides that a shareholder  who purchases  shares in
any one of three statutory ranges (20%-33 1/3%, 33 1/3%-50%,  and 50% or more of
the  outstanding  shares)  cannot  vote those  shares on any  matter  unless the
acquisition  of  the  additional  shares  has  been  approved  by  disinterested
shareholders,  and (iii) a super-majority provision in the Company's Articles of
Incorporation  that  requires  the  affirmative  vote  of at  lease  80%  of the
outstanding  voting  shares  on  significant   transactions,   unless  at  least
two-thirds  of  the  Board  of  Directors  then  in  office  have  approved  the
transaction.

EMPLOYEES

         At  December  31,  1997,  F&M had  1,077  full  time and 248 part  time
employees.  No employees are represented by any collective  bargaining unit. F&M
considers relations with its employees to be good.

MARKET REGIONS

         The market  regions of F&M extend  from the eastern  panhandle  of West
Virginia southward to Virginia in Winchester,  the surrounding Shenandoah Valley
through  Harrisonburg and Rockingham  County and eastward to Loudoun,  Fauquier,
Stafford  and  Prince  William  counties,  to the  central  Virginia  markets of
Charlottesville and Richmond, southern Virginia market in Emporia and Greenville
County and Montgomery and Prince  George's  counties in Maryland.  The following
table displays the market and population data for each of the market regions:

<PAGE>
<TABLE>
<CAPTION>
<S> <C>


                                          BANKING        % MARKET        MARKET                 1990
COUNTY/CITY (1)                           OFFICES        SHARE (2)       RANK (2)           POPULATION
-------------------------------------  -------------- --------------- --------------  --------------------
State of Virginia:
Shenandoah Valley:
 City of Winchester                          10             46               1                21,947
 Frederick County                             5             24               1                45,723
 Warren County                                4             30               1                26,142
 Shenandoah County                            3             12               4                31,636
 Clarke County                                1             25               2                12,101
 Rappahannock County                          1             43               2                 6,622
 Rockingham County                            5             18               3                57,482
 City of Harrisonburg                         4             11               5                30,707
Northern Virginia:
 City of Fairfax                              1              8               5                20,959
 City of Falls Church                         1              1               8                 8,982
 City of Manassas                             3              9               4                33,399
 Loudoun County                               7             16               1                86,100
 Fairfax County                              11              2              12               819,000
 Fauquier County                              3             16               2                52,000
 Prince William County                        3              3               7               216,000
 Stafford County                              1              *              NM                61,000
Charlottesville/
Albemarle County:
 City of Charlottesville                      1              *              NM                40,341
 Albemarle County                             3              7               7                68,040
 Nelson County                                2             35               2                12,778
 Amherst County                               1              2               7                28,578
Richmond:
 City of Richmond                             3              1              11               203,056
 Henrico County                               4              2              11               217,881
 Chesterfield County                          3              2              13               209,274
Emporia:
 City of Emporia                              3             33               1                14,109
State of West Virginia:
Eastern Panhandle:
 Jefferson County                             3             22               2                35,926
 Berkeley County                              3             17               3                59,253
 Mineral County                               3             43               1                26,697
State of Maryland:
 Montgomery County                            6              1              15               821,035
 Prince George                                2              *              NM               769,747


----------------------------------------------------------------------------------------------------------
* Represents less than 1% deposit market share     NM=Not meaningful
</TABLE>


<PAGE>



(1)      In Virginia,  certain  cities are separate  political  entities and not
         part of the counties that  surround  them.  The city of Winchester  and
         Frederick County,  the city of Harrisonburg and Rockingham  County, the
         city of  Charlottesville  and Albemarle County, the city of Fairfax and
         Fairfax  County and the city of Richmond  and Henrico and  Chesterfield
         Counties are examples.  The FDIC and OTS provide  deposit data for each
         separately incorporated city.
(2)      Deposit data  includes  total bank and thrift  deposits and is based on
         FDIC  and OTS  data as of June 30,  1997,  which  is the most  recently
         available information.

LENDING ACTIVITIES

         All of F&M's subsidiary banks offer both commercial and consumer loans,
but  lending  activity is  generally  focused on  consumers  and small to middle
market businesses  within each subsidiary banks' respective market regions.  Six
of  F&M's  subsidiary  banks,  F&M  Bank-Massanutten,  F&M  Bank  Blakeley,  F&M
Bank-Martinsburg,  F&M  Bank-Keyser,  F&M  Bank-Emporia,  and  F&M  Bank-Peoples
emphasize consumer lending with activities focused primarily on residential real
estate and consumer lending. F&M Bank-Richmond,  F&M Bank-Central  Virginia, F&M
Bank-Northern Virginia and F&M Bank-Allegiance are based in larger markets where
commercial  loan demand is stronger and, as a result,  their lending  activities
place a greater emphasis on small to medium sized 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.

         The following  table sets forth the composition of F&M's loan portfolio
(by percentage) for the three years ended December 31:
<TABLE>
<CAPTION>
<S> <C>
                                                   1997                1996                1995
                                            -------------------  ------------------ -------------------
Commercial                                            16.8 %               15.6 %             14.5 %
Real estate construction                               5.4                  4.6                4.2
Real estate mortgage:
 Residential (1-4 family)                             31.2                 31.6               31.7
 Home equity lines                                     4.4                  4.8                5.2
 Multifamily                                           2.0                  2.2                1.9
 Nonfarm, nonresidential(1)                           27.8                 28.4               28.9
 Agricultural                                          1.0                  1.4                1.4
 Real estate mortgage
  Subtotal                                            66.4                 68.4               69.1
Loans to individuals:
 Consumer                                              9.9                  9.8               10.5
 Credit card                                           1.5                  1.6                1.6
Loans to Individuals:
 Subtotal                                             11.4                 11.4               12.5
 Total Loans                                         100.0 %              100.0 %            100.0 %
Total loans (dollars)                       $    1,543,598       $    1,439,108     $    1,296,204
</TABLE>

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


<PAGE>



         Approximately  47.6% of F&M's loan  portfolio at December 31, 1997, was
comprised of commercial loans, which included loans secured by real estate shown
in  the  Table   above   under  the   categories   of   multifamily,   non-farm,
non-residential  and  agricultural  where  real  estate is among the  sources of
collateral  securing  the  loan.  F&M's  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 F&M's  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  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 36.2 % of its  total  loan  portfolio  at  December  31,  1997.  The
residential mortgage loans made by F&M's subsidiary banks and Big Apple Mortgage
are  made  only  for  single  family,  owner-occupied  residences  within  their
respective  market  regions.   Residential   mortgage  loans  offered  by  F&M's
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 (also t/a F&M Mortgage  Company),  F&M Bank-Northern
Virginia  and  F&M  Bank-Peoples   sell  into  the  secondary  market  permanent
residential   mortgage  loans  that  conform  to  GNMA  and  FNMA   underwriting
guidelines.  These F&M subsidiaries  purchase  government insured 1-4 family FHA
and VA loans and resell them  immediately in package form. At December 31, 1997,
only Big Apple  Mortgage  had $13.3  million in loans that it had  committed  to
purchase, but had not settled upon.

         F&M's  real  estate  construction  portfolio  historically  has  been a
relatively  small  portion of the total loan  portfolio.  At December  31, 1997,
construction  loans  were $83.9  million  or 5.4% of the total  loan  portfolio.
Generally, all construction loans are made to finance owner-occupied  properties
with permanent  financing  commitments in place.  F&M's  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.

         Consumer loans were 11.4% of F&M's total loan portfolio at December 31,
1997.  F&M's  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 each subsidiary banks' respective market regions.

<PAGE>

CREDIT POLICIES AND PROCEDURES

         F&M has  established  system-wide  guidelines  governing,  among  other
things, lending practices,  credit analysis and approval procedures,  and credit
quality review. Within these guidelines, F&M's subsidiary banks have latitude to
tailor  their loan  products to meet the needs of the  communities  and specific
customers.  A holding company officer or  representative  serves on the Board of
Directors  of each  subsidiary  bank to  monitor  practices  and to serve as the
liaison with F&M.

LOAN APPROVAL

         F&M's loan  approval  policies  provide for  various  levels of officer
lending  authority.  When the aggregate  outstanding  loans to a single borrower
exceed an  individual  officer's  lending  authority,  the loan  request must be
approved by an officer with a higher lending limit or by the  subsidiary  bank's
loan review  committee.  F&M has  assigned a lending  limit for each  subsidiary
bank.  Loans that would result in a subsidiary bank exceeding its assigned limit
must be approved first by the subsidiary  bank's loan review  committee and then
by a central  credit  committee  appointed by the holding  company.  The central
credit committee consists of six senior officers of F&M  Bank-Winchester and the
Company,  along with  outside  directors  of either F&M  Bank-Winchester  or the
Company, who rotate at the twice weekly meetings.

         All loans to a particular  borrower are reviewed each time the borrower
requests a renewal or extension of any loan or requests an additional  loan. All
lines of credit are  reviewed  annually  prior to  renewal.  These  reviews  are
conducted by each  subsidiary  bank and, if necessary,  by F&M's central  credit
committee.

LOAN REVIEW

         Each  subsidiary  bank of F&M 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 a loan review team that performs a detailed
on-site review and analysis of each subsidiary  bank's  portfolio on at least an
annual basis to ensure the consistent  application  of system-wide  policies and
procedures.  The holding  company  loan  review  team  reviews all loans over an
established principal amount for each subsidiary bank, which results in a review
of 60% to 75% of the  total  principal  amount  of the  subsidiary  bank's  loan
portfolio.  In addition,  all lending relationships  involving a classified loan
are reviewed  regardless of size.  The holding  company loan 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 loan grading system.

         All  classified  loans are reviewed at least  quarterly by F&M's senior
officers and monthly by the subsidiary bank's boards of directors.  All past due
and nonaccrual  loans are reviewed  monthly by the  subsidiary  banks' boards of
directors.  As a  matter  of  policy,

<PAGE>

F&M's  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.

ALLOWANCE FOR LOAN LOSSES

         Each  subsidiary  bank of F&M  maintains  its allowance for loan losses
based on loss  experience  for each  loan  category  over a period  of years and
adjusts the allowance for existing  economic  conditions as well as  performance
trends within specific areas, such as real estate. In addition,  each subsidiary
bank  periodically  reviews  significant  individual  credits  and  adjusts  the
allowance  when deemed  necessary.  The  allowance  also is increased to support
projected loan growth.

IMPAIRED LOANS

         The recorded  investment  in certain  loans that were  considered to be
impaired  in  accordance  to FASB  114 was  $13.3  million  at year  end 1997 as
compared to $8.9 million at year end 1996, of which $12.5 million was classified
as  nonperforming.  Included in 1997 impaired loans are $11.3 million secured by
commercial  real  estate.  All  impaired  loans  at year end 1997 and 1996 had a
related   valuation   allowance   totaling   $3.8  million  and  $1.4   million,
respectively,.  The average  recorded  investment in certain  impaired loans for
1997 and 1996 was approximately $8.5 million and $9.3 million, respectively. For
1997 and 1996,  interest  income  recognized  on  impaired  loans  totaled  $513
thousand and $154 thousand,  respectively, all of which was recognized on a cash
basis.

         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.  Cash 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.  Changes in the  allowance  relating to impaired  loans are charged or
credited to the provision for loan losses.

         An impaired loan is charged-off  when  management  determines  that the
prospect of recovery of the principal of the loan has significantly diminished.

DEPOSITS

         F&M's  subsidiary  banks offer a number of programs to consumers and to
small and middle  market  businesses  at interest  rates  consistent  with local
market conditions. The following table sets forth the mix of depository accounts
offered by the  subsidiary  banks as a percentage of total deposits at the dates
indicated:

<PAGE>
                                                 December 31,
                                --------------------------------------------
                                      1997             1996            1995
                                -----------    -------------   -------------
Noninterest-bearing demand           19.1%            17.0%           16.7%
Interest checking                     16.4             15.5            15.1
Savings accounts                       9.2             10.4            11.2
Money market accounts                  9.8             10.6            11.3
Time deposit accounts:
 Under $100,000                       36.2             37.7            36.8
 $100,000 and over                     9.3              8.8             8.9
                                -----------    -------------   -------------
                                    100.0%           100.0%          100.0%

         F&M's subsidiary banks control deposit flows primarily  through pricing
of deposits  and, to a lesser  extent,  through  promotional  activities.  F&M's
subsidiary  banks  establish  deposit  rates  based  on a  variety  of  factors,
including  competitive  conditions,  liquidity  needs  and  compliance  with net
interest margin requirements  established by F&M for all subsidiary banks. As of
December 31, 1997,  F&M's subsidiary banks had $198.2 million of certificates of
deposit greater than $100,000, or 9.6% of total deposits. F&M's subsidiary banks
do not accept brokered deposits.

         No material  portion of the deposits of F&M's subsidiary banks has been
obtained  from a  single  or a small  group  of  customers,  and the loss of any
customer's  deposits or a small group of  customers'  deposits  would not have a
material  adverse effect on the business of any of F&M's  subsidiary  banks. See
"Business-Market  Regions" for  information  regarding  each  subsidiary  bank's
deposit share and rank in its respective market.

LIQUIDITY AND SENSITIVITY TO INTEREST RATES

         The  primary  functions  of  asset/liability  management  are to ensure
adequate    liquidity   and   maintain   an    appropriate    balance    between
interest-sensitive   assets  and   interest-sensitive   liabilities.   Liquidity
management involves the ability to meet the cash flow requirements of F&M's loan
and deposit  customers.  Interest  rate  sensitivity  management  seeks to avoid
fluctuating  net  interest  margins  and to  enhance  consistent  growth  of net
interest income through periods of changing  interest rates.  F&M does not hedge
its  position  with swaps,  options or futures  but  instead  maintains a highly
liquid and short-term position in all of its earning assets and interest-bearing
liabilities.

         In order to meet its liquidity needs, F&M schedules the maturity of its
investment  securities according to its needs. The weighted-average  life of the
securities portfolio at the end of 1997 was 4 years 5 months which is indicative
of F&M's investment  philosophy of investing in U.S. Government  securities with
maturities  between  five and ten  years.  F&M  views its  securities  portfolio
primarily as a source of liquidity and safety,  however, it may if the market is
favorable, make changes in the available for sale portfolio to take advantage of
changes in the yield curve.  F&M views the total  available for sale  securities
portfolio as a source of liquidity,  whereas,  liquidity in the held to maturity
portfolio is

<PAGE>


limited to calls and maturities.  The maturity ranges of the securities and the
average taxable-equivalent yields as of December 31, 1997, are shown in the
following table
<TABLE>
<CAPTION>
<S> <C>
                                    U.S. Government                  State and
                                    and its Agencies                 Municipal                     Other
                               Book Value           Yield     Book Value      Yield        Book Value         Yield
                            --------------------------------- ------------------------- -------------------------------
One year or less             $      100,937        5.52%     $    3,256       5.22%          $ 7,870            4.42%
After one year
 through five years                 354,312        6.16          13,887       5.39              6,821           5.98
After five through                   99,636        6.61           9,214       5.41                -                -
 ten years
After ten years                      38,053        6.97           2,916       5.29                -                -
                            ------------------              --------------                  -------------
  Total                     $       592,938        6.18%     $   29,273       5.37%          $ 14,691           5.22%
                            ==================              ==============                  =============
</TABLE>

         A cash reserve,  consisting primarily of overnight  investments such as
Federal  Funds,  is also  maintained  to meet any  contingencies  and to provide
additional capital, if needed.

         Most of F&M's loans are fixed-rate  installment  loans to consumers and
mortgage loans whose  maturities are generally longer than the deposits by which
they are funded. A degree of interest-rate risk is incurred if the interest rate
on deposits  should  rise  before the loans  mature.  However,  the  substantial
liquidity provided by the monthly repayments on these loans can be reinvested at
higher rates that largely reduce the  interest-rate  risk.  Home equity lines of
credit have adjustable  rates that are tied to the prime rate. Many of the loans
not in the  installment or mortgage  categories have maturities of less than one
year or have floating rates that may be adjusted periodically to reflect current
market rates. These loans are summarized in the following table:

REMAINING MATURITIES OF SELECTED LOANS

                                         December 31, 1997
                              ------------------------------------
                                 Commercial,
                                  Financial and      Real estate-
                                  Agricultural       Construction
                              ------------------------------------
                                        (Dollars in thousands)

Within 1 year                           $156,960          $56,238
                              -------------------   --------------
Variable Rate:
1 to 5 years                              15,006            2,971
After 5 years                              5,566            2,684
                              -------------------   --------------
  Total                                   20,572            5,655
                              -------------------   --------------

Fixed Rate:
1 to 5 years                              69,835           14,328
After 5 years                             12,514            7,683
                              -------------------   --------------
  Total                                   82,349           22,011
                              -------------------   --------------
  Total Maturities                      $259,881          $83,904
                              ===================   ==============


<PAGE>



         F&M's  asset/liability/risk  committee is responsible for reviewing the
Company's  liquidity  requirements  and  maximizing  the  Company's net interest
income  consistent  with  capital  requirements,  liquidity,  interest  rate and
economic   outlooks,   competitive   factors  and  customer   needs.   Liquidity
requirements  are also  reviewed in detail for each of F&M's  individual  banks,
however, overall asset/liability management is performed on a consolidated basis
to achieve a consistent and coordinated approach.

OTHER ACTIVITIES

         In 1997, F&M's  subsidiary banks offered a range of trust services.  At
December 31, 1997,  the Trust  Department  of F&M  Bank-Winchester  managed $311
million in assets in approximately 1,182 accounts,  covering both personal trust
activities  and  employee  benefit  plans.  F&M  Bank-Northern  Virginia and F&M
Bank-Peoples  offered similar trust services in 1997 and managed assets totaling
$34 million and $145 million,  respectively,  at December 31, 1997.  F&M's other
subsidiary banks did not operate trust departments in 1997.

         Effective  January 1, 1998,  F&M Trust Company,  a  wholly-owned  trust
subsidiary of the Company,  began operations and assumed  responsibility for all
the trust and fiduciary  activities of the Virginia banking  subsidiaries of the
Company.



COMPETITION

         Each of the market  regions in which the Company  operates has a highly
competitive  banking  market  involving  commercial  banks  and  thrifts.  Other
competitors,  including  credit unions,  consumer finance  companies,  insurance
companies and money market  mutual  funds,  compete with the Company for certain
lending and deposit gathering services. In its Charlottesville/Albemarle County,
northern Virginia, and suburban Richmond markets, the Company faces particularly
intense  competition from several  state-wide and regional banking  institutions
which have substantial operations in those market regions.  Management believes,
however, that the Company enjoys certain competitive advantages in its principal
market of Winchester,  the surrounding  northern  Shenandoah  Valley and Loudoun
County  where  F&M   Bank-Winchester   is  the  largest  financial   institution
headquartered  in the area and the  dominant  bank in  terms of  deposit  market
share.

         Competition  among  the  various  financial  institutions  is  based on
interest  rates offered on deposit  accounts,  interest  rates charged on loans,
credit and service charges, the quality of services,  the convenience of banking
facilities and, in connection with loans to larger  borrowers,  relative lending
limits. Many of the financial organizations in competition with the Company have
much greater financial resources,  diversified markets, and branch networks than
F&M and are able to offer similar  services at varying costs with higher lending
limits.

<PAGE>

With reciprocal  interstate banking, the Company also faces the prospect
of additional competitors entering its markets as well as additional competition
in its efforts to acquire other financial institutions.


EXECUTIVE OFFICERS OF THE REGISTRANT

         All officers of the Company and its  subsidiaries  are elected annually
to serve at the pleasure of the Board of Directors of the Company. The following
table sets forth the name, age, year first elected, and offices held at February
28, 1998, of each of the executive officers of the Company:
<TABLE>
<CAPTION>

                                            YEAR FIRST
NAME                                AGE     ELECTED              OFFICE
----                                ---     -------              ------
<S> <C>
W. M. Feltner                       78         1970              Chairman and Chief  Executive  Officer of
                                                                 the  Company;  Chairman  of the  Board of
                                                                 F&M Bank-Winchester

Alfred B. Whitt                     59         1998              President,   Vice  Chairman,  and  Chief
                                                                 Financial  Officer of the Company;  Vice
                                                                 Chairman    and    Secretary    of   F&M
                                                                 Bank-Winchester

Charles E. Curtis                   59         1998              Vice  Chairman  and Chief  Administrative
                                                                 Office of the Company;  Vice  Chairman of
                                                                 F&M Bank-Winchester

F. Dixon Whitworth, Jr.             53         1985              Executive Vice President of the
                                                                 Company; President of F&M
                                                                 Trust Company

Betty H. Carroll                    60         1985              Senior  Vice  President  of the  Company
                                                                 and President,  Chief Executive  Officer
                                                                 of F&M Bank-Winchester

Michael L. Bryan                    46         1998              Corporate    Secretary    and    General
                                                                 Counsel of the Company

<PAGE>

Barbara H. Ward                     52         1983              Treasurer  of the  Company;  Senior Vice
                                                                 President of F&M Bank-Winchester
</TABLE>

         Mr.  Feltner has been a senior  executive  officer of the Company since
its inception in 1970.

        Mr.  Whitt  joined the Company in 1987 as  Director of Human  Resources,
before which time he served as President of F&M Bank-Massanutten,  Harrisonburg,
Virginia,  since its  organization  in 1973.  In July of 1991,  he was appointed
Senior Vice President, Senior Financial Officer and Secretary of the Company and
F&M  Bank-Winchester.  As of January 1, 1998, Mr. Whitt was appointed President,
Vice Chairman and Chief Financial Officer of the Company,  and Vice Chairman and
Secretary to the Board of F&M Bank-Winchester.

         In March of 1996,  Mr. Curtis joined the Company as President and Chief
Executive  Officer  of Fairfax  Bank and Trust  Company,  now F&M  Bank-Northern
Virginia.  Mr. Curtis served in this position from July 22, 1985 to December 31,
1997. As of January 1, 1998,  Mr.  Curtis was appointed  Vice Chairman and Chief
Administrative Officer of the Company, and Vice Chairman of F&M Bank-Winchester.

         F. Dixon Whitworth, Jr. joined the Company in August 1985, as President
of the Suburban Bank, now F&M Bank-Richmond,  and served as such until November,
1985, when he became  Executive Vice President of the Company.  As of January 1,
1998, Mr. Whitworth was appointed President of F&M Trust Company.

         Mrs.   Carroll   has   served  as  Chief   Executive   Officer  of  F&M
Bank-Winchester since December 1988.

        Mr. Bryan was appointed  Corporate  Secretary and General Counsel of the
Company effective  January 1, 1998. Prior to this  appointment,  Mr. Bryan was a
partner in the law firm of Bryan & Coleman,  P.C., Winchester,  Virginia,  since
February 1, 1995.

         Mrs. Ward was appointed Senior Vice President of F&M Bank-Winchester in
March of 1992.  Prior thereto,  she was a Vice President of F&M  Bank-Winchester
since 1974. She has been Treasurer of the Company since 1983.


                           SUPERVISION AND REGULATION

        The  Company and its  subsidiary  banks are subject to state and federal
banking laws and regulations which impose specific  requirements or restrictions
on and provide for general  regulatory  oversight  with respect to virtually all
aspects of  operations.  The  following is a brief  summary of certain  statues,
rules and  regulations  affecting  the Company and its  subsidiary  banks.  This
summary is qualified in its  entirety by reference to

<PAGE>

the  particular  statutory and  regulatory  provisions  referred  to  below  and
is not  intended  to be an exhaustive description of the statutes or regulations
applicable to the business of the  Company  and its  subsidiary  banks.  A
change  in  applicable  laws or regulations  may have a material  effect on the
business  and  prospects of the Company.


THE COMPANY

        The  Company is  registered  as a bank  holding  company  under the Bank
Holding  Company Act  ("BHCA") and the Virginia  Financial  Institution  Holding
Company Act, and is therefore subject to regulation and examination by the Board
of Governors  of the Federal  Reserve  System (the  "Federal  Reserve")  and the
Virginia State  Corporation  Commission (the "Virginia  SCC").  F&M's subsidiary
banks are subject to  examination  and  regulation by the Virginia SCC, the West
Virginia Board of Banking and Financial  Institutions  (the "West Virginia Board
of  Banking")  and the  Commissioner  of  Financial  Regulation  of the State of
Maryland  (the  "Maryland-CFR")  . In addition,  the Company and its  subsidiary
banks are  subject to  certain  minimum  capital  standards  established  by the
Federal Reserve and the FDIC.

        Under the BHCA,  the Company is required to secure the prior approval of
the  Federal  Reserve  before it can merge or  consolidate  with any other  bank
holding company,  or acquire all or substantially  all of the assets of any bank
or acquire  direct or indirect  ownership or control of any voting shares of any
bank that is not  already  majority  owned by it if after such  acquisition  the
Company would  directly or indirectly  own or control more than 5% of the voting
shares of such  bank.  The BHCA  also  prohibits  the  Company  from  acquiring,
directly  or   indirectly   voting  shares  of,  or  interests  in,  or  all  or
substantially  all of the  assets  of,  any bank  located  outside  the State of
Virginia unless the  acquisition is  specifically  authorized by the laws of the
state in which such bank is located, as discussed below.

        The Company is prohibited  under the BHCA, and  regulations  promulgated
thereunder, from engaging in, and from acquiring direct or indirect ownership or
control of more than 5% of voting shares of any company  engaged in,  nonbanking
activities  unless the Federal Reserve,  by order or regulation,  has found such
activities to be so closely related to banking or managing or controlling  banks
as to be a proper  incident  thereto.  The  Federal  Reserve  has by  regulation
determined  that certain  activities  are closely  related to banking within the
meaning  of the BHCA.  These  activities  include,  among  others,  operating  a
mortgage,  finance,  credit card or factoring  company;  performing certain data
processing  operations;  providing investment and financial advice; acting as an
insurance agent for certain types of credit-related insurance;  leasing personal
property on a  full-payout,  non-operating  basis;  and providing  certain stock
brokerage and investment advisory services.

        The Company,  as an affiliate of its subsidiary banks within the meaning
of the Federal Reserve Act, is subject to certain restrictions under the Federal
Reserve Act

<PAGE>

regarding transactions between a bank and companies with which it is affiliated.
These provisions limit extensions of credit (including guarantees of loans) by
the subsidiary banks to affiliates,  investments in the stock or other
securities of the Company by the  subsidiary  banks and the nature and amount of
collateral that  subsidiary  banks may accept from any affiliate to secure loans
extended  to the  affiliate.  Further,  under the  Federal  Reserve  Act and the
regulations promulgated thereunder,  a bank holding company and its subsidiaries
are prohibited  from engaging in certain tie-in  arrangements in connection with
any extension of credit or provision of any property or service.

        The BHCA and the Change in Bank Control Act,  together with  regulations
of the Federal Reserve, require that, depending on the particular circumstances,
either Federal Reserve  approval must be obtained or notice must be furnished to
the Federal Reserve and not disapproved prior to any person or company acquiring
"control" of a bank holding company, such as the Company,  subject to exemptions
for  certain  transactions.  Control  is  conclusively  presumed  to exist if an
individual or company acquires 25% or more of any class of voting  securities of
the bank holding  company.  Control is rebuttably  presumed to exist if a person
acquires  10% or more but less than 25% of any class of  voting  securities  and
either the company has registered  securities under Section 12 of the Securities
Exchange  Act of 1934,  as  amended,  or no  other  person  will  own a  greater
percentage of that class of voting securities immediately after the transaction.
The  regulations  provide a procedure  for challenge of the  rebuttable  control
presumption.

        Federal  Reserve  policy  requires  a bank  holding  company to act as a
source  of  financial  strength  to each of its  bank  subsidiaries  and to take
certain  measures to preserve and protect bank  subsidiaries in situations where
additional  investments  in a troubled  bank  subsidiary  may not  otherwise  be
warranted.  Under the Federal Deposit Insurance  Corporation  Improvement Act of
1991  ("FDICIA"),  in order  to  avoid  receivership  of an  insured  depository
institution  subsidiary,  a bank holding  company is required to guarantee up to
certain maximum limits the compliance with the terms of any capital  restoration
plan filed by such subsidiary with its appropriate federal banking regulator. In
addition, if a bank holding company has more than one bank or thrift subsidiary,
the  bank  holding  company's  other  subsidiary  depository   institutions  are
responsible  under a cross  guarantee for any losses to the FDIC  resulting from
the failure of a depository institution  subsidiary.  Under these provisions,  a
bank holding company may be required to loan money to its depository institution
subsidiaries  in the form of capital notes or other  instruments.  However,  any
such loans likely  would be unsecured  and  subordinated  to such  institution's
depositors and certain other creditors.

         Under federal legislation, restrictions on interstate bank acquisitions
were abolished effective September 29, 1995, and bank holding companies from any
state are now able to acquire  banks and bank holding  companies  located in any
other state. Effective June 1, 1997, the law permits banks to merge across state
lines, subject to earlier "opt-in" or "opt-out" action by individual states. The
law  also  allows  interstate  branch  acquisitions  and de  novo  branching  if
permitted by the host state.  Virginia,  Maryland and West Virginia have adopted
early "opt-in"  legislation that allows interstate bank mergers.

<PAGE>

The states also permits  interstate  branch  acquisitions  and de novo branching
if  reciprocal treatment is accorded Virginia banks in the state of the
acquiror.

        All  acquisitions,  whether by an  in-state  or  out-of-state  acquiror,
involving a Virginia bank or bank holding  company require the prior approval of
the Virginia SCC, in addition to approval by the appropriate  federal regulatory
authority.  Similarly,  the West  Virginia  Board of Banking  must  approve  all
acquisitions  of  a  West  Virginia  bank  or  bank  holding  company,  and  the
Maryland-CFR  must approve all  acquisitions  of a Maryland bank or bank holding
company.

REGULATION OF SUBSIDIARY BANKS

GENERAL

        All of F&M's subsidiary banks are state-chartered institutions organized
under either Virginia,  West Virginia,  or Maryland law. Seven of the subsidiary
banks,  F&M  Bank-Winchester,  F&M  Bank-Massanutten,   F&M  Bank-Richmond,  F&M
Bank-Central  Virginia,  F&M Bank-Emporia,  F&M Bank-Northern  Virginia, and F&M
Bank-Peoples are  Virginia-chartered  institutions regulated and examined by the
Virginia SCC. F&M Bank-Blakeley,  F&M  Bank-Martinsburg  and F&M Bank-Keyser are
West Virginia-chartered institutions regulated and examined by the West Virginia
Board  of  Banking.  F&M  Bank-Allegiance  is a  Maryland  state-chartered  bank
regulated and examined by the Maryland-CFR.

        F&M's subsidiary banks are all members of the Federal Reserve System and
are,  therefore,  supervised and examined by the Federal Reserve,  their primary
federal regulator. The Federal Reserve and the Virginia SCC, West Virginia Board
of Banking, or the Maryland-CFR, as appropriate, conduct regular examinations of
each subsidiary bank, reviewing the adequacy of their allowance for loan losses,
quality of loans and investments,  propriety of management practices, compliance
with laws and regulations and other aspects of operations.  In addition to these
regular examinations, each subsidiary bank must furnish the Federal Reserve with
quarterly reports containing  detailed financial  statements and schedules.  The
FDIC,  which  provides  deposit  insurance,  also has  authority  to examine and
regulate F&M's subsidiary banks.

        Federal and state banking laws and  regulations  govern all areas of the
operations of F&M's subsidiary  banks,  including  maintenance of cash reserves,
loans,  mortgages  maintenance  of minimum  capital,  payment of dividends,  and
establishment of branch offices. Federal and state bank regulatory agencies also
have the general authority to eliminate  dividends paid by insured banks if such
payment is deemed to constitute an unsafe and unsound practice. As their primary
federal  regulator,  the Federal  Reserve  has  authority  to impose  penalties,
initiate  civil  administrative  actions and take other  steps to prevent  F&M's
subsidiary banks from engaging in unsafe or unsound  practices.  In this regard,
the Federal Reserve has adopted capital adequacy requirements  applicable to its
member banks.

<PAGE>

DEPOSIT INSURANCE

        The  deposits  of F&M's  subsidiary  banks are  currently  insured  to a
maximum of $100,000 per depositor,  subject to certain  aggregation  rules.  The
FDIC has  implemented a  risk-related  assessment  system for deposit  insurance
premiums and all depository  institutions have been assigned to one of nine risk
assessment  classifications based upon certain capital and supervisory measures.
All  deposits  of F&M's  subsidiary  banks are  subject to the rates of the Bank
Insurance  Fund  ("BIF"),   the  federal  deposit  insurance  fund  that  covers
commercial  bank  deposits.  In 1997,  all  F&M's  banks  received  a "1A"  risk
classification rating, the highest possible rating.

REGULATORY CAPITAL REQUIREMENTS

        On December 19, 1991,  FDICIA was enacted.  Among other  things,  FDICIA
requires the federal banking  agencies to take "prompt  corrective  action" with
respect  to  banks  that  do  not  meet  minimum  capital  requirements.  FDICIA
establishes five capital tiers: "well  capitalized,"  "adequately  capitalized",
"under   capitalized",   "significantly   undercapitalized",   and   "critically
undercapitalized",  which terms are each further defined by federal regulations.
A depository  institution is "well capitalized" if it significantly  exceeds the
minimum  level  required  by  regulation  for  each  relevant  capital  measure,
"adequately capitalized" if it meets each such measure, "undercapitalized" if it
fails  to meet  any  such  measure,  "significantly  undercapitalized"  if it is
significantly below any such measure,  and "critically  undercapitalized"  if it
fails to meet any  critical  capital  level  set forth in the  regulations.  The
critical  capital level must be a level of tangible  equity capital equal to not
less than 2.0% of total  assets  and not more than 65% of the  minimum  leverage
ratio to be prescribed  by  regulation  (except to the extent that 2.0% would be
higher  than  such  65%  level).  An  institution  may  be  deemed  to  be  in a
capitalization  category  that is lower than is indicated by its actual  capital
position if it receives an  unsatisfactory  examination  rating.  In order to be
classified as a "well  capitalized  institution,"  the  institution  must have a
total risk-based capital ratio of 10% and a leverage ratio of 5%.

        If  a  depository   institution   fails  to  meet   regulatory   capital
requirements,  regulatory  agencies  can  require  submission  and  funding of a
capital  restoration  plan by the  institution,  place limits on its activities,
require  the  raising  of  additional  capital,  and,  ultimately,  require  the
appointment of a conservator or receiver for the institution. As of December 31,
1997,  all F&M's  subsidiary  banks  exceeded  the required  regulatory  capital
requirements under FDICIA.

CAPITAL ADEQUACY

         Information   on  "Capital   Adequacy"  may  be  found  under  ITEM  7.
"MANAGEMENT'S  DISCUSSION  AND  ANALYSIS OF FINANCIAL  CONDITION  AND RESULTS OF
OPERATIONS", "Capital Resources".

<PAGE>

        Dividends  from F&M's  subsidiary  banks  constitute the major source of
funds for dividends to be paid by the Company.  The amount of dividends  payable
by each  subsidiary  bank to the Company  depends  upon its earnings and capital
position,  and is limited by federal and state law,  regulations and policy. The
Federal  Reserve  has the general  authority  to limit  dividends  paid by F&M's
subsidiary  banks and the Company if such  payments are deemed to  constitute an
unsafe and unsound practice.

        As state member banks subject to the regulations of the Federal Reserve,
each  subsidiary  bank must  obtain  approval  of the  Federal  Reserve  for any
dividend if the total of all dividends declared by F&M's subsidiary banks in any
calendar  year would  exceed  the total of its net  profits  for such  year,  as
defined by the Federal Reserve,  plus its retained net profits for the preceding
two years. In addition, each subsidiary bank may not pay a dividend in an amount
greater than its undivided  profits then on hand after deducting  current losses
and bad debts. For this purpose,  bad debts are generally defined to include the
principal  amount of all loans which are in arrears  with respect to interest by
six months or more,  unless  such loans are fully  secured and in the process of
collection.

        In  addition,  Virginia law imposes  restrictions  on the ability of all
banks  chartered  under  Virginia law to pay  dividends.  Under Virginia law, no
dividend may be declared or paid that would impair a bank's paid-in capital. The
Virginia SCC also can limit the payment of dividends by any Virginia  bank if it
determines the  limitation is in the public  interest and is necessary to ensure
the bank's financial soundness.

        Under West  Virginia  law, a state bank may declare a dividend only from
its undivided  profits and, if the bank's surplus account is not greater than or
equal to the par value of the bank's stock,  the bank may not declare a dividend
unless a portion of the bank's  profits for the period for which  dividends  are
declared  is   credited   to  the  bank's   surplus   account.   Also,   a  West
Virginia-chartered  bank must obtain the approval of the West Virginia  Board of
Banking prior to declaring a dividend if the total of all dividends  paid by the
bank in any  calendar  year  exceeds the total of its profits for that year plus
its undivided profits for the preceding two years.

        Pursuant to Maryland  law, a state bank may declare a cash dividend only
from  (i)  its  undivided  profits  or  (ii)  with  the  prior  approval  of the
Maryland-CFR,  its surplus in excess of 100% of its required  capital stock. For
further  information  about the  Company's  dividends,  see Part  II.,  Item 5.,
"Market for Registrant's Common Equity and Related Stockholder Matters."

RECENT LEGISLATIVE DEVELOPMENTS

        From time to time,  various  legislative  and regulatory  proposals with
respect to the  regulation  of  financial  institutions  are  considered  by the
executive  branch  of  the  Federal  government,   Congress  and  various  state
governments,  including Virginia, West Virginia, and Maryland.  Certain of these
proposals,  if adopted,  could significantly  change the

<PAGE>

regulation of banks and the financial services industry. The Company cannot
predict whether any of these proposals will be adopted or, if adopted,  how
these  proposals would affect the Company.

ITEM 2.  PROPERTIES

         The principal executive offices of F&M were moved January 1, 1998, to 9
Court Square,  Winchester,  Virginia,  a multi-story  building  complex which is
owned free of any  encumbrances.  The  Company  operates a total of 108  banking
offices (87 in Virginia,  12 in West Virginia,  and 9 in Maryland),  60 of which
are  owned  by  the  Company  or  one  of  its  subsidiary  banks  free  of  any
encumbrances,  and 48 of which are leased under  agreements  expiring at various
dates,  including  renewal  options.  The Company  also owns  additional  office
facilities for various of its lending,  audit,  accounting,  and data processing
functions.  Additional information regarding F&M's lease agreements may be found
under ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA, Note 15.


ITEM 3.  LEGAL PROCEEDINGS

         In  the  ordinary  course  of  its  operations,  the  Company  and  its
subsidiary banks are parties to various legal proceedings.  Based on information
presently  available,  and after  consultation  with legal  counsel,  management
believes that the ultimate outcome in such proceedings,  in the aggregate,  will
not have a material adverse effect on the business or the financial condition or
results of operations of the Company.


ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         The Company has not submitted any matters to its security holders since
its Annual Meeting of Shareholders held April 22, 1997.



<PAGE>



                                                 PART II

ITEM 5.      MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
             MATTERS.

         The  following  table  sets  forth the per share high and low last sale
prices for the common  stock of the  Company as  reported  on the New York Stock
Exchange,  and the cash dividends paid or declared per share on the Common Stock
for the period indicated:

                                PRICE RANGE                        CASH
                         HIGH                  LOW             DIVIDENDS
                         ----                  ---             ---------

1996
First Quarter            19.750              17.250               0.160
Second Quarter           18.500              16.000               0.160
Third Quarter            19.375              17.250               0.175
Fourth Quarter           21.375              18.125               0.230

1997
First Quarter            22.875              19.625               0.180
Second Quarter           26.375              19.875               0.180
Third Quarter            30.4375             26.00                0.185
Fourth Quarter           36.25               28.5625              0.185

         At December  31,  1997,  there were  20,374,957  shares of Common Stock
outstanding held by 7,881 holders of record.

         On November 1, 1997,  the Company  issued  265,853 shares of its common
stock in connection with the acquisition of Shomo & Lineweaver Insurance Agency,
a  closely-held  insurance  agency  based in  Harrisonburg,  Virginia  ("Shomo &
Lineweaver"). The acquisition was structured as a tax-free transaction involving
the exchange of 265,853  shares of Company  common stock in exchange for all the
outstanding  shares of Shomo &  Lineweaver.  The shares of Company  common stock
issued in the transaction  were not registered  under the Securities Act of 1933
in  reliance  on  the  private  offering  and  intrastate   offering  exemptions
thereunder.

         The Company  historically has paid cash dividends on a quarterly basis.
The final  determination  of the timing,  amount and payment of dividends on the
Common Stock is at the discretion of the Board of Directors and will depend upon
the earnings of the Company and its  subsidiaries,  principally  its  subsidiary
banks,  the  financial  condition  of the Company and other  factors,  including
general  economic  conditions  and  applicable   governmental   regulations  and
policies.

<PAGE>

         The Company or F&M  Bank-Winchester has paid regular cash dividends for
more than 55 consecutive years.

         The  Company  is  a  legal  entity   separate  and  distinct  from  its
subsidiaries, and its revenues depend primarily on the payment of dividends from
F&M's  subsidiary  banks.  F&M's  subsidiary  banks are subject to certain legal
restrictions  on the  amount  of  dividends  they  are  permitted  to pay to the
Company.  At  December  31,  1997,  F&M's  subsidiary  banks had  available  for
distribution as dividends to the Company approximately $40.784 million.

ITEM 6.  SELECTED FINANCIAL INFORMATION

         Incorporated herein by reference,  as Exhibit 13, to page 1 of the 1997
Annual Report.

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 
              RESULTS OF OPERATIONS

         Incorporated herein by reference,  as Exhibit 13, to pages 7 through 24
of the 1997 Annual Report.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         Incorporated herein by reference,  as Exhibit 13, to pages 12 and 13 of
the 1997 Annual Report.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         Incorporated herein by reference, as Exhibit 13, to pages 25 through 46
of the 1997 Annual Report.


ITEM 9.  CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND 
             FINANCIAL DISCLOSURES.

         None.


<PAGE>




                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

ITEM 11. EXECUTIVE COMPENSATION

ITEM 12. SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         Pursuant to General  Instruction  G(3), the  information  called for by
         Part III,  Items 10. through 13., is  incorporated  herein by reference
         from the Company's  definitive proxy  statement,  dated March 30, 1998,
         for the Company's  Annual Meeting of  Shareholders to be held April 28,
         1998,  which  definitive  proxy  statement  is to  be  filed  with  the
         Commission  pursuant to Rule 14a-6 on or prior to March 30,  1998.  The
         information  regarding  executive  officers  called  for by Item 401 of
         Regulation S-K is included in Part I under  "EXECUTIVE  OFFICERS OF THE
         REGISTRANT".


<PAGE>



                                     PART IV


ITEM 14.  EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K.

(a)       The  following  documents  included  in  Part II of  this  report  are
          incorporated  by reference to the  Company's  1997 Annual  Report (see
          Exhibit 13):

1.        Financial Statements                                              Page

          Report of Independent Certified Public Accountants                 47
          F&M National Corporation and Subsidiaries:
          Consolidated Balance Sheets at December 31, 1997 and 1996          25
          Consolidated Statements of Income at December 31, 1997,
             1996, and 1995                                                  26
          Consolidated Statements of Changes in Shareholders'
             Equity for years ended December 31, 1997,
             1996 and 1995                                                   27
          Consolidated Statements in Cash Flows for the periods
             ended December 31, 1997, 1996 and 1995                          28
          Notes to Consolidated Financial Statements                         29

2.        Financial Statement Schedules

          All schedules are omitted  because of the absence of conditions  under
          which they are required or because the required  information  is given
          in the financial statements or notes thereto.

3.        Exhibits.

          (10)    Material Contracts.

                  (i)      Form of agreement  between officers of the Registrant
                           under  the  Registrant's   Defined  Benefit  Deferred
                           Compensation    and    Salary    Continuation    Plan
                           (incorporated herein by reference to Exhibit 10(b) to
                           Registration Statement #33-10696, filed on December 
                           9, 1986).

                  (ii)     Registrant's    Officers'    Incentive   Bonus   Plan
                           (incorporated herein by reference to Exhibit 28(i) to
                           Registration Statement #33-25867 filed on December 2,
                           1988).

                  (iii)    Registrant's 1992 Incentive and  Non-Qualified  Stock
                           Option  Plan  (incorporated  herein by  reference  to
                           Exhibit 10(b) to  Registration  Statement  #33-50902,
                           filed on August 14, 1992).

                  (iv)     Executive Severance  Agreements entered into with the
                           Registrant  and the following  Executive  Officers of
                           the  Registrant on December 1, 1995:  Jack R. Huyett,
                           Betty H.  Carroll,  Alfred  B.  Whitt,  and F.  Dixon
                           Whitworth,  Jr.  (incorporated herein by reference to
                           Form  10-K/405 for the calendar  year ended  December
                           31,  1995,  filed  with the  Commission  on March 28,
                           1996).

         (11)     Statement  re  computation   of  per  share  earnings   (filed
                  herewith).

         (13)     Portions of the 1997  Annual  Report to  Shareholders  for the
                  fiscal year ended December 31, 1997 (filed herewith).

         (21)     Subsidiaries of the Registrant (filed herewith).

         (23)     Consent of Yount,  Hyde &  Barbour,  P. C.,  Certified  Public
                  Accountants (filed herewith).

         (27)     Financial Data Schedule (filed herewith).

(b)      Reports on Form 8-K.

         During 1997, the Company filed the following reports:

          (i)     October 23, 1997,  for event of October 22, 1997,  under ITEMS
                  5.  to  report  the  changes  in  management  of F&M  National
                  Corporation.
          (ii)    December 4, 1997,  for event of  December 2, 1997,  under ITEM
                  5.,  to  announce  that the  Registrant  had  entered  into an
                  Agreement  and Plan of  Reorganization  with  Peoples  Bank of
                  Virginia, Chesterfield, Virginia
          (iii)   December 15, 1997, for event of December 12, 1997,  under ITEM
                  5.,  to  announce  that the  Registrant  had  entered  into an
                  Agreement  and  Plan  of  Reorganization   with  The  Bank  of
                  Alexandria, Alexandria, Virginia.




<PAGE>



                                   SIGNATURES

Pursuant  to the  requirements  of  Section  13 or 15(d) of the  Securities  and
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned,  thereunto duly authorized, as of the 11th day of
March, 1998:

                                       F&M NATIONAL CORPORATION
                                       Winchester, Virginia


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

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following  persons on behalf of the  registrant and
in the capacities on the 11th day of March, 1998:


SIGNATURE                                     TITLE

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

/s/ Alfred B. Whitt                           Vice Chairman, President, Chief
ALFRED B. WHITT                               Financial Officer, Director

/s/ Charles E. Curtis                         Vice Chairman, Chief
CHARLES E. CURTIS                             Administrative Officer

/s/ Frank Armstrong, III
FRANK ARMSTRONG, III                          Director

/s/ William H. Clement
WILLIAM H. CLEMENT                            Director

/s/ Charles E. Curtis
CHARLES E. CURTIS                             Director

/s/ John E. Fernstrom
JOHN E. FERNSTROM                             Director

/s/ William R. Harris
WILLIAM R. HARRIS                             Director

<PAGE>



/s/ L. David Horner, III
L. DAVID HORNER, III                          Director

/s/ Jack R. Huyett
JACK R. HUYETT                                Director

/s/ George L. Romine
GEORGE L. ROMINE                              Director

/s/ John S. Scully, III
JOHN S. SCULLY, III                           Director

/s/ J. D. Shockey, Jr.
J. D. SHOCKEY, JR.                            Director

/s/ Ronald W. Tydings
RONALD W. TYDINGS                             Director

/s/ Fred G. Wayland, Jr.
FRED G. WAYLAND, JR.                          Director