TABLE OF CONTENTS

Selected Financial Data ...................................................    1
To Our Owners, Customers,
     Neighbors and Other Friends ..........................................    2
1997 Highlights ...........................................................    4
Management's Discussion and
     Analysis of Financial Condition
     and Results of Operations ............................................    7
Financial Statements ......................................................   25
Notes to Financial Statements .............................................   29
Independent Auditor's Report ..............................................   47
Corporate Directors and
     Officers .............................................................   48
Directors and Officers of Affiliates ......................................   49
Office Locations ..........................................................   52
General Information .......................................................   55


                            F&M NATIONAL CORPORATION
                               CORPORATE PROFILE

         F&M National Corporation is a bank holding company registered under the
Bank Holding Company Act of 1956, as amended. It was incorporated under the laws
of Virginia on November 26, 1968, and commenced business on December 31, 1969.
The Corporation, headquartered in Winchester, Virginia, was organized primarily
as a financial holding company which operates through subsidiary organizations
or establishments which are engaged in banking and in bank and finance related
businesses.

         The Corporation has eleven commercial banks, seven located in Virginia,
three located in West Virginia and one in Maryland. Each of these financial
institutions is operated independently which is contrary to the way most bank
holding companies operate. By operating as independent units, they can be more
responsive to their customers' needs since they can make their own decisions on
the local level and they can be better attuned to the needs of the communities
they serve. And yet, though they operate independently, they have the financial
backing and strength of the F&M National Corporation's 2 1/2 billion in assets.
The combination of the affiliates' independence and the corporation's financial
strength makes the F&M National Corporation a truly unique and outstanding
financial institution.

         The F&M National Corporation also has five indirect subsidiaries: Big
Apple Title Company, Big Apple Mortgage Company, Credit Bureau of Winchester,
Winchester Credit Corporation and F&M-Shomo & Lineweaver Insurance Agency.


Cover Photo courtesy Rick Foster - The Winchester Star

<PAGE>




                             SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>

                                                             


                                                              Year Ended December 31,
                                  -----------------------------------------------------------------------------
                                       1997            1996            1995            1994            1993
                                  -------------   -------------    ------------    ------------    ------------
                                                (In thousands, except ratios and per share amounts)
<S>                                  <C>            <C>              <C>             <C>             <C>       
Income Statement Data:
   Interest income................   $  178,589     $   168,034      $  158,529      $  139,806      $  124,103
   Interest expense...............       75,162          71,231          67,157          53,409          49,142
                                  -------------   -------------    ------------    ------------    ------------
   Net interest income............      103,427          96,803          91,372          86,397          74,961

   Provision for loan losses......        5,685           2,050           2,048           2,669           3,295
                                  -------------   -------------    ------------    ------------    ------------
   Net interest income after
      provision for loan losses...       97,742          94,753          89,324          83,728          71,666
   Noninterest income.............       22,811          20,478          18,999          18,248          15,579
   Securities gains...............        4,234             267             519             293           2,055
   Noninterest expense............       78,241          71,105          70,166          67,547          57,678
                                  -------------   -------------    ------------    ------------    ------------
   Income before income taxes.....       46,546          44,393          38,676          34,722          31,622
   Income taxes...................       15,431          15,095          12,841          10,450           9,770
                                  -------------   -------------    ------------    ------------    ------------

   Net income.....................   $   31,115     $    29,298      $   25,835      $   24,272      $   21,852
                                  =============   =============    ============    ============    ============
Per Share Data:
   Net income per share, basic....        $1.54       $    1.44      $     1.27      $     1.19      $     1.12
   Net income per share, diluted..         1.53            1.42            1.25            1.17            1.11
   Cash dividends ................         0.73            0.69            0.61            0.54            0.58
   Book value at period end.......        12.16           11.32           10.87            9.69            9.65
   Tangible book value............        11.60           10.96           10.48            9.26            9.34
   Average basic shares
     outstanding..................       20,235          20,409          20,368          20,381          19,563
   Average diluted shares
     outstanding..................       20,398          20,620          20,641          20,660          19,757

Balance Sheet Data:

   Assets.........................   $2,520,312     $ 2,303,751      $2,207,989      $2,020,491      $1,940,967
   Loans, net of unearned income..    1,543,598       1,439,108       1,296,204       1,209,511       1,120,866
   Securities.....................      638,478         596,993         634,747         590,389         591,003
   Deposits.......................    2,137,834       1,966,938       1,882,849       1,754,131       1,693,029
   Shareholders' equity...........      247,824         230,723         222,046         195,436         189,039

Performance Ratios:
   Return on average assets.......         1.30%           1.30%           1.23%           1.21%           1.24%
   Return on average equity.......        13.09%          12.89%          12.18%          12.50%          12.46%
   Dividend payout................        47.45%          48.08%          42.05%          39.52%          43.91%
   Efficiency (1).................        61.31%          59.91%          62.93%          63.69%          62.37%

Asset Quality Ratios:

   Allowance for loan losses to
      period end loans, net.......         1.34%           1.25%           1.41%           1.47%           1.46%
   Allowance for loan losses to
      nonaccrual loans............       109.38%         161.35%         137.53%          86.94%          56.73%
   Nonperforming assets to
      period end loans and
      foreclosed properties (2)...         2.07%           1.63%           2.17%           2.90%           3.72%
   Net charge-offs to average
      loans.......................         0.19%           0.17%           0.13%           0.10%           0.21%

Capital and Liquidity Ratios:
   Leverage.......................         9.55%           9.90%          10.09%           9.72%          10.34%

   Risk-based capital ratios:
      Tier 1 capital..............        15.02%          15.53%          15.94%          14.87%          15.69%
      Total capital...............        16.27%          16.78%          17.19%          16.12%          16.94%
   Average loans to average
      deposits....................        73.66%          70.99%          68.54%          66.82%          64.48%
</TABLE>




Note: The amounts previously reported in Form 10Q and Form 10K for the periods
      presented have been retroactively restated to reflect the acquisitions of
      FB&T Financial Corporation on March 29, 1996, Allegiance Banc Corporation
      on October 1, 1996, Bank of the Potomac on April 6, 1995, PNB Financial
      Corporation on July 1, 1994 and Hallmark Bank & Trust on July 1, 1994 and
      a 2.5% stock dividend effective September 1, 1994.

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

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

                                                                               1



<PAGE>

--------------------------------------------------------------------------------

(Photo of W.M. Feltner)                                "We call it `on the  
                                                       spot service.' . . . 
                                                       that is what they    
                                                       deserve and that     
                                                       is what we           
                                                       provide."            
                                                       
W.M. Feltner




To Our Owners, Customers, 
Neighbors and Other Friends:




Well folks, we did it again. 1997 was another record-setting year for the "Big
Apple." Both earnings and assets reached new highs, we increased our dividend
payout and the price of our stock (FMN) zoomed. Not too bad for a combination of
11 community banks.
   I say community banks because that's exactly what they are -- operated by
local people with local boards of directors, both of whom understand the needs
of their customers, satisfy those needs and fulfill their obligations to their
localities through their participation in civic affairs and charitable
contributions. What I am saying is, they make the decisions. There is no waiting
for an answer from North Carolina or any other place. We call it "on the spot
service." That is what the public demands, that is what they deserve and that is
what we provide.
   Our 28th year of operation was a continuation of the progress that we have
enjoyed over the past many years. Would you be surprised if I told you that over
the past five years our earnings have increased 76.1%, our assets are up 52.2%,
that our total banking offices are up 103.7% and that the average annual yield
on our stock was 23.9%. I could go on but I think you get my drift.
   From an operational standpoint, the year was fairly significant. I'll not
bore you with a lot of figures because they are covered in other sections of
this annual report. I will merely say assets exceeded 2 1/2 billion dollars for
the first time. Earnings exceeded 31 million and were up 6.2% over 1997.
Earnings per share were $1.54 and book value of our stock at year's end was
$12.16.
   With the corporation's continued growth, work space was becoming a major
concern. That problem was resolved with the completion of our new headquarters
at 9 Court Square, Winchester, Virginia. A celebration was held on August 30,
1997, and approximately 2,000 shareholders were in attendance. The new quarters
are truly a thing to behold and in the event you have not seen it, I am
extending you a personal invitation to do so. I know you will enjoy and
appreciate the visit. Incidentally, the cover of this report gives you a bird's
eye view of the building's exterior. You really owe it to yourself to see the
interior.
   During the year, the F&M Bank-Winchester acquired the Shomo & Lineweaver
Insurance Agency in Harrisonburg. This affiliation will permit us to offer all
types of insurance to you and our other customers. I do hope you will take
advantage of this because we do have a special inducement for our shareholders.
Offering all types of insurance coverage to our customers should be a great
convenience for them and should be beneficial to the corporation.
   We also took another major step in our service to the public by creating a
new trust company. This new entity will posture the company for a statewide
presence in Virginia as a corporate fiduciary and will mean better service and
financial management for our customers, shareholders and personnel.
   From a statewide perspective, Virginia banking in 1997 took another giant
step backward. Four of the state's largest financial institutions sold to
out-of-state bank holding companies. Merger mania, or should I say money mania,
has again taken its toll. I can understand why the smaller banks are seeking
help from larger institutions. With government regulations as stringent as they
are, they don't have a lot of choice. Other than money, however, the larger
organizations have little or no excuse for their actions.
   And while I am on the subject, I can't let our friendly congressional
legislators off the hook. Another year has passed and the only thing they have
done for the banking industry is agree to disagree. They can't reach agreement
among themselves on what is good for us. Every time a new proposal or bill is
discussed, it steps on someone's toes like the insurance companies, credit
unions, or whoever, so as a result nothing ever gets done. You know, if we had
term limits, that wouldn't happen but you'll not see it. A year ago it was a hot
subject, now you seldom hear anything about it. You can say what you please, and
regardless of how you 


"You can say what you please, and regardless of how you look at it, Congress has
done more harm than good to the banking industry during my 60 years in banking."



2



<PAGE>

--------------------------------------------------------------------------------

"The mergers we                                        (Photo of Jack R. Huyett)
have accomplished 
have been brought 
about by our being 
contacted by 
banks that are 
looking for a 
strong partner 
with which to 
work."
                                                                  Jack R. Huyett




look at it, Congress has done more harm than good to the banking industry during
my 60 years in banking. They have let everyone into the banking business but
still have the banks strapped with laws passed in the 30's. Now that's their
idea of being progressive! Need an ATM? Go to your nearest gas station. They'll
own one. Want a checking or savings account, home or mostly any other type of
loan, go to any brokerage firm, insurance company, credit union or any of a
dozen or so different types of commercial enterprises and they will provide it.
And don't overlook the bankruptcy law. What once was looked upon as a shame and
disgrace has been so liberalized by Congress that it has become a legal and
convenient way for one to get out of debt. In 1997, personal bankruptcies were
up 19.5% over 1996. 1.3 million people took the escape route to the tune of 40
billion dollars. Think Congress will take a hand? Don't bet on it. Now you have
a small idea why I'm so fond of our legislators.
   On December 31, 1997, Jack Huyett, the company's President and Chief
Administrative Officer, retired. Jack was Blakeley Bank's Chief Executive
Officer when they joined the F&M. He had served Blakeley for 37 years and was
President of F&M National Corporation for six years. His banking knowledge and
experience will be greatly missed and we extend him our very best in a
well-deserved retirement.
   Several important officer positions have changed for the coming year. Alfred
B. Whitt becomes the Corporation's Vice Chairman, President and Senior Financial
Officer. Charles E. Curtis becomes Vice Chairman and Chief Administrative
Officer and Michael L. Bryan becomes Corporate Attorney and Secretary of the
Board.
   On an extremely sad note, our director William A. Julias passed away on
January 1, 1998. Bill was Chairman of the Board of F&M Bank-Massanutten in
Harrisonburg, Virginia, and served on the corporate board for 18 years. He will
be greatly missed by all of us.
   During the fourth quarter, we were fortunate to reach agreements with two
very fine banking institutions whereby they will become an integral part of our
company. They are Peoples Bank of Virginia with assets in excess of 79 million
located in Chesterfield, Virginia, with two branches in Richmond and one in
Midlothian; and the Bank of Alexandria with assets in excess of 75 million and
four Alexandria City locations. Because of their proximity to existing F&M
Banks, we will be combining them, thereby, strengthening each institution which
will be better situated to serve the public in those areas. Peoples Bank will
become F&M Bank-Richmond and Bank of Alexandria will become F&M Bank-Northern
Virginia. We are delighted to have these institutions join our company. Not only
because they are superior banks but because they permit us to expand our
position in those areas. Regulatory approval is anticipated and hopefully the
transactions will be completed in the second quarter.
   Many bankers and others have asked me how we have been so successful in
acquiring banks. Contrary to what most holding companies do, we do not go out
and solicit acquisitions. The mergers we have accomplished have been brought
about by our being contacted by banks that are looking for a strong partner with
which to work. We have an excellent reputation in that regard because we do not
let people go and an acquired bank remains in control of its own operation.
   While 1997 was an outstanding year for the economy, it was an unsettling one.
It has left me with a feeling of uncertainty. Business in general was too good,
the stock market was too good and too volatile, threats of higher interest rates
were the order of the day despite no inflation; lagging corporate earnings seem
a certainty for 1998.
   So where do we go from here? Let's hope the slowdown will be just that. No
better -- no worse.
   As for the F&M, we are looking forward to a challenging and rewarding year.
Certainly these are questionable and uncertain times. After all, isn't every new
year the same? I am going to tell you exactly what I have told you for the last
umpteenth years. We face the new year with confidence and with your support, the
support of our customers, employees, officers and directors of our 11 banks,
1998, hopefully, will be another record year. GOD BLESS!
   Sincerely yours,

/s/ W.M. Feltner                                       /s/ Jack R. Huyett   
W.M. Feltner                                           Jack R. Huyett
Chairman of the Board                                  President            
                                                       



                                                                               3


<PAGE>


--------------------------------------------------------------------------------
                                                                                
1997 Highlights


                                A Bit of History
   A group of structures, which became known as 9 Court Square, were built over
a period of more than one hundred years. Among these buildings were the law
offices of Jacob Senseney, the Office of the Court Clerk, the County Records
Room, and the old Palace Bar.
   Starting in 1995, F&M National Corporation undertook a massive restoration
project which joined these various structures into one building, now known as
"The Wilbur M. Feltner Building." This complex will serve as the new
headquarters of the Corporation.


(Photo appears here with the following caption)
W. M. Feltner and Jack R. Huyett in front of the Feltner Building

(Photo appears here with the following caption)
Descriptive marker adjacent to Corporate Headquarters

(Photo appears here with the following caption)
Entry and Lobby of Corporate Headquarters

(Photo appears here with the following caption)
Gallery of Feltner Building


4

<PAGE>


                                A Lot of Service
   F&M expanded its branch network to 108 offices by opening 12 new locations
with seven in Northern Virginia, Harrisonburg, and Richmond, three in West
Virginia, and two in Maryland. F&M also improved its ATM network by adding an
additional 51 units throughout the Company's service area.

                          Additional Financial Services

   Shomo & Lineweaver Insurance Agency, Inc., Harrisonburg, Virginia, joined F&M
on November 1, 1997. Shomo & Lineweaver fills a void in the financial services
previously offered by F&M as it is a full service insurance agency. The
affiliation will enable F&M to offer a full line of insurance products, such as
automobile, home, business, life, health, and disability.
   Other financial services available will include annuities, employee benefits
programs, and brokerage services.
   F&M Trust Company opened for business on January 1, 1998. F&M Trust Company
was formed to better serve the financial management needs of F&M's customers
throughout Virginia, and to better posture for F&M's future state-wide presence
as a corporate fiduciary.


[Photograph appears here with the following caption]
F&M-Shomo & Lineweaver's Headquarters in Harrisonburg

   The combination of the three existing trust departments of the F&M banks into
the F&M Trust Company will enable F&M to maximize the professional expertise of
its combined resources for the benefit of its current and future clients.
   F. Dixon Whitworth, Jr. will serve as President. Its headquarters will be in
Winchester, Virginia. Regional offices will be operated at F&M Bank-Peoples,
Warrenton, Virginia, and F&M Bank-Northern Virginia, Fairfax, Virginia, with
additional offices expected to open in other communities in the future.
   Fiduciary services to be offered include estate administration, investment
management, employee benefits administration, and custody and trust
administration.

                               A Bit of the Future

   Peoples Bank of Virginia, Chesterfield, Virginia, with assets of $79 million,
will join F&M in the second quarter of 1998, and will merge with our F&M
Bank-Richmond.
   The Bank of Alexandria, Alexandria, Virginia, with assets of $75 million,
will join F&M in the second quarter and will merge with our F&M Bank-Northern
Virginia.
   We are extremely pleased to have such quality institutions join the F&M
family of community banks and to help us expand and strengthen our franchises in
the Richmond market and the growing Northern Virginia market.
   Home Banking will be introduced in Winchester, Northern Virginia, and
Warrenton. This service will later be expanded to our other market areas.


5

<PAGE>


                              Five Years of Growth

DOLLARS (IN MILLIONS)



                                     ASSETS

93      1.941
94      2.020
95      2.208
96      2.304
97      2.520









                                    EARNINGS


DOLLARS (IN MILLIONS)

93      21.852
94      24.272
95      25.835
96      29.298
97      31.115






                                    DIVIDENDS


DOLLARS (IN MILLIONS)

93       9.595
94       9.592
95      10.864
96      14.087
97      14.765

6

<PAGE>



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

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

Overview
      F&M produced record earnings during 1997, performing well in a highly
complex, competitive business environment. F&M's continued high asset quality,
an excellent interest margin and improved management efficiencies contributed to
record net income of $31.1 million, a return on assets of 1.30% and a return on
equity of 13.09%.
      F&M expanded its product base on November 1, 1997 with the acquisition of
Shomo and Lineweaver Insurance Agency ("Shomo Ins.") located in Harrisonburg,
Virginia. Shomo Ins. offers automobile, home, group, life and business
insurance, as well as, financial counseling. The acquisition of Shomo Ins. was
accounted for as a tax-free purchase with the exchange of 265,853 shares of F&M
common stock.
      F&M's banking market expanded in 1997 by 12 branch locations to include
108 branches located in Virginia, West Virginia and Maryland.

Results of Operations
      Net income increased 6.2% in 1997 to $31.1 million, compared with $29.3
million earned in 1996 and $25.8 million earned in 1995. Net income per share,
basic increased to $1.54 per share in 1997 compared to $1.44 and $1.27 per share
for 1996 and 1995. Net income per share, diluted increased to $1.53 per share in
1997 compared to $1.42 per share for 1996 and $1.25 for 1995.
      Profitability ratios compare favorably in 1997, 1996 and 1995. Return on
average assets on an annualized basis was 1.30% for 1997 and 1996. In 1995, this
ratio was 1.23%. Return on average shareholders' equity is another significant
measure of profitability which in 1997 improved to 13.09%, compared to 12.89%
and 12.18% for 1996 and 1995, respectively. These performance ratios have varied
since 1993, with return on average assets decreasing slightly from 1.24% in 1993
to 1.21% in 1994, increasing slightly to 1.23% in 1995 and increasing to 1.30%
in 1996. Return on average shareholders' equity rebounded from 12.46% in 1993 to
12.50% in 1994, decreasing to 12.18% in 1995 and increasing to 12.89% in 1996.
      Net interest margin represents tax-equivalent net interest income divided
by average earning assets. It reflects the average effective rate earned by F&M
on its average earning assets. In 1997, net interest margin, on a tax-equivalent
basis, was 4.81% compared to 4.76% for 1996 and 4.82% for 1995. Net interest
income and net interest margin are influenced by fluctuations in market rates
and changes in both the volume and mix of average earning assets and the
liabilities that fund those assets. In 1997, the yield on interest-earning
assets increased 4 basis points from 8.21% in 1996 to 8.25% in 1997 and the cost
of interest-bearing liabilities increased 2 basis points from 4.22% in 1996 to
4.24% in 1997. The change in the yield on earning assets and liabilities is a
result of competitive pressures in the market place resulting in higher rates
paid on deposits and consequentially, higher rates received on loans.
      In 1997, interest-earning assets have increased to $2.292 billion from
$2.106 billion in 1996 and $2.018 billion in 1995. Loan demand remained strong
in each of these years, although competitive forces have increased for potential
loan customers. Loans, net of unearned discount in 1997 increased $105 million
to $1.544 billion as compared to $1.439 billion in 1996 and $1.296 billion in
1995. F&M's securities portfolio represents the second largest component of
interest earning assets. At December 31, 1997, F&M's securities portfolio
totaled $638.5 million, $41.5 million or 7.0% higher than year end 1996. The
securities portfolio at year end 1996 totaled $597.0 million, which was $37.8
million or 5.9% lower than year end 1995. Funds invested in securities in 1997
were an effort to balance the portfolio of interest earning assets and take
advantage of attractive yields. In 1996, funds were invested in loans due to
strong customer demand.
      F&M's efficiency ratio, a measure of its performance based upon the
relationship between non-interest expense and income less securities gains,
compares favorably to other Virginia financial institutions. F&M's efficiency
ratio for 1997, 1996 and 1995 was 61.31%, 59.91% and 62.93%, respectively. A
lower efficiency ratio represents a greater control of non-interest related
costs. This ratio is higher as a result of acquisition and affiliation costs due
to F&M's program of acquiring financial institutions. A fluctuation in the
efficiency ratio can be attributed to relative changes in both non-interest
expense and net interest income.


7

<PAGE>



      Since the beginning of 1988, F&M has acquired approximately $1.206 billion
in assets and $1.043 billion in deposits through twelve bank acquisitions and
one nonbank acquisition. Eleven of these acquisitions were accounted for as a
pooling-of-interests and two as a purchase, which enabled F&M to expand its
market into the eastern panhandle of West Virginia, northern Virginia market of
Loudoun, Fauquier, Fairfax and Prince William counties, southern Virginia market
of Greensville County, increase its market share in two of its other Virginia
markets and enter the Maryland markets of Montgomery and Prince George's
counties.
      F&M is not aware of any current recommendations by any regulatory
authorities which, if they were implemented, would have a material effect on the
registrant's liquidity, capital resources, or results of operations.
      Table 1 sets forth, for the periods indicated, selected quarterly results
of F&M's operations.






                                                                                

<TABLE>
<CAPTION>


               Table 1 -- Summary of Financial Results By Quarter


                                                                   1997                                        1996*
                                                      ---------------------------------        -------------------------------------
                                                       Dec. 31  Sept. 30   June 30  March 31   Dec. 31  Sept. 30   June 30  March 31
                                                       -------  --------   -------  --------   -------  --------   -------  --------

                                                                   (In thousands, except per share amounts)
<S>                                                   <C>       <C>       <C>       <C>       <C>       <C>      <C>        <C>     
Interest income ....................................  $ 45,699  $ 45,024  $ 44,378  $ 43,488  $ 42,793  $ 42,153 $  41,769  $ 41,319
Interest expense ...................................    19,736    19,015    18,451    17,960    18,073    17,771    17,614    17,773
                                                                                                         -------   -------   -------
Net interest income ................................    25,963    26,009    25,927    25,528    24,720    24,382    24,155    23,546
Provision for loan losses ..........................     2,994       779       842     1,070       460       562       556       472
                                                                                                         -------   -------   -------
Net interest income after provision for loan losses     22,969    25,230    25,085    24,458    24,260    23,820    23,599
                                                                                                                              23,074
Noninterest income .................................     9,546     6,843     5,453     5,203     5,606     5,143     4,847     5,149
Noninterest expense ................................    21,349    20,074    18,797    18,021    18,405    18,133    17,030    17,537
Income before income taxes .........................    11,166    11,999    11,741    11,640    11,461    10,830    11,416    10,686
Applicable income taxes ............................     3,325     4,114     4,007     3,985     3,830     3,643     3,946     3,676
                                                                                                         -------   -------   -------
Net income .........................................  $  7,841 $   7,885 $   7,734  $  7,655  $  7,631 $   7,187 $   7,470  $  7,010
                                                      ======== ========= =========  ========  ======== ========= =========  ========



Earnings per share, basic.........................    $   0.39 $    0.39 $   0.38   $    0.38  $ 0.38 $    0.35  $    0.37  $   0.34

Earnings per share, assuming dilution.............    $   0.38 $    0.39 $   0.38   $    0.37  $ 0.37 $    0.35  $    0.36  $   0.34
</TABLE>


*The amounts previously reported on Form 10Q for the periods presented have been
retroactively restated to reflect the acquisitions of FB&T Financial Corporation
on March 29, 1996, Allegiance Banc Corporation on October 1, 1996.


Net Interest Income
      Net interest income represents the principal source of earnings for F&M.
Net interest income equals the amount by which interest income exceeds interest
expense and represents F&M's gross profit margin. Changes in the volume and mix
of interest-earning assets and interest-bearing liabilities, as well as their
respective yields and rates, have a significant impact on the level of net
interest income.
      Net interest income increased to $103.4 million for the year ended
December 31, 1997, up 6.8% over the $96.8 million reported for the same period
in 1996 and up 5.9% in 1996 over the $91.4 million reported for 1995. Net
interest income in 1997 was affected by a greater demand for loans coupled with
attractive market rates and a strong, expanding economy. Loans grew $105 million
or 7.3% to $1.544 billion in 1997 from $1.439 billion in 1996. Loans increased
in 1996 by $143 million or 11.0% over $1.296 billion in 1995. In 1997, deposits
provided the source of funds by increasing to $2.138 billion, up $171 million or
8.7% from $1.967 billion in 1996. Interest-bearing deposits increased $97
million in 1997 to $1.729 billion from $1.632 billion in 1996. Strong deposit
and loan growth was the result of offering attractive market rates coupled with
customers' desire to place investments in a strong, highly capitalized financial
corporation.
      Net interest income was $96.8 million for the year 1996, up 12.0% over the
$91.4 million reported for the same period in 1995 and up 5.8% in 1995 over the
$86.4 million reported for 1994. Net interest income in 1996 was affected by
strong loan demand following a recessionary period. Loans grew $143 million or
11.0% to $1.439 billion in 1996 from $1.296 billion in 1995. In 1996, total
interest-bearing deposits provided the primary source of funds increasing to
$1.632 billion, up $63.6 million or 4.0% from $1.569 billion in 1995.
Interest-bearing deposits increased $106 million in 1995 from $1.463 billion in
1994.
      Net interest income for 1995 increased $5.0 million to $91.4 million,
compared to $86.4 million for 1994 and the net interest margin for 1995 was
4.82%. At year end 1995, the securities portfolio was $634.8 million, up $44.4
million

8

<PAGE>

or 7.5% over the same period 1994. During 1995, funds were kept in liquid
interest-earning assets to be available when securities yields and loan demand
improved.

      Table 2 analyzes charges in net interest income attributable to changes in
the volume of interest-bearing assets and liabilities compared to changes in
interest rates. Nonaccruing loans are included in average loans outstanding.



                       Table 2 -- Volume and Rate Analysis
                              Tax equivalent basis
                                                             
<TABLE>
<CAPTION>



                                                                        1997                               1996              
                                                           ------------------------------      ----------------------------- 
                                                                                Change in                           Change in
                                                             Volume     Rate     Income/        Volume     Rate      Income/ 
                                                             Effect    Effect    Expense        Effect    Effect     Expense 
                                                           ---------- --------- ---------      --------  --------- --------- 
                                                                               (Dollars in thousands)
<S>                                                         <C>       <C>       <C>            <C>       <C>      <C>     
Earning Assets:
  Taxable securities....................................    $ (681)   $ (118)   $ (799)        $1,931    $  113   $  2,044
  Tax-exempt securities.................................      (475)       170     (305)          (503)      (59)      (562)
  Taxable loans.........................................    11,563      (271)    11,292        11,270    (2,627)     8,643
  Tax-exempt loans......................................       216        (4)       212           358       (13)       345
  Federal funds sold and repurchase agreements..........       (69)        14      (55)          (757)     (321)    (1,078)

  Interest-bearing deposits in other banks..............       201       (22)       179            49       (14)       35
                                                         ---------- --------- ---------      --------  --------- ---------
       Total earning assets.............................    $10,755   $ (231)   $10,524        $12,348   $(2,921)  $ 9,427
                                                         ---------- --------- ---------      --------  --------- ---------
Interest-Bearing Liabilities:
  Checking deposits.....................................    $  716    $    29   $   745        $  313    $ (705)  $   (392)
  Savings deposits - regular............................      (161)     (162)     (323)          (135)     (832)      (967)
  Savings deposits - money market.......................      (242)       166      (76)          (376)     (459)      (835)

  CD's & other time deposits - $100,000 & over..........     1,510      (372)     1,138         4,160       878      5,038
  CD's & other time deposits - under $100,000...........     1,165         33     1,198           771        91        862
                                                         ---------- --------- ---------      --------  --------- ---------
       Total interest-bearing deposits..................     2,988      (306)     2,682         4,733    (1,027)     3,706
       Borrowed funds short-term........................       539        198       737           389      (227)       162
       Borrowed funds long-term.........................       507          5       512           216       (10)       206
                                                         ---------- --------- ---------      --------  --------- ---------
       Total interest-bearing liabilities...............     4,034      (103)     3,931         5,338    (1,264)     4,074
                                                         ---------- --------- ---------      --------  --------- ---------

       Change in net interest income....................    $6,721    $ (128)   $ 6,593        $7,010    $(1,657)  $ 5,353
                                                         ========== ========= =========      ========  ========= =========
</TABLE>



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

      Table 3 (page 10 and 11) depicts interest income on earning assets and
related average yields as well as interest expense on interest-bearing
liabilities and related average rates paid for the periods indicated. Loans
placed on a nonaccrual status are included in the balances and were included in
the computation of yields, upon which they had no material effect.



Interest Sensitivity
      The primary goals of interest rate risk management are to minimize
fluctuations in net interest margin as a percentage of earning assets and to
increase the dollars of net interest margin at a growth rate consistent with the
growth rate of total assets. These goals are accomplished by balancing the
volume of floating-rate liabilities with a similar volume of floating-rate
assets, by keeping the average maturity of fixed rate asset and liability
contracts reasonably consistent and short, and by routinely adjusting pricing
rates to market conditions on a weekly basis.
      The goal of F&M is to generally maintain a position that is to provide
flexibility enough to move to an equality between rate-sensitive assets and
rate-sensitive liabilities, which may be desirable when there are wide and
frequent fluctuations in interest rates. Interest rate gaps are managed through
investments, loan pricing and deposit pricing. When an unacceptable positive gap
within a one-year time frame occurs, maturities can be extended by selling
shorter term investments and buying longer maturities. The same effect can also
be accomplished by reducing emphasis on variable rate loans. When an
unacceptable negative gap occurs, variable rate loans can be increased and more
investment in shorter term investments can be made. Pricing policies on either
or both loans and deposits can be changed to accomplish any of the goals. F&M
reviews the interest sensitivity position of each subsidiary bank at least once
a quarter.


9

<PAGE>

      Table 3 -- Average Balances, Income and Expense, Yields and Rates (1)

<TABLE>
<CAPTION>

                        Twelve Months Ended December 31,

                                                                                        1997
                                                                                                    Annual
                                                                            Average     Income/     Yield/
                                                                            Balance     Expense      Rate
-----------------------------------------------------------------------------------------------------------
ASSETS                                                                          (Dollars in thousands)
Securities:
<S>                                                                      <C>           <C>           <C>  
    Taxable............................................................  $  576,900    $ 35,899      6.22%
    Tax-exempt (1).....................................................      26,428       2,335      8.84%
------------------------------------------------------------------------------------------------------------
        Total securities...............................................     603,328      38,234      6.34%

Loans (net of unearned income):

    Taxable............................................................   1,483,223     135,994      9.17%
    Tax-exempt (1).....................................................      14,754       1,583     10.73%

        Total loans....................................................   1,497,977     137,577      9.18%

Federal funds sold and repurchase agreements...........................      71,409       3,859      5.40%
Interest-bearing deposits in other banks...............................       8,022         290      3.62%
------------------------------------------------------------------------------------------------------------
        Total earning assets...........................................   2,180,736     179,960      8.25%

Less: allowance for loan losses........................................     (18,496)
Total nonearning assets................................................     227,955

        Total assets...................................................$  2,390,195
                                                                       ============

LIABILITIES AND SHAREHOLDERS' EQUITY Interest-bearing deposits:
    Checking...........................................................$    320,344    $  7,087      2.21%
    Regular savings....................................................     200,345       5,556      2.77%
    Money market  savings..............................................     204,923       6,020      2.94%
    Certificates of deposit:
        Less than $100,000.............................................     763,085      42,057      5.51%
        $100,000 and more..............................................     186,398      10,345      5.55%
------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits........................................   1,675,095      71,065      4.24%

Short-term borrowings..................................................      84,148       3,066      3.64%

Long-term borrowings...................................................      15,198       1,031      6.78%
------------------------------------------------------------------------------------------------------------
        Total interest-bearing liabilities.............................   1,774,441      75,162      4.24%

Noninterest-bearing liabilities:

    Demand deposits....................................................     358,652

    Other liabilities..................................................      19,389
                                                                             ------

Total liabilities......................................................   2,152,482
Stockholders' equity...................................................     237,713
                                                                            -------

Total Liabilities and shareholders` equity.............................$  2,390,195
                                                                       ============

Net interest income....................................................                $104,798
                                                                                       --------

Interest rate spread...................................................                              4.01%

Interest expense as a percent of average earning assets................                              3.45%

Net interest margin....................................................                              4.81%

</TABLE>
(1) Income and yields are reported on a taxable-equivalent basis.

10

<PAGE>


<TABLE>
<CAPTION>



                        Twelve Months Ended December 31,

------------------------------------------------------------------------------------------------------------
                 1996                                                                   1995
                           Annual                                                                  Annual
    Average     Income/    Yield/                                          Average     Income/     Yield/
    Balance     Expense     Rate                                           Balance     Expense      Rate
------------------------------------------------------------------------------------------------------------
<S>           <C>            <C>                                         <C>          <C>            <C>  
        (Dollars in thousands)                                                 (Dollars in thousands)

 $  587,823   $  36,698      6.24%                                       $  557,258   $  34,654      6.22%
     31,605       2,640      8.35%                                           37,645       3,202      8.51%
------------------------------------------------------------------------------------------------------------
    619,428      39,338      6.35%                                         594,9035      37,856      6.36%



  1,357,220     124,702      9.19%                                        1,233,488     116,059      9.41%
     12,739       1,371     10.76%                                            9,409       1,026     10.90%
------------------------------------------------------------------------------------------------------------
  1,369,959     126,073      9.20%                                        1,242,897     117,085      9.42%

     72,706       3,914      5.38%                                           86,474       4,992      5.77%
      2,127         111      5.22%                                              975          76      7.79%
------------------------------------------------------------------------------------------------------------
  2,064,220     169,436      8.21%                                        1,925,249     160,009      8.31%

    (18,335)                                                                (17,835)
    205,932                                                                 189,361
    -------                                                                 -------
 $2,251,817                                                              $2,096,775
 ==========                                                              ==========



 $  288,494   $   6,342      2.20%                                       $  276,417   $   6,734      2.44%
    207,739       5,879      2.83%                                          211,987       6,846      3.23%
    212,471       6,096      2.87%                                          225,065       6,931      3.08%

    736,193      40,919      5.56%                                          661,188      35,881      5.43%
    165,304       9,147      5.53%                                          151,384       8,285      5.47%
------------------------------------------------------------------------------------------------------------
  1,610,201      68,383      4.25%                                        1,526,041      64,677      4.24%

     69,039       2,329      3.37%                                           51,818       2,167      4.18%

      7,725         519      6.72%                                            4,513         313      6.94%
------------------------------------------------------------------------------------------------------------
  1,686,965      71,231      4.22%                                        1,582,372      67,157      4.24%



    319,596                                                                 287,311

     17,937                                                                  15,028
     ------                                                                  ------
  2,024,498                                                               1,884,711
    227,319                                                                 212,064
    -------                                                                 -------
 $2,251,817                                                              $2,096,775
 ==========                                                              ==========

              $  98,205                                                               $  92,852
              ---------                                                               ---------

                             3.99%                                                                   4.07%

                             3.45%                                                                   3.49%

                             4.76%                                                                   4.82%
</TABLE>

11

<PAGE>


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

Forward-Looking Statements
      The sections that follow, Market Risk Management, contain certain
forward-looking statements (as defined in the Private Securities Litigation
Reform Act of 1995). These forward-looking statements may involve significant
risks and uncertainties. Although F&M believes that the expectations reflected
in such forward-looking statements are reasonable, actual results may differ
materially from the results discussed in these forward-looking statements.

Market Risk Management
      Market risk is the risk of loss arising from adverse changes in the fair
value of financial instruments due to changes in interest rates, exchange rates
and equity prices. F&M's market risk is composed primarily of interest rate
risk. F&M's Asset/Liability/Risk Committee ("ALCO") is responsible for reviewing
the interest rate sensitivity position of F&M and establishing policies to
monitor and limit exposure to interest rate risk. Guidelines established by ALCO
are reviewed by F&M's Board of Directors.
      Asset/Liability/Risk Management: The primary goals of asset/liability/risk
management are to maximize net interest income and the net value of F&M's future
cash flows within the interest rate risk limits set by ALCO.
      Interest Rate Risk Measurement: Interest rate risk is monitored through
the use of three complementary measures: static gap analysis, earnings
simulation modeling and net present value estimation. While each of the interest
rate risk measurements has limitations, taken together they represent a
reasonably comprehensive view of the magnitude of interest rate risk in the
Corporation, the distribution of risk along the yield curve, the level of risk
through time, and the amount of exposure to changes in certain interest rate
relationships.
      Static Gap: Gap analysis measures the amount of repricing risk embedded in
the balance sheet at a point in time. It does so by comparing the differences in
the repricing characteristics of assets and liabilities. A gap is defined as the
difference between the principal amount of assets and liabilities, adjusted for
off-balance sheet instruments, which reprice within a specified time period. The
cumulative one-year gap, at year-end, was -12.2% of total earning assets. The
policy limit for the one-year gap is plus or minus 15% of adjusted total earning
assets.
      Core deposits and loans with noncontractual maturities are included in the
gap repricing distributions based upon historical patterns of balance attrition
and pricing behavior which are reviewed at least annually.
      The gap repricing distributions include principal cash flows from
residential mortgage loans and mortgage-backed securities in the timeframes in
which they are expected to be received. Mortgage prepayments are estimated by
applying industry median projections of prepayment speeds to portfolio segments
based on coupon range and loan age.
      Earnings Simulation: The earnings simulation model forecasts one year net
income under a variety of scenarios that incorporate changes in the absolute
level of interest rates, changes in the shape of the yield curve and changes in
interest rate relationships. Management evaluates the effects on income of
alternative interest rate scenarios against earnings in a stable interest rate
environment. This type of analysis is also most useful in determining the
short-run earnings exposures to changes in customer behavior involving loan
payments and deposit additions and withdrawals.
      The most recent earnings simulation model projects net income would
decrease by approximately 3.2% of stable-rate net income if rates immediately
fall by two percentage points over the next year. It projects an increase of
approximately 2.7% if rates rise immediately by two percentage points.
Management believes this reflects a liability-sensitive rate risk position for
the one-year horizon. This one-year forecast is within the ALCO guideline of
15.0%.
      This dynamic simulation model includes assumptions about how the balance
sheet is likely to evolve through time, in different interest rate environments.
Loan and deposit growth rate assumptions are derived from historical analysis
and management's outlook, as are the assumptions used to project yields and
rates for new loans and deposits. All maturities, calls and prepayments in the
securities portfolio are assumed to be reinvested in like instruments. Mortgage
loan prepayment assumptions are developed from industry median estimates of
prepayment speeds for portfolios with similar coupon ranges and seasoning.
Noncontractual deposit growth rates and pricing are assumed to follow historical
patterns. The sensitivities of key assumptions are analyzed at least annually
and reviewed by ALCO.
      Net Present Value: The Net Present Value ("NPV") of the balance sheet, at
a point in time, is defined as the discounted present value of asset cash flows
minus the discounted value of liability cash flows. Interest rate risk

12
<PAGE>

analysis using NPV involves changing the interest rates used in determining the
cash flows and in discounting the cash flows. The resulting percentage change in
NPV is an indication of the longer term repricing risk and options risk embedded
in the balance sheet.
      At year-end, a 200 basis point immediate increase in rates is estimated to
reduce NPV by 7.8%. Additionally, NPV is projected to increase by 5.0% if rates
fall immediately by 200 basis points. Analysis of the average quarterly change
in the Treasury yield curve over the past ten years indicates that a parallel
curve shift of 200 basis points or more is an event that has less than a .1%
chance of occurrence.
      As with gap analysis and earnings simulation modeling, assumptions about
the timing and variability of balance sheet cash flows are critical in NPV
analysis. Particularly important are the assumptions driving mortgage
prepayments and the assumptions about expected attrition of the core deposit
portfolios. These assumptions are applied consistently across the different rate
risk measures.
      Summary information about interest-rate risk measures are presented below.

<TABLE>
<CAPTION>

                     Table 4 -- Interest-rate Risk Measures
                                                                                                Year-end
                                                                                                  1997
                                                                                             --------------
<S>               <C>                                                                                 <C>  
           Static 1-Year Cumulative Gap                                                              -12.2%
           1-Year Net Income Simulation Projection
            -200 bp Shock vs Stable Rate                                                              -3.2%
            +200 bp Shock vs Stable Rate                                                               2.7%
           Static Net Present Value Change
            -200 bp Shock vs Stable Rate                                                               5.0%
            +200 bp Shock vs Stable Rate                                                              -7.8%
</TABLE>

      Due to borrowers' preferences for floating-rate loans and depositors'
preferences for fixed-rate deposits, F&M's balance sheet tends to move toward
less liability sensitivity with the passage of time. The earnings simulation
model indicates that if all prepayments, calls and maturities of the securities
portfolios expected over the next year were to remain uninvested, then the
current liability sensitivity position would be lessened. Purchases of
fixed-rate securities have been made to offset the natural tendency toward a
less liability sensitive interest rate risk position.
      Management expects interest rates to be relatively stable during 1998 and
believes that the current modest level of liability sensitivity is appropriate.


Noninterest Income

      Noninterest income for 1997 increased $6.3 million, or 30.4%, over the
same period in 1996. Trust Department income increased $139 thousand or 6.3%
from $2.2 million for 1996 to $2.3 million for 1997 as a result of increased
fiduciary activities and the settlement of estates. Service charges on deposit
accounts, the largest single item of noninterest income, increased to $842
thousand for 1997, up 9.3% over the comparable period a year ago as a result of
adding additional services and improving existing deposit services. Credit card
fees increased to $3.7 million for 1997 as compared to $3.4 million for 1996 as
a result of increased card loan volume. Fees for other customer services were
$2.3 million for 1997, which increased $409 thousand or 22.1% from 1996 as a
result of increased marketing of current services and providing new services for
customers. Gains on sale of securities increased to $4.2 million for 1997 as
compared to $267 thousand for 1996. Security gains are realized when market
conditions exist that are favorable to F&M and/or conditions dictate additional
liquidity is desirable. In 1997, F&M took advantage of significant stock market
gains in other corporate stock held by the corporation which when sold, realized
security gains of $3.3 million. Other operating income increased in 1997, up
$692 thousand or 17.5% from 1996 to 1997. The increase in other operating income
was the result of increased charges for various nondeposit related fees such as
checkbook sales, safe deposit box fees, and loan documentation fees.

      In 1996, noninterest income increased $1.2 million or 6.3% from $19.5
million in 1995 to $20.7 million. Trust Department income increased $384
thousand or 21.2% from $1.8 million for 1995 to $2.2 million for 1996 as a
result of increased fiduciary activities. Service charges on deposit accounts
were $9.1 million for 1996, up 12.8% over the previous year. Credit card fees
were $3.4 million and $3.2 million for 1996 and 1995, up $208 thousand as a
result of increased card lending activities. Fees for other customer services
were $1.8 million for 1996, which increased $115 thousand or 6.6% from 1995 as a
result of a reduction in loan refinancing activity. Gains on sale of securities
were $267 thousand for 1996 as compared to $519 thousand for 1995. Security
gains are realized when market conditions exist that are favorable to F&M and/or
conditions dictate additional liquidity is desirable. Interest rates were rising
in 1996 reducing the appeal to reposition securities, therefore, security gains
were smaller in 1996 than in 1995.

13


<PAGE>

<TABLE>
<CAPTION>


                          Table 5 -- Noninterest Income

                                                                                 Year ended December 31,
                                                                            --------------------------------
                                                                              1997        1996        1995
                                                                            ---------  ----------  ----------
                                                                                 (Dollars in thousands)
<S>                                                                         <C>         <C>        <C>      
               Commissions and fees from fiduciary activities............   $   2,335   $  2,196   $   1,812

               Service charges on deposit accounts.......................       9,929      9,087       8,054
               Credit card fees..........................................       3,652      3,401       3,193
               Fees for other customer services..........................       2,258      1,849       1,734
               Other operating income....................................       4,637      3,945       4,207
                                                                           ----------  ----------  ----------
                       Noninterest income................................      22,811     20,478      19,000
               Profits on securities available for sale..................       4,218        265         519
               Investment securities gains, net..........................          16          2          --
                                                                           ----------  ----------  ----------
                       Total noninterest income..........................   $  27,045   $ 20,745   $  19,519
                                                                           ==========  ==========  ==========
</TABLE>



Noninterest Expense


      Total noninterest expense increased $7.1 million or 10.0%, from $71.1
million in 1996 to $78.2 million in 1997. Salaries and employee benefits
increased $4.7 million or 12.6%, net occupancy expense including furniture and
equipment expense increased $1.1 million or 9.3%, credit card expense increased
$332 thousand or 14.9% and other operating expense increased $1.0 million or
5.1%. Deposit insurance increased from $205 thousand in 1996 to $240 thousand in
1997 as a result of higher fees due to deposit growth. Growth in 1997
noninterest expense is attributable to branch bank expansion and costs
associated with handling asset and liability growth.
      For 1996, noninterest expense increased by $939 thousand, or 1.3%, from
$70.2 million in 1995 to $71.1 million in 1996. This increase was primarily due
to a $1.7 million, or 4.9% increase in salary and employee benefits, a $377
thousand, or 5.3% increase in net occupancy expense including furniture and
equipment expense and a $260 thousand, or 13.2% increase in credit card expense.
Other operating expenses also increased $461 thousand or 2.4% in 1996. The
primary reason for the increases in noninterest expense was costs associated
with acquiring and opening new bank offices and remodeling other banking
offices. Credit card expenses increased as a result of higher card lending
activity coupled with a computer conversion. Other operating expenses increased
as a result of professional fees associated with acquiring new banks and
training and conversion costs associated with converting to a new consolidated
data processing system.


<TABLE>
<CAPTION>

                         Table 6 -- Noninterest Expense

                                                                                 Year ended December 31,
                                                                            --------------------------------
                                                                              1997        1996        1995
                                                                            ---------  ----------  ----------
                                                                                 (Dollars in thousands)
<S>                                                                         <C>         <C>        <C>      
               Salaries and employee benefits............................   $  41,908   $ 37,229   $  35,507
               Net occupancy expense of premises.........................       6,531      5,957       5,966
               Furniture and equipment expense...........................       5,853      5,370       4,984
               Deposit insurance.........................................         240        205       2,086
               Credit card expense.......................................       2,563      2,231       1,971
               Other operating expenses..................................      21,146     20,113      19,652
                                                                           ----------  ----------  ----------
                      Total..............................................   $  78,241   $ 71,105   $  70,166

                                                                           ==========  ==========  ==========

</TABLE>


Income Taxes

      Income tax expense at December 31, 1997 was $15.4 million, up from $15.1
million for 1996 and up from $12.8 million for 1995. The increase in income
taxes is attributable to increased taxable earnings at the federal statutory
income tax rate of 35%. This corresponds to an effective tax rate of 33.2%,
34.0% and 33.2% for the three years ended December 31, 1997, 1996 and 1995,
respectively. Note 16 to the Consolidated Financial Statements for year end
provide a reconciliation between income tax expense computed using the federal
statutory income tax rate and F&M's actual income tax expense. Also included in
Note 16 to the Consolidated Financial Statements is information regarding the
principal items giving rise to deferred taxes for each of the three years ended
December 31.

Loan Portfolio
      Loans, net of unearned income, increased to $1.544 billion at December 31,
1997, up $105 million or 7.3% from $1.439 billion at year end 1996 and up $143
million or 11.0% from $1.296 billion at year end 1995. The strong increase in
loan activity for 1997 is indicative of a healthy economic environment in F&M's
banking market area. All of F&M's

14

<PAGE>

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 F&M's subsidiary banks,
F&M Bank-Massanutten, F&M Bank-Blakeley, F&M Bank-Emporia, F&M Bank-Peoples, F&M
Bank-Martinsburg, and F&M Bank-Keyser, emphasize consumer lending, with
activities focused primarily on residential real estate and consumer lending.
F&M Bank-Richmond, F&M Bank-Northern Virginia, F&M Bank-Central Virginia and F&M
Bank-Allegiance are based in larger markets where the commercial loan demand is
stronger and, as a result, their lending activities place a greater emphasis on
small to medium-size business. F&M Bank-Winchester, because of its size and
dominant position in its market, has a greater opportunity to appeal to larger
commercial customers in addition to consumers.
      Approximately 47.8% of F&M's loan portfolio at December 31, 1997 was
comprised of commercial loans, which includes certain loans secured by real
estate in categories of multifamily, non-farm, non-residential and agricultural
where real estate is among the sources of collateral securing the loan. 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
real property, accounts receivable, inventory and equipment. In addition, a
number of commercial loans are secured by real estate used by such businesses
and are generally personally guaranteed by the principals of the businesses.
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 35.5% of total loans at December 31, 1997. The residential mortgage loans
made by F&M's subsidiary banks and Big Apple Mortgage Company are made only for
single family, owner-occupied residences within their respective market regions.
The residential mortgage loans offered by F&M's subsidiaries 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. As a result
of strict underwriting guidelines, F&M has experienced charge-offs involving
residential construction loans since 1993 of less than one half of 1%.
      Consumer loans were 11.3% 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 of F&M's subsidiary banks' respective market regions.
      Loans secured by real estate consist of a diverse portfolio of
predominantly single family residential loans, which at December 31, 1997
comprised 35.5% of the loan portfolio. Loans secured by commercial real estate
comprised 31.0% of the loan portfolio at December 31, 1997 and consist
principally of commercial and industrial loans where real estate constitutes a
source of collateral (27.8%) (shown in Table 7 under the category of "Non-farm,
non-residential"), multifamily loans (2.0%) and agricultural loans (1.2%). F&M
attempts to reduce its exposure to the risks of the local real estate market by
limiting the aggregate size of its commercial real estate portfolio and by
making such loans primarily on owner-occupied properties. F&M has historically
engaged in limited mortgage lending on multifamily and agricultural properties.
Real estate construction loans accounted for only 5.4% of total loans
outstanding at December 31, 1997. F&M's charge-off rate for all loans secured by
real estate was 0.07% of period end loans. This is consistent with 1996 when the
charge-off rate for all loans secured by real estate was 0.02% of period end
loans outstanding. F&M's consumer loan portfolio, its second largest loan
category, consists principally of personal loans.
      Consistent with its focus on providing community-based financial services,
F&M generally does not make loans outside its principal market regions. F&M does
not engage in foreign lending activities, consequently, the loan portfolio is
not exposed to risk from foreign credits. F&M maintains a policy not to
originate or purchase loans classified by regulators as highly leveraged
transactions or loans to foreign entities or individuals.

15

<PAGE>

      F&M's unfunded loan commitments amounted to $316.6 million at December 31,
1997, compared to $323.2 million at December 31, 1996. This decrease in unfunded
loan commitments is due to review by management of available lines and reducing
excessive lines.
      On December 31, 1997, F&M had a concentration of loans in non-farm,
non-residential loans, consisting primarily of commercial loans secured by real
estate of $429.8 million and 1-4 family residential mortgage loans of $481.6
million which were in excess of 10 percent of the total loan portfolio. Because
of the nature of F&M's market, loan collateral is predominately real estate
related.
      A number of economic factors in conjunction with loan activity in 1997
suggest that loan growth in 1998 should continue to be strong, but not as
vibrant as it was in 1996 and 1995. Although interest rates are above the floors
they reached in 1996, they remain at reasonable levels for borrowers. New home
construction is increasing as are home sales. Auto sales were up in 1997, and
the forecast is for continued strength. The economy is creating new jobs and
absorbing the unemployment that was created during the recession and business
restructuring in 1996 and 1995. Importantly, reports suggest that borrowers are
showing a great degree of confidence in the economy. These factors resulted in a
positive loan growth trend in 1997 and represent the necessary elements for
growth in 1998.
                                                                         
<TABLE>
<CAPTION>


                            Table 7 -- Loan Portfolio

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

                                                         1997           1996          1995           1994          1993
                                                     ------------  -------------  ------------   ------------  -------------
                                                                              (Dollars in thousands)
<S>                                                   <C>           <C>            <C>            <C>           <C>        
Commercial, financial and agricultural.............   $   259,881   $    225,327   $   187,991    $   180,736   $   146,880
Real estate construction...........................        83,904         66,477        53,682         46,081        50,280
Real estate mortgage:
    Residential (1-4 family).......................       481,637        454,109       410,889        385,842       372,174
    Home equity lines..............................        67,232         67,326        67,848         68,022        60,367
    Multifamily....................................        31,266         31,712        25,191         26,106        22,445
    Non-farm, non-residential (1)..................       429,827        409,563       374,634        322,146       290,193
    Agricultural...................................        18,516         19,199        17,576         17,511        16,615
                                                     ------------  -------------  ------------   ------------  -------------
    Real estate subtotal...........................     1,028,478        981,909       896,138        819,627       761,794
Loans to individuals:
    Consumer.......................................       152,092        147,917       142,151        150,135       151,566
    Credit card....................................        22,904         23,197        22,832         19,119        16,865
                                                     ------------  -------------  ------------   ------------  -------------
    Loans to individuals subtotal..................       174,996        171,114       164,983        169,254       168,431
        Total loans................................     1,547,259      1,444,827     1,302,794      1,215,698     1,127,385

Less unearned income...............................       (3,661)        (5,719)        (6,590)       (6,187)        (6,519)
                                                     ------------  -------------  ------------   ------------  -------------
Loans-- net of unearned income.....................   $ 1,543,598   $  1,439,108   $ 1,296,204    $ 1,209,511   $ 1,120,866
                                                     ============  =============  ============   ============  =============
</TABLE>

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


<TABLE>
<CAPTION>

                     Remaining Maturities of Selected Loans
                                                                                                December 31, 1997
                                                                                           ---------------------------

                                                                                            Commercial,
                                                                                           Financial and  Real Estate-
                                                                                           Agricultural   Construction
                                                                                           ------------   ------------
                                                                                             (Dollars in thousands)
<S>                      <C>                                                               <C>            <C>        
                  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
                                                                                           ============   ============
</TABLE>

Asset Quality
      Allowance for Loan Losses. The allowance for loan losses is an estimate of
an amount adequate to provide for potential losses in the loan portfolio of each
of F&M's subsidiary banks. The amount of the allowance is based on 

16

<PAGE>

management's evaluation of the collectability of the loan portfolio, credit
concentrations, trends in historical loss experience, specific impaired loans,
and economic conditions. Allowances for impaired loans are generally determined
based on collateral values or the present value of estimated cash flows. The
allowance is increased by a provision for loan losses, which is charged to
expense and reduced by charge-offs, net of recoveries. Changes in the allowances
relating to impaired loans are charged or credited to the provision for loan
losses. Each of F&M's subsidiary banks has a formal loan review function which
consists of a committee of bank officers that regularly reviews loans and
assigns a classification based on current perceived credit risk. In addition,
the holding company has an independent loan review team that performs a detailed
on-site review and analysis of each of F&M's subsidiary bank's loan portfolio on
at least an annual basis reviewing 60% to 75% of the total principal amount of
each of F&M's subsidiary bank's loan portfolio. In addition, all lending
relationships involving an adversely classified loan are reviewed. The review
team has the authority to classify any loan it determines is not satisfactorily
classified within F&M's grading system. All classified loans are reviewed at
least quarterly by F&M's senior officers and by the subsidiary banks' board of
directors. All past due and nonaccrual loans are reviewed monthly by the
subsidiary banks' board of directors. As a matter of policy, 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. This detailed management analysis forms the basis for
determining the amount needed in the allowance for loan losses. Although the
ratio of the allowance to total loans and nonaccrual loans may be less than its
peers, F&M believes the ratio to be adequate based on this loan risk review
analysis.
      Nonperforming loans increased $7.8 million from $11.1 million at year end
1996 to $18.9 million at year end 1997. In keeping with F&M's conservative
philosophy, the amount provided for the provision for loan losses was increased
to $5.7 million after careful analysis of possible losses in the loan portfolio.
In 1996 and 1995, the nature of loan quality in the portfolio and improved
underwriting standards allowed F&M to maintain a lower allowance for loan
losses. The ratio of allowance for loan losses to period end loans, net for
1997, 1996 and 1995 was 1.34%, 1.25% and 1.41%, respectively. In 1997, F&M
included in its loan portfolio $64.7 million loans composed of SBA, FHA and VA
residential housing loans that were guaranteed by the U.S. government. If these
guaranteed loans were excluded from total average loans for 1997, the ratio of
allowance for loan losses to period end loans, net would be 1.40%. In 1997, 1996
and 1995, the ratio of allowance for loan losses to nonaccrual loans were
109.38%, 161.35% and 137.53%, respectively, which is an indication that the
allowance is adequate with respect to nonaccrual loans.
      The allowance is also subject to regulatory examinations and
determinations as to adequacy, which may take into account such factors as the
methodology used to calculate the allowance and the size of the allowance in
comparison to peer companies identified by regulatory agencies. F&M's subsidiary
banks are examined at different times, but the Virginia Bureau of Financial
Institutions examined all Virginia banking subsidiaries, the West Virginia
Division of Banking examined all West Virginia banking subsidiaries and Federal
Reserve Bank of Baltimore examined F&M's Maryland bank subsidiary during 1997.
Loans classified for regulatory purposes as loss, doubtful, substandard, or
special mention, do not represent or result from trends or uncertainties which
management reasonably expects will materially impact future operating results,
liquidity, or capital resources or represent material credits about which
management is aware of any information which causes management to have serious
doubts as to the ability of such borrowers to comply with the loan repayment
terms.
      F&M maintains a general allowance for loan losses and does not allocate
its allowance for loan losses to individual categories for management purposes.
Table 8 shows an allocation among loan categories based upon analysis of the
loan portfolio's composition, historical loan loss experience, and other factors
and the ratio of the related outstanding loan balances to total loans.

<TABLE>
<CAPTION>


               Table 8 -- Allocation of Allowance for Loan Losses



                                            1997                            1996                            1995
                                 --------------------------      --------------------------      --------------------------
                                                Percent of                      Percent of                      Percent of
                                               Loans in Each                   Loans in Each                   Loans in Each
                                                Category to                     Category to                     Category to
                                    Allowance   Total Loans        Allowance    Total Loans        Allowance    Total Loans

                                  ----------   ------------       ----------   -----------       -----------    -----------
December 31:                                                       (Dollars in thousands)
<S>                                 <C>            <C>             <C>            <C>              <C>             <C> 
    Commercial, financial and
      agriculture.............      $  8,524       16.8%           $   6,278      15.6%            $   6,388       14.4%
    Real estate-construction..           746        5.4                  717       4.6                   710        4.1
    Real estate-mortgage......         6,785       66.5                6,529      68.0                 6,644       68.8
    Consumer..................         4,586       11.3                4,412      11.8                 4,510       12.7
                                  ----------   ------------       ----------   -----------       -----------    -----------
                                    $ 20,641      100.0%           $  17,936     100.0%            $  18,252      100.0%
                                  ==========   ============       ==========   ===========       ===========    ===========

</TABLE>
17

<PAGE>

      F&M provided $5.7 million, $2.1 million and $2.0 million for provision for
loan losses for the years 1997, 1996 and 1995, respectively. These charges to
the provision represent management's decision to provide an amount necessary to
achieve a level in the allowance for loan losses to adequately cover possible
losses to the portfolio.
      F&M's net charge-offs increased in 1997 to $3.0 million, higher than the
1996 level of $2.4 million and higher than 1995 net charge-offs of $1.6 million.
The higher net charge-offs in 1997 was due to a few customers inability to
manage their finances. Loans to individuals made up of consumer and credit card
loans represented the highest category of net charge-offs in 1997 of $1.8
million as compared to $963 thousand in 1996. In 1997, personal bankruptcies and
credit card losses contributed largely to the charge-offs in the loans to
individuals category. Net charge-offs to average loans was 0.19%, 0.17% and
0.13% for the years 1997, 1996 and 1995, respectively.

                      Table 9 -- Allowance for Loan Losses



<TABLE>
<CAPTION>
                                                                                       December 31,
                                                              --------------------------------------------------------------
                                                                1997          1996         1995         1994         1993
                                                             ----------    ---------    ---------    ---------    ---------
                                                                                  (Dollars in thousands)
<S>                                                           <C>          <C>          <C>          <C>           <C>     
Balance, beginning of period...............................   $  17,936    $  18,252    $  17,826    $  16,317     $ 13,592
    Loans charged-off:
        Commercial, financial and agriculture..............         867        1,409          591        1,288        1,331
        Real estate construction...........................          48           --           74           45            4
        Real estate mortgage:
            Residential (1-4 family).......................         362          142          583          280          376
            Home equity lines..............................          --           27           --           14          239
            Multifamily....................................          --           45           --           --           --
            Non-farm, non-residential (1)..................         256           81           95           --           89
            Agricultural...................................         400           --           --           --           --
                                                             ----------    ---------    ---------    ---------    ---------
                    Real estate subtotal...................       1,018          295          678          294          704
    Consumer...............................................       1,147          643          952          669        1,316
    Credit card............................................         999          537          343          146          144

                                                             ----------    ---------    ---------    ---------    ---------
                    Loans to individuals subtotal..........       2,146        1,180        1,295          815        1,460
                    Total loans charged-off................       4,079        2,884        2,638        2,442        3,499
    Recoveries:
        Commercial, financial and agriculture..............         727          142          642          817          506
        Real estate construction...........................          --           --           --           --            8
        Real estate mortgage:
            Residential (1-4 family).......................          24          119           68          125          332
            Home equity lines..............................          --           --           56           22           --
            Multifamily....................................          --            3           --           --           --
            Non-farm, non-residential (1)..................          36           37           19            4          31
            Agricultural...................................          --           --           --           --           --
                                                             ----------    ---------    ---------    ---------    ---------
                    Real estate subtotal...................          60          159          143          151          363
    Loans to individuals:
        Consumer...........................................         260          192          218          301          487
        Credit card........................................          52           25           13           12           22
                                                             ----------    ---------    ---------    ---------    ---------
                    Loans to individuals subtotal..........         312          217          231          313          509
                    Total recoveries.......................       1,099          518        1,016        1,281        1,386

                                                             ----------    ---------    ---------    ---------    ---------
Net charge-offs............................................       2,980        2,366        1,622        1,161        2,113
Provision for loan losses..................................       5,685        2,050        2,048        2,670        3,395
Increase from purchase.....................................          --           --           --           --        1,443
                                                             ----------    ---------    ---------    ---------    ---------
Balance, end of period.....................................   $  20,641    $  17,936    $  18,252    $  17,826     $ 16,317
                                                             ==========    =========    =========    =========    =========
Ratio of allowance for loan losses to loans outstanding
  at end of period.........................................       1.34%        1.25%        1.41%        1.47%        1.46%
Ratio of net charge-offs to average loans outstanding 
during period .............................................       0.19%        0.17%        0.13%        0.10%        0.21%
</TABLE>


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

      The net amount of interest recorded during each year on loans that were
classified as nonperforming or restructured on December 31, 1997, 1996 and 1995
was $216 thousand, $769 thousand and $229 thousand, respectively. If these loans
had been accruing interest at their originally contracted rates, related income
would have been $1.7 million in 1997, $1.5 million in 1996 and $1.3 million in
1995.

18
<PAGE>

      Nonperforming Assets. Total nonperforming assets, which consist of
nonaccrual loans, restructured loans and foreclosed properties, were $32.2
million, $23.6 million, and $28.5 million at year end 1997, 1996 and 1995,
respectively. The increase in nonperforming assets in 1997 was due to an
increase in nonaccrual loans. F&M management exerts great effort to identify
deteriorating assets early in the business cycle to ensure that prompt action is
taken while working toward final resolution of all nonperforming assets.
      Nonperforming loans (nonaccrual loans and restructured loans) at December
31, 1997 were $19.0 million, or 1.2% of total loans, up from $11.2 million, or
0.8% of total loans at December 31, 1996 and up from $13.3 million, or 1.0% of
total loans, at December 31, 1995. Nonperforming loans at year end 1997 were
composed largely of 1-4 family residential loans amounting to $3.3 million,
construction and land development amounting to $776 thousand, real estate
secured by farmland amounting to $1.5 million and commercial loans secured by
real estate amounting to $9.4 million. Nonperforming loans which were guaranteed
by the US government were $470 thousand in 1997.

      Nonperforming loans are those loans where, in the opinion of management,
the full collection of principal or interest is unlikely. Nonperforming loans
increased 69.8% during 1997, while they decreased 17.8% in 1996. The increase in
nonperforming loans in 1997 was primarily due to the inclusion of loans made to
one commercial customer for $6.6 million. In 1997, F&M increased the provision
for loan losses by $2.0 million to adequately provide for any possible loses
attributable to this customer.
      The recorded investment in certain loans that were considered to be
impaired 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. The average recorded investment in
certain impaired loans for the years ended December 31, 1997 and December 31,
1996 was approximately $8.5 million and $9.3 million, respectively. For the year
1997 and 1996, interest income recognized on impaired loans totaled $513
thousand and $154 thousand, all of which was recognized on a cash basis.
      Nonaccrual loans excluded from impaired loan disclosure under FASB 114
amounted to $6.4 million and $4.6 million at December 31, 1997 and 1996,
respectively. If interest on these loans had been accrued, such income would
have approximated $320 thousand and $345 thousand for 1997 and 1996,
respectively.
      Foreclosed properties consists of 27 parcels of real estate acquired
through debt previously contracted. These properties consist primarily of
commercial and residential real estate whose value is determined through sale at
public auction or fair market value, whichever is less. In 1995, F&M acquired
through foreclosure approximately 1,000 acres of real estate located in
Jefferson County, West Virginia, valued in excess of $4 million. F&M is
marketing this property and will dispose of it as expediently as possible. At
December 31, 1997, F&M had $13.2 million in foreclosed property upon which it
does not anticipate incurring any material loss on the final disposition.


<TABLE>
<CAPTION>



                        Table 10 -- Nonperforming Assets



                                                                                  December 31,
                                                     -----------------------------------------------------------------------
                                                         1997           1996          1995           1994          1993
                                                     ------------  -------------  ------------   ------------  -------------
                                                                              (Dollars in thousands)
<S>                                                   <C>           <C>            <C>            <C>           <C>        
Nonaccrual loans...................................   $    18,871   $     11,116   $    13,272    $    20,504   $    28,761
Restructured loans.................................            79             82           358            382           770
Foreclosed property................................        13,230         12,396        14,839         14,657        12,584
                                                     ------------  -------------  ------------   ------------  -------------
        Total nonperforming assets.................   $    32,180   $     23,594   $    28,469    $    35,543   $    42,115

                                                     ============  =============  ============   ============  =============

Loans past due 90 days accruing interest...........   $     2,713   $      4,487   $     3,789    $     1,973   $     2,887
Allowance for loan losses to period end loans......          1.34%          1.25%          1.41%         1.47%         1.46%
Allowance for loan losses to nonaccrual loans......        109.38%        161.35%        137.53%        86.94%        56.73%
Nonperforming assets to period end loans and
  foreclosed properties............................          2.07%          1.63%          2.17%         2.90%         3.72%
Net charge-offs to average loans...................          0.19%          0.17%          0.13%         0.10%         0.21%
</TABLE>

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

<TABLE>
<CAPTION>
                                                                                  December 31,
                                                     -----------------------------------------------------------------------
                                                         1997           1996          1995           1994          1993
                                                     ------------  -------------  ------------   ------------  -------------
                                                                              (Dollars in thousands)
<S>                                                   <C>           <C>            <C>            <C>           <C>        
Income that would have been recorded in accordance with original terms:
      Nonaccrual loans and restructured loans......   $     1,680   $      1,549   $     1,343    $     1,444   $     1,244
Income actually recorded:
      Nonaccrual and restructured loans............           216            769           229            159            33
</TABLE>


      On December 31, 1997, there were no material outstanding commitments to
lend additional funds with respect to nonperforming loans.


19

<PAGE>

      Loans are placed on nonaccrual status when collection of interest and
principal is doubtful, generally when loans become 90 days past due. There are
three negative implications for earnings when a loan is placed on nonaccrual
status. First, all interest accrued but unpaid at the date the loan is placed on
nonaccrual status is either deducted from interest income or written off as a
loss. Second, accruals of interest are discontinued until it becomes certain
that both principal and interest can be repaid. Third, there may be actual
losses which necessitate additional provisions for loan losses be charged
against earnings.
      At December 31, 1997, loans past due 90 days or more and still accruing
interest because they are both well secured and in the process of collection
were $2.7 million, compared to $4.5 million at December 31, 1996 and $3.8
million at December 31, 1995.
      Potential Problem Loans. At December 31, 1997, potential problem loans
were approximately $11.0 million, including 4 lending relationships with
principal balances in excess of $500,000, which had an aggregate principal
balance outstanding of $9.9 million. Loans are viewed as potential problem loans
according to the ability of such borrowers to comply with current repayment
terms. These loans are subject to constant management attention, and their
status is reviewed on a regular basis. The potential problem loans identified at
December 31, 1997 are generally secured by residential and commercial real
estate with appraised values that exceed the principal balance.
      Although trends for credit quality factors, such as loan losses and
non-performing assets, continue to improve, it is likely that F&M will continue
modest provisions for loan losses in 1998. The principal factor for additional
provisions is expected growth in the loan portfolio as the result of continued
improvement in economic conditions.
      Continued positive economic conditions and an assessment of the loan
portfolio and problem assets suggest that loan losses in 1998 should not be
materially greater than those in 1997. At such relatively low levels of loan
losses as were experienced in 1997, however, a minor dollar fluctuation in
losses could represent a large percentage increase. Loan loss expectations for
1998 are influenced by economic forecasts of continued growth and moderate
interest rates. Financial circumstances of individual borrowers also will affect
loan loss results. Unforeseen changes, either in economic conditions or
borrowers' financial conditions, could also impact actual loan losses in 1998.
F&M will maintain and follow its policies and practices intended to minimize
future credit losses.


Securities
      The book value of the securities portfolio was $638.5 million at December
31, 1997, compared to $597.0 million at December 31, 1996. The securities
portfolio increased $41.5 million in 1997 over 1996, which followed a decrease
of $37.8 million in 1996 over 1995. Investment in U.S. Government securities
increased $45.4 million, or 8.3%, for the year 1997, however, for the year 1996
they decreased $38.0 million, or 6.5%. Investment in states and political
subdivisions remained at relatively low levels. F&M has generally not reinvested
funds in securities issued by states and political subdivisions, because those
securities do not have the same tax benefits that they have had in the past.
      The securities portfolio consists of two components, securities held to
maturity and securities available for sale. Securities are classified as held to
maturity when management has the intent and F&M has the ability at the time of
purchase to hold the securities to maturity. Securities held to maturity are
carried at cost adjusted for amortization of premiums and accretion of
discounts. Securities to be held for indefinite periods of time are classified
as available for sale and accounted for at the lower of cost or market value.
Securities available for sale include securities that may be sold in response to
changes in market interest rates, changes in the security's prepayment risk,
increases in loan demand, general liquidity needs and other similar factors.
      Financial Accounting Standards Board Pronouncement No. 115 effective
January 1, 1994, required F&M to show the effect of market changes in the value
of securities available for sale (AFS). The market value of AFS securities at
December 31, 1997 was $231.8 million. The effect of the market value of AFS
securities less the book value of AFS securities, net of income taxes is
reflected as a line in Stockholders' Equity as unrealized gain of $2.2 million
and $429 thousand at December 31, 1997 and December 31, 1996, respectively.
Investment rates have decreased in 1997 and 1996, thereby, causing currently
held bond portfolio market values to increase. In 1995, the decline in market
yields was due to interest rate fluctuations only and not a result of re-ratings
or down grading of securities.

20

<PAGE>


<TABLE>
<CAPTION>

                             Table 11 -- Investment Portfolio and Securities Available For Sale


      The carrying value of investment securities at the dates indicated was:
                                                                                          December 31,
                                                                            --------------------------------
                                                                              1997        1996        1995
                                                                            ---------  ----------  ----------
                                                                                 (Dollars in thousands)

<S>                                                                         <C>         <C>        <C>      
               U.S. Government securities................................   $ 375,858   $301,630   $ 309,506
               States and political subdivisions.........................      29,273     30,351      33,112
               Other securities..........................................       1,576      1,584         985
                                                                           ----------  ----------  ----------

                       Total investment securities.......................   $ 406,707   $333,565   $ 343,603
                                                                           ==========  ==========  ==========
</TABLE>

    



      The carrying value of securities available for sale at the dates indicated
was:
<TABLE>
<CAPTION>
                                                                                      December 31,
                                                                            --------------------------------
                                                                              1997        1996        1995
                                                                            ---------  ----------  ----------
                                                                                 (Dollars in thousands)

<S>                                                                         <C>         <C>        <C>      
               U.S. Government securities................................   $ 217,080   $245,853   $ 276,017
               Other securities..........................................      14,691     17,575      15,127

                                                                           ----------  ----------  ----------
                       Total securities available for sale...............   $ 231,771   $263,428   $ 291,144
                                                                           ==========  ==========  ==========
</TABLE>


           Table 12 -- Maturity Distribution and Yields of Securities
                                December 31, 1997
                            Taxable-Equivalent Basis


<TABLE>
<CAPTION>
                                                     Due after 1        Due after 5       Due after 10
                                 Due in 1 year        through 5         through 10          years and
                                    or less             years              years        Equity Securities        Total
                              -----------------  -----------------  -----------------  -----------------  -----------------
                                Amount    Yield    Amount    Yield    Amount    Yield     Amount   Yield     Amount   Yield
                              ---------  ------   --------- ------   --------  ------   --------  ------   --------- ------
                                                              (Dollars in thousands)
<S>                             <C>       <C>      <C>       <C>      <C>       <C>    <C>         <C>      <C>       <C>  
Securities held for investment:
    U.S. Government securities  $ 68,725  5.50%    $222,624  6.34%    $ 63,616  6.77%  $  20,893   7.45%    $375,858  6.32%
  Other taxable securities...         --  0.00%       1,317  8.42%         259  5.70%         --   0.00%       1,576  7.70%
                               ---------           ---------          --------           --------           ---------
      Total taxable..........     68,725  5.50%     223,941  6.35%      63,875  6.77%     20,893   7.45%     377,434  6.32%
  Tax-exempt securities (1)..      3,256  5.22%      13,887  5.39%       9,214  5.41%      2,916   5.29%      29,273  5.37%
                               ---------           ---------          --------           --------           ---------
      Total .................  $  71,981  5.49%   $ 237,828  6.30%   $  73,089  6.59%   $ 23,809   7.19%   $ 406,707  6.26%
                               ---------           ---------          --------           --------           ---------
Securities held for sale:
  U.S. Government securities.  $  32,212  5.55%   $ 131,688  5.85%   $  36,020  6.32%   $ 17,160   6.38%   $ 217,080  5.93%
  Other taxable securities...      7,870  4.42%       6,821  5.98%          --  0.00%         --   0.00%      14,691  5.22%
                               ---------           ---------          --------           --------           ---------
      Total .................  $  40,082  5.33%   $ 138,509  5.86%   $  36,020  6.32%   $ 17,160   6.38%   $ 231,771  5.88%
                               ---------           ---------          --------           --------           ---------
Total securities.............  $ 112,063  5.43%   $ 376,337  6.13%   $ 109,109  6.50%   $ 40,969   6.85%   $ 638,478  6.12%
                               =========           =========          ========           ========           =========
</TABLE>



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

      See Note 2 to the Consolidated Financial Statements as of December 31,
1997 for an analysis of gross unrealized gains and losses in the securities
portfolio.

Deposits
      F&M has made an effort in recent years to increase core deposits and
reduce cost of funds. Deposits provide funding for F&M's investments in loans
and securities, and the interest paid for deposits must be managed carefully to
control the level of interest expense.
      Deposits at December 31, 1997 increased $170.9 million or 8.7% to $2.138
billion from $1.967 billion at year end 1996. Non-interest bearing demand
deposits increased $73.9 million or 22.1% from $334.5 million in 1996 to $408.4
million in 1997. Interest bearing deposits increased $96.9 million or 5.9% to
$1.729 billion in 1997. In 1997, savings deposits increased $37.9 million or
7.4% to $548.0 million, while money market deposits increased by only $1.1
million. Certificates of deposit over and under $100,000 experienced a $57.9
million or 6.3% increase in deposits. Unlike deposit growth in 1996 which was
affected by comparatively low interest rates and the consequent

                                                                              21

<PAGE>


movement of funds out of deposit accounts and into alternative investments,
depositors in 1997 were seeking attractive guaranteed rates provided by
certificates of deposits.
      F&M does not have any other time deposits, other than certificates of
deposits, over $100,000.
      Deposits at December 31, 1996 grew $84.1 million or 4.5% to $1.967
billion. Non-interest bearing demand deposits increased $20.5 million or 6.5%
from $314.0 million in 1995 to $334.5 million in 1996. Interest bearing deposits
increased $63.6 million or 4.1% to $1.632 billion in 1996. Interest checking,
savings deposits, and money market deposits experienced a reduction in deposits
in 1996, whereas, certificates of deposit over and under $100,000 experienced an
increase in deposits. Deposit growth in 1996 was affected by comparatively low
interest rates and the consequent movement of funds out of deposit accounts and
into alternative investments. In addition to moving funds out of deposit
accounts, depositors continued to shift funds into more liquid accounts.

                       Table 13 -- Deposits and Rates Paid


<TABLE>
<CAPTION>
                                                                        December 31,
                                --------------------------------------------------------------------------------------------
                                            1997                            1996                            1995
                                ---------------------------      --------------------------       --------------------------
                                    Amount          Rate            Amount         Rate             Amount          Rate
                                 -----------   ------------      ------------   -----------      ------------   ------------
                                                                   (Dollars in thousands)
<S>                              <C>           <C>               <C>                <C>          <C>             <C>
Noninterest-bearing accounts...  $   408,449                     $    334,499                    $    314,037
                                 -----------                     ------------                    ------------
Interest-bearing accounts:
    Interest checking..........      350,911        2.21%             305,040       2.20%             283,857       2.44%
    Regular savings............      197,095        2.77%             205,029       2.83%             211,982       3.23%
    Money-market...............      208,970        2.94%             207,860       2.87%             213,722       3.08%
        Time deposits:
            Less than $100,000.      774,216        5.51%             742,433       5.56%             692,028       5.43%
            $100,000  and more.      198,193        5.55%             172,077       5.53%             167,223       5.47%
                                 -----------                     ------------                    ------------

Total interest-bearing.........    1,729,385        4.24%           1,632,439       4.25%           1,568,812       4.24%
                                 -----------                     ------------                    ------------
        Total..................  $ 2,137,834                     $  1,966,938                    $  1,882,849
                                 ===========                     ============                    ============
</TABLE>


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

                           Within       Three to        Six to         One to         Over                        Percent
                            Three          Six          Twelve          Five          Five                       of Total
                           Months        Months         Months          Years         Years          Total       Deposits
                        ------------  ------------   ------------  -------------  ------------   ------------  -------------
                                                                      (Dollars in thousands)
<S>                     <C>             <C>           <C>           <C>            <C>            <C>                <C>  
At December 31, 1997.   $     66,157    $   37,582    $    63,588   $     30,866   $        --    $   198,193        9.27%
</TABLE>

Capital Resources
      Management seeks to maintain a capital structure that will assure an
adequate level of capital to support anticipated asset growth and absorb
potential losses. The adequacy of F&M's capital is reviewed by management on an
ongoing basis with emphasis on the size, composition and quality of F&M's asset
and liability levels and consistent with regulatory requirements and industry
standards.
      The Federal Reserve, along with the Comptroller of the Currency and the
Federal Deposit Insurance Corporation, have adopted capital guidelines to
supplement the definitions of capital for regulatory purposes and to establish
minimum capital standards. Specifically, the guidelines categorize assets and
off-balance sheet items into four risk-weighted categories. The minimum ratio of
qualifying total capital to risk-weighted assets is 8.0%, of which at least 4.0%
must be Tier I capital, composed of common equity, retained earnings and a
limited amount of perpetual preferred stock, less certain goodwill items. F&M
had a ratio of risk-weighted assets to total capital of 16.27% at December 31,
1997 and a ratio of risk-weighted assets to Tier I capital of 15.02%. Both of
these exceed the capital requirements adopted by the federal bank regulatory
agencies.
      Table 14 reflects the cash dividends per share declared during each
quarter of the periods indicated. The information in Table 14 may vary for
certain periods from the dividends paid during the quarter in cases where the
dividend was paid in the quarter following its declaration. In addition, the
amounts shown have not been restated and adjusted to reflect the acquisition on
March 29, 1996 of FB&T Financial Corporation and on October 1, 1996 of
Allegiance Banc Corporation.

22

               Table 14 -- Common Stock Performance and Dividends

<TABLE>
<CAPTION>
                                                         Common Stock Price
                                       -------------------------------------------------------
                                                 1997                         1996                   Dividends Declared
                                                                                                 ---------------------------
                                          High            Low           High           Low           1997          1996
                                      ------------   ------------  -------------  ------------   ------------  -------------
<S>                                    <C>            <C>           <C>             <C>           <C>           <C>       
First quarter.......................   $    22.875    $    19.625   $     19.750    $   17.250    $     0.180   $    0.160
Second quarter......................        26.375         19.875         18.500        16.000          0.180        0.160
Third quarter.......................        30.438         26.000         19.375        17.250          0.185        0.175
Fourth quarter......................        36.250         28.563         21.375        18.125          0.185        0.230

Years ended December 31.............   $    36.250    $    19.625   $     21.375   $    16.000    $     0.730   $    0.725
</TABLE>

F&M National Corporation common stock is traded on the New York Stock Exchange
(NYSE) under the symbol FMN. On December 31, 1997 there were approximately 7,881
shareholders of record.


                         Table 15 -- Analysis of Capital
<TABLE>
<CAPTION>
                                                                                      December 31,
                                                                            --------------------------------
                                                                              1997        1996        1995
                                                                            ---------  ----------  ----------
                                                                                 (Dollars in thousands)

               Tier 1 Capital:
<S>                                                                         <C>         <C>        <C>      
                   Common stock..........................................   $  40,750   $ 40,747   $  40,848
                   Additional paid in capital............................      68,206     69,197      72,716
                   Retained earnings.....................................     136,700    120,350     105,140
                   Less: Goodwill........................................      11,158      7,195       7,947
                                                                           ----------  ----------  ----------
                   Total Tier 1 capital..................................     234,498    223,099     210,757

               Tier 2 Capital:
                   Allowance for loan losses.............................      19,478     17,936      16,527
                   Allowable long term debt..............................          --         --          --
                                                                           ----------  ----------  ----------
                   Total Tier 2 capital..................................      19,478     17,936      16,527
                   Total risk-based capital..............................   $ 253,976   $241,035   $ 227,284
                                                                           ==========  ==========  ==========

               Risk-weighted assets......................................  $1,561,141 $1,436,341  $1,322,144

               CAPITAL RATIOS:
                   Tier 1 risk-based capital ratio.......................      15.02%     15.53%      15.94%
                   Total risk-based capital ratio........................      16.27%     16.78%      17.19%
                   Tier 1 capital to average total assets................       9.55%      9.90%      10.09%
</TABLE>

Liquidity
      Liquidity represents an institution's ability to meet present and future
financial obligations through either the sale or maturity of existing assets or
the acquisition of additional funds through liability management. Liquid assets
include cash, interest-bearing deposits with banks, federal funds sold,
securities and loans classified as available for sale and loans and investment
securities maturing within one year. As a result of F&M's management of liquid
assets and the ability to generate liquidity through liability funding,
management believes that F&M maintains overall liquidity sufficient to satisfy
its depositors' requirements and meet its customers' credit needs.
      At December 31, 1997, approximately $934.6 million or 41.1% of total
earning assets is due to mature or reprice within the next year.
      F&M also maintains additional sources of liquidity through a variety of
borrowing arrangements. F&M's subsidiary banks maintain federal fund lines with
a number of larger regional and money-center banking institutions totaling in
excess of $65.3 million, of which $3.0 million was borrowed at December 31,
1997. Federal funds borrowed by F&M's subsidiary banks during 1997 averaged less
than $500,000. At December 31, 1997, certain of F&M's subsidiary banks had
outstanding $76.9 million of borrowings pursuant to securities repurchase
agreement transactions, ranging in maturity from one day to three months. Also,
F&M has credit lines totaling $301.9 million from the Federal Home Loan Bank
that can be utilized for short and/or long-term borrowing.
      F&M engages in short-term borrowings at the parent company level, as well.
At December 31, 1997, F&M had $14.2 million outstanding in short-term
obligations issued to selected customers of F&M's subsidiary banks pursuant to a
master agreement. As a back-up source of funds, F&M has approved bank lines of
credit totaling $9.0 million. These lines are used infrequently with the average
aggregate balance outstanding under the lines not exceeding $1.0


                                                                              23
<PAGE>

million since they have been in place. At year end 1997, 1996 and 1995, there
were no outstanding balances under these lines of credit.
      In 1994, some of F&M's subsidiary banks joined the Federal Home Loan Bank
system in order to enter a program of long-term borrowing which must be invested
in Residential Housing Finance Assets (RHFA). RHFA are defined as (1) Loans
secured by residential real property; (2) Mortgage-backed securities; (3)
Participations in loans secured by residential real property; (4) Loans financed
by Community Investment Program advances; (5) Loans secured by manufactured
housing, regardless of whether such housing qualifies as residential real
property; or (6) Any loans or investments which the Federal Housing Finance
Board and the Bank, in their discretion, otherwise determine to be residential
housing finance assets. In 1997, long-term borrowings from the Federal Home Loan
Bank system for RHFA investments were $17.1 million maturing through 2006.

Accounting Rule Changes
      In June 1996, the FASB issued FASB Statement No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities".
This Statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities. Those
standards are based on consistent application of a financial components approach
that focuses on control of the affected asset or liability that it controls or
surrenders. This Statement is effective for transfers and servicing of financial
assets and extinguishments of liabilities occurring after December 31, 1996, and
is to be applied prospectively.
      In October 1996, the FASB issued FASB Statement No. 127, which deferred
for one year paragraphs 9-12 (Accounting for Transfers and Servicing of
Financial Assets) under FASB No. 125 for securities lending, repurchase
agreements, dollar rolls and other secured transactions. The FASB also agreed to
defer for one year paragraph 15 (Secured Borrowings and Collateral) under FASB
No. 125 for all transactions.
      During June 1997, the FASB issued FASB No. 130, "Reporting Comprehensive
Income." This pronouncement established standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general purpose financial statements. FASB No. 130 is effective
for financial statements beginning after December 15, 1997.
      Additionally during June of 1997, the FASB issued FASB No. 131,
"Disclosures about Segments of an Enterprise and Related Information." FASB No.
131 establishes standards for the way that public enterprises report information
about operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports issued to shareholders. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. This statement becomes effective for financial statements for periods
beginning after December 31, 1997.

Year 2000
      F&M has established a committee at each subsidiary bank to address and
evaluate problems that may be encountered with respect to the Year 2000. These
committees are charged with identifying potential problems and uncertainties
that would cause financial reporting to be inaccurate, addressing the cost
associated with resolving any Year 2000 problems, and compilation of
documentation relating to testing of computer programs and equipment.
      It is the opinion of F&M that the cost of addressing the Year 2000
problems will not be a material event or uncertainty that would cause previously
reported financial information to no longer be accurate. Also, F&M is of the
opinion that the cost or consequences of the Year 2000 will not represent a
known material event or uncertainty that will reasonably be expected to
adversely affect future financial results.

24



<PAGE>

                    F&M NATIONAL CORPORATION AND SUBSIDIARIES
                           Consolidated Balance Sheets
                           December 31, 1997 and 1996
                        (In Thousands, Except Share Data)

<TABLE>
<CAPTION>
                                                                                                    December 31,
                                                                                       ------------------------------------
                                                                                              1997                1996
                                                                                         ---------------    ---------------
<S>                                                                                      <C>                <C>            
Assets
 Cash and due from banks (Notes 1, 15 and 19)........................................    $       125,154    $       112,866
 Interest-bearing deposits in other banks............................................              7,839              1,262
  Securities (fair value 1997, $645,057; 1996, $598,970)
    (Notes 1 and 2)..................................................................            638,478            596,993
  Federal funds sold and securities purchased under
    agreements to resell.............................................................            101,802             69,045
  Loans (Notes 1, 3, 5 and 19).......................................................          1,547,259          1,444,827
  Unearned income....................................................................            (3,661)             (5,719)
                                                                                         ---------------    ---------------
              Loans (net of unearned income).........................................    $     1,543,598    $     1,439,108
    Allowance for loan losses (Notes 1 and 4)........................................           (20,641)            (17,936)
                                                                                         ---------------    ---------------
              Net loans..............................................................    $     1,522,957    $     1,421,172
  Bank premises and equipment, net (Notes 1 and 6)...................................             57,102             45,939
  Other assets (Note 16).............................................................             66,980             56,474
                                                                                         ---------------    ---------------
              Total assets...........................................................    $     2,520,312    $     2,303,751
                                                                                         ===============    ===============
Liabilities and Shareholders' Equity
Liabilities
 Deposits:
    Noninterest-bearing demand deposits..............................................    $       408,449    $       334,499
    Savings and interest-bearing demand deposits.....................................            756,975            717,929
    Time deposits (Note 7)...........................................................            972,410            914,510
                                                                                         ---------------    ---------------
              Total deposits.........................................................    $     2,137,834    $     1,966,938
  Federal funds purchased and securities sold under
    agreements to repurchase (Note 8)................................................             79,876             51,537
  Federal Home Loan Bank advances (Note 8)...........................................                 --              8,297
  Other short-term borrowings (Notes 5 and 8)........................................             14,509             14,876
  Long-term debt (Note 9)............................................................             17,136             11,497
  Other liabilities..................................................................             23,133             19,883
  Commitments and contingent liabilities
    (Notes 15 and 18)................................................................                 --                 --
                                                                                         ---------------    ---------------
              Total liabilities......................................................    $     2,272,488    $     2,073,028
                                                                                         ---------------    ---------------
Shareholders' Equity
 Preferred stock, no par value, authorized 5,000,000 shares,
    no shares outstanding............................................................    $            --    $            --
  Common stock, par value $2 per share, authorized 30,000,000 shares,
    issued 1997, 20,374,957 shares; issued 1996, 20,373,697 shares...................             40,750             40,747
  Capital surplus....................................................................             68,206             69,197
  Retained earnings (Note 17)........................................................            136,700            120,350
  Unrealized gain on securities available for sale, net..............................              2,168                429
                                                                                         ---------------    ---------------
              Total shareholders' equity.............................................    $       247,824    $       230,723
                                                                                         ---------------    ---------------
              Total liabilities and shareholders' equity.............................    $     2,520,312    $     2,303,751
                                                                                         ===============    ===============
</TABLE>
------------------
See Notes to Consolidated Financial Statements.

                                                                              25
<PAGE>

                    F&M NATIONAL CORPORATION AND SUBSIDIARIES
                        Consolidated Statements of Income
        For Each of the Three Years in the Period Ended December 31, 1997
                      (In Thousands, Except Per Share Data)

<TABLE>
<CAPTION>
                                                                                           December 31,
                                                                     ------------------------------------------------------
                                                                            1997              1996                1995
                                                                      ---------------    ---------------    ---------------
<S>                                                                   <C>                <C>                <C>            
Interest Income
 Interest and fees on loans.........................................  $       137,023    $       125,593    $       116,726
  Interest and dividends on investment securities:
    Taxable interest income.........................................           20,656             19,077             18,951
    Interest income exempt from federal income taxes................            1,518              1,716              2,081
  Interest and dividends on securities available for sale:
    Taxable interest income.........................................           14,504             17,027             15,200
    Dividends.......................................................              739                595                503
  Interest income on federal funds sold and securities
    purchased under agreements to resell............................            3,859              3,914              4,992
  Interest on deposits in banks.....................................              290                111                 76
                                                                      ---------------    ---------------    ---------------
                     Total interest income..........................  $       178,589    $       168,034    $       158,529
                                                                      ---------------    ---------------    ---------------
Interest Expense
 Interest on deposits ..............................................  $        71,065    $        68,384    $        64,677
  Interest on short-term borrowings.................................            3,066              2,329              2,167
  Interest on long-term debt........................................            1,031                518                313
                                                                      ---------------    ---------------    ---------------
                     Total interest expense.........................  $        75,162    $        71,231    $        67,157
                                                                      ---------------    ---------------    ---------------
                     Net interest income............................  $       103,427    $        96,803    $        91,372

  Provision for loan losses (Notes 1 and 4).........................            5,685              2,050              2,048
                                                                      ---------------    ---------------    ---------------
                     Net interest income after provision
                        for loan losses.............................  $        97,742    $        94,753    $        89,324
                                                                      ---------------    ---------------    ---------------
Other Income
 Commissions and fees from fiduciary activities.....................  $         2,335    $         2,196    $         1,812
  Service charges on deposit accounts...............................            9,929              9,087              8,053
  Credit card fees..................................................            3,652              3,401              3,193
  Fees for other customer services..................................            2,258              1,849              1,734
  Other operating income............................................            4,637              3,945              4,207
  Profits on securities available for sale (Note 2).................            4,218                265                519
  Investment securities gains, net (Note 2).........................               16                  2                 --
                                                                      ---------------    ---------------    ---------------
                     Total other income.............................  $        27,045    $        20,745    $        19,518
                                                                      ---------------    ---------------    ---------------
Other Expenses
 Salaries and employees' benefits (Notes 12, 13 and 14).............  $        41,908    $        37,229    $        35,507
  Net occupancy expense of premises (Notes 6 and 15)................            6,531              5,957              5,967
  Furniture and equipment expenses (Notes 6 and 15).................            5,853              5,370              4,984
  Deposit insurance.................................................              240                205              2,086
  Credit card expense...............................................            2,563              2,231              1,971
  Other operating expenses..........................................           21,146             20,113             19,651
                                                                      ---------------    ---------------    ---------------
                     Total other expenses...........................  $        78,241    $        71,105    $        70,166
                                                                      ---------------    ---------------    ---------------
                     Income before income taxes.....................  $        46,546    $        44,393    $        38,676

Income tax expense (Notes 1 and 16).................................           15,431             15,095             12,841
                                                                      ---------------    ---------------    ---------------
                     Net income.....................................  $        31,115    $        29,298    $        25,835
                                                                      ===============    ===============    ===============
Earnings per common share, basic (Notes 1 & 11).....................  $          1.54    $          1.44    $          1.27
                                                                      ===============    ===============    ===============
Earnings per common share, assuming dilution (Notes 1 &11)..........  $          1.53    $          1.42    $          1.25
                                                                      ===============    ===============    ===============
</TABLE>
------------------
See Notes to Consolidated Financial Statements.

26


<PAGE>

                    F&M NATIONAL CORPORATION AND SUBSIDIARIES
           Consolidated Statements of Changes in Shareholders' Equity
        For Each of the Three Years in the Period Ended December 31, 1997
                 (In Thousands, Except Share and Per Share Data)

<TABLE>
<CAPTION>
                                                                                             Unrealized Gain
                                                                                            (Loss) on Secur-
                                                 Common          Capital        Retained     ities Available
                                                  Stock          Surplus        Earnings      for Sale, Net       Total
                                             -------------   -------------   --------------   -------------   -------------
<S>                                          <C>             <C>             <C>             <C>              <C>         
Balance-- December 31, 1994................. $      40,346   $      71,036   $       91,336  $      (7,282)   $    195,436
  Net income-- 1995.........................            --              --           25,835              --         25,835
  Cash dividends declared ($0.61 per share).            --              --         (10,864)              --        (10,864)
  Issuance of common stock-- dividend
    reinvestment plan (149,443 shares)......           299           2,091               --              --          2,390
  Acquisition of common stock
    (184,014 shares)........................          (368)         (2,708)           (100)              --         (3,176)
  Issuance of common stock-- employee
    stock ownership plan (37,393 shares)....            75             525               --              --            600
  Issuance of common stock-- exercise of
    employee stock options (84,586 shares)..           169             148               --              --            317
  Issuance of stock options under nonvari-
    able compensatory plan (26,000 shares)..            --             207               --              --            207
  Issuance of common stock to acquire
    investment (11,980 shares)..............            24             176               --              --            200
  Issuance of common stock for employee
    stock discount plan (35,357 shares).....            71             405               --              --            476
  Issuance of common stock-- stock
     dividend -- FB&T Financial Corporation
    (116,077 shares)........................           232             836          (1,068)              --             --
  Change in unrealized gain (loss) on secur-
    ities available for sale, net of deferred
    income taxes of $5,824..................            --              --               --          10,625         10,625
                                             -------------   -------------   --------------   -------------   -------------
Balance-- December 31, 1995................. $      40,848   $      72,716   $      105,139  $        3,343   $    222,046
  Net income-- 1996.........................            --              --           29,298              --         29,298
  Cash dividends declared ($0.69 per share).            --              --          (14,087)             --        (14,087)
  Acquisition of common stock
    (410,704 shares)........................          (821)         (6,635)              --              --         (7,456)
  Issuance of common stock-- employee
    stock ownership plan (55,326 shares)....           110             874               --              --            984
  Issuance of common stock-- exercise of
    employee stock options (275,699 shares).           551           1,218               --              --          1,769
  Issuance of stock options under nonvari-
    able compensatory plan (50,000 shares)..            --             500               --              --            500
  Issuance of common stock for employee
    stock discount plan (29,498 shares).....            59             524               --              --             583
  Change in unrealized gain (loss) on
    securities available for sale, net of
    deferred income taxes of $1,627.........            --              --               --          (2,914)        (2,914)
                                             -------------   -------------   --------------   -------------   -------------
Balance-- December 31, 1996................. $      40,747   $      69,197   $      120,350  $          429   $    230,723
  Net income-- 1997.........................            --              --           31,115              --         31,115
  Cash dividends declared ($0.73 per share).            --              --         (14,765)              --        (14,765)
  Acquisition of common stock
    (441,627 shares)........................          (883)         (9,711)              --              --        (10,594)
  Issuance of common stock-- employee
    stock ownership plan (49,858 shares)....           100             950               --              --          1,050
  Issuance of common stock-- exercise of
    employee stock options (80,917 shares)..           162             525               --              --            687
  Issuance of stock options under nonvari-
    able compensatory plan (68,500 shares)..            --             732               --              --            732
  Issuance of common stock for employee
    stock discount plan (46,259 shares).....            92             748               --              --            840
  Issuance of common stock in exchange for
    net assets in acquisition (265,853 shares)         532            5,765              --             --           6,297
  Change in unrealized gain (loss) on
    securities available for sale, net of
    deferred income taxes of $1,049.........            --              --               --           1,739          1,739
                                             -------------   -------------   --------------   -------------   -------------
Balance-- December 31, 1997................. $      40,750   $      68,206   $      136,700  $        2,168   $    247,824
                                             =============   =============   ==============   =============   =============
</TABLE>

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

                                                                              27
<PAGE>


                    F&M NATIONAL CORPORATION AND SUBSIDIARIES
                      Consolidated Statements of Cash Flows
        For Each of the Three Years in the Period Ended December 31, 1997
                                 (In Thousands)
<TABLE>
<CAPTION>
                                                                                           December 31,
                                                                     ------------------------------------------------------
                                                                            1997              1996                1995
                                                                      ---------------    ---------------    ---------------
<S>                                                                   <C>                <C>                <C>
Cash Flows From Operating Activities
 Net income.........................................................  $        31,115    $        29,298    $        25,835
  Adjustments to reconcile net income to net cash provided by
    operating activities:
      Depreciation and amortization.................................            5,429              4,784              4,788
      Provision for loan losses.....................................            5,685              2,050              2,048
      Deferred income taxes (credits)...............................            1,619                (34)                76
      Profits on securities available for sale......................           (4,218)              (265)              (519)
      Investment securities gains, net..............................              (16)                (2)                --
      (Gain) loss on sale of other real estate......................               90               (121)               (91)
      Net amortization and accretion of securities..................             (102)               304                384
      Increase in other assets......................................           (5,538)            (2,036)            (4,243)
      Increase in other liabilities.................................            1,930                977              6,743
                                                                      ---------------    ---------------    ---------------
                    Net cash provided by operating activities.......  $        35,994    $        34,955    $        35,021
                                                                      ---------------    ---------------    ---------------

Cash Flows From Investing Activities
  (Increase) in interest-bearing deposits in other banks............  $        (5,806)    $          (76)   $         (957)
  Proceeds from sales, principal repayments and calls of securities
    available for sale .............................................           60,467             45,979             37,464
  Proceeds from maturities of securities available for sale.........           49,551             28,950             37,876
  Proceeds from principal repayments and calls of investment
    securities .....................................................           52,714             13,935             20,736
  Proceeds from maturities of investment securities.................           61,389             96,915             76,545
  Purchase of securities available for sale.........................          (71,536)           (77,874)           (99,372)
  Purchase of investment securities.................................         (186,946)           (74,737)          (100,982)
  (Increase) decrease in federal funds sold and securities purchased under
    agreements to resell............................................          (32,757)            16,761            (40,771)
  Net (increase) in loans...........................................         (111,146)          (147,688)           (96,558)
  Purchases of bank premises and equipment..........................          (15,069)            (9,896)            (7,250)
  Proceeds from sale of other real estate...........................            2,397              5,052              7,202
  Cash acquired in acquisition......................................              529                 --                 --
                                                                      ---------------    ---------------    ---------------
                    Net cash (used in) investing activities.........  $      (196,213)    $     (102,679)    $     (166,067)
                                                                      ---------------    ---------------    ---------------

Cash Flows From Financing Activities
 Net increase (decrease) in noninterest-bearing and interest-bearing
    demand deposits and savings accounts............................  $       112,996    $        28,830    $       (44,811)
  Net increase in certificates of deposit...........................           57,900             55,259            173,529
  Dividends paid....................................................          (15,686)           (12,049)           (10,572)
  Increase (decrease) in federal funds purchased and securities sold
    under agreements to repurchase..................................           28,339             (5,935)            19,029
  Increase (decrease) in other short-term borrowings................             (367)            (3,917)             2,213
  Net proceeds from issuance and sale of common stock...............            2,577              3,336              3,783
  Acquisition of common stock.......................................          (10,594)            (7,456)            (3,176)
  Increase (decrease) in Federal Home Loan Bank advances............           (8,297)             2,560              3,862
  Proceeds from long-term debt......................................            8,500              8,775              1,000
  Principal payments on long-term debt..............................           (2,861)            (1,503)              (968)
                                                                      ---------------    ---------------    ---------------
                     Net cash provided by financing activities......  $       172,507    $        67,900    $       143,889
                                                                      ---------------    ---------------    ---------------
                     Increase in cash and cash equivalents..........  $        12,288    $           176    $        12,843

Cash and Cash Equivalents
 Beginning..........................................................          112,866            112,690             99,847
                                                                      ---------------    ---------------    ---------------
  Ending............................................................  $       125,154    $       112,866    $       112,690
                                                                      ===============    ===============    ===============
Supplemental Disclosures of Cash Flow Information
 Cash payments for:
    Interest .......................................................  $        74,138    $        70,828    $        65,026
                                                                      ===============    ===============    ===============
    Income taxes....................................................  $        16,384    $        14,260    $        10,615
                                                                      ===============    ===============    ===============
Supplemental Schedule of Noncash Investing and Financing Activities
  Issuance of stock options under nonvariable compensatory plan.....  $           732    $           500    $           206
                                                                      ===============    ===============    ===============
  Issuance of common stock to acquire investment....................  $            --    $            --    $           200
                                                                      ===============    ===============    ===============
  Loan balances transferred to foreclosed properties................  $         3,729    $         2,419    $         8,133
                                                                      ===============    ===============    ===============
  Common stock issued for stock dividend............................  $            --    $            --    $         1,068
                                                                      ===============    ===============    ===============
  Unrealized gain (loss) on securities available for sale...........  $         2,788    $       (4,541)    $        16,450
                                                                      ===============    ===============    ===============
  Issuance of common stock in exchange for net assets in acquisition  $         6,297    $            --    $            --
                                                                      ===============    ===============    ===============
</TABLE>
------------------
See Notes to Consolidated Financial Statements.

28


<PAGE>

                    F&M NATIONAL CORPORATION AND SUBSIDIARIES
                         NOTES TO CONSOLIDATED FINANCIAL
                  STATEMENTS For Each of the Three Years in the
                         Period Ended December 31, 1997

Note 1 -- Nature of Banking Activities and Significant Accounting Policies
      F&M National Corporation and Subsidiaries (the Corporation) grant
commercial, financial, agricultural, residential and consumer loans to customers
in Virginia, West Virginia and Maryland. The loan portfolio is well diversified
and generally is collateralized by assets of the customers. The loans are
expected to be repaid from cash flow or proceeds from the sale of selected
assets of the borrowers.
      The accounting and reporting policies of F&M National Corporation and
Subsidiaries conform to generally accepted accounting principles and to the
reporting guidelines prescribed by regulatory authorities. The following is a
description of the more significant of those policies and practices.

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

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

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

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

      c.  Trading Securities
      Trading securities, which are generally held for the short term in
      anticipation of market gains, are carried at fair value. Realized and
      unrealized gains and losses on trading account assets are included in
      interest income on trading account securities. The Corporation had no
      trading securities at December 31, 1997 and 1996.

Loans
      Loans are shown on the balance sheets net of unearned income and allowance
for loan losses. Interest income on commercial and real estate mortgage loans is
computed on the loan balance outstanding. Interest income on installment loans
is computed on the sum-of-the-months digits and actuarial methods.
      The Corporation has adopted FASB Statement No. 114, "Accounting by
Creditors for Impairment of a Loan", which was amended by FASB Statement No.
118. Statement 114, as amended, requires that the impairment of loans that have
been separately identified for evaluation is to be measured based on the present
value of expected future cash flows or, alternatively, the observable market
price of the loans or the fair value of the collateral. However, for those loans
that are collateral dependent (that is, if repayment of those loans is expected
to be provided solely by the underlying collateral) and for which management has
determined foreclosure is probable, the measure of impairment of those loans is
to be based on the fair value of the collateral. Statement 114, as amended, also
requires certain disclosures about investments in impaired loans and the
allowance for credit losses and interest income recognized on loans.
      The Corporation considers all consumer installment loans and residential
mortgage loans to be homogeneous

                                                                              29

<PAGE>


loans. These loans are not subject to impairment under FASB 114. A loan is
considered impaired when it is probable that the Corporation will be unable to
collect all principal and interest amounts according to the contractual terms of
the loan agreement. Factors involved in determining impairment include, but are
not limited to, expected future cash flows, financial condition of the borrower,
and the current economic conditions. A performing loan may be considered
impaired, if the factors above indicate a need for impairment. A loan on
nonaccrual status may not be impaired if in the process of collection or there
is an insignificant shortfall in payment. An insignificant delay of less than 30
days or a shortfall of less than 5% of the required principal and interest
payment generally does not indicate an impairment situation, if in management's
judgment the loan will be paid in full. Loans that meet the regulatory
definitions of doubtful or loss generally qualify as an impaired loan under FASB
114. Charge-offs for impaired loans occur when the loan, or portion of the loan
is determined to be uncollectible, as is the case for all loans.

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

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

Bank Premises and Equipment
      Premises and equipment are stated at cost less accumulated depreciation
and amortization. Premises and equipment are depreciated over their estimated
useful lives; leasehold improvements are amortized over the lives of the
respective leases or the estimated useful life of the leasehold improvement,
whichever is less. Depreciation and amortization are recorded on the
straight-line and declining-balance methods.
      Costs of maintenance and repairs are charged to expense as incurred. Costs
of replacing structural parts of major units are considered individually and are
expensed or capitalized as the facts dictate.

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

Income Taxes
      The Corporation accounts for income taxes using the asset and liability
method of accounting for income taxes as prescribed by FASB Statement No. 109,
"Accounting for Income Taxes". Under the asset and liability method of Statement
109, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the consolidated financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. Under
Statement 109, the effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the year that includes the enactment date.

Common Stock
      Shares of its own common stock reacquired by the Corporation are cancelled
as a matter of state law and are accounted for as authorized but unissued
shares.

Earnings Per Share
      In 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings per Share." Statement 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Basic earnings per share excludes any dilutive effects of options, warrants and
convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. All earnings per share
amounts for all periods have been presented, and where appropriate, restated to
conform to the Statement 128 requirements.

30

<PAGE>

Trust Division
      Securities and other property held by the Trust Division in a fiduciary or
agency capacity are not assets of the Corporation and are not included in the
accompanying consolidated financial statements.

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

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

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

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

Derivative Financial Instruments
      FASB Statement No. 119, "Disclosure about Derivative Financial Instruments
and Fair Value of Financial Instruments" requires various disclosures for
derivative financial instruments which are futures, forward swap, or option
contract, or other financial instruments with similar characteristics. The
Corporation does not have any derivative financial instruments as defined under
this Statement.

Note 2 -- Securities

      The amortized cost and fair values of securities being held to maturity as
of December 31, 1997 and 1996 are as follows:



<TABLE>
<CAPTION>
                                                                              December 31, 1997
                                                   ------------------------------------------------------------------------
                                                                            Gross             Gross
                                                       Amortized         Unrealized        Unrealized             Fair
                                                         Cost               Gains           (Losses)              Value
                                                   ---------------    ---------------    ---------------    ---------------
<S>                                                 <C>               <C>                <C>                <C>            
U.S. Treasury securities and obligations of                                     (In Thousands)
  U.S. government corporations and agencies.......  $      375,858    $         6,494    $         (596)    $       381,756
Obligations of states and political
  subdivisions....................................          29,273                668               (60)             29,881
Corporate securities..............................             976                 49                 --              1,025
Mortgage-backed securities........................             600                 24                 --                624
                                                   ---------------    ---------------    ---------------    ---------------
                                                    $      406,707    $         7,235    $         (656)    $       413,286
                                                   ===============    ===============    ===============    ===============

                                                                              December 31, 1996
                                                   ------------------------------------------------------------------------
                                                                            Gross             Gross
                                                       Amortized         Unrealized        Unrealized             Fair
                                                         Cost               Gains           (Losses)              Value
                                                   ---------------    ---------------    ---------------    ---------------

U.S. Treasury securities and obligations of                                     (In Thousands)
  U.S. government corporations and agencies.......  $      301,630    $         3,641    $       (2,105)    $       303,166
Obligations of states and political
  subdivisions....................................          30,350                526              (156)             30,720
Corporate securities..............................             981                 45                 --              1,026
Mortgage-backed securities........................             604                 26                 --                630
                                                   ---------------    ---------------    ---------------    ---------------
                                                    $      333,565    $         4,238    $       (2,261)    $       335,542
                                                   ===============    ===============    ===============    ===============
</TABLE>

                                                                              31

<PAGE>

      The amortized cost and fair value of securities being held to maturity as
of December 31, 1997, by contractual maturity are shown below. Expected
maturities may differ from contractual maturities because the corporate
securities and mortgage-backed securities may be called or repaid without any
penalties. Therefore, these securities are not included in the maturity
categories in the maturity summary.

<TABLE>
<CAPTION>
                                                                                            Amortized             Fair
                                                                                              Cost                Value
                                                                                         ---------------    ---------------
                                                                                                   (In Thousands)
<S>                                                                                      <C>                <C>            
          Due in one year or less..................................................      $        71,981    $        71,881
          Due after one year through five years....................................              236,511            238,469
          Due after five years through ten years...................................               72,830             74,012
          Due after ten years......................................................               23,809             27,255
          Corporate securities.....................................................                  976              1,025
          Mortgage-backed securities...............................................                  600                624
                                                                                         ---------------    ---------------
                                                                                         $       406,707    $       413,286
                                                                                         ===============    ===============
</TABLE>



      The amortized cost and fair value of securities available for sale as of
December 31, 1997 and 1996, are as follows: 


<TABLE>
<CAPTION>
                                                                              December 31, 1997
                                                   ------------------------------------------------------------------------
                                                                            Gross             Gross
                                                       Amortized         Unrealized        Unrealized             Fair
                                                         Cost               Gains           (Losses)              Value
                                                   ---------------    ---------------    ---------------    ---------------
<S>                                                <C>                <C>                <C>                <C>
                                                                                (In Thousands)
U.S. Treasury securities and obligations of
  U.S. government corporations and agencies....... $       215,386    $         2,054    $         (360)    $       217,080
Corporate securities..............................           3,951              1,748                (1)              5,698
Other.............................................           8,810                183                 --              8,993
                                                   ---------------    ---------------    ---------------    ---------------
                                                   $       228,147    $         3,985    $         (361)    $       231,771
                                                   ===============    ===============    ===============    ===============

                                                                              December 31, 1996
                                                   ------------------------------------------------------------------------
                                                                            Gross             Gross
                                                       Amortized         Unrealized        Unrealized             Fair
                                                         Cost               Gains           (Losses)              Value
                                                   ---------------    ---------------    ---------------    ---------------

                                                                                 (In Thousands)
U.S. Treasury securities and obligations of
  U.S. government corporations and agencies....... $       246,089    $         1,502    $       (1,737)    $       245,854
Corporate securities..............................           8,127                781                (1)              8,907
Other.............................................           8,361                306                 --              8,667
                                                   ---------------    ---------------    ---------------    ---------------
                                                   $       262,577    $         2,589    $       (1,738)    $       263,428
                                                   ===============    ===============    ===============    ===============
</TABLE>


      The amortized cost and fair value of securities available for sale, as of
December 31, 1997 by contractual maturity are shown below. Expected maturities
may differ from contractual maturities because the corporate securities and
mortgage-backed securities may be called or prepaid without any penalties.
Therefore, these securities are not included in the maturity categories in the
maturity summary.

<TABLE>
<CAPTION>
                                                                                            Amortized             Fair
                                                                                              Cost                Value
                                                                                         ---------------    ---------------
                                                                                                   (In Thousands)
<S>                                                                                      <C>                <C>
          Due in one year or less.....................................................   $        32,195    $        32,212
          Due after one year through five years.......................................           130,732            131,688
          Due after five years through ten years......................................            35,716             36,020
          Due after ten years.........................................................            16,743             17,160
          Corporate securities........................................................             3,951              5,698
          Other.......................................................................             8,810              8,993
                                                                                         ---------------    ---------------
                                                                                         $       228,147    $       231,771
                                                                                         ===============    ===============
</TABLE>

32

<PAGE>

      Proceeds from principal repayments and calls of securities held to
maturity during 1997, 1996 and 1995 were $52,714,000, $13,935,000 and
$20,736,000. Gross gains of $20,000, $5,000 and $27,000 and gross losses of
$4,000, $3,000 and $27,000 were realized on those principal repayments and calls
during 1997, 1996 and 1995, respectively. There were no sales of securities held
to maturity during 1997, 1996 and 1995.

      Proceeds from sales, principal repayments and calls of securities
available for sale during 1997, 1996 and 1995 were $60,467,000, $45,979,000 and
$37,464,000. Gross gains of $4,272,000, $320,000 and $524,000 and gross losses
of $54,000, $55,000 and $5,000 were realized on those sales and calls during
1997, 1996 and 1995, respectively.

      The book value of securities pledged to secure deposits and for other
purposes amounts to $204,861,000 and $129,075,000 at December 31, 1997 and 1996,
respectively.

Note 3 --Loans

      Major classifications of loans are as follows:
<TABLE>
<CAPTION>
                                                                                                    December 31,
                                                                                         ----------------------------------
                                                                                              1997                1996
                                                                                         ---------------    ---------------
                                                                                                   (In Thousands)
<S>                                                                                      <C>                <C>            
            Commercial, financial and agricultural...................................    $       259,881    $       225,327
            Real estate-- construction...............................................             83,904             66,477
            Real estate-- mortgage...................................................          1,028,478            981,909
            Consumer loans to individuals............................................            174,996            171,114
                                                                                         ---------------    ---------------
                                                                                         $     1,547,259    $     1,444,827
                                                                                         ===============    ===============
</TABLE>


Note 4 --Allowance for Loan Losses

      Changes in the allowance for loan losses are as follows:
<TABLE>
<CAPTION>
                                                                                           December 31,
                                                                     ------------------------------------------------------
                                                                            1997              1996                1995
                                                                      ---------------    ---------------    ---------------
                                                                                         (In Thousands)
<S>                                                                   <C>                <C>                <C>            
Balance at beginning of year........................................  $        17,936    $        18,252    $        17,825
Provision charged to operating expense..............................            5,685              2,050              2,048
Recoveries added to the reserve.....................................            1,099                518              1,016
Loan losses charged to the reserve..................................           (4,079)           (2,884)             (2,637)
                                                                      ---------------    ---------------    ---------------
Balance at end of year..............................................  $        20,641    $        17,936    $        18,252
                                                                      ===============    ===============    ===============
</TABLE>

Impairment of loans having recorded investments of $13,301,000 at December 31,
1997 and $8,896,000 at December 31, 1996, has been recognized in conformity with
FASB Statement No. 114, as amended by FASB Statement No. 118. The average
recorded investment in impaired loans during 1997 and 1996 was $8,535,000 and
$9,285,000, respectively. The total allowance for loan losses related to these
loans was $3,763,000 and $1,354,000 on December 31, 1997 and 1996, respectively.
Interest income on impaired loans of $513,000 and $154,000 was recognized for
cash payments received in 1997 and 1996, respectively.

Nonaccrual loans excluded from impaired loan disclosure under FASB Statement No.
114 amounted to $6,361,000 and $4,574,000 at December 31, 1997 and 1996,
respectively. If interest on these loans had been accrued, such income would
have approximated $320,000 and $345,000 for 1997 and 1996, respectively.


                                                                              33

<PAGE>

Note 5 --Related Party Transactions

      The Securities and Exchange Commission requires disclosure of loans which
exceed $60,000 to executive officers and directors of the Corporation or to
their associates. Such loans were made on substantially the same terms as those
prevailing for comparable transactions with similar risk. At December 31, 1997
and 1996, these loans totaled $35,533,000 and $48,065,000, respectively. During
1997, total principal additions were $9,406,000 and total principal payments
were $21,938,000.

      The Corporation was indebted to related parties for short-term borrowings
totaling $4,004,000 and $2,827,000 at December 31, 1997 and 1996, respectively.

      The Corporation paid $95,000 in 1997 to the law firms of two directors who
serve as legal counsel for two bank subsidiaries.

      Construction of bank premises during 1997 included $1,978,000 paid to
companies of related parties.


Note 6 --Bank Premises and Equipment,Net

      Premises and equipment are summarized as follows:

<TABLE>
<CAPTION>
                                                                                                    December 31,
                                                                                       ------------------------------------
                                                                                              1997                1996
                                                                                         ---------------    ---------------
                                                                                                   (In Thousands)
<S>                                                                                      <C>                <C>            
Premises.............................................................................    $        50,874    $        40,006
Leasehold improvements...............................................................              5,207              4,368
Furniture and equipment..............................................................             29,597             22,582
Construction in progress.............................................................              2,498              5,056
                                                                                         ---------------    ---------------
                                                                                         $        88,176    $        72,012
Less accumulated depreciation and amortization.......................................           (31,074)            (26,073)
                                                                                         ---------------    ---------------
                                                                                         $        57,102    $        45,939
                                                                                         ===============    ===============
</TABLE>

      Depreciation and amortization of bank premises and equipment included in
operating expenses for the years ended December 31, 1997, 1996 and 1995, were
$4,456,000, $3,987,000 and $3,856,000 respectively.

Note 7 --Deposits

      The aggregate amount of jumbo time deposits, each with a minimum
denomination of $100,000, was $198,193,000 and $172,076,000 in 1997 and 1996,
respectively.

      At December 31, 1997, the scheduled maturities of time deposits (in
thousands) are as follows:

                Less than one year                          $      766,501
                One year through five years                        205,909
                                                            --------------
                                                            $      972,410
                                                            ==============

Note 8 -- Short-Term Borrowings

      Short-term borrowings consist of securities sold under agreements to
repurchase which are secured transactions with customers and generally mature
the day following the date sold. Short-term borrowings may also include federal
funds purchased, which are unsecured overnight borrowings from other financial
institutions, and advances from the FHLB of Atlanta, which are secured either by
a blanket floating lien on all real estate mortgage loans secured by 1 to 4
family residential properties, FHLB stock, or other mortgage-related assets.

      The Corporation has unused lines of credit for short-term borrowings
totaling approximately $375,200,000 at December 31, 1997.

34

<PAGE>


      The table below presents selected information on the combined totals of
repurchase agreements and other short-term borrowings for the years ended
December 31, 1997 and 1996:

<TABLE>
<CAPTION>
                                                                                              1997                1996
                                                                                         ---------------    ---------------
                                                                                                   (In Thousands)
<S>                                                                                      <C>                <C>            
Maximum balance at any month end during the year.....................................    $       110,000    $        76,400
Average balance for the year.........................................................             81,800             68,700
Weighted average rate for the year...................................................              3.64%              3.37%
Weighted average rate on borrowings at year end......................................              4.72%              4.55%
Estimated fair value.................................................................    $        94,385    $        74,710
</TABLE>

      The weighted average rates shown for borrowings at year end were
calculated by multiplying the effective rate for each transaction by the
principal amount and dividing the aggregate product by the total principal
outstanding.

      Due to the short maturities of these financial instruments, the carrying
amounts for both repurchase agreements and other short-term borrowings were
deemed to approximate fair values at December 31, 1997 and 1996.

Note 9 -- Long-Term Debt

      In 1994, the Corporation joined the Federal Home Loan Bank system in order
to enter a program of long-term borrowing which is restricted to be invested in
Residential Housing Finance Assets (RHFA). RHFA are defined as (1) Loans secured
by residential real property; (2) Mortgage-backed securities; (3) Participations
in loans secured by residential real property; (4) Loans financed by Community
Investment Program advances; (5) Loans secured by manufactured housing,
regardless of whether such housing qualifies as residential real property; or
(6) Any loans or investments which the Federal Housing Finance Board and the
Bank, in their discretion, otherwise determine to be residential housing finance
assets. Borrowings from the Federal Home Loan Bank system for RHFA investments
totaled $17,136,000 and $11,497,000 at December 31, 1997 and 1996, maturing
through 2006. The interest rate on the notes payable range from 5.54% to 8.18%
at December 31, 1997. Principal payments on the notes (in thousands) are due as
follows:
                1998                                        $        5,271
                1999                                                 2,608
                2000                                                 2,108
                2001                                                 2,117
                2002                                                 1,126
                Later years                                          3,906
                                                            --------------
                                                            $       17,136
                                                            ==============

Note 10 -- Business Combinations

      On November 1, 1997, the Corporation completed its acquisition of Shomo &
Lineweaver Insurance Agency, Inc. The Corporation issued 265,853 shares of its
common stock in exchange for all of the shares of common stock of Shomo &
Lineweaver Insurance Agency, Inc. The excess of the total acquisition cost over
the fair value of the net assets acquired of $4,823,000 is being amortized over
25 years by the straight-line method. The acquisition has been accounted for as
a purchase and results of operations of Shomo since the date of acquisition are
included in the consolidated financial statements.

      On March 29, 1996, the Corporation completed its acquisition of FB&T
Financial Corporation (FB&T), the holding company for Fairfax Bank & Trust
Company. A total of approximately 2,518,000 shares of the Corporation's stock
was issued in the transaction, which was accounted for as a
pooling-of-interests.

      On October 1, 1996, the Corporation completed its acquisition of
Allegiance Banc Corporation, the holding company for Allegiance Bank, N.A. A
total of approximately 1,456,000 shares of the Corporation's stock was issued in
the transaction, which was accounted for as a pooling-of-interests.

                                                                              35

<PAGE>

      Total assets and results of operations as originally reported for 1995
have been restated to reflect the accounts of the pooled entities as follows:

<TABLE>
<CAPTION>
                                                         Total              Total              Net             Net Income
                                                        Assets             Income            Income             Per Share
                                                   ---------------    ---------------    ---------------    ---------------
                                                                                (In Thousands)
<S>                                                <C>                <C>                <C>                <C>            
1995 originally reported.......................... $     1,833,820    $       149,482    $        23,432    $          1.42
1995 results of pooled entities...................         374,169             28,565              2,403                 --
                                                   ---------------    ---------------    ---------------    ---------------
                    As restated                    $     2,207,989    $       178,047    $        25,835    $          1.27
                                                   ===============    ===============    ===============    ===============
</TABLE>

      On April 6, 1995, F&M completed its acquisition of Bank of the Potomac,
Inc. (Potomac). A total of approximately 872,000 shares of the Corporation's
stock was issued in the transaction, which was accounted for as a
pooling-of-interests.

Note 11 -- Earnings Per Share

      The following shows the weighted average number of shares used in
computing earnings per share and the effect on weighted average number of shares
of diluted potential common stock. Potential dilutive common stock has no effect
on income available to common stockholders. Earnings per share amounts for prior
periods have been restated to give effect to the application of Statement 128
which was adopted by the Corporation in 1997.

<TABLE>
<CAPTION>
                                         1997                            1996                            1995
                             -----------------------------    -----------------------------   -----------------------------
                                                    Per                              Per                            Per
                                                   Share                            Share                          Share
                                  Shares          Amount          Shares           Amount         Shares          Amount
                             ---------------   -----------    --------------   ------------   --------------   ------------

<S>                               <C>           <C>               <C>           <C>               <C>           <C>        
Basic EPS                         20,234,651    $     1.54        20,409,374    $      1.44       20,368,000    $      1.27
                                               ===========                     ============                    ============
Effect of dilutive
 securities:
    Stock options                    163,362                         210,834                         273,942
                             ---------------                  --------------                  --------------
    Diluted EPS                   20,398,013    $     1.53        20,620,208    $      1.42       20,641,942    $      1.25
                             ===============   ===========    ==============   ============   ==============   ============
</TABLE>

Note 12 -- Stock-Based Compensation Plans

      At December 31, 1996, the Corporation has two stock-based compensation
plans which are described below. Grants under those plans are accounted for
following APB Opinion No. 25 and related interpretations. Compensation cost
charged to income for the stock option plan was $173,000, $136,000 and $103,000
for the years ended December 1997, 1996 and 1995, respectively. No compensation
cost has been recognized for grants under the Employee Stock Discount Plan.

Stock Option Plan
      The Corporation sponsors a stock option plan, which provides for the
granting of both incentive and nonqualified stock options to executive officers
and key employees of the Company and its Subsidiaries. The option price of
incentive options will not be less than the fair market value of the stock at
the time an option is granted. Nonqualified options may be granted at a price
established by the Board of Directors including prices less than the fair market
value on the date of grant.

      A summary of the status of the stock option plan at December 31, 1997,
1996 and 1995 and changes during the years ended on those dates is as follows:

36

<PAGE>


<TABLE>
<CAPTION>
                                         1997                            1996                            1995
                             -----------------------------    -----------------------------   -----------------------------
                                                 Weighted                         Weighted                       Weighted
                                                  Average                          Average                        Average
                                                 Exercise                         Exercise                       Exercise
                                  Shares           Price          Shares            Price         Shares           Price
                             ---------------   -----------    --------------   ------------   --------------   ------------
<S>                                  <C>        <C>                  <C>        <C>                  <C>        <C>        
Outstanding at
  beginning of year                  196,154    $     9.16           306,441    $      7.24          344,867    $      6.08
Granted                               68,500         10.69            76,842          10.66           46,160           8.03
Exercised                            (55,343)         9.15          (186,131)          6.61          (84,586)          2.98
Forfeited                                 --                            (998)                             --
                             ---------------                  --------------                  --------------
Outstanding and
  exercisable at end
  of year                            209,311   $      9.67           196,154   $       9.16          306,441   $       7.24
                             ===============                  ==============                  ==============
Weighted-average fair
  value per option of
  options granted during
  the year                                     $     14.75                     $       8.19                    $       6.27
</TABLE>

The Corporation accounts for the stock option plan and the stock discount plan
under APB Opinion No. 25. Proforma adjustments of compensation cost for the
stock-based compensation plans determined based on the grant date fair values of
awards (the method described in FASB Statement No. 123). For the purpose of
computing the proforma amounts indicated below, the fair value of each option on
the date of grant is estimated using the Black-Scholes option-pricing model with
the following weighted average assumptions used for grants in 1997, 1996 and
1995, respectively: dividend yields of 3.0%, 3.6% and 3.8%; expected volatility
of 18.1%, 20.7% and 20.4%; a risk free interest rate of 5.8%, 5.1% and 5.1%; and
an expected option life of 10 years from the date of grant. 37

<TABLE>
<CAPTION>
                                                                            1997              1996                1995
                                                                      ---------------    ---------------    ---------------
                                                                                         (In Thousands)
<S>                                                                   <C>                <C>                <C>            
Net Income:       As Reported.......................................  $        31,115    $        29,298    $        25,835
                  Pro Forma.........................................           30,459             28,912             25,656
Basic EPS:        As Reported.......................................             1.54               1.44               1.27
                  Pro Forma.........................................             1.51               1.42               1.26
Diluted EPS:      As Reported.......................................             1.53               1.42               1.25
                  Pro Forma.........................................             1.49               1.40               1.24
</TABLE>

A further summary about options outstanding at December 31, 1997, is as follows:

<TABLE>
<CAPTION>
                                                             Options Outstanding and Exercisable
                                                   -----------------------------------------------------
                                                                          Weighted          Weighted
              Range of                                                    Remaining         Average
              Exercise                                  Number           Contractual        Exercise
              Prices                                 Outstanding            Life              Price
------------------------                           ---------------    ---------------    ---------------
<S>                                                 <C>                <C>               <C>            
       $   6.26                                           3,833              .2 years    $          6.26
           9.62                                          13,661             1.0                     9.62
           8.35                                           4,983             1.3                     8.35
           8.14 - 10.95                                  17,420             2.2                    10.31
           11.89                                          6,387             3.2                    11.89
           7.69 - 7.93                                   24,527             6.0                     7.90
           7.94                                          26,000             7.0                     7.94
           10.00                                         45,500             8.0                    10.00
           10.69                                         67,000             9.0                    10.69
                                                   ---------------
       $   6.26 - 11.89                                 209,311             6.6                     9.67
                                                   ===============
</TABLE>

Employee Stock Discount Plan
      In 1993, the Corporation adopted an Employee Stock Discount Plan. The Plan
offers eligible employees of the Corporation the opportunity to purchase common
stock through payroll deduction. The price of the shares purchased is the lesser
of 85% of the market price of the shares as determined under the plan at January
1 of the calendar year of purchase or 85% of the market price of the shares as
determined under the plan at December 31 of the calendar year of purchase.
Employees automatically become eligible to participate on January 1 or July 1 as
of the date they reach age 18 and complete 12 months of service, whichever
occurs last. A regular employee is one who is customarily employed for more than
20 hours per week and more than five months per year.

                                                                              37

<PAGE>


      All officers and directors who are eligible employees may participate.
46,259 shares were issued for the 1997 plan year at a discount of $148,000.
29,498 shares were issued for the 1996 plan year at a discount of $91,000.
35,357 shares were issued during 1995 at a discount of $84,000. The number of
shares available to be issued in future years totals 113,046.

      A further summary about options outstanding at December 31, 1996, is as
follows:

Note 13 -- Employee Benefit Plans

      F&M National Corporation and its affiliates have a defined contribution
retirement plan covering substantially all full-time employees and provides that
employees automatically become eligible to participate on January 1 or July 1 as
of the date they reach age 18 and complete 12 months of service, whichever
occurs last. The plan was amended in 1989 to add a 401(k) or deferred feature.

      Under the plan, a participant may contribute to the plan an amount up to
10% of his covered compensation for the year, subject to certain limitations.
For each year in which the employee makes a contribution to the plan, the
Corporation will make a matching contribution. The Corporation may also make,
but is not required to make, a discretionary contribution for each participant
out of its current or accumulated net profits. The amount of the matching
contribution and discretionary contribution, if any, is determined on an annual
basis by the Board of Directors.

      The total plan expense for 1997, 1996 and 1995, was $240,000, $234,000 and
$229,000, respectively.

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

      The total plan expense for 1997, 1996 and 1995 was $1,214,000, $1,049,000
and $955,000, respectively.

Note 14 -- Executive and Director Compensation Plans

Executive Incentive Compensation Plan
      The Executive Incentive Compensation Plan was established for the purpose
of attracting and retaining key executives. The executives and the amounts of
the awards (subject to limits as set forth in the Plan) are determined by a
Committee composed of members of the Corporation's Board of Directors who are
not employees. The aggregate cash awards amounted to $1,320,000 in 1997,
$1,227,000 in 1996 and $885,000 in 1995.

      In addition, deferred compensation plans have been adopted for certain key
employees which provide that benefits are to be paid in monthly installments for
15 years following retirement or death. The agreement provides that if
employment is terminated for reasons other than death or disability prior to age
65, the amount of benefits would be reduced or forfeited. The deferred
compensation expense for 1997, 1996 and 1995, based on the present value of the
retirement benefits, amounted to approximately $505,000, $572,000 and $518,000,
respectively. The plan is unfunded. However, life insurance has been acquired on
the lives of these employees in amounts sufficient to discharge the obligations
thereunder.

Nonemployee Director Stock Compensation and Warrant Plans
      Effective June 15, 1994, FB&T Financial Corporation ("FB&T") (a subsidiary
of F&M National Corporation as of March 29, 1996) implemented a Nonemployee
Director Stock Compensation Plan (the "Option Plan"). Allegiance Bank, N.A.
("Allegiance") (a subsidiary of F&M National Corporation as of October 1, 1996)
implemented a Director Stock Warrant Plan effective February 8, 1994. The
exercise price of awards were fixed at the fair market value of the share on the
date the option was granted.

      The following summarizes the option activity under the stock option plan
for the last two years as restated to equivalent shares of the Corporation's
common stock:

38


<PAGE>

<TABLE>
<CAPTION>
                                                        Number          Option Price
                                                       of Shares          Per Share
                                                   ---------------    ---------------
<S>                                                        <C>        <C>       <C>  
    Outstanding, December 31, 1995................         142,624    $6.26 -   $8.77
        Grants....................................              --
        Exercised.................................         (89,567)   $6.26 -   $8.77
        Cancelled.................................          (4,790)
                                                   ---------------    ---------------
    Outstanding, December 31, 1996                          48,267    $6.26 -   $8.77

        Grants....................................              --
        Exercised.................................         (25,574)   $6.26 -   $8.77
                                                   ---------------    ---------------
    Outstanding, December 31, 1997                          22,693    $6.26 -   $8.77
                                                   ===============    ===============
</TABLE>
  

Note 15 -- Lease Commitments and Contingent Liabilities
      The Corporation and Subsidiaries were obligated under a number of
noncancelable leases mainly for various banking premises and equipment.
Facilities leases, including renewal options, expire through 2008. Total rental
expense for operating leases for 1997, 1996 and 1995, was $2,837,000, $2,757,000
and $2,757,000, respectively. Minimum rental commitments under noncancelable
leases with terms in excess of one year as of December 31, 1997, were as
follows:

                              Year                       Operating Leases
                --------------------------------      --------------------
                                                          (In Thousands)
                1998............................        $           2,793
                1999............................                    2,779
                2000............................                    2,439
                2001............................                    2,307
                2002............................                    1,868
                Later years.....................                   13,047
                                                       ------------------
                Total minimum payments..........        $          25,233
                                                       ==================



      In the normal course of business, there are other outstanding commitments
and contingent liabilities which are not reflected in the accompanying financial
statements. The Corporation does not anticipate losses as a result of these
transactions.
      As members of The Federal Reserve System, the Corporation's subsidiary
banks are required to maintain certain average reserve balances. For the final
weekly reporting period in the years ended December 31, 1997 and 1996, the
aggregate amounts of daily average required balances were approximately
$28,867,000 and $21,962,000, respectively.

Note 16 -- Income Taxes

      Net deferred tax assets consist of the following components as of December
31, 1997 and 1996:

<TABLE>
<CAPTION>
                                                                           1997                  1996
                                                                   ------------------   ------------------
                                                                                (In Thousands)
<S>                                                                 <C>                 <C>               
Deferred tax assets:
  Provision for loan losses......................................   $           6,826   $            5,636
  Salary continuation plan.......................................               1,442                1,091
  Other real estate owned........................................                 488                  271
  Nonaccrual interest............................................                 113                   34
  Other..........................................................                 366                  307
                                                                   ------------------   ------------------
                                                                    $           9,235   $            7,339
                                                                   ------------------   ------------------
Deferred tax liabilities:
  Depreciation...................................................   $           1,281   $            1,070
  Excess tax basis - acquisition.................................                 257                  191
  Securities available for sale..................................               1,306                  261
  Other..........................................................                  26                   26
                                                                   ------------------   ------------------
                                                                    $           2,870   $            1,548
                                                                   ------------------   ------------------
                                                                    $           6,365   $            5,791
                                                                   ==================   ==================
</TABLE>

                                                                              39
<PAGE>


      The provision for income taxes charged to operations for the years ended
December 31, 1997, 1996 and 1995, consists of the following:

<TABLE>
<CAPTION>
                                                                            1997              1996                1995
                                                                      ---------------    ---------------    ---------------
                                                                                         (In Thousands)
<S>                                                                   <C>                <C>                <C>            
Current tax expense.................................................  $        13,812    $        15,129    $        12,765
Deferred tax (benefit)..............................................            1,619               (34)                 76
                                                                      ---------------    ---------------    ---------------
                                                                      $        15,431    $        15,095    $        12,841
                                                                      ===============    ===============    ===============
</TABLE>

      The income tax provision differs from the amount of income tax determined
by applying the federal income tax rate to pretax income for the years ended
December 31, 1997, 1996 and 1995 due to the following:

<TABLE>
<CAPTION>
                                                                            1997              1996                1995
                                                                      ---------------    ---------------    ---------------
<S>                                                                         <C>               <C>                 <C>  
Computed "expected" tax expense.....................................        35.0%             35.0%               35.0%
Increase (decrease) in income taxes resulting from:
  Tax-exempt interest...............................................        (1.7)             (2.1)               (2.9)
  Nondeductible merger expenses.....................................         --                 .3                  .7
  Other, net........................................................         (.1)               .8                  .4
                                                                      ---------------    ---------------    ---------------
                                                                            33.2%             34.0%               33.2%
                                                                      ===============    ===============    ===============
</TABLE>

Note 17 -- Restrictions on Transfers to Parent

      Transfer of funds from banking subsidiaries to the Parent Corporation in
the form of loans, advances and cash dividends, are restricted by federal and
state regulatory authorities. As of December 31, 1997, the aggregate amount of
unrestricted funds which could be transferred from the Corporation's
subsidiaries to the Parent Corporation, without prior regulatory approval,
totaled $40,785,000 or 16.5% of the consolidated net assets.

Note 18 -- Financial Instruments With Off-Balance-Sheet Risk

      The Corporation and Subsidiaries are party to financial instruments with
off-balance-sheet risk in the normal course of business to meet the financing
needs of its customers and to reduce its own exposure to fluctuations in
interest rates. These financial instruments include commitments to extend
credit, standby letters of credit and financial guarantees. Those instruments
involve, to varying degrees, elements of credit and interest rate risk in excess
of the amount recognized in the balance sheet. The contract or notional amounts
of those instruments reflect the extent of involvement the Corporation and
Subsidiaries have in particular classes of financial instruments.
      The Corporation and Subsidiaries' exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for commitments to
extend credit and standby letters of credit and financial guarantees written is
represented by the contractual notional amount of those instruments. The
Corporation and Subsidiaries use the same credit policies in making commitments
and conditional obligations as it does for on-balance-sheet instruments.
      Unless noted otherwise, the Corporation and Subsidiaries do not require
collateral or other security to support financial instruments with credit risk.
      A summary of the contract or notional amount of the Corporation and
Subsidiaries' exposure to off-balance-sheet risk as of December 31, 1997 and
1996, is as follows:

<TABLE>
<CAPTION>
                                                                                              1997                1996
                                                                                         ---------------    ---------------
                                                                                                   (In Thousands)
<S>                                                                                      <C>                <C>            
Financial instruments whose contract amounts represent credit risk:
  Commitments to extend credit.......................................................    $       316,614    $       323,204
  Standby letters of credit and financial guarantees written.........................    $        17,957    $        17,829
</TABLE>

      Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Corporation

40

<PAGE>



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

      Standby letters of credit and financial guarantees written are conditional
commitments issued by the Corporation and Subsidiaries to guarantee the
performance of a customer to a third party. Those guarantees are primarily
issued to support public and private borrowing arrangements, including
commercial paper, bond financing, and similar transactions. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers. The Corporation and Subsidiaries hold
marketable securities as collateral supporting those commitments for which
collateral is deemed necessary. The extent of collateral held for those
commitments at December 31, 1997, varies from 0 percent to 100 percent; the
average amount collateralized is 38.1 percent.

Note 19 -- Credit Risk
      As of December 31, 1997, the Corporation had a concentration of loans in
non-farm, non-residential loans, consisting primarily of commercial loans
secured by real estate of $429,827,000 which were in excess of 10 percent of the
total loan portfolio. The Corporation does not engage in any foreign lending
activities.
      As of December 31, 1997, the Corporation had $6,485,000 in deposits in
financial institutions in excess of amounts insured by the Federal Deposit
Insurance Corporation (FDIC).

Note 20 -- Disclosures About Fair Value of Financial Instruments
      The following methods and assumptions were used to estimate the fair value
of each class of financial instruments
for which it is practicable to estimate that value:
Cash and Short-Term Investments
      For those short-term instruments, the carrying amount is a reasonable
estimate of fair value.
Investment Securities and Securities Available for Sale
      For securities and marketable equity securities held for investment
purposes, fair values are based on quoted market prices or dealer quotes. For
other securities held as investments, fair value equals quoted market price, if
available. If a quoted market price is not available, fair value is estimated
using quoted market prices for similar securities.
Loan Receivables
      For certain homogeneous categories of loans, such as some residential
mortgages, credit card receivables, and other consumer loans, fair value is
estimated using the quoted market prices for securities backed by similar loans,
adjusted for differences in loan characteristics. The fair value of other types
of loans is estimated by discounting the future cash flows using the current
rates at which similar loans would be made to borrowers with similar credit
ratings and for the same remaining maturities.
Deposit Liabilities
      The fair value of demand deposits, savings accounts, and certain money
market deposits is the amount payable on demand at the reporting date. The fair
value of fixed-maturity certificates of deposit is estimated using the rates
currently offered for deposits of similar remaining maturities.
Off-Balance Sheet Financial Instruments
      The fair value of commitments to extend credit is estimated using the fees
currently charged to enter similar agreements, taking into account the remaining
terms of the agreements and the present credit worthiness of the counterparties.
For fixed-rate loan commitments, fair value also considers the difference
between current levels of interest rates and the committed rates.
      The fair value of stand-by letters of credit is based on fees currently
charged for similar agreements or on the estimated cost to terminate them or
otherwise settle the obligations with the counterparties at the reporting date.
      At December 31, 1997 and 1996, the carrying amounts and fair values of
loan commitments, and stand-by letters of credit, were immaterial.
      The estimated fair values of the Corporation's financial instruments are
as follows:

                                                                              41

<PAGE>

<TABLE>
<CAPTION>
                                                                 1997                                   1996
                                                  -----------------------------------  ------------------------------------
                                                      Carrying             Fair             Carrying              Fair
                                                       Amount              Value             Amount               Value
                                                  ----------------  -----------------  -----------------    ---------------
                                                            (In Thousands)                          (In Thousands)
<S>                                               <C>                <C>                <C>                 <C>            
Financial assets:
  Cash and short-term investments..............   $        234,795   $        234,795   $        183,173    $       183,173
  Investments securities.......................            406,707            413,286            333,565            335,542
  Securities available for sale................            231,771            231,771            263,428            263,428
  Loans........................................          1,543,598          1,542,100          1,439,108          1,456,634
  Less: allowance for loan losses..............           (20,641)                --            (17,936)                 --
                                                  ----------------  -----------------  -----------------    ---------------
        Total financial assets.................   $      2,396,230   $      2,421,952   $      2,201,338    $     2,238,777
                                                  ================  =================  =================    ===============

Financial liabilities:
  Deposits.....................................   $      2,137,834   $      2,144,365   $      1,966,938    $     1,971,386
  Federal funds purchased and securities sold
    under agreement to repurchase..............             79,876             79,876             51,536             51,536
  Other short-term borrowings..................             14,509             14,509             14,876             14,876
  Federal Home Loan Bank advances..............                 --                 --              8,297              8,297
  Long-term debt...............................             17,136             13,887             11,497             10,453
                                                  ----------------  -----------------  -----------------    ---------------
        Total financial liabilities............   $      2,249,355   $      2,252,637   $      2,053,144    $     2,056,548
                                                  ================  =================  =================    ===============
</TABLE>

Note 21 -- Regulatory Matters
      The Corporation is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory -- possibly additional discretionary
-- actions by regulators that, if undertaken, could have a direct material
effect on the Corporation's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Corporation must meet specific capital guidelines that involve quantitative
measures of the Corporation's assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. The Corporation's
capital amounts and classification are also subject to qualitative judgments by
the regulators about components, risk weightings, and other factors.
      Quantitative measures established by regulation to ensure capital adequacy
require the Corporation to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets, and of Tier 1 capital to average assets. Management
believes, as of December 31, 1997, that the Corporation meets all capital
adequacy requirements to which it is subject.
      As of December 31, 1997, the most recent notification from the Federal
Reserve Bank categorized the Corporation as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Corporation must maintain minimum total risk-based, Tier 1
risk-based, and Tier 1 leverage ratios as set forth in the table.
      There are no conditions or events since that notification that management
believes have changed the institution's category.
      The Corporation's and significant Subsidiaries' actual capital amounts and
ratios are also presented in the table:

42

<PAGE>

<TABLE>
<CAPTION>
                                                                                                   To Be Well Capitalized
                                                                           For Capital             Under Prompt Corrective
                                                Actual                  Adequacy Purposes             Action Provisions
                                      ---------------------------   --------------------------   ---------------------------
                                         Amount          Ratio         Amount         Ratio         Amount         Ratio
                                      ------------   ------------  -------------  ------------   ------------  -------------
                                                                          (In Thousands)
<S>                                    <C>               <C>         <C>               <C>        <C>           <C>
As of December 31, 1997:
  Total Capital (to Risk Weighted Assets)

      Consolidated..................   $   253,976       16.3%      >$   124,891    >  8.0%            N/A
                                                                    -               -                     
      F&M Bank-Winchester...........   $    78,440       15.7%      >$    40,067    >  8.0%       >$    50,084  >  10.0%
                                                                    -               -             -             -
      F&M Bank-NOVA.................   $    46,160       14.1%      >$    26,204    >  8.0%       >$    32,755  >  10.0%
                                                                    -               -             -             -
  Tier 1 Capital (to Risk Weighted Assets)
      Consolidated..................   $   234,498       15.0%      >$    62,446    >  4.0%            N/A
                                                                    -               -
      F&M Bank-Winchester...........   $    72,180       14.4%      >$    20,034    >  4.0%       >$    30,050   >  6.0%
                                                                    -               -             -              -
      F&M Bank-NOVA.................   $    42,066       12.9%      >$    13,102    >  4.0%       >$    19,653   >  6.0%
                                                                    -               -             -              -
  Tier 1 Capital (to Average Assets)
      Consolidated..................   $   234,498        9.6%      >$    98,236    >  4.0%            N/A
                                                                    -               -
      F&M Bank-Winchester...........   $    72,180        8.8%      >$    32,854    >  4.0%       >$    41,067   >  5.0%
                                                                    -               -             -              -
      F&M Bank-NOVA.................   $    42,066        8.3%      >$    20,202    >  4.0%       >$    25,253   >  5.0%
                                                                    -               -             -              -
As of December 31, 1996:
  Total Capital (to Risk Weighted Assets)
      Consolidated..................   $   241,035       16.8%      >$   114,907    >  8.0%            N/A
                                                                    -               -
      F&M Bank-Winchester...........   $    74,131       16.0%      >$    37,137    >  8.0%       >$    46,421  >  10.0%
                                                                    -               -             -             -       
      F&M Bank-NOVA.................   $    42,817       14.3%      >$    24,017    >  8.0%       >$    30,022  >  10.0%
                                                                    -               -             -             -
  Tier 1 Capital (to Risk Weighted Assets)
      Consolidated..................   $   223,099       15.5%      >$    57,454    >  4.0%            N/A
                                                                    -               -
      F&M Bank-Winchester...........   $    68,328       14.7%      >$    18,568    >  4.0%       >$    27,853   >  6.0%
                                                                    -               -             -              -
      F&M Bank-NOVA.................   $    39,064       13.0%      >$    12,009    >  4.0%       >$    18,013   >  6.0%
                                                                    -               -             -              -
  Tier 1 Capital (to Average Assets)
      Consolidated..................   $   223,099        9.9%      >$    91,331    >  4.0%            N/A
                                                                    -               -
      F&M Bank-Winchester...........   $    68,328        8.6%      >$    31,625    >  4.0%       >$    39,531   >  5.0%
                                                                    -               -             -              -
      F&M Bank-NOVA.................   $    39,064        9.0%      >$    17,379    >  4.0%       >$    21,724   >  5.0%
                                                                    -               -             -              -
</TABLE>

Note 22 -- Proposed Merger
      Peoples Bank of Virginia ("PVA") and the Corporation have entered into a
Definitive Agreement and Plan of Reorganization, dated as of December 1, 1997
and a related Plan of Merger (collectively, the "Merger Agreement"). This
transaction is subject to the approval of regulatory authorities and
shareholders of PVA. Under the terms of the Merger Agreement, PVA will be merged
with F&M Bank-Richmond and each share of common stock of PVA outstanding
immediately prior to consummation of the Merger will be exchanged, in a tax-free
exchange, for 2.58 shares of common stock of F&M, with cash being paid in lieu
of issuing fractional shares. It is anticipated that the Merger will become
effective by April 1, 1998. As of December 31, 1997, PVA had total assets of
$80.4 million, total loans of $47.0 million, total deposits of $70.4 million and
total shareholders' equity of $8.2 million.
      The Bank of Alexandria ("BA") and the Corporation have entered into a
Definitive Agreement and Plan of Reorganization, dated as of December 12, 1997
and related Plan of Merger (collectively, the "Merger Agreement"). This
transaction is subject to the approval of regulatory authorities and
shareholders of BA. Under the terms of the Merger Agreement, BA will be merged
with F&M Bank-Northern Virginia and each share of common stock of BA outstanding
immediately prior to consummation of the Merger will be exchanged, in a tax-free
exchange, for 0.942 shares of common stock of F&M, with cash being paid in lieu
of issuing fractional shares. It is anticipated that the Merger will become
effective in the second quarter of 1998. As of December 31, 1997, BA had total
assets of $76.1 million, total loans of $58.2 million, total deposits of $67.6
million and total shareholders' equity of $7.9 million.


                                                                              43

<PAGE>


Note 23 -- Condensed Financial Information -- Parent Company Only


                            F&M NATIONAL CORPORATION
                            (Parent Corporation Only)

                                 BALANCE SHEETS
                           December 31, 1997 and 1996
<TABLE>
<CAPTION>
                                                                                                    December 31,
                                                                                         ----------------------------------
                                                                                              1997                1996
                                                                                         ---------------    ---------------
                                                                                                   (In Thousands)
<S>                                                                                      <C>                <C>            
Assets
 Cash on deposit with subsidiary banks...............................................    $             1    $           132
  Investment in subsidiaries, at cost, plus equity in undistributed net income.......            240,986            221,151
  Securities available for sale......................................................              9,964             12,072
  Other short-term investments.......................................................              7,726              9,854
  Bank premises and equipment, net...................................................              1,348              1,376
  Intangible, goodwill, at amortized cost............................................                245                304
  Other assets.......................................................................             10,692              8,785
                                                                                         ---------------    ---------------
                 Total assets........................................................    $       270,962    $       253,674
                                                                                         ===============    ===============
Liabilities and Shareholders' Equity

Liabilities
  Short-term borrowings..............................................................    $        14,218    $        14,455
  Dividends payable..................................................................              3,761              4,682
  Other liabilities..................................................................              5,159              3,814
                                                                                         ---------------    ---------------
                Total liabilities....................................................    $        23,138    $        22,951
                                                                                         ---------------    ---------------
Shareholders' Equity
  Preferred stock....................................................................    $            --    $            --
  Common stock.......................................................................             40,750             40,747
  Capital surplus....................................................................             68,206             69,197
  Retained earnings, which are substantially undistributed earnings
    of subsidiaries..................................................................            136,700            120,350
  Unrealized gain on securities available for sale, net..............................              2,168                429
                                                                                         ---------------    ---------------
                Total shareholders' equity...........................................    $       247,824    $       230,723
                                                                                         ---------------    ---------------
                Total liabilities and shareholders' equity...........................    $       270,962    $       253,674
                                                                                         ===============    ===============
</TABLE>


44

<PAGE>


                            F&M NATIONAL CORPORATION
                            (Parent Corporation Only)
                              STATEMENTS OF INCOME
        For Each of the Three Years in the Period Ended December 31, 1997


<TABLE>
<CAPTION>
                                                                                           December 31,
                                                                      -----------------------------------------------------
                                                                            1997              1996                1995
                                                                      ---------------    ---------------    ---------------
<S>                                                                   <C>                <C>                <C>            
                                                                                         (In Thousands)
Revenue
 Dividends from subsidiaries........................................  $        17,012    $        14,418    $        10,981
  Interest on other short-term investments..........................              219                665                770
  Interest and dividends on securities available for sale...........              448                390                343
  Management fees from subsidiaries.................................            2,826              2,409              2,116
  Rental income from subsidiaries...................................               54                 91                402
  Profits on securities available for sale..........................            3,252                407                 --
  Other revenue.....................................................               22                 11                  4
                                                                      ---------------    ---------------    ---------------
                 Total revenue......................................  $        23,833    $        18,391    $        14,616
                                                                      ---------------    ---------------    ---------------
Expenses
 Salaries and employee benefits.....................................  $         2,113    $         2,029    $         1,817
  Directors` fees...................................................              190                178                189
  Taxes (other than income).........................................               42                 13                 41
  Interest..........................................................              348                374                367
  Amortization of goodwill..........................................               60                 60                 60
  Depreciation......................................................               34                 35                101
  Merger expenses...................................................                9                381                270
  Other expenses....................................................            1,068                956                491
                                                                      ---------------    ---------------    ---------------
                 Total expenses.....................................  $         3,864    $         4,026    $         3,336
                                                                      ---------------    ---------------    ---------------
                Income before income taxes and equity
                    in undistributed net income of subsidiaries.....  $        19,969    $        14,365    $        11,280

Income Tax Expense (Benefit)........................................            1,143              (164)                309
                                                                      ---------------    ---------------    ---------------
                Income before equity in undistributed
                    net income of subsidiaries......................  $        18,826    $        14,529    $        10,971

Equity in Undistributed Net Income of Subsidiaries..................           12,289             14,769             14,864
                                                                      ---------------    ---------------    ---------------
                Net income..........................................  $        31,115    $        29,298    $        25,835
                                                                      ===============    ===============    ===============
</TABLE>


                                                                              45

<PAGE>

                            F&M NATIONAL CORPORATION
                            (Parent Corporation Only)
                            STATEMENTS OF CASH FLOWS
        For Each of the Three Years in the Period Ended December 31, 1997

<TABLE>
<CAPTION>
                                                                                           December 31,
                                                                     ------------------------------------------------------
                                                                            1997              1996                1995
                                                                      ---------------    ---------------    ---------------
                                                                                         (In Thousands)
<S>                                                                   <C>                <C>                <C>            
Cash Flows From Operating Activities
 Net income.........................................................  $        31,115    $        29,298    $        25,835
  Adjustments to reconcile net income to net cash provided
    by operating activities:
      Depreciation..................................................               34                 35                101
      Amortization..................................................               60                 60                 60
      Deferred income taxes (credits)...............................              239               (308)              (159)
      Discount accretion............................................               (4)                (3)                (3)
      Profits on securities available for sale......................           (3,252)              (406)                --
      Undistributed net income of subsidiaries......................          (12,289)           (14,769)           (14,864)
      Decrease in goodwill..........................................               --                304                 28
      (Increase) decrease in other assets...........................           (1,781)            (4,804)               519
      Increase in other liabilities.................................            1,345              1,076              1,206
                                                                      ---------------    ---------------    ---------------
          Net cash provided by operating activities.................  $        15,467    $        10,483    $        12,723
                                                                      ---------------    ---------------    ---------------
Cash Flows From Investing Activities
 Decrease in investment in subsidiaries.............................  $            --    $           162    $           264
  Purchase of securities available for sale.........................           (2,227)            (6,024)            (1,802)
  Proceeds from sale of securities available for sale...............            8,447              2,954                 --
  (Increase) decrease in other short-term investments...............            2,128             12,561             (7,379)
  Proceeds from sale of equipment to subsidiaries...................               --                 --              2,772
  Purchase of bank premises and equipment...........................               (6)                (3)              (292)
                                                                      ---------------    ---------------    ---------------
          Net cash provided by (used in) investing activities.......  $         8,342    $         9,650             (6,437)
                                                                      ---------------    ---------------    ---------------
Cash Flows From Financing Activities
 Increase (decrease) in short-term borrowings.......................  $          (237)    $       (4,007)    $         3,791
  Net proceeds from issuance and sale of common stock...............            2,577              3,336              3,783
  Acquisition of common stock.......................................          (10,594)            (7,456)            (3,176)
  Dividends paid....................................................          (15,686)           (12,049)           (10,572)
                                                                      ---------------    ---------------    ---------------

          Net cash (used in) financing activities...................  $       (23,940)   $       (20,176)    $       (6,174)
                                                                      ---------------    ---------------    ---------------
          Increase (decrease) in cash and cash equivalents..........  $          (131)   $           (43)    $          112

Cash and Cash Equivalents
 Beginning..........................................................              132                175                 63
                                                                      ---------------    ---------------    ---------------

  Ending............................................................  $             1    $           132    $           175
                                                                      ===============    ===============    ===============
Supplemental Disclosures of Cash Flow Information
 Cash payments for interest.........................................  $           348    $           374    $           367
                                                                      ===============    ===============    ===============
Supplemental Schedule of Noncash Investing and
  Financing Activities
 Issuance of stock options under nonvariable compensatory plan......  $           732    $           500    $           206
                                                                      ===============    ===============    ===============
 Issuance of common stock to acquire investment.....................  $            --    $            --    $           200
                                                                      ===============    ===============    ===============
 Common stock issued for stock dividends............................  $            --    $            --    $         1,068
                                                                      ===============    ===============    ===============
 Issuance of common stock in exchange for net
    assets in bank acquisition......................................  $         6,297    $            --    $            --
                                                                      ===============    ===============    ===============
 Unrealized gain (loss) on securities available for sale............  $         (858)    $           215    $           942
                                                                      ===============    ===============    ===============
</TABLE>

46

<PAGE>


                          INDEPENDENT AUDITOR'S REPORT


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


      We have audited the accompanying consolidated balance sheets of F&M
National Corporation and Subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of income, changes in shareholders' equity, and
cash flows for the years ended December 31, 1997, 1996 and 1995. These financial
statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
      We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
      In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of F&M National
Corporation and Subsidiaries as of December 31, 1997 and 1996, and the results
of its operations and its cash flows for the years ended December 31, 1997, 1996
and 1995, in conformity with generally accepted accounting principles.



Winchester, Virginia                      /s/ Yount, Hyde & Barbour, P.C.
January 28, 1998                          YOUNT, HYDE & BARBOUR, P.C.


                                                                              47


F&M NATIONAL CORPORATION


DIRECTORS:

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

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

Charles E. Curtis
Vice Chairman, Chief Administrative Officer
F&M National Corporation

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

John R. Fernstrom
Chairman of the Board,
F&M Bank-Allegiance

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

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

Jack R. Huyett
Retired President and CAO,
F&M National Corporation;

George L. Romine
Sales Management Consultant

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

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

Ronald W. Tydings
President, Tydings Bryan and Adams P.C.

Fred G. Wayland, Jr.
Retired President, F&M Bank-Peoples

Alfred B. Whitt
President, Vice Chairman and Chief Financial Officer
F&M National Corporation
Vice Chairman and Secretary
F&M Bank-Winchester

Director Emeritus
C. Ridgely White

OFFICERS:

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

Alfred B. Whitt
President, Vice Chairman,
Chief Financial Officer

Charles E. Curtis
Vice Chairman and Chief
Administrative Officer

Jack R. Huyett
President and Chief Administrative Officer
Retired December 31, 1997

F. Dixon Whitworth, Jr.
Executive Vice President

Betty H. Carroll
Senior Vice President

Barbara H. Ward
Treasurer

Jack W. Lee, Jr.
Vice President-Auditor

Colleen M. Bly
Director of Human Resources Services

Richard B. Wiltshire, Jr.
Independent Loan Review Officer



48

<PAGE>


F&M BANK-WINCHESTER

DIRECTORS:

Frank Armstrong, III
Betty H. Carroll
W. H. Clement
Charles E. Curtis
W. M. Feltner, Chairman
Joseph E. Kalbach
George L. Romine
J. D. Shockey, Jr.
William A. Truban, DVM
Alfred B. Whitt
F. Dixon Whitworth, Jr.

Director Emeritus:
Mary M. Henkel

OFFICERS:

W. M. Feltner
Chairman of the Board

Alfred B. Whitt
Vice Chairman, Secretary

Charles E. Curtis
Vice Chairman

Betty H. Carroll
President and Chief Executive Officer

Barbara H. Ward
Senior Vice President

LOANS:

M. Lee Boppe
Senior Vice President-Loans

   Frances H. Fortune
Senior Vice President-Credit

Robert E. Lee
Senior Vice President-Loans

Fay H. DeHaven
Vice President-Loans

Romaine S. Hess
Vice President-Loan Operations

Steven D. Tavenner
Vice President-Loans

OPERATIONS:

Peggy J. Marcus
Senior Vice President-Cashier

Shelby C. Hodgson
Vice President-Branch Coordinator

Arvilla S. Rinker
Vice President-Operations

Linda P. Russell
Vice President-NSF Officer

Paul E. Shifflett
Vice President-Controller

CHARGE CARDS:

Clyde C. Lamond III
Vice President-Charge Cards

DATA PROCESSING:

G. Hollis Mock
Vice President-Data Processing

MONEY MANAGEMENT:

Phyllis K. Bishop
Vice President

Linda G. Jones
Vice President

MARKETING:

Jill A. Feltner
Marketing Director

Miles R. Orndorff, Jr.
Public Relations Director

F&M BANK-
CENTRAL VIRGINIA

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

OFFICERS:

Wayne L.Turner
President and
Chief Executive Officer

William K. King
Senior Vice President and Secretary

Donnie L. Snead
Vice President and Cashier

F&M BANK-EMPORIA

DIRECTORS:

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

OFFICERS:

O. Wayne Hanks
President and Chief
Executive Officer

Samuel W. Adams, III
Senior Vice President

D. Elliott Collins
Vice President

Ryland A. Winston
Vice President

F&M BANK-
MASSANUTTEN

DIRECTORS:

J. Robert Black
Robert W. Drechsler
Dwight W. Hartman
W. Wallace Hatcher, Vice Chairman
Russell K. Henry, Jr.
Marian G. Jenkins
Curtis F. Kite
W. Price Lineweaver
Harry L. Rawley
Wayne L. Smith
Garnett R. Turner
Nancy H. Whitmore
Alfred B. Whitt

OFFICERS:

Russell K. Henry, Jr.
President and Chief Executive Officer

Writa D. Hill
Executive Vice President,
Senior Operations Officer, Secretary

Edward A. Strunk
Senior Vice President

James G. Link
Vice President

F&M-BANK-NORTHERN
VIRGINIA

DIRECTORS:

Daniel R. Baker
Warren E. Barry
Robert H. Bird
Hugh W. Compton
Charles E. Curtis
James C. Davis
David E. Feldman
Howard R. Green
Thom F. Hanes
Reed E. Larson
Henry C. Mackall
Charles D. Mercer
T. Earl Rogers
Thomas D. Rust

                                                                              49

<PAGE>



Robert E. Sevila
Ronald W. Tydings, Chairman
Michael M. Webb
Alfred B. Whitt
F. Dixon Whitworth, Jr.

OFFICERS:

T. Earl Rogers
President and Chief Executive Officer

Thom F. Hanes
Executive Vice President and
Regional Executive Officer

Ramona W. Rodriquez
Senior Vice President, Chief
Financial Officer and Secretary

Donald E. Strehle
Senior Vice President, Branch Administrator

Alice B. Williams
Senior Vice President and
Regional Executive Officer

J. David Holden
Senior Vice President

Steven R. Wilson
Senior Vice President

Karin M. Johns
Cashier and Assistant Secretary

Peter T. Fuge
Vice President-Senior Commercial Loan Officer

Wayne R. Garcia
Vice President-Senior Commercial Loan Officer

Edward P. Alton
Vice President-Mortgage Lending

Nancy J. Krause
Vice President-Compliance Officer

Thomas F. Bradley
Vice President

B. Drew Brown
Vice President

George G. Carson
Vice President

John Djuric
Vice President

Cynthia C. Fisher
Vice President

Debbie A. Free
Vice President

Paula A. Grotzinger
Vice President

Arlene F. Haley
Vice President

Phyllis A. Kennerknecht
Vice President

Robert J. Maiorana
Vice President

Cynthia E. McGlumphy
Vice President

James E. Merritt
Vice President

Michele K. Parker
Vice President

George T. Pawlak
Vice President

Jeffery M. Rosati
Vice President

Patsy I. Rust
Vice President

Alex Solis
Vice President

James M. Weaver
Vice President

Charles W. Whittaker
Vice President

F&M-PEOPLES

DIRECTORS:

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

Director Emeritus:

Vincent L. Tolson

OFFICERS:

Mark C. Riley
President and Chief Executive Officer

Warren L. Bane
Vice President-Senior Loan Officer

Theodore R. Coleman
Vice President-Loans

Caren M. Eastham
Vice President-
Administrative Services

Richard L. Monahan
Vice President-Lending

Joan B. Oliver
Vice President-Data Processing

Nancy W. Clatterbuck
Vice President-Branch Manager

Daryl A. Urnosky
Vice President-Chief Financial
Officer

F&M BANK-RICHMOND

DIRECTORS:

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

OFFICERS:

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

Wayne D. Eaves
Senior Vice President

K. Bradley Hildebrandt
Vice President-Commercial Lending

Daily H. Stern
Vice President and Compliance Officer

Marshall E. McCall
Vice President-Commercial Lending

F&M BANK-BLAKELEY

DIRECTORS:

Charles C. Conrad
J. Blackwell Davis, Sr., Chairman
Denver L. Hipp
Dr. JamesM. Moler
Paul L. Reid

OFFICERS:

Denver L. Hipp
President and Chief Executive Officer

Ida M. Hull
Senior Vice President and Cashier

Reginald C. Kimble
Senior Vice President-Lending

Thomas R. Reilly
Senior Vice President-Administration

F&M BANK-KEYSER

DIRECTORS:

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


50

<PAGE>



OFFICERS:

Douglas E. Haines
President and Chief Executive Officer

David E. Harr, Jr.
Vice President

Dwight C. Metcalf
Vice President

F&M BANK-
MARTINSBURG

DIRECTORS:
Betty H. Carroll
Craig H. Collis
C. William Hammond
J. Wayne Lancaster, Chairman
Craig L. Meadows, D.D.S.
Donald L. Sperow, Sr.

Directors Emeriti:

G. Francis Caton
William R. McCune, M.D.
Evelyn S. Oates

OFFICERS:
C. William Hammond
President and Chief Executive Officer

David C. Jeffcoat
Vice President-Lending

Susan M. Wenger
Vice President-Compliance

Mary K. Hayward
Vice President-Special Projects

Jodi A. Frankenberry
Vice President-Administration

F&M BANK-ALLEGIANCE

DIRECTORS:
Charles E. Curtis
John R. Fernstrom, Chairman
William E. Knight
Linda Greer Spooner
Ronald A. Willoner

OFFICERS:
Robert P. Pugh
Interim President

Mervis V. Samuels
Vice President-Commercial Lending

William A. Gallagher
Vice President-Commercial Lending

Richard D. Corrigan
Vice President-Real Estate Lending

David W. Irey
Vice President-Consumer Loans and
Compliance Officer

Elaine B. Durkin
Vice President-Operations

F&M TRUST COMPANY

DIRECTORS:
Betty H. Carroll
W. H. Clement
Joseph E. Kalbach
Ronald W. Tydings
Edward C. A. Wachtmeister
Michael M. Webb
F. Dixon Whitworth, Jr., Chairman

OFFICERS:

F. Dixon Whitworth, Jr.
President

Marshall J. Beverley, Jr.
Senior Vice President

Thomas H. Kirk
Senior Vice President

W. Blakeley Curtis
Vice President

Dennis R. Dorsett
Vice President

Robert E. Duvall
Vice President

F&M-SHOMO AND LINEWEAVER
INSURANCE AGENCY,
INCORPORATED

DIRECTORS:

Betty H. Carroll
Michael A. Conway
Robert W. Drechsler, Chairman
Michael E. Fiore
W. Michael Heatwole, III
W. Price Lineweaver
Ellen M. Ritchie
Jerry D. Sheets
Norman J. Stern
Donald W. Wallinger
Alfred B. Whitt

OFFICERS:

Robert W. Drechsler
Chairman

W. Price Lineweaver
President

Michael E. Fiore
Secretary

F&M FINANCIAL SERVICES CORPORATION

DIRECTORS:
Norman J. Stern
W. Michael Heatwole, III

OFFICERS:

Norman J. Stern
President

W. Michael Heatwole, III
Secretary

BIG APPLE
MORTGAGECOMPANY

DIRECTORS AND OFFICERS:

Vergil H. Bates
President and Director
James M. O'Brien
Executive Vice President
Beverly A. Alexander
Vice President
Betty H. Carroll
Vice President and Director
Alfred B. Whitt
Secretary-Treasurer and Director

WINCHESTER
CREDIT CORPORATION

DIRECTORS:

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

OFFICERS:

Jack R. Huyett
President
Richard V. Reedy
Vice President
Special Assets Division-Loudoun County
Betty H. Carroll
Vice President
Alfred B. Whitt
Secretary
Barbara H. Ward
Treasurer

CREDIT BUREAU OF
WINCHESTER, INC.

Sandra K. Hart
Manager

APPLE TITLE COMPANY

DIRECTORS:

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

OFFICERS:

Jack R. Huyett
President

Betty H. Carroll
Vice President

Alfred B. Whitt
Secretary

Frances H. Fortune
Treasurer

                                                                              51

<PAGE>




Corporate Headquarters

F&M NATIONAL CORPORATION
9 Court Square
Winchester, Virginia 22601
540-665-4200

F&M BANK-WINCHESTER
Main Office
115 North Cameron Street
Winchester, Virginia 22601
540-665-4200

Other Banking Offices:

Winchester, Virginia 22601
540-665-4200
100 North Loudoun Street
509A Amherst Street
2252 Valley Avenue
829 North Loudoun Street
1850 Apple Blossom Drive
748 Berryville Avenue
124 West Piccadilly Street
2082 South Pleasant Valley Road
2004 South Pleasant Valley Road

Clarke County:
23 North Church Street
Berryville, Virginia 22611
540-955-1222

Frederick County:
6701 Northwestern Pike
Gore, Virginia 22637
540-858-2832
7800 Main Street
Middletown, Virginia 22645
540-869-1200
5306 Main Street
Stephens City, Virginia 22655
540-869-3000
1855 Senseny Road
Winchester, Virginia 22602
540-665-4200
300 Westminster Canterbury Drive
Winchester, Virginia 22603
540-665-4200

Loudoun County:
38997 East Colonial Highway
Hamilton, Virginia 20158
540-338-3600
101 Catoctin Circle, SE
Leesburg, Virginia 20175
703-771-7202
7 West Market Street
Leesburg, Virginia 20176
703-771-7245
7 Broad Way
Lovettsville, Virginia 20180
540-822-9034
202 West Washington Street
Middleburg, Virginia 20117
540-687-5731
21 Main Street
Round Hill, Virginia 20141
540-338-6065
22550 Davis Drive
Sterling, Virginia 20164
703-435-0782

Rappahannock County:
644 Zachary Taylor Highway
Flint Hill, Virginia 22627
540-675-3596

Shenandoah County:
Apple Avenue and U.S. Route 11
Mount Jackson, Virginia 22842
540-477-2931
158 South Main Street
Woodstock, Virginia 22664
540-459-5500
9383 Congress Street
New Market, Virginia 22844
540-740-8044

Warren  County:
540-635-3134
102 East Main Street
Front Royal, Virginia 22630
215 North Royal Avenue
Front Royal, Virginia 22630
Royal Plaza Shopping Center
433 South Street
Front Royal, Virginia 22630
123 East Sixth Street
Front Royal, Virginia 22630


F&M BANK-CENTRAL VIRGINIA
1425 Seminole Trail
Charlottesville, Virginia 22901
804-973-4233
101 Critzer Shop Road
Afton, Virginia 22920
540-456-8156
840 South Main Street
Amherst, Virginia 24521
804-946-2265
2208 Ivy Road
Charlottesville, Virginia 22903
   804-293-9181
1113 5th Street Extended
Charlottesville, Virginia 22902
804-293-5211
93 Front Street
Lovingston, Virginia 22949
804-263-4806
350 Valley Street
Scottsville, Virginia 24590
804-286-2805

F&M BANK-EMPORIA

401 Halifax Street
Emporia, Virginia 23847
804-634-6555
301 West Atlantic Street
Emporia, Virginia 23847
804-634-8855
431 South Main Street
Emporia, Virginia 23847
804-634-8866

F&M BANK-MASSANUTTEN

1855 East Market Street
Harrisonburg, Virginia 22801
540-434-6761
3150 South Main Street
Harrisonburg, Virginia 22801
540-433-1330
611 Mount Clinton Pike
Harrisonburg, Virginia 22801
540-433-9936
157 North Main Street
Broadway, Virginia 22915
540-896-7083
200 Augusta Street
Grottoes, Virginia 24441
540-249-5727
1900 South High Street
Harrisonburg, Virginia 22801
540-432-6490
317 North Main Street
Bridgewater, Virginia 22812
540-828-4737
American Legion Drive and
Route 42
Timberville, Virginia 22853
540-896-5858
430 Highlands Place
Harrisonburg, Virginia 22801
540-433-2702

F&M BANK-NORTHERN VIRGINIA

4117 Chain Bridge Road
Fairfax, Virginia 22030
703-385-3335
200 North Washington Street
Alexandria, Virginia 22314
703-684-1091
4115 Annandale Road
Annandale, Virginia 22003
703-642-9212
7027A Manchester Boulevard
Alexandria, Virginia 22310
703-922-8001
14260 J Centreville Square
Centreville, Virginia 20120
703-359-9387
5105 Westfields Boulevard
Centreville, Virginia 20120
703-359-9393
13821 Lee Jackson Highway
Chantilly, Virginia 20151
703-359-9397
12220 Fairfax Towne Center
Fairfax, Virginia 22033
703-359-7556
133 South Washington Street
Falls Church, Virginia 22046
703-352-6194
3829 South George Mason Drive
Falls Church, Virginia 22041
703-671-5862


52


<PAGE>


14091 John Marshall Highway
Gainesville, Virginia 20155
703-754-8520
230 Herndon Parkway
Herndon, Virginia 22070
703-435-1000
12493 Dillingham Square
Lake Ridge, Virginia 22192
703-590-8700
9201 Church Street
Manassas, Virginia 20110
703-368-1101
13414 Dumfries Road
Manassas, Virginia 20112
703-791-2265
7900 Sudley Road
Manassas, Virginia 20110
703-392-0370
6257A Old Dominion Drive
McLean, Virginia 22101
703-691-7897
7830 Backlick Road
Springfield, Virginia 22150
703-913-0102
8432 Old Keene Mill Road
Springfield, Virginia 22152
703-451-0074
6810 Commerce Street
Springfield, Virginia 22150
703-451-8100
440 Maple Avenue
Vienna, Virginia 22180
703-319-0299
8221 Old Courthouse Road
Vienna, Virginia 22182
703-359-9390
14229 Potomac Mills Road
Woodbridge, Virginia 22192
703-497-2333


F&M BANK-PEOPLES

21 Main Street
Warrenton, Virginia 20186
540-347-1711
251 West Lee Highway
Warrenton, Virginia 20186
540-349-3491
8318 East Main Street
Marshall, Virginia 20115
540-364-1511
760 Warrenton Road
Fredericksburg, Virginia 22406
540-899-3882


F&M BANK-RICHMOND

9401 West Broad Street
Richmond, Virginia 23294
804-346-8080
1776 Staples Mill Road
Richmond, Virginia 23230
804-355-7841
209 West Franklin Street
Richmond, Virginia 23220
804-780-0122
5001 Lakeside Avenue
Richmond, Virginia 23228
804-264-2783
9960 Midlothian Turnpike
Richmond, Virginia 23235
804-320-6610
1300 East Parham Road
Richmond, Virginia 23227
804-264-2824
9012 Three Chopt Road
Richmond, Virginia 23229
804-282-7527
6980 Forest Hill Avenue
Richmond, Virginia 23225
804-272-5337
4310 West Hundred Road
Chester, Virginia 23831
804-748-2735
9440 Ironbridge Road
Chesterfield, Virginia 23832
804-748-7181


F&M BANK-BLAKELEY
301 South Mildred Street
Ranson, West Virginia 25438
304-725-7014
Somerset Village Shopping Center
Route 340 North
Charles Town, West Virginia 25414
304-728-8023
Hilldale Shopping Center
Route 340 South
Charles Town, West Virginia 25414
304-728-0216
1504 Tuscawilla Hills
Charles Town, West Virginia 25414
304-728-4270
Walmart
4 Charles Town Plaza
Charles Town, West Virginia 25414
304-728-4290

F&M BANK-KEYSER
87 North Main Street
Keyser, West Virginia 26726
304-788-3111
Express Office
Florida & Southern Drive
Keyser, West Virginia 26726
   304-788-0883
Route 28 and Carroll Lane
Fort Ashby, West Virginia 26719
304-298-3667

F&M BANK-MARTINSBURG
301 West Burke Street
Martinsburg, West Virginia 25401
304-264-5020
1321 Edwin Miller Boulevard
Martinsburg, West Virginia 25401
304-264-5040
704 Foxcroft Avenue, North
Martinsburg, West Virginia 25401
304-262-6301
Route 51 West
Inwood, West Virginia 25428
304-229-5824

F&M BANK-ALLEGIANCE
4719 Hampden Lane
Bethesda, Maryland 20814
301-656-5300
10533 Baltimore Boulevard
Beltsville, Maryland 20705
301-937-9766
8019 Snouffer School Road
Gaithersburg, Maryland 20879
301-417-2640
8401 Corporate Drive
Landover, Maryland 20785
301-731-1700
11921 Rockville Pike
Rockville, Maryland 20852
301-424-3550
99 South Washington Street
Rockville, Maryland 20850
301-217-9494
8602 Colesville Road
Silver Spring, Maryland 20910
301-588-9700
2729 University Boulevard, West
Wheaton, Maryland 20902
301-949-2440
9401 Key West Avenue
Rockville, Maryland 20850
301-417-0422

F&M TRUST COMPANY
38 Rouss Avenue
Winchester, Virginia 22601
540-665-4204
21 Main Street
Warrenton, Virginia 20186
540-349-3474
4117 Chain Bridge Road
Fairfax, Virginia 22030
703-383-1347


F&M-SHOMO AND
LINEWEAVER INSURANCE
AGENCY INCORPORATED

F&M FINANCIAL SERVICES CORPORATION
328 South Main Street
Harrisonburg, Virginia 22801
540-434-1301
2 East Wolfe Street
Harrisonburg, Virginia 22801
57 East Main Street
Luray, Virginia, 22835
5934 Main Street
Mt. Jackson, Virginia 22842

                                                                              53

<PAGE>





BIG APPLE MORTGAGE COMPANY

124 West Piccadilly Street
Winchester, Virginia 22601
540-665-4340
12 Rouss Avenue
Winchester, Virginia 22601
540-665-4356
Apple Avenue and U.S. Route 11
Mount Jackson, Virginia 22842
540-477-2931
F&M Mortgage Company
22550 Davis Drive
Sterling, Virginia 20164
703-733-0123
1321 Edwin Miller Boulevard
Martinsburg, West Virginia 25401
304-263-7334


APPLE TITLE COMPANY
12 Rouss Avenue
Winchester, Virginia 22601
540-665-4233


WINCHESTER CREDIT CORPORATION
12 Rouss Avenue
Winchester, Virginia 22601
540-338-2962


CREDIT BUREAU OF WINCHESTER, INC.
12 Rouss Avenue
Winchester, Virginia 22601
540-662-0368

54

<PAGE>


                               GENERAL INFORMATION
Annual Meeting
      The annual meeting of shareholders will be held at the TraveLodge Banquet
Room, 1825 Dominion Avenue, Winchester, Virginia, Tuesday, April 28, at 10:00
a.m.

Stock Transfer Agent

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

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

Information
      For additional information, contact Alfred B. Whitt, President, or Michael
L. Bryan, Secretary, F&M National Corporation, 540-665-4200.

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

Mailing Address
                            F&M National Corporation
                                  P.O. Box 2800
                           Winchester, Virginia 22604
<PAGE>