SECURITIES AND EXCHANGE COMMISSION
                             Washington, D. C. 20549

                                    FORM 10-K

[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
      ACT OF 1934 For the Fiscal Year Ended December 31, 1998

                                       OR

[   ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF SECURITIES EXCHANGE
      ACT OF 1934

                          Commission File Number 0-5929

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

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

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

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

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

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

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

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

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

State the aggregate market value of the voting stock held by the non-affiliates
of the Registrant. The aggregate market value is computed by reference to the
closing price of such stock as reported by the New York Stock Exchange on
February 26, 1999: $ 577,531,013

NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AT FEBRUARY 26, 1998:   21,818,588

                    DOCUMENTS INCORPORATED BY REFERENCE

(1) Portions of the Registrant's Annual Report to Shareholders for the fiscal
    year ended December 31, 1998, are incorporated by reference in Parts II and
    IV hereof; and
(2) Portions of Registrant's 1999 Proxy Statement dated March 23, 1999, are
    incorporated by reference in Part III hereof.

<PAGE>

                                PART I

ITEM 1. BUSINESS.

(A)     GENERAL DEVELOPMENT OF BUSINESS

        The following is a summary of the major developments in F&M's business
since January 1, 1998 (F&M National Corporation is referred to herein as "F&M"
or the "Company"):

        On January 1, 1998, F&M Trust Company was formed by consolidating the
trust departments of F&M Bank-Winchester, F&M Bank-Peoples, and F&M
Bank-Northern Virginia.

        On April 1, 1998, Peoples Bank of Virginia ("PBVA"), Chesterfield,
Virginia, merged with and into F&M Bank-Richmond. Each share of common stock of
PBVA outstanding immediately prior to consummation of the merger was exchanged,
in a tax-free exchange, for 2.58 shares of the common stock of F&M, with cash
being paid in lieu of issuing fractional shares. At December 31, 1997, PBVA 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 merger was
accounted for as a pooling of interests.

        On April 1, 1998, F&M Bank-Richmond opened the following four branch
offices which were formerly branch offices of PBVA: 9970 Ironbridge Road,
Chesterfield, Virginia, 5756 Hopkins Road, Richmond, Virginia, 11450 Midlothian
Turnpike, Richmond, Virginia and 11010 Hull Street Road, Richmond, Virginia. One
former branch office of PVBA located at 9440 Ironbridge Road, Chesterfield,
Virginia was closed.

        On April 30, 1998, F&M and J.V. Arthur, Inc, ("JVA"), Winchester,
Virginia, announced an agreement of affiliation of JVA with F&M Bank-Winchester,
F&M's lead bank. On May 1, 1998, F&M expanded its product base with the
acquisition JVA, which offers a full line of insurance products including
automobile, home, group, life and business insurance. The acquisition was
accounted for as a pooling of interests with payment in the form of F&M common
stock.

        On June 1, 1998, The Bank of Alexandria ("BOA"), Alexandria, Virginia,
merged with and into F&M Bank-Northern Virginia. Each share of common stock of
BOA outstanding immediately prior to consummation of the merger was 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. At December 31, 1997, BOA had total
assets of $75.9 million, total loans of $58.2 million, total deposits of $67.6
million, and total shareholders' equity of $7.9 million. The merger was
accounted for as a pooling of interests.

<PAGE>

        On June 1, 1998, F&M Bank-Northern Virginia opened the following four
branch offices, which were formerly branch offices of BOA: 1717 King Street,
Alexandria, Virginia, 7901 Richmond Highway, Alexandria, Virginia, 606 King
Street, Alexandria, Virginia, and 2111 Eisenhower Avenue, Alexandria, Virginia.
One former branch of BOA located at 200 Washington Street, Alexandria, Virginia
was closed.

         On September 21, 1998, F&M Bank-Richmond opened branch offices at the
following locations: 4851 Laburnam Avenue, Richmond, Virginia and 17650
Midlothian Turnpike, Chesterfield, Virginia

        On October 1, 1998, F&M Bank-West Virginia opened a branch office at
Wal-Mart, Route 4, Box 82, Keyser, West Virginia.

        On October 20, 1998, F&M Bank-Northern Virginia opened a branch office
at 25393 Elklick Road, South Riding, Virginia

        On November 10, 1998, F&M and Security Bank Corporation ("Security"),
Manassas, Virginia announced that their respective Boards of Directors approved
an agreement for the affiliation of Security with F&M. The merger agreement
provided for the merger of Security with F&M's affiliate, F&M Bank-Northern
Virginia, and F&M to exchange the number of its shares of common stock whose
aggregate market value determined as of the date of the closing equals $17.25.
The affiliation with Security closed on March 22, 1999 with F&M exchanging, in a
tax-free transaction, 0.653 shares of F&M common stock for each share of
Security common stock. The merger was accounted for as a pooling of interests.
At December 31, 1998, Security had total assets of $61.2 million, total loans of
$34.3 million, Deposits of $52.4 million, and total stockholders' equity of $7.9
million.

        On December 1, 1998, Credit Bureau of Winchester ("CBW") discontinued
business. CBW, a wholly owned subsidiary of F&M Bank-Winchester, provided
customer credit information to subsidiary banks.

(B)     FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS

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

(C)     NARRATIVE DESCRIPTION OF THE BUSINESS

                                   THE COMPANY

GENERAL

        F&M National Corporation is a multi-bank holding company headquartered
in Winchester, Virginia. F&M's nine subsidiary banks operate 119 banking offices
offering a full range of banking services principally to individuals and small
and middle-market business in north, central and south Virginia including the
Shenandoah Valley, and the eastern panhandle of West Virginia, and the counties
of Montgomery and Prince George's in Maryland. At December 31, 1998, F&M had
assets of $2.889 billion, deposits of $2.436 billion and shareholders' equity of
$287.1 million.

<PAGE>

        F&M was formed in 1969 to serve as the parent holding company of its
then sole subsidiary bank, F&M Bank-Winchester, organized in 1902. Since its
organization, F&M has acquired 22 banks, which expanded its market area and
increased market share in Virginia, West Virginia and Maryland.

        The following table sets forth certain information concerning F&M and
its operating subsidiaries at December 31, 1998:

<TABLE>
<CAPTION>

                            DATE       BANKING       TOTAL         TOTAL          TOTAL
                          ACQUIRED     OFFICES      ASSETS         LOANS        DEPOSITS
                         -------------------------------------------------------------------
                                             (Dollars in thousands)
<S>                         <C>          <C>         <C>           <C>            <C>
F&M Bank-Winchester
  Winchester, VA (1)        1970          32     $   794,024   $   498,244    $   694,736
F&M Bank-Massanutten
  Harrisonburg, VA (2)      1980           9         230,164       177,548        191,068
F&M Bank-Richmond
  Richmond, VA (3)          1982          15         300,559       159,893        271,640
F&M Bank-Central
  Virginia
  Charlottesville, VA       1985           7          87,102        40,362         73,944
F&M Bank-West Virginia
  Ranson, WV (4)            1988          13         328,315       212,587        287,444
F&M Bank-Emporia
  Emporia, VA               1993           3          74,149        34,946         65,089
F&M Bank-Peoples
  Warrenton, VA             1994           4         122,522        81,397        107,787
F&M Bank-Northern VA
  Fairfax, VA (5)           1996          27         701,491       380,778        601,433
F&M Bank-Allegiance
  Bethesda, MD              1996           9         203,674       107,287        142,881
F&M (Parent only)             -            -          46,714             -              -
                                       -----      ----------     ---------      ---------
Total                                    119      $2,888,714    $1,693,042    $ 2,436,022

</TABLE>
-----------------
(1) Includes F&M Mortgage Services, Inc., and two insurance agencies. Also
    includes the 1993 purchase of substantially all of the assets and assumption
    of certain liabilities of Farmers and Merchants Bank of Hamilton (the
    "Hamilton Bank').
(2) Includes the merger in 1995 of F&M Bank-Broadway, Broadway, Virginia, into
    F&M Bank-Massanutten.
(3) Includes the acquisition in 1998 of Peoples Bank of Virginia, Chesterfield,
    Virginia. 
(4) Created from the consolidation in 1998 of F&M Bank-Blakeley, F&M 
    Bank-Martinsburg and F&M Bank-Keyser.
(5) Includes the acquisition in 1994 of Hallmark Bank and Trust, Springfield,
    Virginia, the acquisition in 1995 of The Bank of the Potomac, Herndon,
    Virginia, the acquisition in 1996 of FB&T Financial Corporation, Fairfax,
    Virginia and the acquisition in 1998 of The Bank of Alexandria, Alexandria,
    Virginia.

<PAGE>

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

        F&M's subsidiary banks are community-oriented and offer services
customarily provided by full-service banks, including individual and commercial
demand and time deposit accounts, commercial and consumer loans, residential
mortgages, credit card services and safe deposit boxes. Lending is focused on
individuals and small and middle-market businesses in the local market regions
of each of F&M's subsidiary banks. In 1998, F&M Trust Company was formed by
consolidating the trust departments of F&M Bank-Winchester, F&M Bank-Peoples,
and F&M Bank-Northern Virginia. F&M Trust Company provides a variety of personal
trust services including management of common trust funds, estate administration
and planning specifically addressing the investment and financial management
needs of its customers. At December 31, 1998, F&M Trust Company managed assets
and accounts totaling $586.4 million.

        F&M operates in seven market regions: the Shenandoah Valley of Virginia;
the eastern panhandle of West Virginia; Charlottesville/Albemarle County and
surrounding areas; Greenville County in southside Virginia; suburban Richmond,
primarily Henrico and Chesterfield Counties; the northern Virginia areas of
Loudoun, Fairfax, and Prince William Counties; Stafford, Warrenton and
surrounding Fauquier County area and the counties of Montgomery and Prince
George's in Maryland. The more populous sectors within each of the seven market
regions experienced substantial population growth between 1980 and 1990, most of
which exceeded 20% growth. At December 31, 1998, F&M operated 34 banking offices
in the Shenandoah Valley from Winchester to Harrisonburg with deposits of $719.9
million; 13 banking offices in the eastern panhandle of West Virginia with
deposits of $287.4 million; 7 banking offices in the Charlottesville/Albemarle
County area with deposits of $73.9 million; 3 banking offices in Emporia,

<PAGE>

Virginia, and surrounding Greenville County with deposits of $65.1 million; 15
banking offices in suburban Richmond, Virginia, with deposits of $271.6 million;
34 banking offices in Loudoun, Fairfax and Prince William Counties of northern
Virginia with deposits of $769.3 million; 4 offices in the town of Warrenton and
Fauquier and Stafford Counties with deposits of $107.8 million; and 9 offices in
the counties of Montgomery and Prince George's in Maryland with deposits of
$142.9 million. F&M's principal market is Winchester and the surrounding six
Virginia counties where its lead bank, F&M Bank-Winchester, is the dominant
financial institution in terms of deposit market share, with a 51% share of
total deposits in Winchester, a 23% share of total deposits in surrounding
Frederick County, a 29% share of total deposits in Warren County, and a 16%
share of total deposits in Loudoun County. In Rockingham County, which has the
largest population of any county or city in the Shenandoah Valley, F&M has a 15%
deposit market share. In F&M's three-county West Virginia market, F&M has a 26 %
deposit market share in Jefferson County (which includes Charles Town), a 17%
deposit market share in Berkeley County (which includes Martinsburg) and a 42%
deposit market share in Mineral County (which includes Keyser). In Fairfax,
Prince William and Fauquier Counties (including Warrenton), F&M has 3%, 4%, and
16%, respectively, of deposit market share. Although F&M's deposit market share
in the Richmond and Charlottesville areas is small, F&M has positioned its
banking offices in these two markets to increase deposit market share as a
result of continued business and population growth in the suburban markets
surrounding Richmond and Charlottesville. In F&M's two-county Maryland market,
F&M is positioning itself to increase market share in Montgomery County and
Prince George's County.

        F&M's subsidiary banks have not experienced loan quality deterioration
due to conservative underwriting standards and focused in-market lending
practices. At December 31, 1998, F&M had total nonperforming assets of
approximately $26.9 million, representing 1.58% of period end loans and
foreclosed properties.

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

ACQUISITION PROGRAM

        F&M has expanded its market area and increased its market share through
both internal growth and strategic acquisitions. Since the beginning of 1988,
F&M has acquired approximately $1.4 billion in assets and approximately $1.2
billion in deposits through 14 acquisitions. 1998 acquisitions by F&M are
outlined in "ITEM 1. BUSINESS (a) General Development of Business."

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

<PAGE>

ANTI-TAKEOVER PROVISIONS

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

EMPLOYEES

        At December 31, 1998, F&M had 1,244 full time and 293 part time
employees. No employees are represented by any collective bargaining unit. F&M
considers relations with its employees to be good.

MARKET REGIONS

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

<TABLE>
<CAPTION>

                                  BANKING     % MARKET      MARKET          1990
       COUNTY/CITY (1)            OFFICES     SHARE (2)    RANK (2)      POPULATION
------------------------------- ------------ ------------ -----------  ----------------
<S>                                 <C>          <C>          <C>            <C>

STATE OF VIRGINIA:
Shenandoah Valley:
 City of Winchester                  10           51            1           21,947
 Frederick County                     5           23            1           45,723
 Warren County                        4           29            1           26,142
 Shenandoah County                    3            9            5           31,636
 Clarke County                        1           22            2           12,101
 Rappahannock County                  1           43            2            6,622
 Rockingham County                    4           19            3           57,482
 City of Harrisonburg                 5           13            5           30,707
Northern Virginia:
 City of Alexandria                   5            4            4          111,182
 City of Fairfax                      1           10            5           20,959
 City of Falls Church                 2            2            7            8,982
 City of Manassas                     3           10            4           33,399

</TABLE>


<PAGE>
<TABLE>
<CAPTION>

                                  BANKING     % MARKET      MARKET          1990
       COUNTY/CITY (1)            OFFICES     SHARE (2)    RANK (2)      POPULATION
------------------------------- ------------ ------------ -----------  ----------------
<S>                                 <C>          <C>          <C>            <C>

 Loudoun County                       8           16            1           86,100
 Fairfax County                      12            2           11          819,000
 Fauquier County                      3           16            2           52,000
 Prince William County                3            4            7          216,000
 Stafford County                      1            1           10           61,000
Charlottesville/
Albemarle County:
 City of Charlottesville              1            *            8           40,341
 Albemarle County                     3            8            7           68,040
 Nelson County                        2           35            2           12,778
 Amherst County                       1            6            6           28,578
Richmond:
 City of Richmond                     3            1            8          203,056
 Henrico County                       4            3            8          217,881
 Chesterfield County                  7            7            7          209,274
Emporia:
 City of Emporia                      3           32            1           14,109
STATE OF WEST VIRGINIA:
 Jefferson County                     5           26            2           35,926
 Berkeley County                      5           17            3           59,253
 Mineral County                       3           42            1           26,697
STATE OF MARYLAND:
 Montgomery County                    6            1           16          821,035
 Prince George's                      3            1           NM          769,747
State of Virginia                    95            3            7        6,187,358
State of West Virginia               13            2           11        1,793,477
State of Maryland                     9            *           NM        4,781,000

</TABLE>

------------
* Represents less than 1% deposit market share     NM=Not meaningful

(1)   In Virginia, certain cities are separate political entities and not part
      of the counties that surround them. The city of Winchester and Frederick
      County, the city of Harrisonburg and Rockingham County, the city of
      Charlottesville and Albemarle County, the city of Fairfax and Fairfax
      County and the city of Richmond and Henrico and Chesterfield Counties are
      examples. The FDIC and OTS provide deposit data for each separately
      incorporated city.
(2)   Deposit data includes total bank and thrift deposits and is based on FDIC
      and OTS data as of June 30, 1998, which is the most recently available
      information.

<PAGE>

LENDING ACTIVITIES

        All of F&M's subsidiary banks offer both commercial and consumer loans,
but lending activity is generally focused on consumers and small to middle
market businesses within each subsidiary banks' respective market regions. Four
of F&M's subsidiary banks, F&M Bank-Massanutten, F&M Bank-West Virginia, F&M
Bank-Emporia, and F&M Bank-Peoples emphasize consumer lending with activities
focused primarily on residential real estate and consumer lending. F&M
Bank-Richmond, F&M Bank-Central Virginia, F&M Bank-Northern Virginia and F&M
Bank-Allegiance are based in larger markets where commercial loan demand is
stronger and, as a result, their lending activities place a greater emphasis on
small to medium sized business. F&M Bank-Winchester, because of its size and
dominant position in its market, has a greater opportunity to appeal to large
commercial customers in addition to consumers.

        The following table sets forth the composition of F&M's loan portfolio
(by percentage) for the three years ended December 31:

<TABLE>
<CAPTION>

                                             1998            1997             1996
                                     --------------- ---------------- ---------------
<S>                                          <C>             <C>              <C>
Commercial                                   16.6%           16.7%            15.6%
Real estate construction                      6.0             5.8              4.6
Real estate mortgage:
 Residential (1-4 family)                    30.1            30.9             31.1
 Home equity lines                            3.5             4.2              4.5
 Multifamily                                  1.8             2.0              2.3
 Nonfarm, nonresidential(1)                  30.0            28.4             28.9
 Agricultural                                 0.9             1.1              1.2
                                     --------------- ---------------- ---------------
   Real estate mortgage subtotal             65.2            66.6             68.0
Loans to individuals:
 Consumer                                    10.9             9.3              9.8
 Credit card                                  1.3             1.6              1.6
                                     --------------- ---------------- ---------------
   Loans to individuals subtotal             12.2            10.9             11.8

 Total Loans                                100.0%          100.0%           100.0%
 Total loans (dollars)               $  1,693,041    $  1,648,754     $  1,527,786

</TABLE>

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

        Approximately 16.6% of F&M's loan portfolio at December 31, 1998, was
comprised of commercial loans, which included loans secured by real estate shown
in the table above under the categories of multifamily, non-farm,
non-residential and agricultural where real estate is among the sources of
collateral securing the loan. F&M's subsidiary banks offer a variety of
commercial loans within their market regions, including revolving lines of
credit, working capital loans, equipment financing loans, and letters of credit.
Although F&M's subsidiary banks typically look to the borrower's cash flow as
the principal source of repayment for such loans, many of the loans within this

<PAGE>

category are secured by assets, such as accounts receivable, inventory and
equipment. In addition, a number of commercial loans are secured by real estate
used by such businesses and are generally personally guaranteed by the
principals of the business. F&M's commercial loans generally bear a floating
rate of interest tied to a system-wide prime rate set by F&M Bank-Winchester.

        F&M's residential real estate loan portfolio (including home equity
lines) was 65.2 % of its total loan portfolio at December 31, 1998. The
residential mortgage loans made by F&M's subsidiary banks and F&M Mortgage
Services, Inc., are made only for single family, owner-occupied residences
within their respective market regions. Residential mortgage loans offered by
F&M's subsidiary banks are either adjustable rate loans or fixed rate loans with
20 to 30 year amortization schedules that mature with a balloon payment on the
third or fifth year anniversary of the loan.

        F&M Mortgage Services, Inc., 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, 1998, only F&M Mortgage Services,
Inc., had $28.2 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, 1998,
construction loans were $101.7 million or 6.0% 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 since 1993 of less than one-half of 1%.

        Consumer loans were 12.2% of F&M's total loan portfolio at December 31,
1998. F&M's subsidiary banks offer a wide variety of consumer loans, which
include installment loans, credit card loans, home equity lines, and other
secured and unsecured credit facilities. The performance of the consumer loan
portfolio is directly tied to and dependent upon the general economic conditions
in each subsidiary banks' respective market regions.

CREDIT POLICIES AND PROCEDURES

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

<PAGE>

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

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

LOAN REVIEW. Each subsidiary bank of F&M has a formal loan review function that
consists of a committee of bank officers that regularly reviews loans and
assigns a classification, if required, based on current perceived credit risk.
In addition, the holding company has a loan review team that performs a detailed
on-site review and analysis of each subsidiary bank's portfolio on at least an
annual basis to ensure the consistent application of system-wide policies and
procedures. The holding company loan review team reviews all loans over an
established principal amount for each subsidiary bank, which results in a review
of 60% to 75% of the total principal amount of the subsidiary bank's loan
portfolio. In addition, all lending relationships involving a classified loan
are reviewed regardless of size. The holding company loan review team has the
authority to classify any loan it determines is not satisfactory or to change
the classification of a loan within F&M's loan grading system.

        All classified loans are reviewed at least quarterly by F&M's senior
officers and monthly by the subsidiary bank's boards of directors. All past due
and nonaccrual loans are reviewed monthly by the subsidiary banks' boards of
directors. As a matter of policy, F&M's subsidiary banks place loans on
nonaccrual status when management determines that the borrower can no longer
service debt from current cash flows and/or collateral liquidation. This
generally occurs when a loan becomes 90 days past due as to principal and
interest.

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

IMPAIRED LOANS. The recorded investment in certain loans that were considered to
be impaired in accordance to FASB 114 was $11.0 million at year end 1998 as
compared to $14.5 million at year end 1997, of which $7.3 million was classified
as nonperforming. Included in 1998 impaired loans are $7.2 million secured by

<PAGE>

commercial real estate. All impaired loans at year-end 1998 and 1997 had a
related valuation allowance totaling $2.3 million and $4.0 million,
respectively. The average recorded investment in certain impaired loans for 1998
and 1997 was approximately $13.9 million and $10.2 million, respectively. For
the years 1998 and 1997, interest income recognized on impaired loans totaled
$804 thousand and $513 thousand, respectively, all of which was recognized on a
cash basis.

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

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

DEPOSITS

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

                                               December 31,
                                  ------------------------------------
                                    1998         1997         1996
                                  ---------    ----------  -----------
Noninterest-bearing demand          22.0%          19.2%       17.1%
Interest checking                   18.0           16.2        15.3
Savings accounts                     8.7            9.1        10.2
Money market accounts               10.1           10.4        11.4
Time deposit accounts:
 Under $100,000                     31.2           35.6        37.1
 $100,000 and over                  10.0            9.5         8.9
                                  ---------    ----------  -----------
                                   100.0%         100.0%      100.0%

        F&M's subsidiary banks control deposit flows primarily through pricing
of deposits and, to a lesser extent, through promotional activities. F&M's
subsidiary banks establish deposit rates based on a variety of factors,
including competitive conditions, liquidity needs and compliance with net
interest margin requirements established by F&M for all subsidiary banks. As of
December 31, 1998, F&M's subsidiary banks had $242.1 million of certificates of
deposit greater than $100,000, or 10% of total deposits. F&M's subsidiary banks
do not accept brokered deposits.

<PAGE>


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

LIQUIDITY AND SENSITIVITY TO INTEREST RATES

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

        In order to meet its liquidity needs, F&M schedules the maturity of its
investment securities according to its needs. The weighted-average life of the
securities portfolio at the end of 1998 was 5 years 2 months, which is
indicative of F&M's investment philosophy of investing in U.S. Government
securities with maturities between five and ten years. F&M views its securities
portfolio primarily as a source of liquidity and safety. However, it may if the
market is favorable, make changes in the available for sale portfolio to take
advantage of changes in the yield curve. F&M views the total available for sale
securities portfolio as a source of liquidity, whereas, liquidity in the held to
maturity portfolio is limited to calls and maturities. The maturity ranges of
the securities and the average taxable-equivalent yields as of December 31,
1998, are shown in the following table:

<TABLE>
<CAPTION>


                  U.S. Government                State and
                  And its Agencies               Municipal                  Other
                  Book Value         Yield       Book Value      Yield      Book Value    Yield
                  ------------------------- --------------------------- ------------------------
<S>                      <C>       <C>       <C>       <C>         <C>         <C>

One year or less   $   111,883       6.14%       $ 2,867          7.23%      $  650       8.46%
After one year
 through five
years                  395,397       6.03         11,862          7.43          512       7.90
After five                                                                        -
through
 ten years             155,284       6.41          7,432          7.63          258       5.70
After ten years         66,969       6.73          1,878          8.41       16,697       6.12
                  -------------               -----------                -----------
  Total           $    729,533       6.16%   $    24,039          7.55%    $ 18,117       6.25%
                  =============               ===========                ===========

</TABLE>

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

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

<PAGE>

REMAINING MATURITIES OF SELECTED LOANS

                                  December 31, 1998
                         ---------------------------------
                         Commercial,
                         Financial and     Real estate and
                         Agricultural      Construction
                         ------------------------------------
                          (Dollars in thousands)

Within 1 year            $ 150,586         $    71,071
                         ---------------   ------------------
Variable Rate:
1 to 5 years                25,949               4,768
After 5 years               11,439               7,279
                         ---------------   ------------------
  Total                     37,388              12,047
                         ---------------   ------------------

Fixed Rate:
1 to 5 years                80,883              11,609
After 5 years               11,857               6,988
                         ---------------   ------------------
  Total                  $  92,740         $    18,597
                         ===============   ==================
  Total Maturities       $ 280,714         $   101,715
                         ===============   ==================

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

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.

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 dollar 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.

<PAGE>

        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 or
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.

        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.

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. F&M's
Board of Directors review guidelines established by ALCO. Asset/Liability
Management: The primary goals of asset/liability 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 1998 and 1997, was -4.7% and -12.2% of
total earning assets, respectively. The policy limit for the one-year gap is
plus or minus 15% of adjusted total earning assets.

<PAGE>

        Core deposits and loans with non-contractual 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 4.7% of stable-rate net income if rates were to fall
immediately by two hundred basis points. It projects an increase of
approximately 7.3% if rates rise by two hundred basis points. Management
believes this reflects a slight 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 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 5.1%. Additionally, NPV is projected to increase by 2.2% 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.

<PAGE>

        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 is
presented below.

                                                Year-end           Year-end
                                               ------------     ------------
                                                  1998             1997
                                               ------------     ------------
Static 1-Year Cumulative Gap                         -4.7%           -12.2%
1-Year Net Income Simulation Projection
   -200 bp Shock vs Stable Rate                      -8.1%            -3.2%
   +200 bp Shock vs Stable Rate                       7.3%             2.7%
Static Net Present Value Change
   -200 bp Shock vs Stable Rate                       2.2%             5.0%
   +200 bp Shock vs Stable Rate                      -5.1%            -7.8%

        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 will decline less than 1% during 1999
and believes that the current modest level of liability sensitivity is
appropriate.

OTHER ACTIVITIES

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

        In 1998, F&M Trust Company offered a range of trust services. At
December 31, 1998, F&M Trust Company managed $ 586.4 million in assets in
approximately 1,627 fiduciary accounts, covering both personal trust activities
and employee benefit plans.

<PAGE>

COMPETITION

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

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

<PAGE>

EXECUTIVE OFFICERS OF THE REGISTRANT

        All officers of the Company and its subsidiaries are elected annually to
serve at the pleasure of the Board of Directors of the Company. The following
table sets forth the name, age, year first elected, and offices held at February
26, 1999, of each of the executive officers of the Company:

<TABLE>
<CAPTION>


                                    YEAR
                                    FIRST
NAME                         AGE    ELECTED           OFFICE
----                         ---    -------           ------
<S>                          <C>      <C>             <C>
W. M. Feltner                79       1970            Chairman and Chief Executive Officer of
                                                      the Company; Chairman of the Board of
                                                      F&M Bank-Winchester

Alfred B. Whitt              60       1998            President, Vice Chairman, and Chief
                                                      Financial Officer of the Company; Vice
                                                      Chairman and Secretary of F&M
                                                      Bank-Winchester

Charles E. Curtis            60       1998            Vice Chairman and Chief Administrative
                                                      Office of the Company; Vice Chairman of
                                                      F&M Bank-Winchester

F. Dixon Whitworth, Jr.      54       1985            Executive Vice President of the
                                                      Company; President of F&M Trust Company

Betty H. Carroll             61       1987            Senior Vice President of the Company;
                                                      President and Chief Executive Officer
                                                      of F&M Bank-Winchester

Michael L. Bryan             47       1998            Corporate Secretary and General
                                                      Counsel of the Company

Barbara H. Ward              53       1983            Treasurer of the Company; Senior Vice
                                                      President of F&M Bank-Winchester

</TABLE>


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

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

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

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

        Mrs. Carroll has served as President and Chief Executive Officer of F&M
Bank-Winchester since December 1988. She was appointed Senior Vice President of
the Company in 1987.

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

<PAGE>

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

SUPERVISION AND REGULATION

       The Company and its subsidiary banks are subject to state and federal
banking laws and regulations, which impose specific requirements or restrictions
on and provide for general regulatory oversight with respect to virtually all
aspects of operations. The following is a brief summary of certain statues,
rules and regulations affecting the Company and its subsidiary banks. This
summary is qualified in its entirety by reference to the particular statutory
and regulatory provisions referred to below and is not intended to be an
exhaustive description of the statutes or regulations applicable to the business
of the Company and its subsidiary banks. A change in applicable laws or
regulations may have a material effect on the business and prospects of the
Company.

THE COMPANY

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

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

<PAGE>

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

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

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

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

<PAGE>

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

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

REGULATION OF SUBSIDIARY BANKS

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

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

<PAGE>

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

DEPOSIT INSURANCE. The deposits of F&M's subsidiary banks are currently insured
to a maximum of $100,000 per depositor, subject to certain aggregation rules.
The FDIC has implemented a risk-related assessment system for deposit insurance
premiums and all depository institutions have been assigned to one of nine risk
assessment classifications based upon certain capital and supervisory measures.
All deposits of F&M's subsidiary banks are subject to the rates of the Bank
Insurance Fund ("BIF"), the federal deposit insurance fund that covers
commercial bank deposits. In 1998, all F&M's banks received a "1A" risk
classification rating, the highest possible rating.

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

       If a depository institution fails to meet regulatory capital
requirements, regulatory agencies can require submission and funding of a
capital restoration plan by the institution, place limits on its activities,
require the raising of additional capital, and, ultimately, require the
appointment of a conservator or receiver for the institution. As of December 31,
1998, all F&M's subsidiary banks exceeded the required regulatory capital
requirements under FDICIA.

<PAGE>

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

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

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

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

<PAGE>

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

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

RECENT LEGISLATIVE DEVELOPMENTS

       From time to time, various legislative and regulatory proposals with
respect to the regulation of financial institutions are considered by the
executive branch of the Federal government, Congress and various state
governments, including Virginia, West Virginia, and Maryland. Certain of these
proposals, if adopted, could significantly change the regulation of banks and
the financial services industry. The Company cannot predict whether any of these
proposals will be adopted or, if adopted, how these proposals would affect the
Company.

<PAGE>

ITEM 2. PROPERTIES.

        The principal executive offices of F&M moved January 1, 1998, to 9 Court
Square, Winchester, Virginia, a multi-story building complex that is owned free
of any encumbrances. The Company operates a total of 119 banking offices (97 in
Virginia, 13 in West Virginia, and 9 in Maryland), 66 of which are owned by the
Company or one of its subsidiary banks free of any encumbrances, and 54 of which
are leased under agreements expiring at various dates, including renewal
options. The Company also owns additional office facilities for various of its
lending, audit, accounting, and data processing functions. Additional
information regarding F&M's lease agreements may be found under "ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA, Note 15."

ITEM 3. LEGAL PROCEEDINGS.

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

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

        The Company has not submitted any matters to its security holders since
its Annual Meeting of Shareholders held April 28, 1998.

<PAGE>

                                     PART II

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

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

                                        PRICE RANGE                    CASH
                                   HIGH               LOW             DIVIDENDS
                                   ----               ---             ---------
1997
First Quarter                     22.875             19.625           0.180
Second Quarter                    26.375             19.875           0.180
Third Quarter 30.4375              26.00              0.185
Fourth Quarter                     36.25            28.5625           0.185

1998
First Quarter                      36.25              31.75           0.185
Second Quarter                     34.31              32.00           0.185
Third Quarter 31.56                26.13              0.195
Fourth Quarter                     31.69              25.06           0.195

       At December 31, 1998, there were 21,948,484 shares of Common Stock
outstanding held by 8,182 holders of record.

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

       The Company or F&M Bank-Winchester has paid regular cash dividends for
more than 56 consecutive years.

       The Company is a legal entity separate and distinct from its
subsidiaries, and its revenues depend primarily on the payment of dividends from
F&M's subsidiary banks. F&M's subsidiary banks are subject to certain legal
restrictions on the amount of dividends they are permitted to pay to the
Company. At December 31, 1998, F&M's subsidiary banks had available for
distribution as dividends to the Company approximately $31.3 million.

<PAGE>

ITEM 6.          SELECTED FINANCIAL DATA.

                 Incorporated herein by reference, as Exhibit 13, to page 1 of
                 the 1998 Annual Report.

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

                 Incorporated herein by reference, as Exhibit 13, to pages 6
                 through 26 of the 1998 Annual Report.

ITEM 7A.         QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

                 Incorporated herein by reference, as Exhibit 13, to pages 9 and
                 12 of the 1998 Annual Report.

ITEM 8.          FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

                 Incorporated herein by reference, as Exhibit 13, to pages 27
                 through 49 of the 1998 Annual Report.

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

                 None.


<PAGE>

                                    PART III

ITEM 10.         DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

ITEM 11.         EXECUTIVE COMPENSATION.

ITEM 12.         SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
                 MANAGEMENT.

ITEM 13.         CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

                 Pursuant to General Instruction G(3), the information called
                 for by Part III, Items 10. through 13., is incorporated herein
                 by reference from the Company's definitive proxy statement,
                 dated March 23, 1999, for the Company's Annual Meeting of
                 Shareholders to be held April 27, 1999, which definitive proxy
                 statement was filed with the Commission pursuant to Rule 14a-6
                 on March 23, 1999. The information regarding executive officers
                 called for by Item 401 of Regulation S-K is included in Part I
                 under "EXECUTIVE OFFICERS OF THE REGISTRANT".

<PAGE>

                                     PART IV

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

(a)     The following documents included in Part II of this report are
        incorporated by reference to the Company's 1998 Annual Report (see
        Exhibit 13):


1.      Financial Statements                                              Pages

        F&M National Corporation and Subsidiaries:
           Consolidated Balance Sheets at December 31, 1998 and 1997       27
           Consolidated Statements of Income for the years
              ended December 31, 1998, 1997, and 1996                      28
           Consolidated Statements of Changes in Shareholders'
              Equity for years ended December 31, 1998, 1997 and 1996      29
           Consolidated Statements in Cash Flows for the years
              ended December 31, 1998, 1997 and 1996                       30
           Notes to Consolidated Financial Statements                      31
           Report of Independent Certified Public Accountants              49

2.      Financial Statement Schedules

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

3.      Exhibits.

        (3)
               (i)    Registrant's Articles of Incorporation (incorporated
                      herein by reference to Exhibit 3.1 to Registration
                      Statement #33-45717).

               (ii)   Registrant's Bylaws (incorporated herein by reference to
                      Exhibit 3.2 to Registration Statement #33-45717).

        (10)   Material Contracts.

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

<PAGE>

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

              (iii)   Executive  Severance  Agreements  entered  into  with
                      the  Registrant and the following  Executive  Officers of
                      the  Registrant  on December 1, 1995:  Betty H.  Carroll,
                      Alfred  B.   Whitt,   and  F.   Dixon   Whitworth,   Jr.;
                      (incorporated  herein by reference  to Form  10-K/405 for
                      the calendar year ended December 31, 1995, filed with the
                      Commission  on March 28, 1996),  and Executive  Severance
                      Agreement entered into with the Registrant and Charles E.
                      Curtis on April 1, 1996 (incorporated herein by reference
                      to Form 10-K for the  calendar  year ended  December  31,
                      1996, filed with the Commission on March 19, 1997).

               (iv)   Registrant's 1992 Incentive and Non-Qualified Stock Option
                      Plan, as amended and restated February 2, 1998
                      (incorporated herein by reference to Exhibit 99.0 to
                      Registration Statement #333-63111 filed on September 9,
                      1998).

               (v)    Registrant's 1998 Employee Stock Discount Plan
                      (incorporated herein by reference to Exhibit 99.1 to
                      Registration Statement #333-63113 filed on September 9,
                      1998).

        (11)   Statement re computation of per share earnings (incorporated by
               reference as Note 11, page 38, of the 1998 Annual Report to
               Shareholders filed herewith as Exhibit 13).

        (13)   Portions of the 1998 Annual Report to Shareholders for the fiscal
               year ended December 31, 1998 (filed herewith).

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

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

        (27)   Financial Data Schedule (filed herewith).

(b)     Reports on Form 8-K:

        None.

<PAGE>


                              SIGNATURES

        Pursuant to the requirements of Section 13 or 15(d) of the Securities
and Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized, as of the
10th day of March, 1999:

                                     F&M NATIONAL CORPORATION
                                     Winchester, Virginia


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

        Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities on the 10th day of March, 1999:


SIGNATURE                                              TITLE

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

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

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

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

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

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

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

<PAGE>




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

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

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

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

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

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