SECURITIES AND EXCHANGE COMMISSION
                            Washington, D. C.  20549


                                  FORM 10-K405


[ X ] ANNUAL REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES
      EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 1995

      OR

[   ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
      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)

38 ROUSS AVENUE, WINCHESTER, VIRGINIA                    22601
(Address of principal executive offices)                 (Zip Code)


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

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

          SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

                         Common Stock, $2.00 par value
                                (Title of Class)


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


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. [ X ]

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 29, 1996: $293,057,330.00


       NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AT FEBRUARY 29, 1996:
                                   16,517,797



                      DOCUMENTS INCORPORATED BY REFERENCE

(1) Portions of the  Registrant's  Annual Report to Shareholders  for the fiscal
year ended December 31, 1995 are  incorporated  by reference in Parts I, II, and
IV hereof; and

(2) Portions of  Registrant's  1996 Proxy  Statement  dated March 21, 1996,  are
incorporated by reference in Part III hereof.



<PAGE>

                                     PART I

                                ITEM 1. BUSINESS


(a)        GENERAL DEVELOPMENT OF BUSINESS

           Since  January  1,  1995,  there  have  been no  developments  in the
Registrant's (hereinafter called "F&M" or the "Company") business other than the
following:

           On  January  19,  1995,  F&M   Bank-Broadway   was  merged  into  F&M
Bank-Massanutten.

           On March 17, 1995, F&M acquired Farland Investment  Management,  Inc.
("Farland")  through the exchange of 11,980 shares of F&M common stock.

           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 financial statements have been
restated to reflect the share exchange.

           On April 11, 1995,  F&M  Bank-Winchester  acquired from the County of
Frederick property located at 9 Court Square, Winchester, Virginia consisting of
land and buildings in exchange for 2 parking lots of equal value.

           On April 21, 1995, F&M  Bank-Winchester  opened a full service branch
bank at 1855 Senseny Road, Winchester, Virginia.

           On June 17, 1995, F&M Bank-Peoples  opened a full service branch bank
at 760 Warrenton Road, Fredericksburg, Virginia.

           On June 20,  1995,  F&M  Bank-Winchester  opened a branch bank at 300
Westminister Canterbury Drive, Winchester, Virginia.

           On October  20,  1995,  F&M  Bank-Martinsburg  closed its branch bank
located at 131 South Queen Street, Martinsburg,  West Virginia, and converted it
to an operations center.

           On November  22,  1995,  FB&T  Financial  Corporation  (FB&T) and F&M
announced   that  they  entered  into  a  Definitive   Agreement   and  Plan  of
Reorganization,  and 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


<PAGE>


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 $243.1  million,  total
loans  were  $149.1  million,  total  deposits  were  $191.5  million  and total
shareholders'  equity was $16.9 million. The merger will become effective during
the first quarter 1996.

           On December  12,  1995,  F&M  Bank-Massanutten  opened a full service
branch bank at the corner of Route 42 and American  Legion  Drive,  Timberville,
Virginia.


(b)  FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS

           F&M and its  subsidiaries  are engaged 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.  At December  31,  1995,  F&M's eleven
Subsidiary  Banks  operate 77 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. At December 31, 1995, F&M had assets of $1.8
billion, deposits of $1.6 billion and shareholders' equity of $193.5 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  fourteen banks,  which expanded its market area
and increased market share in Virginia and West Virginia.


<PAGE>

           The following Table sets forth certain information concerning F&M and
its operating subsidiaries as of December 31, 1995:

<TABLE>
<CAPTION>

                                       DATE      BANKING         TOTAL                TOTAL                TOTAL
                                       ACQ.      OFFICES         ASSETS               LOANS              DEPOSITS
<S>                                    <C>         <C>        <C>                  <C>                  <C>
F&M Bank-Winchester
 Winchester, VA(1)                     1970        31         $  779,228           $  437,167           $  698,033
F&M Bank-Massanutten
 Harrisonburg, VA(2)                   1980         8            160,934               94,567              139,383
F&M Bank-Richmond
 Richmond, VA(3)                       1982         9            153,157               96,112              140,138
F&M Bank-Central
Virginia(4)
 Charlottesville VA                    1985         7             74,268               34,742               63,487
F&M Bank-Blakeley
 Charles Town/Ranson, WV               1988         3             96,864               73,680               80,965
F&M Bank-Martinsburg
 Martinsburg, WV                       1988         3             93,797               64,416               84,094
F&M Bank-Keyser
 Keyser, WV                            1992         3             89,501               56,361               77,081
F&M Bank-Emporia
 Emporia, VA                           1993         3             63,676               29,836               55,726
F&M Bank-Hallmark
 Springfield, VA                       1994         5            126,873               69,941              105,174
F&M Bank-Peoples
 Warrenton, VA                         1994         4             96,804               63,739               85,533
F&M Bank-Potomac                       1995         1             61,919               33,268               53,863
F&M (Parent only)                       -           -             36,799                 -                   -
Total                                              77         $1,833,820           $1,053,829           $1,583,477

</TABLE>

(1)     Includes Big Apple Mortgage and a general credit reporting agency.  Also
        includes  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.
(2)     Includes the acquisition in 1986 of Virginia Capital Bank, Richmond,
        Virginia.
(3)     Includes the acquisition in 1990 of Peoples Bank of Central Virginia,
        Lovingston, 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 the 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,  amount 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


<PAGE>


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.

           The  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 the Subsidiary Banks. In addition, F&M Bank-Winchester,  F&M Bank-Keyser, F&M
Bank-Hallmark,  and F&M Bank-Peoples  operate trust departments offering a range
of fiduciary  services.  At December 31, 1995,  trust assets under management at
these four banks totaled $308.5 million.

           F&M  operates  in  six  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 and Stafford  County,
Warrenton and surrounding Fauquier County area. The more populous sectors within
each of the six market regions experienced substantial population growth between
1980 and 1990,  most of which  exceeded 20% growth.  At December  31, 1995,  F&M
operated  39  banking  offices  in the  Shenandoah  Valley  from  Winchester  to
Harrisonburg  with  deposits  of $534.2  million;  nine  banking  offices in the
eastern  panhandle  of West  Virginia  with  deposits of $242.1  million;  seven
banking  offices in the  Charlottesville/Albemarle  County area with deposits of
$63.5  million;  three banking  offices in Emporia,  Virginia,  and  surrounding
Greenville  County  with  deposits of $55.7  million;  nine  banking  offices in
suburban Richmond,  Virginia,  with deposits of $140.1 million;  and six banking
offices in Loudoun,  Fairfax and Prince  William  Counties of northern  Virginia
with deposits of $164.7  million;  and four offices in the city of Warrenton and
Fauquier and Stafford  Counties with deposits of $85.5 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 45% share of total  deposits in Winchester,  a 25%
share of total deposits in surrounding  Frederick  County,  a 27% 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 19% deposit market share. In F&M's three-county
West Virginia  market,  F&M has a 22% deposit  market share in Jefferson  County
(which  includes  Charles Town),  a 22% deposit market share in Berkeley  County
(which  includes  Martinsburg)  and a 49% deposit market share in Mineral County
(which  includes  Keyser).  In Fairfax,  Prince William,  and Fauquier  Counties
(including Warrenton), F&M has 1%, 1%, and 17% 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.


<PAGE>


           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 $817.6 million in assets and approximately
$725.1 million in deposits through ten bank  acquisitions.  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.

           The Subsidiary Banks have not experienced loan quality  deterioration
to the same extent as many other  financial  institutions,  due to  conservative
underwriting standards and focused in-market lending practices.  The purchase of
assets of the Hamilton  Bank  increased  nonperforming  assets at September  18,
1993, by $27.9 million,  of which,  $21.3 million were nonaccrual loans and $6.6
million were foreclosed  properties.  At December 31, 1995,  these Hamilton Bank
nonaccrual loans and foreclosed properties have been reduced to $3.4 million and
$4.6 million,  respectively.  At December 31, 1995, F&M had total  nonperforming
assets of approximately  $23.9 million,  representing  2.24% 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 trading as 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,  in  addition,  $16.0  million  residential  loans  were  warehoused,
available for sale.

           F&M's 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  least  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.


<PAGE>


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,  and  southern  Virginia  market in Emporia  and
Greenville  County.  The following Table displays the market and population data
for each of the market regions:

<TABLE>
<CAPTION>
                                                                                                             %
                                                                                                             GROWTH
                                       BANKING           % MARKET       MARKET          1990                 FROM
COUNTY/CITY(1)                         OFFICES           SHARE(2)       RANK(2)         POPULATION           1980-90
<S>                                      <C>                <C>           <C>             <C>                   <C>
Shenandoah Valley:
 City of Winchester                      10                 45             1               21,947                9
 Frederick County                         5                 25             1               45,723               34
 Warren County                            4                 27             1               26,142               23
 Shenandoah County                        3                 11             5               31,636               15
 Clarke County                            1                 21             2               12,101               21
 Rappahannock County                      1                 46             2                6,622                9
 Rockingham County                        4                 19             3               57,482               10
 City of Harrisonburg                     4                  9             5               30,707               25
Northern Virginia:
 City/Alexandria                          1                  *            NM              111,182
 Loudoun County                           7                 18             1               86,100               50
 Fairfax County                           4                  1            NM              819,000
 Fauquier County                          3                 17             2               52,000
 Prince William Co.                       1                  1            NM              216,000
 Stafford Co.                             1                  *            NM               61,000
Charlottesville/
Albemarle County:
 City/Charlottesville                     1                  *            NM               40,341                1
 Albemarle County                         3                  6             7               68,040               22
 Nelson County                            2                 35             2               12,778                5
 Amherst County                           1                  2             6               28,578               (2)
Richmond:
 City of Richmond                         3                  1            NM              203,056               (8)
 Henrico County                           3                  2            NM              217,881               21
 Chesterfield County                      3                  2            NM              209,274               48
Emporia:
 City of Emporia                          3                 38             1               14,109              (10)
 Eastern Panhandle
 of West Virginia:
 Jefferson County                         3                 22             2               35,926               19
 Berkeley County                          3                 16             4               59,253               27
 Mineral County                           3                 49             1               26,697               (2)
State of Virginia                        68                                             6,187,358               16
State of West Va.                         9                                             1,793,477               (8)

</TABLE>

* Represents less than 1% deposit market share
NM = Not Meaningful.

(1)     In Virginia, certain cities are separate political entities and
        not part of the counties that surround them.  The city of


<PAGE>



        Winchester and Frederick County, the city of Harrisonburg and Rockingham
        County,  the city of  Charlottesville  and Albemarle County, the city of
        Richmond  and  Henrico  and  Chesterfield  Counties,  and  the  city  of
        Alexandria  and Fairfax  County 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,  1995,  which  is the  most  recently
        available information.


LENDING ACTIVITIES

           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. Six of
the   Subsidiary   Banks,   F&M   BankMassanutten,   F&M  Bank   Blakeley,   F&M
Bank-Martinsburg,   F&M  BankKeyser,  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-Potomac and F&M  Bank-Hallmark 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, 1995:

                                   1995           1994             1993

Commercial                          12.8%          13.6%            11.2%
Real estate construction             3.9            3.3              4.2
Real estate mortgage:
 Residential (1-4 family)           33.0           32.9             34.9
 Home equity lines                   5.2            5.5              4.8
 Multifamily                         1.9            1.9              1.8
 Nonfarm, nonresidential(1)         28.4           26.8             26.5
 Agricultural                        1.6            1.7              1.7
 Real estate mortgage
  Subtotal                          70.1           68.8             69.7
Loans to individuals:
 Consumer                           11.3           12.7             13.5
 Credit card                         1.9            1.6              1.4
Loans to individuals:
  Subtotal                          13.2           14.3             14.9
  Total loans                      100.0%         100.0%           100.0%
Total loans (dollars)         $1,053,829     $1,009,223         $959,052

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



<PAGE>




           Approximately 12.8% of F&M's loan portfolio at December 31, 1995, 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. 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 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  70.1% of its  total  loan  portfolio  at  December  31,  1995.  The
residential  mortgage loans made by the Subsidiary  Banks and Big Apple Mortgage
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 trading as 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,
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.

           Loans to individuals were 18.4% of F&M's total loan portfolio at
December 31, 1995, if home equity lines were included.  The


<PAGE>



Subsidiary Banks offer a wide variety of consumer loans,  which include consumer
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.


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,  the 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 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.




<PAGE>



           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, 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.

ALLOWANCE FOR LOAN LOSSES. Each Subsidiary Bank 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

           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
Statement  No. 118,  "Accounting  by Creditors  for  Impairment of a Loan-Income
Recognition and  Disclosures."  Statement 114, as amended,  applies to all loans
that are identified for evaluation,  uncollateralized as well as collateralized,
except  for  large  groups  of   smaller-balance   homogeneous  loans  that  are
collectively  evaluated for impairment.  Homogeneous  loans include  residential
mortgage,  credit card and  consumer  installment  loans.  A loan is  considered
impaired when, based on current  information and events, it is probable that F&M
will be unable to collect all amounts due according to the contractual  terms of
the loan  agreement.  A delay of more than 90 days or a  shortfall  in amount of
payments  of more  than  10%  normally  would  require  impairment  recognition.
However,  a loan is not  impaired  during a period  of delay in  payment  if F&M
expects to collect all amounts due including interest accrued at the contractual
interest rate for the period of delay.

           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 for the  collateral.  Measurement  of impairment for loans not meeting the
above criteria would be under the aggregate collection  experience method. Under
this  method,  loans  with  similar  risk  characteristics  are  aggregated  and
historical  data is used to determine the loan loss for the group.  F&M measures
the impairment of loans on a loan-by-loan basis.

           Loans are placed on nonaccrual when a loan is specifically determined
to be impaired or when principal or interest is delinquent


<PAGE>



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.

           The implementation of FASB 114 does not have a material impact on the
credit risk of F&M.  Information  about  impaired loans as of and for the period
ended 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

Impaired loans by measurement method:
Fair value of collateral method                               $  9,076,463
Expected cash flow method                                        1,629,000
Aggregate collection experience method                               --
  Total impaired loans                                        $ 10,705,463


DEPOSITS

        The  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:

December 31,                         1995         1994       1993

Noninterest-bearing demand           14.9%        15.5%      14.2%
Interest checking                    15.8         17.1       16.7
Savings accounts                     11.7         14.1       14.6
Money market accounts                 9.2         12.0       13.1
Time deposit accounts:
Under $100,000                       39.9         35.2       35.2
$100,000 and over                     8.5          6.1        6.2
                                    100.0%       100.0%     100.0%


<PAGE>




           The Subsidiary Banks control deposit flows primarily  through pricing
of  deposits  and,  to a lesser  extent,  through  promotional  activities.  The
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, 1995, the Subsidiary  Banks had $135.1 million of  certificates  of
deposit greater than $100,000,  or 8.5% of total deposits.  The Subsidiary Banks
do not accept brokered deposits.

           No material  portion of the deposits of the 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 the  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 1995  was 4 years 8  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 limited to calls and  maturities.  The maturity ranges of
the  securities  and the average  taxable-equivalent  yields as of December  31,
1995, are shown in the following Table.


<PAGE>


<TABLE>
<CAPTION>

                      U.S. Government                State and                         Other
                      and its Agencies               Municipals                        Book
                      Book             Yield         Book                Yield         Value          Yield
<S>                   <C>              <C>           <C>                 <C>           <C>            <C>
One year or
 less                 $100,907         6.28%         $ 4,605             8.55%         $ 7,552        3.46%

After one year
 through
 five years            289,895         6.13%          12,044             7.95%           3,321        6.71%

After five
 years through
 ten years              91,880         6.75%          10,096             8.10%           2,013        7.25%

After ten
 years                  38,880         7.11%           2,621             8.71%           5,455        7.41%

Total                 $521,562         6.34%         $29,366             8.03%         $18,341        5.64%

</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, 1995
(Dollars in thousands)              Commercial,
                                    Financial and          Real estate-
                                    Agricultural           Construction

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


<PAGE>





           F&M's  asset/liability  committee is  responsible  for  reviewing the
Corporation's  liquidity  requirements  and  maximizing  the  Corporation'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.

           One of the tools F&M uses to determine its interest-rate  risk is gap
analysis. Gap analysis attempts to examine the volume of interest-rate sensitive
assets minus interest-rate sensitive liabilities. The difference between the two
is the interest sensitivity  gap, which indicates how future changes in interest
rates may affect net interest  income.  Regardless of whether interest rates are
expected to increase or fall, the object is to maintain a gap position that will
minimize any changes in net interest  income. A negative gap exists when F&M has
more  interest-sensitive  liabilities maturing within a certain time period than
interest-sensitive  assets.  Under  this  scenario,  if  interest  rates were to
increase, it would tend to reduce net interest income. At December 31, 1995, F&M
had a  positive  one  year  balance  sheet  gap of $98.0  million  and a risk to
interest margin (gap as a percentage of rate sensitive assets) of 5.85%.

           F&M attempts to control interest-rate risk according to its projected
needs  utilizing  maturity and  repricing  reports.  F&M also compares the Olson
Model, a dynamic modeling process that projects the impact of different interest
rate, loan and deposit growth  scenarios over a 12-month period to its projected
needs.  A large part of F&M's loans and deposits  comes from its retail base and
does not automatically  reprice on a contractual basis in reaction to changes in
interest-rate  levels.  Accordingly,   F&M  has  not  experienced  the  earnings
volatility indicated by its interest-sensitive gap position.  F&M's net interest
margin for 1993,  1994 and 1995 were 4.67%,  4.74% and 4.75%.  Whether  interest
rates were high or low,  F&M has been able to  maintain  adequate  liquidity  to
provide for changes in interest rates and in loan and deposit demands.


OTHER ACTIVITIES

           The  Subsidiary  Banks  offer a range of trust  services.  The  Trust
Department  of  F&M   Bank-Winchester   manages  $188.9  million  in  assets  in
approximately  1,050  accounts,  covering both  personal  trust  activities  and
employee benefit plans.  F&M  Bank-Hallmark  and F&M Bank-Peoples  offer similar
trust  services and manage  assets  totaling  $28.6  million and $82.8  million,
respectively. F&M Bank-Keyser offers a range of trust services as well, managing
approximately  $8.3 million in assets. The other Subsidiary Banks do not operate
trust  departments,  but are encouraged to offer their customers the opportunity
to utilize trust services offered by F&M Bank-Winchester.





<PAGE>



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,
the  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. 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 names,  offices and ages at February 29,  1995,  of each of
the  executive  officers  of the Company  and is  included  in  conformity  with
Instruction 3 of Item 401(b) of Regulation S-K:

                                  FIRST
NAME                       AGE    ELECTED      OFFICE

W. M. Feltner              76     1970         Chairman and Chief Executive
                                               Officer of the Company;
                                               Chairman of Board, F&M
                                               Bank-Winchester

Jack R. Huyett             63     1992         President-Chief Administrative
                                               Officer of the Company

F. Dixon Whitworth Jr.     51     1985         Executive Vice President of
                                               the Company



<PAGE>



Alfred B. Whitt            57     1991         Senior Vice President,
                                               Secretary, Senior Financial
                                               Officer of the Company and F&M
                                               Bank-Winchester

Betty H. Carroll           58     1985         Senior Vice President of the
                                               Company; President, Chief
                                               Executive Officer, F&M
                                               Bank-Winchester

Barbara H. Ward            50     1983         Treasurer of the Company;
                                               Senior Vice President of F&M
                                               Bank-Winchester


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

           Mr.  Huyett  joined the  Company in November of 1988 at which time he
was  President  and Chief  Executive  Officer of Blakeley Bank and Trust Company
(now F&M Bank-Blakeley),  a position he had held for 19 years. He was appointed
President and Chief Administrative Officer of the Company July 1, 1992.

           F. Dixon Whitworth, Jr. Winchester,  Virginia,  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.  Prior to joining the Company as President of The Suburban  Bank in
1984,  he had been  employed as Executive  Vice  President of Southern Bank (now
Jefferson National Bank), Richmond, Virginia for eleven years.

           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 January of 1990, he was appointed
Senior  Financial  Officer of the  Company and Senior  Financial  Officer of F&M
Bank-Winchester. In July of 1991, he was appointed Senior Vice President, Senior
Financial Officer and Secretary of the Company and F&M Bank-Winchester.

           On December 7, 1988, Mrs.  Carroll was named Chief Executive  Officer
of F&M  Bank-Winchester.  Prior  thereto,  she  had  been  President  and  Chief
Administrative Officer of F&M Bank-Winchester since 1985, and had been Executive
Vice President of that bank for eleven years before becoming President and Chief
Administrative Officer.

           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.

<PAGE>




                           SUPERVISION AND REGULATION

           The Company and the 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 the  Subsidiary  Banks.  This
summary is qualified in its  entirety by reference to 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 the  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"). The Subsidiary Banks
are subject to  examination  and  regulation  by the  Virginia  SCC and the West
Virginia Board of Banking and Financial  Institutions  (the "West Virginia Board
of Banking").  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


<PAGE>



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 the  Subsidiary  Banks within the
meaning of the Federal Reserve Act, is subject to certain restrictions under the
Federal  Reserve Act 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 recently  enacted  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.  See "Recent  Legislation and Regulatory  Developments."  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.


<PAGE>


           All  acquisitions,  whether by an in-state or out-of-state  acquirer,
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.

           The BHCA  currently  prohibits the Federal  Reserve from approving an
application  from a bank  holding  company to acquire  shares of a bank  located
outside  the state in which the  operations  of the  holding  company's  banking
subsidiaries   are  principally   conducted,   unless  such  an  acquisition  is
specifically  authorized  by statute of the state in which the bank whose shares
are  to  be  acquired  is  located.  However,  under  recently  enacted  federal
legislation,  the  restriction  of  interstate  acquisitions  will be  abolished
effective  one year from  enactment of such  legislation,  and  thereafter  bank
holding  companies from any state will be able to acquire banks and bank holding
companies located in any other state,  subject to certain conditions,  including
nationwide  and state  concentration  limits.  Banks also will be able to branch
across state lines  effective  June 1, 1997 (unless  state law would permit such
intestate  branching at an earlier date),  provided  certain  condition are met,
including  that  applicable  state law must  expressly  permit  such  interstate
branching.  Virginia has adopted  legislation  that will permit branching across
state lines effective July 1, 1995, provided there is reciprocity with the state
in which the out-of-state bank is based.


REGULATION OF SUBSIDIARY BANKS

           All  of  the  Subsidiary  Banks  are   state-chartered   institutions
organized  under either  Virginia or West Virginia law.  Eight 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 BankHallmark, F&M Bank-Peoples, and
F&M Bank-Potomac are  Virginiachartered  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.

           The  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 or West
Virginia Board of Banking, as appropriate,  conduct regular  examinations of the
Subsidiary  Banks,  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, the Subsidiary Banks 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 the Subsidiary Banks.

           Federal and state banking laws and regulations govern all areas


<PAGE>



of the  operations  of the  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
the  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.


RECENT LEGISLATION AND REGULATORY DEVELOPMENTS

           On December 19, 1991, FDICIA was enacted.  Among other things, FDICIA
provides  increased  funding  for the FDIC's  Bank  Insurance  Fund  ("BIF") and
expanded regulation of depository  institutions and their affiliates,  including
parent holding  companies.  A significant  portion of the additional BIF funding
will be in the form of borrowings to be repaid by insurance premiums assessed on
BIF members.  These premium  increases  would be in addition to the increases in
deposit  premiums  made during  1994.  FDICIA  provides for an increase in BIF's
ratio of reserves to insured deposits to 1.25% within the next 15 years, also to
be financed by insurance  premiums.  The result of these  provisions  could be a
significant increase in the insurance assessment rate on deposits of BIF members
over the next 15  years.  FDICIA  provides  authority  for  special  assessments
against  insured  deposits  and for the  development  of a system  of  assessing
deposit  insurance  premiums based upon the financial  institution's  risk. FDIC
announced  in early 1995 that  current  projections  indicate the BIF's ratio of
reserves could reach the 1.25% requirement by the second quarter of 1996.

           On September 15, 1992, the FDIC approved final  regulations  adopting
the risk-related deposit insurance system that was proposed in May 1992. The new
risk-related regulations, effective January 1, 1994, will initially result in an
eight basis point  spread  between  the  highest  and lowest  deposit  insurance
premiums.  The  strongest  institutions  will  continue  to pay  annual  deposit
insurance  premiums  of 0.23% and the  weakest  will pay 0.31%.  Under the final
riskrelated insurance  regulations,  each insured depository institution will be
assigned  to  one  of  three   categories,   "well   capitalized,"   "adequately
capitalized" or "less than adequately  capitalized" as defined in regulations to
be established  pursuant to FDICIA by the Federal  Reserve and the other federal
bank regulatory agencies. These categories will be further subdivided into three
subgroups based upon the FDIC's  evaluations of the risk posed by the depository
institution,  based in part on examinations by the institution's primary federal
and/or state  regulator.  F&M's banks have  received a "1A" risk  classification
rating for 1995, the highest  possible rating and are paying the minimum premium
of $2,000 per bank per year.

           Among other things,  FDICIA requires the federal banking  agencies to
take  "prompt  corrective  action" in respect of banks that do not meet  minimum
capital requirements. FDICIA establishes five


<PAGE>



capital   tiers:   "well   capitalized,"   "adequately   capitalized",    "under
capitalized",      "significantly     undercapitalized",     and     "critically
undercapitalized",  to be 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"  under the proposed rules, 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.  The obligation of
a controlling  bank holding  company under FDICIA to fund a capital  restoration
plan is limited to the lesser of 5% of an  undercapitalized  subsidiary's assets
or the amount required to achieve regulatory capital adequacy  requirements.  If
the  controlling  bank holding  company fails to fulfill its  obligations  under
FDICIA  and  files (or has  filed  against  it) a  petition  under  the  Federal
bankruptcy  code,  the  FDIC's  claim  may be  entitled  to a  priority  in such
bankruptcy proceeding over third party creditors of the bank holding company.

           Any institution that is not well capitalized is generally  prohibited
from accepting  brokered deposits and offering interest rates on deposits higher
than the prevailing rate in its market;  in addition,  "pass through"  insurance
coverage  may  not  be  available  for  certain   employee   benefit   accounts.
Under-capitalized  depository  institutions may be subject to growth limitations
and are  required  to  submit a  capital  restoration  plan.  The  federal  bank
regulatory  agencies may not accept a capital plan  without  determining,  among
other  things,  that the plan is based on  realistic  assumptions,  is likely to
succeed in restoring the depository institutions's capital, and is guaranteed by
the parent  holding  company.  If a  depository  institution  fails to submit an
acceptable   plan,   it  will   be   treated   as  if  it   were   significantly
undercapitalized.


           Significantly undercapitalized depository institutions may be subject
to a number of requirements and restrictions, including orders to sell
sufficient voting stock to become adequately capitalized, requirements to reduce
total assets, and cessation of receipt of deposits from correspondent banks.
Critically


<PAGE>



undercapitalized institutions are subject to appointment of a receiver or
conservator.

           FDICIA contains  numerous other  provisions,  including new reporting
requirements,  termination  of the "to big to fail"  doctrine  except in special
cases,  limitations on the FDIC's payment of deposits at foreign  branches,  and
revised  regulatory  standards for, among other things,  real estate lending and
capital adequacy.

           An insured depository  institution may not pay management fees to any
person having control of the institution  nor may an  institution,  except under
certain  circumstances  and with prior  regulatory  approval,  make any  capital
distribution  if,  after making such payment or  distribution,  the  institution
would be  undercapitalized.  FDICIA also  contains a number of consumer  banking
provisions,   including  disclosure  requirements  and  substantive  contractual
limitations with respect to deposit accounts.

           Other  legislative  and  regulatory  proposals  regarding  changes in
banking,  and the regulation of bank thrifts and other  financial  institutions,
are being considered by the executive branch of the Federal government, Congress
and various state governments,  including Virginia and West Virginia. Certain of
these proposals,  if adopted, could significantly change the regulation of banks
and the financial services industry. It cannot be predicted whether any of these
proposals  will be adopted or, if adopted,  how these  proposals will affect the
Company.


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".


DIVIDENDS

           Dividends  from the Subsidiary  Banks  constitute the major source of
funds for dividends to be paid by the Company.  The amount of dividends  payable
by the Subsidiary  Banks to the Company  depends upon their 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 the
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 the  Subsidiary  Bank 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


<PAGE>



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. For further information about
the Company's dividends,  see Part II., Item 5., "Market for Registrant's Common
Equity and Related Stockholder Matters".


EMPLOYEES

           At  December  31,  1995,  F&M had 865 full  time  and 169  part  time
employees.  No employees are represented by any collective  bargaining unit. F&M
considers relations with its employees to be good.



<PAGE>




ITEM 2.  PROPERTIES

           The  principal  executive  offices  of F&M are  located  in the  Yost
Building at 38 Rouss Avenue, Winchester, Virginia, a two-story building built in
1784 and owned  free of any  encumbrances.  The  Company  operates a total of 77
banking offices (68 in Virginia and 9 in West  Virginia),  55 of which are owned
by the Company or one of the Subsidiary Banks free of any  encumbrances,  and 22
of which are  leased  under  agreements  expiring  at various  dates,  including
renewal  options,   through  2008.  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 14.


ITEM 3.  LEGAL PROCEEDINGS

           In the  ordinary  course  of its  operations,  the  Company  and  the
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 25, 1995.


<PAGE>



                                    PART II


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

           On December 28, 1994,  the Company began trading its capital stock on
the New York Stock  Exchange  under the symbol "F M N".  Prior to  December  28,
1994, the Company's common stock was traded in the  over-the-counter  market and
quoted on the NASDAQ National Market System under the symbol "FMNT".

           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/or the NASDAQ  National Market System,  and the cash dividends paid
or declared per share on the Common Stock for the period indicated:

                            PRICE RANGE                               CASH
                            HIGH                 LOW                DIVIDENDS

1993
 First Quarter              17.25                15.38                0.140
 Second Quarter             16.50                13.75                0.140
 Third Quarter              16.75                14.25                0.140
 Fourth Quarter             16.50                14.75                0.145

1994
 First Quarter              16.50                15.57                0.145
 Second Quarter             16.25                15.50                0.145
 Third Quarter              17.37                16.00                0.145
 Fourth Quarter             17.25                14.75                0.150

1995
 First Quarter              17.12                15.75                0.150
 Second Quarter             17.37                15.50                0.150
 Third Quarter              18.12                15.62                0.150
 Fourth Quarter             20.00                17.25                0.160

           At December 31, 1995,  there were  16,552,324  shares of Common Stock
outstanding held by 7,821 holders of record.

           The  Company  historically  has paid cash  dividends  on a  quarterly
basis,  together with a special cash dividend in the fourth quarter of each year
depending  upon  the  Company's  performance  that  year.  The  Company  in 1992
implemented  a practice of  eliminating  the special  cash  dividend and instead
increasing  its  regular   fourth  quarter   dividend  based  on  the  Company's
performance,  with the  intention of paying an  equivalent  amount for the first
three quarters of each following  year. 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 the 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 50 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
the  Subsidiary  Banks.  The  Subsidiary  Banks are  subject  to  certain  legal
restrictions  on the  amount  of  dividends  they  are  permitted  to pay to the
Company.   At  December  31,  1995,  the  Subsidiary  Banks  had  available  for
distribution as dividends to the Company approximately $35.4 million.



ITEM 6.           SELECTED FINANCIAL INFORMATION

                  Incorporated herein by reference,  as Exhibit 13, to page 1 of
                  the 1995 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 12
                  through 29 of the 1995 Annual Report.


ITEM 8.           FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                  Incorporated  herein by reference,  as Exhibit 13, to pages 30
                  through 50 of the 1994 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 21, 1996,  for the  Company's  Annual
Meeting  of  Shareholders  to be held April 23,  1996,  which  definitive  proxy
statement  was filed  with the  Commission  pursuant  to Rule 14a-6 on March 20,
1996. 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 1995 Annual Report:

        (1)    Financial Statements                                         Page
               Report of Independent Certified Public Accountants           50
               F&M National Corporation and Subsidiaries:
               Consolidated Balance Sheets at December 31, 1995
                    and 1994                                                30
               Consolidated Statements of Income at December 31, 1995
                    and 1994                                                31
               Consolidated Statements of Changes in Shareholders'
                    Equity for years ended December 31, 1995,
                    1994 and 1993                                           32
               Consolidated Statements in Cash Flows for the periods
                    ended December 31, 1995, 1994 and 1993                  33
               Notes to Financial Statements                                34

        (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.

               (i)       Registrant's Articles of Incorporation, as amended and
                         adopted effective April 25, 1995, (filed herewith).

              (ii)       Registrant's Bylaws, as amended and adopted effective
                         December 13, 1995 (filed herewith).

      (10)     Material Contracts.

               (i)       Form of  agreement  between  seventeen  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  1982  Incentive and  Non-Qualified  Stock
                         Option  Plan,  as  amended   (incorporated   herein  by
                         reference to Exhibit  10(a) to  Registration  Statement
                         #33-20165, filed on February 17, 1988).

           (iii)         Registrant's Officers' Incentive Bonus Plan
                         (incorporated herein by reference to Exhibit 28(i) to


<PAGE>



                         Registration  Statement  #33-25867 filed on December 2,
                         1988).

           (iv)          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).

           (v)           Incorporated herein by reference is the Agreement and
                         Plan of Reorganization and Plan of Merger dated
                         November 22, 1995, between the Registrant and FB&T
                         Financial Corporation, filed as Appendix I and Exhibit
                         A, respectively, of the Proxy Statement and Prospectus
                         which is part of Registration Statement No. 333-363 on
                         Form S-4, January 22, 1996.

           (vi)          The Registrant entered into Executive Severance
                         Agreements with 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. (form of agreement filed
                         herewith).

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

      (13)     Portions of the 1995 Annual Report to Shareholders for the fiscal
               year ended December 31, 1995 (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 1995, the Company filed the following reports:

                 (i)     January  11,   1995,   under  ITEM  5.  to  report  the
                         Registrant's Board granting authority to its management
                         to  purchase up to 250,000  shares of the  Registrant's
                         common  stock on the open market for general  corporate
                         purposes.

                (ii)     February 21, 1995, under ITEM 5. to report
                         discontinuance and sale of the assets of four of the
                         Registrant's non-bank subsidiaries.

               (iii)     April 12, 1995, under ITEMS 2. and 7., to report the
                         consummation of the merger of Bank of the Potomac with
                         and into the Registrant.

                (iv)     November 24, 1995, under ITEM 5. to report approval of
                         a definitive agreement for the affiliation of FB&T
                         Financial Corporation with and into the Registrant.



<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 20th day of
March, 1996:

                                                F&M NATIONAL CORPORATION
                                                Winchester, Virginia


                                         /s/
                                         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 20th day of March, 1996:

SIGNATURE                          TITLE

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

/s/                                President, Chief Administrative Officer,
JACK R. HUYETT                     Director

/s/                                Principal Accounting and Financial Officer,
ALFRED B. WHITT                    Secretary

/s/
FRANK ARMSTRONG, III               Director

/s/
JAMES L. BOWMAN                    Director

/s/
BETTY H. CARROLL                   Director

/s/
WILLIAM H. CLEMENT                 Director

/s/
WILLIAM R. HARRIS                  Director

/s/
L. DAVID HORNER, III               Director

/s/
WILLIAM A. JULIAS                  Director



<PAGE>




/s/                                Director
GEORGE L. ROMINE

/s/
JOHN S. SCULLY, III                Director

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

/s/
FRED G. WAYLAND, JR.               Director


C. RIDGELY WHITE                     Director

/s/
F. DIXON WHITWORTH, JR.              Director