TABLE 1 - SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>


                                                                      YEAR ENDED DECEMBER 31,
                                  -------------------------------------------------------------------------------------------------
                                       1996              1995                 1994                   1993                1992
                                  ---------------    --------------     ----------------      ----------------      ---------------
                                                       (IN THOUSANDS, EXCEPT RATIOS AND PER SHARE AMOUNTS)
<S> <C>
INCOME STATEMENT DATA:
    Interest income............... $      168,034    $      158,529       $      139,806        $      124,103       $      119,886
    Interest expense..............         71,231            67,157               53,409                49,142               52,825
                                  ---------------    --------------     ----------------      ----------------      ---------------
    Net interest income...........         96,803            91,372               86,397                74,961               67,061
    Provision for loan losses.....          2,050             2,048                2,669                 3,295                4,799
                                  ---------------    --------------     ----------------      ----------------      ---------------
    Net interest income after

       PROVISION FOR LOAN LOSSES..         94,753            89,324               83,728                71,666               62,262
    Noninterest income............         20,478            18,999               18,248                15,579               13,246
    Securities gains..............            267               519                  293                 2,055                1,218
    Noninterest expense...........         71,105            70,166               67,547                57,678               51,813
                                  ---------------    --------------     ----------------      ----------------      ---------------
    Income before income taxes....         44,393            38,676               34,722                31,622               24,913
    Income taxes..................         15,095            12,841               10,450                 9,770                7,246
                                  ---------------    --------------     ----------------      ----------------      ---------------
    Net income.................... $       29,298    $       25,835       $       24,272        $       21,852       $       17,667
                                  ===============    ==============     ================      ================      ===============
PER SHARE DATA:

    NET INCOME....................          $1.44             $1.27                $1.19                  $1.12               $0.97
    Cash dividends ...............           0.69              0.61                0.54                    0.58 (1)            0.41
    Book value at period end......          11.32             10.87                 9.69                  9.65                 8.84
    Tangible book value...........          10.96             10.48                 9.26                  9.34                 8.81

BALANCE SHEET DATA:
    Assets........................ $    2,303,751    $    2,207,989       $    2,020,491        $    1,940,967       $    1,655,026
    Loans, net of unearned income.      1,439,108         1,296,204            1,209,511             1,120,866              919,067
    Securities....................        596,993           634,747              590,389               591,003              502,805
    Deposits......................      1,966,938         1,882,849            1,754,131             1,693,029            1,444,336
    Shareholders' equity..........        230,723           222,046              195,436               189,039              164,145
    Average shares outstanding....         20,409            20,368               20,381                19,563               18,261

PERFORMANCE RATIOS:
    Return on average assets......           1.30%             1.23%                1.21%                 1.24%                1.13%
    Return on average equity......           2.89%            12.18%               12.50%                12.46%               11.99%
    Dividend payout...............          48.08%            42.05%               39.52%                43.91%               34.91%

    EFFICIENCY (2)................           59.91%           62.93%               63.69%                62.37%               62.84%

ASSET QUALITY RATIOS:
    Allowance for loan losses to
       period end loans, net......           1.25%             1.41%                1.47%                 1.46%                1.49%
    Allowance for loan losses to
       nonaccrual loans...........         161.35%           137.53%               86.94%                56.73%               79.69%
    Nonperforming assets to
       period end loans and
       foreclosed properties (3)..           1.63%             2.17%                2.90%                 3.72%                2.89%
    Net charge-offs to average
       loans......................           0.17%             0.13%                0.10%                 0.21%                0.61%

Capital and Liquidity Ratios:
    Leverage......................           9.90%            10.09%                9.72%                10.34%               10.47%
    Risk-based capital ratios:
       Tier 1 capital.............          15.53%            15.94%               14.87%                15.69%               17.30%
       Total capital..............          16.78%            17.19%               16.12%                16.94%               18.55%
    Average loans to average
       deposits...................          70.99%            68.54%               66.82%                64.48%               66.58%
</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)  INCLUDES FIRST QUARTER 1994 DIVIDEND DECLARED IN 1993.

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

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

                                       1

<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  Financial Data" and the  Consolidated  Financial  Statements and
Notes to Consolidated Financial Statements.

Overview

      1996 was a year of record earnings,  expansion and change. F&M's continued
high  asset  quality,  an  excellent  interest  margin and  improved  management
efficiencies  contributed  to record  net income of $29.3  million,  a return on
assets of 1.44% and an efficiency ratio of 59.91%.

      F&M  expanded its market area with the  acquisition  of a bank in northern
Virginia and a bank in  Maryland.  In 1996,  F&M's  banking  market  included 96
branches located in Virginia, West Virginia and Maryland.

      On March 29, 1996, FB&T Financial  Corporation ("FB&T") Fairfax,  Virginia
with assets of $255.4 million and eleven branch  offices,  became a wholly-owned
subsidiary  of F&M with a tax-free  exchange of  2,517,577  shares of F&M common
stock for all of the outstanding  shares of FB&T. The share exchange of FB&T has
been  accounted  for as a pooling of interests  and,  therefore,  all  financial
statements have been restated to reflect the share exchange.

      On October 1, 1996, Allegiance Banc Corporation ("Allegiance"),  Bethesda,
Maryland  with  assets of $133.2  million  and seven  branch  offices,  became a
wholly-owned  subsidiary of F&M with a tax-free  exchange of 1,455,628 shares of
F&M common  stock for all of the  outstanding  shares of  Allegiance.  The share
exchange of Allegiance  has been  accounted  for as a pooling of interests  and,
therefore,  all  financial  statements  have been  restated to reflect the share
exchange.
      Change  came on August 9, 1996 when  F&M-Potomac,  Herndon,  Virginia  and
Fairfax Bank & Trust Company,  Fairfax,  Virginia merged into F&M Bank-Hallmark,
which subsequently became F&M Bank-Northern Virginia ("NOVA").  NOVA, whose main
office is located at 4117 Chain Bridge Road, Fairfax,  Virginia has 18 locations
with assets of $434.4  million,  loans of $288.9  million and deposits of $350.5
million at year end 1996.

Results of Operations

      Net income  increased 13.4% in 1996 to $29.3 million,  compared with $25.8
million  earned in 1995 and $24.3  million  earned in 1994.  Earnings  per share
increased  to $1.44 per share in 1996  compared to $1.27 and $1.19 per share for
1995 and 1994, respectively.

      Higher income levels in 1996 lifted profitability ratios over 1995 ratios.
Return on average  assets on an annualized  basis for 1996 was 1.30% compared to
1.23% for the same  period for the prior  year.  In 1994,  this ratio was 1.21%.
Another  significant measure of profitability,  return on average  shareholders'
equity for 1996  improved to 12.89%,  compared to 12.18% for 1995 and 12.50% for
1994.  These  performance  ratios have varied since 1992, with return on average
assets  rebounding from 1.13% in 1992 to 1.24% in 1993,  decreasing  slightly to
1.21% in 1994 and then increasing  slightly to 1.23% in 1995.  Return on average
shareholders' equity rebounded from 11.99% in 1992 to 12.46% in 1993, increasing
slightly to 12.50% in 1994 and decreasing to 12.18% in 1995.

      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.  Net interest margin, on a tax-equivalent  basis,
was 4.76% for 1996  compared to 4.82% for 1995 and 4.77% for 1994.  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 1996,  the yield on  interest-earning
assets declined 10 basis points from 8.31% in 1995 to 8.21% in 1996 and the cost
of  interest-bearing  liabilities  declined 2 basis points from 4.24% in 1995 to
4.22% in 1996. The decline in the yield on earning  assets and  liabilities is a
result of a decrease in the prime rate in the first  quarter of 1996 by 25 basis
points.

      In 1996, 1995 and 1994, loan demand remained strong,  although competitive
forces have  increased  for potential  loan  customers.  Loans,  net of unearned
discount were $1.439  billion in 1996 as compared to $1.296  billion in 1995 and
$1.210 billion in 1994. F&M's securities portfolio represents the second largest
component of earning assets.  At December 31, 1996, F&M's  securities  portfolio
totaled $597.0  million,  $37.8 million (5.9%) lower than year end 1995 and $6.6
million  (1.1%) higher than year end 1994.  Funds invested in securities in 1996
declined as a result of the strong demand ($143 million) in lending activities.

      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

                                       6

<PAGE>


1996,  1995 and 1994 was 59.91%,  62.93% and 63.69%,  respectively.  A lower
efficiency  ratio  represent a greater  control of  non-interest  related costs.
A  fluctuation  in the  efficiency  ratio can be  attributed to relative changes
in both noninterest expense and net interest income.

      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.
Eleven of these  acquisitions were accounted for as a  pooling-of-interests  and
one as a  purchase,  which  enabled  F&M to expand its market  into the  eastern
panhandle  of West  Virginia,  northern  Virginia  market of Loudoun,  Fauquier,
Fairfax and Prince William  counties,  southern  Virginia  market of Greensville
County, 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 2 sets forth, for the periods indicated,  selected quarterly results
of F&M's operations.



               Table 2 -- Summary of Financial Results By Quarter

<TABLE>
<CAPTION>

                                                           1996*                                   1995*
                                           -------------------------------------   ---------------------------------------
                                           Dec. 31  Sept. 30   June 30  March 31   Dec. 31  Sept. 30   June 30  March 31
                                           -------  --------   -------  --------   -------  --------   -------  --------
                                                        (In thousands, except per share amounts)
<S> <C>
Interest income ........................   $42,793                                 $42,153   $41,769   $41,319   $37,711
Interest expense .......................    18,073    17,771    17,614    17,773    17,991    17,588    16,691    14,887
                                           -------------------------------------   -------------------------------------
Net interest income ....................    24,720    24,382    24,155    23,546    23,275    22,667    22,606    22,824
Provision for loan losses ..............       460       562       556       472     1,304       262       220       262
                                           -------------------------------------   -------------------------------------
Net interest income after provision
  for loan losses ......................    24,260    23,820    23,599    23,074    21,971    22,405    22,386    22,562
Noninterest income .....................     5,606     5,143     4,847     5,149     4,993     4,735     5,158     4,632
Noninterest expense ....................    18,405    18,133    17,030    17,537    18,501    16,497    17,807    17,361
Income before income taxes .............    11,461    10,830    11,416    10,686     8,463    10,643     9,737     9,833
Applicable income taxes ................     3,830     3,643     3,946     3,676     2,731     3,602     3,279     3,229
                                           -------------------------------------   -------------------------------------
Net income .............................   $ 7,631   $ 7,187   $ 7,470   $ 7,010   $ 5,732   $ 7,041   $ 6,458   $ 6,604
                                           =====================================   =====================================
Net income per share ...................   $  0.38   $  0.35   $  0.37   $  0.34   $  0.28   $  0.35   $  0.32   $  0.32
</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 and Bank of
the Potomac on April 6, 1995.

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 $96.8 million for the year ended December
31, 1996,  up 5.9% 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 a  greater  demand  for  loans  coupled  with
attractive  market rates and an  expanding  economy.  Loans grew $142.9  million
(11.0%) to $1.439  billion  in 1996 from  $1.296  billion in 1995 and  increased
$86.7  million  (7.2%) in 1995 from $1.210  billion in 1994.  In 1996,  deposits
provided the source of funds by increasing to $1.967  billion,  up $84.1 million
(4.5%) from $1.883 billion in 1995.  Interest-bearing  deposits  increased $63.6
million in 1996 to $1.632  billion from $1.569  billion in 1994.  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 $91.4 million for the year 1995, up 5.8% over the
$86.4 million reported for the same period in 1994 and up 15.3% in 1994 over the
$75.0  million  reported for 1993.  Net interest  income in 1995 was affected by
improved loan demand following a recessionary  period.  Loans grew $86.7 million
(7.2%) to $1.296  billion in 1995 from $1.210  billion in 1994.  In 1995,  total
interest-bearing  deposits  provided the primary  source of funds  increasing to
$1.569  billion,   up  $106.1  million  (7.3%)  from  $1.463  billion  in  1994.
Interest-bearing deposits increased $36.0 million in 1994 from $1.427 billion in
1993. The year 1994 was a period  when the  recessionary  period,  that began in
1993, was nearing its end. Net interest  income for 1994 increased $11.4 million
to $86.4 million  compared to $75.0 million for 1993 and the net interest

                                       7

<PAGE>
      Table 3 -- Average Balances, Income and Expense, Yields and Rates (1)
<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>
ASSETS                                                            (Dollars in thousands)            (Dollars in thousands)
Securities:
    Taxable................................................  $  587,823  $ 36,698    6.24%      $  557,258  $ 34,654    6.22%
    Tax-exempt (1).........................................      31,605     2,640    8.35%          37,645     3,202    8.51%
------------------------------------------------------------------------------------------------------------------------------
        Total securities...................................     619,428    39,338    6.35%         594,903    37,856    6.36%

Loans (net of unearned income):
    Taxable................................................   1,357,220   124,702    9.19%       1,233,488   116,059    9.41%
    Tax-exempt (1).........................................      12,739     1,371   10.76%           9,409     1,026   10.90%
------------------------------------------------------------------------------------------------------------------------------
        Total loans........................................   1,369,959   126,073    9.20%       1,242,897   117,085    9.42%
Federal funds sold and repurchase agreements...............      72,706     3,914    5.38%          86,474     4,992    5.77%
Interest-bearing deposits in other banks...................       2,127       111    5.22%             975        76    7.79%
------------------------------------------------------------------------------------------------------------------------------
        Total earning assets...............................   2,064,220   169,436    8.21%       1,925,249   160,009    8.31%

Less: allowance for loan losses............................     (18,335)                           (17,835)
Total nonearning assets....................................     205,932                            189,361
                                                             ----------                         ----------
        Total assets.......................................  $2,251,817                         $2,096,775
                                                             ==========                         ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits:
    Checking...............................................  $  288,494  $  6,342    2.20%      $  276,417  $  6,734    2.44%
    Regular savings........................................     207,739     5,879    2.83%         211,987     6,846    3.23%
    Money market savings...................................     212,471     6,096    2.87%         225,065     6,931    3.08%
    Certificates of deposit:
        Less than $100,000.................................     736,193    40,919    5.56%         661,188    35,881    5.43%
        $100,000 and more..................................     165,304     9,147    5.53%         151,384     8,285    5.47%
------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits............................   1,610,201    68,383    4.25%       1,526,041    64,677    4.24%

Short-term borrowings......................................      69,039     2,329    3.37%          51,818     2,167    4.18%

Long-term borrowings.......................................       7,725       519    6.72%           4,513       313    6.94%
------------------------------------------------------------------------------------------------------------------------------
        Total interest-bearing liabilities.................   1,686,965    71,231    4.22%       1,582,372    67,157    4.24%

Noninterest-bearing liabilities:

    Demand deposits........................................     319,596                            287,311

    Other liabilities......................................      17,937                             15,028
                                                             ----------                         ----------
Total liabilities..........................................   2,024,498                          1,884,711
Stockholders' equity.......................................     227,319                            212,064
                                                             ----------                         ----------
Total Liabilities and shareholders` equity.................  $2,251,817                         $2,096,775
                                                             ==========                         ==========
Net interest income........................................              $ 98,205                           $ 92,852
                                                                         --------                           --------
Interest rate spread.......................................                          3.99%                              4.07%

Interest expense as a percent of average earning assets....                          3.45%                              3.49%

Net interest margin........................................                          4.76%                              4.82%
</TABLE>


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


                                       8

<PAGE>

               
<TABLE>
<CAPTION>
                                                              Twelve Months Ended December 31,
----------------------------------------------------------------------------------------------
                                                                           1994
                                                                                       Annual
                                                               Average     Income/     Yield/
                                                               Balance     Expense      Rate
----------------------------------------------------------------------------------------------
<S> <C>
ASSETS                                                              (Dollars in thousands)
Securities:
    Taxable................................................  $  555,346   $  33,492      6.03%
    Tax-exempt (1).........................................      43,259       3,431      7.93%
----------------------------------------------------------------------------------------------
        Total securities...................................     598,605      36,923      6.17%

Loans (net of unearned income):
    Taxable................................................   1,153,906     100,251      8.69%
    Tax-exempt (1).........................................       8,669         608      7.01%
----------------------------------------------------------------------------------------------
        Total loans........................................   1,162,575     100,859      8.68%
Federal funds sold and repurchase agreements...............      80,792       3,400      4.21%
Interest-bearing deposits in other banks...................         521          38      7.29%
----------------------------------------------------------------------------------------------
        Total earning assets...............................   1,842,493     141,220      7.66%

Less: allowance for loan losses............................     (17,138)
Total nonearning assets....................................     178,105
                                                             ----------
        Total assets.......................................  $2,003,460
                                                             ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits:
    Checking...............................................  $  280,181   $   6,961      2.48%
    Regular savings........................................     242,677       7,442      3.07%
    Money market savings...................................     263,422       7,521      2.86%
    Certificates of deposit:
        Less than $100,000.................................     548,033      24,455      4.46%
        $100,000 and more..................................     116,588       5,281      4.53%
----------------------------------------------------------------------------------------------
Total interest-bearing deposits............................   1,450,901      51,660      3.56%

Short-term borrowings......................................      50,882       1,629      3.20%

Long-term borrowings.......................................       2,835         120      4.23%
----------------------------------------------------------------------------------------------
        Total interest-bearing liabilities.................   1,504,618      53,409      3.55%

Noninterest-bearing liabilities:

    Demand deposits........................................     288,878

    Other liabilities......................................      15,848
                                                             ----------
Total liabilities..........................................   1,809,344
Stockholders' equity.......................................     194,116
                                                             ----------
Total Liabilities and shareholders` equity.................  $2,003,460
                                                             ==========
Net interest income........................................               $  87,811
                                                                          ---------
Interest rate spread.......................................                              4.11%

Interest expense as a percent of average earning assets....                              2.90%

Net interest margin........................................                              4.77%
</TABLE>

                                       9

<PAGE>


margin for 1994 was  4.77%.  At year end 1994,  the  securities  portfolio  was
$590.4 million,  down $61.4  thousand  (0.1%) over the same period  1993. During
1994, funds  were  kept  in  liquid  interest-earning  assets  to  be  available
when securities yields and loan demand improved.

      Table 3 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.

      Table 4 analyzes changes in net interest income attributable to changes in
the volume of  interest-bearing  assets and  liabilities  compared to changes in
interest rates. Nonaccruing loans are included in average loans outstanding.

                       Table 4 -- Volume and Rate Analysis
                              Tax equivalent basis
<TABLE>
<CAPTION>

                                                              1996                                    1995
                                                 --------------------------------      -------------------------------
                                                                        Change in                            Change in
                                                   Volume      Rate      Income/        Volume      Rate      Income/
                                                   Effect     Effect     Expense        Effect     Effect     Expense
                                                 ----------  ---------  ---------      --------   --------   ---------
                                                                       (Dollars in thousands)
<S> <C>
Earning Assets:
  Taxable securities .........................   $  1,931    $    113    $  2,044    $    114    $  1,048    $  1,162
  Tax-exempt securities ......................       (503)        (59)       (562)       (525)        296        (229)
  Taxable loans ..............................     11,270      (2,627)      8,643       7,182       8,626      15,808
  Tax-exempt loans ...........................        358         (13)        345          56         362         418
  Federal funds sold and repurchase agreements       (757)       (321)     (1,078)        254       1,338       1,592
  Interest-bearing deposits in other banks ...         49         (14)         35          35           3          38
                                                 --------    --------    --------    --------    --------    --------
       Total earning assets ..................   $ 12,348    $ (2,921)   $  9,427    $  7,116    $ 11,673    $ 18,789
                                                 --------    --------    --------    --------    --------    --------
Interest-Bearing Liabilities:
  Checking deposits ..........................   $    313    $   (705)   $   (392)   $   (103)   $   (124)   $   (227)
  Savings deposits - regular .................       (135)       (832)       (967)     (1,014)        418        (596)
  Savings deposits - money market ............       (376)       (459)       (835)     (1,251)        661        (590)
  CD's & other time deposits - $100,000 & over      4,160         878       5,038       5,564       5,862      11,426
  CD's & other time deposits - under $100,000         771          91         862       1,772       1,232       3,004
                                                 --------    --------    --------    --------    --------    --------
       Total interest-bearing deposits .......      4,733      (1,027)      3,706       4,968       8,049      13,017
       Borrowed funds short-term .............        389        (227)        162          30         508         538
       Borrowed funds long-term ..............        216         (10)        206          93         100         193
                                                 --------    --------    --------    --------    --------    --------
       Total interest-bearing liabilities ....      5,338      (1,264)      4,074       5,091       8,657      13,748
                                                 --------    --------    --------    --------    --------    --------
       Change in net interest income .........   $  7,010    $ (1,657)   $  5,353    $  2,025    $  3,016    $  5,041
                                                 ========    ========    ========    ========    ========    ========

</TABLE>


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

Interest Sensitivity

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

      The goal of F&M is to  generally  maintain a  position  that is to provide
enough  flexibility  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.

                                       10

<PAGE>


      F&M  manages  the gap  between  rate-sensitive  assets and  rate-sensitive
liabilities  to expand and contract with the rate cycle phase.  The  traditional
targeted gap should be between a negative  15% and a positive  15%. The one year
income statement gap at December 31, 1996 was 8.48% which is within the targeted
gap.

      At December 31,  1996,  F&M had $90.1  million more in interest  sensitive
assets than interest sensitive  liabilities subject to repricing within one year
and  was,  therefore,   in  an  asset-sensitive   position.  An  asset-sensitive
institution's  net interest  margin and net interest  income  generally  will be
impacted favorably by rising interest rates, while that of a liability-sensitive
institution generally will be impacted favorably by declining interest rates.

      F&M  utilizes  shock  analysis  to  project  the  estimated  effect on net
interest  income at various  interest rate  scenarios.  This  analysis  reflects
interest rate changes and the related impact on net income on interest sensitive
assets and  liabilities  over  specified  periods.  At December  31,  1996, a 2%
increase in the prime rate is projected to increase net interest  income  $3.553
million.  Conversely,  if the prime rate  decreases  2%,  projected net interest
income would decrease similarly.

      Table 5 analyzes  F&M's rate  interest  sensitivity  at December 31, 1996.
This is a one-day position which is continually  changing and is not necessarily
indicative of F&M's position at any other time.



                      Table 5 -- Rate Sensitivity Analysis
                                December 31, 1996

<TABLE>
<CAPTION>
                                                       Repricing Time Frame
                             ------------------------------------------------------------------------

                                                                           Over 5 Years
                                  1-90 Day      91-365 Day  1 to 5 Years      or Not
                                 Sensitivity   Sensitivity   Sensitivity    Sensitive       Total
                                 -----------   -----------   -----------    ----------    ----------
                                                  (Dollars in thousands)
<S> <C>
          ASSETS
Loans, net unearned (1)
  Fixed rate....................  $  68,492      $132,999      $ 456,898     $ 140,625     $ 799,014
  Floating rate.................    384,685       126,144        116,026         2,123       628,978
                                  ---------      --------       --------     ---------     ---------
  Total loans...................    453,177       259,143        572,924       142,748     1,427,992
Investment securities
  Treasuries-HTM................      8,597        26,725         61,594        41,015       137,931
  Treasuries-AFS................      7,450        17,620         60,105        18,948       104,123
  Agencies-HTM..................     25,542        12,196         79,305        46,656       163,699
  Agencies-AFS..................      8,353        10,111         74,404        48,862       141,730
  Tax free municipals...........      3,017         2,631         11,461        13,242        30,351
  Federal funds sold and other..     80,813            --          8,393           260        89,466
                                  ---------      --------       --------     ---------     ---------
  Total securities..............    133,772        69,283        295,262       168,983       667,300
                                  ---------      --------       --------     ---------     ---------
Total rate sensitive assets.....    586,949       328,426        868,186       311,731     2,095,292
                                  ---------      --------       --------     ---------     ---------
          LIABILITIES
Interest checking...............  $  27,880      $     --      $ 227,303     $  49,857     $ 305,040
Money market deposits...........     20,787        83,143        103,930            --       207,860
Regular savings.................         --            --        164,023        41,005       205,028
Time deposits > $100,000........     38,544        85,995         47,438           100       172,077
Time deposits < $100,000........    141,161       353,039        248,233            --       742,433
Short-term borrowings...........     74,709            --             --            --        74,709
Long-term borrowings............         --            --          4,822         6,675        11,497
                                  ---------      --------       --------     ---------     ---------
Total rate sensitive
  liabilities...................    303,081       522,177        795,749        97,637     1,718,644
                                  ---------      --------       --------     ---------     ---------
Rate sensitivity gap............    283,868      (193,751)        72,437       214,094       376,648
Cumulative gap..................    283,868        90,117        162,554       376,648
Risk to interest margin:
 Gap as a % of rate
   sensitive assets.............     13.55%         4.30%          7.76%        17.98%
% of Annualized Income .........
-----------------------------------------------------------------------------------------------------
Risk to Capital Account.........
-----------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
                                                 Income Statement Gap
                             -------------------------------------------------------
                                                             One Year
                                One Year       Earnings       Income          2%
                                 Balance        Change       Statement    Prime Rate
                                Sheet Gap        Ratio          Gap         Change
                                ---------      ---------    ----------    ----------
                                              (Dollars in thousands)
<S> <C>
          ASSETS
Loans, net unearned (1)
  Fixed rate.................    $201,491         75.00%     $ 151,118     $   3,022
  Floating rate..............     510,829        100.00%       510,829        10,217
                                 --------                    ---------     ---------
  Total loans................     712,320         92.93%       661,947        13,239
Investment securities
  Treasuries-HTM.............      35,322         75.00%        26,492           530
  Treasuries-AFS.............      25,070         75.00%        18,803           376
  Agencies-HTM...............      37,738         75.00%        28,304           566
  Agencies-AFS...............      18,464         75.00%        13,848           277
  Tax free municipals........       5,648         37.00%         2,090            42
  Federal funds sold and othe      80,813         93.00%        75,155         1,503
                                 --------                    ---------     ---------
  Total securities...........     203,055         81.11%       164,692         3,294
                                 --------                    ---------     ---------
Total rate sensitive assets..     915,375         90.31%       826,638        16,533
                                 --------                    ---------     ---------
          LIABILITIES
Interest checking............    $ 27,880         87.50%     $  24,395     $     488


Money market deposits........     103,930         77.50%        80,546         1,611
Regular savings..............          --          0.00%            --            --
Time deposits > $100,000.....     124,539         76.70%        95,521         1,910
Time deposits < $100,000.....     494,200         76.70%       379,051         7,581
Short-term borrowings........      74,709         93.00%        69,479         1,390
Long-term borrowings.........          --         93.00%            --            --
                                 --------                    ---------     ---------
Total rate sensitive
  liabilities................     825,258         78.64%       648,993        12,980
                                 --------                    ---------     ---------
Rate sensitivity gap.........      90,117                      177,645         3,553


Cumulative gap...............      90,117
Risk to interest margin:
 Gap as a % of rate
   sensitive assets..........       4.30%                        8.48%

% of Annualized Income ......                                                   7.9%
-------------------------------------------------------------------------------------

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

 (1) Excludes nonaccruals

Noninterest Income

      Noninterest income for 1996 increased $1.2 million, or 6.3%, over the same
period in 1995.  Trust  Department  income increased $385 thousand or 21.2% from
$1.8  million  for  1995 to $2.2  million  for  1996 as a  result  of  increased
fiduciary  activities and the settlement of estates.  Service charges on deposit
accounts,  the largest  single item


                                       11

<PAGE>

of  noninterest  income,  increased  to $9.1 million for 1996, up 12.8% over the
comparable  period a year ago as a result of adding additional services and
improving existing deposit services.  Credit card fees  increased to $3.4
million for 1996 as compared to $3.2 million for 1995 as a result of increased
card loan volume.  Fees for other  customer  services were $1.8  million for
1996,  which  increased  $114  thousand  (6.6%) from 1995 as a result of
increased marketing of current services and providing new services for
customers.  Gains on sale of  securities  declined to $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.  In 1996 and 1995,  market interest rates were generally
not favorable  which reduced the appeal to reposition.  Other  operating  income
decreased $262 thousand (-6.2%), down from $4.2 million for 1995 to $3.9 million
for 1996. Contributing to the decrease in other operating income were reductions
in rent income and other real estate income.

      Noninterest  income  increased $978 thousand or 5.3% from $18.5 million in
1994 to $19.5 million in 1995. Trust  Department  income increased $170 thousand
or 10.3%  from $1.6  million  for 1994 to $1.8  million  for 1995 as a result of
increased  fiduciary  activities.  Service charges on deposit accounts were $8.1
million for 1995,  up 8.1% over the  previous  year.  Credit card fees were $3.2
million  and $2.6  million  for 1995 and 1994,  up $582  thousand as a result of
increased card lending  activities.  Fees for other customer  services were $1.7
million for 1995, which declined $371 thousand (-17.6%) from 1994 as a result of
a reduction in loan refinancing activity.  Gains on sale of securities were $519
thousand  for 1995 as compared to $293  thousand  for 1994.  Security  gains are
realized  when  market  conditions  exist  that  are  favorable  to  F&M  and/or
conditions dictate additional liquidity is desirable. In 1994 and 1995, interest
rates were rising, reducing the appeal to reposition securities.



                         Table 6 -- Noninterest Income

<TABLE>
<CAPTION>
                                                                  Year ended December 31,
                                                             --------------------------------
                                                               1996        1995        1994
                                                             ---------  ----------  ----------
                                                                  (Dollars in thousands)
<S> <C>
Commissions and fees from fiduciary activities............   $   2,196   $  1,812   $   1,642
Service charges on deposit accounts.......................       9,087      8,054       7,449
Credit card fees..........................................       3,401      3,193       2,612
Fees for other customer services..........................       1,849      1,734       2,105
Other operating income....................................       3,945      4,207       4,440
                                                            ----------  ----------  ----------
        Noninterest income................................      20,478     19,000      18,248
Profits on securities available for sale..................         265        519         273
Investment securities gains, net..........................           2         --          20
                                                            ----------  ----------  ----------
        Total noninterest income..........................   $  20,745   $ 19,519   $  18,541
                                                            ==========  ==========  ==========
</TABLE>

Noninterest Expense

      Total  noninterest  expense  increased  $940 thousand  (1.3%),  from $70.2
million  in 1995 to  $71.1  million  in 1996.  Salaries  and  employee  benefits
increased $1.7 million or 4.9%, net occupancy  expense  including  furniture and
equipment expense increased $378 thousand or 3.4%, credit card expense increased
$259 thousand or 13.2% and other  operating  expense  increased $462 thousand or
2.4%.  Deposit insurance  declined from $2.1 million in 1995 to $205 thousand in
1996 as a result of the FDIC deposit  insurance fund achieving a level deemed to
be adequate to protect deposits,  therefore, premiums were adjusted in the third
quarter of 1995 to reflect this achievement.

      For 1995,  noninterest  expense  increased by $2.6 million,  or 3.9%, from
$67.5 million in 1994 to $70.2 million in 1995.  This increase was primarily due
to a $1.6 million,  or 4.7% increase in salary and employee  benefits and a $2.0
million, or 11.2% increase in other operating  expenses.  The primary reason for
the  increase  in salary  and  benefits  was  personnel  costs  associated  with
acquiring new banks and opening new banking  offices.  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.


                                       12

<PAGE>

                         Table 7 -- Noninterest Expense

<TABLE>
<CAPTION>
                                                                  Year ended December 31,
                                                             --------------------------------
                                                               1996        1995        1994
                                                             ---------  ----------  ----------
                                                                  (Dollars in thousands)
<S> <C>
Salaries and employee benefits............................   $  37,229   $ 35,507   $  33,915
Net occupancy expense of premises.........................       5,957      5,966       5,512
Furniture and equipment expense...........................       5,370      4,984       4,596
Deposit insurance.........................................         205      2,086       3,907
Credit card expense.......................................       2,231      1,971       1,950
Other operating expenses..................................      20,113     19,652      17,667
                                                            ----------  ----------  ----------
       Total..............................................   $  71,105   $ 70,166   $  67,547
                                                            ==========  ==========  ==========
</TABLE>

Income Taxes

      Income tax expense at December 31, 1996 was $15.1  million,  up from $12.8
million  for 1995 and up from $10.5  million  for 1994.  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 34.0%,
33.2% and 30.1% for the three  years ended  December  31,  1996,  1995 and 1994,
respectively.  Note 15 to the  Consolidated  Financial  Statements  for year end
provide a reconciliation between the amount of income tax expense computed using
the federal statutory income tax rate and F&M's actual income tax expense.  Also
included in Note 15 to the  Consolidated  Financial  Statements  is  information
regarding  the  principal  items  giving rise to deferred  taxes for each of the
three years ended December 31.

Loan Portfolio

      Loans, net of unearned income, increased to $1.439 billion at December 31,
1996,  up $142.9  million or 11.0% from  $1.296  billion at year end 1995 and up
$86.7 million or 7.2% from $1.210 billion at year end 1994. The strong  increase
in loan  activity for 1996 is indicative of a healthy  economic  environment  in
F&M's banking market area. 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 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  47.6% of F&M's loan  portfolio  at  December  31,  1996 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 36.2% of total loans at December 31, 1996.  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

                                       13

<PAGE>

resell them  immediately in package  form.  At  December  31,  1996,  Big  Apple
Mortgage,   F&M   Bank-Northern  Virginia and F&M Bank-Peoples had $18.0 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, 1996,
construction  loans  were $66.5  million  or 4.6% 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 no charge-offs involving
residential construction loans since 1987.

      Consumer  loans were 16.6% of F&M's total loan  portfolio  at December 31,
1996, if home equity lines are included in this category. 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, 1996
comprised 36.2% of the loan  portfolio.  Loans secured by commercial real estate
comprised  32.0%  of the  loan  portfolio  at  December  31,  1996  and  consist
principally of commercial and industrial  loans where real estate  constitutes a
source of collateral  (28.5%) (shown in Table 8 under the category of "Non-farm,
non-residential"),  multifamily loans (2.2%) and agricultural  loans (1.3%). 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  4.6%  of  total  loans
outstanding at December 31, 1996. F&M's charge-off rate for all loans secured by
real estate was 0.02% of period end loans. This is consistent with 1995 when the
charge-off  rate for all loans  secured  by real  estate was 0.05% of period end
loans  outstanding.  F&M's  consumer  loan  portfolio,  its second  largest loan
category, consists principally of personal loans.

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

      F&M's  unfunded loan  commitments  (excluding  unused home equity lines of
credit and credit card lines)  amounted to $265.3  million at December 31, 1996,
compared  to $225.8  million at  December  31,  1995.  This  increase  is due to
stronger  seasonal  demands on lines of credit  during the summer months than at
year end.

      On  December  31,  1996,  F&M had a  concentration  of loans in  non-farm,
non-residential loans,  consisting primarily of commercial loans secured by real
estate of $409.6  million  which  were in excess of 10 percent in 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 1996
suggest  that loan growth in 1997 should be more vibrant than it was in 1995 and
1994.  Although  interest rates are above the floors they reached in 1995,  they
remain at reasonable  levels for borrowers.  New home construction is increasing
as are home sales. Auto sales were up in 1996, 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 1995 and 1994.
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 1996 and represent the necessary elements for growth in 1997.

                                       14

<PAGE>

                            Table 8 -- Loan Portfolio
<TABLE>
<CAPTION>
                                                                                  December 31,
                                                     -----------------------------------------------------------------------
                                                         1996           1995          1994           1993          1992
                                                     ------------  -------------  ------------   ------------  -------------
                                                                              (Dollars in thousands)
<S> <C>
Commercial, financial and agricultural.............   $   225,327   $    187,991   $   180,736    $   146,880   $   154,168
Real estate construction...........................        66,477         53,682        46,081         50,280        28,089
Real estate mortgage:
    Residential (1-4 family).......................       454,109        410,889       385,842        372,174       324,922
    Home equity lines..............................        67,326         67,848        68,022         60,367        60,182
    Multifamily....................................        31,712         25,191        26,106         22,445        16,617
    Non-farm, non-residential (1)..................       409,563        374,634       322,146        290,193       182,419
    Agricultural...................................        19,199         17,576        17,511         16,615        14,295
                                                     ------------  -------------  ------------   ------------  -------------
    Real estate subtotal...........................       981,909        896,138       819,627        761,794       598,435
Loans to individuals:
    Consumer.......................................       147,917        142,151       150,135        151,566       133,489
    Credit card....................................        23,197         22,832        19,119         16,865        13,319
                                                     ------------  -------------  ------------   ------------  -------------
    Loans to individuals subtotal..................       171,114        164,983       169,254        168,431       146,808
        Total loans................................     1,444,827      1,302,794     1,215,698      1,127,385       927,500
Less unearned income...............................        (5,719)        (6,590)       (6,187)        (6,519)       (8,433)
                                                     ------------  -------------  ------------   ------------  -------------
Loans--net of unearned income......................   $ 1,439,108   $  1,296,204   $ 1,209,511    $ 1,120,866   $   919,067
                                                     ============  =============  ============   ============  =============
</TABLE>

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


                     Remaining Maturities of Selected Loans

                                                       December 31, 1996
                                                  ---------------------------
                                                   Commercial,
                                                  Financial and  Real Estate-
                                                  Agricultural   Construction
                                                  ------------   ------------
                                                    (Dollars in thousands)
Within 1 year..................................   $    119,534   $    56,753
                                                  ------------   ------------
Variable Rate:
    1 to 5 years...............................         12,301         1,653
    After 5 years..............................             --            --
                                                  ------------   ------------
    Total......................................   $     12,301   $     1,653
                                                  ------------   ------------
Fixed Rate:
    1 to 5 years...............................         69,393         7,881
    After 5 years..............................         24,099           190
                                                  ------------   ------------

    Total......................................   $     93,492   $     8,071
                                                  ------------   ------------
    Total Maturities...........................   $    225,327   $    66,477
                                                  ============   ============

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 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

                                       15

<PAGE>

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' 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.  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 substantially
less than its peers,  F&M believes  the ratio to be adequate  based on this loan
risk review analysis.

      In 1996, 1995 and 1994,  improved loan quality, a decline in nonperforming
loans,  the nature of its loan  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 1996,  1995 and 1994 was
1.25%,  1.41%  and  1.47%,  respectively.  In  1996,  F&M  included  in its loan
portfolio  $57.0 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 1996, the ratio of allowance for loan
losses to period  end loans,  net would be 1.30%.  In 1996,  1995 and 1994,  the
ratio of allowance for loan losses to nonaccrual loans were 161.35%, 137.53% and
86.94%,  respectively,  which  indicates  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 the
Office  of  the  Comptroller  of  the  Currency  examined  F&M's  Maryland  bank
subsidiary  during  1996.  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 9 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.


                                       16


               Table 9 -- Allocation of Allowance for Loan Losses

<TABLE>
<CAPTION>

                                          1996                        1995                      1994
                                ------------------------   ------------------------    --------------------------
                                              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>
  Commercial, financial and
    agriculture..............   $    6,278    15.6%        $    6,388       14.4%     $    6,346        14.9%
  Real estate-construction...          717     4.6                710        4.1             713         3.8
  Real estate-mortgage               4,412    11.8              4,510       12.7           4,278        13.9
                                ----------   -----         ----------      -----      ----------       -----
                                $   17,936   100.0%        $   18,252      100.0%     $   17,826       100.0%
                                ==========   =====         ==========      =====      ==========       =====
</TABLE>

        The  quality of F&M's loan portfolio and improved underwriting standards
have permitted F&M to provide $2.1 million, $2.0 million and  $2.7  million  for
provision  for  loan  losses  for  the  years 1996, 1995 and 1994, respectively.

        F&M's net charge-offs increased in 1996 to $2.4 million, higher than the
1995 level of $1.6 million and higher than 1994 net charge-offs of $1.2 million.
The  higher  net  charge-offs  in  1996  was due to a few customers inability to
exercise fundamental business judgment. Net charge-offs  to  average  loans  was
0.17%,  0.13%  and  0.10%  for  the  years  1996,  1995  and 1994, respectively.


                                       16

<PAGE>


                      Table 10 -- Allowance for Loan Losses
<TABLE>
<CAPTION>
                                                                                       December 31,
                                                              -------------------------------------------------------------
                                                                1996          1995         1994         1993         1992
                                                             ----------    ---------    ---------    ---------    ---------
                                                                                  (Dollars in thousands)
<S> <C>
Balance, beginning of period...............................   $  18,252    $  17,826    $  16,317    $  13,592     $ 14,387
    Loans charged-off:
        Commercial, financial and agriculture..............       1,409          591        1,288        1,331        3,174
        Real estate construction...........................          --           74           45            4           --
        Real estate mortgage:
            Residential (1-4 family).......................         142          583          280          376        1,564
            Home equity lines..............................          27           --           14          239           25
            Multifamily....................................          45           --           --           --           --
            Non-farm, non-residential (1)..................          81           95           --           89          170
            Agricultural...................................          --           --           --           --           --
                                                             ----------    ---------    ---------    ---------    ---------
                    Real estate subtotal...................         295          678          294          704        1,759
    Consumer...............................................         643          952          669        1,316        1,334
    Credit card............................................         537          343          146          144          178
                                                             ----------    ---------    ---------    ---------    ---------
                    Loans to individuals subtotal..........       1,180        1,295          815        1,460        1,512
                    Total loans charged-off................       2,884        2,638        2,442        3,499        6,445
    Recoveries:
        Commercial, financial and agriculture..............         142          642          817          506          524
        Real estate construction...........................          --           --           --            8           --
        Real estate mortgage:
            Residential (1-4 family).......................         119           68          125          332          117
            Home equity lines..............................          --           56           22           --           25
            Multifamily....................................           3           --           --           --           --
            Non-farm, non-residential (1)..................          37           19            4           31           --
            Agricultural...................................          --           --           --           --           --

                                                             ----------    ---------    ---------    ---------    ---------
                    Real estate subtotal...................         159          143          151          363          142
    Loans to individuals:
        Consumer...........................................         192          218          301          487          245
        Credit card........................................          25           13           12           22           40
                                                             ----------    ---------    ---------    ---------    ---------
                    Loans to individuals subtotal..........         217          231          313          509          285
                    Total recoveries.......................         518        1,016        1,281        1,386          951
                                                             ----------    ---------    ---------    ---------    ---------
Net charge-offs............................................       2,366        1,622        1,161        2,113        5,494
Provision for loan losses..................................       2,050        2,048        2,670        3,395        4,799
Increase from purchase.....................................          --           --           --        1,443           --
                                                             ----------    ---------    ---------    ---------    ---------
Balance, end of period.....................................   $  17,936    $  18,252    $  17,826    $  16,317     $ 13,692
                                                             ----------    ---------    ---------    ---------    ---------
                                                             ----------    ---------    ---------    ---------    ---------
Ratio of allowance for loan losses to loans outstanding
  at end of period.........................................        1.25%        1.41%        1.47%        1.46%        1.49%
Ratio of net charge-offs to average loans outstanding
  during period............................................        0.17%        0.13%        0.10%        0.21%        0.61%
</TABLE>


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

      Nonperforming   Assets.  Total  nonperforming  assets,  which  consist  of
nonaccrual loans, restructured loans and foreclosed properties, decreased 17.1%,
19.9% and 15.6% during 1996,  1995 and 1994,  respectively.  The  improvement in
nonperforming  assets  during the last three years was due to reduced  levels of
new  nonperforming  loans as a result of an improving  economic  environment and
management's efforts to identify  deteriorating assets early enough in the cycle
to ensure prompt action toward resolution.

      Nonperforming  loans (nonaccrual loans and restructured loans) at December
31, 1996 were $11.2 million, or 0.8% of total loans, down from $13.6 million, or
1.1% of total loans at December 31, 1995 and down from $20.9


                                       17

<PAGE>


million, or 1.7% of total loans,  at December 31,  1994.  Nonperforming  loans
at year end 1996 were composed  largely of 1-4 family  residential  loans
amounting to $3.6  million, construction and land development amounting to $50
thousand, real estate secured by farmland  amounting  to $1.1  million and
commercial  loans  secured by real estate amounting to $3.4 million.

      Nonperforming  loans are those loans where,  in the opinion of management,
the full  collection of principal or interest is unlikely.  Nonperforming  loans
decreased 17.8% during 1996 and 34.7% during 1995.

      The net amount of  interest  recorded  during each year on loans that were
classified as  nonperforming or restructured on December 31, 1996, 1995 and 1994
were $769  thousand,  $229 thousand and $159  thousand,  respectively.  If these
loans had been accruing interest at their originally  contracted rates,  related
income  would  have been $1.5  million  in 1996,  $1.3  million in 1995 and $1.4
million in 1994.

      The  recorded  investment  in  certain  loans that were  considered  to be
impaired  in  accordance  with  FASB  114 was $8.9  million  at year end 1996 as
compared to $11.0  million at year end 1995,  of which $6.5 million are included
in nonperforming assets under Table 11. Included in 1996 impaired loans are $5.6
million secured by commercial  real estate.  All impaired loans at year end 1996
had a related valuation  allowance totaling $1.4 million. At year end 1995, $8.0
million had a related  valuation  allowance of $1.4 million and $3.3 million did
not have a valuation allowance primarily due to application of interest payments
against  book  balances or  write-downs  previously  taken on these  loans.  The
average  recorded  investment  in  certain  impaired  loans for the years  ended
December 31, 1996 and December 31, 1995 was approximately $9.3 million and $11.7
million, respectively. For the year 1996 and 1995, interest income recognized on
impaired  loans  totaled  $154  thousand  and $263  thousand,  all of which  was
recognized on a cash basis.

      Nonaccrual  loans  excluded from impaired loan  disclosure  under FASB 114
amounted  to $4.6  million  and $3.2  million  at  December  31,  1996 and 1995,
respectively.  If interest on these loans had been  accrued,  such income  would
have   approximated   $345  thousand  and  $396  thousand  for  1996  and  1995,
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, 1996,  F&M had $12.4 million in  foreclosed  property upon which it
does not anticipate incurring any material loss on the final disposition.

      In March 1996, F&M acquired  approximately  247 acres in Jefferson County,
West Virginia,  for development  purposes.  The development  project consists of
single  family  residential  lots with sales to be directed  toward the commuter
market.  A contingency  reserve of $500 thousand has been established to account
for development costs such as installing roads and utilities associated with the
project.

                        Table 11 -- Nonperforming Assets
<TABLE>
<CAPTION>
                                                                                  December 31,
                                                     -----------------------------------------------------------------------
                                                         1996           1995          1994           1993          1992
                                                     ------------  -------------  ------------   ------------  -------------
                                                                              (Dollars in thousands)
<S> <C>
Nonaccrual loans...................................   $    11,116   $     13,272   $    20,504    $    28,761   $    17,181
Restructured loans.................................            82            358           382            770           753
Foreclosed property................................        12,396         14,839        14,657         12,584         8,884

                                                     ------------  -------------  ------------   ------------  -------------
        Total nonperforming assets.................   $    23,594   $     28,469   $    35,543    $    42,115   $    26,818
                                                     ============  =============  ============   ============  =============

Loans past due 90 days accruing interest...........   $     4,487   $      3,789   $     1,973    $     2,887   $     5,588
Allowance for loan losses to period end loans......          1.25%          1.41%         1.47%          1.46%         1.49%
Allowance for loan losses to nonaccrual loans......        161.35%        137.53%        86.94%         56.73%        79.69%
Nonperforming assets to period end loans and
  foreclosed properties............................          1.63%          2.17%         2.90%          3.72%         2.89%
Net charge-offs to average loans...................          0.17%          0.13%         0.10%          0.21%         0.61%
</TABLE>

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

<TABLE>
<CAPTION>
                                                                                  December 31,
                                                     -----------------------------------------------------------------------
                                                         1996           1995          1994           1993          1992
                                                     ------------  -------------  ------------   ------------  -------------
                                                                              (Dollars in thousands)
<S> <C>
Income that would have been recorded in
  accordance with original terms:
      Nonaccrual loans and restructured loans......   $     1,549   $      1,343   $     1,444    $     1,244   $     1,077
Income actually recorded:
      Nonaccrual and restructured loans............           769            229           159             33            --
</TABLE>

                                       18

<PAGE>

      On December 31, 1996,  there were no material  outstanding  commitments to
lend additional funds with respect to nonperforming loans.

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

      At December  31, 1996,  loans past due 90 days or more and still  accruing
interest  because  they are both well  secured and in the process of  collection
were $4.5  million,  compared  to $3.8  million at  December  31,  1995 and $2.0
million at December 31, 1994.

      Potential  Problem Loans.  At December 31, 1996,  potential  problem loans
were  approximately  $26.2  million,  including  6  lending  relationships  with
principal  balances  in excess of  $500,000,  which had an  aggregate  principal
balance  outstanding  of $11.3  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,  1996 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 non-performing assets,
continue to improve,  it is likely that F&M will continue modest  provisions for
loan losses in 1997. 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 1997 should not be
materially  greater than those in 1996.  At such  relatively  low levels of loan
losses as were  experienced  in 1996,  however,  a minor dollar  fluctuation  in
losses could represent a large percentage  increase.  Loan loss expectations for
1997 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 1997.
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 $597.0 million at December
31,  1996,  compared to $634.7  million at December  31,  1995.  The  securities
portfolio  decreased $37.8 million in 1996 over 1995, which followed an increase
of $44.4  million in 1995 over 1994.  Investment in U.S.  Government  securities
decreased  $38.0  million,  or -6.5%,  for the year 1996,  and  increased  $54.6
million,  or 10.3%,  for the year 1995, while investment in states and political
subdivisions  declined during the same periods. F&M has generally not reinvested
funds in securities issued by states and political  subdivisions,  because those
securities do not have the same tax benefits that they have had in the past.

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

      FASB 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,  1996 was $263.4
million. The effect of the market value of AFS securities less the book value of
AFS  securities,  net of income taxes is  reflected  as a line in  Stockholders'
Equity as unrealized gain of $429 thousand and $3.3 million at December 31, 1996
and December 31, 1995, respectively. Investment rates have decreased in 1996 and
1995, 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.

      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
17 in the Notes to Consolidated Financial Statements.

                                       19

<PAGE>

         Table 12 -- Investment Portfolio and Securities Available For Sale

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

<TABLE>
<CAPTION>
                                                                         December 31,
                                                               --------------------------------
                                                                 1996        1995        1994
                                                               ---------  ----------  ----------
                                                                    (Dollars in thousands)
<S> <C>
  U.S. Government securities................................   $ 301,630   $309,506   $ 303,975
  States and political subdivisions.........................      30,351     33,112      39,617
  Other securities..........................................       1,584        985       3,721
                                                              ----------  ----------  ----------
          Total investment securities.......................   $ 333,565   $343,603   $ 347,313
                                                              ==========  ==========  ==========
</TABLE>

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

<TABLE>
<CAPTION>
                                                                         December 31,
                                                               --------------------------------
                                                                 1996        1995        1994
                                                               ---------  ----------  ----------
                                                                    (Dollars in thousands)
<S> <C>
  U.S. Government securities................................   $ 245,853   $276,017   $ 226,986
  Other securities..........................................      17,575     15,127      16,091
                                                              ----------  ----------  ----------
          Total securities available for sale...............   $ 263,428   $291,144   $ 243,077
                                                              ==========  ==========  ==========
</TABLE>



                Table 13 -- Distribution and Yields of Securities
                                December 31, 1996
                            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>
Securities held for investment:
    U.S. Government
    securities...............          $ 73,060    5.77%   $140,899   6.17%   $ 64,132   6.79%  $  23,539   7.42%    $301,630  6.30%

  Other taxable securities...                --    0.00%      1,324   7.72%        260   5.70%         --   7.00%       1,584  7.38%
                                      ---------            --------           --------           --------           ---------
      Total taxable..........            73,060    5.77%    142,223   6.18%     64,392   6.79%     23,539   7.42%     303,214  6.30%
  Tax-exempt securities (1)..             5,648    5.13%     11,461   5.26%      9,590   5.47%      3,652   5.31%      30,351  5.31%
                                      ---------            --------           --------           --------           ---------
      Total .................         $  78,708    5.72%   $153,684   6.12%   $ 73,982   6.62%   $ 27,191   7.14%   $ 333,565  6.22%
                                      ---------            --------           --------           --------           ---------

Securities held for sale:
  U.S. Government
   securities................         $  43,534    6.22%   $134,509   6.14%   $ 45,631   6.77%   $ 22,179   6.94%   $ 245,853  6.35%
  Other taxable securities...            10,506    2.85%      7,069   6.03%         --   0.00%         --   0.00%      17,575  4.13%
                                      ---------            --------           --------           --------           ---------
      Total .................         $  54,040    5.56%   $141,578   6.13%   $ 45,631   6.77%   $ 22,179   6.94%   $ 263,428  6.20%
                                      ---------            --------           --------           --------           ---------
Total securities.............         $ 132,748    5.66%   $295,262   6.12%   $119,613   6.67%   $ 49,370   7.05%   $ 596,993  6.21%
                                      =========            ========           ========           ========           =========
</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, 1996 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, 1996  increased  $84.1  million or 4.5% to $1.967
billion  from  $1.883  billion  at year end 1995.  Non-interest  bearing  demand
deposits  increased  $20.5 million  (6.5%) from $314.0 million in 1995 to $334.5
million in 1996.  Interest  bearing  deposits  increased $63.6 million (4.1%) to
$1.632 billion in 1996. Savings deposits and money market deposits experienced a
reduction in deposits of $12.8 million,  while  certificates of deposit over and
under $100,000 experienced a $55.3 million or 6.4% increase in deposits.  Unlike
deposit  growth in 1995 which was affected by  comparatively  low interest rates
and  the  consequent  movement  of  funds  out  of  deposit  accounts  and  into

                                       20

<PAGE>

alternative  investments,  depositors in 1996 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,  1995 grew  $128.7  million  or 7.3% to $1.883
billion.  Non-interest  bearing demand  deposits  increased $22.6 million (7.8%)
from $291.4 million in 1994 to $314.0 million in 1995. Interest bearing deposits
increased  $106.1 million (7.3%) to $1.569 billion in 1995.  Interest  checking,
savings deposits,  and money market deposits experienced a reduction in deposits
in 1995, whereas, certificates of deposit over and under $100,000 experienced an
increase in deposits.  Deposit growth in 1995 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 14 -- Deposits and Rates Paid

<TABLE>
<CAPTION>
                                                                        December 31,
                                ------------------------------------------------------------------------------------
                                           1996                            1995                       1994
                                -------------------------      -----------------------      ------------------------
                                    Amount        Rate            Amount       Rate             Amount       Rate
                                 -----------   ----------      ------------  ---------      ------------   ---------
                                                                 (Dollars in thousands)
<S> <C>
Noninterest-bearing accounts...  $   334,499                   $   314,037                  $   291,414
                                 -----------                   -----------                  -----------
Interest-bearing accounts:

    Interest checking..........      305,040      2.20%            283,857     2.44%            292,839       2.48%
    Regular savings............      205,029      2.83%            211,982     3.23%            235,412       3.07%
    Money-market...............      207,860      2.87%            213,722     3.08%            248,744       2.86%
        Time deposits:
         Less than $100,000....      742,433      5.56%            692,028     5.43%            567,672       4.46%
         $100,000  and more....      172,077      5.53%            167,223     5.47%            118,050       4.53%
                                 -----------                   -----------                  -----------
Total interest-bearing.........    1,632,439      4.25%          1,568,812     4.24%          1,462,717       3.56%
                                 -----------                   -----------                  -----------
        Total..................  $ 1,966,938                   $ 1,882,849                  $ 1,754,131
                                 ===========                   ===========                  ===========

</TABLE>



                     Maturities of CD's of $100,000 and More

<TABLE>
<CAPTION>
                          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>
At December 31, 1996... $   38,544  $  25,493   $  60,502    $  47,438    $  100    $  172,077      8.75%
</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 16.78% at December 31,
1996 and a ratio of  risk-weighted  assets to Tier I capital of 15.53%.  Both of
these exceed the capital  requirements  adopted by the federal  bank  regulatory
agencies.

      Table 15  reflects  the cash  dividends  per share  declared  during  each
quarter  of the  periods  indicated.  The  information  in Table 15 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.

                                       21

<PAGE>

               Table 15 -- Common Stock Performance and Dividends

<TABLE>
<CAPTION>
                                                    Common Stock Price
                                       ------------------------------------------
                                               1996                  1995           Dividends Declared
                                                                                    ------------------
                                         High         Low       High        Low       1996       1995
                                      ----------   ---------  --------   --------   --------   -------
<S> <C>
First quarter.......................   $ 19.750    $ 17.250   $ 17.125   $ 15.750    $ 0.160   $ 0.150
Second quarter......................     18.500      16.000     17.375     15.500      0.160     0.150
Third quarter.......................     19.375      17.250     18.125     15.650      0.175     0.150
Fourth quarter......................     21.375      18.125     20.000     17.250      0.230     0.160

Years ended December 31.............   $ 21.375    $ 16.000   $ 20.000   $ 15.500    $ 0.725   $ 0.610
</TABLE>

F&M National  Corporation  common stock is traded on the New York Stock Exchange
(NYSE) under the symbol FMN. On December 31, 1996 there
were approximately 8,313 shareholders of record.

                         Table 16 -- Analysis of Capital

<TABLE>
<CAPTION>
                                                           December 31,
                                                 --------------------------------
                                                   1996        1995        1994
                                                 ---------  ----------  ---------
                                                      (Dollars in thousands)
<S> <C>
  Tier 1 Capital:
      Common stock............................. $   40,747 $   40,848  $   40,346
      Additional paid in capital...............     69,197     72,716      71,036
      Retained earnings........................    120,350    105,140      91,336
      Less: Goodwill...........................      7,195      7,947       8,624

                                                 --------- ----------  ----------
      Total Tier 1 capital.....................    223,099    210,757     194,094

  Tier 2 Capital:
      Allowance for loan losses................     17,936     16,527      16,319
      Allowable long term debt.................         --         --          --
                                                 --------- ----------  ----------
      Total Tier 2 capital.....................     17,936     16,527      16,319
      Total risk-based capital................. $  241,035 $  227,284  $  210,413
                                                ========== ==========  ==========


  Risk-weighted assets......................... $1,436,341 $1,322,144  $1,305,511

  CAPITAL RATIOS:
      Tier 1 risk-based capital ratio..........      15.53%     15.94%      14.87%
      Total risk-based capital ratio...........      16.78%     17.19%      16.12%
      Tier 1 capital to average total assets...       9.90%     10.09%       9.72%
</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,  1996,  approximately  $894.8  million or 42.8% of total
earning  assets is due to mature or reprice within the next year.

      F&M also maintains  additional  sources of liquidity  through a variety of
borrowing arrangements.  F&M's subsidiary banks maintain federal fund lines with
a number of larger regional and money-center  banking  institutions  totaling in
excess of $66.5  million,  of which $1.5  million was  borrowed at December  31,
1996. Federal funds borrowed by F&M's subsidiary banks during 1996 averaged less
than  $500,000.  At December 31,  1996,  certain of F&M's  subsidiary  banks had
outstanding  $50.0  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  $243.8  million from the Federal Home Loan Bank
that can be utilized for short and/or long-term borrowing.

      F&M engages in short-term borrowings at the parent company level, as well.
At  December  31,  1996,  F&M  had  $14.9  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 irregularly with the average
aggregate  balance  outstanding under the lines not exceeding $1.0

                                       22

<PAGE>

million since they  have  been in  place.  At year end  1996,  1995 and  1994,
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 1996, long-term borrowings from the Federal Home Loan
Bank system for RHFA investments were $11.5 million maturing through 2006.

Accounting Rule Changes

      FASB  Statement  No. 125,  "Accounting  for  Transfers  and  Servicing  of
Financial Assets and  Extinguishments of Liabilities",  was issued in June, 1996
and  establishes,  among other things,  new criteria for  determining  whether a
transfer of financial assets in exchange for cash or other consideration  should
be accounted for as a sale or as a pledge of collateral in a secured  borrowing.
Statement  125  also   establishes  new  accounting   requirements  for  pledged
collateral.  As  issued,  Statement  125 is  effective  for  all  transfers  and
servicing of financial assets and extinguishments of liabilities occurring after
December 1996.

      FASB  Statement  No.  127,  "Deferral  of the  Effective  Date of  Certain
Provisions of FASB  Statement No. 125",  defers for one year the effective  date
(a)  of  paragraph  15 of  Statement  125  and  (b)  for  repurchase  agreement,
dollar-roll,  securities lending, or similar transactions, of paragraph 9-12 and
237(b) of Statement 125.

      The  effects  of  these  Statements  on  the  Corporation's   consolidated
financial statements are not expected to be material.


                                       23

<PAGE>

                    F&M NATIONAL CORPORATION AND SUBSIDIARIES
                           Consolidated Balance Sheets
                           December 31, 1996 and 1995

<TABLE>
<CAPTION>
                                                                                                    December 31,
                                                                                         ----------------------------------
                                                                                              1996                1995
                                                                                         ---------------    ---------------
<S> <C>
Assets
 Cash and due from banks (Notes 1, 14 and 18)........................................    $   112,865,694    $   112,689,788
 Interest-bearing deposits in other banks............................................          1,262,050          1,186,003
 Securities (fair value: 1996, $598,969,796; 1995, $643,026,452)
    (Notes 1 and 2)..................................................................        596,993,106        634,746,903
 Federal funds sold and securities purchased under
    agreements to resell.............................................................         69,045,000         85,805,674
 Loans (Notes 1, 3, 5 and 18).......................................................       1,444,827,004      1,302,793,863
 Unearned income....................................................................          (5,719,476)        (6,590,035)
                                                                                         ---------------    ---------------
              Loans (net of unearned income).........................................      1,439,107,528      1,296,203,828
    Allowance for loan losses (Notes 1 and 4)........................................        (17,936,226)       (18,252,558)
                                                                                         ---------------    ---------------
              Net loans..............................................................      1,421,171,302      1,277,951,270
 Bank premises and equipment, net (Notes 1 and 6)...................................          45,938,850         40,030,724
 Other assets.......................................................................          56,474,848         55,578,691
                                                                                         ---------------    ---------------
              Total assets...........................................................    $ 2,303,750,850    $ 2,207,989,053
                                                                                         ===============    ===============

Liabilities and Shareholders' Equity
Liabilities
 Deposits:
    Noninterest bearing..............................................................    $   334,499,270    $   314,036,710
    Interest bearing.................................................................      1,632,438,743      1,568,812,598
                                                                                         ---------------    ---------------
              Total deposits (Note 7)................................................    $ 1,966,938,013    $ 1,882,849,308
 Federal funds purchased and securities sold under
    agreements to repurchase.........................................................         51,536,393         57,472,002
 Federal Home Loan Bank advances....................................................           8,297,300          5,737,275
 Other short-term borrowings (Notes 5 and 8)........................................          14,875,683         18,792,294
 Long-term debt (Note 9)............................................................          11,496,969          4,225,000
 Other liabilities..................................................................          19,883,010         16,866,767
 Commitments and contingent liabilities
    (Notes 14 and 17)................................................................                 --                 --
                                                                                         ---------------    ---------------

              Total liabilities......................................................    $ 2,073,027,368    $ 1,985,942,646
                                                                                         ---------------    ---------------

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 1996, 20,373,697 shares; issued 1995, 20,423,878 shares...................         40,747,394         40,847,756
 Capital surplus....................................................................          69,196,572         72,715,714
 Retained earnings (Note 16)........................................................         120,350,161        105,139,724
 Unrealized gain (loss) on securities available for sale, net.......................             429,355          3,343,213
                                                                                         ---------------    ---------------
              Total shareholders' equity.............................................    $   230,723,482    $   222,046,407
                                                                                         ---------------    ---------------
              Total liabilities and shareholders' equity.............................    $ 2,303,750,850    $ 2,207,989,053
                                                                                         ===============    ===============
</TABLE>
------------------
See Notes to Consolidated Financial Statements.

                                       24

<PAGE>


                    F&M NATIONAL CORPORATION AND SUBSIDIARIES
                        Consolidated Statements of Income
          For Each of the Three Years in the Period Ended December 31, 1996

<TABLE>
<CAPTION>
                                                                                           December 31,
                                                                      -----------------------------------------------------
                                                                            1996              1995                1994
                                                                      ---------------    ---------------    ---------------
<S> <C>
Interest Income
 Interest and fees on loans.........................................  $   125,593,301    $   116,725,791    $   100,646,346
 Interest and dividends on investment securities:
    Taxable interest income.........................................       19,077,161         18,950,847         15,595,804
    Interest income exempt from federal income taxes................        1,715,787          2,080,992          2,230,281
 Interest and dividends on securities available for sale:
    Taxable interest income.........................................       17,026,922         15,200,231         17,571,906
    Dividends.......................................................          594,433            503,036            323,885
 Interest income on federal funds sold and securities
    purchased under agreements to resell............................        3,914,340          4,992,000          3,400,424
  Interest on deposits in banks.....................................          111,476             75,637             37,744
                                                                      ---------------    ---------------    ---------------
                     Total interest income..........................  $   168,033,420    $   158,528,534    $   139,806,390
                                                                      ---------------    ---------------    ---------------
Interest Expense
 Interest on deposits (Note 7)......................................  $    68,383,740    $    64,676,453    $    51,659,229
 Interest on short-term borrowings.................................         2,328,794          2,167,039          1,629,484
 Interest on long-term debt........................................           518,515            313,355            120,313
                                                                      ---------------    ---------------    ---------------
                     Total interest expense.........................  $    71,231,049    $    67,156,847    $    53,409,026
                                                                      ---------------    ---------------    ---------------
                     Net interest income............................  $    96,802,371    $    91,371,687    $    86,397,364

  Provision for loan losses (Notes 1 and 4).........................        2,049,535          2,048,366          2,669,380
                                                                      ---------------    ---------------    ---------------
                     Net interest income after provision
                        for loan losses.............................  $    94,752,836    $    89,323,321    $    83,727,984
                                                                      ---------------    ---------------    ---------------
Other Income
 Commissions and fees from fiduciary activities.....................  $     2,196,396    $     1,811,631    $     1,642,010
 Service charges on deposit accounts...............................         9,086,889          8,053,520          7,449,095
 Credit card fees..................................................         3,400,751          3,193,424          2,611,519
 Fees for other customer services..................................         1,848,682          1,734,422          2,105,396
 Other operating income............................................         3,945,421          4,207,103          4,440,380
 Profits on securities available for sale (Note 2).................           265,584            518,582            272,629
 Investment securities gains, net (Note 2).........................             1,602                236             19,895
                                                                      ---------------    ---------------    ---------------
                     Total other income.............................  $    20,745,325    $    19,518,918    $    18,540,924
                                                                      ---------------    ---------------    ---------------
Other Expenses
 Salaries and employees' benefits (Notes 11, 12 and 13).............  $    37,228,829    $    35,506,637    $    33,915,170
 Net occupancy expense of premises (Notes 6 and 14).................        5,957,516          5,966,327          5,512,462
 Furniture and equipment expenses (Notes 6 and 14)..................        5,370,362          4,983,931          4,595,909
 Deposit insurance..................................................          204,629          2,086,455          3,906,687
 Credit card expense................................................        2,230,768          1,971,396          1,950,447
 Other operating expenses...........................................       20,113,419         19,651,161         17,666,410
                                                                      ---------------    ---------------    ---------------
                     Total other expenses...........................  $    71,105,523    $    70,165,907    $    67,547,085
                                                                      ---------------    ---------------    ---------------
                     Income before income taxes.....................  $    44,392,638    $    38,676,332    $    34,721,823

Income tax expense (Notes 1 and 15).................................       15,095,008         12,840,959         10,450,181
                                                                      ---------------    ---------------    ---------------
                     Net income.....................................  $    29,297,630    $    25,835,373    $    24,271,642
                                                                      ===============    ===============    ===============
Earnings Per Share (Note 1)
 Per average share outstanding, net income..........................  $          1.44    $          1.27    $          1.19
                                                                      ===============    ===============    ===============
</TABLE>
------------------
See Notes to Consolidated Financial Statements.

                                       25

<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, 1996

<TABLE>
<CAPTION>
                                                                                            Unrealized Gain
                                                                                            (Loss) on Secur-
                                                 Common          Capital        Retained     ities Available
                                                  Stock          Surplus        Earnings      for Sale, Net       Total
                                             -------------   -------------   --------------   -------------   -------------
<S> <C>
Balance -- December 31, 1993.................$  39,164,396   $  66,155,782   $   83,165,715  $      553,186   $189,039,079
  Net income -- 1994.........................           --              --       24,271,642              --     24,271,642
  Cash dividends declared ($0.54 per share).            --              --       (9,591,822)             --     (9,591,822)
  Issuance of common stock -- dividend
    reinvestment plan (118,288 shares)......       236,576       1,670,226               --              --      1,906,802
  Issuance of common stock -- exercise of
    employee stock options (16,817 shares)..        33,634          48,170               --              --         81,804
  Issuance of stock options under nonvari-
    able compensatory plan (26,000 shares)..            --         211,120               --              --        211,120
  Acquisition of common stock
    (165,000 shares)........................      (330,000)     (2,485,487)              --              --     (2,815,487)
  Issuance of common stock -- stock dividend
    (378,690 shares)........................       757,380       5,243,898       (6,001,278)             --             --
  Cash paid in lieu of fractional shares....            --              --          (58,029)             --        (58,029)
  Issuance of common stock for employee
    stock discount plan (16,755 shares).....        33,510         192,579               --              --        226,089
  Issuance of common stock -- stock split--
    Allegiance Banc Corporation
        (225,308 shares)....................       450,616              --         (450,616)             --             --
    Change in unrealized gain (loss) on
        securities available for sale, net of
        deferred income taxes of $3,762,241.            --              --               --      (7,835,498)    (7,835,498)
                                             -------------   -------------   --------------   -------------   -------------
Balance -- December 31, 1994.................$  40,346,112   $  71,036,288   $   91,335,612   $  (7,282,312)  $195,435,700
  Net income -- 1995.........................           --              --       25,835,373              --     25,835,373
  Cash dividends declared ($0.61 per share).            --              --      (10,863,521)             --    (10,863,521)
  Issuance of common stock -- dividend
    reinvestment plan (149,443 shares)......       298,886       2,090,992               --              --      2,389,878
  Acquisition of common stock
    (184,014 shares)........................      (368,028)     (2,708,127)         (99,458)             --     (3,175,613)
  Issuance of common stock -- employee
    stock ownership plan (37,393 shares)....        74,786         525,219               --              --        600,005
  Issuance of common stock -- exercise of
    employee stock options (84,586 shares)..       169,172         147,655               --              --        316,827
  Issuance of stock options under nonvari-
    able compensatory plan (26,000 shares)..            --         206,440               --              --        206,440
  Issuance of common stock to acquire
    investment (11,980 shares)..............        23,960         176,040               --              --        200,000
  Issuance of common stock for employee
    stock discount plan (35,357 shares).....        70,714         405,079               --              --        475,793
  Issuance of common stock -- stock
     dividend -- FB&T Financial Corporation
    (116,077 shares)........................       232,154         836,128       (1,068,282)             --             --
  Change in unrealized gain (loss) on secur-
    ities available for sale, net of deferred
    income taxes of $5,824,493..............            --              --               --      10,625,525     10,625,525
                                             -------------   -------------   --------------   -------------   ------------
Balance-- December 31, 1995................. $  40,847,756   $  72,715,714   $  105,139,724   $   3,343,213   $222,046,407
  Net income-- 1996.........................            --              --       29,297,630              --     29,297,630
  Cash dividends declared ($0.69 per share).            --              --      (14,087,193)             --    (14,087,193)
  Acquisition of common stock

    (410,704 shares)........................      (821,408)     (6,634,880)              --              --     (7,456,288)
  Issuance of common stock-- employee
    stock ownership plan (55,326 shares)....       110,652         873,355               --              --        984,007
  Issuance of common stock-- exercise of
    employee stock options (275,699 shares).       551,398       1,218,157               --              --      1,769,555
  Issuance of stock options under nonvari-
    able compensatory plan (50,000 shares)..            --         500,000               --              --        500,000
  Issuance of common stock for employee
    stock discount plan (29,498 shares).....        58,996         524,226               --              --        583,222
  Change in unrealized gain (loss) on
    securities available for sale, net of
    deferred income taxes of $1,626,806.....            --              --               --      (2,913,858)    (2,913,858)
                                             -------------   -------------   --------------   -------------   ------------
Balance -- December 31, 1996................ $  40,747,394   $  69,196,572   $  120,350,161   $     429,355   $230,723,482
                                             =============   =============   ==============   =============   ============
</TABLE>

See Notes to Consolidated Financial Statements.


                                       26

<PAGE>


                    F&M NATIONAL CORPORATION AND SUBSIDIARIES
                      Consolidated Statements of Cash Flows
        For Each of the Three Years in the Period Ended December 31, 1996

<TABLE>
<CAPTION>
                                                                                           December 31,
                                                                     ------------------------------------------------------

                                                                            1996              1995                1994
                                                                      ---------------    ---------------    ---------------
<S> <C>
Cash Flows From Operating Activities
 Net income.........................................................  $    29,297,630    $    25,835,373    $    24,271,642
  Adjustments to reconcile net income to net cash provided by
    operating activities:
      Depreciation and amortization.................................        4,784,076          4,788,076          4,389,944
      Provision for loan losses.....................................        2,049,535          2,048,366          2,669,380
      Deferred income taxes (credits)...............................          (33,943)            75,869            504,663
      Profits on securities available for sale......................         (265,584)          (518,582)          (272,629)
      Investment securities gains, net..............................           (1,602)              (236)           (19,895)
      (Gain) loss on sale of other real estate......................         (121,161)           (91,504)          (111,159)
      Net amortization and accretion of securities..................          303,980            384,494            835,397
      Increase in other assets......................................       (2,035,832)        (4,243,100)           (36,317)
      Increase (decrease) in other liabilities......................          978,081          6,742,229         (4,486,765)
                                                                      ---------------    ---------------    ---------------
                    Net cash provided by operating activities.......  $    34,955,180    $    35,020,985    $    27,744,261
                                                                      ---------------    ---------------    ---------------

Cash Flows From Investing Activities
  (Increase) decrease in interest-bearing deposits in other banks...  $       (76,047)    $     (956,792)   $     2,013,704
  Proceeds from sales, principal repayments and calls of securities
    available for sale .............................................       45,978,750         37,463,623         73,433,018
  Proceeds from maturities of securities available for sale.........       28,950,300         37,875,663         36,698,256
  Proceeds from principal repayments and calls of investment
    securities......................................................       13,935,579         20,736,543         14,165,988
  Proceeds from maturities of investment securities.................       96,915,000         76,545,000         69,747,000
  Purchase of securities available for sale.........................      (77,874,356)       (99,372,271)       (59,556,641)
  Purchase of investment securities.................................      (74,736,534)      (100,981,652)      (146,137,390)
  (Increase) decrease in federal funds sold and securities purchased
    under agreements to resell......................................       16,760,674        (40,770,674)        37,541,000
  Net (increase) in loans...........................................     (147,688,459)       (96,557,941)       (96,240,485)
  Purchases of bank premises and equipment..........................       (9,895,697)        (7,250,248)        (6,100,280)
  Proceeds from sale of other real estate...........................        5,051,573          7,201,709          3,824,378
  Acquisition of intangible assets..................................               --                 --         (3,175,798)
                                                                      ---------------    ---------------    ---------------
                    Net cash (used in) investing activities.........  $  (102,679,217)    $ (166,067,040)    $  (73,787,250)
                                                                      ---------------    ---------------    ---------------

Cash Flows From Financing Activities
 Net increase (decrease) in noninterest-bearing and interest-bearing
  demand deposits and savings accounts..............................  $    28,830,273     $  (44,810,986)    $   34,522,182
 Net increase in certificates of deposit............................       55,258,432        173,528,966         26,580,271
 Dividends paid.....................................................      (12,049,032)       (10,571,850)        (9,116,127)
 Increase (decrease) in federal funds purchased and securities sold
   under agreements to repurchase...................................       (5,935,609)        19,028,993          7,217,592
 Increase (decrease) in other short-term borrowings.................       (3,916,611)         2,213,437          2,965,430
 Net proceeds from issuance and sale of common stock................        3,336,784          3,782,503          2,214,695
 Acquisition of common stock........................................       (7,456,288)        (3,175,613)        (2,815,487)
 Increase in Federal Home Loan bank advances........................        2,560,025          3,861,981          1,875,294
 Proceeds from long-term debt.......................................        8,775,000          1,000,000          4,279,743
 Principal payments on long-term debt...............................       (1,503,031)          (968,573)           (86,170)
 Cash paid in lieu of fractional shares on stock dividend...........               --                --             (58,029)
                                                                      ---------------    ---------------    ---------------
                     Net cash provided by financing activities......  $    67,899,943    $   143,888,858    $    67,579,394
                                                                      ---------------    ---------------    ---------------
                     Increase in cash and cash equivalents..........  $       175,906    $    12,842,803    $    21,536,405
Cash and Cash Equivalents
 Beginning..........................................................      112,689,788         99,846,985         78,310,580
                                                                      ---------------    ---------------    ---------------
 Ending....... .....................................................  $   112,865,694    $   112,689,788    $    99,846,985
                                                                      ===============    ===============    ===============
Supplemental Disclosures of Cash Flow Information
 Cash payments for:
    Interest .......................................................  $    70,827,904    $    65,026,353    $    52,845,925
                                                                      ===============    ===============    ===============

    Income taxes....................................................  $    14,259,799    $    10,615,038    $    11,851,612
                                                                      ===============    ===============    ===============

Supplemental Schedule of Noncash Investing and Financing Activities
  Issuance of stock options under nonvariable compensatory plan.....  $       500,000    $       206,440    $       211,120
                                                                      ===============    ===============    ===============
  Issuance of common stock to acquire investment....................  $            --    $       200,000    $            --
                                                                      ===============    ===============    ===============
  Loan balances transferred to foreclosed properties................  $     2,418,892    $     8,133,232    $     7,219,969
                                                                      ===============    ===============    ===============




  Common stock issued for stock dividend............................  $            --    $     1,068,282    $     6,001,278
                                                                      ===============    ===============    ===============
  Unrealized gain (loss) on securities available for sale...........  $    (4,548,264)    $   16,450,018    $   (11,597,739)
                                                                      ===============    ===============    ===============
</TABLE>

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

                                       27
<PAGE>

                   F&M NATIONAL CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
       For Each of the Three Years in the Period Ended December 31, 1996

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  investments are classified in three categories and are
accounted for as follows:

      a.  Securities Held to Maturity

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

      b. Securities  Available for Sale

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

      c. Trading Securities

      Trading  securities,  which  are  generally  held  for the  short  term in
      anticipation  of market  gains,  are carried at fair value.  Realized  and
      unrealized  gains and losses on trading  account  assets are  included  in
      interest  income on trading  account  securities.  The  Corporation had no
      trading securities at December 31, 1996 and 1995.

Loans

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

      On January 1, 1995,  the  Corporation  adopted  FASB  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.

      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


                                       28

<PAGE>





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 and Dividends Paid Per Share

      Earnings  and  dividends  paid per share of Common  Stock are based on the
weighted  average  number of shares  outstanding  during each year after  giving
retroactive  effect to the  equivalent  shares  exchanged in acquisition of FB&T
Financial Corporation and Allegiance Banc Corporation in 1996, in acquisition of
Bank of Potomac in 1995,  and in acquisition  of PNB Financial  Corporation  and
Hallmark Bank & Trust Company in 1994, and the 2 1/2% stock dividend in 1994.

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

                                       29

<PAGE>


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

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


Note 2 -- Securities

      The  amortized  cost and fair values of  securities  being held to
maturity as of December  31, 1996 and 1995 are as follows:

<TABLE>
<CAPTION>


                                                                              December 31, 1996
                                                   ------------------------------------------------------------------------
                                                                            Gross             Gross
                                                       Amortized         Unrealized        Unrealized             Fair
                                                         Cost               Gains           (Losses)              Value
                                                   ---------------    ---------------    ---------------    ---------------
<S> <C>
U.S. Treasury securities and obligations of
  U.S. government corporations and agencies.......  $  301,630,183    $     3,640,591    $   (2,105,085)    $   303,165,689
Obligations of states and political
  subdivisions....................................      30,350,628            525,884          (155,851)         30,720,661
Corporate securities..............................         980,675             44,855                 --          1,025,530
Mortgage-backed securities........................         603,678             26,356               (60)            629,974
                                                   ---------------    ---------------    ---------------    ---------------
                                                    $  333,565,164    $     4,237,686    $   (2,260,996)    $   335,541,854
                                                   ===============    ===============    ===============    ===============

</TABLE>

<TABLE>
<CAPTION>

                                                                              December 31, 1995
                                                   ------------------------------------------------------------------------
                                                                            Gross             Gross
                                                       Amortized         Unrealized        Unrealized             Fair
                                                         Cost               Gains           (Losses)              Value
                                                   ---------------    ---------------    ---------------    ---------------
<S> <C>
U.S. Treasury securities and obligations of
  U.S. government corporations and agencies.......  $  309,505,838    $     8,255,236    $     (823,118)    $   316,937,956
Obligations of states and political
  subdivisions....................................      33,112,251            854,416           (93,140)         33,873,527
Corporate securities..............................         985,200             86,155                 --          1,071,355
                                                   ---------------    ---------------    ---------------    ---------------
                                                    $  343,603,289    $     9,195,807    $     (916,258)    $   351,882,838
                                                   ===============    ===============    ===============    ===============
</TABLE>

      The amortized cost and fair value of securities  being held to maturity as
of  December  31,  1996,  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.


                                       30

<PAGE>

<TABLE>
<CAPTION>

                                                            Amortized             Fair
                                                              Cost                Value
                                                         ---------------    ---------------
<S> <C>
          Due in one year or less...................     $    78,708,577    $    78,741,480
          Due after one year through five years.....         152,360,381        152,511,972
          Due after five years through ten years....          73,722,372         73,833,445
          Due after ten years.......................          27,189,480         28,799,450
          Corporate securities......................             980,675          1,025,531
          Mortgage-backed securities................             603,679            629,976
                                                         ---------------    ---------------
                                                         $   333,565,164    $   335,541,854
                                                         ===============    ===============
</TABLE>

      The amortized  cost and fair value of securities  available for sale as of
December 31, 1996 and 1995, are as follows:

<TABLE>
<CAPTION>


                                                                              December 31, 1996
                                                   ------------------------------------------------------------------------
                                                                            Gross             Gross
                                                       Amortized         Unrealized        Unrealized             Fair
                                                         Cost               Gains           (Losses)              Value
                                                   ---------------    ---------------    ---------------    ---------------
<S> <C>
U.S. Treasury securities and obligations of
  U.S. government corporations and agencies....... $   246,088,681    $     1,501,613    $   (1,736,700)    $   245,853,594
Corporate securities..............................       8,127,053            781,421            (1,155)          8,907,319
Other.............................................       8,361,570            305,459                --           8,667,029
                                                   ---------------    ---------------    ---------------    ---------------
                                                   $   262,577,304    $     2,588,493    $   (1,737,855)    $   263,427,942
                                                   ===============    ===============    ===============    ===============
</TABLE>

<TABLE>
<CAPTION>

                                                                              December 31, 1995
                                                   ------------------------------------------------------------------------
                                                                            Gross             Gross
                                                       Amortized         Unrealized        Unrealized             Fair
                                                         Cost               Gains           (Losses)              Value
                                                   ---------------    ---------------    ---------------    ---------------
<S> <C>
U.S. Treasury securities and obligations of
  U.S. government corporations and agencies....... $   271,384,134    $     5,599,598    $     (967,274)    $   276,016,458
Corporate securities..............................       7,898,408            514,373            (1,804)          8,410,977
Other.............................................       6,462,170            254,009                --           6,716,179
                                                   ---------------    ---------------    ---------------    ---------------
                                                   $   285,744,712    $     6,367,980    $     (969,078)    $   291,143,614
                                                   ===============    ===============    ===============    ===============
</TABLE>

      The amortized cost and fair value of securities  available for sale, as of
December 31, 1996 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.


                                                      Amortized       Fair
                                                        Cost          Value
                                                   -------------  -------------

          Due in one year or less..................$  43,545,114  $  43,534,146
          Due after one year through five years....  134,203,455    134,509,768
          Due after five years through ten years...   45,906,889     45,630,921
          Due after ten years......................   22,433,223     22,178,758
          Corporate securities.....................    8,127,053      8,907,320
          Other....................................    8,361,570      8,667,029
                                                   -------------  -------------
                                                   $ 262,577,304  $ 263,427,942
                                                   =============  =============

      Proceeds  from  principal  repayments  and  calls  of  securities  held to
maturity  during  1996,  1995  and  1994  were   $13,935,579,   $20,736,543  and
$14,165,988.  Gross gains of $5,138,  $26,862  and  $27,452 and gross  losses of

                                       31

<PAGE>


$3,536, $26,626 and $7,557 were realized on those principal repayments and calls
during 1996, 1995 and 1994, respectively. There were no sales of securities held
to maturity during 1996, 1995 and 1994.

      Proceeds  from  sales,   principal  repayments  and  calls  of  securities
available for sale during 1996, 1995 and 1994 were $45,978,750,  $37,463,623 and
$73,433,018.  Gross gains of $320,878,  $523,631 and $1,111,204 and gross losses
of $55,294,  $5,049 and $838,575  were  realized on those sales and calls during
1996, 1995 and 1994, respectively.

      As allowed by the  Question and Answer  Guide to FASB  Statement  No. 115,
"Accounting  for Certain  Investments in Debt and Equity  Securities"  issued in
November of 1995,  debt  securities  with an amortized  cost of $7,466,366  were
transferred from  held-to-maturity to  available-for-sale  in December 1995. The
securities had an unrealized loss of approximately $107,153.

      The book  value of  securities  pledged to secure  deposits  and for other
purposes amounts to $129,074,575 and $151,128,142 at December 31, 1996 and 1995,
respectively.



Note 3 --Loans

      Major classifications of loans are as follows:

                                                         December 31,
                                               -------------------------------
                                                   1996              1995
                                               -------------     -------------

     Commercial, financial and agricultural.. $  225,327,000   $  187,991,335
     Real estate-- construction..............     66,477,000       53,681,409
     Real estate-- mortgage..................    981,909,000      896,137,849
     Consumer loans to individuals...........    171,114,004      164,983,270
                                              -------------     -------------
                                              $1,444,827,004   $1,302,793,863
                                              ==============   ==============


Note 4 --Allowance for Loan Losses

      Changes in the allowance for loan losses are as follows:

<TABLE>
<CAPTION>


                                                                                           December 31,
                                                                     ------------------------------------------------------
                                                                            1996              1995                1994
                                                                      ---------------    ---------------    ---------------
<S> <C>
Balance at beginning of year........................................  $    18,252,558    $    17,825,732    $    16,316,978
Provision charged to operating expense..............................        2,049,535          2,048,366          2,669,380
Recoveries added to the reserve.....................................          518,211          1,016,356          1,281,537
Loan losses charged to the reserve..................................       (2,884,078)        (2,637,896)        (2,442,163)
                                                                      ---------------    ---------------    ---------------
Balance at end of year..............................................  $    17,936,226    $    18,252,558    $    17,825,732
                                                                      ===============    ===============    ===============
</TABLE>


Impairment of loans having  recorded  investments  of $8,895,545 at December 31,
1996 and  $11,031,979 at December 31, 1995, 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 1996 and 1995 was  $9,284,958 and
$11,715,971,  respectively. The total allowance for loan losses related to these
loans was $1,354,493 and $1,429,961 on December 31, 1996 and 1995, respectively.
Interest  income on impaired  loans of $153,673 and $263,087 was  recognized for
cash payments received in 1996 and 1995, respectively.

Nonaccrual  loans  excluded from impaired loan  disclosure  under  Statement 114
amounted  to  $4,574,467   and   $3,171,152  at  December  31,  1996  and  1995,
respectively.  If interest on these loans had been  accrued,  such income  would
have approximated $345,392 and $396,493 for 1996 and 1995, respectively.


                                       32

<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, 1996
and 1995, these loans totaled $48,064,949 and $53,486,144,  respectively. During
1996,  total principal  additions were  $3,281,448 and total principal  payments
were $8,702,643.

      The  Corporation  was indebted to related  parties for short-term
borrowings  totaling  $2,827,000 and $6,515,000 at December 31, 1996 and 1995,
respectively.

      The  Corporation  paid  $106,033 in 1996 to the law firms of two
directors  who serve as legal  counsel for two bank subsidiaries.

      Construction  in progress  includes  $1,967,979 paid by the Corporation to
companies of related parties.

Note 6 --Bank Premises and Equipment,Net

      Premises and equipment are summarized as follows:

<TABLE>
<CAPTION>

                                                                 December 31,
                                                     -----------------------------------
                                                           1996                1995
                                                      ---------------    ---------------
<S> <C>
Premises............................................. $    40,005,936    $    36,476,953
Leasehold improvements...............................       4,368,052          4,586,157
Furniture and equipment..............................      22,582,066         25,718,083
Construction in progress.............................       5,056,320          1,697,001
                                                      ---------------    ---------------

                                                      $    72,012,374    $    68,478,194
Less accumulated depreciation and amortization.......     (26,073,524)       (28,447,470)
                                                      ---------------    ---------------
                                                      $    45,938,850    $    40,030,724
                                                      ===============    ===============
</TABLE>


      Depreciation and  amortization of bank premises and equipment  included in
operating  expenses for the years ended December 31, 1996,  1995 and 1994,  were
$3,987,571, $3,855,589 and $3,812,358, respectively.

Note 7 --Deposits

      Deposits  outstanding at December 31, 1996, 1995 and 1994, and the related
interest expense for the periods then ended are summarized as follows:

<TABLE>
<CAPTION>

                                                        December 31,1996                         December 31,1995
                                              ------------------------------------     ------------------------------------
                                                    Amount             Expense               Amount              Expense
                                              -----------------   ----------------       ---------------    ---------------
<S> <C>
Noninterest bearing..........................  $    334,499,270   $             --       $   314,036,710    $            --
                                              -----------------   ----------------       ---------------    ---------------
Interest bearing:
  Interest checking..........................  $    305,040,322   $      6,342,326       $   283,857,011    $     6,733,646
  Money market accounts......................       207,860,462          6,095,841           213,722,288          6,931,302
  Regular savings............................       205,028,539          5,879,215           211,982,311          6,845,530
  Certificates of deposit:
    Less than $100,000.......................       742,433,389         40,919,170           692,028,074         35,881,273
    $100,000 and more........................       172,076,031          9,147,188           167,222,914          8,284,702
                                              -----------------   ----------------       ---------------    ---------------
      Total interest bearing.................  $  1,632,438,743   $     68,383,740       $ 1,568,812,598    $    64,676,453

                                              -----------------   ----------------       ---------------    ---------------
      Total deposits.........................  $  1,966,938,013   $     68,383,740       $ 1,882,849,308    $    64,676,453
                                              =================   ================       ===============    ===============

</TABLE>


                                       33

<PAGE>


                                                    December 31,1994
                                        ------------------------------------
                                              Amount             Expense
                                        -----------------   ----------------

Noninterest bearing....................  $    291,414,432   $             --

                                        -----------------   ----------------
Interest bearing:
  Interest checking....................  $    292,839,556   $      6,960,081
  Money-market accounts................       248,743,822          7,521,739
  Regular savings......................       235,411,496          7,441,570
  Certificates of deposit:
    Less than $100,000.................       567,672,196         24,454,748
    $100,000 and more..................       118,049,826          5,281,091
                                        -----------------   ----------------
      Total interest bearing...........  $  1,462,716,896   $     51,659,229
                                        -----------------   ----------------
      Total deposits...................  $  1,754,131,328   $     51,659,229
                                        =================   ================

Note 8 -- Short-Term Borrowings

      The Corporation has unused lines of credit totaling  $243,738,589 with the
Federal Home Loan Bank. In addition,  the Corporation had unused lines of credit
totaling $9,000,000 with nonaffiliated banks at December 31, 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  $11,496,969  and  $4,225,000  at December  31, 1996 and 1995,  maturing
through  2006.  The interest rate on the notes payable range from 6.29% to 8.18%
at December 31, 1996. Principal payments on the notes are due as follows:

                              1997.......................  $    1,361,294
                              1998.......................       1,403,336
                              1999.......................       2,232,339
                              2000.......................       1,725,000
                              2001.......................       1,725,000
                              Later years................       3,050,000
                                                           --------------
                                                           $   11,496,969
                                                           ==============

Note 10 -- Business Combinations

      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.

      Total assets and results of  operations  as  originally  reported for 1995
and 1994 have been restated to reflect the accounts of the pooled entities as
follows:

                                       34

<PAGE>

<TABLE>
<CAPTION>


                                                         Total              Total              Net             Net Income
                                                        Assets             Income            Income             Per Share
                                                   ---------------    ---------------    ---------------    ---------------
<S> <C>
1995 originally reported.......................... $ 1,833,820,380    $   149,481,907    $    23,432,149    $          1.42
1995 results of pooled entities...................     374,168,673         28,565,545          2,403,224                 --
                                                   ---------------    ---------------    ---------------    ---------------
                    As restated                    $ 2,207,989,053    $   178,047,452    $    25,835,373    $          1.27
                                                   ===============    ===============    ===============    ===============

1994 originally reported.......................... $ 1,708,492,508    $   135,926,068    $    20,700,876    $          1.25
1994 results of pooled entities...................     311,998,121         22,421,246          3,570,766                 --
                                                   ---------------    ---------------    ---------------    ---------------

                    As restated                    $ 2,020,490,629    $   158,347,314    $    24,271,642    $          1.19
                                                   ===============    ===============    ===============    ===============
</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.

      On  July  1,  1994,  F&M  completed  its  acquisitions  of  PNB  Financial
Corporation  (PNB) and  Hallmark  Bank & Trust  Company  (Hallmark).  A total of
approximately  1,193,000 shares of the Corporation's stock was issued in the PNB
transaction and approximately  1,107,000 shares of the  Corporation's  stock was
issued in the Hallmark  transaction.  The  transactions  were accounted for as a
pooling-of-interests.


Note 11 -- 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  $136,077  and $102,806 for the
years ended December 1996 and 1995, respectively.  No compensation cost has been
recognized  for  grants  under  the  Employee  Stock  Discount  Plan.   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),  did not have a material  impact on net income and
earnings per common share.

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, 1996 and
1995 and changes  during the years ended on those dates is as follows:


<TABLE>
<CAPTION>

                                                              1996                                      1995
                                              ------------------------------------     ------------------------------------
                                                                      Weighted                                  Weighted
                                                                       Average                                   Average
                                                                      Exercise                                  Exercise
                                                    Shares              Price                Shares               Price
                                               ----------------   ----------------       ---------------    ---------------
<S> <C>
Outstanding at beginning of year.............       306,441       $           7.24           344,867        $          6.08
                                               ----------------   ----------------       ---------------    ---------------
Granted......................................        76,842                  10.66            46,160                   8.03
                                               ----------------   ----------------       ---------------    ---------------
Exercised....................................      (186,131)                  6.61           (84,586)                  2.98
                                               ----------------   ----------------       ---------------    ---------------
Forfeited....................................          (998)                 11.89                --                     --
                                               ----------------   ----------------       ---------------    ---------------
Outstanding and exercisable at end
    of year..................................       196,154       $           9.16           306,441        $          7.24

                                               ================   ================       ===============    ===============
Weighted-average fair value per option
    of options granted during the year.......  $       8.19                              $      6.27
                                               ----------------   ----------------       ---------------    ---------------

                                       35

<PAGE>


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



                               Options Outstanding and Exercisable
                     -----------------------------------------------------

                                           Weighted          Weighted
         Range of                         Remaining           Average
         Exercise         Number         Contractual         Exercise
          Prices       Outstanding           Life              Price
-------------------- ---------------    ---------------    ---------------
        4.17 - 7.81         7,043              .0 years    $          7.61
           8.33            15,304              .8                     8.33
           6.26             5,270             1.2                     6.26
           9.62            15,299             2.0                     9.62
           8.35             8,335             2.3                     8.35
       8.14 - 10.95        22,443             3.2                    10.15
           11.89           16,767             4.2                    11.89
        7.69 - 7.93        30,693             7.0                     7.90
           7.94            26,000             8.0                     7.94
           10.00           49,000             9.0                    10.00
                     ---------------


       4.17 - 11.89       196,154             5.5          $          9.16
                     ===============




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. All officers and directors
who are eligible  employees may  participate.  29,498 shares were issued for the
1996 plan year at a discount of $91,217.  35,357  shares were issued during 1995
at a discount of $84,192. 16,755 shares were issued during 1994 at a discount of
$39,897.  The number of shares  available  to be issued in future  years  totals
159,305.

Note 12 -- Employee Benefit Plans

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

      The total plan expense for 1996, 1995 and 1994, was $233,993, $229,014 and
$142,087, 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 1996,  1995 and 1994 was  $1,049,000,  $955,029
and $610,173, respectively.

                                       36

<PAGE>


Note 13 -- 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  $1,226,842  in 1996,
$884,772 in 1995 and $684,768 in 1994.

      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 1996, 1995 and 1994, based on the present value of the
retirement benefits,  amounted to approximately $571,727, $517,981 and $240,315,
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:



                                               Number          Option Price
                                              of Shares          Per Share
                                            -------------    ---------------

    Outstanding, December 31, 1994..........      100,799    $6.26 -   $7.25
        Grants..............................       41,825    $8.14 -   $8.77
        Exercised...........................           --
                                            -------------
    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
                                            ==============   ===============

Note 14 -- Lease Commitments and Contingent Liabilities

      The  Corporation  and  Subsidiaries  were  obligated  under  a  number  of
noncancelable   leases  mainly  for  various  banking  premises  and  equipment.
Facilities leases,  including renewal options, expire through 2008. Total rental
expense for operating leases for 1996, 1995 and 1994, was $2,756,738, $2,756,796
and $2,499,453,  respectively.  Minimum rental  commitments under  noncancelable
leases  with  terms in  excess  of one year as of  December  31,  1996,  were as
follows:

                               Year                       Operating Leases
                 --------------------------------      --------------------
                 1997............................        $       2,334,125
                 1998............................                2,302,804
                 1999............................                2,122,708
                 2000............................                1,933,409
                 2001............................                1,783,605
                 Later years.....................                9,103,048
                                                        ------------------
                 Total minimum payments..........        $      19,579,699
                                                        ==================

                                       37
<PAGE>

      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,  1996 and 1995,  the
aggregate  amounts  of  daily  average  required  balances  were   approximately
$21,962,000 and $19,077,000, respectively.

Note 15 -- Income Taxes

      Net deferred tax assets consist of the following components as of December
31, 1996 and 1995:


</TABLE>
<TABLE>
<CAPTION>
                                                                           1996                  1995
                                                                   ------------------   ------------------
<S> <C>
Deferred tax assets:
  Provision for loan losses......................................   $       5,636,079   $        5,609,134
  Salary continuation plan.......................................           1,090,405              901,926
  Nonaccrual interest............................................              34,085              281,960
  Other..........................................................             578,189              776,390
                                                                   ------------------   ------------------
                                                                    $       7,338,758   $        7,569,410
                                                                   ------------------   ------------------


Deferred tax liabilities:
  Depreciation...................................................   $       1,070,113   $        1,015,615
  Bond discount accretion........................................               3,383               25,931
  Excess tax basis - acquisition.................................             191,316              486,323
  Securities available for sale..................................             261,148            1,887,954
  Other..........................................................              22,305               23,843
                                                                   ------------------   ------------------
                                                                    $       1,548,265   $        3,439,666
                                                                   ------------------   ------------------

                                                                    $       5,790,493   $        4,129,744
                                                                   ==================   ==================
</TABLE>

      The provision for income taxes charged to operations for the years ended
December 31, 1996,  1995 and 1994 ,consists of the following:

<TABLE>
<CAPTION>
                                                                            1996              1995                1994
                                                                      ---------------    ---------------    ---------------
<S> <C>
Current tax expense.................................................  $    15,128,951    $    12,765,090    $     9,945,518
Deferred tax (benefit)..............................................          (33,943)            75,869            504,663
                                                                      ---------------    ---------------    ---------------

                                                                      $    15,095,008    $    12,840,959    $    10,450,181
                                                                      ===============    ===============    ===============
</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, 1996, 1995 and 1994 due to the following:

<TABLE>
<CAPTION>
                                                                            1996              1995                1994
                                                                      ---------------    ---------------    ---------------
<S> <C>
Computed "expected" tax expense.....................................        35.0%             35.0%               35.0%
Increase (decrease) in income taxes resulting from:
  Tax-exempt interest...............................................        (2.1)             (2.9)               (3.8)
  Nondeductible merger expenses.....................................          .3                .7                  .6
  Other, net........................................................          .8                .4                (1.7)
                                                                      ---------------    ---------------    ---------------

                                                                            34.0%             33.2%               30.1%
                                                                      ===============    ===============    ===============
</TABLE>

                                       38

<PAGE>


Note 16 -- Restrictions on Transfers to Parent

      Transfer of funds from banking  subsidiaries to the Parent  Corporation in
the form of loans,  advances and cash  dividends,  are restricted by federal and
state regulatory  authorities.  As of December 31, 1996, the aggregate amount of
unrestricted   funds  which  could  be   transferred   from  the   Corporation's
subsidiaries  to the Parent  Corporation,  without  prior  regulatory  approval,
totaled $44,021,654 or 19.1% of the consolidated net assets.

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

      The Corporation and Subsidiaries  are party to financial  instruments with
off-balance-sheet  risk in the normal  course of business to meet the  financing
needs of its  customers  and to  reduce  its own  exposure  to  fluctuations  in
interest  rates.  These  financial  instruments  include  commitments  to extend
credit,  standby letters of credit and financial  guarantees.  Those instruments
involve, to varying degrees, elements of credit and interest rate risk in excess
of the amount  recognized in the balance sheet. The contract or notional amounts
of those  instruments  reflect the extent of  involvement  the  Corporation  and
Subsidiaries have in particular classes of financial instruments.

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

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

      A summary  of the  contract  or  notional  amount of the  Corporation  and
Subsidiaries'  exposure to  off-balance-sheet  risk as of December  31, 1996 and
1995, is as follows:


<TABLE>
<CAPTION>
                                                                                              1996                1995
                                                                                         ---------------    ---------------
<S> <C>
Financial instruments whose contract amounts represent credit risk:
  Commitments to extend credit.......................................................    $   323,204,242    $   337,821,054
  Standby letters of credit and financial guarantees written.........................    $    17,827,863    $    17,336,869
</TABLE>

      Commitments  to extend credit are agreements to lend to a customer as long
as  there  is no  violation  of  any  condition  established  in  the  contract.
Commitments  generally have fixed expiration dates or other termination  clauses
and may require  payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash  requirements.  The Corporation and Subsidiaries  evaluate
each  customer's  credit  worthiness  on a  case-by-case  basis.  The  amount of
collateral  obtained,  if deemed  necessary by the Corporation and  Subsidiaries
upon  extension of credit,  is based on  management's  credit  evaluation of the
counterparty.  Collateral  held  varies  but may  include  accounts  receivable,
inventory, property and equipment, and income-producing commercial properties.

      Standby letters of credit and financial guarantees written are conditional
commitments  issued  by  the  Corporation  and  Subsidiaries  to  guarantee  the
performance  of a customer to a third  party.  Those  guarantees  are  primarily
issued  to  support  public  and  private  borrowing   arrangements,   including
commercial  paper,  bond financing,  and similar  transactions.  The credit risk
involved in issuing  letters of credit is essentially  the same as that involved
in extending loan facilities to customers. The Corporation and Subsidiaries hold
marketable  securities  as collateral  supporting  those  commitments  for which
collateral  is  deemed  necessary.  The  extent  of  collateral  held for  those
commitments  at December  31, 1996,  varies from 0 percent to 100  percent;  the
average amount collateralized is 38 percent.



Note 18 -- Credit Risk

      As of December 31, 1996, the Corporation  had a concentration  of loans in
non-farm,  non-residential  loans,  consisting  primarily  of  commercial  loans
secured by real estate of $409,563,000 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, 1996, the  Corporation  had  $13,502,083 in deposits in
financial  institutions  in excess of  amounts  insured by the  Federal  Deposit
Insurance Corporation (FDIC).

                                       39

<PAGE>

Note 19 -- Disclosures About Fair Value of Financial Instruments

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

Cash and Short-Term Investments

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

Investment Securities and Securities Available for Sale


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

Loan Receivables

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

Deposit Liabilities

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

Off-Balance Sheet Financial Instruments

      The fair value of commitments to extend credit is estimated using the fees
currently charged to enter similar agreements, taking into account the remaining
terms of the agreements and the present credit worthiness of the counterparties.
For  fixed-rate  loan  commitments,  fair value also  considers  the  difference
between current levels of interest rates and the committed rates.

      The fair value of  stand-by  letters of credit is based on fees  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, 1996 and 1995,  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:


<TABLE>
<CAPTION>
                                                                 1996                                   1995
                                                  -----------------------------------  ------------------------------------
                                                      Carrying             Fair             Carrying              Fair
                                                       Amount              Value             Amount               Value
                                                  ----------------  -----------------  -----------------    ---------------

                                                    (Dollars in thousands)                          (Dollars in thousands)
<S> <C>
Financial assets:
  Cash and short-term investments..............   $        183,173   $        183,173   $        199,681    $       199,681
  Investments securities.......................            333,565            335,542            343,603            351,883
  Securities available for sale................            263,428            263,428            291,144            291,144
  Loans........................................          1,439,108          1,456,634          1,296,204          1,294,718
  Less: allowance for loan losses..............           (17,936)                 --           (18,253)                 --

                                                  ----------------  -----------------  -----------------    ---------------
        Total financial assets.................   $      2,201,338   $      2,238,777   $      2,112,379    $     2,137,426
                                                  ================  =================  =================    ===============




Financial liabilities:
  Deposits.....................................   $      1,966,938   $      1,971,386   $      1,882,849    $     1,878,539
  Federal funds purchased and securities sold
    under agreement to repurchase..............             51,536             51,536             57,472             57,472
  Other short-term borrowings..................             14,876             14,876             18,792             18,792
  Federal Home Loan Bank advances..............              8,297              8,297              5,737              5,737
  Long-term debt...............................             11,497             10,453              4,225              3,930
                                                  ----------------  -----------------  -----------------    ---------------
        Total financial liabilities............   $      2,053,144   $      2,056,548   $      1,969,075    $     1,964,470

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

</TABLE>

                                       40

<PAGE>


Note 20 -- 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,  1996,  that the  Corporation  meets all capital
adequacy requirements to which it is subject.

      As of December 31,  1996,  the most recent  notification  from the Federal
Reserve  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:


<TABLE>
<CAPTION>
                                                                                                   To Be Well Capitalized
                                                                           For Capital             Under Prompt Corrective
                                                Actual                  Adequacy Purposes             Action Provisions
                                      ---------------------------   --------------------------   ---------------------------
                                         Amount          Ratio         Amount         Ratio         Amount         Ratio
                                      ------------   ------------  -------------  ------------   ------------  -------------
                                                                       (Amount in Thousands)
<S> <C>
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%
                                                                    -               -             -              -

As of December 31, 1995:
  Total Capital (to Risk Weighted
  Assets)
        Consolidated..................   $   227,284     17.2%      >$   105,772    >  8.0%                N/A
                                                                    -               -
      F&M Bank-Winchester...........   $    69,422       15.7%      >$    35,718    >  8.0%       >$    44,647  >  10.0%
                                                                    -               -             -             -

  Tier 1 Capital (to Risk Weighted
  Assets)
      Consolidated..................   $   210,757       15.9%      >$    52,886    >  4.0%                N/A
                                                                    -               -
      F&M Bank-Winchester...........   $    63,841       14.4%      >$    17,859    >  4.0%       >$    26,788   >  6.0%
                                                                    -               -             -              -

  Tier 1 Capital (to Average Assets)

      Consolidated..................   $   210,757       10.9%      >$    83,558    >  4.0%                N/A
                                                                    -               -
      F&M Bank-Winchester...........   $    63,841        8.1%      >$    31,441    >  4.0%       >$    39,301   >  5.0%
                                                                    -               -             -              -
</TABLE>

                                       41

<PAGE>


Note 21 -- Condensed Financial Information -- Parent Company Only



                            F&M NATIONAL CORPORATION
                            (Parent Corporation Only)

                                 BALANCE SHEETS
                           December 31, 1996 and 1995

<TABLE>
<CAPTION>
                                                                                                    December 31,
                                                                                       ------------------------------------
                                                                                              1996                1995
                                                                                         ---------------    ---------------
<S> <C>
Assets
 Cash on deposit with subsidiary banks...............................................    $       131,742    $       174,705
  Investment in subsidiaries, at cost, plus equity in undistributed net income.......        221,151,205        209,089,335
  Securities available for sale......................................................         12,071,896          8,876,336
  Other short-term investments.......................................................          9,854,000         22,415,000
  Bank premises and equipment, net...................................................          1,375,831          1,408,160
  Intangible, goodwill, at amortized cost............................................            304,372            668,516
  Other assets.......................................................................          8,784,937          3,256,584
                                                                                         ---------------    ---------------

                 Total assets........................................................    $   253,673,983    $   245,888,636
                                                                                         ===============    ===============
Liabilities and Shareholders' Equity

Liabilities
  Short-term borrowings..............................................................    $    14,455,000    $    18,462,000
  Dividends payable..................................................................          4,681,654          2,643,492
  Other liabilities..................................................................          3,813,847          2,736,737
                                                                                         ---------------    ---------------
                Total liabilities....................................................    $    22,950,501    $    23,842,229
                                                                                         ---------------    ---------------

Shareholders' Equity
  Preferred stock....................................................................    $            --    $            --
  Common stock.......................................................................         40,747,394         40,847,756
  Capital surplus....................................................................         69,196,572         72,715,714
  Retained earnings, which are substantially undistributed earnings
    of subsidiaries..................................................................        120,350,161        105,139,724
  Unrealized gain (loss) on securities available for sale, net.......................            429,355          3,343,213
                                                                                         ---------------    ---------------

                Total shareholders' equity...........................................    $   230,723,482    $   222,046,407
                                                                                         ---------------    ---------------

                Total liabilities and shareholders' equity...........................    $   253,673,983    $   245,888,636
                                                                                         ===============    ===============
</TABLE>

                                       42

<PAGE>


                            F&M NATIONAL CORPORATION
                            (Parent Corporation Only)

                              STATEMENTS OF INCOME
       For Each of the Three Years in the Period Ended December 31, 1996

<TABLE>
<CAPTION>
                                                                                           December 31,
                                                                     ------------------------------------------------------

                                                                            1996              1995                1994
                                                                      ---------------    ---------------    ---------------
<S> <C>
Revenue

  Dividends from subsidiaries.......................................  $    14,418,052    $    10,980,591    $     8,658,100
  Interest on other short-term investments..........................          665,551            769,557            644,529
  Interest and dividends on securities available for sale...........          389,775            342,713            317,948
  Management fees from subsidiaries.................................        2,409,014          2,115,916          1,166,400
  Rental income from subsidiaries...................................           91,000            402,550            426,300
  Profits on securities available for sale..........................          406,572                 --                 --
  Other revenue.....................................................           11,182              4,523             16,050
                                                                      ---------------    ---------------    ---------------
                 Total revenue......................................  $    18,391,146    $    14,615,850    $    11,229,327
                                                                      ---------------    ---------------    ---------------
Expenses
  Salaries and employee benefits....................................  $     2,029,238    $     1,817,236    $       990,377
  Directors` fees...................................................          178,525            188,408            204,050
  Taxes (other than income).........................................           13,215             41,124             42,577
  Interest..........................................................          373,747            367,097            346,421
  Amortization of goodwill..........................................           59,877             59,877             59,877
  Depreciation......................................................           34,902            100,881             96,780
  Merger expenses...................................................          381,083            269,958            461,195
  Other expenses....................................................          955,735            491,206            715,747
                                                                      ---------------    ---------------    ---------------
                 Total expenses.....................................  $     4,026,322    $     3,335,787    $     2,917,024
                                                                      ---------------    ---------------    ---------------

                Income before income taxes and equity
                    in undistributed net income of subsidiaries.....  $    14,364,824    $    11,280,063    $     8,312,303

Income Tax Expense (Benefit)........................................         (163,700)           309,292             84,854
                                                                      ---------------    ---------------    ---------------

                Income before equity in undistributed
                    net income of subsidiaries......................  $    14,528,524    $    10,970,771    $     8,227,449

Equity in Undistributed Net Income of Subsidiaries..................       14,769,106         14,864,602         16,044,193
                                                                      ---------------    ---------------    ---------------

                Net income..........................................  $    29,297,630    $    25,835,373    $    24,271,642
                                                                      ===============    ===============    ===============
                                       43

<PAGE>




                            F&M NATIONAL CORPORATION
                            (Parent Corporation Only)

                            STATEMENTS OF CASH FLOWS
       For Each of the Three Years in the Period Ended December 31, 1996


</TABLE>
<TABLE>
<CAPTION>
                                                                                           December 31,
                                                                     ------------------------------------------------------

                                                                            1996              1995                1994
                                                                      --------------    ---------------    ---------------
<S> <C>
Cash Flows From Operating Activities
 Net income........................................................  $    29,297,630    $    25,835,373    $    24,271,642
  Adjustments to reconcile net income to net cash provided
    by operating activities:
     Depreciation..................................................           34,902            100,881             96,780
     Amortization..................................................           59,877             59,877             59,877
     Deferred income taxes (credits)...............................         (308,285)          (159,274)          (182,986)
     Discount accretion............................................           (3,187)            (3,383)            (3,183)
     Profits on securities available for sale......................         (406,572)                --                 --
     Undistributed net income of subsidiaries......................      (14,769,106)       (14,864,602)       (16,044,193)
     Decrease in goodwill..........................................          304,267             28,853             23,864
     (Increase) decrease in other assets...........................       (4,803,990)           519,076         (2,364,144)
     Increase in other liabilities.................................        1,077,110          1,206,671          1,626,463
                                                                      --------------    ---------------    ---------------
            Net cash provided by operating activities..............  $    10,482,646    $    12,723,472    $     7,484,120
                                                                      --------------    ---------------    ---------------

Cash Flows From Investing Activities
 Decrease in investment in subsidiaries............................  $       162,013    $       264,541    $     1,190,006
 Purchase of securities available for sale.........................       (6,024,544)        (1,802,395)          (734,438)
 Proceeds from sale of securities available for sale...............        2,954,031                 --                 --
 (Increase) decrease in other short-term investments...............       12,561,000         (7,379,000)            31,000
 Proceeds from sale of equipment to subsidiaries...................               --          2,771,841            387,000
 Purchase of bank premises and equipment...........................           (2,573)          (292,221)           (89,650)
                                                                      --------------    ---------------    ---------------
            Net cash provided by (used in) investing activities....  $     9,649,927    $    (6,437,234)   $       783,918
                                                                      --------------    ---------------    ---------------

Cash Flows From Financing Activities
 Increase (decrease) in short-term borrowings......................  $    (4,007,000)   $     3,791,000    $     1,488,000
 Net proceeds from issuance and sale of common stock...............        3,336,784          3,782,503          2,214,695
 Acquisition of common stock.......................................       (7,456,288)        (3,175,612)        (2,815,487)
 Dividends paid....................................................      (12,049,032)       (10,571,851)        (9,116,127)
 Cash paid for fractional shares...................................               --                 --            (58,029)
                                                                      --------------    ---------------    ---------------
            Net cash (used in) financing activities................  $   (20,175,536)   $    (6,173,960)   $    (8,286,948)
                                                                      --------------    ---------------    ---------------
            Increase (decrease) in cash and cash equivalents         $       (42,963)   $       112,278    $       (18,910)
Cash and Cash Equivalents
 Beginning.........................................................          174,705             62,427             81,337
                                                                      --------------    ---------------    ---------------
 Ending............................................................  $       131,742    $       174,705    $        62,427
                                                                      ==============    ===============    ===============

Supplemental Disclosures of Cash Flow Information
 Cash payments for interest........................................  $       373,747    $       367,097    $       346,421
                                                                      ==============    ===============    ===============
Supplemental Schedule of Noncash Investing and
 Financing Activities
 Issuance of stock options under nonvariable compensatory plan.....  $       500,000    $       206,440    $       211,120
                                                                      ==============    ===============    ===============
 Issuance of common stock to acquire investment....................  $            --    $       200,000    $            --
                                                                      ==============    ===============    ===============
 Common stock issued for stock dividends...........................  $            --    $     1,068,282    $     6,001,278
                                                                      ==============    ===============    ===============
 Unrealized gain (loss) on securities available for sale...........  $       215,404    $       941,959    $      (350,506)
                                                                      ==============    ===============    ===============

</TABLE>

                                       44

<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, 1996 and 1995, and the
related consolidated  statements of income, changes in shareholders' equity, and
cash flows for the years ended December 31, 1996, 1995 and 1994. 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, 1996 and 1995, and the results
of its operations and its cash flows for the years ended December 31, 1996, 1995
and 1994, in conformity with generally accepted accounting principles.


                                                /s/ Yount, Hyde & Barbour, P.C.
Winchester, Virginia                            -------------------------------
January 29, 1997                                    YOUNT, HYDE & BARBOUR, P.C.


                                       45